Skip Navigation



CASE | DECISION | ANALYSIS | JUDGE | FOOTNOTES

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


SUBJECT: Colorado Department of Personnel & Administration

DATE: March 24, 2003
        

 


 

Docket No. A-02-138
Decision No. 1872
DECISION
...TO TOP

DECISION

The Colorado Department of Personnel and Administration (Colorado) appealed a decision of the Division of Cost Allocation (DCA) disallowing $1,577,439 as the federal share, with interest, of funds that Colorado transferred from a reserve fund maintained to provide health and other insurance benefits for state employees, some of whom work on federal programs. DCA issued the disallowance after Colorado removed approximately $7.4 million from the reserve and used it to cover state budgetary shortfalls.

The reserve is funded by contributions from Colorado state employees and from Colorado as their employer. Federal programs and funding sources provided federal financial participation (FFP) of approximately 21% of Colorado's employer contributions. DCA determined the disallowance by applying that FFP rate to the entire transferred amount. DCA also disallowed $28,603 in interest on the transferred funds until the date of its disallowance letter; that amount is included in the total disallowance.

Colorado regarded the transferred funds as divisible into state employer and employee shares, in proportion to their respective contributions to the reserve fund. Colorado did not contest the disallowance of FFP that it said was attributable to its employer contributions, or DCA's determination of the FFP rate, and those issues are therefore not before us. However, Colorado challenged the portion of the disallowance that it said was attributable to employee contributions, on the grounds that Colorado did not claim or receive FFP in employee contributions. In addition, Colorado challenged the disallowance of interest on the transferred funds. Colorado also asked the Board to rule on whether it could maintain the employee contributions in a separate fund to avoid similar disallowances, and whether it could use the employee contributions to fund employer contributions for which it would claim FFP.

For the reasons explained below, we sustain the disallowance of $1,577,439, consisting of $1,548,836 in FFP in the transferred funds, and $28,603 in imputed interest. When Colorado removed funds from the reserve, it reduced its past employer contributions to the reserve by the entire amount of those funds, including the funds attributable to employee contributions, because Colorado did not return those funds to the employees, but kept them for itself. Since the federal government shares in the costs of Colorado's program, it is entitled to share in the savings Colorado realized when it effectively reduced its employer contributions by appropriating the excess reserve funds.

Under controlling cost principles, this reduction constituted an applicable credit that Colorado was required to share with the federal funding sources that help fund Colorado's employer contributions. Moreover, those cost principles also require Colorado to refund imputed interest on the federal share of the funds it transferred from the reserve. We thus sustain the disallowance of interest. Finally, we decline to issue an advisory opinion on Colorado's proposal to account for employee contributions separately and use them as its state share, as those issues are not before us.

Applicable regulations and guidelines

The allowability of costs claimed by state governments under federal grants is governed by Office of Management and Budget (OMB) Circular A-87. 45 C.F.R. §§ 74.27(a) and 92.22(b). In order to be allowable, a cost must be necessary and reasonable for proper and efficient performance and administration of a federal award and allocable to the award. OMB Circular A-87, Attachment (Att.) A, ¶ C.1. A cost is allocable to a particular cost objective if the goods or services involved are chargeable or assignable to such cost objective in accordance with relative benefits received. OMB Circular A-87, Att. A, ¶ C.3.a. To be allowable under federal awards, a cost must also be accorded consistent treatment, and be the net of all applicable credits. OMB Circular A-87, Att. A, ¶ C.3.a.

The Circular characterizes applicable credits as follows:

Applicable credits refer to those receipts or reduction of expenditure-type transactions that offset or reduce expense items allocable to Federal awards as direct or indirect costs. Examples of such transactions are: purchase discounts, rebates or allowances, recoveries or indemnities on losses, insurance refunds or rebates, and adjustments of overpayments or erroneous charges. To the extent that such credits accruing to or received by the governmental unit relate to allowable costs, they shall be credited to the Federal award either as a cost reduction or cash refund, as appropriate.

OMB Circular A-87, Att. A, ¶ C.4.a.

This appeal involves federal funds awarded to pay for health, life and other insurance benefits provided to state employees who work on federally-funded programs. OMB Circular A-87 makes the cost to the state of such fringe benefits allowable, provided they are granted under established written policies and are allocated to federal awards and all other activities in a manner consistent with the pattern of benefits attributable to the individuals or group(s) of employees whose salaries and wages are chargeable to such federal awards and other activities. OMB Circular A-87, Att. B, ¶ 11.d.2. Fringe benefits are considered central services that states provide and bill to operating agencies on a centralized basis. OMB Circular A-87, Att. C, ¶¶ A.1, B.1. Such costs must be claimed pursuant to a state-wide or central service cost allocation plan (SWCAP) that describes how the costs of the central services (in this case, fringe benefits for state employees) will be allocated and billed to the programs that benefit from them. OMB Circular A-87, Att. C, ¶¶ A, B.1, C. States must submit a SWCAP for each year that they claim central service costs. OMB Circular A-87, Att. C, ¶ D. The billing rates used to charge federal awards for central services must be based on the estimated costs of providing the services. OMB Circular A-87, Att. C, ¶ G.4.

Colorado deposits its employer contributions and the contributions from its employees in a reserve fund that Colorado maintains to purchase insurance from commercial insurance companies and to provide coverage directly. Under OMB Circular A-87, the reserve fund is an internal service fund (ISF) and a self-insurance fund (SIF). Colorado Exhibit (Ex.) 2. ISFs are permitted to maintain a reasonable level of reserve, of up to 60 days cash expenses for normal operating purposes. OMB Circular A-87, Att. C, ¶ G.2. Generally, the SIF premiums are charged to various federal programs using the SWCAP. As part of the SWCAP, a state government must provide specific documentation about ISFs, including a fiscal year-end reconciliation schedule showing the revenues, costs, and year-end balance. OMB Circular A-87, Att. C, ¶ E.3.b(1), G.4.

Contributions to SIF reserves must be based on sound actuarial principles using historical experience and reasonable assumptions; SIF reserve levels are normally limited to the discounted present value of claims (i) submitted and adjudicated but not paid; (ii) submitted but not adjudicated; and (iii) incurred but not submitted. OMB Circular A-87, Att. B, ¶ 25.d. The Circular also contains specific reporting requirements for such funds. For ISFs with operating budgets of $5 million or more, this information includes balance sheets and statements of revenues and expenses, with revenues broken out by source. OMB Circular A-87, Att. C, ¶ E.3.b. Moreover, each billed central service activity must separately account for all revenues (including imputed revenues) generated by the service, expenses incurred to furnish the service, and profit and loss. OMB Circular A-87, Att. C, ¶ G.1. States that transfer funds from a self-insurance reserve to other accounts, such as a general fund, must make refunds to the federal government for its share of funds transferred, including earned or imputed interest from the date of transfer. OMB Circular A-87, Att. B, ¶ 25.d.5.

Background

This disallowance followed Colorado's removal of money from a reserve fund established by Colorado law to provide state employees with insurance benefits, including health and life insurance. (1) Both Colorado and its state employees contribute to the reserve fund, and Colorado is eligible to receive federal funding in its contributions, to the extent that its state employees work on federally-funded programs. The amount of federal funding that Colorado receives is based on the amount of its contributions. Colorado did not dispute DCA's determination that federal funding sources provided approximately 20.8233% of Colorado's employer contributions to the reserve. Colorado Brief (Br.) at 22.

Colorado makes employer contributions at levels necessary to provide its employees with specified levels of monthly benefits per employee. Colorado Rev. Stat. § 24-50-609. Colorado reported that employees contribute amounts necessary to fund the difference between the benefit levels funded by the state and the costs of the insurance benefits they wish to receive. Colorado Reply Br. at 13-14. Colorado law provides that reserve funds are to be maintained separately from Colorado's general revenues, and are to be used for the payment of insurance premiums, claims costs, and other administrative fees and costs associated with benefit plans, including offsetting unexpected year-end deficits and extraordinary fluctuations in annual premiums. Colorado Rev. Stat. § 24-50-613. Unexpended funds remaining at the end of a fiscal year do not revert to Colorado's general fund, but are held by the state treasurer in a custodial capacity. Portions of the reserve fund not needed for the payment of premiums and claims costs may be invested, with interest on the investments to be credited to the reserve fund. Id.

During the period of April 12 through June 26, 2002, pursuant to authorization from its legislature, Colorado transferred a total of $7,437,997 out of the reserve fund. Colorado Br. at 8; DCA Br. at 4, n.6. Colorado reported that it used the transferred funds, which it referred to as excess funds, to offset general revenue shortfalls caused by poor economic conditions, and that $5.4 million was transferred to its Department of Corrections to reduce general fund expenditures. Colorado Br. at 8, 19, 21; Colorado Reply Br. at 14. Colorado reported that the transferred funds comprised 46.2% in funds attributable to employee contributions, 51.9% attributable to employer contributions, and 1.9% to interest earned and provider refunds. Colorado Br. at 21. By letter dated September 12, 2002, DCA disallowed $1,548,836, determined by applying the 20.8233% FFP rate to the transferred funds, as well as $28,603 in interest on the transferred funds from the time of transfer until the date of the disallowance letter, computed at 4.67%, which DCA described as Colorado's lowest internal rate of return.

ANALYSIS
...TO TOP

Colorado regarded the transferred funds as divisible into state employer and employee shares, in proportion to their respective contributions to the reserve fund. Colorado contested the disallowance of FFP related to the portion of the transferred funds that it said were attributable to state employee contributions, on the grounds that the federal government did not provide FFP in the employee contributions. Citing Board decisions and the cost principles, Colorado argued that transferred employee contributions were not applicable credits in which the federal government was entitled to share. Colorado also disputed the disallowance of $28,603 in interest, on the grounds that Colorado earned no interest on the transferred funds but spent them upon their transfer from the reserve fund, to cover budgetary shortfalls.

Colorado also argued that the disallowance was inconsistent with an understanding it had with DCA, that the federal government did not have a claim on employee contributions because it did not provide FFP in those contributions. Colorado reported that this understanding arose from discussions surrounding an earlier disallowance of transferred reserve funds, where DCA had not sought to recover any funds related to employee contributions, and from the administration of Colorado's SWCAP, where the DCA negotiator had permitted Colorado to segregate employer and employee contributions. Colorado asked the Board to rule on whether Colorado could exclude the employee contributions from its SWCAP, so that the federal government would not be able to assert further claims against these funds, and, further, use the employee contributions to fund its employer contributions for which it would claim FFP.

Colorado did not contest the disallowance of FFP in the portion of the transferred funds that it conceded were attributable to its state employer contributions, as these transfers included federal funds. Colorado also did not contest the disallowance of federal funding in that portion of the transferred funds that Colorado described as consisting of earned interest and provider refunds. Colorado Br. at 62. Colorado thus asserted only that the disallowance should be reduced to $819,414, not that it should be overturned in its entirety. (2) Colorado also did not assert that it should be permitted to defray the disallowance by lowering future employer contribution rates and thus claims for FFP, instead of repaying the disallowed amount. (3)

We address each of these issues below.

  • The entire amount that Colorado removed from the reserve fund, including funds that Colorado said were attributable to employee contributions, constituted applicable credits by which Colorado was required to reduce its past claims for federal funding.

At the outset, we note that we do not agree with Colorado's argument that a portion of the excess funds that it removed from the reserve is necessarily attributable to employee contributions. By keeping all of the transferred funds for itself, and not returning any to its state employees, Colorado treated the entire amount as employer contributions. However, as we explain below, even assuming that some of the transferred funds were attributable to employee contributions, the applicable cost principles still require Colorado to refund FFP in the entire transferred amount.

Colorado is eligible to receive federal funding for salaries and fringe benefits, including the health and life insurance benefits at issue here, for its state employees who work on federally-funded programs. The federal government, through various programs, has in effect agreed to provide funding amounting to approximately 21% of Colorado's employer contributions to the reserve fund that Colorado maintains to pay for those benefits. The total amount of FFP Colorado may receive in its employer contributions to the reserve fund rises and falls with the level of those contributions; the greater the contributions (within allowable limits under federal cost principles) the greater the FFP. Conversely, when Colorado effectively reduces its past contributions to the reserve, it must refund FFP to the extent of that reduction.

Thus, the federal government may recoup FFP to reflect the reduction in Colorado's contribution that Colorado enjoyed when it removed monies from the reserve fund and used them for other purposes. Colorado reduced its contributions not simply by the amount of funds attributable to the employer contributions that Colorado removed from the reserve fund, but also by the amount of any employee contributions that Colorado removed, because Colorado did not return those funds to the employees, but kept them for itself. In order to maintain the 21% FFP rate provided by the various federal programs and funding sources, Colorado was required to refund FFP in the entire amount of the reduction in its employer contributions it realized when it removed excess amounts from the reserve fund.

An example illustrates this concept. Assume that a state has a reserve fund of $200, of which 40% [$80] is attributable to state employee contributions, and 60% [$120] to state employer contributions. The state receives FFP under various federal programs in its employer contributions at the rate of 20%, meaning that the state's $120 employer contribution includes $24 in FFP [20% of $120].

The state removes $60 from the reserve fund and transfers it to its general fund. Based on the proportions above, the amount removed from the reserve fund consists of $24 attributable to employee contributions [40% of $60] and $36 attributable to state employer contributions [60% of $60], of which $7.20 [20% of $36] is federal funds. As Colorado has done here, the state then refunds the federal government the $7.20 FFP in the transferred state employer contribution, and keeps the entire $24 in employee contributions for itself. None of the removed funds are returned to the employees.

By keeping the $24 in employee contributions for itself, the state has effectively lowered its overall employer contribution to $60 [$120 state employer contribution - $36 transferred state employer contributions - $24 transferred employee contributions]. At the 20% FFP rate resulting from various federal programs and funding sources, the state is eligible for $12 FFP in its $60 employer contribution. However, because it returned only $7.20 to the federal government, the state has kept FFP of $16.80 [$24 - $7.20], effectively increasing the FFP rate in its employer contributions to 28%, in excess of the 20% rate which it was eligible to receive from federal funding sources. To maintain the 20% FFP rate, the state must refund the $4.80 FFP it kept in excess of the $12 FFP for which it was eligible. As DCA has done here, the excess FFP may be calculated by applying the FFP rate for which the state was eligible to the amount of the transferred funds that Colorado said was attributable to employee contributions.

The cost principle that requires Colorado to refund FFP in the entire amount it removed from the reserve fund is the requirement that costs claimed for federal funding must be net of all applicable credits. As relevant here, applicable credits are "reduction[s] of expenditure-type transactions that offset or reduce expense items allocable to Federal awards . . . . To the extent that such credits accruing to or received by the governmental unit relate to allowable costs, they shall be credited to the Federal award either as a cost reduction or cash refund, as appropriate." OMB Circular A-87, Att. A, ¶ C.4.a. Having received an offset or reduction in its allowable employer contributions through receipt of the entire amount it removed from the reserve fund, Colorado is required to share that reduction with federal funding sources.

As the Board observed in discussing applicable credits,

A common theme in the applicable credit cases (and in the examples of applicable credits in OMB A-87) is the receipt of monies (or reductions of expenditures) by a state related to its federally funded program which, if unaccounted for in the program, would result in a savings or gain to the state alone.

Oregon Dept. of Human Resources, DAB No. 1298, at 10 (1992). In each of the applicable credit examples given in the Circular, there is a direct relationship or nexus between a grant-related cost and some form of discount or credit, between the questioned receipts and the federally funded program. California Dept. of Finance, DAB No. 1592, at 6 (1996), citing New York State Dept. of Social Services, DAB No. 1536 (1995). The entire amount of the transferred funds is an applicable credit under these standards. The funds arose from and are directly related to the same specific activity for which federal funding was provided, the provision of insurance benefits for state employees, and the maintenance of a reserve fund to pay for those benefits.

As DCA noted, this case is analogous to California, which held that funds transferred from a reserve relating to employee contributions for which the state had not claimed FFP were applicable credits. California involved interest earned on employee contributions to a reserve fund maintained to provide retirement benefits for state employees. The employee contributions were credited with an annual rate of return based on expected earnings that turned out to be less than the actual earnings. California kept the difference and used it to fund its employer contributions. The Board held that the interest earnings were applicable credits which California was required to apply to reduce its claim for federal funding in its employer contributions to the retirement fund.

In that case, California argued that the transferred interest was not an applicable credit because it was earned on employee contributions for which the state had not received FFP. The Board found that while the interest earnings were not federal funds, they were also not state funds, meaning that their receipt by the state reduced California's expenditures for pension benefits, which were the basis for its receipt of FFP. In making this determination, the Board observed that there was a nexus between federal funding and the transferred earnings on employee contributions because the earnings arose directly out of the operation of California's retirement system, for which federal funding was provided. That reasoning applies here, where the employee contributions arose from the operation of the same program, the provision of insurance benefits for state employees, for which federal funding was provided. Neither the employees nor the federal government would have made their respective contributions but for the operation of the reserve fund and Colorado's program to provide insurance benefits for the employees. Since the federal government shares in the costs of Colorado's program, it is entitled to share in any savings resulting from the operation of that program, such as the savings Colorado realized when it appropriated the employee contributions, effectively reducing its own employer contributions. That Colorado may have used the transferred funds for purposes other than reducing its employer contributions is irrelevant, because the state as a whole must be viewed as a single unit responsible for the administration of grant funds. Alabama Dept. of Finance, DAB No. 1635 (1997); California. By taking the transferred reserve funds, Colorado realized savings in its federally-funded employee insurance program, even if it applied those savings elsewhere.

  • Prior Board decisions do not support Colorado and are consistent with our decision that the transferred funds are applicable credits.

Citing Board decisions, Colorado argued that there is no nexus between the employee contributions to the reserve fund and the federal funding that Colorado received in its employer contributions. Colorado also argued that the employee contributions were not similar to the examples of applicable credits listed in OMB Circular A-87 (purchase discounts, rebates or allowances, recoveries or indemnities on losses, insurance refunds or rebates, and adjustments of overpayments or erroneous charges) or addressed in prior Board decisions, and did not fit into any of the categories of applicable credits that the Board delineated in Oregon.

In Oregon, the Board reviewed its decisions as of 1992 and found that sources of funds held to be applicable credits comprised several general categories:

o Interest received by a state on federal funds, on recoveries of overpayments to Medicaid providers, on child support collections, and on federal funds provided for self-insurance accounts.

o Fees or income generated by federally-funded activities, such as court fees imposed for processing child support orders.

o Discounts and refunds received by a grantee as a result of the expenditure of federal funds, such as discounts on claims from hospitals to which the state had provided working-capital advances, and refunds of FICA taxes.

o Unused or excessive federal funds received by a grantee, such as uncashed and canceled warrants.

o Reimbursement for one cost received from two federal programs.

Oregon at 10, citations omitted.

Citing the above list of examples of applicable credits in Oregon, Colorado argued that the transferred employee contributions were not, for example, income generated by federally-funded activities, because they were contributed by the employees independent of federal participation in the employer contributions, and that they were not discounts or refunds, because they did not result from the expenditure of federal funds.

Oregon and the other Board cases Colorado cited do not support Colorado's position. First, Colorado did not explain why the amounts at issue here are not fully characterized as a refund to Colorado of amounts it paid into the reserve fund, based on estimated costs of funding employee insurance benefits that proved to be too high, resulting in the excess that Colorado could remove without hindering the reserve fund's operation; as noted above, Colorado characterized the transferred amounts as excess reserve funds. Colorado Br. at 21. Second, these decisions do not address the particular and unique circumstances here, which the Board has not faced prior to this disallowance. No significance may be assigned to the absence from the Oregon list of a specific mention of employee contributions appropriated from a reserve fund, where the Board had not previously considered whether they were applicable credits.

Colorado's attempts to distinguish the prior Board cases focused on the particular facts the Board faced, to the exclusion of the overall effect of Colorado's appropriation of the excess reserve funds. That effect was to lower Colorado's employer contribution, which determines Colorado's eligibility for FFP, by the entire amount of the funds that Colorado removed from the reserve and kept for itself. In this respect, the transferred funds are akin to a refund or to the rebate or discount mentioned in the list of examples in OMB Circular A-87. The Board has noted that if a state received a discount or rebate on the purchase of a desk for its Medicaid program, it could not seek FFP on the full retail price. Hawaii Dept. of Social Services and Housing, DAB No. 779, at 6 (1986). Here, instead of a desk, Colorado purchased insurance coverage for state employees, by making federally-funded contributions to the reserve fund. When it took funds back from the reserve fund -- whatever the original source of the specific funds remaining in the reserve -- it effectively received a refund or rebate in its purchase of insurance coverage, in the full amount of the appropriated funds. Under the cost principles, Colorado was required to share that refund or rebate with the federal government.

The essence of Colorado's argument that there was no relationship or nexus between the transferred employee contributions and federal funding was that the employee contributions were not generated directly by the expenditure of federal funds, as would be the case with interest earned on federal funds, or a discount received on items of property purchased with federal funds. However, neither the Circular nor the Board cases addressing applicable credits require that the federal funds be used to generate the applicable credits for a nexus to exist. In the analogous case of California, discussed above, a nexus existed because the interest earnings on employee contributions arose directly out of the operation of the state's federally-funded retirement system, even though the interest was not earned on the federal funds. For the reasons we discussed earlier, we conclude that such a nexus exists here.

Colorado also argued that there was no nexus between the employee contributions and federal participation in the reserve fund because Colorado received the employee contributions prior to placing them in the reserve fund. In making this argument, Colorado cited language in Oregon that, for the purpose of determining whether the required nexus exists, the character of the funds in question "must be assessed at the point that they are received by the state." Oregon at 11. The specific language from Oregon addressed markedly different circumstances and does not support Colorado. In Oregon, the Board, examining past applicable credits cases, stated:

In determining whether there is a nexus between the questioned receipts and the federally funded program, the applicable credits provision requires that the character of the receipts must be assessed at the point that they are received by the state, and not when eventually credited to the state Medicaid agency, as receipts by a state may be applicable credits even if never credited to the state Medicaid agency. North Carolina, supra.

Oregon at 11, citing North Carolina Dept. of Human Resources, DAB No. 361 (1982). In North Carolina, the state argued that interest earned on recoveries from Medicaid providers did not offset or reduce the state's Medicaid expenditures because the interest was placed into the state's general fund, beyond the reach of the state Medicaid agency. The point of the cited language is that the state could not eliminate the applicable credits character of the recoveries by routing them through its general fund prior to crediting them, or not crediting them at all, to the state Medicaid agency that received the federal funds to which the recoveries related. Here, the employee contributions related to federal expenditures because they were contributed to the same fund and for the same purpose as the FFP in Colorado's employer contributions. In that sense, they were thus related to federal expenditures at the time they were received by the state, which rendered them applicable credits once Colorado reduced its prior costs for the reserve fund (and its eligibility for FFP it had already received for those costs) by diverting the transferred funds from their intended purpose.

Colorado also attempted to distinguish California on the basis that it involved interest earnings, which appear among the examples of applicable credits in the Circular. This argument overlooks the more relevant fact that the interest in California was earned on employee contributions in which the state had not claimed FFP, but which had been made for the same purpose for which federal funds were awarded, and which reduced the state's overall costs for that purpose when the state took the employee earnings for its own use.

Colorado also cited Oregon to argue that the transferred employee contributions were akin to state funds that it could use without making restitution to federal funding sources. Oregon involved funds raised through a four-dollar fee levied on each driver's license that Oregon issued or renewed, used to defray costs of treating indigent persons injured in motor vehicle accidents. The federal agency, the Health Care Financing Administration (now the Centers for Medicare & Medicaid Services) sought to treat the driver's license fees as applicable credits after Oregon amended its Medicaid funding statues to use the fees to fund the state share of Medicaid expenditures for which it claimed FFP. The Board found the nexus or relation to Oregon's Medicaid program too remote for the fees to be considered applicable credits. This remoteness distinguished Oregon from other Board cases involving fees deemed applicable credits (Maryland Dept. of Human Resources, DAB No. 412 (1983), and Maryland Dept. of Human Resources, DAB No. 639 (1985)), where the fees derived from the same activities for which federal funds were claimed, and were associated closely with the activities for which federal funds were provided. That distinction applies here as well. We have discussed the nexus between the employee contributions and the federal funds provided to the reserve fund. Colorado's employee contributions were raised through the operation of the same program for which the disallowed federal funding was provided and for the same purpose, the provision of insurance benefits for state employees. In Oregon, by contrast, the disputed funds were raised through an unrelated program, and from a different set of people than those who benefitted from Oregon's federally funded Medicaid program. The fees were charged to all holders of Oregon driver's licenses, including those who may never be injured in motor vehicle accidents, let alone require indigent medical care or qualify for the receipt of Medicaid benefits. The federal government provided the disallowed funds for the operation of Oregon's Medicaid program, not its motor vehicle licensing administration.

Colorado also cited the Board's decision in Texas Office of the Governor, DAB No. 1608 (1997), rev'd Texas v. HHS, No. A- 99-CA-056 SS (W.D. Tex. Aug. 26, 2000), rev'd per curiam, (5th Cir. June 7, 2002), for the proposition that DCA could only disallow funding proportionate to the total amount of federal funding in the reserve fund. In Texas, the state effectively diluted the federal interest in a health insurance reserve fund for state employees by enrolling a large group of employees without increasing the reserve fund. The Board rejected DCA's attempt to disallow all the federal funding that had been provided for the reserve, and reduced the disallowance to a proportionate share of the reserve fund that reflected the extent to which the fund, and thus the federal contribution therein, had been diluted through the enrollment of the additional employees. The disallowance here is not analogous. DCA is not demanding that Colorado refund the entire federal share of the reserve fund, as it did in Texas. Accordingly, that aspect of the Texas decision is not applicable here.

  • The Board will not approve Colorado's proposal to exclude future employee contributions from its SWCAP, or to use them to fund future employer contributions.

Colorado also requested that the Board rule on the permissibility of its proposal to place the state employee contributions in a reserve outside of its SWCAP, and thus outside of DCA's purview, and to use them for its federally-funded employer contributions. Colorado cited Oregon to argue that the transferred employee contributions were state funds, akin to monies that Colorado raises through its general powers of taxation, which are not considered applicable credits, and which the state may use to fund expenditures for which it claims FFP.

The issues that Colorado raised are not before us. Under OMB Circular A-87, amendments to Colorado's SWCAP are subject to DCA's annual approval. As relevant here, the Board's regulations limit Board review to final written decisions in disputes including those involving cost allocation plans, which are subject to annual review and approval by DCA, and also to disallowance decisions denying payment of an amount claimed under an award, or requiring return or set-off of funds already received. 45 C.F.R. Part 16, App. A, ¶¶ B, C.a.1, D; OMB Circular A-87, Att. C., ¶¶ D.1, F.1. No such final determinations addressing Colorado's proposals have been rendered, and a ruling in their absence, where all the facts upon which a decision would hinge have not been developed, would be premature. We note that DCA has indicated that it would not approve removal of the employee contributions from Colorado's SWCAP, because of the reporting requirements that states must meet in order to receive federal funding in self-insurance reserves. Among other information, states must report all sources of revenue, as well as transfers out of such funds. OMB Circular A-87, Att. C., ¶ E.3.c. Should such a dispute come before us, we would, as we have here, examine the underlying transaction and its overall effect on federal funding sources.

  • Prior dealings with DCA do not provide a basis for reversing the disallowance.

Much of Colorado's argument was directed at what it considered DCA's poor conduct in violating the understanding that the federal government did not have an interest in transferred funds relating to employee contributions, as it had not provided FFP in those contributions. Colorado argued that this understanding arose during discussions to resolve an earlier disallowance of transferred reserve funds, and in negotiations concerning the structure of Colorado's SWCAP. In the earlier disallowance, issued in 1996 after Colorado removed monies from the reserve fund during 1992, DCA sought to recover FFP in Colorado's employer contributions only, and did not disallow any monies attributable to transferred contributions from state employees. Colorado asserted that during discussions related to the 1996 disallowance, a prior DCA negotiator agreed that the federal government did not have a claim on funds attributable to employee contributions. Colorado also argued that the prior DCA negotiator agreed that Colorado, in its SWCAP and in related reports it files with DCA, could segregate employer and employee contributions because the federal government did not participate in the employee contributions. Colorado argued that the subsequent DCA negotiator violated this agreement in 2002, after having permitted Colorado to segregate the employee and employer contributions during the preceding years, an action that Colorado characterized as a breach of good faith by DCA. Colorado Br. at 8-14.

Colorado argued that if it had known that DCA would later assert a federal claim against employee contributions, it would have placed them into a different fund which would not have been included in Colorado's SWCAP. While acknowledging that the legal principle of estoppel would not apply to this appeal, Colorado argued that DCA should be held accountable for its actions, and that the Board should thus view the transferred employee contributions as not having been included in the reserve fund in the first place. Colorado Br. at 56-58; Colorado Reply Br. at 14. Colorado argued that reversal of the disallowance related to employee contributions would afford it the fair and equitable treatment contemplated by OMB Circular A-87.

DCA's prior dealings do not limit its ability to take this disallowance. As DCA noted, it issued the prior disallowance before the Board issued the decision in California confirming that earnings on employee contributions could constitute applicable credits, even though the federal government had not directly provided FFP in the employee contributions. Moreover, even if in the past DCA permitted Colorado to segregate employer and employee contributions, Colorado did not here treat any of the excess reserve funds as separate employee contribution amounts that should be returned to the employees. In general, we disagree that DCA has treated Colorado unfairly or inequitably in taking this disallowance. Rather, equity is served by maintaining the federal rate of funding in Colorado's reserve fund that the parties had agreed on via the various programs by which the federal government shares in Colorado's employer contributions. As we demonstrated above, Colorado effectively increased the FFP rate when it appropriated the employee contributions for itself, reducing its own costs in the reserve fund.

While Colorado specifically disclaimed any estoppel argument, we note that Colorado has not shown that it suffered any detriment as a result of DCA's violation of the understanding Colorado says the parties had. The only thing that Colorado would have done differently is to have excluded the employee contributions from DCA's oversight. DCA indicated that this action would not be permissible and would violate federal cost principles concerning the maintenance of SIFs and ISFs for which federal funding is claimed. DCA Br. at 23.

  • DCA may disallow interest imputed on the entire amount of the applicable credits in the transferred reserve funds.

DCA disallowed $28,603 in interest on the transferred funds, from the time that Colorado transferred the funds out of the reserve until the date of its disallowance letter, September 12, 2002. DCA computed the interest at the rate of 4.67%, which it stated was the state's lowest rate of return during that time period. Colorado Ex. 4; DCA Ex. 2. DCA based the disallowance of interest on the following provision in OMB Circular A-87:

Whenever funds are transferred from a self-insurance reserve to other accounts (e.g., general fund), refunds shall be made to the Federal Government for its share of funds transferred, including earned or imputed interest from the date of transfer.

OMB Circular A-87, Att. B, ¶ 25.d.5.

Colorado cited the Board decision in Alabama holding that in the absence of express authority to recover imputed interest, a federal agency may not recover interest on federal funds that could have been earned by the grantee but was not. Colorado argued that it did not earn interest on the transferred funds but spent them soon after their transfer to cover budgetary shortfalls, with most of the funds being spent by its Department of Corrections.

Colorado is correct that the Board has reversed disallowances of interest not actually earned on federal funds, where there was no express authority to recover such imputed interest. However, the revised version of OMB Circular A-87, published in 1995, included the language quoted above, absent from the previous version, requiring states to refund imputed interest on the federal government's share of funds that states remove from reserves. 60 Fed. Reg. 26,484 (May 17, 1995). Since federal agencies were already able to disallow interest earned, long considered an applicable credit, the addition of the cited language clearly provided the additional authority to disallow imputed interest on federal funds transferred from a reserve. While the Circular does not specify the rate at which interest will be imputed, DCA here acted reasonably within its discretion by imputing interest at Colorado's lowest internal rate of return.

OMB Circular A-87 thus requires Colorado to refund imputed interest on the federal government's "share of funds transferred." As we demonstrated in our analysis above, the federal government's "share" is determined by applying the FFP rate to the reduction that Colorado realized in its employer contributions when it removed the excess reserve funds. That reduction consisted of the entire amount of the transferred funds, including the amounts that Colorado described as attributable to employee contributions, as Colorado did not return those funds to the employees. Permitting Colorado to refund any lower amount would effectively increase the FFP rate above the approximately 21% rate that Colorado was eligible to receive under various federal programs. The language of the Circular does not limit imputed interest that states must refund to only the FFP that federal funding sources originally provided in a state's employer contributions, during periods prior to the transfer. Rather, it calls for a refund of imputed interest on the federal government's "share of the funds transferred." That amount was the federal share of the savings Colorado realized from removing the funds from the self-insurance reserve, and consisted of federal funds provided for the specific purpose of funding employee insurance benefits through the reserve. That is thus the amount on which Colorado must refund imputed interest. Alternatively, as we observed above, the entire amount of the transferred funds may be regarded as consisting of Colorado's employer contributions, because that is how Colorado treated those funds by keeping them for itself, and not returning any amounts to its state employees. The federal share on which interest is imputed is again determined by applying the FFP rate to that entire amount.

Conclusion

For the reasons explained above, we sustain the disallowance of $1,577,439, consisting of $1,548,836 in FFP in the transferred funds, and $28,603 in imputed interest.

JUDGE
...TO TOP

Judith A. Ballard

Marc R. Hillson

Donald F. Garrett
Presiding Board Member

FOOTNOTES
...TO TOP

1. Colorado called the reserve fund the Group Benefits Plan Reserve Fund, and DCA called it the State Employees and Officials Insurance Fund. DCA Ex. 2. In their briefs both parties referred to it simply as the reserve fund, as we do here.

2. Colorado calculated the uncontested disallowance amount by subtracting from the total disallowance those sums in which it contended that the federal government had no claim. From the $1,577,439 disallowance, Colorado subtracted $715,562 that it argued was attributable to the 46.2% of the reserve fund consisting of employee contributions, $13,860 in earned interest and provider refunds that Colorado argued were attributable to employee contributions, and the entire $28,603 in interest that DCA assessed on the transferred funds for the time period between the dates of transfer and disallowance. Colorado Br. at 62.

3. The cost principles permit overcharges for central service costs to be repaid by adjustments to future billing rates. OMB Circular A-87, Att. C., ¶ G.4. The Board has recognized that DCA has discretion in determining instead to seek a refund. Michigan Dept. of Management and Budget, DAB No. 1811 (2002).

CASE | DECISION | ANALYSIS | JUDGE | FOOTNOTES