New York State Department of Social Services, DAB No. 1479 (1994)

Department of Health and Human Services

DEPARTMENTAL APPEALS BOARD

Appellate Division

SUBJECT: New York State Department of Social Services

DATE: June 15, 1994
Docket No. A-92-238
Decision No. 1479

DECISION

The New York State Department of Social Services (New York) appealed the
Administration for Children and Families' (ACF) decision dated July 29,
1992 disallowing $939,994 in federal financial participation (FFP)
claimed under title IV-A of the Social Security Act. Subsequent to New
York's filing this appeal, the parties engaged in settlement
negotiations and ACF reduced the disallowance to $568,488. As to this
reduced disallowance, New York conceded that $315,356 is appropriately
disallowed but contended that it is entitled to $253,132 in federal
reimbursement. State Exhibit (Ex.) 2, Attachment (Att.) A.

This case involves funds that New York advanced contractors to pay for
start-up costs to establish employment search programs for title IV-A
recipients. New York advanced these funds prior to the effective date of
its state plan amendment establishing an employment search program under
title IV-A. At issue in this case is FFP in the portion of these
advances, calculated by New York to be $253,132, which the contractors
paid for start-up costs after the effective date of the state plan
amendment and which were then reported to New York and reconciled as
expenditures in New York's accounting records. ACF denied FFP on the
grounds that the advances were expenditures made prior to the effective
date of the employment search program plan amendment.


For the reasons set out below, we reverse the disallowance at issue but
grant ACF leave to review New York's calculation of the amount. Since
ACF did not accept New York's contention that this part of the advances
should be allowed, ACF never presented any evidence or argument as to
whether the $253,132 calculation was accurate. As it is unclear from
the record whether ACF has verified its accuracy, we will allow ACF a
limited period of time in which to review New York's calculation.

Background

Section 240.60 of 45 C.F.R. provides for FFP at a 50 percent rate for
reasonable expenses incurred by a state in providing services or in
contracting with third parties for an approved employment search program
under title IV-A. In June 1987, New York filed State Plan Amendment
(SPA) 87-26 to establish an employment search program. ACF approved the
amendment on July 27, 1987 with an effective date of April 1, 1987.

In order to operate its employment search program, New York awarded a
number of contracts to set up Comprehensive Employment Opportunity
Support Centers (CEOSCs). Through these CEOSCs, private contractors
were to provide training, and employment and supportive services to
recipients of Aid to Families with Dependent Children under title IV-A.

The contracts contained a "reimbursement plan" which divided the total
amount awarded between approved "start- up costs" and the "amount
available for reimbursement" for services. The start-up costs were
memorialized in a "start-up budget" which set out certain salary,
equipment, supply, and contract services costs the contractor was
expected to incur in establishing a CEOSC. The contracts provided that
the remainder of the amount awarded was the "amount available for
reimbursement" which would be paid pursuant to a "per unit" rate for
different types of activities. 1/ The contracts provided that the per
unit reimbursement would be on the basis of vouchers and supporting
documentation that the contractors submitted on a monthly basis setting
forth the activities conducted and the title IV-A recipients
participating in the activities.

Prior to the effective date of SPA 87-26, New York advanced funds to the
contractors in the amount of their approved start-up costs. From the
advanced funds, the contractors disbursed payments for start-up costs
prior to as well as after the effective date of SPA 87-26. The
contractors then filed reports with New York as to their actual start-up
costs. New York reviewed the reports and determined which costs were
allowable under the contract start-up budgets and which were not
allowable. New York also determined that some of the advanced funds
were not spent by the contractors for start-up costs and constituted
"over-advances." Those over-advance amounts were subsequently set-off
against amounts claimed on the contractors' vouchers for payment for
services. ACF originally disallowed the advance payments in their
entirety.

New York conceded ACF's disallowance of FFP in advance payments which
represent amounts which the contractors actually paid for start-up costs
prior to the effective date of the plan amendment. This category totals
$315,356 and is not at issue in this case. As to the over-advances that
New York set-off against amounts due to the contractors for services
provided after the effective date, ACF revised the July 29, 1992
disallowance and determined that New York was entitled to FFP in this
part of the advances. This undisputed category totals $371,506.
Therefore, remaining at issue in this case are the funds that New York
advanced to contractors prior to the effective date of SPA 87-26 but
which the contractors used after the effective date to pay for start-up
costs and which New York reconciled as expenditures in its accounting
system after the effective date.

Analysis

The contested FFP represents amounts contractors paid for start-up costs
after the effective date of SPA 87-26 from cash advanced by New York
prior to the effective date. From the outset, it is important to note
what is not in dispute in this case. ACF does not dispute that the
start-up costs paid from the advanced funds benefitted New York's title
IV-A employment search program and are the types of costs which are
allowable under title IV-A. Further, there is no indication in the
record that these costs somehow also benefitted another program and are
therefore allocable in part to another program. Rather, ACF based its
disallowance solely on the timing of the disbursement of the advances by
New York.

New York claimed FFP pursuant to an amendment to its title IV-A state
plan. Section 205.5(b) of 45 C.F.R. provides that --

. . . FFP is available for additional expenditures resulting from
an amended provision of the State plan as of the first day of the
calendar quarter in which an approvable amendment is submitted or
the date on which the amended provision becomes effective in the
State, whichever is later.

Therefore, the issue presented in this case is whether New York incurred
the disputed expenditures before or after the effective date of SPA
87-26.

New York argued that, under its modified accrual basis of accounting, it
incurred the expenditures after the effective date because these
start-up costs were neither paid by the contractors nor recorded by New
York as expenditures until after the effective date. ACF took the
position the expenditures were incurred prior to the effective date when
New York advanced the funds to the contractors. It argued that both the
date the contractors actually paid for the start-up costs and New York's
accounting methodology were irrelevant to the question of whether the
advances were expenditures.

As explained below, we conclude that FFP is available in the contested
part of the advances. New York's reliance on its accounting system for
determining when an expenditure of funds occurred is a reasonable
application of the language of 45 C.F.R.  205.5(b) and federal cost
principles. Further, New York's position is supported by prior Board
decisions. Finally, ACF offered no authority or persuasive arguments
for its position that the advances necessarily constituted expenditures.


Section 205.5(b) of 45 C.F.R. provides that FFP is available for
additional expenditures resulting from a plan amendment as of its
effective date. Federal cost principles recognize that a grantee's
accounting methodology customarily determines costs applicable to a
title IV-A grant, i.e., when an expenditure occurs for purposes of
determining the grant to which an expenditure is properly charged. OMB
Circular A-87, Att. A., B.3, made applicable to title IV-A by 45 C.F.R.
74.171, defines a "cost" as "determined on a cash, accrual, or other
basis acceptable to the Federal grantor agency as a discharge of the
grantee's accountability for Federal funds." ACF did not identify any
interpretation of the term "expenditure" as used in 45 C.F.R.  205.5(b)
which would have put New York on notice that the term was meant to
override a state's customary methods of determining when an expenditure
is incurred under its accounting system. Therefore, New York was
reasonable in applying the term "expenditure" in the context of when it
recorded an expenditure in its accounting system.

New York represented that, under its accounting system, "advances are
not considered as expenditures, and must be reconciled to actual
expenditures." State Ex. 2, Affidavit of Roger Nelligan, Chief of Cost
Allocation, New York State Department of Social Services, at 5. Under
that system, when New York advanced cash to its contractors, it recorded
the advances as an accounts receivable. When the contractors reported
their start-up costs, New York reconciled the amount of the contractors'
payments to the advances and recorded an accounts payable. When this
reconciliation or settlement occurred, the accounts receivable created
by the advance was liquidated and an expenditure recorded. It was at
the completion of this process that New York regards an expenditure to
have occurred. Id. Therefore, under New York's modified accrual
system, the advance was analogous to a loan rather than an expenditure,
and New York considered an expenditure to be made only after the
contractor had spent the money and New York had approved the
contractor's costs by recording an accounts payable against the accounts
receivable created by the advance of cash.

ACF did not dispute New York's description of its accounting methodology
or New York's representations concerning the status of advances pursuant
to that methodology. Moreover, there is no evidence in the record that
ACF did not find New York's accounting methodology generally acceptable.
Therefore, we conclude that New York has shown that the costs claimed
constituted expenditures after the effective date of SPA 87-26 based on
a modified accrual methodology acceptable to the Federal grantor agency.

Further, prior Board decisions have recognized that an advance, or a
transfer of funds between parties, is not necessarily an expenditure of
funds and does not necessarily create a cost allocable to the federal
program. In Ohio Dept. of Mental Retardation and Developmental
Disabilities, DAB No. 405 (1983), the Board concluded that the transfer
of funds by the grantee to a fiscal agent did not constitute an
expenditure during the fiscal year the transfer was made. Rather, the
Board looked to the date of the "ultimate transaction," i.e., the date
of the transaction(s) which procured program goods and services. In New
Jersey Dept. of Human Services, DAB No. 1016 (1989), the Board rejected
the Agency's position that an expenditure of funds occurred when New
Jersey originally disbursed funds from its general treasury on behalf of
State residential treatment facilities for payroll and supply costs.
The decision held instead that the expenditure of funds occurred
subsequently when the State Medicaid agency, pursuant to its applicable
Medicaid rate, actually paid the State facilities or entered an
accounting entry to that effect in its accounting system.

While ACF correctly pointed out that these decisions concerned different
programs and regulations, the decisions overall support New York's
argument that a cash advance does not necessarily constitute an
expenditure for purposes of claiming FFP. Therefore, the fact that New
York advanced funds to these contractors is not dispositive of when its
accounting system recognized expenditures properly charged to the
advanced funds.

The FFP claims at issue were submitted on New York's expenditure reports
for the quarters ending December 31, 1988 and March 31, 1989. However,
on these expenditure reports, New York retroactively attributed these
costs to the quarter ending March 31, 1987. New York explained why its
central office accounting system originally caused the advanced cash to
be reflected on its expenditure reports for the quarter preceding the
April 1, 1987 effective date of SPA 87-26. State Ex. 2, at 6-7.
Nevertheless, ACF argued since New York's expenditure reports claimed
FFP in the amount of the advances and attributed its FFP claim to the
quarter in which the advances were made, the advances were expenditures
for that quarter. 2/ ACF Memorandum in Support of Disallowance at 2, 5.
The thrust of this argument is that once New York attributed the
advances to the quarter preceding the state plan amendment's effective
date, no adjustment could be made to reflect that the advances actually
represented amounts paid by contractors and recorded as expenditures by
New York after the effective date.

ACF cited no authority for its position that the act of attributing its
FFP claim to the quarter when it made the advances irrevocably bound New
York and prevented ACF from correctly reflecting the timing of New
York's expenditures. Further, as New York pointed out, ACF did not
consistently apply this principle in this case. Rather, ACF allowed New
York to set-off the portions of the advances that the contractors did
not pay for start- up costs against the contractors' subsequent claims
for services costs. Therefore, ACF recognized that these advance
amounts were attributable to subsequent quarters when the contractors
actually provided the services and submitted vouchers to New York. ACF
did not satisfactorily explain why it distinguished between expenditures
recorded by New York after the effective date on the basis of whether
they were start-up costs or services costs. Consequently, we find that
where the contractors actually paid for start-up costs from the cash
advances after the effective date of SPA 87-26, those amounts are also
attributable to those later quarters.


Therefore, since New York reasonably claimed FFP in expenditures
determined in accordance with its accounting system and ACF advanced no
persuasive authority otherwise, we conclude that FFP is available in the
amount of New York's cash advances which represent amounts both paid by
the contractors and recorded by New York as expenditures after the
effective date of the state plan.

Conclusion

On the basis of the preceding analysis, we reverse the disallowance of
$253,132 FFP subject to adjustment by ACF if it disagrees with New
York's calculation of the amount of the advance paid for start-up costs
by the contractors after the effective date of SPA 87-26. ACF should
notify New York within thirty days of receiving this decision if ACF
intends to review New York's calculation. New York may appeal the
correctness of any recalculation by ACF within thirty days of receiving
a revised determination by ACF.


Donald F. Garrett

M. Terry Johnson

Cecilia Sparks Ford Presiding Board Member


1. For example, the contract with the Federation Employment and
Guidance Service (FEGS) provided that FEGS was to be reimbursed $679.28
per unit for completing an assessment and Opportunity Contract with a
recipient. State Ex. 6, Contract, Appendix F-1.

2. ACF also argued (apparently in the alternative) that under the
definition of "accrued expenditure" in 45 C.F.R.  74.71, an advance was
not an expenditure since it was not made for specific documented goods
or services. ACF argued that no expenditure for FFP purposes had
therefore occurred. We do not need to address this assertion, however,
since 45 C.F.R.  74.71 does not apply to title IV-A grants. See 45
C.F.R.