New Jersey Department of Human Services, DAB No. 1562 (1996)

Department of Health and Human Services

DEPARTMENTAL APPEALS BOARD

Appellate Division

SUBJECT: New Jersey Department of Human Services

DATE: February 13, 1996
Docket No. A-95-151
Decision No. 1562

DECISION

The New Jersey Department of Human Services (New Jersey)
appealed a determination by the Administration for
Children and Families (ACF) disallowing $58,541 in
federal financial participation (FFP) claimed under title
IV-D (Child Support and Establishment of Paternity) of
the Social Security Act (Act). The disallowed costs were
claimed as adjustments to prior year costs on New
Jersey's quarterly report of expenditures for the quarter
ended June 30, 1994, which was dated October 25, 1994.
ACF determined that New Jersey's claims for indirect
costs for its Gloucester County (County) Probation and
Family Court Clerk Divisions were made beyond the two-
year filing period provided by section 1132(a) of the Act
for such costs, and that the claims did not qualify for
the exception for adjustments to prior year costs. ACF
found that the County's Probation Division costs were
applicable to the quarters ended March 31, 1987 through
December 31, 1989, while the County's Family Court Clerk
Division costs were applicable to the quarter ended
December 31, 1989. Thus, ACF determined that New
Jersey's claims were not filed within the required two-
year period. New Jersey did not assert that the claims
were filed within the two-year period, but asserted that
the claims came within the exception for adjustments to
prior year costs.

For the reasons discussed below, we uphold the entire
disallowance because we conclude that the claims did not
come within the exception for adjustments to prior year
costs.

Applicable Authority

Section 1132(a) of the Act prohibits the payment of
federal funds for any expenditure that has not been
claimed within two years after the end of the calendar
quarter in which the state made the expenditure, except
that this subsection is not to be applied "so as to deny
payment with respect to any expenditure involving . . .
adjustments to prior year costs."

The implementing regulations, found at 45 C.F.R. Part 95,
Subpart A (1987), repeat the two-year limitation on the
filing of claims, and list the exceptions to the time
limits, including "any claim for an adjustment to prior
year costs." 45 C.F.R.  95.19(a). An "adjustment to
prior year costs" is defined as "an adjustment in the
amount of a particular cost item that was previously
claimed under an interim rate concept and for which it is
later determined that the cost is greater or less than
that originally claimed." 45 C.F.R.  95.4.

Requirements for allocation of joint costs such as the
indirect costs claimed here are set forth in Office of
Management and Budget Circular A-87 (OMB A-87), made
applicable to costs of state and local governments
charged to U.S. Department of Health and Human Services
(HHS) grants by 45 C.F.R.  74.171. 1/ A cost allocation
plan (CAP) supporting the allocation of joint costs must
be negotiated with and approved by a "cognizant agency."
OMB A-87, Att. A.,  at J.1. The plan must contain the
items of expense to be included and the methods to be
used in distributing costs. OMB A-87, Att. A.,  J.2.
One method of distributing indirect costs is use of an
indirect cost rate determined by dividing total indirect
costs by a distribution base, usually direct salaries and
wages or modified total direct costs.

OMB A-87 gives HHS responsibility for issuing
instructions for state and local governments to use in
preparing CAPs. See OMB A-87, Att. A.,  J.3. The
instructions are in a guide referred to as OASC-10, which
New Jersey did not dispute applied here. In relevant
part, OASC-10 provides that an indirect cost proposal
must be prepared by each local government department/unit
that wishes to claim indirect costs under HHS grants and
that a separate proposal is required for each fiscal year
for which costs are to be claimed. OASC-10 at 10. In
particular, OASC-10 describes three types of agreements
under which indirect cost rates may be approved by the
federal government: provisional-final; predetermined;
and fixed with carry-forward. See OASC-10 at 14.

With regard to the fixed with carry-forward rate
agreement, OASC-10 provides:

The fixed with carry-forward (FCF) agreement
incorporates the desirable characteristics of both
the provisional and predetermined agreements. Like
the predetermined agreement, the FCF agreement is
based on an estimate of a future period's cost and
is not subject to revision. However, differences
between the estimated costs and the actual costs,
when they become known, are includable (carried-
forward) as an adjustment in a subsequently proposed
cost plan of the preparer State or local government.

OASC-10 at 15 (emphasis added).

In an indirect cost rate proposal, choices of the type of
rate and the distribution base form part of the
methodology. Where a fixed rate with carry-forward is
used, the carry-forward amount is part of the calculation
in an indirect cost proposal for a later year (usually
two years after the year in which the costs were
incurred). OASC-10, Appendix 5, exhibit (Ex.) B. That
proposal, under the two-year cycle used by New Jersey,
was to be included in New Jersey's CAP for title IV-D
costs for approval by HHS. Thus, while use of a fixed
rate with carry-forward contemplates adjustment from
estimated to actual costs, it contemplates that those
adjustments will be made through a particular process --
inclusion in a cost allocation plan that is approved by
HHS.

Factual Background

The County used the fixed with carry-forward method (FCF
method) to set its indirect cost rates. See New Jersey
brief (Br.) at 3. During calendar years 1987, 1988, and
1989, the County Treasurer's office prepared the County-
wide indirect cost proposals, which allocated costs to
specific operating divisions. Indirect costs determined
in accord with the county-wide proposal were then
included in New Jersey's federally approved cost
allocation plan for title IV-D.

In particular, in accordance with the FCF method a
specific dollar amount of indirect costs was assigned to
the County's Probation Division for calendar years 1987,
1988, and 1989. These costs were then allocated to the
three specific operating components within the Probation
Division: Administration, Family, and All Other, based
upon the proportion of staff salaries within each
component. New Jersey Br. at 4. The results of this
calculation for the Administration and Family components
were then divided by the total salaries in each component
to establish each component's "interim" indirect cost
rate, which was then used to calculate an indirect cost
dollar amount applicable to each component. Id. In
calendar year 1989, actual costs for calendar year 1987
were determined, and "a roll forward adjustment
finalizing that year" (1987) was included in the indirect
cost proposal developed for calendar year 1989.
Accordingly, the 1989 rate was calculated based on an
estimate of the 1989 indirect costs and the roll-forward
adjustment amount from 1987. Similarly, an amount
reflecting actual 1988 costs was rolled forward into the
1990 indirect cost plan, and an adjustment reflecting
actual 1989 costs was rolled forward into the 1991
indirect cost plan. Id.

With regard to costs of the County's Family Court Clerk
Division, an indirect cost rate was first established for
this unit in the last quarter of calendar year 1989.
New Jersey Br. at 4. In developing the FCF indirect cost
rate, the County included costs in the "County Clerk-
Judicial" account, which contained the Family Court Clerk
Division. However, in computing the indirect cost rate,
the County failed inadvertently to include costs assigned
to the "County Clerk" account. New Jersey Br. at 5.
Actual 1989 costs, other than the "County Clerk" account,
for this Division were used to calculate a carry-forward
adjustment for 1991. ACF Ex. 3.

Thereafter, the County hired a consulting firm to review
the procedures used by the County in developing its
indirect cost rate proposals. The consultant recommended
that the County's basis for allocating County-wide and
Probation Division indirect costs among the Division's
three operating components of Administration, Family, and
All Other, be changed from a salary-based method to a
staff count method. Additionally, the consultant
discovered that the County, in calculating the indirect
cost rate for the Family Court Clerk Division, had failed
to include in its calculations the costs assigned to the
"County Clerk" account. Thus, the consultant also
recommended that the County recalculate the indirect cost
rate for the Family Court Clerk Division, raising the
rate from 14.28% to 57.34%. New Jersey Br. at 5; see,
also, ACF Exs. 1, 2, and 3.

New Jersey maintained that the consultant's
recommendations were made to provide for a more precise
allocation of costs and a more equitable determination of
title IV-D and non-title IV-D costs, and also to
establish consistency with the staff count allocation
methodology employed in the Probation Department Cost
Allocation Plan. New Jersey Br. at 6. Hence, on the
basis of the consultant's recommendations, the County
recalculated the indirect cost rates for the Probation
Division for calendar years 1987, 1988, and 1989, and
used a staff count method rather than a salary-based
method as the means of allocating the costs. The County
also recalculated the indirect cost rate for the Family
Court Clerk Division by including the costs of the
"County Clerk" account for the period October through
December 1989. In June of 1994, the County submitted the
revised rate-setting methodology to the New Jersey
Administrative Office of the Courts (AOC), the state
agency which supervises the child support activities of
both the County Probation and Court Clerk offices
throughout New Jersey. AOC then informed the State
Division of Family Development (DFD) of the New Jersey
Department of Human Services of the increasing
adjustments, and DFD included the adjustments on New
Jersey's quarterly report for the quarter ended June 30,
1994, which was dated October 25, 1994. New Jersey did
not allege that these adjustments were included in any
indirect cost proposal included in a CAP approved by HHS.

Analysis

It is uncontested that New Jersey did not file the claims
at issue within the two-year period allowed by statute
and regulation for such costs. Thus, the only issue in
this case is whether New Jersey's claims qualified as
adjustments to prior year costs, which are excepted from
the two-year filing requirement. In order to qualify
under 45 C.F.R.  95.4, such costs must have been
previously claimed under an interim rate concept and then
later determined to be greater or less than the original
claim.

At the outset, we note that the preamble to the
implementing regulations indicated that the exception for
adjustments to prior year costs would be interpreted
narrowly. Specifically, the preamble stated that such
adjustments were limited to "claims for services or
medical assistance based on interim rates." Subsequent
adjustments to interim rates would be allowed only when
they were "unforeseen and unavoidable," since "a broader
exception would render the statutory provision a
nullity." 46 Fed. Reg. 3527, 3528 (January 15, 1981).

New Jersey contended that ACF conceded that both the
Probation Division's indirect costs and the Family Court
Clerk Division's indirect costs were previously claimed
under an interim rate concept. In addition, New Jersey
asserted that in both instances an adjustment in the
amount of a particular cost item was determined to be
greater than what was originally claimed. Thus, New
Jersey reasoned that both features of the "adjustment to
prior year costs" definition had been met, and that the
questioned claims fell within the exception. New Jersey
Br. at 8. Further, New Jersey argued that ACF has
attempted to add a third requirement to this definition
by requiring "that adjustments to costs previously
claimed under an interim rate concept must cease after
such costs have been finalized" (following utilization of
the roll-forward mechanism). Id. New Jersey asserted
that such an addition is improper, not only because it
does not appear in the regulation, but also because there
is no clear policy statement anywhere in the regulations
which explains exactly what "finalized" means. Id. New
Jersey maintained, however, that the Board has dealt with
the issue of making further adjustments in "finalized"
rates. Although New Jersey conceded that the Board's
discussion was in the context of Medicaid per-diem rates,
New Jersey argued that its situation is similar to the
one in Pennsylvania Department of Public Welfare, DAB No.
703 (1985), which was discussed in depth in South
Carolina State Health and Human Services Finance
Commission, DAB No. 943 (1988). In South Carolina, the
Board said:

In Pennsylvania . . . certain items of provider
costs (rentals and general obligation bond charges)
were not specifically included in calculating the
interim rates or the "final cost settlements." The
stated reason was a lack of communication between
Pennsylvania state agencies. The analysis in that
case centered on the Agency's position that the
claims could not qualify as adjustments to prior
year costs because the specific provider costs in
question were not claimed in the interim rate
process. The Board pointed out . . . that what is
claimed in the interim rate is not each individual
divisible item accumulated on the provider's cost
report, but rather the per diem rate, based on those
individual items, used to reimburse the facility.

The Board in Pennsylvania further stated that "[a]s
long as this type of adjustment was contemplated by
the rate-setting system in Pennsylvania and was not
prohibited by the State plan," it had no basis to
find that the claims were not adjustments to prior
year costs.

South Carolina at 6. New Jersey maintained that here, as
in Pennsylvania, it identified, three to five years after
the fact, certain costs which inadvertently had not been
included in calculating the interim or the "final cost
settlements" for its Family Court Clerk Division. 2/

Further, New Jersey argued that it has no written policy
precluding any of its counties from re-opening an
indirect cost rate proposal after a roll-forward
computation has been performed. Moreover, New Jersey
asserted that it is unaware of any written federal policy
which would preclude such a re-opening, especially in a
situation such as the County's in this case, where a
county's indirect cost proposal need not actually be
submitted to and negotiated with the federal government,
but rather must only be retained on file for possible
federal review. New Jersey Br. at 10. See OASC-10 at
10.

We conclude that New Jersey's claims are not adjustments
to prior year costs, which would qualify as exceptions to
the two-year filing period, since they are not the type
of adjustments contemplated by New Jersey's FCF rate-
setting method.

Contrary to New Jersey's argument, ACF has not attempted
to add a requirement to the adjustment to prior year
costs definition. ACF did not dispute that New Jersey's
FCF system was a type of interim rate-setting
methodology, but argued that an FCF rate is not subject
to revision once it has been finalized for a particular
year through the carry-forward process.

In its arguments, New Jersey failed to take into account
the specific consequences of the FCF method. OASC-10
provides:

Like the predetermined agreement, the FCF agreement
is based on an estimate of a future period's cost
and is not subject to revision.

OASC-10 at 15 (emphasis added). Under the FCF method,
the County may include revised costs only prospectively
in a carry-forward adjustment, to reflect the difference
between estimated and actual costs, and cannot revise
prior year rates or prior year cost allocation methods to
claim costs retroactively. To recover revised costs, New
Jersey must include them in an indirect cost proposal as
a carry-forward adjustment as part of a CAP and must
obtain approval of the plan by HHS. 3/

In addition, New Jersey's reliance on Pennsylvania,
supra, is misplaced. While New Jersey quoted some
comments made by the Board, New Jersey did not address
other relevant statements. We find no basis here for
concluding that the FCF indirect cost rates used for
these divisions were subject to any further routine
adjustments as part of the FCF methodology. In South
Carolina, supra, at p. 6, the Board said, with respect to
the situation in Pennsylvania:

However, the principle of these cases should not be
extended any further than their particular facts.
Where an interim per diem rate was claimed within
two years, and then a state later realized that it
had mistakenly not included costs of particular
items in computing the final rate, the state can
properly recompute its final rate to include the
omitted costs only if the state's retrospective
rate-setting process permits it to re-open a final
rate and the adjustment itself is one reasonably
encompassed by the state's retrospective system.

In South Carolina, supra, at p. 7, the Board also said:

The exception for adjustments to prior year costs is
intended to give a state a reasonable opportunity to
adjust its interim rate, consistent with the methods
and procedures of its established rate-setting
methodology. As we said in Tennessee Dept. of
Health and Environment, DAB No. 921 (1987), the
interim rate exception is limited to the "state's
interim and final cost settlement process."

We find that these sections of the discussion in South
Carolina, supra, are more relevant to our inquiry here
than the sections cited by New Jersey. Moreover, as we
noted in South Carolina, the purpose of the timely claims
limitation is to prevent states from coming in and
claiming FFP many years after expenditures since such
claims make federal budget planning difficult. South
Carolina at 7.

Consequently, it is clear that our decisions did not view
the exception as intended to allow a state to claim
additional costs years later based on a restructuring of
its underlying allocation method, which was the case here
for the Probation Division. In addition to the routine
carry-forward adjustment, consistent with its established
FCF methodology, the County has claimed an upward
adjustment based on a retroactive change to its
rate-setting method. Indeed, New Jersey acknowledged
that the claim for the additional Probation Division
costs resulted from its consultant's recommendation to
change the County's methodology for allocating its
indirect costs between title IV-D and non-title IV-D
costs from a salary-based method to a staff count method.
This type of change is not envisioned by the exception
for adjustments to prior year costs. Nor is this change
recognized by the Board's past decisions as an adjustment
to prior year costs within the meaning of the exception.
In sustaining the disallowance in South Carolina, supra,
we said:

Here the interim rate had been adjusted for the
years in question, final settlement had been made,
and the cost reports had been closed for several
years.

South Carolina at 7. Similarly in this case, indirect
costs for the periods in question had been claimed under
both the fixed rate and the carry-forward rate. An
upward adjustment based on a modified allocation method
does not qualify as an adjustment to prior year costs
under the applicable regulation.

Finally, while the fact that New Jersey failed to claim
costs assigned to the "County Clerk" account in the
County's Family Court Clerk Division is unfortunate,
under the FCF methodology, New Jersey also could not
retroactively claim these costs once the two-year
claiming period had expired and the carry-forward rate
had been settled. As noted above, once the carry-forward
calculation is made, there is no further revision to
indirect costs rates for a particular year. While New
Jersey could have included these omitted costs in its
carry-forward adjustment (had it discovered its omission
before that rate was set), there is no basis for
permitting such a retroactive adjustment now.

Conclusion

Based on the foregoing analysis, we uphold the entire
disallowance because we conclude that the claims did not
come within the exception for adjustments to prior year
costs.


Judith A. Ballard


Norval D. (John) Settle


Cecilia Sparks Ford
Presiding Board Member


1. The general provisions of 45 C.F.R. Part 74 are,
with certain exceptions not relevant here, made
applicable to title IV-D grants by 45 C.F.R.  304.10.
Part 74 was revised effective August 25, 1994. 59 Fed.
Reg. 43754. A final revision of OMB A-87 was published
in the Federal Register on May 17, 1995 (60 Fed. Reg.
26484). The provisions cited in the text were the ones
in effect prior to August 25, 1994.

2. While New Jersey argued in great detail that its
situation with respect to the Family Court Clerk Division
claim was similar to the situation in Pennsylvania, New
Jersey did not make the same argument in support of its
contention that the Probation Division claims were
adjustments to prior year costs.

3. ACF asserted that New Jersey was not permitted to
make ad hoc changes to its CAP (Probation Division claim)
or to claim for adjustments outside its rate-setting
process (Family Court Clerk Division claim). Indeed, the
CAP regulations provide that such claims "will be
disallowed" if not in accord with an approved CAP. 45
C.F.R.  95.519.