Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Arizona Department of Economic Security
DATE: June 6, 1991
Docket No. 89-230
Decision No. 1255
DECISION
The Arizona Department of Economic Security (State) appealed a
funding
reduction imposed under section 403(h) of the Social Security Act
(Act)
by the Office of Child Support Enforcement (OCSE). Based on
audits of
the State's child support enforcement and paternity
establishment
program, which determined that the State did not substantially
comply
with requirements of Title IV-D of the Act, OCSE imposed a one
percent
reduction of the amount of money otherwise payable to the
State
(approximately $750,000) for Aid to Families with Dependent
Children
(AFDC) during the period July 1, 1988 through June 30, 1989.
The State did not dispute OCSE's finding concerning the level of
the
State's performance under the applicable audit criteria. Instead,
the
State challenged the regulations that governed this disallowance.
For
the reasons stated below, we uphold OCSE's decision to reduce by
one
percent the State's AFDC funding for the one-year period beginning
July
1, 1988. Specifically, we conclude that--
o OCSE properly applied its
interpretation of the statutory term
"substantial compliance" to the time
period here;
o OCSE reasonably interpreted the
statutory requirement for
"substantial compliance" to mean that a state must
be taking action to
provide basic child support services (required under the
Act) in at
least 75 percent of the cases requiring those services;
o OCSE was not required to use notice and
comment rulemaking
procedures, under the Administrative Procedure Act (APA),
5 U.S.C. 553,
to promulgate the statistical methodology which OCSE used to
perform its
reviews of the State's performance;
o OCSE's adoption of a regulation
specifying a one-year limit on
the period permitted by the statute for
corrective action is not
arbitrary, capricious, or contrary to the purpose of
the statute.
Statutory and regulatory provisions
Each state that operates an AFDC program under Title IV-A of the Act
is
required to have a child support enforcement and paternity
establishment
program under Title IV-D of the Act. Section 402(a)(27)
of the Act.
The Title IV-D program has been in existence since July
1975. OCSE has
responsibility for auditing state Title IV-D programs,
pursuant to
section 452(a)(4) of the Act, and evaluating whether the
actual
operation of such programs conforms to statutory and
regulatory
requirements. Following adoption of Title IV-D, the
participating
states were given 18 months by Congress -- until December 31,
1976 -- to
establish and begin operating their programs before compliance
audits
actually began. Under the applicable statute, a state was
subject to a
five percent reduction of its Title IV-A funds if the audit
found that
the state was not in compliance. Congress, however,
continuously
extended the initial moratorium on imposition of this funding
reduction,
so that no reduction was ever imposed during the first eight years
of
the program's operation, although OCSE did continue its annual audits.
On August 16, 1984, Congress adopted the Child Support
Enforcement
Amendments of 1984, section 9 of Public Law 98-378 (the
1984
Amendments). As amended, section 403(h)(1) of the Act provides
that--
if a State's program operated under Part D is found as a
result
of a review conducted under section 452(a)(4) not to
have
complied substantially with the requirements of such part
for
any quarter beginning after September 30, 1983, and
the
Secretary determines that the State's program is not
complying
substantially with such requirements . . ., the
amounts
otherwise payable to the State under this part [A] for
such
quarter and each subsequent quarter, prior to the first
quarter
throughout which the State program is found to be in
substantial
compliance with such requirements, shall be reduced . . .
.
(Emphasis added.)
The amended section then provides for graduated reductions, starting
with
a reduction of "not less than one nor more than two percent" and
increasing
to a maximum of five percent with each consecutive finding
that a state is
not complying substantially with Title IV-D
requirements.
The 1984 Amendments provided for the continuation of compliance
audits,
which could in appropriate cases be scheduled as infrequently as
once
every three years. Rather than directing immediate reduction of
funding
for a state which failed an audit, the Amendments provided that
a
reduction could be suspended while the state was given an opportunity
to
bring itself into compliance through a corrective action plan
approved
by OCSE. Section 403(h)(2)(A)-(C) of the Act, as
amended. If a
follow-up review of a state's performance showed that the
state still
did not achieve substantial compliance, a reduction would be
imposed.
Section 403(h)(2)(B)(iii) of the Act.
Section 9(c) of the 1984 Amendments provides that they "shall be
effective
on and after October 1, 1983."
OCSE proposed regulations implementing the Amendments on October 5,
1984,
49 Fed. Reg. 39488 (1984), and issued final regulations on October
1, 1985,
50 Fed. Reg. 40120 (1985). (We refer to these regulations as
the "1985
regulations.") The 1985 regulations amended parts, but not
all, of the
audit regulations at 45 C.F.R. Part 305. Section 305.20(a),
as amended
by the 1985 regulations, provided that, beginning with the
fiscal year (FY)
1984 audit period, certain listed audit criteria
(related primarily to
administrative or fiscal matters) "must be met."
This section also provided
that the procedures required by specified
audit criteria "must be used in 75
percent of the cases reviewed for
each criterion . . . ." These
criteria relate to performance of basic
services provided under a IV-D state
plan and are the criteria at issue
in this appeal. Nine of the
service-related audit criteria for the FY
1985 audit period are based on
sections of 45 C.F.R. Part 305 which
(with minor exceptions not relevant
here) were originally published in
1976, with minor amendments in 1982.
(We refer to these provisions, as
amended in 1982, as the "existing
regulations" since they were in effect
during FY 1984.) In addition,
OCSE added six service-related criteria
beginning with the FY 1985 audit
period; none of these criteria are
relevant to this disallowance, however,
since the State was found to
have substantially complied with all of them in
the audits that underlie
this case.
Thus, under the 1985 regulations, substantial compliance for FY
1985
audits was measured by audit criteria from the existing regulations
and
certain new criteria; a state had to be providing the required
services
in 75% of the cases requiring them. The 1985 regulations
specified that
the corrective action period could not exceed one year from
the date of
the initial notice of noncompliance. 45 C.F.R.
305.99(c). In follow-up
reviews after the corrective action period,
OCSE would examine only the
audit criteria that the state had previously
failed or had complied with
only marginally (that is, in 75 to 80% of the
cases reviewed for that
criterion). 45 C.F.R. 305.10(b) and 305.99, as
amended. In conducting
these compliance audits, OCSE pledged
that, "The sampling methodology
used by OCSE will provide statistically
reliable results for each
criterion." 50 Fed. Reg. at 40128.
Background
OCSE's audit for FY 1985 (October 1, 1984 through September 30,
1985)
resulted in a June 25, 1987 notice to the State that it had been
found
to have failed to comply "substantially with the requirements of
Title
IV-D of the Act" in the following areas: (1) location of
absent
parents; (2) establishing paternity; (3) establishing child
support
obligations; (4) informing the State AFDC agency of support
payments
made to the IV-D Agency; (5) distribution of support payments
in
accordance with regulations; and (6) providing services to
individuals
not otherwise eligible. See July 30, 1987 Disallowance
Letter (OCSE
Exhibit (Ex.) A). 1/
Rather than appealing OCSE's findings, the State opted to propose
a
corrective action plan that was accepted by OCSE on October 28,
1987,
and the funding reduction was suspended. Appeal Brief (App. Br.)
at 2.
The corrective action period ended on July 29, 1988. The
follow-up
review by OCSE of the State's performance for calendar year
1988
resulted in the September 29, 1989 notice of substantial
noncompliance
that is the subject of this appeal. OCSE found that the
State had
achieved substantial compliance with five of the six criteria that
it
had failed in the FY 1985 audit. The State continued to fail,
however,
the remaining audit criterion for location of absent parents, 45
C.F.R.
205.33(g). Specifically, OCSE found that the State had taken
action in
only 29 of 104 cases, or 28 percent of the sampled cases. 2/
Analysis
I. The State's challenges to the applicability of the 1985
regulations
lack merit.
The State contended that the disallowance should be overturned because
the
regulations upon which it was based -- those specifying the 75
percent
standard for determining whether a state's performance
substantially complied
with program requirements -- were invalid. The
State maintained
that, under Bowen v. Georgetown University Hospital,
488 U.S. 204 (1988)
(hereafter Georgetown), OCSE needed specific
statutory authorization to adopt
these regulations with a retroactive
effective date and apply them
retroactively. The State also maintained
that the regulations have
retroactive effect in violation of the APA,
which defines a "rule" as having
"future effect" (see 5 U.S.C. 551(4)
and Georgetown (Scalia, J.,
concurring)). In addition, the State argued
that the 75 percent
standard in the regulations could not validly be
applied to it because that
standard had an insufficient empirical basis
and therefore was established in
an arbitrary and capricious manner
under Maryland v. Mathews, 415 F. Supp.
1206 (D.D.C. 1976). The
State acknowledged that these
arguments were virtually identical to
arguments which had been considered and
rejected by the Board in Ohio
Department of Human Services, DAB No. 1202
(1990); New Mexico Dept. of
Human Services, DAB No. 1224 (1991); and District
of Columbia Dept. of
Human Services, DAB No. 1228 (1991).
In its response brief, OCSE
concurred with, adopted and incorporated the
arguments and exhibits
relied upon by the Board in reaching its conclusions
on these issues in
the prior cases. OCSE Br. at 7.
Although the State asked the Board to reconsider its determinations in
the
prior cases, it admitted that, although it was given the opportunity
to do
so, it never identified any alleged errors in the Board's analyses
in those
decisions, apart from the Board's failure to adopt the State's
view of the
law. Transcript (Tr.) at 27. We have carefully considered
the
State's comments and, based on our analyses below, we reaffirm our
previous
conclusions.
We are, of course, bound by the Department's regulations, even if
invalid
under a constitutional analysis, if those regulations are
applicable.
See 45 C.F.R. 16.14. In the present case, some of the
issues raised by
the State here clearly challenge the validity of these
regulations, but they
also raise interrelated questions of
applicability. We do not need to
sort out these issues precisely,
however, since we conclude that all of the
State's arguments concerning
the regulations are without merit. We
reject the State's arguments
because:
o Section 403(h)(1) of the Act, as
amended, requires reductions
for states not found to be in substantial
compliance in audits "for any
quarter beginning after September 30, 1983,"
and Congress explicitly
made the 1984 Amendments effective on October 1,
1983. The
circumstances here are therefore distinguishable from those
in
Georgetown, where the agency published cost-limit rules for
Medicare
providers in 1984 and attempted to apply the rules to 1981 costs, in
the
absence of any statutory authority to do so. Here, the
statute
expressly made the change in the standard retroactive.
o The effect of the 1985 regulations here is also
significantly
different from the effect of the cost-limit rules considered
in
Georgetown. There, Medicare providers were entitled to a specific
level
of reimbursement under the regulations in effect in 1981, and the
1984
rules would have retroactively reduced that level. Here, the
AFDC
funding reduction applies to periods after the 1985 regulations
were
published.
o The audit criterion at issue here,
location of absent parents,
was in the existing regulations, had been in
effect without substantial
change since 1976, and was based on IV-D state
plan requirements. As we
discuss below, this criterion is absolutely
critical to a successful
IV-D program. The 75 percent standard is more
lenient than the standard
in the existing regulations, which provided that
the State must "meet"
all criteria. Even if the State is correct that
OCSE could not
reasonably implement this by requiring action in 100 percent
of the
cases, the existing regulations clearly contemplated a compliance
level
greater than 75 percent. 3/
o More important, the 1985 regulations
afforded the State a
corrective action period. Although, as discussed
below, the State
argued that this period was too short, the fact remains that
the State
here had notice of the 75 percent standard prior to this period,
and
over two years to adjust its administrative practices before
the
follow-up review period.
o The regulations here merely interpret the statutory term
"substantial
compliance." Obviously, the range of compliance levels
OCSE could adopt
is limited by this term, particularly when it is read
together with
section 403(h)(3) of the Act (which permits a finding of
substantial
compliance only when any noncompliance is of a technical
nature). A
level lower than 75 percent would have been subject to
challenge as
inconsistent with statutory intent.
o Since the 75 percent standard
reasonably interprets the
statutory term "substantial compliance," the
circumstances here are
distinguishable from those considered in Maryland,
where the court found
that regulations setting "tolerance levels" for AFDC
eligibility
determination errors were not reasonably related to the purposes
of the
statute. Moreover, unlike the "tolerance levels" in Maryland,
the 75
percent standard here had an empirical basis in past performance
levels
measured through OCSE's audits. While audit results from FYs
1980 and
1981 showed that some states were not yet achieving 75 percent
levels,
other states were achieving 100 percent levels at that time (See
OCSE
Ex. 8 from New Mexico record, Board Docket No. 88-252 (OCSE Ex.
8[NM]),
and OCSE could reasonably expect all states to be achieving 75
percent
levels by FY 1984. 4/
II. OCSE was not required to promulgate its audit methodology as a
rule
under the APA.
In addition to its challenges to the regulations applied by OCSE in
its
Title IV-D audits, the State argued that the statistical
methodology
used by OCSE to make determinations about whether states
achieved
substantial compliance was invalid because it had not been
promulgated
in regulations adopted through notice and comment rulemaking
under the
APA. The State cited Batterton v. Marshall, 648 F.2d 694
(D.C.Cir.
1980), and Estate of Smith v. Heckler, 747 F.2d 583 (10th Cir.
1984), on
remand, Estate of Smith v. Bowen, 656 F. Supp. 1093 (D.Colo. March
24,
1987), enforced, 675 F. Supp. 586 (D.Colo. Dec. 18, 1987), as
supporting
its contention on this point.
In its reply brief and at oral argument, the State acknowledged that
these
arguments had been incorporated by New Mexico in its appeal, and
decided
adversely by the Board in New Mexico. See New Mexico at 13-16.
The
State criticized the analysis in New Mexico and asked the Board to
reconsider
its position.
After careful consideration of the State's arguments, we conclude that
the
audit procedures used here were not required to be published under
the APA
because they were a general statement of policy, or a rule of
agency
procedure, rather than a legislative rule. Clearly, the agency
retained
discretion "to accept a non-conforming audit report, or for
that matter to
prescribe additional requirements in a particular case."
Guardian Federal
S&L v. Federal S&L Ins. Corp., 589 F.2d 658, 666
(D.C.Cir.
1978). See OCSE Ex. C at 3-4, 6. In fact, in Oklahoma Dept.
of
Human Services, DAB No. 1223 (1991), OCSE used a completely
different
methodology when it determined that performance for the
particular
criterion under review could not be measured using its
usual
methodology. 5/ Furthermore, in this case and other similar
appeals
OCSE has modified its statistical methodology in response to
states'
criticisms. Thus, the circumstances here are clearly
distinguishable
from those in Batterton, where the federal agency, directed
by statute
to develop a method of measurement, adopted an inflexible system
that
was not subject to adjustment through adjudication or other
method. In
the instant case, the State did not even argue that it could
have
achieved substantial compliance in the location of absent
parents
criterion if OCSE had used a different statistical methodology in
its
audit. 6/
In addition, this case is dissimilar to Smith because here the
audit
methodology provides only a possible method for measuring a
state's
compliance with substantive requirements; it does not itself
establish
any substantive requirement. In other words, we consider
OCSE's audit
methodologies to be a means for gathering evidence about whether
a state
has achieved substantial compliance, not an inflexible standard
that
must be applied. OCSE must be allowed to respond with flexibility
in
assessing the wide variety of structures and procedures used by
the
states to administer the programs and to use its audit
resources
efficiently. See New Mexico at 13-16.
Accordingly, we reject this argument as a basis for overturning
the
disallowance.
III. The State's arguments concerning the validity of the
one-year
corrective action period must also be rejected.
The State also argued that OCSE's regulation limiting corrective
action
periods to one year was arbitrary, capricious, and inconsistent with
the
intent of the statute. Section 403(h)(2)(A) of the Act, as
amended,
provides that --
the reduction required under paragraph (1) shall be
suspended
for any quarter if -- (i) the State submits a corrective
action
plan, within a period prescribed by the Secretary
following
notice of the finding under paragraph (1), which contains
steps
necessary to achieve substantial compliance within a time
period
the Secretary finds to be appropriate; . . . .
(Emphasis added.) The Secretary's implementing regulations at 45
C.F.R.
305.99(c) provide that:
The penalty will be suspended for a period not to exceed
one
year from the date of the notice if the following conditions
are
met:
(1) Within 60 days of the date of the notice,
the State
submits a corrective action plan to the
appropriate Regional
Office which contains a
corrective action period not to
exceed one year from
the date of the notice and which
contains steps
necessary to achieve substantial compliance
with the
requirements of title IV-D of the Act; . . . .
(Emphasis added.) The State argued that OCSE's blanket
determination
that one year was an appropriate length of time for a
corrective action
period thwarted congressional intent that a state be given
sufficient
time to bring itself into compliance.
In particular, the State argued that certain unusual circumstances
that
took place during its corrective action period demonstrated that
the
regulation was too harsh and should have included provision
for
extension of the one-year period. Those circumstances were the
State's
inability to acquire and put into operation an automated system
for
child support and the unexpected termination by the Maricopa
County
Attorney's Office of its IV-D contract with the State during
the
corrective action period.
In response to the State's contentions, OCSE argued that its
regulation
was reasonable and fully consistent with the statute and
legislative
history. OCSE noted that the State would have known as
early as July of
1986 (a year before its corrective action period began on
July 30,
1987), that OCSE's preliminary audit had found the State's
parent
locator services to be far short of compliance. OCSE Br. at
12. OCSE
maintained that its regulation was entirely consistent with
the portion
of legislative history cited by the State, S. REP. No. 387, 99th
Cong.,
2nd Sess. 33, reprinted in 1984 U.S. CODE CONG. & ADMIN. NEWS
2429,
which merely referred to "a corrective action plan which will remedy
the
problem within a reasonable period of time." OCSE contended that
the
statute's authorization of the Secretary to define a "reasonable
period
of time" for corrective action could not reasonably encompass a
period
long enough to plan, install, and implement an automated system --
such
systems ordinarily take from five to ten years to put into
place.
Moreover, OCSE noted that this reason for delay was not mentioned in
the
State's corrective action plan. OCSE also argued that the State
should
have had sufficient resources in place at the time of the
Maricopa
contract termination to take some action on cases requiring
parent
location, since the State was already responsible for
conducting
searches through the State and federal parent locator
services.
Finally, OCSE requested that if the Board determined that the
State's
factual allegations were relevant, the Board should provide for
further
record development on that topic.
We agree with OCSE that its conclusion that a one-year period
was
appropriate for corrective action was reasonable, particularly since
the
state plan requirements at issue here had been in effect as of
1976.
Moreover, most states had had notice of the particular shortcomings
of
their programs from earlier years' audits (see, e.g., New Mexico, n.
3).
In fact, OCSE's November 8, 1982 audit report for FY 1981 noted
serious
deficiencies in the State's parent locator services, the criterion
at
issue in this case, stating, "[T]he IV-D agency did not use
appropriate
procedures to locate the absent parent in the majority of
cases
reviewed." OCSE Ex. G at 3 (emphasis added). Furthermore, a
Management
Analysis Review of the State's program in early 1986 also
discussed
problems with parent locator services. See OCSE Ex. H.
In addition, the State has not disputed that it was given specific
warning
of the serious nature of its failings in the July 1986 draft
audit
report. The particular criterion which the State failed here
--
location of absent parents -- was the most frequently required
service,
according to the program results audit. This often preliminary
step is
fundamental to the State being able to provide any other requested
child
support establishment and enforcement services.
Rather than convincing us that Congress intended that a corrective
action
period be tailored to the alleged needs of a particular state,
the
legislative history demonstrates that the determination of "a
reasonable
period of time" was specifically committed to the
Secretary's
discretion. Given OCSE's responsibility to audit compliance
for 54
jurisdictions, its decision to adopt an outer limit for the
appropriate
corrective action period is well within its discretion.
Certainly the
1984 Amendments evidence a strong intention to finally hold the
states
accountable for providing services 7/, and we see no basis in
the
language or history to support a multi-year implementation of
an
automated data processing system. 8/
We therefore conclude that the regulation is not arbitrary, capricious
or
contrary to statutory intent. Consequently, the State's contention
does
not provide a basis for overturning the funding reduction in this
case.
Conclusion
Based on the reasons discussed above, we conclude that the
funding
reduction should be upheld.
__________________________ Judith
A.
Ballard
__________________________
Alexander
G. Teitz
__________________________ Donald
F.
Garrett Presiding Board
Member
1. We note that the auditors examined whether any efforts were made
by
the State in these cases to furnish these services. The success
of
these efforts, while noted for statistical purposes, was
not
determinative as to whether the State was found to be in
substantial
compliance; the State received credit for "action" so long as it
took
some action towards these goals. See 50 Fed. Reg. at 40132.
2. With respect to the criterion at issue here, OCSE had found in
the
initial audit that the State took action in only 36 of 127 sampled
cases
requiring location of missing parents (28% of sampled cases).
3. The existing regulations required the states to have and
be
utilizing written procedures detailing step by step actions to be
taken.
45 C.F.R. 305.1, 305.24(a), 305.25(a), 305.33; 45 C.F.R. Part
303
(1983). Although no reduction had actually been imposed based on
the
existing audit criteria, this was due to the moratoria. The states
had
no guarantee that Congress would continue to delay imposition of
the
reductions.
4. We note that the percentages given in OCSE Ex. 8[NM] (a
draft
analysis by OCSE of 1980 and 1981 audit results) are derived simply
by
dividing the number of complying sample cases by the total
number
reviewed. If OCSE had instead used the same method for
estimating
compliance levels it used in the 1984 and 1985 audits for all
states
(see our discussion in New Mexico at 18-20), the compliance
percentages
shown on Exhibit 8[NM] for the earlier years would have been
higher.
Moreover, contrary to what the State argued, State Br. at 40, it was
not
improper to rely on data from earlier audits. Although the
1985
regulations made some changes, the locate requirement at issue in
this
case had been in effect since 1976. Moreover, New Mexico's Ex. 16,
a
report on audits for FYs 1984 and 1985, showed that 21 states
or
territories met all the criteria initially and at least 15 others
met
them after a corrective action period. (Some states had not yet had
a
follow-up review, and some have appealed the results of their
follow-up
reviews to this Board.) In Maryland, the Secretary had
acknowledged
that some errors in making eligibility determinations were
unavoidable
due to the complex nature of the requirements. Here, the
State did not
argue that the service-related requirements were complex or
that there
was any barrier to meeting those requirements which could not
be
overcome.
5. The Board rejected OCSE's substitute methodology in Oklahoma
because
it was not a statistically reliable methodology, not because OCSE
had
deviated from its usual methodology. See Oklahoma at 3-5.
6. While this appeal was pending, OCSE discovered a flaw in
its
statistical calculations for Arizona's program results audit.
(A
similar flaw had earlier been brought to OCSE's attention by the
State
of Ohio in its penalty disallowance appeal.) OCSE submitted a
corrected
calculation for Arizona (March 1, 1991 Letter from OCSE Counsel
to
Board), upon which the State chose not to comment. See March 21,
1991
Confirmation of Oral Argument Schedule. That report again
concluded
that the State had not met the 75 percent standard for the location
of
absent parents criterion. (The most generous estimate of the
State's
performance was that during FY 1985 the State may have taken a
location
action in 35.4 percent of cases requiring it. March 1, 1991
submission
at Appendix 1.)
7. On the same page as the language cited by the State, the
Senate
Finance Committee Report stated
In view of the changes proposed . . ., the penalty provisions
of
the law will apply only in cases where States not only fail
to
carry out the requirements of the law but also refuse
to
undertake the necessary changes to correct that situation.
For
this reason, the Committee cannot foresee any situation in
which
legislative action to suspend these revised penalties would
be
appropriate.
S. REP. No. 387, cited above, at 33.
8. The Board is bound in its decisionmaking by all
applicable
regulations. 45 C.F.R. 16.14. Consequently, the
State's allegations
about its particular problems in achieving compliance
within the
one-year period are not relevant, since we have no authority to
waive
the limit, and we therefore do not address them. We do note
our
experience from other penalty cases, however, that showed that OCSE
gave
credit for a location "action" for something so simple as sending
a
letter to the last known address of an absent parent, see State[NM]
Ex.
32, or including a case in a mass submission of names to the
Federal
Parent Locator Service, see District of Columbia
at