Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: North Carolina Department of Human Resources
Docket Nos. A-96-168 and A-97-74
Decision No. 1631
Date: September 19, 1997
DECISION
The North Carolina Department of Human Resources (North
Carolina, State) appealed decisions of the Administration
for Children and Families (ACF) disallowing $15,183,181
(Docket No. A-96-168) and $2,568,544 (Docket No. A-97-74)
in federal financial participation (FFP). North Carolina
had claimed FFP pursuant to the Emergency Assistance (EA)
provisions of title IV-A of the Social Security Act (Act)
for the cost of services provided to children in juvenile
facilities operated by the Division of Youth Services of
North Carolina's Department of Human Resources (DYS).
The services were provided during the period January
through December 1995.
ACF denied the claims on three different grounds. First,
ACF asserted that, since the expenditures were incurred
for services for children in "secure" juvenile
residential facilities, they were not allowable costs
under EA. Second, ACF asserted that North Carolina had
not complied with ACF's requirements for determining
eligibility and authorizing payment prior to providing
services. Third, ACF asserted that these expenditures
could only be claimed pursuant to an amendment to North
Carolina's cost allocation plan (CAP).
These disallowances involve a period of time when North
Carolina, like many other states, took advantage of a
broad interpretation of "emergency" to shift a large
proportion of the costs of serving children in many of
its juvenile justice system facilities from state funds
to federal funds. The amount of the disallowances does
not reflect a major new program of services to such
children; indeed, North Carolina did not allege that
services to these children were improved by this influx
of federal funds. ACF has since rescinded its broad
interpretation of the EA program effective January 1,
1996. The issue in this case is just how broad that
interpretation was prior to its rescission.
Below, we first discuss at length ACF's contention that
all the State's claims must be disallowed for violating
ACF's policy precluding reimbursement for EA services in
secure facilities. We conclude that ACF failed to show
that it established an enforceable national policy
precluding such reimbursement in 1995; thus, ACF cannot
disallow these claims based on a secure facilities
restriction, and further examination of the claims is
necessary. Second, we conclude that to the extent that
North Carolina's application and authorization process
did not comply with the EA program's requirements, its
claims must be disallowed. Third, we conclude that North
Carolina's claims are not barred due to its failure to
seek and obtain approval of a cost allocation plan
amendment to allocate costs of providing direct services
to recipients. Based on these determinations, we uphold
these disallowances, subject to downward adjustment if
North Carolina documents its expenditures for services
which were provided to children after they were
determined to be eligible for EA. North Carolina will
have 30 days from receipt of this decision, or such
longer time as ACF may allow, to provide this
documentation.
Relevant Federal Authority and Background
The EA program was established in 1967 as an optional
component of title IV-A of the Act. It provided
reimbursement to states at an FFP rate of 50% for the
amount "expended under the State plan . . . as emergency
assistance to needy families with children." Section
403(a)(5) of the Act. Section 406(e)(1) of the Act, as
in effect during the period in question, defined
emergency assistance as follows:
The term "emergency assistance to needy families
with children" means any of the following, furnished
for a period not in excess of 30 days in any 12-
month period, in the case of a needy child under the
age of 21 who is (or, within such period as may be
specified by the Secretary, has been) living with
any of the relatives specified in subsection (a)(1)
in a place of residence maintained by one or more of
such relatives as his or their own home, but only
where such child is without available resources, the
payments, care, or services involved are necessary
to avoid destitution of such child or to provide
living arrangements in a home for such child, and
such destitution or need for living arrangements did
not arise because such child or relative refused
without good cause to accept employment or training
for employment--
(A) money payments, payments in kind, or such
other payments as the State agency may specify with
respect to, or medical care or any other type of
remedial care . . . and
(B) such services as may be specified by the
Secretary.
The Secretary has promulgated rules implementing the EA
program at 45 C.F.R. § 233.120, which, inter alia,
effectuate congressional intent that eligibility
conditions imposed for the receipt of EA may be more
liberal than those applicable to Aid to Families with
Dependent Children (AFDC), the principal program
established in title IV-A.
By fiscal year 1990, some 20 years after the enactment of
EA, 32 jurisdictions operated EA programs. According to
state plans on file with ACF, as of October 1988, most EA
programs covered natural disasters (23 jurisdictions),
such as floods and fires, and "unspecified crisis
threatening family or living arrangements (21
jurisdictions)." House Comm. on Ways and Means, Overview
of Entitlement Programs, WMCP No. 102-44, 102d Congress,
2d Session 631 (1992). Typical qualifying causes for EA
specified by states --
included (in order of frequency): eviction,
potential eviction, or foreclosure; homelessness;
utility shut-off or loss of heating energy supply or
equipment; loss of employment or strike; civil
disorders or crimes of violence; health
hazards/risks to health and safety; emergency
medical needs; an illness, accident, or injury.
Id.
Sometime in the early 1990's, ACF allowed an expansion of
these traditional types of emergencies by approving state
plan amendments providing for services, including
residential services, for children in the custody of or
under the supervision of the state's juvenile justice
system. 1/ By the end of 1995, ACF had approved at
least 23 state plan amendments authorizing EA services
for such children. State Exhibit (Ex.) 62, at 2. North
Carolina was one of the states that amended its title IV-
A state plan to include EA services to juvenile justice
system children.
In the early 1990s, EA claims began to expand
dramatically on a national basis, increasing over 400
percent from Fiscal Year (FY) 1991 to 1994. State Ex.
41, at 1. By FY 1996, claims were projected to increase
550 percent from FY 1991 EA expenditures. Id. These
increases were of such concern to ACF that it requested
the Office of the Inspector General (OIG) to undertake a
study of the causes of "skyrocketing costs." 2/ State
Ex. 40, at 1.
ACF asserted that in "late 1994," it adopted a "national
policy" that services for juveniles in secure facilities
were not allowable EA expenditures. 7/8/96 disallowance
letter at 5. North Carolina was notified that it could
not claim reimbursement for services to children in
secure facilities in a letter from the Regional
Administrator of Region IV dated January 31, 1995. State
Ex. 20. That letter provided as follows --
There is national concern that under the Emergency
Assistance (EA) program, some states may be claiming
FFP (Federal financial participation) for secured
facility care for some children. The Administration
for Children and Families, Washington Office has
issued a request that all states must now provide to
ACF regional offices confirmation that FFP has not
been claimed for any situation in which a youth has
been placed in secured facility care. In addition,
that FFP will not be claimed in future placements in
such facility.
Our definition of a secure facility means a youth
cannot leave such a facility at any time without an
escort; the facility is secured at all times, day
and night, and a youth cannot leave the facility on
his own; the court has ordered the youth to be
placed in a secure facility because he has committed
a serious crime; i.e., the youth is not a status
offender. A youth who is a status offender is
returned to his family and community for supervised
care with a plan to receive community-based
services. Such youth is either living in a non-
secure residential or day program. In a non-secure
facility, the youth may leave at any time, there are
no guards, and the youth can walk out of the program
any time if he or his guardian wishes not to
cooperate.
Please provide a written confirmation to the Atlanta
ACF Regional Office that FFP is not and will not be
claimed for secured facility care for children
placed under the EA program. Your confirmation will
be attached to the current North Carolina EA State
Plan.
An expedited response to this request will be
appreciated.
Id. (emphasis in original). North Carolina responded to
this letter in April 1995. It asserted that while it had
not yet claimed FFP for the costs of services in secure
facilities, it fully intended to do so. North Carolina
further represented that its plan was developed after
review of other states' plans and it was "aware that many
other states operated IVA-EA programs that included such
care when we developed our plan." State Ex. 30.
On September 12, 1995, ACF issued Action Transmittal 95-9
(AT-95-9) precluding EA reimbursement for services to any
children in the juvenile justice system. 3/ State Ex.
39. This action transmittal notified states that FFP
would not be available under EA for the costs of benefits
or services provided to children --
who have been removed as a result of the child's
alleged, charged, or adjudicated delinquent
behavior, or who have otherwise been determined to
be in need of State supervision by reason of the
child's behavior.
Id. at 3. The action transmittal was effective
immediately for states which had not amended their state
plans to include EA reimbursement for such children.
States which had amended their plans and had been
receiving EA reimbursement were given until January 1,
1996 to submit conforming state plan amendments and to
change their claiming procedures. 4/ Since this case
involves North Carolina's claims for calendar year 1995,
AT-95-9 is not at issue here.
North Carolina claimed FFP for the cost of services to
children in secure facilities despite ACF's assertions
that such claims were unallowable. Initially ACF
deferred these claims so that it could review North
Carolina's documentation. Subsequently on July 8, 1996,
ACF disallowed $15,183,181 in FFP, and on December 17,
1996, ACF disallowed $2,568,544 in FFP for all claims for
services to children in DYS operated facilities.
Federal reimbursement for EA under section 403(a)(5) of
the Act was repealed by section 103 of the Personal
Responsibility and Work Opportunity Reconciliation Act of
1996, Public Law 104-193 (August 22, 1996).
North Carolina's Juvenile Justice EA Services
In the Fall of 1994, North Carolina submitted and ACF
approved two amendments to the EA portion of its title
IV-A state plan. With State Plan Transmittal No. (TN)
94-AFDC-7 (State Ex. 18), approved effective November 1,
1994, North Carolina expanded its program from an EA
cash-assistance program to one that covered a range of
services for families in crisis. With State Plan TN 94-
AFDC-8 (Id.), approved effective January 1, 1995, North
Carolina expanded its EA program so that each of the
Department of Human Resources divisions principally
concerned with child and family welfare began taking EA
applications. DYS was one of these divisions.
As to the "kinds of emergencies covered," State Plan TN
94-AFDC-8 provided that such emergencies included --
4. a situation in which Emergency Assistance is
necessary to avoid destitution of the needy child
or to provide shelter for the child
* * *
8. abuse, neglect, or dependency of children 5/
9. situation in which a child is at risk of removal
from the home
10. situation in which return to the home of a child
who is currently separated from his family may
create an emergency.
State Ex. 18 at unnumbered page (p.) 6.
As to the kinds of assistance provided to meet emergency
situations, State Plan TN 94-AFDC-8 provided for "Out-of-
Home services, including Residential Placement; Care and
Treatment in a Family Setting; and, Care and Treatment in
a Group Setting." Id. at unnumbered p. 7. North
Carolina represented that it intentionally drafted its
plan amendment broadly so that it would cover a range of
services in both secure and non-secure residential
settings. State Att. A at 5. 6/ While ACF contends
that North Carolina cannot claim reimbursement for secure
facilities, ACF has not disputed North Carolina's
position that the language in its state plan was broad
enough to include services to children in the juvenile
justice system.
Pursuant to these provisions, North Carolina claimed
reimbursement for expenditures for children under the
jurisdiction of DYS in three different types of juvenile
facilities: Eckerd Foundation therapeutic camps (Eckerd
camps), detention centers, and training schools.
Eckerd camps are foster care residential treatment camps
for children ages 7 to 18 who have behavioral problems,
are in conflict with the law, or are at risk of being in
conflict with the law. See N.C. Admin. Code § 44E.0001.
The camps are self-sufficiency camps that are also
licensed as foster care facilities and are eligible to
receive title IV-E funds. The camps utilize a camping
environment as a significant part of their treatment and
education programs. Children may be referred to the
camps by the North Carolina juvenile courts, or parents
can request placement of their children in the camps,
without court intervention. However, children are
admitted to the camps only upon the recommendation of a
screening board, on the basis of diagnostic tests, and
they cannot be admitted without parental consent.
Children admitted to the Eckerd camps sometimes go home
on weekends.
The DYS-operated juvenile detention centers house
juveniles who have been arrested and are awaiting
hearings; juveniles who have been adjudicated delinquent
or have violated their probations and are awaiting
placement in a training school or community facility;
juveniles awaiting placement in psychiatric treatment
facilities; and juveniles who are awaiting placement
because of status offenses. At the detention centers,
children receive educational services, medical care, some
psychological evaluations, and substance abuse
counseling. N.C. Admin. Code § 44B.0103.
DYS also operates five training schools. The training
schools also provide treatment and educational services.
N.C. Admin. Code § 44F.1201. They admit children who
have been adjudicated "delinquent," a term which may
include juveniles who have violated local ordinances or
motor vehicle laws as well as juveniles who have
committed serious offenses. See N.C. Admin. Code
§ 44F.0301(A)(1)(a). The training schools' goal is
rehabilitating each student pursuant to an Individualized
Treatment Program and Educational Plan delivered by a
treatment team of psychologists, social workers,
psychiatrists, and teachers.
Analysis
I. Prior to its issuance of AT-95-9 precluding EA
reimbursement for services in all types of
juvenile facilities, ACF failed to adopt an
enforceable policy precluding EA reimbursement
for services in secure juvenile facilities.
The Board has held that if a federal agency's
interpretation of a statute or a regulation it is charged
with enforcing is a reasonable one, and the state had
notice of it, then a disallowance based on that
interpretation will be upheld by the Board. Indiana
Dept. of Public Welfare, DAB No. 970 (1988); see also New
York State Dept. of Social Services, DAB No. 1473 (1994);
Maine Dept. of Human Services, DAB No. 712 (1985); and
Nebraska Dept. of Health, DAB No. 373 (1982). However,
in cases in which a state has adopted a contrary
interpretation that the Board determines is reasonable,
the Board has declined to uphold a disallowance based on
agency interpretations that were not clearly adopted by
the relevant program office, were not consistently
applied, and were not appropriately communicated to
states. For example, Hawaii Dept. of Social Services and
Housing, DAB No. 779 (1986), involved conflicting
regulatory interpretations concerning whether State
income from excise taxes paid by Medicaid providers had
to be deducted from the State's payment to the providers
in determining the amount of reimbursement eligible for
FFP. The Board found that Hawaii was entitled to apply
its reasonable interpretation because its State plan
clearly provided for reimbursement of the excise tax; its
interpretation was consistent with program regulations;
HCFA had paid this cost for many years; and HCFA had not
given appropriate notice to the State that its practice
was contrary to federal requirements. In Hawaii, the
State was not given notice of HCFA's contrary
interpretation until the deferral and disallowance
letters. The Board wrote:
We are here [not] dealing with one series of
disallowances for one state only, but a national
issue. It appears that many states may be similarly
situated. A federal department's policy in such an
instance ought reasonably to be articulated
nationally, and the fact that the "policy" here was
not so announced--particularly when it could so
easily have been, through an action transmittal--
undermines the argument that Hawaii has had notice
sufficient to cause it--and only it--to undergo
substantial administrative disruption.
See also Medicaid QC Control Disallowance, DAB No. 948
(1988); New York State Dept. of Social Services, DAB No.
1023 (1989); Maine Medicaid Fraud Control Unit, DAB No.
1182 (1990).
Based on the record in this case, we conclude that ACF
failed to adopt a secure facilities funding restriction
in a way that could be consistently administered by the
Regional Offices. The result of this failure was that
the secure facilities restriction was not communicated
systematically to states and was applied in a haphazard
and inconsistent manner. Consequently, we hold that
North Carolina is not bound by ACF's secure facilities
restriction for the expenditures at issue.
ACF argued that it never had a national policy allowing
EA reimbursement for secure facilities and that therefore
Region IV's January 1995 notice to North Carolina
concerning secure facilities was sufficient. ACF Brief
at 9-10. ACF contended that the actions of another
Regional Office approving two state plans which
explicitly provided for services in secure facilities did
not mean that other states could assume that ACF had
adopted a national policy of allowing such costs. ACF
also contended that the letter sent to Region IV states
stating that there was now a national policy against
permitting such claims, and the refusal of ACF to approve
some states' EA plans for secure facilities, was
sufficient evidence that ACF had adopted this position as
its national policy.
For the following reasons, we conclude that ACF's
position is not a realistic characterization of what
transpired in 1993 and 1994 or a fair characterization of
what North Carolina could reasonably assume about ACF's
interpretation of the scope of the EA program when it
submitted it plan amendment in late 1994.
o ACF does not dispute that by the early 1990's, it
had decided that expenditures for residential
services to children under the jurisdiction of a
state's juvenile justice system were allowed EA
costs. ACF is correct that it never said, as a
general principle, that this policy included
secure facilities. However, given the common
components of a juvenile justice system, ACF's
failure to distinguish between secure and non-
secure facilities allowed states to reasonably
conclude that secure facilities could be covered.
o Additionally, during 1994, ACF approved two
states' plan amendments which expressly covered
secure facilities: Pennsylvania and Delaware.
See State Ex. 6, Att. 3-A, p. 4 (Pennsylvania);
State Ex. 16, Att. 3-A, p. 1 (Delaware).
Further, in 1993 ACF had approved California's
plan amendment. State Ex. 7, at 5. The record
indicates that California also covered secure
facilities services. State Ex. 41, Att. at 7.
North Carolina knew of ACF's actions in approving
these plans and designed its EA amendment to
obtain such reimbursement. State Att. A at 5.
ACF's approvals therefore provided additional
grounds for North Carolina to reasonably conclude
that ACF did not interpret the EA statute to
exclude services to children in secure
facilities.
o Further, while we understand ACF cannot have
"policy" imposed upon it by the mistakes of a
Regional Office in approving a random plan
provision, the record shows that the Pennsylvania
and California approvals were not the random acts
of Regional Offices. Indeed, the record is clear
that there was consultation with and approval of
the ACF central office on both these plans.
State Exs. 8 (California) and 53 (Pennsylvania).
ACF pointed out that the correspondence between
the central office and the Regional Office on
Pennsylvania's amendment did not discuss or even
acknowledge that Pennsylvania's amendment
expressly referred to secure facilities. ACF
argued that "surely the silence of Region III and
OFA on the issue did not constitute a statement
of policy." ACF Supplemental Br. at 7. However,
it is not necessary for us to find that this
silence constituted a statement of policy that
secure facility costs were allowable. Rather,
ACF's actions show that ACF had a policy of
allowing FFP under the EA program for the costs
of juvenile facilities, without differentiating
between secure and non-secure facilities.
o Finally, it is also clear that within ACF, plan
approvals are regarded (appropriately) as a kind
of precedent which should guide future plan
approvals. State Ex. 7, at 6.
Therefore, while approval of a state's plan may not
constitute agency "policy," it is something from which
another state can draw reasonable conclusions as to
current agency policy and upon which it can reasonably
rely in drafting state plan amendments. In this
instance, North Carolina reasonably concluded that ACF
had interpreted the EA statute to allow reimbursement for
a range of juvenile justice facilities, without regard to
the character of the restrictions imposed on the children
in those facilities. Below we discuss the evidence in
the record which supports our determination that, when
ACF finally decided that secure facility costs were not
allowable, it failed to adopt an enforceable "national
policy" to that effect. 7/
The first problem with ACF's position that it adopted a
national policy restricting EA expenditures is that there
is no document which sets forth the policy. Despite the
statement in Region IV's January 1995 letter to North
Carolina that such a national policy had been adopted,
there is no document issued by the central office
explaining what is meant by "secure facility," what ACF's
basis was for concluding that services in non-secure
facilities were reimbursable while services in secure
facilities were not, and how ACF expected the Regional
Offices to administer this restriction. 8/
For example, while Region IV's letter to North Carolina
contains a "definition" of a secure facility, it is not
clear who determined the contents of the definition. Was
this language given to Region IV by the central office?
If so, did the central office give the language to other
Regional Offices so they could use the same definition
and why is there no evidence of action? If not, how
could the central office know the Regional Offices had a
common understanding of the meaning of the term "secure
facility"? 9/ These are matters that one would expect
a central office to memorialize and distribute to the ten
Regional Offices responsible for the day-to-day
supervision of the EA program.
Second, the secure facilities restriction was never
communicated to the states in any systematic way by the
central or Regional Offices. Out of ten Regions, only
Region IV sent general notices to the states in its
region that such claiming must stop. Other than the
Region IV letters, the only other letter setting out this
new national policy was sent by Region III to
Pennsylvania. 10/ State Ex. 22.
While not all states had EA plans and not all EA plans
covered children who had been removed from their homes
into publicly funded care, it is difficult to understand
why such a potentially cost impacting restriction would
not be systematically communicated by the Regional
Offices. States which covered juvenile justice children
either identified that they were using secure facilities,
such as detention centers, or had plan provisions which
could cover secure facilities. Therefore, all states
covering juvenile justice services should have been
informed since they might have been actively claiming
secure facility reimbursement. Further, even states
without juvenile justice provisions or EA plans should
have been informed of this development since they might
have been in the process of developing state plan
amendments and programs similar to North Carolina's and
other states'. This lack of a written statement of
policy from the central office stands in stark contrast
to ACF's issuance of AT-95-9. In that document, ACF
recognized that the interpretation it was announcing was
contrary to the position it had previously taken in
approving EA plans, and it provided an explanation of the
interpretation as well as time to permit states with
approved plans to amend those plans.
Third, not only was the restriction not generally
communicated to states, ACF did not respond to inquiries
about the restriction or responded with inaccurate
information. For example --
o In March 1995, Region IX wrote to OFA reiterating
that California was claiming for children in
secure facilities and "we need your guidance on
defining a secured facility and how to limit
California from claiming FFP . . . " State Ex.
23. OFA did not acknowledge Region IX's inquiry
until August 1995 and then only to say that it
would be responding to the inquiry shortly with
an action transmittal. State Ex. 36.
Presumably, ACF was referring to AT-95-9, which
precluded EA reimbursement for services in
juvenile justice facilities.
o In March 1995, Alabama wrote Region IV to ask for
a citation for ACF's authority to restrict claims
for secure facilities. State Ex. 25. On
April 17, 1995, Region IV responded that it had
"made your concerns known to our Washington
Office . . . . they have assured us that no EA
state plan which includes charges for secure
facilities has been approved." According to the
record before us, this was definitely not an
accurate statement. ACF Ex. F at unnumbered p.
11. Region IV did not provide the requested
citation but simply stated that "at this time,
the ruling remains unchanged . . . ." Id.
o On April 4, 1995, North Carolina wrote to Region
IV saying that it knew other states were claiming
for services in secure facilities and that it
intended to file similar claims. State Ex. 30.
On April 12, Region IV responded with the same
mistaken assertion that no EA state plan had been
approved. State Ex. 31.
Fourth, in addition to failing generally to notify states
of the secure facility restriction, ACF failed to enforce
the restriction uniformly for states that it had reason
to know were claiming for secure facilities. Most
dramatically, there is no indication in the record that
OFA tried to stop California from claiming reimbursement
for secure facilities even though it knew California was
filing such claims. 11/ Further, while Region II
wrote Pennsylvania to stop claiming for secure
facilities, there is no indication in the record that
Pennsylvania acquiesced to this directive. Finally,
there is nothing to indicate that ACF requested Delaware,
whose plan covered "juvenile secure residential services"
(State Ex. 16), to stop claiming for secure facilities.
Fifth, in the state plan approval process during late
1994 and 1995, ACF inconsistently applied its restriction
on secure facilities. On the one hand, it informed some
states that it was approving their amendments based on
representations that they services in secure facilities.
See ACF Ex. G, unnumbered p. 1-3, concerning the
Louisiana plan; ACF Ex. G, unnumbered p. 4, concerning
the Florida plan; ACF Ex. G, unnumbered p. 5, concerning
the New Jersey plan. See also State Ex. 37 concerning
the Connecticut proposed plan amendment. On the other
hand, ACF approved amendments to other plans which
covered facilities which plainly appeared to be some type
of secure facility. See State Ex. 48, containing
Montana's amendment which provided for services in
"shelter care, family foster care, group home care,
detention centers, transition centers;" and State Ex. 56,
containing South Dakota's amendment providing for
services to children under the jurisdiction of its
"Department of Corrections." Further, ACF approved
amendments to plans covering juvenile justice services
without ascertaining whether such services included
secure facilities. See State Ex. 18 concerning approval
of North Carolina's amendments; State Ex. 50, at
unnumbered pp. 6-8, concerning approval of Washington's
plan for children in "juvenile facilities;" State Ex. 59
concerning approval of New Mexico's plan providing for
"residential group care;" State Ex. 52, at unnumbered p.
3 concerning approval of Oklahoma's plan providing for
services in cases of a delinquent referral or a juvenile
petition; and State Ex. 50, at unnumbered p. 1,
concerning approval of North Dakota's plan providing for
services in "juvenile facilities." 12/
Because ACF never centrally memorialized a secure
facilities policy, haphazardly communicated information
concerning FFP for secure facility placements to the
states, inconsistently dealt with states that had claimed
EA for secure facilities, and acted inconsistently in
approving state plans, we conclude that there was no such
policy. Consequently, North Carolina's claims for FFP
may not be disallowed on this basis.
II. North Carolina's application and authorization
process did not comply with the EA program's
requirements.
The second basis for ACF's disallowance was its assertion
that North Carolina failed to comply with the EA
program's application and payment authorization
requirements. At issue are the sufficiency of North
Carolina's application, whether North Carolina had to
authorize payment for services prior to delivering the
services, whether North Carolina could rely on the
principle of presumptive eligibility, and whether North
Carolina impermissibly delegated discretionary tasks to
outside contractors.
We conclude that North Carolina's eligibility
determination and payment authorization processes did not
comply with federal requirements. Below we discuss the
application and authorization principles that are not in
dispute and we describe how North Carolina handled its EA
application process in DYS facilities. We then explain
our conclusions that North Carolina cannot treat juvenile
detention orders as EA applications, that EA is subject
to the principle of prior authorization, and that North
Carolina cannot rely on the principle of presumptive
eligibility. We also find that ACF has failed to show
that North Carolina impermissibly delegated eligibility
determination responsibilities.
A. Undisputed Eligibility Determination Principles
The parties both agree that the following eligibility
determination principles apply in the EA program. 13/
First, when a state is authorizing EA services such as
residential care, an EA application is required for the
child receiving the services. That application may be
submitted by the child's parent or responsible adult or
by a social service agency acting on behalf of the child.
Second, 45 C.F.R. § 233.120(b)(3) provides that FFP is
available only for emergency assistance which the State
authorizes during one period of 30 consecutive days in
any 12 consecutive months. North Carolina's EA
Application Instructions provided that the date of
application determines the EA "30-day period" and the EA
"12-month period." State Ex. 28, at 8. Thus, "[a]ll
services which will be needed over the entire benefit
period must be authorized within the first thirty days."
Id. As to the 12-month period, "services that are
authorized during the 30-day period may be provided for
up to 364 days from the date of the AFDC-EA application."
Id.
Third, the date of the application determines the date of
initial eligibility. An EA recipient is not entitled to
benefits prior to that date except in the limited
circumstances that such benefits are necessary to address
the emergency at issue. (The example that is typically
used to illustrate this exception is the situation in
which a family needs current month rent to avoid eviction
but is also in arrears for the prior month rent. A state
may pay both months so that the family will not be
evicted.)
B. How DYS Processed EA Applications
Each DYS facility had two EA specialists who worked in
the facility and who "endeavored to complete a formal EA
application form for each student admitted to a DYS
facility on the same day he or she was admitted, and to
verify his or her eligibility shortly thereafter." State
Att. B at 4. The EA specialists were able to process
"hundreds" of formal EA applications, and tried to
complete the process at the time the child entered the
facility or was released from the facility. Id. at 5.
However, the EA specialists simply did not have
enough time to complete the EA paperwork and
eligibility verification process on those dates.
Also, some DYS facilities were delayed in processing
EA applications because they were waiting for the
installation of computer hardware and telephone
lines to support computer connections to the DHR
automated EA eligibility system. Although DYS staff
presumed that students admitted to the DYS
facilities were eligible for EA, and promptly
authorized services for them (and sometimes their
families), these circumstances caused DYS delays in
completion of paperwork, in reviewing relevant files
for eligibility information, and in verifying
eligibility.
Id.
Because of its inability to process EA eligibility
determinations, North Carolina hired outside contractors,
Deloitte & Touche and the Public Consulting Group (the
contractors), to "complete documentation relating to EA
services provided to students in DYS facilities." Id. at
6. Teams from the contractors "worked on-site at DYS
facilities or in the DYS Central Office during July,
August, and September, 1995." Id. North Carolina
instructed the contractors "to treat the date of a
student's admission to a DYS facility as the actual
`application date,' because [it] regarded the court
commitment or other referral papers for each student as
initiating the EA application process." Id. at 7. The
contractors filled out formal EA application forms using
information from the case files/client folders, including
age of the child, circumstances that resulted in
placement with DYS, the child's living arrangements at
the time of placement, types of counseling and
interventions provided to the child, and whether EA
eligibility had previously been determined by the State.
Id. The contractors also completed EA workbooks and
service logs, using the same information source, and then
forwarded the entire package -- case file/client folder,
application form, workbook, and supporting documents --
to the State for review and preparation of claims.
C. Why North Carolina's Process Did Not Comply
with EA Requirements
We conclude that North Carolina's eligibility
determination process did not comply with federal
requirements for the following reasons. First, North
Carolina cannot treat juvenile commitment orders as EA
applications. Second, even if the commitment orders did
constitute applications, the requirement of prior (or
simultaneous) authorization applies to EA services and
North Carolina was required to determine these children's
eligibility prior to providing services. Finally, North
Carolina cannot rely on the principle of presumptive
eligibility as a substitute for prior authorization.
Below we discuss each of these conclusions.
(1) The Commitment Order
North Carolina argued that it should be able to treat the
juvenile commitment order or referral documents for the
child as an EA application for that child. It pointed
out that ACF had informed a number of states that child
abuse reports could be considered to be EA applications.
See State Exs. 4, 5, 9. North Carolina argued that
commitment orders were similar to abuse reports in that
in both types of cases "an EA worker must act immediately
to authorize the services that are indicated to deal with
a child's emergency." North Carolina Br. at 51.
Additionally, it noted that ACF had expressly approved
treating juvenile court documents as EA applications in
the Oklahoma state plan. See State Ex. 52. Finally, it
argued that, as EA is an emergency assistance program,
flexibility in determining EA eligibility was critical to
assure that bureaucratic processes did not prevent
recipients from obtaining needed assistance.
While North Carolina's arguments may have abstract merit,
we conclude that North Carolina is not entitled to treat
its commitment orders as EA applications for the
following reasons.
o First, North Carolina's treatment of the
commitment orders as applications appears to be a
hindsight adjustment which does not coincide with
North's Carolina's contemporaneous actions in
establishing its EA DYS program. For example,
the record contains North Carolina's EA
application form, the EA workbook used to
document eligibility, and the EA application
instructions. State Exs. 26, 27, 28. None of
these documents refer to use of or reliance on a
juvenile commitment order or any other type of
document in lieu of the EA application.
Further, the authorization period and the benefit
period in EA are determined by the date of
application. Therefore, if that date was
determined by some other means than the date on
the application form, it would seem that North
Carolina's eligibility determination process
would have to include instructions to eligibility
workers about reliance on the commitment order
date. Instead, the instructions provide, "The
date of the application is the date the applicant
or his representative signs the application form
under penalty of perjury." Ex. 28, at 5.
o Second, in the EA program, all services for the
benefit period must be authorized within thirty
days of the application. 14/ Here there is no
showing that North Carolina had a process for
authorizing, within 30 days of the commitment
order, all services that would be needed for a
given child over the entire benefit period.
North Carolina's provision of immediate
residential services to a child is not the same
thing as an authorization for the range of
services such a child and his/her family might
need over the benefit period.
o Third, commitment orders, in the context of North
Carolina's EA program, did not have the same
relationship to the emergency at issue as the
abuse reports in the cases of child abuse. ACF
authorized the use of abuse reports because, upon
receiving an abuse report, a worker may need to
make an immediate decision whether a family needs
services to prevent removal or whether the child
should be removed. However, the type of
emergency North Carolina was addressing in most
of these cases was "RH" or return of the child to
his/her home. State Att. B at 7. 15/
Therefore, while the child was removed from
his/her home as a result of the commitment order,
the emergency at issue (that an emergency might
result when the child was returned home), as the
definition is applied by North Carolina, does not
require the same immediate decisionmaking that
child abuse emergencies do.
For the preceding reasons, we conclude that North
Carolina cannot use its commitment orders as EA
applications.
(2) Prior or Simultaneous Authorization
However, even if North Carolina was entitled to treat its
commitment orders as EA applications, the record
indicates that in most cases it failed to properly
determine eligibility and authorize services prior to
providing the services. Therefore, it cannot claim
reimbursement for these services unless it can rely on
the principle of presumptive eligibility. First we
discuss the prior authorization standard and why it
applies in this case. Then we discuss presumptive
eligibility and why it does not apply.
The principle of prior authorization is described at part
IV, section 5214 of the Handbook of Public Assistance as
follows:
All disbursements of assistance payments must be
supported by a prior (or simultaneous) authorization
of award signed by the official or officials charged
with this responsibility. Such authorization of
award, which shall be dated, shall be an affirmative
statement indicating that the eligibility of each
applicant has been established and that a decision
has been made, effective on a specific date, to
grant assistance of a specified amount as OAA, AB,
AFDC, APTD OR AABD.
ACF Ex. H. Because prior authorization can work hardship
in cases where assistance is needed immediately but
eligibility cannot be verified immediately, ACF allowed
states a choice as to whether they want to provide
benefits pursuant to presumptive eligibility. Under
presumptive eligibility, a state can authorize payment or
services prior to determining whether an applicant is
actually eligible. 16/
North Carolina argued that the EA program was not subject
to any prior authorization requirement. North Carolina
based its argument on several points. First, North
Carolina argued that the Handbook generally and section
5214 specifically did not apply to the EA program.
Second, North Carolina asserted that ACF had never given
states general notice that the Handbook or the principle
of prior authorization applied to EA. Third, North
Carolina argued that the principle of prior authorization
was contrary to the purposes of EA, which was to provide
assistance to meet the emergency rather than expose the
child to further harm while eligibility was being
determined.
For the following reasons, we reject North Carolina's
position and conclude that prior authorization applies to
EA.
o Authorization is part of the common vocabulary of
public benefit programs. 17/ A person submits
an application and the state agency authorizes
benefits on the basis of its determination that
the person is eligible pursuant to that
application. Unless the agency is relying on the
principle of presumptive eligibility, it is also
commonly understood that the agency must make a
decision on eligibility before it treats the
person as eligible. If this were not the common
understanding, there would be no reason for the
principle of presumptive eligibility.
o In 1969 when it issued the EA regulations, ACF
gave states notice that the part of the Handbook
containing prior authorization applied to EA. In
its transmittal of the regulations to state
administrators, it provided:
MANUAL REFERENCE: Handbook of Public
Assistance, Part IV. Handbook instructions
will be issued as soon as possible.
ACF Ex. J, at 1. ACF's apparent failure to issue
any additional specific EA instructions does not
diminish its 1969 notice that Part IV of the
Handbook was a reference for the EA program.
18/
o The only other nationwide notice in the record
indicating that ACF considered prior
authorization to be an EA requirement was in AT-
78-44, which was issued in 1978. AT 78-44
stated:
Eligibility must be based on an application. A
determination must be made that the individual
meets the conditions of eligibility for EA
under the State Plan.
ACF Ex. E, Att. 1 at 2. Granted one must imply
the requirement that the determination as to
eligibility "must be made" prior to the time that
services are delivered. However, we think that
it is a fair implication in that it would be
superfluous for ACF to say that a determination
must be made on an application unless it meant
that the determination must be made prior to
actually providing EA.
o While ACF did not issue a specific general notice
as to prior authorization, the record indicates
that, when asked, ACF consistently said that
prior authorization applied to EA. For example,
in Policy Information Memo No. 18, issued in 1972
to Regional Staff, it wrote:
The provision of assistance under the AFDC-EA
program is governed by the same basic Federal
policies which apply to other federally aided
financial assistance programs. As in any other
public assistance category, the family would
need to apply, be determined eligible under the
State plan for emergency assistance and such
assistance be authorized prior to making the
expenditure to be claimed for Federal
reimbursement.
ACF Ex. E, Att.3, at 2 (emphasis in original).
See also ACF Ex. E, Att. 4, at 2 (Policy
Memorandum dated February 8, 1973); ACF Ex. D at
3-4 (10/1/93 OFA Memorandum to Region IX). 19/
o Finally, ACF also repeatedly discussed the
principle of presumptive eligibility as it
applied to EA. See ACF Ex. E, Att.3, at 2; and
Att. 4, at 2; and ACF Ex. D at 3-4. Unless prior
authorization applied to EA, there would be no
need to discuss presumptive eligibility.
Therefore, we conclude that North Carolina had sufficient
notice that prior authorization was required for EA
services.
Further, we reject North Carolina's argument that prior
authorization is inimicable to EA, a program to address
emergencies which, by their nature, sometimes cannot wait
for the operation of routine eligibility determination
process. The record does not show that North Carolina
adopted an alternative approach to overcome problems with
random denials of assistance resulting from some overly
rigid application process. Rather, what appears to have
happened is the wholesale breakdown of North Carolina's
eligibility process and subsequent attempt to structure
an alternative justification to enable the State to
continue to claim EA for these services. There is no
indication in the record that North Carolina used these
EA dollars to improve its juvenile justice services;
these children were placed in facilities and provided the
services they would have received whether or not they
qualified for EA. While ACF's broad interpretation of
the EA statute during this period allowed North Carolina
to use federal funds in this way, it did not allow North
Carolina to simply dispense with the formalities of an
application process. Consequently, we find North
Carolina's assertion that wholesale disregard of its
promulgated application processing standards was
necessary to provide children with appropriate EA
services self-serving and unpersuasive.
(3) Presumptive Eligibility
Assuming, for the sake of argument, that North Carolina
can treat the commitment order as an application, and
applying our determination that prior authorization
applies to EA, the next question is whether North
Carolina can rely on the principle of presumptive
eligibility to justify providing EA services prior to
determining whether the children receiving those services
were eligible. As explained below, we conclude that
North Carolina cannot use presumptive eligibility because
nothing in its state plan or its EA program material
indicated that it would use presumptive eligibility.
North Carolina argued that it had no actual notice that
it must include presumptive eligibility in its state
plan. For the following reasons, we conclude that North
Carolina had sufficient notice that its state plan must
indicate, for title IV-A benefits generally or EA
benefits specifically, that presumptive eligibility would
be used.
First, as to presumptive eligibility, section 5220.3 of
the Handbook provides:
f. The special procedure for assistance payments
prior to completion of eligibility investigation
must be provided for in the approved State plan.
ACF Ex. H. North Carolina did not have, in the EA
portion of its title IV-A state plan, any provisions
stating that it would use presumptive eligibility,
outlining in what circumstances it would find a family to
be presumptively eligible, or applying a process by which
such payments would be made by the State on its own
responsibility and federal funds would not be claimed
until investigation is completed and eligibility
established.
Second, in section 2.1.C of title IV-A state plans,
states are asked to elect whether they will use
presumptive eligibility. North Carolina elected not to
use it. State Ex. 47, at 1. Since this election is
contained in a section of the plan overwhelmingly devoted
to the programmatic design of a state's AFDC program, we
are unable to conclude that such a negative election
always precludes the use of presumptive eligibility in a
state's EA program. However, the fact that states know
that they must either opt in or opt out of presumptive
eligibility for AFDC is support for our conclusion that
states understand they must indicate whether they intend
to use presumptive eligibility for EA.
North Carolina also argued that although its state plan
did not specifically include presumptive eligibility as
part of its plan for administering EA, the State never
understood its election under section 2.1.C. to apply to
its EA program, and it interpreted its state plan as
permitting EA eligibility workers to find presumptively
eligible all children entering the three types of
institutions at issue, based on a qualifying emergency.
See State Att. B at 18; State Att. D at 3. The State
noted that the Board has often held that it will defer to
a State's reasonable interpretation of its own State
plan. See South Dakota Dept. of Social Services, DAB No.
934 (1988).
In South Dakota and similar cases, the Board has stated
that it will look to the language of the state plan and
consider whether the state's proposed interpretation is
reasonable, gives effect to the purpose of the plan and
program requirements, and is supported by evidence of
consistent administrative practice. South Dakota at 4.
Not only did North Carolina not include any language
whatsoever concerning presumptive eligibility in the
provisions of its state plan covering EA, its application
materials are devoid of any indication that it included
presumptive eligibility in the design of its program.
There is no place on the application for workers to
indicate that a child is presumptively eligible. State
Ex. 26. There are no instructions in the EA workbook
used by eligibility workers to process EA applications on
how to process a case which is only presumptively
eligible. State Ex. 27. And finally, the EA Application
Instructions, while quite detailed on the steps a worker
should take to process an application, are silent on the
topic of presumptive eligibility. State Ex. 28.
Consequently, we conclude that North Carolina cannot rely
on the principle of presumptive eligibility in
documenting its claims. Thus, even in cases for which
North Carolina met the application requirement, the
disallowance must be sustained for all claims for which
there is no documentation showing authorization of
benefits prior or simultaneous to the provision of EA
services.
III. North Carolina's failure to amend its cost
allocation plan does not bar its EA claims for this
period.
The disallowance letters included as a basis for
disallowance North Carolina's failure to submit a cost
allocation plan (CAP) amendment in accordance with 45
C.F.R. § 95.509. See 7/8/96 disallowance letter at 3-5;
12/17/96 disallowance letter at 2. Those letters stated
that North Carolina's claims for EA services provided
through the juvenile justice system were therefore not
made in accordance with an approved CAP and thus
unallowable. North Carolina contended that its claims
were for costs of providing services directly to program
recipients and were therefore not included in the
definition of state public assistance agency costs
required to be included in a CAP. Thus, North Carolina
declined to amend its CAP.
Since we have determined that North Carolina may claim
FFP in payments for services to families involved in the
juvenile justice system, provided those claims satisfied
the application and prior authorization requirements, it
is necessary for us to resolve this issue. Upon review
of the applicable regulations, the parties' contentions,
and pertinent Board decisions, we conclude that North
Carolina is not required to amend its CAP to reflect the
costs of providing EA services through DYS. Thus, North
Carolina may use the per diem rates it paid DYS
facilities to claim FFP. However, ACF may review the per
diem rates to assure that they are reasonable.
A. Cost Allocation Plan Regulations
The provisions of 45 C.F.R. Part 95 are applicable to the
EA program pursuant to 45 C.F.R. § 95.503. Section
95.507 provides that a State must submit a CAP for the
State agency to the Director, Division of Cost Allocation
(DCA). The plan describes the procedures used to
identify, measure, and allocate to each program all State
agency costs. 45 C.F.R. § 95.507(a)(1). "Cost
allocation plan" is defined at section 95.505 as --
a narrative description of the procedures that the
State agency will use in identifying, measuring, and
allocating all State agency costs incurred in
support of all programs administered or supervised
by the State agency.
"State agency costs" are defined in the same regulation
as --
all costs incurred by or allocable to the State
agency except expenditures for financial assistance,
medical vendor payments, and payments for services
and goods provided directly to program recipients
such as day care services, family planning services
or household items as provided for under the
approved State program plan.
Section 95.519 provides, "If costs under a Public
Assistance program are not claimed in accordance with the
approved cost allocation plan . . . or if the State
failed to submit an amended cost allocation plan as
required by § 95.509, the costs improperly claimed will
be disallowed." ACF contended that the following
provisions of 45 C.F.R. § 95.509 were applicable to the
circumstances of this case --
(a) The State shall promptly amend the cost
allocation plan and submit the amended plan to the
Director, DCA if any of the following events occur:
(3) The State plan for public assistance programs
is amended so as to affect the allocation of costs.
B. The Parties' Arguments
It is undisputed that North Carolina's CAP does not
include provisions for allocating DYS's costs of
providing direct services to EA recipients and that North
Carolina has declined to amend its CAP as requested by
ACF. North Carolina contended that DYS costs are not
included in the definition of "State agency costs"
because these services were billed directly to the
program at per diem rates as "payments for services and
goods provided directly to program recipients . . . ."
According to the State, ACF recognized in an Region IV
Regional Administrator's Memo #ACF-95-2, dated June 21,
1995, that payments for services and goods provided to
program recipients could include payments to a state
agency providing such services if the IV-A agency staff
actually provided a service which might otherwise be
purchased from an outside source. See State Ex. 34, at
2-3. The State represented that no part of its juvenile
justice EA claim represented costs of administrative
functions performed by DYS or contractor staff. State
Att. A at 19; State Att. D at 7. The State also
contended that the DYS services costs need not be
included in its public assistance CAP because DYS is not
the federal grant recipient; EA claims are filed instead
by the State's Division of Social Services. North
Carolina also contended that two Board decisions squarely
support its position that CAP requirements do not apply
to FFP claims based on per diem rates for services
provided by a State agency: Iowa Dept. of Human
Services, DAB No. 624 (1985), and Missouri Dept. of
Social Services, DAB No. 630 (1985). Finally, North
Carolina argued that if the Board should determine that a
CAP amendment is necessary, the State should be permitted
to file one with an effective date retroactive to January
1, 1995.
ACF argued that the amendment of North Carolina's state
plan to include EA for services provided within the
juvenile justice system so significantly affected the
allocation of costs of the EA program that the applicable
regulations required amendment of the State's CAP to
reflect that change. ACF contended in its briefs that
the exclusion from the definition of state agency costs
of payments for direct services provided to recipients
applies only to services purchased from and provided by
an entity outside the State agency. Since DYS is a state
agency that is a division of North Carolina's Department
of Human Resources, ACF maintained that DYS cannot be a
direct service provider: "If the service is provided by
the staff of the State agency, as is the case here, then
such costs are State agency costs." ACF Br. at 44.
According to ACF, the payments involved here may be
either for direct program costs, e.g., the costs of
counseling a client or of daily room and board, or for
administrative costs, e.g., costs of staff time spent
determining eligibility or authorizing services,
processing applications, or case management. ACF
contended that even if North Carolina did not claim
administrative costs incurred by its DYS staff, the
consultants' fees paid by the State for preparation of EA
applications and eligibility determinations were
administrative costs that should have been included in a
CAP amendment. ACF did not address the State's
contentions regarding Regional Administrator's June 21,
1995 memorandum #ACF-95-2, and it did not dispute the
State's assertion that DYS itself does not file claims
for EA funds. ACF likewise did not address in its briefs
the cited Board decisions; however, in the July 1976
disallowance letter ACF stated that those Board
decisions, which concerned costs claimed under Title XIX
of the Act (Medicaid), were inapplicable to programs
authorized under the Title IV-A plan. 20/ ACF stated
--
The Medicaid State Plan apparently permits the
establishment and use of daily per diem rates for
services (provided by hospital or intermediate care
facilities) as long as the methodology for computing
those rates is included in the State's Medicaid Plan
which has been approved by the Health Care Finance
[sic] Administration (HCFA). The Title IV-A State
Plan does not have a like provision.
12/8/96 disallowance letter at 5 (emphasis in original).
C. Analysis
We conclude that North Carolina's payments at per diem
rates to DYS facilities for services provided to EA
recipients were not State agency costs required by
applicable regulations to be included in a CAP. This
conclusion is consistent with ACF's instructions to the
states for preparing EA claims in the Regional
Administrator's Memo #ACF-95-2, issued during the
disallowance period, which stated --
The only costs which should be reported as EA
"payments" . . . are payments which are made
directly to or on behalf of eligible clients for
goods or services which are provided for in the
approved State Plan for EA to alleviate the
identified emergency. Generally, these would be
payments to clients or to vendors of goods or
services (public or private) made via contracted
agreement with the IV-A agency. The only situations
in which the salary, benefits and related
nonpersonal services costs of IV-A agency staff
should be considered as EA "payments" is if the IV-A
agency staff actually provides a service which might
otherwise be purchased from an outside source. An
example of this would include direct family
counseling or therapy which might be provided by a
qualified IV-A agency staff person to eliminate the
source of the emergency.
State Ex. 34, at 2-3. ACF has not contended that the
services at issue here were not services which might
otherwise have been purchased from an outside source.
Moreover, North Carolina has provided affidavits, which
ACF has not challenged, stating that these EA claims do
not include costs of administrative functions incurred
either by DYS staff or consultants. Att. A and Supp.
Dec. 7. 21/ Finally, ACF has not controverted North
Carolina's assertion that DYS has no direct federal
awards. Based on this record, these payments qualify as
payments for services and goods provided directly to
program recipients that do not have to be included in the
State's public assistance CAP.
Although the Board decisions in Iowa and Missouri deal
with FFP claims for Medicaid, they are helpful in
explaining why expenditures made at per diem rates for
DYS services are not required to be included in the
State's CAP. In Iowa, HCFA had disallowed retroactive
claims submitted after the state included statewide
indirect costs in the calculation of per diem rates paid
to state-operated providers of Medicaid services, on the
grounds that a CAP amendment was not submitted to or
approved by DCA. The Board held that neither Office of
Management and Budget Circular A-87 (OMB A-87) nor the
Medicaid regulations required a state to follow CAP
approval procedures for a governmental component which is
providing services to program recipients, but not itself
claiming indirect costs under a federal program. The
state's payments of state-operated providers' per diem
rates were payments for direct services to Medicaid
recipients. HCFA was free to examine the payments to
ensure that the approved reimbursement system was
followed in setting the per diem rates, but HCFA could
not disallow the retroactive increase on the grounds that
the proper effective date for the increase was when the
CAP was amended. While HCFA had a legitimate interest in
assuring that using central services costs to calculate a
rate did not result in any inequity to the federal
government, in this case there were approved methods for
allocating these costs that provided such assurance.
Similarly, in Missouri, HCFA's disallowance was for
payments by the state at per diem rates for services
provided to Medicaid patients in state-operated
facilities. These per diem rates were based on
Missouri's Medicaid state plan and included allocable
state-wide overhead as allocated by a CAP on file with
the Medicaid agency (but never approved by DCA). The
Board concluded that although a CAP was required to
support indirect costs charged to a federal grant, these
indirect costs were part of a per diem rate that was
charged as a direct cost of the services. Once again,
neither OMB A-87 nor the Medicaid regulations required
DCA approval for allocation of state-wide costs to these
state-operated providers. The Board noted that, in a
prospective payment system, the indirect costs might not
even be current costs, since they would likely be based
on a historic base period. 22/
ACF contended that these cases were distinguishable
because Medicaid apparently permitted the establishment
and use of daily per diem rates for services (provided by
state-operated facilities) as long as the methodology for
computing those rates was included in the states'
approved Medicaid plans, while the Title IV-A State plan
at issue here does not have a like provision. That
argument is unpersuasive, given ACF's recognition in the
Regional Administrator's Memo that a state IV-A agency
might provide direct services, and the lack of any ACF
assertion that North Carolina's state EA plan did not
include out-of-home services when provided by the State
IV-A agency. Hence, the only explanation for rejecting
the claims here would have to be that such per diem rates
are an unacceptable method of claiming. ACF's argument
seems to rest on its assertions that these rates might
include administrative costs directly related to the EA
program and that it does not know how these rates were
calculated. However, North Carolina presented affidavits
stating that its EA claims did not include any costs of
processing applications or determining eligibility, and
the State represented (and ACF did not disagree) that the
rate used for claims for services to the Eckerd camp EA
recipients was the same rate used for Title IV-E
recipients. Thus, the State clearly has a method for
calculating the per diem costs charged for EA services
that can be examined by ACF to ensure that the federal
government is not bearing an inequitable share of such
costs. Consequently, we find ACF's objections to using
the per diem rates for these claims to be unfounded.
We therefore reject as a basis for disallowance North
Carolina's failure to amend its CAP to include DYS
facility costs incurred in providing EA services.
Thus, North Carolina may use the per diem rates it paid
DYS facilities to claim FFP. However, ACF may review the
method of calculating these per diem rates to assure that
the rates are based on costs allowable under the
applicable cost principles of OMB A-87.
Conclusion
For the foregoing reasons, we uphold these disallowances
in the amounts of $15,183,181 and $2,568,544, subject to
downward adjustment if, within 30 days of its receipt of
this decision, or such longer time as ACF may permit,
North Carolina documents its expenditures for services
which were provided to children after they were
determined to be eligible for EA. North Carolina may
return to the Departmental Appeals Board within 30 days
of receiving ACF's final determination on those claims.
___________________________
Cecilia Sparks Ford
___________________________
Norval D. (John)
Settle
___________________________
M. Terry Johnson
Presiding Board Member
* * * Footnotes * * *
1. Some years prior to approving state plan
amendments for services to juvenile justice system
children, ACF had begun approving state plan amendments
for services to children who were in danger of being
removed or had been removed from their homes because of
abuse or neglect. EA plans which covered abused and
neglected children did not necessarily cover delinquent
children, but plans that included delinquent children
appear always to have included services to abused and
neglected children.
2. In October 1995, the OIG issued its report
titled "Review of Rising Costs in the Emergency
Assistance Program." The report documented the expansion
of EA and traced the causes of that expansion. As
causes, the report identified ACF's approval of state
plan amendments--
which enabled States to maximize Federal revenue by
obtaining EA funding for services traditionally
State funded. These services, predominantly
juvenile justice, tuition, foster care, and child
welfare usually address long-term problems while EA
was intended to address temporary emergencies.
Id.
3. The OIG report stated that in the course of
conducting the review, the OIG had recommended to ACF
that it revise or rescind its policies that allowed
states to claim EA for foster care and juvenile justice
expenditures. The report noted that ACF had taken one
such action by issuing AT-95-9. State Ex. 41, Attachment
(Att.) at 17-18.
4. In the action transmittal, ACF discussed the
purpose of EA as demonstrated by its legislative history.
It wrote:
The context of the EA program is the family and its
purpose is to help family members by providing
financial assistance and services to enable them to
meet family emergencies that they are experiencing.
Id. at 1-2. ACF noted that federal policy allowed states
"`to define the types of emergencies it will cover . . .
so long as the program's scope . . . bears a valid
relationship to the intent and purpose of the program . .
. .' (SSA-AT-82-28, p.2.)" It then concluded that
expenditures for children in the juvenile justice system
did not bear such a relationship to EA and therefore did
not qualify for EA reimbursement. Id.
5. The North Carolina Juvenile Code defines a
"dependent" juvenile as one whose parent or guardian is
"unable to provide for the care or supervision" of the
child, and defines a "neglected" juvenile to include a
juvenile who "does not receive proper care, supervision
or discipline" from his parent or guardian. N.C. Gen.
Stat. §§ 7A-517(13) and (21).
6. North Carolina provided with its briefs
affidavits from state officials which it labelled
Attachments A through G, as well as documentary evidence
which it labelled as numbered Exhibits.
7. North Carolina engaged in extensive
discovery aimed at establishing how the secure facilities
restriction was adopted, communicated, and enforced. To
that end, it sought from ACF:
All non-identical copies of the letter dated January
31, 1995 . . . which the Atlanta Regional Office
allegedly sent to all the Title IV-A single State
agencies in Regional IV.
Copies of all letters similar to the Regional IV
January 31, 1995 letter . . ., if any, which other
ACF Regional Offices throughout the country sent to
the Title IV-A single State agencies in their
respective Regions.
Copies of all communications between any Central
Office or Regional Office component of ACF and any
Title IV-A single State agency, which discussed the
issue of claiming FFP for EA services for children
in so-called "secure facilities" . . . .
All documents discussing, analyzing or otherwise
pertaining to the use of Title IV-A Emergency
Assistance funds to cover the cost of services
provided to children in secure facilities . . . .
North Carolina Request for Production of Documents, para.
3-6.
8. In this case, ACF represented that the
restriction was communicated in the course of conference
calls "with key Regional Office staff." In these calls,
the Director of the Division of Self-Sufficiency Programs
of the Office of Family Assistance (OFA) "emphasized that
the purposes and goals of the juvenile justice system for
children placed in `secure facilities' are oriented
towards protection of society and thus are quite distinct
from those of the Emergency Assistance program." ACF Ex.
E at 22. The Director explained that he "stressed to
the Regional officials that they should communicate to
States that FFP would not be available for such `secure
facility' juvenile justice costs . . . ." Id.
However, the record indicates that such calls must not
have been sufficiently informative, timely, or universal,
since, as we discuss in the text, Region IV was the only
one of the ten regions that took action to notify its
states of this alleged policy. Moreover, Region IX wrote
to OFA in March 1995 that --
In September of 1994, AFDC staff had several
conversations with Judith Reich regarding
California's claiming of FFP for secure probation
facilities. We understand that this issue, i.e.,
the allowability of FFP for secure facilities, arose
in Region II with a proposed New Jersey EA
amendment. We subsequently learned that the matter
had been referred to the Office of General Counsel.
* * *
Therefore, we need your guidance on defining a
secured facility and how to limit California from
claiming FFP that is currently allowed under its
approved Title IV-A Plan before we can enter into
any negotiations with the State.
State Ex. 23.
9. Indeed, the danger of the lack of a uniform
definition is illustrated by a letter sent by Region VI
to New Mexico in 1996, deferring certain of its claims
for children in juvenile justice facilities. This
letter set forth the three attributes of a "secure
facility" in different terms from the Region IV January
31, 1995 letter and made the three conditions conjunctive
instead of disjunctive. Under this definition, North
Carolina asserted, none of its facilities would be
classified as secure. State Supplemental Reply Br. at 6.
10. The Region III letter, which uses the text
of the Region IV letter, was dated February 27, 1995.
Unfortunately, there is no indication in the record as to
Pennsylvania's response. Therefore, we cannot tell
whether Pennsylvania stopped filing claims for children
in secure facilities or whether ACF eventually disallowed
such claims.
11. California amended its title IV-A plan
effective July 1, 1993 after extensive consultation with
Region IX and Region IX's consultation with the central
office. See State Exs. 7 and 8. California's July 1,
1993 amendment covered children under the jurisdiction of
County Probation Departments. County governments
initiated the development of the amendment because, under
California law, counties are responsible for juvenile
justice programs and counties had suffered "grave
financial shortfalls" and badly needed additional revenue
to maintain county services. State Ex. 7, at 5. While
the amendment does not refer to "secure facilities" or
"detention centers", it is apparent that the Regional
Office and the central office knew that California was
claiming for what ACF considered to be secure facilities.
See State Exs. 23; and 41, Att. at 7.
12. The Board is also aware of two additional
state plan approvals from another pending Board case,
Pennsylvania Dept. of Public Welfare, Board Docket No. A-
97-94: Nebraska's plan covering removal of a child due
to a judicial determination of delinquency; and Rhodes
Island's plan including as a covered emergency
"delinquency (including waywardness)." State Appeal File
Ex. 6 (pages unnumbered but state plans appear
alphabetically by state).
13. Both parties cited to 45 C.F.R. § 206.10,
but it was not to clear to us that this provision was
directly applicable to state EA plans, since the
authority cited for that regulation is sections 402 and
1102 of the Act, which do not include EA, and since there
is a separate regulation, 45 C.F.R. § 233.120, that
contains specific requirements for state plans under IV-A
providing for EA. North Carolina pointed out that there
were several subsections to section 206.10 which were
inapplicable to EA, e.g., the requirement for periodic
redetermination of eligibility. Moreover, in approving
EA state plans, ACF did not strictly apply each
requirement of section 206.10. For example, as discussed
in the text, an application signed under penalty of
perjury by the applicant or someone on his/her behalf was
not required in all cases.
14. North Carolina's EA instructions
provide:
All services which will be needed over the entire
benefit period must be authorized within the first
thirty days. It is better to authorize a broad
range of services.
Authorizing the service does not mean that it must
be provided.
State Ex. 28, at 8.
15. In North Carolina's EA Application
Instructions, "RH" is described as follows:
RETURN OF CHILD MAY CREATE AN EMERGENCY - Situation
in which return of the child who is currently
separated from the family may create an emergency.
State Ex. 28, at 26.
16. Section 5520.3 of the Handbook sets out the
following standards for presumptive eligibility:
a. Decision to grant assistance prior to completion
of investigation must be made on the basis of facts
which indicate presumptive eligibility.
b. Such payments would be made by the State on its
own responsibility and cannot be matched with
Federal funds until investigation is completed and
eligibility established.
c. The award must be authorized in advance of
payment as categorical assistance either as old-age
assistance, aid to the blind, aid to dependent
children, or aid to the permanently and totally
disabled.
d. Federal participation made on authorization
prior to complete investigation and establishment of
eligibility, cannot be claimed until after the
investigation has been completed and eligibility for
the period of payment has been established.
* * *
f. The special procedure for assistance payments
prior to completion of eligibility investigation
must be provided for in the approved State plan.
Id.
17. "HB-IV-5214 was originally promulgated in
1947. It was preceded in 1941 by a provision with
similar effect in the Social Security Board's Guide to
Public Assistance Administration." New York State Dept.
Of Social Services, DAB No. 585, at 3, n. 3.
18. We recognize that the Handbook is not a
particularly current reference. However, its basic
principles, such as prior authorization and presumptive
eligibility, are the common fare of public benefits
programs. While it might not be appropriate to rely on
some obscure requirement in the Handbook, we do not think
these very basic principles can be discarded simply
because they are only memorialized in the Handbook.
19. North Carolina contended that a deferral
letter from Region VI to New Mexico could be read as
permitting authorization to take place "prior to or
during" the provision of EA services. State Supplemental
Br. at 7. However, the language in question refers to a
process in which the state agency responsible for abused
and neglected children files a formal application for
children who may have been considered presumptively
eligible under the state plan -- "The EA case records
must be able to not only substantiate that [the state
agency responsible for abused and neglected children]
completed the required applications for EA assistance but
also substantiate that facts in the case record
established eligibility for EA services." March 6, 1996
letter at 3. We are therefore unable to agree with North
Carolina that this letter demonstrates that the prior
authorization requirement was being applied disparately
by ACF.
20. ACF's briefs also focused on the State's
assertion that only indirect costs need be included in a
public assistance CAP. That statement is certainly
erroneous -- for example, direct costs attributable to
eligibility workers who take applications for more than
one public assistance program must be allocated among
benefitting public assistance programs. However, that
error was immaterial in this case, and did not affect our
analysis.
21. Although ACF complained that North
Carolina had not shared with it the State's method for
computing the per diem rates used in these claims, ACF
did not in its briefs dispute the State's affiants'
declarations that the State did not include in its EA
claims DYS or consultants' costs for performing
administrative functions.
22. North Carolina indicated that the per diem
payments involved in this case were based on a historic
base period, not on actual costs. State Att. A at 18.
(..continued)