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CASE | DECISION | JUDGE | FOOTNOTES

Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
IN THE CASE OF  

SUBJECT:

Mississippi Department of Human Services



DATE: February 28, 2000

       
 


 

Docket No.A-99-28
Control No. CIN-04-94-00078
Decision No. 1717
DECISION
...TO TOP

DECISION

The Mississippi Department of Human Services (Mississippi) appealed a decision by the Administration for Children and Families (ACF) disallowing $1,300,176 in federal funds claimed under former title IV-F of the Social Security Act (Act) for expenditures made during the period October 1993 through September 1996. The funds were claimed for the costs of a contract with the University of Mississippi (the University) for a Learn, Earn, and Prosper (LEAP) project. Under the LEAP project, the University was to provide, for participants in the Job Opportunities and Basic Skills (JOBS) program, certain educational and training activities that were considered mandatory components of a JOBS program.

The disallowance was based on ACF's determination that the contract costs that Mississippi claimed at a "higher" rate of funding (approximately 78%) included indirect costs incurred by the University. ACF determined that these University indirect costs were eligible for federal matching funds at the rate of only 50%. The amount of the disallowance represents the difference between the two funding rates.

Mississippi argued that the disputed contract expenditures were direct costs to the State agency for JOBS component activities, and thus were eligible for funding at the higher rate. ACF argued that its regulations should be interpreted as requiring that Mississippi segregate the amounts charged by the University (regardless of the nature of the activities contracted for) and as precluding JOBS funding at the higher rate for any costs the University identified as LEAP project costs using an indirect cost rate methodology. In effect, this amounts to an interpretation that the indirect costs the University incurred in running the LEAP project are administrative costs of operating a JOBS program and thus qualify for federal funding only at the 50% rate.

For the reasons stated below, we reverse the disallowance.

Summary of our decision

Under the LEAP project, the University was to provide certain educational and training activities that were mandatory components of a JOBS program. With certain exceptions, the JOBS statute provided 50% funding for expenditures for administrative activities and a higher rate for other expenditures in operating a JOBS program. The legislative history of the funding provision referred to educational and training activities as "non-administrative." The JOBS regulations provided that "direct costs" of component activities were reimbursable at the higher rate. Under the cost principles applicable to the Mississippi state agency administering the JOBS program, the contract expenditures for the LEAP project were such "direct" costs to the state agency, because they were readily identifiable with the cost objective of providing these activities to JOBS participants. Moreover, the preamble to the final JOBS regulation referred to tuition and fees paid for education and training courses as "program costs" reimbursable at the higher rate, even though (like the LEAP project expenditures here), tuition and fees might include amounts intended to reimburse the institution providing the education or training for its indirect costs allocable to these activities. Thus, Mississippi's claim was consistent with a reasonable interpretation of the statute, the plain language of the regulation, and a statement in the preamble.

ACF relied on some statements from its regulations and other policy issuances that ACF said denied the higher rate for any indirect costs and required Mississippi to segregate the University's direct and indirect costs. ACF's position here effectively classifies costs as administrative, not according to the purpose for which they were incurred (that is, the specific cost objective), but according to the methodology (direct or indirect) used to identify them with that cost objective. As early as 1985, this Board held that, when agency policy distinguishes indirect costs for purposes of federal matching rates, the agency must clearly communicate its intention to do so. The basic reasons for this holding were: 1) such a policy is contrary to the general principle that the costs of a federal grant program, project, or activity include all allowable, allocable direct and indirect costs; and 2) such a policy can lead to potentially arbitrary results because the extent of reimbursement depends on a grantee's accounting methods.

As discussed in detail below, ACF's official policy statements, read as a whole, were confusing both on when a state was required to segregate costs under a contract, and, if segregation was required, on the question of whether the costs should be segregated according to the nature of the activity with which they were associated or according to the methodology used to identify the costs with that activity. ACF's official statements were particularly confusing as applied to costs incurred by a university contracting with a state agency for the type of project at issue here.

For example, ACF stated that only certain contracts for "multiple services and activities" involving "significant indirect costs" would require segregation of costs according to available matching rates. ACF further indicated that most contracts would not require segregation because its final rule treated certain services as program services rather than administrative functions, as in the proposed rule. These statements, among others, are inconsistent with ACF's position here. If all costs identified by an indirect cost rate methodology are "administrative costs" under the statute (no matter what the nature of the activity to which they are allocable), then the 50% matching rate would apply whether or not the indirect costs were significant and even if only one program activity were being provided.

We further find that ACF, as part of promoting maximization by states of JOBS funding, created a climate in which Mississippi could have reasonably thought that all of its expenditures for its contract with the University would be reimbursed at the higher rate, in spite of advice to the contrary from an ACF regional financial operations specialist. For example, ACF's information memorandum on revenue maximization states that the higher rate applies to "costs of program activities . . . such as JOBS components," without distinguishing direct or indirect costs, even though one maximization strategy was to use expenditures for indirect costs of contractors as a state's non-federal share. Mississippi Exhibit (Ex.) O. An expert who had been hired by ACF to provide technical assistance to states advised Mississippi that its interpretation was legitimate. Mississippi also relied on one of this Board's decisions, which provides support for viewing the contract expenditures here as direct costs of the Mississippi State agency. Mississippi informed ACF regional officials of its interpretation in 1993. Yet, the regional officials did not seek and receive clarification from ACF central office until after Mississippi had incurred most of the expenditures at issue here and had committed funds to the project for the remainder of the period. Thus, we conclude that Mississippi did not have timely and adequate notice of the interpretation on which ACF relied here.

Below, we first explain the concepts of direct and indirect costs and our previous holding. We then set out a general description of the JOBS program and the statutory matching provision at issue here. Next, we describe in detail ACF's proposed and final rules and policy issuances. We then describe the contract at issue here. After that, we explain why Mississippi's interpretation was reasonable and why ACF's policy was confusing, especially as applied to that contract. Finally, we describe the additional circumstances here which rendered Mississippi's interpretation reasonable, in spite of an ACF regional staff position to the contrary, and address ACF's remaining arguments.

Basic cost principles for state agencies

Office of Management and Budget (OMB) Circular A-87 sets out principles for determining the allowable costs incurred by State, local, and federally-recognized Indian tribal governments under federal grants and cost reimbursement type contracts (including subgrants and subcontracts) except those with (a) publicly financed educational institutions subject to Office of Management and Budget Circular A-21, and (b) certain publicly-owned hospitals and other providers of medical care. OMB Circular A-87 was published in 1981 at 46 Fed. Reg. 9,548, and made applicable to state and local governments first by 45 C.F.R. § 74.171, and then by 45 C.F.R. § 74.27, as well as 45 C.F.R. § 92.22.(1)

Under OMB Circular A-87, the total cost of a grant program is comprised of the "allowable direct cost incident to its performance, plus its allocable portion of allowable indirect costs, less applicable credits." Att. A, § D.1. Direct costs are those that can be identified specifically with a particular cost objective. They may be charged directly to a program or may be charged to cost objectives used for the accumulation of costs pending distribution in due course to grants and other ultimate cost objectives. Att. A, § E.1. Indirect costs are those: (a) incurred for a common or joint purpose benefitting more than one cost objective, and (b) not readily assignable to the cost objectives specifically benefitted, without effort disproportionate to the results achieved. Att. A, § F. Indirect costs refer to those of a grantee department or of other departments supplying goods, services, and facilities to the grantee department.

Indirect costs are distributed (allocated) to a cost objective using an indirect cost rate determined (in its simplest form) by dividing total indirect costs by direct costs in a distribution base (generally, modified total direct costs or direct salaries and wages). For example, if total indirect costs are $1 million and modified total direct costs are $2 million, the indirect cost rate is 50%. Thus, for a cost objective with modified total direct costs of $500,000, the allocable indirect costs would be $250,000, determined by taking 50% of the $500,000.(2)

A "cost objective" is "a pool, center, or area established for the accumulation of costs. Such areas include organizational units, functions, objects or items of expense, as well as ultimate cost objectives including specific grants, projects, contracts, and other activities." Att. A, § A.4.

OMB Circular A-87 states:

There is no universal rule for classifying certain costs as either direct or indirect under every accounting system. A cost may be direct with respect to some specific service or function, but indirect with respect to the grant or other ultimate cost objective. It is essential, therefore, that each item of cost be treated consistently either as a direct or an indirect cost.

Att. A, § D.2. In addition to providing guides for determining direct and indirect costs, the Circular contains standards for selected items of cost, which apply whether a particular item of cost is treated as direct or indirect cost. Examples of such items of cost (or type of cost) are accounting, compensation for personal services, materials and supplies, and building space and related facilities.

We also note that time studies are one method of cost allocation commonly used where state agency personnel are engaged in activities of various programs, or in activities of one program reimbursable at different matching rates. Time spent on various activities is used to allocate direct costs among the activities and, ultimately, also affects the allocation of indirect costs since indirect costs are distributed using a direct cost base.

In New Jersey Dept. of Human Services, DAB No. 648 (1985), the Board rejected an agency disallowance of a higher rate of funding for certain indirect costs of operation of a state's Medicaid Management Information System because the agency had not clearly communicated an interpretation that the statutory language excluded these indirect costs from funding at the higher rate. The underlying reasons for the Board's holding included: 1) the general principle that the costs of a federal grant program, project, or activity include all allowable, allocable direct and indirect costs; and 2) distinguishing direct and indirect costs can lead to potentially arbitrary results because reimbursement may depend on a grantee's accounting methods. Moreover, as OMB Circular A-87 indicates, classification of a cost as direct or indirect is not always an easy task, since a cost may be a direct cost with respect to one cost objective and indirect with respect to another.

The JOBS statute

The Family Support Act of 1988, Public Law No. 100-485, section 201, created the Job Opportunities and Basic Skills (JOBS) program, at Title IV-F of the Social Security Act (Act), to provide needy families with children the education, training, and employment that would help them avoid long-term welfare dependence.

Section 482 of the Act provided as follows:

(a) . . . (1)(A) . . .each State shall establish and operate a job opportunities and basic skills training program (in this part referred to as the "program") under a plan approved by the Secretary as meeting all of the requirements of this part and section 402(a)(19) . . . (2) The State agency that administers or supervises the administration of the State's plan approved under section 402 shall be responsible for the administration or supervision of the administration of the State's program. . .

(b) . . . (1)(A) The State agency must make an initial assessment of the education, child care, and other supportive services needs as well as the skills, prior work experience, and employability of each participant in the program . . .
(B) On the basis of such assessment, the State agency, in consultation with the participant, shall develop an employability plan for the participant. The employability plan shall explain the services that will be provided by the State agency and the activities in which the participant will take part under the program . . .
(2) . . . the State agency may require the participant . . . to negotiate and enter into an agreement with the State agency that specifies such matters as the participant's obligations under the program, the duration of participation in the program, and the activities to be conducted and the services to be provided in the course of such participation. . . .
(3) The State agency may assign a case manager to each participant and the participant's family. The case manager so assigned must be responsible for assisting the family to obtain any services which may be needed to assure effective participation in the program. . . .

(d) SERVICES AND ACTIVITIES UNDER THE PROGRAM. --(1)(A) In carrying out the program, each State shall make available a broad range of services and activities to aid in carrying out the purpose of this part. Such services and activities --
(i) shall include --
(I) educational activities ...;
(II) job skills training;
(III) job readiness activities to help prepare participants for work; and
(IV) job development and job placement; and
(ii) must also include at least 2 of the following:
(I) group and individual job search . . .;
(II) on-the-job training;
(III) work supplementation programs . . .; and
(IV) community work experience programs . . . or any other work experience program approved by the Secretary.
(B) The State may also offer to participants under the program (i) postsecondary education in appropriate cases, and (ii) such other education, training, and employment activities as may be determined by the State and allowed by regulations of the Secretary.

Section 485 of the Act provided:

(a) The State agency that administers or supervises the administration of the State's plan approved under section 402 shall carry out the programs under this part directly or through arrangements or under contracts with administrative entities under section 4(2) of the Job Training Partnership Act, with State and local educational agencies, and with other public agencies or private organizations . . . .

(b) Arrangements and contracts entered into under subsection (a) may cover any service or activity (including outreach) to be made available under the program to the extent that the service or activity is not otherwise available on a nonreimbursable basis.

States were required to have a JOBS program under a plan approved by the Secretary no later than October 1, 1990. States which failed to meet specified participation rates were liable for sanctions in the form of reductions in the rate of federal funding.

Section 403(l)(1)(A) of the Act provided three funding levels for a state's JOBS program expenditures, two of which are at issue here. First, for JOBS program expenditures not exceeding the amount that a state spent during fiscal year 1987 on the former work incentive (WIN) program, which the JOBS program replaced, states were eligible to receive 90% federal funding. This rate is not at issue here. Instead, the dispute involves the rates of funding available for JOBS program expenditures in excess of a state's prior WIN expenditures. Specifically, section 403(l)(1)(A)(ii) provided for funding expenditures at:

(I) 50 percent, in the case of expenditures for administrative costs made by a State in operating such a program for such fiscal year (other than the personnel costs for staff employed full-time in the operation of such program) and the costs of transportation and other work-related supportive services under section 402(g)(2), and

(II) the greater of 60 percent or the Federal medical assistance percentage . . . in the case of expenditures made by a State in operating such a program for such fiscal year (other than for costs described in subclause (I)).

(Emphasis added.)

The federal medical assistance percentage (FMAP) is the rate of funding a state is eligible to receive in its expenditures for medical assistance under the Medicaid program at title XIX of the Act. During the time period relevant to this appeal, Mississippi's FMAP ranged from 78.07 to 78.85 percent. ACF referred to this rate of JOBS funding as the "higher" rate.

We note that the statute does not make any explicit distinction between direct and indirect costs. The primary distinction is between 1) costs that are either administrative costs or costs of supportive services, and 2) other costs of operating the program. The statute also provides an exception to the 50% rate for administrative costs for "personnel costs" for staff employed full-time in the operation of the program. The legislative history provides little guidance, primarily referring to administrative and "non-administrative" costs. We note, however, that the Conference Report refers to "education, training, and other non-administrative activities." H.R. Conf. Rep. No. 998, 100th Cong., 2d Sess. 1988, 1988 U.S.C.C.A.N. 2879, 2932.

Development of the JOBS regulations

ACF issued proposed JOBS regulations on April 18, 1989, and the final regulations on October 13, 1989. We address some of the differences in the proposed and final versions of the regulations, as background for our explanation of why we conclude that ACF's policy was unclear. Four areas that involved considerable discussion in both preambles and are relevant here are: 1) the extent to which functions needed to be performed by the title IV-A state agency in order to meet the requirement that a state designate a single state agency as responsible for the administration or supervision of the administration of the program; 2) treatment of assessment, employability plan, case management, and orientation as either program services or administrative activities; 3) rates of funding available for various costs; and 4) the need for contractors to "segregate" costs according to applicable matching rates.

The single State agency requirement and contracting out provisions

A considerable part of the discussion in the preambles to the proposed and final rules was devoted to discussing how to reconcile 1) the requirement at section 482(a)(2) of the Act that the state IV-A agency administer or supervise the administration of the program; and 2) section 485, granting states broad contracting authority. ACF described as longstanding its policy that a state agency must maintain overall responsibility for the design and operation of federal programs and may not delegate functions involving discretion in the administration or supervision of those programs. 54 Fed. Reg. 15,643 (1989). Yet, ACF also recognized that Congress had provided state IV-A agencies with broad contracting authority. Thus, ACF proposed a distinction under which, for example, "the State IV-A agency may delegate a wide range of activities--such as orientation, literacy testing, and JOBS activities and services. However, it may not delegate functions such as exemption and priority determinations or dispute resolution and hearings since these involve discretionary judgments." 54 Fed. Reg. 15,643-44.

In response to comments seeking clarification about which activities and services could be contracted out under JOBS, ACF made changes to 45 C.F.R. § 250.10, governing administration of the JOBS program. The final regulation permitted the performance of certain JOBS functions and activities involving decision-making with regard to individual participants by entities other than the state IV-A agency, so long as there were specific rules and regulations issued by the state IV-A agency governing their implementation. While noting its previous statements that such activities as processing applications, determining eligibility, providing hearings, and imposing sanctions had to be performed by the state IV-A agency, ACF permitted states to contract out "a wide range of functions," such as orientation, literacy testing, and JOBS component activities and services. 54 Fed. Reg. 42,154. ACF also noted that, because other state and community-based agencies (other than the single state IV-A agency) had already been effectively performing a range of educational, training and employment-related functions for welfare recipients under programs such as the Job Training Partnership Act, the final regulations provided states the flexibility to determine how they could most effectively use all potential state resources, instead of requiring state IV-A agencies to train or expand in-house staff to perform similar JOBS functions which do not directly involve discretionary judgment. ACF also opined in the preamble to the final rule that section 485 of the Act permitted states generally to contract out decision-making functions such as assessment, priority determinations, provision of component services, case management, and conciliation, but only where the State IV-A agency had developed specific criteria under which the decision-making regarding a JOBS participant would be carried out by the contractor.(3) 54 Fed. Reg. 42,154-55.

The treatment of certain functions

As indicated above, the statute contained provisions relating to assessment of the needs of JOBS participants, development of employability plans, orientation, and case management. These were treated as administrative functions in the proposed rule.

In response to comments, however, the final rule provided that these services (assessments, employability plans, orientation, and case management) could be matched at the higher rate. 54 Fed. Reg. 42,160, 42,196.

The requirement for segregation of costs under contracts

Both the proposed and final rule contained the following provision at 45 C.F.R. § 250.13:

The State IV-A agency shall carry out the JOBS program directly or through arrangements or under contracts with administrative entities under section 4(2) of the Job Training Partnership Act (JTPA), with State and local educational agencies, and with other public agencies, Indian Tribes or Alaska Native organizations or private organizations (including community-based organizations as defined in section 4(5) of the JTPA).
(a) Arrangements and contracts entered into under this section may cover any service or activity (including outreach, information and referral) to be made available under the JOBS program. Such contracted service or activity must be consistent with the requirements under § 250.10 and must not otherwise be available on a nonreimbursable basis, as specified in § 250.72(c). . . .

(d) For purposes of claiming FFP, the State IV-A agency must segregate costs by the applicable matching rates, as defined at § 250.73(b)(1), in any arrangement or contract entered into under this section.

In the preamble to the proposed rule, ACF explained the requirement for segregation as follows:

This means that contracted services will qualify for Federal matching funds at the same rate as those services which the State IV-A agency provides directly. This provision is included to assure that State IV-A agency decisions on contracting will be based upon the efficient administration of the program and that consistent Federal matching will be available to the State IV-A agency regardless of the method used to provide services.

54 Fed. Reg. 15,646.

In response to several comments that segregation of contract costs would be extremely burdensome, and that the definitions in JOBS might not be compatible with other programs, such as JTPA, ACF stated:

The Act does require different matching rates for different activities, and we maintain our position that State agency decisions about contracting not be driven by available matching rates. However, based on all the comments we received, we have amended § 250.73 as to what activities are eligible for the different matching rates. A full discussion of these changes appears in the preamble to § 250.73. The effect of these changes is that more of the costs of providing services directly to participants will be eligible for enhanced match, whether the service is provided by the State IV-A agency or another entity. Therefore, it is less likely that segregation of costs will be required. However, we have not amended § 250.13 in the final regulations since there may be some contracts which will still require segregation of costs because of the nature of the activities.

54 Fed. Reg. 42,160 (emphasis added).

The preamble also stated:

As a result of the clarification of policy regarding application of the different matching rates to program expenditures, it will not be necessary to distinguish between types of costs in most contracts for the direct provision of JOBS services and activities to individuals. However, contracts which, for example, provide multiple services and activities, to the extent that they involve significant indirect costs, could continue to be subject to segregation of costs. For example, if a State IV-A agency contracts with a single provider to deliver several components, administrative costs not directly related to the delivery of services, such as the salary of the head of the agency, would have to be segregated. In addition, contracts for general administrative functions, e.g. payroll and accounting, would be at the 50 percent match rate. This is an area we expect to monitor closely, and should it be necessary, we will revise the regulations accordingly.

54 Fed. Reg. 42,196 (emphasis added).

At another point in the preamble to section 250.73, ACF responded to concerns that segregating costs was not compatible with performance-based contracting (in which payments to contractors were based on outcomes, such as job placements) by again noting:

Changes in the final regulations regarding matching rates will, for the most part, eliminate the need for segregation of costs in contracts. Contracts which include costs not matchable at the higher rate will require cost segregation. The State may use performance-based contracts which include such costs, if the State, in calculating the unit cost, estimates the percentage of costs matchable at each rate.

54 Fed. Reg. 42,197.(4)

As implemented, section 250.73(b) read:

(1) FFP will be available . . . as follows:
(i) At the higher of the State's Medicaid matching rate or 60 percent for: personnel costs (salaries and benefits) for full-time staff working full-time in any capacity in the JOBS program; and all direct costs associated with providing JOBS program services to individuals, including assessment, development of the employability plan, case management, and JOBS component activities.
(ii) At 50 percent for: indirect personnel costs which are excluded from JOBS matching at the FMAP rate (or 60%); non-personal services costs associated with these indirect personnel costs, including space, travel, utilities, equipment, and supplies; the costs of such items as JOBS program planning, monitoring, letting contracts, systems, title IV-F fair hearing activities, and other indirect costs of providing JOBS services and activities; and for transportation, work-related expenses, and work-related supportive services as provided under the requirements of Part 255.

(Emphasis added.)

In the preamble to section 250.73, ACF stated:

Costs eligible for matching at the higher rate are: (1) the personnel costs of full-time staff working full-time in any capacity in the JOBS program, and (2) all direct costs associated with providing JOBS program services to individuals, including assessment, development of the employability plan, case management, and JOBS component activities. These costs include salaries and benefits of employees for the time and effort devoted specifically to these activities, whether they work on a full-time basis or not. In addition, costs of materials acquired or expended specifically for these activities, space, and other costs directly associated with the provision of these services are matched at the higher rate. For example, if a State contracts for a job club, the costs of staff, telephones used by participants, and the room used for the job club are matchable at the higher rate. Indirect costs are not matchable at this rate.

54 Fed. Reg. 42,196 (emphasis added).

ACF stated that the definitions of "direct" and "indirect" costs were the definitions from OMB Circular A-87, "Cost Principles for State and Local Governments." 54 Fed. Reg. 42,196.

As for costs matchable at the 50% rate, the preamble stated:

Costs eligible for match at 50 percent are costs associated with the general administration of the JOBS program. In this category, we include: indirect personnel costs which are excluded from JOBS matching at the higher rate. Non-personal services costs associated with these indirect personnel costs are also matchable at 50 percent. These costs include space, travel, utilities, equipment, and supplies. Also matched at the 50 percent rate are: the costs of such items as JOBS program planning, monitoring, letting contracts, systems, title IV-F fair hearing activities, and other indirect costs of providing JOBS services and activities.

In addition, transportation, work-related expenses, and work-related supportive services are also available for match under the JOBS program at 50 percent. The requirements regarding these supportive services are at Part 255.

54 Fed. Reg. 42,196.(5)

The Action Transmittal

In February 1990, ACF's organizational predecessor, the Family Support Administration, issued Action Transmittal JOBS-FSA-AT-90-4, addressing the allocation of JOBS program expenditures. For expenditures matched at the FMAP (or 60%) rate, the AT provides:

Expenditures matched at this rate fall into two categories. Category I includes the personnel costs (salaries and benefits) of all full-time staff working exclusively, i.e., working full time, on JOBS program functions, including administrative functions.

Category II includes the personnel costs of other JOBS staff directly associated with the performance of the following JOBS activities: orientation, assessment, development of the employability plan, case management, the mandatory JOBS components identified at 45 CFR 250.44, the optional JOBS components identified at 45 CFR 250.45, and other JOBS activities identified at 45 CFR 250.46-.48. Also included in this category are all expenditures made for non-personnel items, e.g., such items as space, utilities, telephone costs, materials and supplies, directly associated with the performance of these activities.

JOBS-FSA-AT-90-4, at 2.

According to the transmittal, JOBS expenditures available for the 50% matching rate --

[A]re those allowable JOBS costs that are not available for match at the FMAP rate (or 60 percent). Generally such costs . . . [include] the costs related to the general supervision and management of the JOBS program not done on a full-time basis, e.g., for personnel costs for payroll and personnel administration functions. Also included are the personnel costs of less than full-time staff . . . who are engaged in JOBS activities other than the JOBS activities identified in the regulations at sections 250.44-.48, orientation, assessment, employability planning development, and case management.

Id. at 6.

The AT addressed questions about certain activities, and stated that orientation (as well as assessment, employability planning development, and case management) "is an activity that may be matched at this [higher] rate." These statements did not distinguish direct and indirect costs of the activity.

Id. at 3.

With respect to cost allocation methods to identify JOBS expenditures at the different match rates, the AT stated:

States should note that many overhead and indirect costs are generally assigned to a cost pool from which costs are allocated to different programs. For the JOBS program many of these costs, such as space, utilities, and telephone costs, are matchable at the FMAP rate (or 60 percent). In order to claim indirect costs associated with any of the activities identified above at the FMAP rate (or 60 percent), States must establish a separate cost account for these costs. This may require that States extract these indirect costs . . . from indirect cost pools established to collect costs shared by other programs or for the JOBS program itself.

Id. at 9.

The AT responded to a question about whether states were required to allocate costs incurred under contracts according to the different JOBS matching rates by stating:

The final regulations permit States to claim at the FMAP rate (or 60 percent) the costs of several additional activities which in the proposed rules were matchable only at 50 percent. Consequently, most contracts will not require segregation of costs. However, if the State enters into a contract with a provider who provides multiple services with significant indirect costs or overhead expenses, costs under such a contract will need to be segregated. This is true in the case of performance-based contracts as well. A State, in calculating a cost per activity, may estimate the percentage of costs applicable at the different matching rates. For such contracts where costs are allocated among the different matching rates, the State, not the contractor, is responsible for assuring that the costs are segregated properly.

Id. at 11.

ACF assistance and guidance on revenue maximization

Following issuance of the JOBS regulations and the action transmittal, ACF grew concerned that states were failing to implement the JOBS program effectively and to take advantage of the opportunity to claim federal JOBS funds. ACF hired consulting firms, including Maximus, Inc. (Maximus), to provide technical assistance to states on how to maximize JOBS funding. Maximus developed for ACF a presentation on revenue maximization for JOBS technical assistance conferences held during FY 1992 at various locations around the country for all states and ACF regional officials. Mississippi Ex. L. The training centered on using already-existing public funds, such as state university expenditures, as the state's share of funds in claiming FFP, a concept that ACF later adopted in an information memorandum.

In the information memorandum, issued in December 1993, ACF noted that despite the availability of federal funding, only eight states were using their full JOBS allocated entitlement to JOBS funds as of mid-September 1993, among "only a handful" that had met or nearly met their allocation. JOBS-ACF-IM-93-20, Mississippi Ex. O at 2, 6. The memorandum, "Maximizing JOBS Program Revenues: A Win-Win Strategy," thus provided information on strategies states could use "to secure all available funds" for their JOBS programs. Id. at 3-4.

The memorandum noted that some states were forced to claim funds at levels far below their JOBS allocation because state legislatures were unable to commit the state funds needed to draw down federal JOBS funds. Id. at 5. ACF thus suggested that state dollars already being spent by state entities other than the IV-A agency on activities related to the JOBS program, such as employment and training, could be used as the state's match to claim federal JOBS funds, provided that there was a memorandum of understanding (MOU) between the contributing agency and the IV-A agency. ACF noted that public entities such as universities could generate federal JOBS funds "for training programs, staff salaries, or other costs paid with public funds that are not otherwise matched." Id. at 11.

In describing the FFP rates available, the information memorandum stated:

These enhanced funds [at the higher rate] are paid to match state spending for program costs and non-administrative expenditures. This match rate applies to the costs of program activities such as orientation, assessment, case management and mandatory and optional JOBS components.

In addition, the personnel costs of staff who are designated as working full-time on the JOBS program are also matched at the enhanced 60 percent or better rate. This means that the salary costs for full time staff working on program and administrative activities, such as managers, supervisors, accounting, planning, evaluation or personnel staff, can be reimbursed at this enhanced rate if they spend all of their time working in the JOBS program.

[The 50% rate] applies to costs for administrative activities, and for the salaries of non-program staff who are not assigned to the JOBS program full time. This same match is also applied to state spending on JOBS-related transportation and other supportive services and expenses needed by JOBS participants to help them move into the workforce.

Id. at 6-7.

Mississippi's LEAP project

In Mississippi, implementation of the JOBS program was hampered by a decentralized, rural population beset with a high illiteracy rate, in contrast to the largely urban AFDC populations of many other states. Mississippi was one of the states faced with the problem of a state legislature unwilling to provide any additional funds for the JOBS program, out of the belief that welfare reform was not supposed to result in increased expenditures. Tr. at 57-58, 184-86.

After Mississippi officials had attended a presentation on revenue maximization and consulted with one of the Maximus presenters (albeit in his private capacity), Mississippi entered into an agreement with the University to provide telecast education and training to JOBS participants through a satellite system to secondary schools throughout Mississippi.(6) Mississippi referred to this project as the Learn, Earn, and Prosper (LEAP) project. The activities to be provided under the agreement included preparation for high school equivalency degrees, education in English proficiency, and preparation of vocational training in technical jobs skills. In addition, through these components, the University was to assist in preparing JOBS participants for work by familiarizing them with workplace expectations, and with work behavior and attitudes needed to compete successfully in the labor market. Mississippi Ex. B. The agreement provided for advance payments to the University of some $4.5 million during its first year, and called for funds from the University to be used as part of the non-federal share of Mississippi's JOBS program expenditures used to claim federal funds. The budget summary sheets identify only "Educational and Jobs Skills Component Services" in the space labeled "Activity." The budget itself is broken down into direct cost categories for personnel, contractual, commodities, equipment, and travel and includes indirect costs, calculated as a percentage of direct costs.

The agreement included as an attachment an indirect cost rate agreement, dated March 23, 1992, that had been negotiated between the University and the HHS Division of Cost Allocation (DCA) and used by the University to claim indirect costs generally under federally-funded programs. The University had separate indirect cost rates for on-campus and off-campus instruction. Mississippi Exs. B, H. For the first year of the LEAP project, through September 30, 1993, the University's indirect costs for the LEAP project were determined through application of its 72% rate for on-campus instruction; Mississippi then claimed federal reimbursement in those indirect costs at the 50% rate. After reviewing the LEAP contract, DCA determined that the 72% rate should not apply after the first year of the agreement because most of the University's costs for the LEAP project were for off-campus functions or activities, and proposed that LEAP project indirect costs be determined using the University's 26% rate for off-campus instruction.(7) The University and DCA then negotiated a special indirect cost rate for the LEAP project of 45.2%, which was applied to determine the indirect costs of the LEAP project beginning in October 1993. Also beginning with the second year of the LEAP project, Mississippi began claiming FFP for all costs of the LEAP project at the higher rate of funding (for Mississippi, the FMAP rate).

Analysis of ACF's policy issuances

As we explain more fully below, Mississippi began claiming the higher rate of funding for its expenditures for its contract with the University based on its view that the contract expenditures were direct costs of providing JOBS component activities to participants since, from the perspective of the State agency, the contract expenditures were readily identifiable with that cost objective. The JOBS regulations provided at section 250.73(b)(1)(i) that the higher rate was available for the "direct costs associated with providing JOBS program services to individuals, including assessment, development of the employability plan, case management, and JOBS component activities." (Emphasis added.) Mississippi's position is consistent with the plain language of § 250.73(b)(1)(i) and with OMB Circular A-87. Moreover, as Mississippi pointed out, treatment of the contract expenditures as direct costs to the state agency whether they are intended to reimburse the University for its indirect or direct costs of the project is consistent with this Board's decision in Iowa Dept. of Human Services, DAB No. 1407 (1993), interpreting the phrase "direct costs" in a different ACF regulation.

ACF took the position, however, that this situation is distinguishable from that in DAB No. 1407. According to ACF, other parts of the JOBS regulations required Mississippi to segregate the project costs between the University's direct and indirect costs and to claim the indirect costs at the 50% rate. In effect, this amounts to an interpretation that project expenditures by Mississippi to reimburse the University for its indirect costs associated with the project were administrative costs of operating a JOBS program. Explaining why we conclude that ACF did not give Mississippi adequate notice of this interpretation requires an analysis of ACF's statements, in light of basic cost allocation principles.

In this section, we first state why we conclude that ACF did not clearly communicate about when segregation of contract costs would be required. We then state why we consider ACF's policy on segregation even more confusing as applied to a contract with a university like the one here. Next, we explain why we conclude that ACF did not clearly communicate an interpretation that all indirect costs are administrative costs of operating a JOBS program.

Segregation of costs

Read as a whole, ACF regulations, preambles, and official policy statements were not clear on when segregation would be required. Our key reasons in support of this conclusion are:

  • •ACF stated in the preamble to the final rule, and reiterated in its action transmittal, that most contracts would not require segregation of costs. ACF explained that the reason for this was that certain services (such as assessment, employability plan, and case management) which ACF originally proposed to treat as administrative functions were treated as programmatic in the final rule. This suggests that segregation is not required if the functions for which a state contracts are programmatic functions.
  • •In describing segregation of costs under contracts, ACF stated that costs should be segregated according to the "nature of the activities." Segregating costs according to the nature of the activities (that is, the cost objective) generally means segregating total costs of each activity, rather than treating the indirect costs of any particular activity differently from the direct costs of that activity. Thus, when the preamble to the final rule refers to the need for segregation in a contract for "multiple services and activities," this could reasonably be interpreted as referring to ultimate cost objectives that are of a different nature -- because they are administrative activities or supportive services or program activities, but not all of one kind.


  • •While ACF described the purpose of the segregation requirement as ensuring that contracting decisions be based on program efficiencies, not on available reimbursement rates, the lack of clarity generally on what rates were available (which we address below) complicates a determination of whether failure to segregate would contravene this purpose.

The segregation requirement as applied to the specific contract here

ACF's policy issuances are even more confusing as applied to the particular contract here -- a contract with a university to provide JOBS component activities. For example:

  • •The preamble identified tuition and fees for a GED program as program costs reimbursable at the higher rate. Tuition or fees would normally reflect some allocation of indirect costs of the educational institution, just as the contract charges here reflected such allocation, yet ACF did not indicate that tuition or fees would need to be segregated.


  • •The preamble to the final rule refers to OMB Circular A-87 in discussing indirect costs. While OMB Circular A-87 applies to costs incurred by the State agency, it does not apply to costs incurred by an educational institution such as a university. (OMB Circular A-21 applies, even if a university is providing services under a contract or subgrant with a State agency.) If ACF intended to require segregation of indirect costs of universities, it should have cited OMB Circular A-21, as well as OMB Circular A-87, since OMB Circular A-87 does not apply to a university.


  • •None of the activities specifically described in the contract between Mississippi and the University is the type of activity described in the regulations and preamble as either an administrative activity or as a supportive service reimbursable at the 50% rate.

ACF argued that Mississippi should have known that its contract with the University was for "multiple services and activities" since three of the four mandatory JOBS components were to be provided by the University. This determination is not so straightforward as ACF suggested, however, for the following reasons:

  • •"Multiple" can mean more than one, but it can also mean "having numerous aspects or functions." Webster's Third New International Dictionary (1976). A functional analysis would be consistent with segregation according to the nature of the activity being contracted or arranged for, such as segregation based on whether activities were JOBS component activities or administrative activities.


  • •The preamble refers to "services and activities" in the conjunctive. Section 482(b)(1)(B) of the Act uses the term "services" for what is provided by the State agency, and "activities" for components in which JOBS participants engage, and the legislative history specifically refers to education and training as "non-administrative activities." While in some places the regulations and preamble include JOBS educational and training activities in the term "services," ACF's policy statements are not consistent in doing so. The use of the phrase "services and activities" is thus confusing as applied to a contract solely for education and training.


  • •The regulations permit a state to combine several mandatory JOBS components into a single program "activity" so long as the state can adequately distinguish the principal components for purposes of federal reporting requirements. 45 C.F.R. § 250.44. Mississippi treated all of the components provided by the University as the "LEAP project" and marketed it as such.

Thus, Mississippi could have reasonably thought that its contract with the University was not a contract for "multiple services and activities."

ACF did not clearly communicate that it considered all indirect costs of state agencies and contractors to be administrative costs of operating a JOBS program

Even if we were to view the contract here as one for multiple services and activities, that would not automatically mean that the segregation required was between direct and indirect costs. ACF said that the segregation should be according to the matching rates available. This does not necessarily mean segregation according to whether the costs are direct or indirect, but could mean segregating first according to whether the activities are administrative, programmatic, or support services.

As noted above, the statute provides 50% funding for administrative costs (other than personnel costs for staff engaged full-time in operation of the program) and for supportive services and the higher rate for all other costs of operating the program. The statute does not distinguish direct and indirect costs, although it does refer to "personnel costs." ACF could reasonably determine that "personnel costs" meant the salaries and wages of staff engaged full time in administrative activities (that would be treated as direct costs) and did not include the indirect costs associated with these administrative activities. Yet, certain statements in the regulations or preambles about indirect costs appear to apply not only to the indirect costs associated with the staff engaged full time in administering the program, but to apply as well to indirect costs associated with directly providing services to JOBS participants. The only basis for this as an interpretation of the statutory funding provision is that ACF considered all indirect costs to be administrative costs under the statute. ACF never explicitly stated this interpretation, however.

Read as a whole, ACF's statements are very confusing and do not reflect a clear understanding that a cost is not intrinsically direct or indirect in nature and, in fact, may be direct with respect to one cost objective and indirect with respect to another. Key examples of confusing statements are the following:

  • •In describing costs reimbursable at the higher rate, the preamble to the proposed rule refers to "costs associated with a JOB participant's involvement in component activities" and "program costs such as OJT payments to an employer or tuition and fees for GED classes." These descriptions do not distinguish between direct and indirect costs.


  • •The summary of the available rates in ACF's information memorandum refers to "costs of" program or non-administrative activities, including JOBS components, as eligible for the higher rate, and does not distinguish direct and indirect costs of the activities. The only limit referred to is the limit to salaries and wages for staff working full time on listed administrative activities.


  • •The preamble to the final rule stated that most contracts would not require segregation and identified "the extent to which there are significant indirect costs" as one factor in determining whether segregation of costs is required. These statements are inconsistent with an interpretation that indirect costs are never reimbursable at the higher rate. If indirect costs were never reimbursable at the higher rate, then all (or at least most) contracts would require segregation, and all indirect costs should be segregated, whether or not "significant."


  • •The preamble to the final rule referred to the 50% rate as being available for "JOBS program planning, monitoring, letting contracts, systems, title IV-F fair hearing activities, and other indirect costs of providing JOBS services and activities."(8) Yet, the costs of the listed activities might be direct costs of the JOBS program, such as salaries and wages. Moreover, activities such as JOBS program planning could be done by full-time staff, in which case the personnel costs should be reimbursable at the higher rate under the statute.


  • •In discussing staff not working full-time on the program, who might be involved in providing program components, the preamble refers to the costs of the time spent on program components and does not differentiate between the direct and indirect costs associated with that time.


  • •ACF's action transmittal on cost allocation describes costs of space, equipment, etc. as "indirect costs" but then indicates that when they are costs of directly providing component activities, these "indirect costs" may be extracted from an indirect cost pool and charged at the higher rate. This statement indicates that ACF did not consider all costs that might normally be allocated through use of an indirect cost rate to be administrative in nature.

ACF argued that Mississippi should have known that the contract costs should be segregated according to whether they were direct or indirect because of the reference to "significant indirect costs" in the preamble to the final rule. It is not clear, however, that the word "significant" should be interpreted in the way that ACF interpreted it here -- to mean substantial in amount or percentage of total costs. The purpose of the segregation requirement (as originally explained in the preamble) was so that single state agencies would decide what functions should be performed through arrangements or contracts based on considerations other than what FFP rate would be available. The preamble further explained that, while the statute required states to designate a single state agency to administer or supervise administration of the program, the statute also permitted states to operate the program through arrangements or contracts. The regulations resolved this potential conflict by permitting states to contract for functions such as assigning program participants to program activities, so long as the single state agency retained certain authority, such as the authority to set policies and procedures. Thus, in this particular program it was anticipated that the single state agency might transfer some functions to other state agencies or contractors that would normally be considered part of program administration. "Significant indirect costs" in this context could mean indirect costs that are associated with personnel engaged in administrative activities (for whom indirect costs would clearly not be reimbursable at the higher rate if they were single state agency employees) and which therefore (unless de minimis) could affect contracting decisions.

While ACF is correct that the University's indirect costs included a cost pool labeled "administrative," in our view this is not a sufficient reason to say that Mississippi should have known that the part of its contract costs related to the University's indirect costs would be reimbursable only at the 50% rate. In addition to other reasons stated above, we note that, in describing costs reimbursable at 50%, ACF uses the descriptions "general administration of the JOBS program" and "general supervision and management of the JOBS program." Use of the term "general" suggests that the provision does not apply to "non-general" administration of the program. This could be confusing, especially in light of the discussion in the preambles regarding what responsibilities for program administration needed to be retained by the IV-A agency. ACF's preamble to the final regulation described these as responsibilities for "overall administration," but never distinguished "general administration" from "overall administration," nor did it directly address whether administration limited to specific program activities like the LEAP project would be considered "general administration of the JOBS program." 54 Fed. Reg. 42,154.

The administrative costs included in the University's cost pool were related to administration of a university. Moreover, the part of the indirect cost pool allocated to the LEAP project through application of the University's indirect cost rate was allocable to JOBS program activities. ACF never adequately explained why these costs should be considered costs of general administration (or general supervision and management) of a JOBS program.

The parties' arguments about whether Mississippi relied to its detriment on a reasonable interpretation of the regulations

Mississippi argued that it had relied to its detriment on its interpretation that the higher rate of funding was available for all of the LEAP expenditures and that that interpretation was reasonable.(9) In support of this position, Mississippi presented testimony from two former Maximus officials who had provided technical assistance to states as part of ACF's JOBS revenue maximization program, one of whom also provided advice to Mississippi in a private capacity. Mississippi also relied on a written "worked example" included with the materials for the training presentation made in Region IV in May 1992 and attended by Mississippi officials and on testimony by its witnesses that ACF had approved this worked example.

Mississippi further argued that the decision to claim indirect costs on the LEAP contract at the higher rate was influenced by the Board's April 29, 1993 decision in Iowa, DAB No. 1407. There, the Board held that the full contractual fees paid to a state university to provide title IV-D training to state employees, including an amount intended to cover the university's indirect costs on the contract, were direct costs to the state IV-D agency allowable under a regulation that limited enhanced FFP in training programs to the direct cost of short term training provided to IV-D agency staff. The Board noted that since the scope of the contract was limited specifically to the provision of short-term training to IV-D employees, all of the costs of the contract were, from the state IV-D agency perspective, readily identifiable with IV-D training objectives and thus fell within the definition of "direct cost" in OMB A-87.(10)

In addition to arguing that its policy was clear, ACF argued that Mississippi did not reasonably rely on a different interpretation. ACF's position was ultimately based on the following: 1) that an ACF regional financial operations specialist consistently told Mississippi that indirect costs were reimbursable at only 50%; 2) that Mississippi understood that the University's indirect costs were reimbursable only at the 50% FFP rate and that is why Mississippi limited its claims for LEAP in the first year to 50% of the indirect costs; 3) that the "worked example" did not clearly show indirect costs being reimbursed at the higher rate, as Mississippi alleged and should not be considered in any event as ACF policy; and 4) Maximus provided advice to Mississippi on the LEAP contract in a capacity other than as ACF's consultant. ACF also suggested that Mississippi's witnesses were not credible because they were being paid to represent Mississippi in its appeal. Finally, ACF pointed to the Board's decision in Illinois Dept. of Children and Family Services, DAB No. 1645 (1998), arguing that that decision supported the disallowance of a university's indirect costs.

The regional financial operation specialist's statements

The record supports ACF's assertion that a regional financial operations specialist had informed Mississippi's JOBS program staff that the 50% rate of funding applied to the University's indirect costs. We do not agree with ACF, however, that this provided adequate notice to Mississippi that the contract expenditures here were unallowable at the higher rate.

First, the financial operations specialist had determined that the 50% rate applied to all indirect costs, whether incurred by a state agency or by a contractor, based on his view that "any cost that did not qualify for the higher rate, by default would qualify for 50% and would have to be segregated in the contract and reflected at the 50% rate." Tr. at 202-207, 244. The record further indicates that, when the financial operations specialist communicated this to the Mississippi JOBS program director in 1994, the program director said that Mississippi considered the entire costs of the LEAP contract as direct costs and that the basis for this was DAB No. 1407. Tr. at 208; see, also, ACF Exs. I.1, J.4. Since the regulations state that direct costs of providing JOBS components do qualify for the higher rate, Mississippi could reasonably have questioned the conclusion the specialist reached.

Moreover, the specialist's view that indirect costs are always reimbursable at only 50% arguably conflicts with statements made by ACF in its official policy issuances (for reasons explained above), so Mississippi could reasonably think that view was erroneous.

While the specialist explained at the hearing why he thought a university's indirect costs were like state agency overhead, he did not testify that he had provided this explanation to Mississippi in response to its assertion that LEAP costs were direct costs of providing JOBS components. Moreover, his explanation describes generally the types of costs that are accumulated in a university's indirect cost pool, concluding that these costs were not associated with JOBS program components but benefitted more than one cost objective. But the indirect costs at issue here are a subset of those costs that has been allocated (through application of the indirect cost rate) to the LEAP project and therefore has been determined to benefit that cost objective.

Moreover, ACF did not assert that the regional financial operations specialist had the authority to set ACF policy, and the record indicates that the regional office itself did not accept his view as definitive. The original disallowance letter from the Regional Commissioner indicates that when ACF staff, and later the Office of Inspector General, questioned Mississippi about claiming the higher rate, Mississippi "continued to maintain that it interpreted Federal policy in this regard differently than we." Mississippi Ex. C at 2. Indeed, in a communication in August 1993, the head of Mississippi's JOBS program explained Mississippi's interpretation that its contract expenditures were direct costs of providing JOBS components and cited DAB No. 1407. ACF Ex. I.1. Yet, the regional office did not request a policy interpretation from ACF's headquarters until July 1995, and did not receive a response until March 1996.(11) ACF Exs. J.3., J.4. The request acknowledged some ambiguity in the official policy statements. The response summarily concluded that the LEAP contract was for "multiple services" and involved "significant" indirect costs and that "[t]herefore, in this instance, indirect costs are limited to the 50 percent FFP rate." ACF Ex. J.4. The response rejected Mississippi's assertion that the University's indirect costs were determined under OMB Circular A-21 and that the costs were direct costs to the state agency governed by the Board's decision in DAB No. 1407, by stating that OMB Circular A-87 applied and that DAB No. 1407 was distinguishable because "the JOBS program regulations specifically reference indirect costs included as part of a contract." ACF Ex. J.4., at 2.

The Assistant Secretary relied on the ACF central office response in upholding the disallowance. Even if we were to consider the central office response to be adequate notice when it was forwarded to Mississippi in April of 1996, however, it was not timely notice to Mississippi. At that point, Mississippi had already claimed most of the amounts at issue here and had entered into its agreement with the University for FY 1996.

Mississippi's change from earlier claims

The parties disagreed about the reason for Mississippi's decision to claim indirect costs on the LEAP contract at the higher rate. ACF argued that Mississippi began claiming at the higher rate only after the reduction in the University's indirect cost rate for the LEAP project. ACF Br. at 2, 14. Mississippi attributed its decision in part to the advice of a consultant who had previously conducted JOBS revenue maximization training under contract with ACF, and who later advised Mississippi on its JOBS program while attempting, ultimately unsuccessfully, to secure a consultant contact with Mississippi.(12) That consultant, William Benton, a doctor of finance and currently vice president of a small firm providing consultation and training in the areas of human service finance and management, was previously a project officer for Maximus. As noted above, Maximus was one of three recipients of a technical assistance contract awarded by ACF in 1991 to design training materials for JOBS revenue maximization and provide training to states.

Dr. Benton developed a presentation on revenue maximization for JOBS technical assistance conferences held during FY 1992 at various locations around the country for all states and ACF regional officials; the briefing was titled "Maximizing Revenues for JOBS Employment and Training Programs." Mississippi Ex. L. The training centered on using already-existing public funds, such as state university expenditures, as the state's share of funds in claiming FFP, concepts that ACF later adopted in its information memorandum. Dr. Benton stated that the training materials reflected his understanding that the indirect costs of a contract to provide direct (non-administrative) services were direct costs to the state agency. He likened payments to a contractor for direct program services to the purchase by the state agency of a photocopy machine, for which the entire purchase price is considered to be a direct cost to the state agency, even though some of the price reflects the manufacturer's indirect and administrative costs, such as overhead. Dr. Benton asserted that this had been his understanding during the time that he presented the JOBS revenue maximization training on behalf of ACF. Tr. at 62-68, 72-73.

The parties disagreed over the extent to which the training sessions informed states they could claim contract costs for the indirect costs of JOBS program services at the higher rate, particularly with regard to a "worked example" prepared by Dr. Benton. The "worked example" shows the costs of a hypothetical contractor such as a state college or university providing JOBS services -- salaries by position, travel, supplies, and indirect costs -- broken down into columns labeled "federal" and "non-federal." Mississippi Ex. L at 13. Disagreement over the meaning of the "worked example" springs from the seemingly inconsistent way that the cost of each item is split between the two categories. For example, the breakdown of the $35,000 cost of the Project Manager's salary is shown as $35,000 federal, and $0 non-federal; as ACF pointed out, the JOBS program did not provide 100% federal funding for any costs. Conversely, the $10,000 cost of the Project Director's salary (20% of his time at $50,000 per year) is broken down between $0 federal, and $10,000 non-federal. Indirect costs of $97,125 (based on a hypothetical indirect cost rate of 50% applied to total direct costs of $194,250) are listed as $15,540 federal, and $81,585 non-federal. The division of individual cost items led ACF to argue that the "worked example" was erroneous for showing costs being claimed without regard to either the 50% or the FMAP matching rate.

During the hearing, Dr. Benton clarified that the "federal" and "non-federal" columns were not intended to reflect the applicable FFP rate for each cost item. Instead, those columns illustrate how a public university might distribute the total of the non-federal funds already existing in the university's budget, and the federal funds drawn down by the state at the FMAP rate, using those non-federal funds as the state's share, and paid to a university. The appearance of the Project Manager's entire $35,000 salary in the federal column meant that this cost was being paid with federal funds drawn down as the federal match of state funds used to pay for the university's other JOBS project costs (such as the Project Director's salary) that appear in the "non-federal" column. The actual FMAP matching rate was reflected only in the bottom line of the worked example, which shows total project costs (direct and indirect) being matched at the hypothetical FMAP rate of 66.64%. Tr. at 74-89.

Dr. Benton explained that the division of funding for indirect costs in the "worked example" ($15,540 federal, $81,585 non-federal) was intended to reflect the policy of many state human services agencies of limiting funding for indirect costs on cost-reimbursement contracts with public universities to amounts well below a university's indirect cost rate, typically eight percent. This amount would be paid to the university out of the federal funds claimed by the state, the balance made up for out of already-existing state funds in the university's budget. Dr. Benton conceded that the columns on the worked example showing the "federal" and "non-federal" breakdowns tended to be confusing and were shown on the worked example only for the purpose of showing the project's "internal workings." He stated that contracts often would show only the column with the total project costs of each item, without the federal/non-federal breakdown. Tr. at 87-88.

The parties disagreed about whether ACF had reviewed or approved the training materials. Mississippi argued that high-level ACF policy and fiscal officials had reviewed the training materials that Maximus prepared on behalf of ACF. Dr. Benton testified that he went over the "worked example" during a telephone call with an ACF central office official, during which he "walked them through" the lines of the worked example that led to the bottom line showing all of the university's costs being claimed at the FMAP rate. Tr. at 59, 77-78. He reported having had many conversations with federal officials at the training sessions or before training sessions, and noted that there were no questions raised in the Atlanta region. Tr. at 97-98. Mississippi stated that the training sessions were attended by ACF central and regional office staff and state JOBS staff, and that the training materials were furnished to each attendee. Deborah Chassman, a former ACF official and former Maximus officer who had worked with Dr. Benton on the contract with ACF and conducted some of the presentations, testified to asking the ACF contracts officer on the JOBS revenue maximization project to ensure that the written materials on revenue maximization were reviewed by upper-level officials at what she called the Office of Financial Management of ACF. Tr. at 23-25. Mississippi provided a computer file draft of a May 5, 1992 letter from Dr. Benton to Suanne Brooks, the former ACF Regional Administrator, which refers to an enclosed draft of a briefing on maximizing revenues for JOBS employment and training programs. Mississippi Ex. U. ACF noted that it was unable to find the letter to Ms. Brooks in Region IV's JOBS program file or to determine if it was in fact received.

ACF also disagreed that the training materials prepared by Maximus demonstrated that indirect costs on a contract could be claimed at the higher rate. ACF noted that indirect costs were not listed in the training materials as among those activities or functions for which enhanced funding was available, citing ACF Ex. N at 9. ("Enhanced Federal Funding Available For: . . .Direct costs associated with JOBS services (orientation, assessment, employability planning, case management, and mandatory and optional JOBS components").

We found Mississippi's witnesses' testimony credible that the training materials were approved by ACF's central office and were presented to ACF regional officials without questions being raised.(13) We further found Dr. Benton credible that he thought it was a reasonable position that the contract expenditures for the LEAP project be treated as direct costs of providing JOBS components, reimbursable at the higher rate, and communicated this to Mississippi officials.

Even if we did not find this testimony to be credible, however, that would not decide the issues here. ACF did not deny that it had hired Maximus to provide technical assistance to states and that the "worked example" was part of the training materials Maximus used in that capacity. Having hired Maximus to provide technical assistance to states, ACF had a duty to ensure that the training materials reflected program requirements. In particular, since ACF clearly knew that one strategy for maximizing revenues that Maximus would advocate would be use of a university's indirect costs as match, ACF had a duty to ensure that Maximus understood and clearly communicated that only 50% funding was available, even if the contract were only for JOBS component activities -- if, indeed, that was ACF's policy. The evidence at the very least shows that ACF failed to clearly communicate such an interpretation to Maximus and to ensure that the training materials reflected such an interpretation. This is another reason why we conclude that ACF did not have a clear policy to this effect, at least at the time.

ACF's reliance here on the fact that the training materials do not specifically identify a university's indirect costs as reimbursable at the higher rate is misplaced. The training materials do identify direct costs of providing JOBS components as reimbursable at the higher rate. Yet, they do not go on to specifically state that contract costs that would normally be treated as a state agency's direct costs will be treated as "administrative costs" for purposes of JOBS if they represent the contractor's indirect costs.

Moreover, ACF's failure to ensure that the training materials were clear is compounded by the fact that shortly after the training ACF issued the information memorandum on revenue maximization which, as noted above, refers simply to "the costs" of providing JOBS components as reimbursable at the higher rate and fails to distinguish direct and indirect costs.

Dr. Benton's status

ACF also suggested that Mississippi could not reasonably rely on advice from Dr. Benton provided in his private capacity. Given the fact that ACF had held him out as an expert in the field, however, this suggestion is somewhat disingenuous on ACF's part. Moreover, Mississippi could have reasonably viewed the Board's decision in DAB No. 1407 as validating Dr. Benton's opinion. In any event, however, we conclude that Mississippi's interpretation was reasonable in light of basic principles of cost allocation and given the various statements in ACF's policy issuances. We find Dr. Benton's testimony significant to show that Mississippi did in fact start to claim the higher rate in reliance on an interpretation that the higher rate was available. His testimony on this point is, moreover, corroborated by: 1) the testimony of ACF's financial operations specialist that the JOBS program director told him in 1994 about Mississippi's interpretation that it was claiming LEAP project costs as direct costs (Tr. at 208); 2) the August 1993 communication by the Mississippi JOBS program director explaining Mississippi's interpretation (ACF Ex. I.1.); and 3) the statement in the Regional Administrator's decision that Mississippi had continued to maintain that it interpreted federal policy differently from the regional office (Mississippi Ex. C at 2).

We note that there is some indication that Dr. Benton had discussed with Mississippi the possibility of a more conservative approach, even while indicating that the approach taken was defensible.(14) In our view, this does not render Mississippi's interpretation unreasonable. Given ACF's active encouragement of JOBS revenue maximization, Mississippi could reasonably believe that ACF would interpret the requirements liberally in Mississippi's favor.

ACF's other arguments

We have considered ACF's other arguments in support of the disallowance, and find them not to be persuasive.

For example, ACF pointed to this Board's decision in DAB No. 1645, describing that decision as holding that indirect costs of a training contract with a university were not training costs allowable at a higher rate of funding. That decision, however, was based not on the fact that the state expenditures at issue were related to the university's indirect costs, but on the fact that the applicable regulation specifically limited training costs reimbursable at the higher rate to specific cost items and that the costs at issue had not been shown to be the type of cost allowable at the higher rate. (Consistent with our discussion above, the Board noted in DAB No. 1645 that a cost is not intrinsically a direct or an indirect cost and may be charged either directly or indirectly, depending on the circumstances.)

ACF also sought to distinguish the Board's decision in New Jersey, DAB No. 648, regarding the need for clarity if indirect costs of an activity are treated differently from direct costs of that activity. ACF argued that, in DAB No. 648, the agency had a previously stated policy that both direct and indirect costs would be eligible for an enhanced rate of FFP, but here, ACF had never stated such an interpretation. The key point in DAB No. 648, however, was not that the agency had previously stated that both direct and indirect costs of the activity were reimbursable at the higher rate -- this was merely a statement of the usual rule. The key points in the decision were that the agency had not clearly communicated a policy contradicting the usual rule and that policies distinguishing costs solely according to the method by which they are identified to a cost objective must be clearly communicated. That basic rationale applies here as well.

ACF also attempted to distinguish this case from Board decisions regarding the need for adequate notice of an interpretative rule that the Board had cited in a letter to the parties. The Board had referred to its holding that a party may not be adversely affected by an interpretative rule not published in the Federal Register unless the party "has actual and timely notice of the terms thereof," citing the Administrative Procedure Act, 5 U.S.C. 552(a)(1), and Oklahoma Dept. of Human Services, DAB No. 1043 (1989). The Board also noted that an agency may not fairly apply a new interpretation retroactively where a state has relied on another reasonable interpretation. Hawaii Dept. of Social Services and Housing, DAB No. 779 (1986). ACF argued that DAB No. 1043 does not apply here because Mississippi had actual notice of ACF's interpretation before changing its methodology to claim indirect costs on the contract at the higher rate, and because Mississippi did not rely on advice from ACF or its agents in deciding to change its claiming methodology. ACF also argued that the publication requirements of the Administrative Procedure Act are not implicated when a state has actual notice of a federal agency's interpretative policy in time to comply with that interpretation.

ACF's efforts to distinguish these holdings are not persuasive in light of our finding that ACF here failed in the first place to clearly communicate a policy distinguishing contract costs according to the method by which they are identified to the contract. Moreover, as in DAB No. 1043, ACF's policy was ambiguous, failing to adequately convey the precise circumstances that would require a state to claim different costs of a contract at different rates.

Finally, ACF argued that the purpose of the segregation requirement was to ensure that decisions were made based on program efficiencies, rather than on funding rates, and that the LEAP project was not efficient, as shown by the high cost per participant. Indeed, ACF's position here appears to have been colored by the fact that ACF did not think that Mississippi made wise choices in how to structure its JOBS program. If ACF believed that the per participant costs were unreasonably high for the LEAP project, however, it should have disallowed the unreasonable amounts. Dissatisfaction with the LEAP project and Mississippi's JOBS program as a whole is not sufficient as a basis for this particular disallowance. ACF's disallowance of the higher rate of funding improperly relied on an interpretation of the funding provisions that was not clearly and timely communicated to Mississippi.

Conclusion

For the reasons stated above, we reverse the disallowance.

JUDGE
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Cecilia Sparks Ford

Donald F. Garrett

Judith A. Ballard
Presiding Board Member

FOOTNOTES
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1. A revised version of OMB Circular A-87 was published in May 1995 and became effective in September 1995, after most the time period at issue here. 60 Fed. Reg. 26,484. No changes were made that are relevant to our decision. Accordingly, we cite to the earlier version.

2. ACF's observation that "the State claimed 72 percent of the LEAP project's indirect costs at the 50 percent FFP [federal financial participation] rate" does not accurately reflect how indirect cost rates are applied. ACF Br. at 13. For the first year of the project when the 72% indirect cost rate applied, the University would have determined the indirect costs of the LEAP project by taking 72% of the project's modified total direct costs for that period.

3. In the final version of the regulation, "overall program administration" that could not be delegated or contracted by the IV-A state agency included:

(i) Establishment of optional provisions and components of the program;
(ii) Responsibility for program planning, design of program, and determining who should participate;
(iii) Establishment of program participation requirements;
(iv) Development of a definition of good cause for failing to participate; and
(v) The issuance of other policies, rules, and regulations governing the program.

45 C.F.R. § 250.10(c)(1).

4. ACF also responded to comments reflecting confusion over which specific costs would be eligible for higher funding:

Comment: Many commenters asked that the higher rate be applicable for the costs of part-time staff involved in any capacity of the JOBS program.
Response: Section 403(l)(1)(A)(ii)(I) of the Act clearly stipulates that the higher rate applies to full-time staff employed in the operation of the JOBS program. Given this language, we conclude that the costs of part-time staff can be matched at the higher rate for the time they spend on the actual provision of activities and services, but that time spent on activities not matchable at the higher rate must be matched at 50 percent. For example, if an individual's work week is 20 hours, and she spends 10 hours running a job club and 10 hours doing administrative work, the 10 hours on job club is matched at the higher rate, but the rest is matched at 50 percent. However, the final regulations significantly increase the activities for which the higher rate applies so that all of a part-time individual's activities might be matchable at the higher rate.

Comment: Many commenters stated that activities such as assessment and case management should be available for match at the higher rate. Other commenters suggested that orientation activities be matched at the higher rate.
Response: The regulations now provide that this rate applies to the costs of assessment and case management activities. Costs of orientation can also be matched at the higher rate. As an alternative, costs of orientation can be matched as title IV-A expenditures, if provided by IV-A staff, as described in § 250.77. . . .

Comment: One State asked if the costs of a first-line supervisor supervising staff directly involved in both the JOBS program and the Food Stamps employment and training program are available for match at the higher percent.
Response: The distinction regarding first-line supervisors has been deleted from the final regulations. If a supervisor is directly involved with an activity for which the higher rate is applicable, then that part of her time associated with this activity is available for match at this rate. However, the costs of that part of her time that is associated with the Food Stamps employment and training program cannot be claimed under the JOBS program.

54 Fed. Reg. 42,196-97.

5. As originally proposed, section 250.73 provided funding at the higher rate in JOBS "program costs" and for "personnel costs (salaries and benefits) for full-time staff working in any capacity in the JOBS program," and 50% funding for "all other administrative costs." Section 250.73(c) of the proposed regulations contained definitions of "program costs" and "administrative costs" that were deleted from the final version, without explanation.

6. We refer to the agreement as a "contract" because the parties did. The agreement refers to the funding mechanism as a "subgrant."

7. As explained in the earlier discussion of indirect cost rates, indirect costs were determined not as a percentage of the University's total direct costs, but of "modified total direct costs" which, in this case, included salaries and wages, fringe benefits, materials, supplies, services, travel, and the costs of subgrants and subcontracts up to $25,000 each, and excluded equipment, capital expenditures, rental costs of off-site facilities, and the costs of subgrants and subcontracts in excess of $25,000 each. The parties stipulated that actual indirect costs as a percentage of total direct costs (unmodified) under the LEAP contract were 35.45% during the first year when the 72% indirect cost rate for on-campus instruction was applied, and ranged from 29.52% to 30.89% through application of the 45.2% special rate. Stipulation as to Percentage of Total Contract Costs Claimed As Indirect Costs, October 1, 1999. Mississippi relied on this analysis to rebut ACF's position that the indirect costs were so substantial that Mississippi should have known they were "significant" and should be segregated.

8. ACF adds further confusion by referring to these elsewhere as "indirect services."

9. Mississippi asserted that, since there was no way the Mississippi legislature would have appropriated more state funds for JOBS, Mississippi would have cut back its JOBS program if it had known, at the time the lower indirect cost rate was negotiated, that only 50% FFP was available. See Tr. at 184-86.

10. Mississippi also asserted that other states had claimed the higher rate for indirect costs of contracts similar to Mississippi's contract with the University, and provided some evidence in support of this assertion. We do not reach this issue here since it is not necessary to our decision.

11. We note that the inquiry from the regional office framed the question as what is the matching rate "applicable to certain administrative costs under the JOBS program." ACF Ex. J.3., at 1. This inquiry, however, contains an assumption that all indirect costs are JOBS administrative costs. Describing the costs as "administrative costs under the JOBS program" presupposes the answer.

12. Mississippi argued initially that there was an understanding with HHS that Mississippi could claim the higher rate indirect costs of the project determined through application of the special, lower indirect cost rate. Mississippi asserted that this understanding resulted from having determined the special 45.2% indirect cost rate for the LEAP project by "disaggregating the University's indirect costs and claiming only those components that were directly related to the direct provision of JOBS services eligible for FFP at the FMAP rate." Mississippi Br. at 7-8. ACF denied that either it or DCA had ever entered into such an understanding with Mississippi, and Mississippi subsequently conceded that it was unable to verify or identify any documentation to support its assertion of such an understanding. Mississippi Letter, September 13, 1999.

13. Contrary to what ACF argued, Dr. Benton's assertion that he advised states during the training sessions that the indirect costs of a contract to provide non-administrative JOBS services could be claimed as direct costs of the state IV-A agency is not undermined by the fact that the training materials Maximus prepared for ACF demonstrated awareness by Maximus that "certain indirect services and costs were matchable at only 50 percent FFP." ACF Br. at 23. The part of the training materials that ACF cited advised states to use full-time staff to provide certain "indirect services" in order to claim FFP at the higher rate; those services are listed as planning, evaluation, monitoring, contracting, fair hearings activities, or a combination of JOBS-related activities. (ACF later provided similar advice to states, in its December 1993 information memorandum. Mississippi Ex. O.) The advice in the training materials simply reflects the fact that section 403(l)(1)(A)(i) of the Act offered funding at the higher rate for the personnel costs (which ACF defined as salaries and wages) of staff working full-time on JOBS administrative activities, activities which would otherwise be eligible for only 50% funding. This advice simply does not address the question of whether indirect costs of a contractor who provides JOBS program services must be treated as administrative costs of the state IV-A agency.

14. While Dr. Benton noted that the University's indirect cost rate could be disaggregated so that components of the indirect cost rate directly associated with the performance of the project (such as space, utilities, telephone costs, material and supplies) could be charged at the higher rate, he also indicated that it was "legitimate" to charge all costs at the higher rate, since the LEAP project was totally devoted to direct client service. Memorandum from Bill Benton to Marie Antoon, July 1, 1993.

CASE | DECISION | JUDGE | FOOTNOTES