SUBJECT: Maryland Department of Human
Resources,

DECISION

The Maryland Department of Human Resources (Maryland) appealed the determination of the Administration for Children and Families (ACF) dated October 10, 2002 disallowing $720,129 in federal financial participation (FFP) claimed for foster care maintenance payments and administrative costs under title IV-E of the Social Security Act (Act). The disallowance was based on a primary review of maintenance payments made for the period April 1 through September 30, 2001 to determine whether the payments were made on behalf of eligible children to eligible foster care providers. ACF determined that 38 of the 80 cases sampled did not meet IV-E eligibility requirements. The basis for ACF's finding of ineligibility in all but two of the 38 sample cases was the lack of a judicial determination that Maryland had made reasonable efforts to finalize a permanency plan for the child. In addition to disallowing the federal share of the foster care maintenance payments for the sample cases it found ineligible, ACF disallowed the federal share of administrative costs that it determined to be associated with each such case.

On appeal, Maryland provided documentation for one sample case (#16), based on which ACF reversed its finding of ineligibility for that case. ACF Br. at 1. Maryland did not argue that any of the other sample cases were eligible for IV-E payments. Instead, Maryland argued that it should have been given a longer time to come into compliance with the requirement for a judicial determination regarding reasonable efforts to finalize a permanency plan. Maryland also questioned whether ACF had reviewed court transcripts before concluding that the requisite judicial determination had not been made. Maryland further argued that the IV-E regulations did not authorize ACF to disallow administrative costs based on ineligibility findings made in a primary review. Finally, Maryland argued that ACF improperly presumed, without any factual basis in the record, that all administrative costs claimed by Maryland were associated with the ineligible sample cases.

For the reasons discussed in detail below, we uphold in full the disallowance of foster care maintenance payments made for the 37 sample cases that ACF ultimately determined were not eligible for IV-E funding. We conclude that ACF has authority to disallow the administrative costs to the extent that they can be associated with the ineligible sample cases based on the methodology in Maryland's approved cost allocation plan. Since it is unclear from the record whether all of the disallowed administrative costs are in fact associated with the sample cases on this basis, however, we remand the case to ACF to further consider this matter and to issue a revised determination with respect to the administrative costs. On remand, ACF should also consider whether the administrative costs it identified as associated with two sample cases that it found ineligible on the sole ground that a requirement for licensing of foster homes was not met are allowable under current ACF policy.

Statutory and Regulatory Background

Title IV-E was originally enacted as part of the Adoption Assistance and Child Welfare Act of 1980, Public Law No. 96-272. Under section 472(a) of title IV-E, as amended by the Adoption and Safe Families Act of 1997, Public Law No. 105-89, federal matching of state foster care maintenance payments is available for a child in foster care who would have been eligible for Aid to Families with Dependent Children (AFDC) under title IV-A as in effect as of June 1, 1995 -

but for his removal from the home of a relative

. . . if-

(1) the removal from the home . . . was the result of a judicial determination to the effect that continuation therein would be contrary to the welfare of such child and (effective October 1, 1983) that reasonable efforts of the type described in section 471(a)(15) for a child have been made[.]

Under section 471(a)(15), a state plan under title IV-E must provide in relevant part that-

(B) except as provided in subparagraph (D), reasonable efforts shall be made to preserve and reunify families-

(i) prior to the placement of a child in foster care, to prevent or eliminate the need for removing the child from the child's home; and

(ii) to make it possible for a child to safely return to the child's home;

(C) if continuation of reasonable efforts of the type described in subparagraph (B) is determined to be inconsistent with the permanency plan for the child, reasonable efforts shall be made to place the child in a timely manner in accordance with the permanency plan, and to complete whatever steps are necessary to finalize the permanent placement of the child[.]

The IV-E regulations at 45 C.F.R. § 1356.21(b)(2) specify that-

[t]he State agency must obtain a judicial determination that it has made reasonable efforts to finalize the permanency plan that is in effect . . . within twelve months of the date the child is considered to have entered foster care . . . , and at least once every twelve months thereafter while the child is in foster care.

Section 1356.21(d) of title 45 provides that--

[t]he judicial determinations regarding contrary to the welfare, reasonable efforts to prevent removal, and reasonable efforts to finalize the permanency plan in effect, including judicial determinations that reasonable efforts are not required, must be explicitly documented and must be made on a case-by-case basis and so stated in the court order.

(1) If the reasonable efforts and contrary to the welfare judicial determinations are not included as required in the court orders . . . , a transcript of the court proceedings is the only other documentation that will be accepted to verify that these required determinations have been made.

Another condition for IV-E funding for maintenance payments is the requirement in section 472(b) of the Act that such payments be made only on behalf of a child who is in the foster family home of an individual or in a child-care institution. Section 472(c) of the Act requires that each type of foster home be "licensed by the State in which it is situated or has been approved, by the agency of such State having responsibility for licensing" homes or institutions "of this type, as meeting the standards established for such licensing . . . ." This requirement is implemented by 45 C.F.R. § 1356.71(g).

In addition to foster care maintenance payments, section 474(a) of the Act authorizes FFP for adoption assistance payments and "amounts . . . found necessary by the Secretary for the provision of child placement services and for the proper and efficient administration of the State plan." Section 1356.60(c) of 45 C.F.R. identifies the types of allowable administrative costs.

The IV-E regulations published on January 25, 2000 set out a process for review of state compliance with the IV-E child and provider eligibility requirements. An initial primary review is conducted on a sample of 80 cases, and if the findings show substantial compliance, no further review is conducted for another three years. 45 C.F.R. § 1356.71(a)(3). Substantial compliance is defined as eight or less ineligible cases in the initial primary review and four or less in a subsequent primary review. Id. A state found to be out of substantial compliance must submit a program improvement plan and, after completion of the plan, is subject to a secondary review of a larger sample of cases. Id. Section 1356.71(j) provides in pertinent part:

(1) States which are found to be in substantial compliance during the primary or secondary review will have disallowances (if any) determined on the basis of individual cases reviewed and found to be in error. The amount of disallowance will be computed on the basis of payments associated with ineligible cases for the entire period of time that each case has been ineligible.

(2) States which are found to be in noncompliance during the primary review will have disallowances determined on the basis of individual cases reviewed and found to be in error, and must implement a program improvement plan in accordance with the provisions contained within it. A secondary review will be conducted no later than during the AFCARS [Adoption and Foster Care Analysis and Reporting System] reporting period which immediately follows the program improvement plan completion date on a sample of 150 cases . . . . If both the case ineligibility and dollar error rates exceed 10 percent, the State is not in compliance and an additional disallowance will be determined based on extrapolation from the sample to the universe of claims paid for the duration of the AFCARS reporting period (i.e., all title IV-E funds expended for a case during the quarter(s) that case is ineligible, including administrative costs). If either the case ineligibility or dollar rate does not exceed 10 percent, the amount of disallowance will be computed on the basis of payments associated with ineligible cases for the entire period of time the case has determined to be ineligible.

The phrase "including administrative costs" in the penultimate sentence above was added to the regulations by "technical corrections" published on November 23, 2001. 66 Fed. Reg. 58672 (ACF Ex. 10).

1. Maryland is not entitled to a longer grace period to comply with the requirement for a judicial determination of reasonable efforts to finalize a permanency plan.

Maryland argued that the disallowance was unwarranted because "Maryland was making progress in its efforts to meet the new requirements," which Maryland stated "sometimes pose difficult burdens." Maryland Br. at 5-7. According to Maryland, under the IV-E regulations, there must be a permanency hearing to determine whether the state has made reasonable efforts to finalize the permanency plan within the same twelve-month period in which the state must establish a permanency plan. Maryland stated that "[a] court may have difficulty making a finding about progress finalizing the permanency plan within the time mandated by 45 C.F.R. § 1356.21(b)(2)(i) if a permanency plan has just been established." Id. at 5 (emphasis in original). Maryland noted that ACF had provided for a twelve-month grace period for states to meet this requirement on other grounds. ⁽¹⁾ Maryland contended that, although this grace period had expired, "it would nevertheless be appropriate for the [Departmental Appeals Board] to take into account the difficulties courts may have encountered in attempting to comply with the new rules, and to take into account Maryland's status as the first state to be reviewed under the new procedures." Id. at 6.

The Board has previously held that the granting of a "grace period" for compliance with a statutory or regulatory requirement is a matter committed solely to agency discretion. See, e.g., Florida Dept. of Health and Rehabilitative Services, DAB No. 1520 (1995); Maryland Dept. of Human Resources, DAB No. 1053 (1989). The Board has also stated that the standard it will apply in reviewing a decision committed to the Agency's discretion is whether the decision was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. See, e.g., Wisconsin Dept. of Administration, DAB No. 1766 (2001). Thus, regardless of the merits of Maryland's arguments, this Board has no authority to extend the period for compliance with the new judicial determination requirement beyond the one-year grace period already provided by ACF unless it determines that ACF's decision to limit the grace period to one year was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.

Maryland pointed to nothing indicating that ACF's decision should be reversed based on this standard. Maryland's assertion that it was difficult within the same twelve-month period to both establish a permanency plan and obtain a judicial determination that reasonable efforts were made to finalize a permanency plan assumes that a formal hearing is required to make this determination although ACF has specifically stated that no formal hearing is necessary. See ACF Title IV-E Foster Care Eligibility Review Guide, dated November 2001, at 18 (ACF Ex. 2). Moreover, Maryland did not explain why it could not establish a permanency plan at an early enough date to give a court adequate time to make a determination regarding reasonable efforts. In any event, even if the time constraints imposed by the requirement for a judicial determination of reasonable efforts to finalize a permanency plan present some difficulties, extending the grace period in this instance would not resolve this recurring problem. We also agree with ACF that the "improvement" cited by Maryland - obtaining the required judicial determination in nine of the 35 sample cases within six months after the date it was due - was not significant. Finally, the record shows that Maryland was not the first state to be reviewed (although it was the first state in Region III to be reviewed). ACF Br. at 13, citing ACF Ex. 3 (Declaration of Delores Smith). Thus, we conclude that ACF did not abuse its discretion in not allowing a further grace period for Maryland to comply with the regulations.

2. Maryland had the burden of providing any documentation that it believed would establish its compliance with the regulations.

In its appeal brief, Maryland observed that -

the ACF auditors may not have taken all relevant information into account when determining that court findings about progress in finalizing permanency plans were untimely. 45 C.F.R. § 1356.21(d)(1) directs ACF to look at transcripts as well as court orders when determining if there has been a judicial determination of reasonable efforts to finalize a permanency plan. It is not clear whether auditors reviewed court transcripts as well as court orders when reviewing cases to see whether the Title IV-E requirement of judicial determination of reasonable efforts to finalize permanency plans had been met.

Maryland Br. at 7, n.2. To the extent Maryland intended to argue that this was a basis for reversing the disallowance, we reject that argument. The Board has consistently held that it is a fundamental principle of grants management that a grantee is required to document its costs, and that the burden of demonstrating the allowability of costs for which funding was received under a grant rests with the grantee. See, e.g., New Jersey Dept. of Human Services, DAB No. 1797 (2001), and cases cited therein; see also 45 C.F.R. §§ 74.50-74.53 (1994). Here, the IV-E regulations specify that the "case record of the child must contain sufficient documentation to verify a child's eligibility . . . ." 45 C.F.R. § 1356.71(f). It was thus Maryland's responsibility to provide any relevant documentation to ACF during the eligibility review. While section 1356.21(d)(1) states that "a transcript of the court proceedings . . . will be accepted to verify" that the requisite judicial determinations have been made, this provision does not place a duty on ACF to search for such documentation if the case records produced by the state do not contain it. Moreover, Maryland had the opportunity to provide additional documentation during the proceedings before this Board, and did in fact provide additional documentation (a court order) for one sample case with its brief in this case. See Maryland Ex. 2. Thus, if Maryland believed that there are court transcripts which show that the requisite judicial determinations were made, it was incumbent on Maryland to produce such transcripts. Maryland's speculation regarding the existence of such transcripts is simply not a basis for reversing ACF's determination that the sample cases were ineligible.

3. ACF had the authority to disallow administrative costs associated with ineligible cases.

Maryland took the position that the disallowance of administrative costs must be reversed because it violates the IV-E regulations. Maryland argued that there is no provision in section 1356.71(j)(2) authorizing ACF to disallow administrative costs associated with cases found to be ineligible during a primary review. Maryland pointed out that-

[t]he phrase "administrative costs" appears only in the portion of 45 C.F.R. § 1356.71(j)(2) that refers to disallowances made when a state is in noncompliance after a secondary review. The phrase does not appear in the part of the rule that describes how the agency will determine disallowances for states found to be in noncompliance after a primary review, such as occurred in Maryland.

Maryland Br. at 3 (emphasis in original). Maryland also noted that the reference to administrative costs was added to section 1356.71(j)(2) by a technical amendment in 2001. Maryland asserted that "[h]ad ACF intended to permit the disallowance of administrative costs based on a primary review, it could have clarified that intent in the amendments." Id. at 4.

We conclude that the IV-E regulations regarding eligibility reviews cannot reasonably be read to preclude a disallowance of administrative costs associated with sample cases determined to be ineligible during a primary review. The preamble to the technical amendment cited by Maryland states that the amendment clarifies that "administrative costs claimed under title IV-E associated with ineligible cases, will be disallowed." 66 Fed. Reg. 58672, 58674 (Nov. 23, 2001) (ACF Ex. 10). This statement is consistent with the statement in the preamble to the final regulation published on January 25, 2000 that "[a]ll title IV-E funds expended during the quarter(s) the case is ineligible will be subject to disallowance, including funds for administrative costs." 65 Fed. Reg. 4020, 4073 (ACF Ex. 9). There is no indication in either preamble that this policy does not apply to ineligible cases identified in a primary review. Thus, it appears that the placement of the provision regarding the disallowance of administrative costs in section 1357.71(j)(2) was simply the result of inartful drafting and does not have the significance Maryland attributed to it.

ACF's intent to state a policy to disallow any administrative costs associated with ineligible sample cases is also clear from ACF's Title IV-E Foster Care Eligibility Review Guide. That document states in relevant part that--

[f]or States found not to be in substantial compliance during a primary review, a disallowance will be assessed on the basis of payments and administrative costs associated with error cases for all title IV-E foster care maintenance payments made during the entire period that these cases are in error.

ACF Ex. 2, at 6.

Moreover, the mere absence of a specific provision stating that certain costs will be disallowed does not undercut this Department's general authority to adjust for any overpayment that is made to a state in a prior quarter. See section 474(b)(2) of the Act. Indeed, it is a basic principle of appropriations law that "public funds may be used only for the purpose or purposes for which they were appropriated." Principles of Federal Appropriations Law, 2d ed., U.S. General Accounting Office, Office of the General Counsel, July 1991, OGC-91-5, at 4-2 (explaining the meaning of 31 U.S.C. § 1301(a)). ⁽²⁾ Thus, title IV-E funds must be used for title IV-E purposes. As noted earlier, section 474(a) provides for funding for foster care maintenance payments, adoption assistance payments, and expenditures "found necessary by the Secretary . . . for the proper and efficient administration of the State plan." ACF could reasonably determine that Maryland was overpaid to the extent that federal payments for administrative costs were made for children who were in fact ineligible for IV-E maintenance payments (except to the extent that such payments were allowable under ACF policy, as discussed below) since those administrative costs were not among the costs the Secretary has determined are necessary for the proper and efficient administration of the state plan.

Furthermore, government-wide cost principles provide that, in order to be allowable, a cost must "[b]e necessary and reasonable for proper and efficient performance and administration of Federal awards" and "[b]e allocable to Federal Awards . . . ." Office of Management and Budget Circular A-87, Attachment A, ¶ C.1. (made applicable to the title IV-E program by 45 C.F.R. §§ 92.4(a)(3) and 92.22(b) as well as by 45 C.F.R. § 74.27(a)). The Circular further states: "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." Id. To the extent that the administrative costs were associated with ineligible sample cases that were treated by Maryland as eligible, those costs were improperly allocated to title IV-E.

Maryland also noted, however, that ACF has announced that "FFP is available in administrative costs incurred on behalf of otherwise IV-E eligible children who have been placed in unlicensed foster family homes (and who for that reason are not reimbursable for IV-E maintenance payments)." Maryland Br. at 4, n.1, citing ACYF-CB-PI-02-08 (Oct. 2, 2002) (Maryland Ex. 1). Maryland implied that the situation here is analogous since the administrative costs were associated with "otherwise IV-E eligible children . . . for whom the applicable court orders lack an explicit judicial determination of reasonable efforts to finalize a permanency plan." Id.

ACYF-CB-PI-02-08 may provide a basis for reversing part of the disallowance. The policy cited by Maryland was first set out in an internal 1993 memorandum to ACF Regional Administrators. In a July 3, 2001 Policy Announcement, ACF sought to limit the application of this policy to children who would be eligible but for being placed in a relative's home while a state is in the process of licensing that home (based on special considerations such as the need to encourage placements with relatives). ACF Ex. 7, at 6. In later promulgating ACYF-CB-PI-02-08, ACF explained that it had decided not to make the policy change announced in 2001 until it had published a regulation for notice and comment. Maryland Ex. 1. Thus, ACF's current policy is to allow administrative costs incurred on behalf of otherwise eligible children placed in unlicensed foster family homes if the state is in the process of licensing the home. Two of the sample cases at issue here (sample #54 and #76) may fall within the ambit of that policy since they were found ineligible on the sole ground that the requirement at 45 C.F.R. § 1356.71(g) for licensing of foster homes was not met. 10/10/02 disallowance letter, 2^nd page of enclosure (unnumbered). Accordingly, on remand, ACF should determine whether the administrative costs ACF identified as associated with these cases ($731 and $28, respectively) are allowable under current ACF policy.

We further conclude, however, that the rationale for the policy does not extend to administrative costs associated with a child who is ineligible for reasons other than being placed in an unlicensed home. Contrary to what Maryland implied, the situation of a child who is ineligible for foster care maintenance payments, no matter where the child is placed, is not analogous to the situation of a child for whom payments could properly be made once the home in which the child is placed becomes licensed or approved or a new appropriate placement is made. Administrative efforts on behalf of a child in the situation addressed in the policy could result in IV-E maintenance payments properly being made. Once the state agency has failed to make reasonable efforts to finalize a permanency plan for the child and/or to obtain a judicial determination to that effect, however, the administrative efforts alone cannot result in proper IV-E maintenance payments.

This case also raises the further issue of whether ACF properly determined that the administrative costs it disallowed were associated with ineligible children. We discuss this issue below.

3. ACF did not establish that all of the disallowed administrative costs were associated with children who were ineligible for IV-E payments.

Maryland argued that ACF could not "simply presume" that the administrative costs "represent overcharges to Title IV-E." According to Maryland, "there is no factual basis in the record" to support such a presumption. Maryland Reply Br. at 2 - 3.

The record shows that ACF calculated the amount of administrative costs attributable to each ineligible sample case as follows:

ACF totaled the current quarter administrative costs claimed for FFP on each of the four quarterly reports during a Federal fiscal year, subtracted the Statewide Automated Child Welfare Information System operational costs, and divided by twelve to yield the average monthly administrative cost. The average monthly number of children reported for each of the four quarterly reports was summed, and divided by four, to yield the average monthly number of children per fiscal year. Then, the average monthly administrative cost per fiscal year was divided by the average monthly number of children per fiscal year to yield the average monthly administrative cost per child for the fiscal years affected by the review. Id. ACF multiplied the number of months or partial months that each child was ineligible by the average administrative cost per child to calculate the administrative costs subject to disallowance.

ACF Br. at 7, n.4, citing ACF Ex. 5 (Declaration of Charlotte Ragozzino). ⁽³⁾

Maryland's argument in effect challenges ACF's calculation methodology. We agree that this methodology is subject to question. Section 1356.60(c) of the regulations implementing title IV-E describes the types of allowable administrative costs and requires that "[t]he State's cost allocation plan shall identify which costs are allocated and claimed under this provision." ⁽⁴⁾ A state's cost allocation plan could distribute different types of administrative costs to title IV-E on different bases. While one basis might be a case count methodology, i.e., the number of title IV-E-eligible children in relation to all children in foster care under the responsibility of the State title IV-E/IV-B agency, this is not the only possible basis. See, e.g., Nebraska Health and Human Services, DAB No. 1882 (2003). If Maryland's approved cost allocation plan provides for associating certain administrative costs with title IV-E based on a count of eligible cases, that case count would change once cases that had been determined eligible for IV-E maintenance payments were rendered ineligible by a failure to meet the judicial determination requirements. A disallowance of administrative costs would therefore be justified based on the adjusted case count. If, on the other hand, Maryland's cost allocation plan provides that certain administrative costs can be associated with title IV-E on other than a case count basis, i.e., irrespective of the number of IV-E eligibles, then disallowance of those costs may not be warranted. However, the record here does not contain a copy of Maryland's cost allocation plan nor any information regarding the bases in the plan for distributing administrative costs to title IV-E. Thus, there is no assurance that the administrative costs disallowed here were calculated consistently with Maryland's cost allocation plan.

Maryland also correctly pointed out that "administrative costs associated with determining eligibility for a child who is regarded as a candidate for Title IV-E are allowable even if the result is a determination that the child is ineligible." Maryland Reply Br. at 2, citing ACYF-PA-87-05; New York State Dept. of Social Services, DAB No. 1428 (1993); and Missouri Dept. of Social Services, DAB No. 844 (1987). This does not appear to have been taken into account by ACF in calculating the disallowance, however. As indicated above, ACF divided the average monthly administrative cost per fiscal year by the average monthly number of children per fiscal year to yield the average monthly administrative cost per child for the fiscal years affected by the review. This methodology does not provide any way to identify the allowable administrative costs associated with determining eligibility for the children in the sample cases determined ineligible by ACF.

Accordingly, we remand the case to ACF to further consider how to properly calculate the unallowable administrative costs associated with ineligible sample cases. ACF should consult with Maryland as appropriate to develop a reasonable calculation methodology consistent with Maryland's cost allocation plan. If Maryland is dissatisfied with ACF's revised determination on this issue, it may seek review pursuant to 45 C.F.R. Part 16.

Conclusion

For the foregoing reasons, we uphold in full the disallowance of foster care maintenance payments for the 37 sample cases that ACF ultimately determined were not eligible for IV-E funding. We remand the case to ACF to consider how to properly calculate the extent to which Maryland was overpaid for the remaining administrative costs and to consider whether the disallowance of administrative costs associated with sample cases #54 and #76 is contrary to current ACF policy. Maryland may appeal ACF's revised determination on these matters pursuant to 45 C.F.R. Part 16.

Donald F. Garrett

Marc R. Hillson

Judith A. Ballard
Presiding Board Member

1. The preamble to the final rule stated in pertinent part:

We realize that obtaining a reasonable efforts determination regarding finalizing permanency plans every 12 months while a child is in foster care is a significant departure from current practice and that States will need transition time to implement this requirement for children who have been in foster care for more than 12 months. Therefore, we will not take adverse action against States who cannot comply with this requirement for a period of 12 months from the effective date of this final rule.

65 Fed. Reg. 4020, 4025 (Jan. 25, 2000). Since the effective date was not until March 27, 2000, the period Maryland had to comply was actually 14 months from the date of publication of the new rule.

2. That section reads: "Appropriations shall be applied only to the objects for which the appropriations were made except as otherwise provided by law." Consistent with this principle, the Board has observed that a grantee's entitlement to federal funds does not extend beyond the FFP authorized in the grant statute, and grantees are not permitted to retain federal grant funds in excess of what is authorized and actually expended for program purposes. New York State Dept. of Social Services, DAB No. 1358 (1992); Evangeline Community Action Agency, Inc., DAB No. 1379 (1993); Economic Opportunity Council of Suffolk, Inc., DAB No. 679 (1985).

3. ACF appears to have subtracted Statewide Automated Child Welfare Information System operational costs from the total administrative costs which it found were associated with the sample cases pursuant to 45 C.F.R. § 1356.60(e). That section provides that such costs "shall be treated as necessary for the proper and efficient administration of the State plan without regard to whether the system may be used with respect to foster or adoptive children other than those on behalf of whom foster care maintenance or adoption assistance payments may be made under this part."

4. Part 95 of 45 C.F.R. defines a cost allocation plan as "a narrative description of the procedures that the State agency will use in identifying, measuring, and allocating all State agency costs incurred in support of all programs administered by the State agency." 45 C.F.R. § 95.505.