Illinois Department of Children and Family Services, DAB No. 1335 (1992)

Department of Health and Human Services

DEPARTMENTAL APPEALS BOARD

Appellate Division

SUBJECT:  Illinois Department of Children and Family Services

DATE:  June 1, 1992
Docket No. 91-111
Decision No. 1335

DECISION

This decision is the result of a court-ordered remand in Illinois
Department of Children and Family Services v. Sullivan, C.A. No. 89-1730
(D.D.C., September 12, 1990).  The district court reviewed the Board's
decision in Illinois Dept. of Children and Family Services, DAB No. 1037
(1989).  In that decision, the Board sustained a determination by the
Administration for Children, Youth and Families (Agency) 1/ that
Illinois was ineligible for $1,034,619 awarded for fiscal year (FY) 1984
under section 427 of the Social Security Act (Act).  The Agency's
determination was based on a case record survey which it conducted to
determine whether Illinois was operating a case review system "for each
child receiving foster care under the supervision of the State," as
required by section 427(a)(1)(B) of the Act.  Illinois took the position
that six children whom the Agency found did not receive the protections
of the case review system were not in "foster care" within the meaning
of section 427(a)(1)(B) and should not have been included in the
universe for the case record survey.  The six children in question were
placed in the homes of relatives which were identified by Illinois as
"approved only" homes.  Illinois argued that the term "foster care"
referred to children in "foster family homes" within the meaning of
section 472(c) of the Act and asserted that the six children were not in
foster family homes because the homes were not approved as meeting
licensing standards.

In DAB No. 1037, the Board sustained the Agency's determination of
ineligibility on the ground that the children in question were in foster
family homes and thus in "foster care" even under the State's definition
of that term.  The Board found specifically that "approved only" homes
met licensing standards.  The Board also found that, in any event, the
record did not establish that the six children in question were in
"approved only" homes.  In view of these findings, the Board did not
address the parties' arguments as to the proper definition of the term
"foster care."  The Board also rejected the State's contention that the
90% compliance standard used by the Agency in the case record survey was
arbitrary, capricious, or an abuse of discretion.  In addition, the
Board rejected the State's contention that the State complied with the
section 427 requirements in several individual cases in addition to the
cases involving children in "approved only" homes.

On appeal to the district court, Illinois challenged the Board's
holdings concerning the children in "approved only" homes and the 90%
compliance standard.  The district court found that the Board erred in
finding that the "approved only" homes met licensing standards. 2/  The
court further found that the six children in question were in fact in
"approved only" homes.  Based on these findings, the court set aside the
Board's decision and remanded the case to the Board to address Illinois'
contention that the term "foster care" as used in section 427 applies
only to children in foster family homes as defined in section 472(c) of
the Act.  The court did not rule on the merits of Illinois' objections
to the 90% compliance standard on the ground that the Board's decision
on remand might render that issue moot.

We find that the term "foster care" as used in section 427 is ambiguous
and that the Agency's and the State's conflicting interpretations of
that term are both reasonable (although the Agency's interpretation may
best effectuate congressional intent).  However, we further find that
the Agency failed to give the State adequate, timely notice of its
interpretation of "foster care" as including children in "approved only"
homes, and may have led the State to believe that such children were not
subject to the section 427 protections.  Moreover, we find that
retroactive application of the Agency's interpretation was not
justified.  Accordingly, we conclude that the Agency erred in finding
the State ineligible for section 427 funds for FY 1984 based on a case
record survey which included these children. 3/

Our conclusion that the Agency erred in finding the State ineligible for
FY 1984 section 427 funds based on a case record survey which included
children in "approved only" homes does not mean that the State was
necessarily eligible for these funds.  Instead, as both parties
previously agreed, a case record survey which excludes such children
must be conducted to determine the State's eligibility. 4/   The Agency
agreed that, if this case record survey finds that the State complied
with the section 427 requirements in 90% or more of the cases, the State
will be eligible for the FY 1984 section 427 funds.  The question
whether the 90% compliance standard applied by the Agency is proper will
be presented only if the State did not comply with the section 427
requirements in at least 90% of the cases.  The State nevertheless
requested that the Board reconsider here the holding in DAB No. 1037
that the 90% compliance standard was proper based on new or additional
authority.  See Confirmation of Conference Call, dated 10/3/91, at 2.
The additional authority cited by the State supports the Board's
holding, however.  Accordingly, we reaffirm this holding.

While the district court set aside DAB No. 1037 in its entirety, the
State's appeal challenged only the portions of that decision which
involved the children in "approved only" homes and the 90% compliance
standard.  We therefore reinstate the portions of DAB No. 1037 which
were not appealed by the State.  Specifically, we reinstate the portions
of the decision which held that sample cases #10, 19, 27, 31, and 32
were out of compliance.  See DAB No. 1037, at 14-24.

Our conclusions about the meaning of the term "foster care" and the
lawfulness of the 90% compliance standard are addressed separately
below.  For each issue, we provide background on the relevant statutory
provisions and Agency issuances and then discuss our conclusions.

      I. Whether Children in "Approved Only" Homes Were in "Foster Care"

Background

The Adoption Assistance and Child Welfare Act of 1980, Public Law No.
96-272, amended title IV of the Act to create a new Part E, which
provides funding for foster care maintenance payments and adoption
assistance payments made by a state.  Public Law No. 96-272 also amended
Part B of title IV by adding a new section 427 which makes additional
funds for child welfare services available to states which meet certain
requirements for protecting children in foster care.

As one of the conditions for the receipt of additional child welfare
funds, section 427(a)(2)(B) of title IV-B requires that a state have
implemented and be operating "to the satisfaction of the Secretary" --

 a case review system (as defined in section 475(5)) for each
 child receiving foster care under the supervision of the State .
 . . .

Section 475(5) of title IV-E provides that --

 The term "case review system" means a procedure for assuring
 that --

      (A) each child has a case plan . . .

      (B) the status of each child is reviewed periodically but
      no less frequently than once every six months by either a
      court or by administrative review . . . , and

      (C) with respect to each such child, procedural safeguards
      will be applied, among other things, to assure each child
      in foster care under the supervision of the State of a
      dispositional hearing to be held, in a family or juvenile
      court or another court . . . of competent jurisdiction, or
      by an administrative body appointed or approved by the
      court, no later than eighteen months after the original
      placement (and periodically thereafter during the
      continuation of foster care) . . . .

In order to receive section 427 funds, a state must also show that it
"has conducted an inventory of all children in foster care under the
responsibility of the State" (section 427(a)(1)), and "has implemented
and is operating to the satisfaction of the Secretary" a statewide
information system with information about the placement of "every child
in foster care" and a service program to help children return to their
homes or be placed for adoption (section 427(a)(2)(A) and (C)).

A state must satisfy some of the same requirements as a condition of
eligibility for title IV-E funds. Specifically, section 471(a)(16)
provides that, in order to be eligible for funding under title IV-E, a
state must have a plan which --

 provides for the development of a case plan (as defined in
 section 475(1)) for each child receiving foster care maintenance
 payments under the State plan and provides for a case review
 system which meets the requirements described in section
 475(5)(B) with respect to each such child . . . .

Title IV-E also provides that foster care maintenance payments are
reimbursable only if they are made on behalf of a child who is "in the
foster family home of an individual" or "in a child-care institution."
Section 472(b).  Section 472(c) states that --

 For the purposes of this part . . . the term "foster family
 home" means a foster family home for children which is licensed
 by the State in which it is situated or has been approved, by
 the agency of such State having responsibility for licensing
 homes of this type, as meeting the standards established for
 such licensing . . . .

Proposed regulations to implement the amendments to title IV made by
Public Law No. 96-272 were first published by the Department of Health
and Human Services (HHS) on December 31, 1980.  The proposed regulations
included a section (section 1357.30) which closely followed the language
of section 427(a).  In addition, the proposed regulations defined the
term "foster care" as --

 . . . 24-hour, out-of-home care provided in a licensed or
 approved foster family home, group home, or child care
 institution.

Proposed section 1355.20(a) (45 Fed. Reg. 86,817, 86,834).  The proposed
regulations also defined the term "foster family home" as "the home of
an individual or family licensed or approved by the State licensing
authority(ies) . . . that provides 24-hour out-of-home care for
children."   Id.  Proposed section 1355.20 stated that the definitions
were applicable to the terms as they appeared throughout the title IV-B
and IV-E regulations, unless otherwise specified.

HHS subsequently withdrew these proposed regulations and issued a second
notice of proposed rulemaking (47 Fed. Reg. 30932 (July 15, 1982)) which
was adopted as a final rule in 1983.  These regulations do not define
the term "foster care" and do not refer to the requirement for a case
review system.  The regulations state with respect to the requirements
for an inventory and statewide information system only that they "must
include those children under the placement and care responsibility of
the State title IV-B or IV-E agencies."  45 C.F.R. . 1357.25 (1983).
Like the original proposed regulations, the final regulations define the
term "foster family home" as "the home of an individual or family
licensed or approved by the State licensing or approval authority(ies) .
. . that provides 24-hour out-of-home care for children."  45 C.F.R. .
1355.20(a).  This section further states that the term "may include
group homes, agency operated boarding homes or other facilities licensed
or approved for the purpose of providing foster care by the State agency
responsible for approval or licensing of such facilities."  Section
1355.20(b) provides that the definitions in section 1355.20(a) are
applicable to the terms as they appear throughout the title IV-B and
IV-E regulations, unless otherwise specified.  In addition, section
1355.20(a) states that "[u]nless otherwise specified, the definitions
contained in section 475 of the Act apply to all programs under title
IV-E and IV-B of the Act."

While the final regulations do not specifically address the question of
the scope of the population to be included in a state's section 427 case
review system, several Agency issuances do so.  The first issuance, PIQ
82-12, dated July 12, 1982, responded to the question whether certain
groups of children -- specifically, mentally disabled children,
developmentally disabled children, SSI/SSP recipients, and children in
voluntary out-of-home placements supervised by a probation department --
should be included in the inventory, information system, and case review
system required by section 427.  The PIQ stated:

 In order to make this determination, two factors should be
 considered.  First, are the children in foster care?  Although
 the Act does not specifically define the term "foster care," the
 definitions of "foster family home" and "child-care institution"
 found in section 472(c) of the Act, provide guidance to the
 State in making this determination.  Second, is the child under
 the responsibility of the State agency administering or
 supervising the administration of the title IV-A(FC), IV-E, or
 IV-B State plan?  A controlling indicator here is whether the
 State agency has the responsibility for care and placement of
 the child and the power to determine the child's placement.

PIQ 82-12, at 4.

On June 5, 1985, the Agency issued PIQ 85-6 in response to a question by
HHS Region X concerning whether children under state responsibility
placed with unlicensed relatives with no foster care payment would be
required to meet the section 427 requirements. 5/  The PIQ stated that
"the following considerations would be applied" in determining whether
the children should be included in a state's foster care population for
purposes of section 427:

 1.  Is the child in foster care?  Has the child been removed
 from his home pursuant to a voluntary placement agreement or as
 the result of a judicial determination and placed in out-of-home
 care?

 2.  Is the child under the responsibility of the State agency
 for placement and care?

PIQ 85-6, at 8.

Finally, on June 1, 1987, the Agency issued PA-87-02.  This issuance,
which was denominated a "Clarification of ACYF-PIQ-82-12," noted that
there had been uncertainty in some states with respect to whether
certain categories of children, including "children placed by the State
in relative foster homes, with or without foster care payments," were
covered by section 427.  PA-87-02 stated that the only two factors to be
considered were "(1) whether the children are in foster care, and (2)
whether the children are under the responsibility of the State title
IV-B/IV-E agency," and stated that "foster care" was "twenty-four hour
substitute care for children outside of their own homes," and included
relative foster homes. 6/

Factual Background

The sampling methodology proposed by the State for the case record
survey for FY 1984 excluded children in "approved only" homes from the
universe from which the case record sample was to be drawn.  As
previously indicated, these children were placed in homes of relatives
which were neither licensed by the State as foster family homes nor
approved as meeting licensing standards.  The State took the position
that these children were not in "foster care" within the meaning of
section 427 and, consistent with this position, the State did not in
fact provide all of the section 427 protections to the children in the
six sample cases reviewed in the case record survey who were living in
"approved only" homes. 7/  The Agency rejected the State's methodology,
taking the position that children placed by the State in "approved only"
homes were in "foster care" within the meaning of this section.  At the
Agency's direction, the State then provided a case record sample which
included children in "approved only" homes.  When the State failed the
case record survey and was determined ineligible for FY 1984 section 427
funds, it appealed this determination in part on the ground that the
survey improperly included children in "approved only" homes.

Analysis

This case raises the question whether the requirement in section 427 for
a case review system for "each child in foster care under the
supervision of the State" applies to children in "approved only" homes.
There is no dispute that these children were "under the supervision" of
the State.  Thus, the issue here is whether these children were in
"foster care" within the meaning of section 427.  The Agency took the
position that it was clear on the face of the statute that all children
in 24-hour, out-of-home care were in "foster care" and that children in
"approved only" homes were thus required to be included in the State's
case review system.  The State took the position that "foster care"
meant care in a foster family home or child care institution as defined
in title IV-E.  The District Court found that the "approved only" homes
were not foster family homes or child care institutions since they were
not licensed or approved as meeting licensing standards for either type
of facility.  Thus, under the State's interpretation, a case review
system would not be required for children in "approved only" homes.

As discussed in detail below, we conclude:

 o  That the Agency's interpretation of the term "foster care" as
 including children in "approved only" homes is reasonable since
 it is consistent with the statutory language and the legislative
 history;

 o  That the Agency's interpretation was, however, not required
 by the language of the statute;

 o  That the statute can also be reasonably interpreted in the
 manner argued for by the State;

 o  That the State did not receive notice of the Agency's
 interpretation until the issuance of PIQ 85-6 in 1985; and

 o  That retroactive application of the Agency's interpretation
 was not justified.

Accordingly, we conclude that the Agency's interpretation was not
binding on the State and that the State's interpretation should be
applied in determining the universe for the case record survey for FY
1984.

1.  The Agency's interpretation of "foster care" is reasonable.

Although the Act uses the term "foster care" in both section 427 of
title IV-B and in title IV-E, there is no express definition of that
term in either title (or in the implementing regulations).  Thus, there
is no basis for finding that the Agency's interpretation of "foster
care" is inconsistent with the specific language of the statute.

Moreover, we find some support for the Agency's interpretation in the
scheme of the Act.  Foster care maintenance payments are available under
section 472(b) only for children in foster family homes or child care
institutions.  In contrast, the section 427 requirements apply to each
child in "foster care under the supervision of the State" without regard
to whether maintenance payments are made on their behalf.  Indeed, as
discussed later, title IV-B in general is directed at a broader range of
child welfare concerns than those associated with children needing
financial support under title IV-E.

The Agency's interpretation is also consistent with the basic purpose of
section 427 to protect the class of children in "foster care."  Since
the purposes of section 427 are protective, a broad reading of the term
"foster care" which entitles the maximum number of children to the
section 427 protections best effectuates congressional intent.

Furthermore, the Agency's interpretation of the term "foster care" is
supported by specific language in the legislative history of the
amendments to title IV of the Act made by Public Law No. 96-272.  The
Senate report on .the bill that was later adopted as Public Law 96-272
stated that the amendments involved --

 a major restructuring of Social Security Act programs for the
 care of children who must be removed from their own homes.  In
 particular, the incentive structure of present law is modified
 to lessen the emphasis on foster care placement and to encourage
 greater efforts to find permanent homes for children either by
 making it possible for them to return to their own families or
 by placing them in adoptive homes.

S. REP. No. 336, 96th Cong., 2nd Sess. 1 (1979).  The children in
question here were clearly "removed from their own homes" and placed by
the State in homes which were not "permanent" homes.  There is no
indication that the legislation was not intended to address the needs of
such children merely because the homes in which they were placed were
not licensed by the State as foster family homes or approved as meeting
these licensing standards.    In addition, in discussing the regulatory
impact of the section 427 program, the Senate report states:

 If . . . a State elects to participate in this program,
 regulations would be necessary to carry out its requirements.
 These regulations would affect the children in State-supervised
 foster care in each participating State including both foster
 care funded under the AFDC foster care provisions and foster
 care otherwise supervised by the State.

S. REP. No. 336, 96th Cong., 2nd Sess. 97 (1979).  This is a clear
indication that Congress viewed "foster care" as covering children in
addition to those eligible for foster care maintenance payments under
title IV-E (formerly funded under title IV-A (AFDC)).

Moreover, as noted by the Agency, the House report on the bill that was
later enacted as Public Law No. 96-272 expressed a preference for
placement with relatives "if appropriate and reasonably possible."  H.
REP. No. 136, 96th Cong., 2nd Sess. 49 (1979).  The Agency asserted that
"[i]t would make no sense for Congress to state its preference for
relative placements only to see children in those placements receive
fewer procedural protections than other children who receive the
protections of Section 427."  Agency brief at 11.  The State responded
that it did not seek to exclude children from the case review system
because they were placed with relatives but rather because they were not
in foster family homes as defined in title IV-E. 8/  In any event, a
significant number of children placed with relatives would be excluded
from the case review system required by section 427 under the State's
interpretation of the term "foster care." 9/  Thus, it is arguable that
adoption of the State's interpretation would frustrate Congressional
intent in this respect.

Since the Agency's interpretation of the term "foster care" as including
children in "approved only" homes is consistent with the language and
underlying purpose of the statute and is supported by the legislative
history, we conclude that it is reasonable. 10/

2.  The Agency's interpretation of "foster care" is not required by the
language of the statute.

The Agency argued that its interpretation was required by the language
of section 427(a)(2)(B), which provides that, in order to receive
section 427 funds, a state must have implemented and be operating "a
case review system . . . for each child receiving foster care under the
supervision of the State."  The Agency read this as requiring that a
child be included in the case review system if the child is "under the
supervision of the State."  The Agency asserted, moreover, that the
reference to "each child" shows that Congress did not intend to exclude
any children under State supervision from the section 427 protections.
The Agency also noted that the requirement for an inventory at section
427(a)(1) applies to "all children in foster care under the
responsibility of the State."  The Agency argued that since this was the
same class of children covered by the case review system, the fact that
the State included children in "approved only" homes in its inventory
meant that these children were in "foster care."

We are not persuaded that the language cited by the Agency requires the
interpretation the Agency advanced here.  As noted above, this case
involves the interpretation of the term "foster care" as used in section
427.  The Agency's view that the controlling factor is whether the child
is "under the supervision of the State" renders the words "in foster
care" superfluous, in contravention of the basic principle of statutory
construction that a law should be construed so as to give meaning to all
its parts.  Sutherland, Statutory Construction, 4th Ed., Vol. 2A, .
46.06.  In addition, the phrase "each child" logically refers to each
child in foster care, not each child under state supervision.  Moreover,
the State alleged (and the Agency did not deny) that there are many
children under state supervision "who are not in anything resembling
foster care, e.g., children in hospitals, correctional facilities,
detention centers, independent living arrangements, and even children
who have returned to their natural parents."  State brief at 23.  Thus,
it makes no sense to equate children in foster care with children under
state supervision.

Furthermore, although it is true that the statute requires an inventory
which includes the same class of children as the case review system, the
statute is no more specific regarding which children should be included
in the inventory than it is with respect to which children should be
included in the case review system.  Moreover, section 1357.25 of 45
C.F.R. gives states discretion to include in the inventory children in
addition to those "under the placement and care responsibility of the
State."   Thus, the fact that the State included children in "approved
only" homes in its inventory is not dispositive. 11/

Accordingly, although we concluded above that the Agency's
interpretation of "foster care" as including children in "approved only"
homes is consistent with the language of the statute and the legislative
history, we further conclude that the statute does not require this
interpretation.  This leaves room for other, reasonable interpretations
such as the one advanced by the State.

3.  The State's interpretation of the statute is reasonable.

The State advanced its own interpretation of the term "foster care."
According to the State, since section 427 expressly adopts the
definition of "case review system" in section 475 of title IV-E and the
definition of "case review system" in section 475 refers to children "in
foster care," the term "foster care" as used in section 427 must derive
its meaning from title IV-E.  The State reasoned further that since
title IV-E requires a case review system for all children receiving
foster care maintenance payments and such payments may be made only on
behalf of a qualified child who is in a "foster family home" as defined
in section 472(c), a child is only in "foster care" if he or she is in a
foster family home. 12/  As indicated above, if the State's argument
were correct, children in "approved only" homes would not be in "foster
care" since the homes were not licensed or approved by the State as
meeting licensing standards, as specified in the definition of "foster
family home." 13/

The State asserted that this reading of the statute was the only
reasonable one, arguing that if "foster care" were not limited to
children in foster family homes as defined by section 472(c), a state
would be required to include in its case review system children who were
not even eligible for foster care maintenance payments in order to
obtain title IV-E funding.  The State also argued that it would make no
sense if a child were considered to be in foster care for purposes of
section 427 but not title IV-E, particularly since section 427 and title
IV-E were enacted together.  The State argued further that it was
logical for Congress to tie section 427 funding to foster homes which
were licensed or approved as meeting licensing standards as a means of
promoting and improving the level of care afforded children in foster
care.  The State noted in this respect that not only does the Act
require that foster family homes be licensed but also HHS itself
emphasized the importance of licensure in the preamble to the 1983
regulations.  Finally, the State argued that its interpretation of the
term "foster care" was consistent with the 1983 regulations since the
regulations provide that the definition of "foster family home" is
applicable to both title IV-B and title IV-E.

We find that the State's interpretation of the term "foster care" as
excluding children in "approved only" homes is a reasonable one.  As
indicated above, since the term "foster care" is not defined in the Act,
there is a great deal of room for interpretation.  As noted earlier, the
State's interpretation leaves a substantial portion of the cases which
are under the State's supervision outside the protections afforded by
section 427.  While the Agency's more inclusive interpretation thus
better effectuates the broad protective purposes of section 427, the
State's interpretation is certainly consistent with the literal language
and structure of the statute.

On the other hand, we find that, like the Agency's interpretation, the
State's interpretation is not required by the language of the Act.  The
State's case is built wholly on inference, since there is nothing in the
statute which expressly ties the term "foster care" as used in section
427 of title IV-B to the definition of "foster family home" in title
IV-E.  Moreover, the State's argument overlooks the requirement in
section 472(a)(16) of the Act that a case review system be provided for
all children receiving foster care maintenance payments.  Children who
are not in foster family homes are not eligible for such payments and,
under this section, need not be included in a case review system as a
condition of title IV-E funding.  Reading section 427 to apply to
children in addition to those in foster family homes would not change
the requirements of section 472(a)(16).  Thus, the Agency's
interpretation would not, as the State contended, require the State to
include children in "approved only" homes in its case review system in
order to obtain title IV-E funding.  Instead, the effect of the Agency's
interpretation is merely to provide an incentive to states to extend the
protections of the case review system to children not covered under
section 472(a)(16).

In addition, contrary to the State's argument, the fact that section 427
and title IV-E were enacted together does not require that they apply to
the same children.  Section 427, which is located in title IV-B,
authorizes additional funding for child welfare services.  Under section
425(a)(1), child welfare services are public social services directed
toward the accomplishment of several goals, including "protecting and
promoting the welfare of all children . . . ."  Title IV-E, on the other
hand, authorizes federal funding for payments on behalf of children in
foster care only if a number of very specific conditions are met.  Since
the two programs are different in purpose and scope, we agree with the
Agency that the better view is that, as a condition of receipt of
additional funds under the broader title IV-B program, Congress intended
to require states to provide procedural protections for children in
addition to those eligible to receive foster care maintenance payments
under title IV-E. 14/

Furthermore, there is no evidence that Congress intended licensure to be
a defining characteristic of "foster care" for purposes of section 427.
The definition of a "foster family home" as one which is licensed or
approved as meeting licensing standards ensures that title IV-E funds
will not be used to support children in homes which do not meet state
licensing standards.  Moreover, although the preamble to the 1983
regulations refers to "the important principle of licensure or approval"
(48 Fed. Reg. 23104, 23105 (May 23, 1983)), this relates specifically to
the definition of "foster family home" in title IV-E.

Finally, contrary to the State's view, the 1983 regulations do not
provide that the definition of "foster family home" applies to titles
IV-B and IV-E.  Instead, the definitions in section 1320.55(a) are made
applicable to the defined terms as they appear throughout the
regulations implementing titles IV-B and IV-E.  Since the term "foster
family home" does not appear in title IV-B, section 1320.55(a) cannot
make the definition of "foster family home" applicable to title IV-B.

We are therefore faced with two conflicting interpretations of "foster
care," both of which are reasonable and neither of which is required by
the statute.  As discussed below, we conclude that the State's
interpretation should be applied for purposes of determining the
universe for the case record survey for FY 1984 since the Agency did not
give the State adequate, timely notice of its interpretation and
retroactive application of the Agency's interpretation is not justified.

4.  The Agency did not give the State adequate, timely notice of its
interpretation.

The Board and the courts have consistently held that, where a statute is
ambiguous, the Agency's interpretation is entitled to deference if "that
interpretation is reasonable, and appropriate notice of that
interpretation has been given to the State."  California Dept. of Health
Services, DAB No. 1285 (1991), at 9, citing Commonwealth of
Pennsylvania, Dept. of Public Welfare v. The United States Department of
Health and Human Services, 928 F.2d 1378 (3d Cir. 1991); see also
Tennessee Dept. of Human Services, DAB No. 1094 (1989), at 7. 15/  This
approach is consistent with 5 U.S.C. . 552(a)(1), which provides that an
agency interpretation of general applicability not published in the
Federal Register may adversely affect a party (other than the agency)
only if "the party has actual and timely notice of the terms thereof."
While the Agency's interpretation of the term "foster care" is
reasonable, the State cannot fairly be held to the Agency's
interpretation if the State did not receive adequate, timely notice of
that interpretation in the context where there was another reasonable
interpretation relied on by the State.  As discussed below, here the
Agency failed to state its interpretation clearly in regulations or
other guidance issued before the fiscal year in question and may have
actually led the State to believe that "approved only" children were not
in "foster care" within the meaning of section 427.  Accordingly, the
State was entitled to exclude such children from the case record survey
for FY 1984.

We note preliminarily that this analysis is valid only if the Agency's
interpretation of "foster care" was an interpretative rule, not required
by 5 U.S.C. . 553 to be published pursuant to notice and comment
rulemaking.   The Agency's view of what constitutes "foster care" is
clearly interpretative since it relates to the meaning of specific
statutory language.  See Gibson Wine Co. v. Snyder, 194 F.2d 329, 331
(D.C. Cir. 1952); United States v. Picciotto, 875 F.2d 345, 347 (D.C.
Cir. 1989).  Thus, the question whether the State had notice of the
Agency's interpretation is critical here.

The Agency contended that its interpretation was clearly articulated in
PIQ 82-12, which was issued to the states prior to FY 1984. 16/
According to the Agency, the PIQ specifies that any child for whom the
state agency is responsible must be included in the case review system
under section 427.  However, we find that the Agency's interpretation is
not clearly articulated in this PIQ and that the PIQ may have actually
led the State to believe that the Agency had adopted the same
interpretation as the State.

The summary at the beginning of the PIQ states that "a State must
include in the inventory, information system and case review system all
those children in foster care under the responsibility of the State
agency(ies) administering or supervising the administration of the title
IV-B Child Welfare Services State Plan or the title IV-E or IV-A (FC)
State plans . . . ."  This merely repeats the statutory requirement,
however, and does not address the question of which children are in
foster care.  The same language is repeated later in the PIQ followed by
the statement:  "Therefore, any child for whom the State agency is
responsible must be included."  However, the PIQ later identifies
whether a child is in foster care and whether the child is under the
responsibility of the state agency as two separate factors which must be
considered in determining whether a child should be included in the case
review system. 17/  After identifying the first factor, the PIQ states
that "[a]lthough the Act does not specifically define the term `foster
care,' the definitions of `foster family home' and `child care
institution' found in section 472(c) of the Act provide guidance in
making this determination." This statement could reasonably be read as
equating "foster care" with "foster family home" and "child care
institution" as defined by section 472(c).  After identifying the second
factor, the PIQ states that "[a] controlling indicator here is whether
the State has the responsibility for care and placement of the child and
the power to determine the child's placement."  Contrary to the Agency's
position, this appears in context to be a clarification of the second
factor rather than a general statement of what constitutes foster care.

Thus, PIQ 82-12 not only failed to give the State notice that the Agency
interpreted the term "foster care" in section 427 as including children
in "approved only" homes, but also arguably confirmed the State's
interpretation of that term as not including such children.

The State was particularly likely to have read PIQ 82-12 as confirming
its interpretation of the term "foster care" since the proposed
regulations issued in December 1980 specifically defined "foster care"
as care in a foster family home or child care institution.  While the
proposed regulations did not have any legal effect, the fact that they
were consistent with the State's reading of the PIQ made it all the more
important that the Agency give the State clear notice of the different
interpretation which it ultimately adopted. 18/

Moreover, the final regulations adopted in 1983 state that a foster
family home may include certain facilities (such as group homes)
"licensed or approved for the purpose of providing foster care."  45
C.F.R. . 1355.20(a).  This language arguably equates "foster care" with
care in a "foster family home," providing further support for the
State's interpretation.

The Agency also contended, however, that Miller v. Youakim, 440 U.S. 126
(1979), to which the State was a party, put the State on notice that it
might not be proper to exclude children in "approved only" homes from
the case review system.  In Youakim, the Supreme Court considered the
State's practice of excluding children who resided with relatives from
eligibility for foster care maintenance payments funded under title IV-A
of the Act prior to the enactment of Public Law No. 96-272.  The Court
rejected the State's argument that children placed with relatives were
not in foster family homes as defined in title IV-A and should be
excluded on that basis, stating that "[n]either the legislative history
nor the structure of the Act indicates that Congress intended to
differentiate among neglected children based on their relationship to
their foster parents."  Youakim at 138-139.  The Agency acknowledged
that, unlike the children in question here, the children at issue in
Youakim were in licensed homes.  The Agency nevertheless contended that,
in view of the Court's statement, the State should have questioned
whether children in relative placements which could not meet licensing
standards could be treated differently from children placed in licensed
homes.  The Agency's argument is based on speculation as to what the
Court would have decided on different facts under a different statutory
provision.  Thus, we do not agree that Youakim raised a question about
whether children in "approved only" homes could properly be excluded
from the case review system required by section 427.  In any event, to
the extent that such a question was raised, the State could reasonably
have thought that it was resolved by the proposed regulations issued in
1980 and by PIQ 82-12. 19/

Thus, the State did not have adequate, timely notice of the Agency's
interpretation of the term "foster care" as used in section 427.
Accordingly, the Agency's interpretation was not binding for purposes of
determining whether the State was eligible for FY 1984 section 427 funds
unless retroactive application of the Agency's interpretation was
justified.

5.  There is no basis for retroactive application of the Agency's
interpretation to FY 1984.

The Agency nevertheless pointed out that the State agreed that the
interpretation of "foster care" which the Agency sought to apply here
was clearly articulated in PIQ 85-6, issued June 5, 1985.  The Agency
asserted that retroactive application of this PIQ was proper under a
balancing test set out in SEC v. Chenery Corp., 332 U.S. 194 (1947), in
which "the ill effects of retroactivity must be balanced against the
mischief of producing a result that is contrary to a statutory design or
to legal and equitable principles."  This test requires consideration of
the following factors:  (1) whether the particular case is one of first
impression; (2) whether the new rule represents an abrupt departure from
well-established practice or merely attempts to fill a void in an
unsettled area of law, (3) the extent to which the party against whom
the rule is applied relied on the former rule, (4) the degree of the
burden which a retroactive order imposes on a party, and (5) the
statutory interest in applying a new rule.

The State contended that the balancing test in Chenery was inappropriate
because the Supreme Court later held in Bowen v. Georgetown University
Hospital, 488 U.S. 204 (1988), that the power to promulgate retroactive
rules must be expressly granted by Congress.  The State further
contended that there was no basis for retroactive application of the
Agency's interpretation even applying Chenery.

We conclude that the Agency's reliance on Chenery is misplaced.  Chenery
dealt with the question whether an order arising out of an agency
adjudication could properly be applied on a retroactive basis. 20/
However, as indicated above, the Agency here sought to retroactively
apply PIQ 85-6 as an interpretative rule, not merely to adjudicate the
meaning of the term "foster care."  As also indicated above, the law is
clear that an interpretative rule, even if reasonable, cannot adversely
affect a party unless the party has timely notice of the interpretation.
21/

In any event, we conclude that retroactive application of the Agency's
interpretation is not warranted even applying the balancing test in
Chenery.  The Agency argued that this case was not one of first
impression since the issue of whether children placed with relatives
could be treated differently from other groups of children in foster
care was in litigation in Youakim.  However, as discussed above, this
case is distinguishable from Youakim in that it involves children placed
in with relatives in non-licensed homes rather than children placed with
relatives in licensed homes.  The Agency also argued that its
interpretation was well-established.  However, as previously discussed,
none of the Agency's issuances prior to PIQ 85-6 clearly articulated the
Agency's interpretation.  The Agency argued in addition that the State
could not reasonably have relied on the interpretation which it advanced
here in light of Youakim and PIQ 82-12. 22/  As just noted, however, the
Agency's interpretation was not evident from PIQ 82-12, and Youakim
arguably raised a different issue from that presented here.  Thus, we
are not persuaded that the State should have questioned whether its own
interpretation of section 427 was correct on the bases cited by the
Agency. 23/

The Agency further argued that since the section 427 funds were
"incentive funds," the State was not prejudiced by a finding that it was
ineligible for the funds.  However, regardless of how the section 427
program is structured, the State will be entitled to the $1,034,619 of
section 427 funds in question here if it passes the case record survey.
Thus, retroactive application of the Agency's interpretation to deprive
the State of these funds would impose a significant burden on the State.
Finally, we agree with the State that retroactive application of the
Agency's interpretation would not further the purposes of the Act since
children who were, in the Agency's view, wrongly excluded by the State
from the case review system could not retroactively receive the section
427 procedural safeguards.  Thus, all of the factors in the balancing
test weigh against the retroactive application of the Agency's
interpretation of the term "foster care."

For the foregoing reasons, we conclude that the State's definition of
the term "foster care" should be applied in selecting the universe for
the case record survey for FY 1984.

 II.  Whether the Use of a 90% Compliance Standard Was Proper

Section 427(a)(2)(B) requires that a state have implemented and be
operating a case review system "to the satisfaction of the Secretary . .
. ."  The Agency awards section 427 funds to a state which wishes to
participate in the section 427 program based on a written certification
by the state that it met the requirements of section 427.  Subsequently,
the Agency performs a compliance review to validate the state's
self-certification.  As part of this compliance review, the Agency
surveys a sample of foster care case records to determine whether the
section 427 requirements were actually met.  However, the Agency has not
required 100% compliance in order for a state to pass the case record
survey, but instead has applied progressively more stringent compliance
standards:  66% for a state's first year of operating a section 427
program, 80% for a state's second year, and 90% for a state's fifth
year.  (The review of the fifth year is performed after two unreviewed
years and is known as the triennial review.)  These compliance standards
were announced in written program instructions sent by the Agency to the
states.  The 90% compliance standard at issue here was announced in PI
85-2, dated January 29, 1985, which was after the fiscal year in
question (FY 1984) but before the review for that year was conducted.

The case record survey for FY 1981, the State's initial year of
operation, found that the State had complied with the section 427
requirements in more than 80% of the cases surveyed.  The Agency
therefore agreed not to conduct another review until FY 1984 and applied
the 90% compliance standard applicable to triennial reviews in that
year.

The State contended that the application of the 90% compliance standard
was arbitrary, capricious, and an abuse of discretion because the
standard was a substantive rule promulgated without notice and comment
rulemaking as required by 5 U.S.C. . 553 and because the 90% standard
was applied retroactively.  In DAB No. 1037, the Board rejected these
arguments, citing its decision in Connecticut Dept. of Children and
Youth Services, DAB No. 952 (1988).  The Board there found that --

 the 90% compliance standard did not change the statutory
 requirements; it was merely the level of compliance which the
 Secretary decided as an administrative matter to enforce in
 triennial reviews.  [Footnote omitted.]  The 90% standard was
 therefore not a rule for which notice and comment rulemaking was
 required . . . .

Connecticut at 8.  The Board also found in Connecticut that retroactive
application of the 90% standard was not prejudicial to Connecticut,
stating --

 To argue that the State was harmed by the lack of notice would
 be to admit that the State never intended to fully comply with
 the statutory requirements, but had aimed instead for the 80%
 level of compliance required in the prior review.  Such an
 approach would be inconsistent with the certification submitted
 by the State . . . that it met the requirements of section 427.

Id. at 8-9.  Finding that the State had "made no showing here that this
conclusion was wrong as a matter of law," the Board in DAB No. 1037
upheld the application of the 90% compliance standard to the State's FY
1984 case record survey.

Although the District Court did not reach the issue of the validity of
the 90% compliance standard in its decision, the State requested that
the Board reconsider its holding on this issue based on new or
additional authority.  The State subsequently called two court decisions
to the Board's attention:  Maryland Dept. of Human Resources v.
Sullivan, 738 F.Supp. 555 (D.D.C. 1990) and Connecticut Dept. of
Children and Youth Services v. Department of Health and Human Services,
C. A. No. 88-1807 (D.D.C., March 18, 1992).  In Maryland, the court
upheld the Board's decision in Maryland Dept. of Human Resources, DAB
No. 1039 (1989), in which the Board incorporated its earlier decision
upholding the application of the 80% compliance standard announced in PI
82-06 (Maryland Dept. of Human Resources, DAB No. 706 (1985)).  The
State attempted to distinguish the instant case from the court's
decision in Maryland on the ground that the compliance standard in
Maryland was announced in an earlier Agency program instruction which,
unlike PI 85-2, gave the Agency discretion in applying the standard.
The State further asserted that the Connecticut court decision, which
upheld DAB No. 952, was wrong in that the court erroneously held that it
need not address the question of whether retroactive application of the
90% standard was proper because the standard constituted an
interpretative rather than a legislative rule.

We conclude that our decision in DAB No. 1037 that the Agency properly
applied a 90% compliance standard should be reaffirmed in light of the
subsequent court decisions.  In discussing the 90% compliance standard,
the court in Connecticut stated in part:

 It is the statute itself that sets forth the requirements under
 the Act. . . .  The 90% compliance standard established in PI
 85-02 creates no new requirements, but merely demonstrates an
 exercise of administrative discretion to allow some deviation
 from perfect compliance with the statute.  . . .  The legal
 standard governing the awarding of funds is set forth in the
 statute itself . . . .  Therefore, it is not the program
 instruction, but the statute itself that creates law and
 determines rights by mandating the behavior of the individual
 states.

C.A. No. 88-1807, at 14.  The court's decision to uphold the application
of the 90% compliance standard was thus based on the same rationale as
the Board's decision to uphold the 90% standard in DAB No. 1037 and DAB
No. 952.  We disagree with the State's position that the court in
Connecticut should have addressed the question whether retroactive
application of the 90% standard was proper notwithstanding the fact that
the court found that this standard was an interpretative rule.  Although
the Secretary determined that a state's performance was satisfactory if
the state provided the section 427 protections to 90% of the children in
foster care, the standard with which the state was bound to comply was
set by the statute, which required that the protections be provided to
"each child."  Thus, neither Connecticut nor this case involve applying
a rule that has an impermissible retroactive effect of altering a
state's substantive rights or obligations.

The Agency did not dispute the State's contention that the program
instruction at issue in Maryland, PI 82-06, was distinguishable from PI
85-2 on the basis asserted by the State.  Nevertheless, the Maryland
court decision is instructive in that, like the Connecticut court
decision, it views the statute as conditioning section 427 funding on a
state's "monitoring each and every child," 738 F. Supp. 555, at 560, and
thus focuses on the fact that the program instruction did not alter
substantive obligations.  While the fact that the administrative
discretion left to the Agency head in PI 82-06 permitted an analysis
viewing PI 82-06 as a general statement of policy, the alternative
analysis that it constitutes an interpretative rule is sufficient to
exempt it from notice and comment rulemaking.  This alternative analysis
applies to PI 85-2 as well as PI 86-06.

Accordingly, consistent with subsequent authority, we reaffirm our
holding in DAB No. 1037 that the Agency properly applied a 90%
compliance standard to the State's case record survey for FY 1984.

Conclusion

For the foregoing reasons, we conclude that the Agency improperly found
the State ineligible for FY 1984 section 427 funds based on a case
record survey which included children in "approved only" homes.
Accordingly, this case is remanded to the Agency to conduct a case
record survey which excludes these children.  If the State complied with
the requirements of section 427 in at least 90% of the sample cases, the
State should be found eligible for the section 427 funds.  If the State
contests new findings in individual cases which raise issues not
previously decided by the Board, it may request review by the Board
within 30 days of its receipt of the Agency's written determination.

 _____________________________ Judith A. Ballard

 _____________________________ Norval D. (John) Settle

 _____________________________ Cecilia Sparks Ford Presiding
 Board Member

1.  Effective April 15, 1991, the Administration for Children, Youth and
Families was one of several agencies combined into the Administration
for Children and Families.

2.  The court agreed that, until October 1981, "approved only" homes met
the licensing standards for foster family homes, but found that once the
licensing standards were updated:

 The designation "approved only" reflected the inability of a
 related caretaker to meet the new licensing standards, not a
 determination that the related caretaker had met the standards
 in effect until October 1981.

District Court decision at 15.

3.  We assume for purposes of this decision that none of the children in
"approved only" homes received title IV-E payments.  Under section
472(b) of the Act, eligibility for such payments is conditioned on the
child's placement in a foster family home or child care institution.
Thus, a child receiving such payments would be in "foster care" as
defined by the State.  While the district court found that the State had
not claimed foster care maintenance payments under title IV-E for any of
the six children at issue, it made no finding with respect to other
children in "approved only" homes.  Accordingly, the Agency may require
proof that all children who received title IV-E payments were included
in the universe.

4.  The Board noted in DAB No. 1037 that the parties disagreed as to
whether the Agency should conduct a case record survey using a new
sample which excluded cases involving "approved only" children or should
use the original sample with the "approved only" cases excluded.
Nevertheless, the Board did not reach that issue in view of its
conclusion that the Agency properly determined that all of the disputed
cases failed the case record survey.  See DAB No. 1037, at 2, n. 2.
While we reach a different conclusion here, the parties agreed that the
Board need not consider as part of this remand the question of how the
Agency should complete the case record survey.  Confirmation of
Conference Call, dated 10/3/91, at 3.

5.  The PIQ also responded to other questions not relevant here.

6.  On May 10, 1991, after the appeal leading to DAB No. 1037 was
instituted, the Agency issued ACYF-IM-91-11, which cited PIQ 82-12 and
PA-87-01 and stated specifically that "children under the responsibility
of the State agency who have been placed with relatives regardless of
whether the State defines the placement as `kinship care,' `foster
care,' or something different" must be afforded the section 427
protections.  IM-91-11, at 1.

7.  The State asserted that its administrative rules implementing
section 427 did not require the section 427 protections for children in
"approved only" homes, but required only that these children be
monitored.

8.  Unless the State placed some children in relatives' homes which
qualified as foster family homes, the distinction made by the State
would not have much validity.  It is not clear from the record whether
any relatives' homes qualified as foster family homes during FY 1984.

9.  The Agency estimated that 45% of the State's "foster care" caseload
would be excluded under the State's interpretation.  Agency brief at 7.
The State estimated that 18.8% would be excluded.  State reply brief at
2-3.  We need not determine the correct percentage since in either case
the number is clearly significant.

10.  Although the State cited other language in the legislative history
as supporting its interpretation, it conceded that this language was not
"dispositive."  Transcript of April 9, 1992 oral argument at 17.

11.  The Board noted in DAB No. 1037 that the exclusion of the children
in "approved only" homes from the State's case review system was
"suspect" because the State provided no evidence that it included such
children in its inventory under this discretionary authority rather than
because they were considered to be in "foster care."  DAB No. 1037 at
11.  However, this alone is not a substantial enough basis for
concluding that the children in "approved only" homes were in "foster
care" within the meaning of section 427.

12.  The State also asserted that a child in a "child care institution"
within the meaning of section 472(c) was in "foster care."  For brevity,
we refer only to foster family homes in discussing the State's
arguments.

13.  Despite the breadth of this argument, the State stated that it was
not contending that other children in unlicensed placements were not in
"foster care" within the meaning of section 427.  Transcript of April 9,
1992 oral argument at 39-41.

14.  It would be illogical to read the statute as requiring section 427
protections for all children eligible for title IV-B services, however,
since that would include children clearly not in foster care, such as
children living with their parents.

15.  The Agency cited Chevron v. NRDC, 467 U.S. 837 (1984), and Board of
Governors v. Dimension Financial Corp., 474 U.S. 361 (1986), in support
of its argument that the Board was required to uphold the Agency's
interpretation of the statute if it is a "permissible construction of
the statute."  Agency brief at 15, quoting Chevron at 843.  These cases
are not on point, however, since they involve court actions to set aside
Agency regulations and did not raise the question of whether there was
adequate notice of the Agency's interpretation.

16.  While the Agency also argued that its interpretation was apparent
on the face of the statute, this argument is not persuasive, as
discussed above.

17.  The Agency noted that the PIQ was responding to the question
whether mentally disabled children, developmentally disabled children,
SSI/SSP recipients, and children in voluntary out-of-home placement
supervised by a probation department should be included in the case
review system and did not mention relative placements as a possible
category of children to be excluded.  However, even if the Agency did
not take children in "approved only" homes into account in developing
the PIQ, this does not make the general criteria stated in the PIQ
inapplicable in determining whether such children must be included in a
state's case review system.

18.  During the oral argument in this case, the Agency contended for the
first time that, in defining "foster care" as "24-hour, out-of-home care
provided in a licensed or approved foster family home," the proposed
regulations were not referring to a foster family home as defined in
section 472(c) of the Act, i.e., one "which is licensed by the State . .
. or has been approved . . . as meeting the standards for such
licensing."  Since the language in the statute and the proposed
regulations is virtually identical, however, we see no basis for the
Agency's argument.

19.  In the course of discussing the notice issue, the Agency also
commented that the State argued successfully before the Board in
Illinois Dept. of Public Aid, DAB No. 478 (1983), that "approved only"
homes met licensing standards for foster family homes, so that children
in these homes were eligible for foster care payments under title IV-A.
The Agency stated that "[i]f Illinois was being truthful with the Board
at that time, then relative placements should have been included in the
State's Section 427 program for at least 1981 and they were not."
Agency brief at 24.  It is not clear what bearing this has on the issue
of whether the State had notice of the Agency's interpretation.  In any
event, the treatment of "approved only" children in FY 1981 is not
relevant here since the District Court in its decision reversing DAB No.
1037 specifically found that "approved only" homes did not meet
licensing standards in FY 1984.

20.  Lower court decisions applying Chenery have likewise dealt with
adjudications (see e.g., Clark-Cowlitz Joint Operating Agency v.
F.E.R.C., 826 F.2d 1074 (D.C. Cir. 1987)) or have involved the
retroactive application of an agency regulation (see e.g., Yakima Valley
Cablevision, Inc. v. F.C.C., 794 F.2d 737 (D.C. Cir. 1986)).

21.  We further note that Bowen is not on point since that case involves
the retroactive application of a legislative rule.  Express
congressional authorization is not required for a federal agency to
merely interpret the meaning of a term not defined in a statute.

22.  The Agency did not dispute that there was actual reliance, however.

23.  The State also noted that in 1982, it had submitted to the Agency
copies of its administrative rules relating to the section 427 program,
including a rule which specified that administrative case reviews were
conducted only for children living in foster family homes licensed or
approved as meeting licensing standards, group homes or child care
institutions.  The State suggested that it reasonably relied on this
interpretation because the Agency approved its administrative rules.
The Agency denied that it was aware of the State's interpretation prior
to 1984.   Agency brief at 13-14.  However, we need not resolve this
dispute in view of our conclusion that the State could reasonably have
read PIQ 82-12 as confirming its