Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: New York State Department of Social Services
DATE: October 5, 1992
Docket Nos. A-92-52 and A-92-183
Decision No. 1360
DECISION
The New York State Department of Social Services (New York)
appealed
disallowances by the Social Security Administration (SSA) of $16,037
for
the state fiscal year ending March 31, 1989 (SFY 1989) and $10,507
for
the state fiscal year ending March 31, 1990 (SFY 1990). 1/
The
disallowances were based on audits performed by Peat, Marwick, Main
and
Co. for the respective years, and were communicated to New York
in
letters from SSA on November 15, 1991 and May 26, 1992,
respectively.
Both of the disallowances involved the allowability of claims
for
interest costs incurred in the financing of certain data
processing
equipment purchased by New York for use by its Office of
Disability
Determinations (ODD).
For the reasons stated below, we uphold in full both disallowances.
We
find that interest charges related to the financing of the
data
processing equipment were clearly unallowable costs under the
federal
cost principles which were expressly made applicable by
regulations.
BACKGROUND
The following facts are not in dispute. New York, through ODD,
provides
disability determinations for SSA under Titles II and XVI of the
Social
Security Act. 2/ To aid in making such determinations, New York
leased
certain data processing equipment from Sperry-Univac, a
private
corporation not a party to this action. The equipment was
leased
pursuant to an advanced planning document (APD) approved by the
federal
Administration for Children and Families (ACF). SSA Br. at 4;
New York
Br. at 3. The original contract, signed on March 25, 1982,
provided
that New York had the option to lease the equipment for six years
and
extend the contract on a year-to-year lease after that period. 3/
See
New York Ex. 3.
On September 15, 1987, New York entered into a refinancing arrangement
for
the Sperry-Univac contract. The refinancing arrangement
involved
multi-party agreements in which New York made a final payment
to
Sperry-Univac to purchase the equipment and issued Certificates
of
Participation (COPs) to the public. 4/ New York Br. at 4-6.
New York
alleged that the refinancing arrangement was made in order to
take
advantage of favorable provisions of the Tax Reform Act of 1986.
New
York further alleged that the refinancing arrangement was intended
to
and did save on the total price of the data processing equipment.
Id.
at 4. At issue in this appeal is whether New York is entitled to
be
reimbursed for interest payments made to the members of the public
who
invested in the COPs.
ANALYSIS
I. The Regulatory Framework of the Cost
Principles Makes it Clear
that the Interest at Issue Here Is Unallowable.
The regulations relating to the administration of the
disability
determination program provide that states will be reimbursed for
their
"necessary" costs in making determinations and include within
necessary
costs direct as well as indirect costs "as defined in 41 C.F.R.
Subpart
1-15.7 and in Federal Management Circular [FMC] 74-4, as amended
or
superseded." 20 C.F.R. .. 404.1626(a) and 416.1026(a). The
regulations
further provide that the states will receive an audit report
showing
whether their expenditures were consistent with cost
principles
described in Subpart 1-15.7 of Part 1-15 of the Federal
Procurement
Regulations (41 C.F.R. . 1-15.7) and in written guidelines "in
effect at
the time the expenditures were made or incurred." 20 C.F.R.
.. 404.1627
and 416.1027. Items of expenditure may be questioned in the
audit
report "on the basis of cost principles and written guidelines in
effect
at the time the expenditures were made or incurred" and these same
items
may ultimately be disallowed.
The expenditures in question here were made or incurred during SFYs
1989
and 1990 when the Federal Procurement Regulations (FPR) had
been
superseded by the Federal Acquisition Regulations (FAR). Subpart
31.6
of 48 C.F.R. Part 31 of the FAR provides the principles for
determining
allowable costs of contracts with state governments. This
subpart
specifically identifies Office of Management and Budget Circular
No.
(OMB Cir.) A-87 as the source for these principles. 48 C.F.R. .
31.602.
This reference is consistent with the definition of "necessary" costs
in
the disability determination regulations, which references FMC 74-4,
as
amended or superseded. OMB Cir. A-87 replaced FMC 74-4.
Accordingly, the disability program regulations in question require us
to
apply the FAR in determining which items of expenditures may be
questioned in
program audits, and the FAR in turn requires us to apply
OMB Cir. A-87 in
determining which costs incurred by states are
"allowable" under grants from
and contracts with the federal government.
OMB Cir. A-87 itself states that
it contains the cost principles
applicable to grants and contracts with state
governments.
With respect to interest costs, the costs at issue here, OMB Cir.
A-87
could not be any clearer. It provides:
D. Unallowable Costs . . .
7. Interest and other
financial
costs. Interest on borrowings (however represented),
bond
discounts, cost of financing and refinancing operations and
legal and
professional fees paid in connection therewith, are
unallowable except
when authorized by Federal legislation [or
when they pertain to certain
rental costs for office space
occupied after 10/1/80.]
OMB Cir. A-87, Attachment B, . D.7. On its face, the language of
the
interest prohibition is inclusive of every kind of interest cost
on
borrowed funds. It does not contemplate exceptions, other than
those
enumerated by the text. As we discuss below, the exceptions
clearly do
not apply here. The Board has consistently applied the
provision to
support disallowances of interest paid on the purchase of
computer
equipment. See New York State Dept. of Social Services, DAB
No. 1343
(1992); Georgia Dept. of Administrative Services, DAB No. 577
(1984);
Alameda County Cost Plan, DAB No. 281 (1982); Illinois Dept.
of
Administrative Services, DAB No. 271 (1982). Thus, we find that
funding
for the interest at issue here is unallowable under the
interest
provision of OMB Cir. A-87, which is made expressly applicable by
the
program regulations.
In spite of this clear identification of interest costs as
being
unallowable, New York argued that it should receive funding for
the
interest claims. As we discuss below, none of these arguments has
any
merit. 5/
II. Other Provisions of the FAR Are Not
Inconsistent with Relevant
Provisions of OMB Cir. A-87.
New York argued that SSA had not made it clear whether the FAR was
to
apply to determine allowable costs under the social security
disability
program, and that consequently the Board should not automatically
apply
the prohibition in the FAR on interest costs. As we discussed
above,
wherever the social security disability regulations refer to the FPR
and
to FMC 74-4, they specifically contemplate that any superseding
cost
principles would apply. These references could not be any
clearer.
Thus, New York had adequate notice that the FAR, which replaced the
FPR,
was applicable for the period at issue. The FAR in turn requires
us to
apply OMB Cir. A-87, which itself replaced FMC 74-4. Thus, New
York is
simply wrong when it argued that it is not clear whether the FAR
and
hence OMB Cir. A-87 would apply.
Moreover, the agreements at issue here have the qualities of a contract
so
that it is reasonable to apply section 31.602 of the FAR, which
adopts the
provisions of OMB Cir. A-87, to a contract between the
federal government and
New York. Even if these agreements are viewed as
having elements of
grants, OMB Cir. A-87 applies to both grants and
contracts. The absence
of a contracting officer as such would not take
these agreements outside of
the realm of contracts for purposes of these
provisions.
In the alternative (we presume), New York also argued that to the
extent
that the prohibition in OMB Cir. A-87 did apply, certain
exceptions
carved out of the FPR in the context of commercial procurement
made it
unreasonable to apply OMB Cir. A-87 to impose an absolute ban on
funding
for interest. New York cited to sections of the FAR which
allow
reimbursement for specific types of costs, including facilities'
capital
cost of money and the purchase of data processing equipment
under
certain conditions. 6/
However, each of the sections in the FAR which was cited by New York
falls
under subpart 31.2, entitled "Contracts with Commercial
Organizations."
See New York Br. at 13. Clearly, New York is not a
commercial
organization. As we have already stated, the only contract
cost
principles contained in the FAR which would be applicable to New
York, a
state recipient of federal funds, are found in subpart 31.6,
entitled
"Contracts with State, Local and Federally Recognized Indian
Tribal
Governments." Subpart 31.6 refers solely to OMB Cir. A-87 as the
source
for determining allowable costs for contracts with state
governments and does
not attempt to further define allowable costs. 48
C.F.R. .
31.602. Therefore, under the organizational structure and
clear text of
the FAR, OMB Cir. A-87 is the sole authority for
determining allowable costs
for New York.
However, New York ignored this organizational structure and instead
argued
that under certain circumstances, interest was and is allowable,
based on
procurement common law and more recent decisions of the Armed
Services Board
of Contract Appeals. 7/ However, none of the decisions
cited by New
York involved the application of the current FAR, and each
of the previous
holdings applied to commercial contractors rather than
to states as
recipients of federal funds. 8/ Therefore, these cases are
clearly not
applicable here.
New York, stating that the text of the procurement regulations and
OMB
Cir. A-87 contain similar language concerning interest
reimbursement,
argued that the provision in OMB Cir. A-87 was adopted
verbatim from the
procurement regulations and should be interpreted in a
consistent manner
with this more liberally-interpreted provision. Id.
at 27. However,
while both the interest provisions in OMB Cir. A-87 and
in the FAR
contain the language "[i]nterest on borrowings (however
represented) . .
. [is] unallowable," each provision contains different
exceptions. For
example, OMB Cir. A-87 allows interest where federal
legislation
otherwise authorizes it or where it pertains to certain lease
costs for
office space occupied after October 1, 1980. On the other
hand, the FAR
allows interest assessed by state and local taxing authorities
under
certain conditions. The interest provisions were
considered
individually and were not simply adopted verbatim from one
another.
Furthermore, as SSA argued, although there is a strong indication
that
there should be parallel interpretation of similar statutes
and
regulations, that indication can be overcome by considering
the
different contexts and purposes of the provisions. The FAR
interest
provision is located in a section applicable only to
commercial
contractors. It is situated among provisions which address
the
allowability of costs for advertising, bonding, lobbying and other
items
not all of which are applicable to state recipients of federal
funds.
On the other hand, OMB Cir. A-87's interest provision is located in
a
general section on unallowable costs and addresses interests unique
to
state recipients, such as governor's expenses and legislative
expenses.
The federal government may reasonably have different policies
and
provisions when it seeks to do business with a commercial
enterprise
than when it deals with a state or local government; thus, the
rationale
for different cost principles applicable to different types
of
recipients of federal funds. For these reasons, we do not find that
the
similarity of the interest provision language contained in the FAR
would
have any bearing on the interpretation of the interest
prohibition
provision contained in OMB Cir. A-87. 9/
III. New York's Other Arguments Would Not Affect the
Outcome of this
Case.
A. The Tax Reform Act of 1986
New York noted that OMB Cir. A-87 contains an exception to the
prohibition
on interest reimbursement where reimbursement for interest
is
authorized by federal legislation. New York argued that the Tax
Reform
Act of 1986 (TRA) authorized reimbursement for interest paid in
relation to
certificates of participation (COPs) when the TRA exempted
from federal
taxation interest income earned by individuals who purchase
certain types of
instruments of indebtedness used to finance qualified
state government
activities. New York Br. at 15-18.
While the TRA may have extended the Internal Revenue Code, section
103,
tax provisions beyond traditional state bond offerings to the type
of
COPs agreements at issue here, 10/ there is nothing which
remotely
suggests an intent to authorize reimbursement for interest paid
on
borrowings by a state as a recipient of federal funds under OMB
Cir.
A-87. New York, DAB No. 1343 at 12. We find that the
federal
legislation exception in OMB Cir. A-87 contemplates a specific
provision
in relevant program legislation allowing for interest. Here,
as SSA
argued, the Social Security Act is the relevant program legislation
and
it does not authorize such interest reimbursement. Therefore, there
is
no specific legislative authorization for interest reimbursement
for
disability determination expenditures as contemplated by OMB Cir.
A-87.
B. Uniformity of Federal-State Procurement Regulations
New York also argued that recipients of federal funds were intended
by
Congress to be subject to the same uniform procurement rules
established
for federal agencies pursuant to Public Law 93-400.
According to New
York, Public Law 93-400, the Office of Federal Procurement
Policy Act,
required OMB to establish "uniform rules for federal executive
agencies
and states as the recipients of federal grants or assistance."
New York
Br. at 28 (citing Pub. Law 93-400, . 6(a)(2), codified at 41 U.S.C.
.
405). New York argued that, in view of this uniformity requirement
and
the fact that the General Services Administration, which
procures
equipment for federal agencies, pays interest on
lease-purchase
agreements with vendors, New York's interest payments should
be
allowable. Id.
New York cited to the original language of Public Law 93-400 in support
of
its assertion that the Administrator of OMB had to establish uniform
federal
and state procurement regulations. New York neglected to
mention that
the Federal Procurement Policy Act has been amended several
times since its
original passage in 1974. The original language which
stated that the
Administrator "shall provide overall direction of
procurement policy" still
remains in the law. However, the original
language which stated that
the Administrator "shall prescribe policies"
to be followed by executive
agencies and recipients of federal grants
now states that the Administrator
"may prescribe Government-wide
procurement policies." 41 U.S.C. .
405(a) (Supp. 1991) (emphasis
added); see also Pub. L. No. 98-191, 1983
U.S.C.C.A.N. (98 Stat.) 2027,
at 2040 and 2049.
In addition to the change in language from the original section
405(a),
the amendment making the change also added a new section to the
Federal
Procurement Policy Act. That section, which was cited by SSA in
support
of it position that uniformity is not required between state and
federal
procurement policies, states as follows:
With due regard to applicable laws and the program activities
of
the executive agencies administering Federal Programs of
grants
assistance, the Administrator may prescribe
Government-wide
policies, regulations, procedures, and forms which
the
Administrator considers appropriate and which shall be
followed
by such executive agencies in providing for the procurement,
to
the extent required under such programs, of property or
services
. . . by recipients of Federal grants or assistance under
such
programs.
41 U.S.C. . 405(i)(1) (emphasis added).
We find that the Office of Procurement Policy Act as it currently
reads
(and as it read at all times pertinent to this disallowance) does
not
require parity between allowable costs for federal agency
procurement
expenditures and state procurement expenditures based on an
agreement
with the federal government. The authority under the language
quoted
above is purely discretionary. It provides that the
Administrator may
provide for uniformity between policies and forms for
federal and state
procurement. No evidence was presented by New York of
any effort by the
Administrator to exercise this discretionary authority to
require that
states which enter contracts with the federal government follow
all
federal procurement procedures, use the same forms as in
procurement
contracts, or otherwise be treated identically with executive
agencies.
C. Economic Reasonableness
New York argued that it was unreasonable to disallow costs associated
with
the purchase of the data processing equipment because the COPs
arrangement
was the most economical manner of financing the purchase.
New York Reply Br.
at 2-8. New York alleged that the total lease price
of the equipment
would have been $25,354,725 and an outright purchase of
the equipment would
have been $28,663,715; however, the total cost under
the COPs agreement was
$22,418,732, resulting in a savings of at least
$2,935,993 over the lease
price. 11/ New York Br. at 5. New York
argued that the cost
savings benefitted SSA in terms of lower program
costs. New York argued
that, since the lease cost of $25,354,725 had
been approved in full (and the
equipment therefore found to be necessary
and reasonably-priced), New York's
lower cost under the COPs agreement
should be fully reimbursable. Id.
at 5, 6. New York argued that to
apply OMB Cir. A-87, which states on
its face that it is not intended to
identify the circumstances to which it
applies, would make the outcome
so economically unreasonable that it must be
held to be inapplicable to
this disallowance. New York Reply Br. at
2.
In prior decisions, various states have raised questions about
the
reasonableness of the federal policy of denying funding for the
interest
expense accompanying the purchase of computer equipment when such
a
purchase might be more economical than leasing. Here, however, it
is
not clear from the record whether this precise issue is raised since
New
York in fact had leased the equipment for a number of years before
it
had decided to exercise its option to purchase the equipment. In
any
event, the Board is bound by applicable laws and regulations and
cannot
disregard the cost principle prohibiting federal reimbursement
of
interest costs which has been specifically implemented by
regulations.
20 C.F.R. . 416.1026(a); Georgia Dept. of Administrative
Services, DAB
No. 577 (1984); Alameda County Cost Plan, DAB No. 281
(1982). This is
true even where it has been argued that the provision
is arbitrary and
capricious. 12/ Georgia at 2; Alameda at 1.
Although the cost
principles require state government recipients to
efficiently and
effectively administer grant and contract programs through
the
application of sound management practices, this provision does
not
convert specifically prohibited costs into allowable ones or serve as
an
exception for otherwise prohibited costs. Missouri Department of
Social
Services, DAB No. 560 at 2 (1984).
D. Proposed Change of Position of OMB on
the Interest
Provision
New York alleged that OMB has stated that it is considering changing
OMB
Cir. A-87 to allow for interest:
OMB is presently revising Circular A-87. One of the
revisions
being considered would allow interest on equipment purchased
and
on building reconstruction after the effective date of
the
revision. OMB anticipates issuing the revised Circular in
1992.
This possible change recognizes that interest is a real cost
of
conducting business.
SSA Ex. 1. New York argued that the "realness" of interest as a cost
of
conducting business does not fluctuate; therefore, if OMB now
admits
that interest is a real cost of conducting business, then the
interest
is and always was an allowable cost because OMB cannot change
its
interpretation of realness and is bound by its admission. New
York
Reply Br. at 8, 9.
We find no merit to this argument. First, we note that the
changes
cited by New York, which were published on October 14, 1988,
are
proposed changes which have not been adopted in final form. See 53
Fed.
Reg. 40352, 40360 (October 14, 1988). Therefore, it is not certain
that
OMB has made a final decision that it should change its policy
on
interest costs.
Secondly, even if it had made a final decision to allow interest costs
as
contemplated by the 1988 proposed revision, it would not apply
retroactively
to the interest costs at issue here:
The cost of interest paid to an external party is
allowable
where associated with the following assets, provided the
assets
are used in support of Federal awards . . . . . . .
(3)
Acquisition or fabrication of capital equipment completed on
or
after January 1, 1989.
53 Fed. Reg. 40360 (emphasis added). In this case, the acquisition
of
the equipment from Sperry-Univac and the entering into the
COPs
arrangement occurred on September 15, 1987, prior to the effective
date
of the provision. Furthermore, New York would also have to
establish
that the provision applied to this type of situation where the
"external
party" consists of members of the public who purchased the
COPs.
Finally, we note that agencies may change their interpretation of
statutes
which they enforce, even if the underlying law does not change,
so long as
both interpretations are reasonable and notice of the change
is proper.
New York State Department of Social Services, DAB No. 1336
at 27 (1992) (OMB
has the authority to change its position in OMB Cir.
A-87 on FFP for interest
relating to public building leases).
Therefore, we do not find that OMB is
retroactively bound by its
proposed revision of the interest provision.
E. Section 221(e) of the Social Security Act
New York argued that disallowing reimbursement for interest incurred
in
the purchase of data processing equipment for use in the
disability
determination process violates section 221(e) of the Social
Security
Act. Section 221(e) provides that each state which makes
disability
determinations is entitled to receive reimbursement for the costs
of
making the determinations. By disallowing interest reimbursement,
New
York argued, SSA did not recognize interest as an expense incidental
to
program administration. New York Reply Br. at 6-9. New York
pointed
out that since the federal agency was required to pay 100% of the
costs
of making disability determinations, this case differed factually
from
other Board decisions where the federal agency and state grantees
were
sharing the costs. Id. at 2, 3.
We do not find section 221(e) and the denial of interest reimbursement
to
be inconsistent. While section 221(e) contemplates full
reimbursement
of costs, the regulations implementing that provision
specify which costs are
allowable for compensation based on
government-wide cost principles.
The costs at issue here are not
entitled to reimbursement under those
regulations, which clearly
represent a reasonable application of section
221(e). It is clearly
reasonable to limit New York's reimbursement
under section 221(e) to
costs which would be allowable under government-wide
cost principles
applicable to contracts and grants with state
governments.
F. Prior Approval
New York argued that since OMB Cir. A-87 specifically allows
reimbursement
for the cost of computer equipment, whether purchased or
leased, where prior
approval is obtained, all costs associated with such
purchase or lease are
reimbursable. New York Br. at 14.
Although a provision states that reimbursement for a certain purchase
will
be allowable only where there was prior approval, this does not
mean that all
costs will be reimbursed, regardless of other
restrictions, where prior
approval was obtained. More specifically, we
have held that prior
approval of a lease-purchase contract does not make
its interest costs
allowable. Washington Dept. of Social Services, DAB
No. 741 (1986).
13/
G. Interest in Other Settings
New York also cited to situations where interest was allowed by
the
federal government in the non-military setting, such as in
American
Chemical Society v. United States, 432 F.2d 597 (Ct. Cl. 1971)
(mortgage
interest allowable in a fixed-fee research grant). New York
Br. at 33.
New York identified rulings of the Secretary of Health and
Human
Services in the Medicare context and of the Comptroller General in
the
contracting context where interest was allowed. Id. at 34-35.
Finally,
New York noted that awarding interest in this case did not require
a
waiver of sovereign immunity, as in the case of prejudgment
interest.
New York Br. at 35 (citing Library of Congress v. Shaw, 478 U.S.
310
(1986)).
The fact that interest is available in other contexts is irrelevant.
SSA
did not argue that interest was not allowable in other contexts but
rather
that it was not allowable in this case because of the applicable
cost
principles. Likewise, SSA did not argue that the payment of
interest
would require a waiver of sovereign immunity. The prohibition
on
interest reimbursement of OMB Cir. A-87 is made expressly applicable
here by
the program regulations.
H. The Applicability of Board Decision No. 560
The Board asked the parties to address the applicability of Missouri
Dept.
of Social Services, DAB No. 560 (1984) to the current
disallowance. New
York argued that it was distinguishable on two
grounds. First, it
argued that Missouri involved interest on a
traditional lease-purchase
agreement and that this disallowance involves
a COPs agreement, which was
expressly authorized by the Tax Reform Act
of 1986. Second, New York
argued that it should not be bound by the
holding of Missouri because the
appellant in Missouri did not raise all
of the arguments raised by New
York. New York Br. at 36, 37.
The language of OMB Cir. A-87 prohibits "interest on borrowings
(however
represented)." It does not purport to make distinctions
between
lease-purchase contracts or COPs agreements; to the contrary, it
applies
to all types of borrowings. As we have already discussed, the
TRA did
not contain an express legislative authorization of funding for
interest
within the meaning of OMB Cir. A-87.
Furthermore, the additional arguments made by New York which were not
made
by the Missouri appellant pertain to the allowance of interest in
other
contexts, such as in the context of Medicare and in military
procurement with
commercial contractors. Since we have found that the
holdings in these
contexts are not applicable to the disallowance here,
we find that our
holding in Missouri clearly applies to this case.
CONCLUSION
For the reasons discussed above, we uphold in full the disallowance
of
funding for interest related to the purchase of data
processing
equipment through the COPs.
__________________________
Judith
A. Ballad
__________________________
Cecilia
Sparks Ford
__________________________
Donald
F. Garrett
Presiding Board Member
1. The disallowance for SFY 1989 is Board Docket No. A-92-52.
The
disallowance for SFY 1990 is Board Docket No. A-92-183. These
two
matters were consolidated by letter dated July 31, 1992 at New
York's
request. Board Docket No. A-92-52 originally contained an appeal
of
both disallowed interest costs and personnel costs. At the request
of
both parties, the issue of personnel costs has been stayed
pending
settlement discussions. If the parties do not resolve this
matter, we
will issue a separate decision on the personnel costs.
2. Title II of the Social Security Act is the Old-Age Survivors
and
Disability Insurance Benefits (OASDI) program. Title XVI is
the
Supplemental Security Income (SSI) program.
3. New York alleged in its brief that the original contract was
a
lease-purchase contract which provided for 60 months of leasing with
an
option to purchase the equipment upon the making of 13
additional
monthly payments. New York Br. at 4; accord New York Ex.
7. This
appears to be inconsistent with the text of the lease
itself. New York
Ex. 3.
4. The multi-party financing arrangement involved the New
York
Department of Social Services, the New York Office of General
Services,
the Public Leasing Corpora-tion and the Chase Lincoln First
Bank. Since
the details of this complicated financing arrangement are
not rele-vant
to this decision, we refer to the individual and collective
actions of
these parties as those of New York. The COPs were similar
to
traditional state-issued bonds in that New York issued them
to
public investors and repaid the investors, over a period
of
time, the principal plus tax-free interest.
5. A separate issue which is raised by the appeal (but which
the
parties did not address) is whether the interest paid to finance
the
purchase here was clearly a cost of making social security
disability
determinations under section 221(e). While the
purchase of the
equipment, which occurred when New York paid Sperry-Univac
the purchase
price, was a cost of making the determinations, the interest
cost could
be viewed as an optional financing mechanism chosen by New York
which
was neither directly related to nor necessarily incurred for
the
program. However, we do not address this issue since we conclude
that
the interest charge in any event is an unallowable cost under
the
applicable regulatory framework.
6. New York argued that the FAR makes "interest on
borrowings"
unallowable but allow contractors to be reimbursed for the
"capital cost
of money." New York noted that the FAR allows the lease
of new computer
equipment by commercial contractors only up to the point
where the cost
exceeds the purchase price of the equipment, and allows the
capital cost
of money but not interest to be considered in estimating the
cost.
However, the capital cost of money is only allowable for
facilities.
7. New York cited cases for the proposition that, under
procurement
common law, the United States is not liable for interest on money
a
contractor was forced to borrow because of a delay in payment by
the
United States. New York Br. at 32. New York then compared
this holding
with later procurement cases decided by the Armed Services Board
of
Contract Appeals (or upon appeal to federal court following decision
by
such Board) in which interest was allowed.
8. Even if these cases were instructive, they do not support
the
positions taken by New York. Cases under the old
procurement
regulations which were cited by New York stand for the limited
principle
that interest is not allowable unless the contractor was forced
to
borrow to finance additional work not originally agreed upon by
the
parties or to finance other extra costs incurred because of
government
action. New York Br. at 5 (citing Bell v. United States, 404
F.2d 975
(Ct. Cl. 1968) and The Singer Company, Librascope Division, 568 F.2d
695
(Ct. Cl. 1977)).
9. New York, citing the procurement regulations and the history
of
military procurement, argued that the prohibition against interest
is
"intimately intertwined" with profit and that the denial of
interest
reimbursement is only proper where an entity has entered into
a
profit-making contract with the government. New York Br. at
19-27. We
do not find the absence of contemplated profit in a
contractual
relationship to have any bearing on the application of the
interest
provision of OMB Cir. A-87. As SSA argued, OMB Cir. A-87
specifically
states that profit is not allowable in contracts with state,
local or
Indian tribal governments. Therefore, the desire to hinder the
"double
recovery" of both profit and interest reimbursement clearly could
not
have been the reason for the inclusion of the interest prohibition
in
OMB Cir. A-87.
10. This Decision does not attempt to analyze the complicated
tax
provisions of the Internal Revenue Code, since such analysis is
not
relevant to the outcome in this Decision.
11. New York did not provide documentation which verifies any of
these
figures or explains how they were calculated or specifically how
a
financed purchased of used equipment involving several years of
interest
charges under COPs arrangements can be "more economical" than
the
outright purchase of the equipment from Sperry Univac without the use
of
the COPs. Nevertheless, we assume for argument sake that the
financed
purchase through the COPs could be demonstrated by New York to be
more
economical than the outright purchase of the equipment.
12. While the interest provision may appear to be arbitrary
and
capricious because of the result of its application to certain
factual
situations such as this, the Administrator of OMB could have
reasonably
determined that it was not feasible to consider the economic
rationale
of allowing interest reimbursement on a case-by-case basis.
It is not
within our authority or expertise to judge the soundness of the
policy.
13. In Washington, we noted that the letter from the federal
agency
approving the lease-purchase agreement did not discuss the
allowability
of reimbursement for interest costs. In this case, the
approval letter
from the agency specifically stated that interest costs would
not be
allowable. Washington at 2; SSA Ex.