SUBJECT: Louisiana Division of Administration

DECISION

The State of Louisiana, through its Division of Administration (DOA), appealed a September 1, 2000 determination by the Division of Cost Allocation (DCA) disallowing $19.2 million in costs for which the State had claimed and received federal reimbursement. Pursuant to that determination, DCA requested a cash refund of $19.2 million.

The disallowance concerns the financing of a governmental self-insurance fund administered by Louisiana's Office of Risk Management (ORM), a component of DOA. Contributions to this fund -- i.e., premiums -- are made by various State agencies from their current appropriations.

In 1999, the State's Legislative Auditor reported that budget constraints had resulted in a reduction in the amount of self-insurance premiums paid by certain agencies. The Legislative Auditor also reported that the premium reductions had not been made uniformly across agencies and, more specifically, that premiums had been reduced for agencies that received most or all their funding from the State but not for agencies whose funding came mainly from federal sources. A subsequent review of ORM's billings by DMG-Maximus, Inc. (DMG) found that, as a result of the selective premium reductions, the federal government had been overcharged by $19.5 million for self-insurance premiums in fiscal years 1997-2000.

In addition to quantifying the premium overcharges for fiscal years 1997-2000, DMG found that, between fiscal years 1989 and 2000, the State had incurred $28.9 million in administrative and insurance-related costs that had benefitted federal programs but never been billed to those programs. Based on the DMG review, the State asked DCA to offset the $28.9 million in unbilled costs from 1989-2000 against the $19.5 million in overcharges from 1997-2000.

In its September 1, 2000 determination letter, DCA took the following actions. First, it found that the $19.5 million in premium overcharges from 1997-2000 were unallowable costs because they had been charged to federal grants in violation of the requirement in Office of Management and Budget (OMB) Circular A-87 that cost procedures and policies be applied uniformly to both federally funded and non-federally funded activities. Second, DCA agreed to offset the unbilled costs from fiscal years 1999-2000 (an amount less than $500,000) against the $19.5 million in overcharges, leaving the current disallowance of approximately $19.2 million. Third, DCA refused to offset the unbilled costs from 1989-1998 against the overcharges, finding that these costs were not "currently reimbursable" (and thus not a basis for offset) because they were not included in the cost allocation plans approved for those years. Finally, DCA demanded an immediate cash refund of $19.2 million.

As discussed below, we uphold the disallowance of $19.2 million for fiscal years 1997-2000, which the State has not challenged. We also affirm DCA's demand for an immediate cash refund of $19.2 million. In addition, we find that DCA's rejection of alternative repayment methods was reasonable, consistent with OMB Circular A-87, and entitled to deference because the disallowance stemmed from a deliberate practice of overcharging federal programs, a practice that persisted for four years and involved a substantial amount of federal funding. Finally, we find that the unbilled costs from fiscal years 1989-1998 -- the costs not approved by DCA for offset -- may not now be claimed or reimbursed, either as a prior-year expenditure (under the 1989-1998 cost allocation plans) or as an adjustment to future self-insurance premiums (under a future cost allocation plan).

The record for this case consists of the briefs and exhibits submitted by the parties. We use the Louisiana Department of Administration acronym, DOA, when citing to the State's briefs and appeal file (AF).

Relevant Authorities

1. General cost principles (OMB Circular A-87)

A state's entitlement to federal reimbursement for the costs of implementing federal programs is governed by OMB Circular A-87. 45 C.F.R. §§ 74.27(a), 92.22(b). OMB Circular A-87 was last substantially revised in 1995. ⁽¹⁾ See 60 Fed. Reg. 26484 (May 17, 1995). We refer to the current version as the "1995 Circular." A previous version, which we call the "1981 Circular," was promulgated in 1981. See 46 Fed. Reg. 9548 (January 28, 1981).

The Department of Health and Human Services (HHS) has issued implementation guides to the 1981 and 1995 Circulars. The guide to the 1981 Circular, entitled "Cost Principles and Procedures for Establishing Cost Allocation Plans and Indirect Cost Rates for Grants and Contracts With The Federal Government," is contained in the State's appeal file (at Tab 5) and cited herein as OASC-10. The guide to the 1995 Circular is similarly titled, contained in the State's appeal file (at Tab 4), and cited herein as ASMB C-10.

OMB Circular A-87 sets forth several generally applicable principles for determining when a cost incurred by a State is an allowable cost under a federal grant, cost reimbursement contract, or other agreement. Attachment A, ¶ C.1 of the 1995 Circular states that a cost is allowable under a federal award if (among other things) it is necessary and reasonable for the proper and efficient administration of the award; is allocable to the award; is authorized or not prohibited under state or local laws or regulations; and conforms to any limitations or exclusions set forth in the Circular. In addition, a cost is allowable only if it is --

consistent with policies, regulations and procedures that apply uniformly to both Federal awards and other activities of the governmental unit.

1995 Circular, Att. A, ¶ C.1(e).

2. Central service costs

"Central service costs" are the costs of services provided by a state on a centralized basis to its various departments and agencies. 1995 Circular, Att. A, ¶ B.4 & Att. C, ¶ A. Central service costs are either "billed" to benefitting agencies and programs on a fee-for-service or similar basis, or "allocated" to the agencies and programs on some other reasonable basis. Id. Att. C, ¶¶ A.1, B.1, B.2. Insurance is regarded as a type of billed central service. Id., Att. C, ¶ B.1.

To ensure that central service costs are assigned to benefitted activities on a reasonable and consistent basis, a state each year submits a central service cost allocation plan, also known as a statewide cost allocation plan (SWCAP), for review and approval by HHS, the federal cognizant agency. 1995 Circular, Att. C, ¶¶ A.1, D.1, F.1; OASC-10, at 2-3. The plan must include or identify all central service costs that will be claimed (either as a billed or an allocated cost) under federal awards for the fiscal year in question. 1995 Circular, Att. C, ¶ C; OASC-10, at 3. A state may claim federal reimbursement for central service costs only in accordance with an approved cost allocation plan. 45 C.F.R. § 95.517.

3. Self-insurance

"Self-insurance is the practice of undertaking to absorb losses internally, without buying insurance from an outside source." Oklahoma Office of State Finance, DAB No. 1668, at 5 (1998). The 1981 and 1995 Circulars provide that contributions to self-insurance reserves are allowable to the extent that the costs of comparable commercial insurance would have been allowable. See 1981 Circular, Att. B, ¶ C.4.c; 1995 Circular, Att. B, ¶ 25.d(1). ⁽²⁾ The 1981 Circular states that "[a]ctual losses which could have been covered by permissible insurance (through an approved self-insurance program or otherwise) are unallowable unless expressly provided for in the grant agreement." 1981 Circular, Att. B., ¶ C.4.d. The 1995 Circular states that actual losses which could have been covered by self-insurance or other means are not allowable "unless expressly provided for in the Federal award or as described" elsewhere in the circular. 1995 Circular, Att. B, ¶ 25.c. The 1995 Circular goes on to state that the "Federal Government will participate in actual losses of a self insurance fund that are in excess of reserves." Id.

Case Background

1. Louisiana's self-insurance fund

ORM provides risk management services to the State's departments and agencies. See La. Rev. Stat. §§ 39:1533, 39:1535; DOA Brief, Tab A, ¶ 2. These services include the management of property and liability insurance coverage for all State property and operations, including workers' compensation. DOA Brief, Tab A, ¶ 3. Such coverage is either purchased in the commercial insurance market or provided through the State's self-insurance fund. Id., ¶¶ 2, 3. The self-insurance fund covers several categories of risk (e.g., medical malpractice, property, bodily injury, etc.) and is financed by the premiums paid by the State's agencies as well as by the income earned from the investment of premiums. La. Rev. Stat. § 39:1533(A); DOA Brief, Tab A, ¶ 5.

ORM incurs administrative costs to manage and operate the State's risk management program. See DOA Response to DCA Surreply, Tab C, ¶ 2. In addition, ORM makes or authorizes payments that extinguish self-insurance fund liabilities. Id. ORM recovers these and other costs by charging premiums to the State's agencies and departments (and thus to the federal programs they administer) whose activities receive coverage under the self-insurance fund. Id.; DOA Brief, Tab A, ¶ 5. Those agencies, in turn, seek reimbursement for the federal government's share of the premiums paid. See DOA Brief, Tab A, ¶ 6.

ORM calculates premiums for each insurance line (risk category) based on an agency's exposure (magnitude of potential losses) and loss experience (actual past losses). DOA Brief, Tab A, ¶ 5; 39 La. Rev. Stat. § 39:1536(A)(1). Insured agencies pay the billed premiums out of current appropriations. DOA Brief, Tab A, ¶ 6.

2. The State's SWCAPs

The State's SWCAPs for fiscal years 1989-2000 identify the categories of central service costs that the federal government had agreed to reimburse (in whole or part) for those years. See DOA AF Tabs 6-18. In each SWCAP, "allocated costs" (for services furnished but not billed) are identified in section I, "billed" costs in section II. "Risk management" is listed in section II as a billed service. The cost information provided in (or with) each SWCAP was based on actual expenditures for the fiscal year two years prior (e.g., the fiscal year 1996 SWCAP was based on fiscal year 1994 expenditures).

3. DMG's review of ORM billings

On March 31, 1999, Louisiana's Legislative Auditor reported that ORM, at the direction of the State's Office of Planning and Budget (OPB), had billed state agencies for the cost of insurance "in a manner that may [have] cause[d] federal programs to bear an inequitable share of the cost." DCA AF Tab 3. In particular, the Legislative Auditor found that --

because of budget constraints, for fiscal years 1997 and 1998, OPB did not include the full amount of calculated premiums in the state's budget. In addition, rather than implementing an across-the-board reduction, OPB designated the specific amount of premium that each agency was to be charged. For example, in fiscal year 1998, ORM calculated that the Department of Social Services should pay 2.3% of the state's total projected insurance cost. However, after adjustments by OPB, the department's share increased to 3.2% of the total premiums that OPB allowed. Conversely, ORM calculated that the Department of Public Safety and Corrections . . . should pay 7.1% of the state's total projected insurance costs. However, after adjustments by OPB, the department's share decreased to 5.9% of the total. The Department of Social Services has significant federal funding sources while the Department of Corrections does not.

Id. In a February 12, 1999 letter to the Legislative Auditor, DOA agreed that ORM's allocation of premiums created the "potential for possible inequitable federal participation." ⁽³⁾ Id. DOA also assured the Legislative Auditor that steps had been taken to correct the problem beginning with fiscal year 1999. Id.

In September 1999, DOA informed DCA that corrective action could not be taken in time to eliminate the possibility of inequitable billing in fiscal years 1999 and 2000. See DCA AF Tabs 4-5. DOA also informed DCA that DMG had been retained to help it determine the amount of any overcharges for the four fiscal years in question (1997-2000). See DCA AF Tab 14. In February 2000, DMG issued a report based on its investigation of ORM's fiscal year 1997-2000 billings for each insurance line in the self-insurance fund. See DOA AF Tab 34.

DMG found that ORM's billings in fiscal years 1997-2000 had resulted in federal programs being overcharged by $19,485,220 because of premium reductions that were not applied uniformly to State agencies. DOA AF Tab 34; DOA Brief, Tab A, ¶ 17; DOA Reply Brief, Tab C, ¶ 3. In addition, DMG found that, in fiscal years 1989-2000, the State had incurred $192,287,827 in administrative and insurance-related costs that benefitted State departments and agencies but were never billed by ORM to those agencies. DOA Brief, Tab A, ¶ 17.

According to DMG, the $192.28 million in unbilled costs from fiscal years 1989-2000 fell into three categories. See DOA AF Tab 34. The first category consisted of legislative appropriations from the general fund to ORM during fiscal years 1989-1996. These appropriated funds were used by ORM to pay claims for losses that were liabilities of the self-insurance fund. See DOA Brief, Tab A, ¶¶ 17-18. The second category of unbilled costs consisted of direct appropriations in fiscal years 1994-1996 for the payment of covered losses. Id. ¶ 18. Unlike the appropriations in the first category, the appropriations in the second category constituted an authorization to pay claims directly from the State's general fund, rather than from funds appropriated to ORM. Id. ¶¶ 8, 17-18. According to DMG, the loss payments made with direct appropriations were not recorded on ORM's financial statements, but because they extinguished claims that were recorded as liabilities, the payments effectively reduced the liabilities shown on those financial statements. DOA AF Tab 34.

The third category of unbilled costs consisted of "central administrative and support" costs that were incurred by DOA between 1989 and 2000, allocated to ORM, and paid with general fund appropriations. See DOA AF Tab 34; DOA Brief, Tab A, ¶ 17.

In short, the $192,287,827 in unbilled administrative or insurance-related costs identified by DMG consisted of:

• $28,987,946 appropriated from the general fund to ORM in fiscal years 1989-1996 to pay claims for self-insured losses;

• $157,628,255 appropriated to make payments directly from the general fund in fiscal years 1994-1996 to cover losses recorded as self-insurance fund liabilities;

• $4,184,326 in allocated DOA administrative costs for fiscal years 1989-1998; and

• $1,487,300 in allocated DOA administrative costs for fiscal years 1999-2000.

See DOA AF Tab 36; DCA AF Tab 1. DMG calculated the federal share of these unbilled costs to be $28,894,093. DOA AF Tab 34 (Ex. C). Of this total, $28,507,049 were found to be allocable to fiscal years 1989-1998, with the remainder ($387,044) allocable to fiscal years 1999-2000. See DOA AF Tab 36; DCA AF Tab 1.

4. The September 1, 2000 determination letter

Based on the DMG report, the State informed DCA, in a February 22, 2000 letter, that it "had provided OMB A-87 allowable administrative services and paid claims from general fund appropriations (contributed capital) totaling $192,287,827. . . which were not reflected on ORM financial statements." DCA AF Tab 17. The State requested that the federal share of these costs -- $28,894,093 -- be used to offset the $19,485,220 in overcharges from fiscal years 1997-2000, resulting in a $9,408,873 credit due the State. Id.

The September 1, 2000 determination letter was DCA's response to the State's offset request. See DOA AF Tab 1. The letter contains the following findings or rulings. First, DCA found that $19,485,220 in self-insurance premiums reimbursed by the federal government for fiscal years 1997-2000 were unallowable costs because they had been charged to federal grants in violation of Attachment A, ¶ C.1(e) of the 1995 Circular, which requires that costs be consistent with policies, regulations and procedures that apply uniformly to both Federal awards and other activities of the governmental unit. Id. at 4.

Second, DCA found that the $28,507,049 in unbilled insurance-related and administrative costs from fiscal years 1989-1998 were not "currently reimbursable," and thus could not be the basis for an offset, because they were "not included in the State's [cost allocation] plan for each of those years in which the costs were incurred with adjustments made at that time[.]" DOA AF Tab 1, at 3. DCA also cited other grounds for refusing to apply these unbilled costs (from fiscal years 1989-1998) as an offset, including federal appropriations law and OMB Circular A-87's prohibition on cost-shifting. ⁽⁴⁾ Id. at 2.

Third, DCA agreed to offset the $19.5 million in overcharges with the federal share of unbilled administrative costs from fiscal years 1999 and 2000 (totalling $387,044). Id. at 3, 4. The DCA official who signed the determination letter stated in an affidavit that these administrative costs were approved for offset because the cost allocation agreements based on those costs had not yet been approved or finalized. DCA AF Tab 13, ¶ 11.

Finally, after finding that most of the unbilled costs identified by the DMG audit were not a proper basis for offset, DCA determined the method by which the State should repay the federal government for its share of the disallowed 1997-2000 costs. DCA addressed this repayment issue by considering the four adjustment methods set out in Attachment C, ¶ G.4 of the 1995 Circular: (1) cash refund; (2) crediting amounts charged to individual programs; (3) adjusting future billing rates; and (4) adjusting allocated central service costs (when the total adjustment is less than $500,000). See DOA AF Tab 1, at 4. DCA ruled out methods two, three, and four on various grounds and, accordingly, demanded a cash refund of $19,261,661. Id.

The State's Contentions on Appeal

The State did not deny that it overcharged the federal government for self-insurance premiums in fiscal years 1997-2000. Nor did it dispute its obligation to repay the federal government $19.2 million. See DOA Reply Brief, ¶ 3. It did, however, take exception to the repayment method chosen by DCA. In particular, the State contended that DCA failed to justify its request for a cash refund and its concomitant refusal to permit the use of other repayment methods. DOA Brief at 22-27. In lieu of a cash refund, the State proposed to make the federal government whole by adjusting future self-insurance premiums to reflect not only the overcharges from fiscal years 1997-2000 but also the unbilled costs from fiscal years 1989-1998. Id. at 26-27. According to the State, the adjustments would "entail giving premium credits to the agencies administering federal programs that were overbilled during fiscal years 1997-2000 because of the variance between actuarially calculated and billed premiums, and also assessing supplemental premiums to reflect risk management costs not taken into account previously." DOA Reply Brief, Tab B, ¶ 13; see also DOA Brief, Tab A, ¶¶ 20-21. State agencies would then file claims seeking reimbursement for the federal share of the supplemental premiums, which would in turn be used to offset the State's $19.2 million debt. See DOA Brief, Tab A, ¶ 20.

The State contended that its proposed billing rate adjustments would not violate OMB Circular A-87 and would be consistent with SWCAP provisions permitting the State to rectify cost-revenue variances. In addition, the State contended that DCA has effectively foreclosed any billing rate adjustments by improperly disallowing the unbilled costs from fiscal years 1989-1998, and by interposing a meritless timely claims objection with respect to those costs. DOA Brief at 22-24, 28-35, 37-42; DOA Reply Brief at 2.

DCA's Contentions

DCA asserted that the "central issue" in this case is whether the State is entitled to offset the 1997-2000 overcharges against the unbilled 1989-1998 costs. DCA Response Brief at 14. Relying on our decision in Maine Dept. of Administration, DAB No. 1659 (1998), aff'd, Maine v. Shalala, 81 F.Supp.2d 91 (D. Me. 1999), ⁽⁵⁾ DCA contended that the State is not entitled to an offset because a claim for the unbilled costs has not yet been submitted. DCA also contended that the unbilled costs are unallowable on various grounds, id. at 16-23, and that any claim for these costs would, in any event, be barred as untimely, id. at 23-28.

Discussion

1. DCA is entitled to a cash refund of $19.2 million.

At issue is the State's request to set aside DCA's demand for an immediate cash refund of $19.2 million. The demand stems from a disallowance of self-insurance premiums charged to federal programs during fiscal years 1997-2000.

The disallowance of the 1997-2000 costs creates a debt owed to the federal government. See 45 C.F.R. § 92.52(a); Telamon Corp., DAB No. 1603 (1996); New York City Human Resources Administration, DAB No. 720 (1986), rev'd and remanded on other grounds sub nom. City of New York v. Shalala, 34 F.3d 1161 (2^nd Cir. 1994). The general rule is that a debt must be repaid, in cash, within a reasonable time. See 45 C.F.R. § 92.52(a). The federal government may permit a debtor to use other means of repayment, but a decision not to use such other methods is generally within the federal agency's discretion. ⁽⁶⁾ As explained in the following sections, there is no basis to conclude that DCA's request for a $19.2 million cash refund was illegal, arbitrary, or an abuse of discretion. ⁽⁷⁾

2. DCA did not misapply the cost principles or abuse its discretion in deciding not to permit repayment by a method other than an immediate cash refund.

In deciding how the State should repay its debt, DCA considered the alternatives specified in Attachment C, ¶ G.4 of the 1995 Circular. Attachment C, ¶ G.4 of the 1995 Circular states in part:

Adjustments of billed central services. Billing rates used to charge Federal awards shall be based on the estimated costs of providing the services, including an estimate of the allocable central service costs. A comparison of the revenue generated by each billed service (including total revenues whether or not billed or collected) to the actual allowable costs of the service will be made at least annually, and an adjustment will be made for the difference between the revenue and the allowable costs. [emphasis added]

Attachment C, ¶ G.4 further states that an adjustment for the difference between the revenue collected for providing a central service and the actual allowable cost of providing that service can be made by one of four methods:

(a) a cash refund to the Federal Government for the Federal share of the adjustment, (b) credits to the amounts charged to the individual programs, (c) adjustments to future billing rates, or (d) adjustments to allocated central service costs.

According to the interpretive guide to the 1995 Circular, a "primary concern" in selecting one of the adjustment methods in Attachment C, ¶ G.4 "would be the assurance that the Federal programs charged in a given year receive an equitable and appropriate adjustment for the over/under billings." ASMB C-10, § 4.8, Q&A 4-14. As indicated, only one adjustment method can be used in a given fiscal year. Id. Q&A 4-12.

As is apparent from its terms, Attachment C, ¶ G.4 was intended to address two common situations: (1) a program agency being charged for a central service based on a rate that generates revenue for the service provider that exceeds the allowable cost ⁽⁸⁾ of providing the service, resulting in a "profit" ⁽⁹⁾ to the provider; and (2) a program agency being charged for a central service based on a rate that fails to fully account for the allowable costs of providing that service, in which case the provider sustains a "loss." See ASMB C-10, § 4-8, ¶ 4-12 (indicating that Attachment C, ¶ G.4 "establishes four methods for adjusting internal service funds (billed central services) for profits or losses realized from operations" (italics added)). When revenue collected for a billed central service exceeds (or falls short of) the allowable costs of providing that service, an adjustment may be made for the difference, so that federally-funded programs are not overcharged (or undercharged). See Idaho Division of Financial Management. To ensure timely accounting of profit and loss, Attachment C, ¶ G.4 requires a state to make an annual comparison of revenue and costs. 1995 Circular, Att. C, ¶¶ E.3.b(1), G.4; see also Idaho Division of Financial Management. Adjustments by one of the four specified methods are then made based on this comparison.

Typically, a cost-revenue variance necessitating an adjustment under Attachment C, ¶ G.4 occurs because the central service billing rate in a given year is based on a prior period's cost experience or derived from cost projections that incorporate variables over which the State may have little or no influence. Consequently, it is inevitable that revenue from billings will underestimate or overestimate the actual cost of providing the service. See DCA AF Tab 13, ¶ 4. Attachment C, ¶ G.4 authorizes a routine method for addressing this inevitability.

The applicability of Attachment C, ¶ G.4 to this case is not apparent. The disallowance to which this provision was applied did not stem from annual comparisons of the self-insurance fund's operating revenue and costs. Moreover, the overcharges for fiscal years 1997-2000 were not alleged or shown to be the result of billing rates (premiums) that yielded an unallowable operating profit. ⁽¹⁰⁾ What triggered the disallowance was not the accrual of profits through normal fund operations, but the decision of the State's budget office to selectively reduce self-insurance premiums for some state agencies at the expense of others with substantial federal funding. Because the overcharges do not reflect an operating profit garnered by ORM in its provision of risk management services, there is no discernable need for an adjustment under Attachment C, ¶ G.4 "for the difference between revenue and the allowable costs" of providing those services.

Assuming for the sake of argument that the 1997-2000 overcharges represent a revenue-cost variance covered by the terms of Attachment C, ¶ G.4, the appropriate corrective action would be the return of that profit, or a reconciliation of the variance, using one of the specified adjustment methods. The State has proposed an adjustment to future billing rates. However, the State has not proposed to adjust future rates to correct a variance that existed in fiscal years 1997-2000, the period for which DCA issued the disallowance. Rather, the alleged variances that would be addressed are ones that arose in fiscal years prior to 1997 due to administrative and insurance-related costs that were never billed to the benefitted programs or claimed by the grantee agencies, and that bear no relationship to the disallowed costs. We find nothing in the regulations, cost principles, or interpretive guides that permits the State to use Attachment C, ¶ G.4 in this manner.

3. DCA acted reasonably in refusing to permit repayment by means other than a cash refund.

Even if we determined that Attachment C, ¶ G.4 was applicable, we would find no reason to disturb DCA's rejection of the non-cash refund adjustment options authorized by that provision. DCA found that the fourth adjustment method in Attachment C, ¶ G.4 -- adjustments to allocated central services -- was inapplicable, see DOA AF Tab 1, at 3, and the State did not contest that finding. DCA also declined to use the second method -- "credits to the amounts charged to the individual programs" -- stating that it was "viable" but "cumbersome" and would require "adequate documentation showing how and when the credits, including the required interest assessment, are made against each Federal program." DOA AF Tab 1, at 3. The State did not dispute that repayment using this method would be cumbersome. More important, the State has not offered to repay its debt solely in this manner (as indicated, only one type of adjustment method can be used in a given fiscal year). Thus, we find no basis to overturn DCA's refusal to use the program credits adjustment method.

Finally, DCA declined to allow a billing rate adjustment (method three), stating that an annual comparison of costs and revenue was a prerequisite to such an adjustment, that billing rate adjustments "are [made] simply to adjust for the differences caused by costs not equaling billing rates multiplied by the units provided the billed organizations," and that "overcharges of $19,485,220 are not the normally expected result of total costs not matching total billings." DOF AF Tab 1, at 3-4. The proposition implicit in these statements is the one discussed earlier -- namely, that a billing rate adjustment would be inappropriate given the nature of the overcharges. The purpose of a billing rate adjustment under Attachment C, ¶ G.4 is to compensate the federal government for its share of an unallowable operating profit (or to permit the service provider to seek federal reimbursement for an operating loss) arising from the use of billing rates based on projected costs or on a prior period's costs. In this case, the excess premiums paid by the overcharged agencies in fiscal years 1997-2000 were not the result of billing rates that overestimated the actual costs of providing risk management services to those agencies. Instead, the excess premiums were the result of the State's decision not to bill certain agencies at the actuarially-determined rates calculated by ORM. ⁽¹¹⁾

The State's offer to repay the disallowance by simultaneously applying program credits and billing rate adjustments to future self-insurance premiums is not a reasonable one under the circumstances. The proposal contains a problematic assumption, which is that the anticipated premium adjustments (to recover unbilled 1989-1998 costs) will yield a level of federal reimbursement sufficient to offset the State's current debt. Whether that additional reimbursement would be sufficient to discharge or offset the State's debt depends on the allowability of the 1989-1998 unbilled costs and whether the proposed adjustments are adequately documented and properly computed. However, no final allowability determination can be made until a SWCAP including these costs is negotiated, the State agencies and departments are billed for the adjusted or supplemental premiums, and reimbursement claims are filed by the affected programs or organizations. This process would likely take several months (or even years) to complete.

Assuming that the unbilled costs could be claimed in accordance with an approved cost allocation plan -- and we find (in the next section) that they may not be -- substantial concerns would arise concerning their allowability, concerns that could, if justified, affect the amount of reimbursement. These concerns implicate a number of cost principles, including but not limited to the requirement that contributions to a self-insurance reserve be actuarially justified (see 1995 Circular, Att. B, ¶ 25.d.(3)), and the requirement that reimbursed losses not exceed self-insurance fund reserves (see id. ¶ 25.c). ⁽¹²⁾ In addition, legitimate questions might be raised about whether the anticipated billing and recovery of these costs would be consistent with the self-insurance fund's statutory requirements and with sound accounting practices. In light of these concerns, the time required to claim reimbursement, and the possibility that the State might not, in the end, appropriate sufficient funds to cover its share of the supplemental self-insurance premiums, the State's repayment plan does not provide the federal government with adequate assurance of repayment.

4. The State's repayment proposal is not viable because the unbilled 1989-1998 costs may not be claimed or allowed, either as prior-year costs or as an adjustment to current costs.

In its September 1, 2000 determination letter, DCA rejected the State's offset request by ruling, on various grounds, that the unbilled 1989-1998 costs were not "currently reimbursable." DCA's briefs raise additional issues concerning the allowability of the unbilled costs. Consequently, the State asked us to determine whether there are obstacles that preclude reimbursement of those costs.

Before addressing that request, we note that there are two categories of unbilled costs at issue. The larger category consists of the appropriations made in fiscal years 1989-1996 to pay for losses covered by the self-insurance fund. The State contended that these costs, totalling approximately $27.3 million, constitute "risk management" costs under section II of the SWCAPs. See DOA Brief at 30. The second category of unbilled costs includes the federal share of the $4,184,326 million in "allocated" DOA administrative costs from 1989-1998. The arguments supporting the State's repayment proposal deal only with the requirements for recovering the $27.3 million that may, according to the State, be claimed under section II. The arguments do not, however, address whether the cost principles, regulations, or SWCAPs permit a claim or adjustment for the allocated (section I) costs. Consequently, we affirm without further discussion DCA's finding that the allocated DOA administrative costs from 1989-1998 may not be claimed or allowed.

As for the $27.3 million in alleged section II costs, there are two possible ways for the State to claim them -- as prior-year costs under the SWCAPs for 1989-1996, or as an adjustment to current billing rates. As we now explain, neither option is available to the State.

a. The unbilled 1989-1996 costs may not be claimed or reimbursed as prior-year costs because they were not identified or included in the SWCAPs for those years, or in the SWCAPs that were based on the State's expenditures in those years.

As indicated, the unbilled 1989-1996 costs are the payments, made with appropriated funds, for losses that were the liabilities of the self-insurance fund. Putting aside any timely claims requirement, these unbilled costs may not be reimbursed as prior-year costs because they were not included or identified in the SWCAPs for those years, or in the SWCAPs that were based on the State's actual expenditures in those years.

Attachment C, ¶ C of the 1995 Circular states that a SWCAP "will include all central service costs that will be claimed (either as a billed or an allocated cost) under Federal awards," and that "[c]osts of central services omitted from the plan will not be reimbursed." Attachment A, ¶ J.2 of the 1981 Circular states that an allocation plan "shall cover all joint costs of the department[.]" OASC-10 states that a SWCAP must reflect "all costs for which a claim is to be made," and that "costs not approved by the cognizant agency will not be recognized." OASC-10, at 3.

The SWCAPs for fiscal years 1989-1996 indicate, in section II, that the federal government had agreed to reimburse its share of the State's "risk management" costs. These costs are identified as the premiums billed to the state agencies whose activities were insured by the self-insurance fund. The risk lines for which these premiums were billed are identified in an addendum to the SWCAP entitled "Information on Internal Service Funds, Self-Insurance, and Other Billed Services." ⁽¹³⁾ See, e.g., DOA AF Tab 11 (indicating in the section entitled "Office of Risk Management, Agency Number 01-8804" that State agencies were billed for eight insurance lines, including workers' compensation, comprehensive general liability, and automobile liability).

In a declaration, Whitman J. Kling, Deputy Undersecretary of DOA (and a former State Risk Director), explained that ORM incurs administrative costs to manage and operate the State's risk management program, and that "from time to time" ORM and the Louisiana legislature "make expenditures to extinguish state Self-Insurance Fund liability claims." DOA Response to DCA Surreply, Tab D, ¶ 2. Mr. Kling further stated that "[n]one of these expenditures and costs are passed through to federal programs as direct or allocated indirect expenses." Id. Instead, he said, "ORM bills premiums to state agencies (and thus to the federal programs they administer) based on exposure and experience, which premiums enable it to recover some or all of its expenses." Id.

In light of these statements and the identification of "risk management" as a section II central service financed by "billed" premiums, we find that the federal government's approval of risk management costs in the 1989-1996 SWCAPs extended only to the premiums -- that is, the annual charges determined by ORM to ensure that reserve levels were maintained at the levels necessary to ensure that losses were covered as they occurred -- billed to the participating agencies for each risk category. The loss payments made with appropriated funds in fiscal years 1989-1996 were clearly not premiums. Nor were they billed by ORM to the benefitted agencies. In addition, there is no evidence that the loss payments were factored into the calculation of premiums actually billed by ORM during the years in question. Finally, the loss payments were not timely identified in the SWCAPs as costs that could be used to adjust premiums for future years, consistent with the approved billing rate methodology. For all these reasons, the 1989-1996 loss payments are not section II risk management costs within the meaning of the approved SWCAPs and may not be claimed under those agreements.

The State suggested that it was not obligated to identify the loss payments as a separate cost or expense item in its SWCAPs. See DOA Brief at 28-29, 32-33. We can find no support for this position. OASC-10 states that preparation of a SWCAP involves an "[i]dentification of the services and the costs of each service to be claimed," and that a SWCAP must include the "items of expense included in the cost of a service." OASC-10, at 3, 6 (underscoring added). In discussing a sample cost allocation plan, OASC-10 indicates that a "detailed breakdown of [section II] costs is not normally required," but that the State "must have and make available to the Federal cognizant agency such cost and revenue breakdowns, utilization records and other information as is necessary to permit a reasonable assessment of the costs incurred and charges made." OASC-10, at 53. These provisions required the State to describe the significant categories of expenditures made to furnish risk management as well as to provide information that would allow the cognizant agency to estimate the level of those expenditures. If, as the State asserted, the loss payments were part of the cost of "risk management," then they were an "item of expense" or category of expenditure that the State should have identified (but did not identify) in the SWCAP or its supporting documentation.

The State maintained that the SWCAPs do include the unbilled 1989-1996 costs because ORM's annual reports, which were appended to the SWCAPs, "refer to or identify the amounts of legislative appropriations to pay claims," and because the fund's annual financial statements "reflect the decrease in ORM liabilities as a result of the legislature's payment of claims." DOA Brief at 32. The State does not explain how or why these somewhat meager pieces of information should have led the cognizant agency to know or anticipate that claims would be filed for its share of these costs (or to know the magnitude of these costs), particularly given ORM's consistent and stated methodology of recovering costs through annual actuarially-based premiums charged to the benefitted agencies. Regardless of the cognizant agency's awareness of the loss payments, these costs cannot be claimed as a prior-year costs because the 1989-1996 SWCAPs do not indicate that section II "risk management" costs include expenditures not reflected in premiums. If the State intended to claim those costs under section II, one would expect to find in the SWCAPs an explanation of how the loss payments would be allocated or billed to the benefitted agencies, as well as a statement or schedule showing the accounting treatment of these costs. We can find no such explanations or statements in the SWCAPs or the material supporting them. ⁽¹⁴⁾

We also find no merit to the State's other contentions. The State asserted that a 1995 Circular provision stating that the "[c]osts of central services omitted from the plan will not be reimbursed" refers to omitted services or activities, not to omitted cost amounts. DOA Brief at 28. This provision cannot be used to bar recovery of the unbilled costs, argued the State, because those costs were "risk management costs, and risk management was identified in the SWCAPs as a category of costs (that is, it was not an "omitted" service)." Id. We do not agree. Even if the quoted provision refers only to an omitted "service," it does not follow that a SWCAP need not include information about significant expenses related to the provision of an included service. Indeed, ASMB C-10 provides that with respect to internal service funds and other billed central services, a SWCAP must include, among other things, a statement of revenue and expenses "broken out by source" and "a schedule comparing total revenues (including imputed revenues) generated by the service to the allowable costs of the service." ASMB C-10, § 4.5.2. These requirements, and others that relate specifically to self-insurance funds (see ASMB C-10, ¶ 4.5.3), indicate that a State must not only identify the categories of expenditures associated with providing a central service but provide the information that will permit the federal government to determine the magnitude of those expenditures. ⁽¹⁵⁾

The State contended that actual expenditure amounts could not have been included in the approved SWCAPs because a SWCAP is typically prepared in advance of the fiscal year-end and necessarily is based on projected costs. DOA Brief at 28. In this case, the projected costs are embodied or reflected in billed premiums (which, in theory, partly reflect prior period cost experience). The existence of this billing and cost-identifying methodology begs the question of whether the loss payments should have been factored into billing rates or identified in the SWCAPs as a separate billable expenditure for the years in question. The SWCAP approval process is designed to ensure that the level or amount of costs to be claimed for certain services is identified to the extent it is known or can be reasonably estimated. Cf. ASMB C-10, ¶ 6.2.1 (discussing the basis for indirect cost rates as an estimate of future year costs). If an expenditure can be projected or estimated with reasonable certainty and accuracy at the time the plan is negotiated, then it ought to be specified, factored into a billing rate (if feasible), or, if a SWCAP is routinely based on a prior year's expenditures, included in the SWCAP that is based on those expenditures. In this case, the State has not demonstrated that reasonable estimates of the loss payments could not have been included in the SWCAPs for 1989, 1994, 1995, or 1996 -- the years in which the appropriations were made. Nor has it shown that those payments were identified, as section II costs, in the SWCAPs based on those years' expenditures (that is, included in the SWCAPs for 1991, 1996, 1997, and 1998).

The State asserted that the appropriations made to pay for insured losses should be treated as imputed premium payments covered by the SWCAPs. DOA Brief at 30, 35. Stating that "there is no federal interest that requires that the State pay risk management costs only from the Self-Insurance Fund for them to be treated as allowable costs," the State suggested that a refusal to recognize the loss payments as risk management costs under the approved SWCAPs "effectively would require ORM premiums to be paid through appropriations to the State agencies," rather than through direct expenditures from the general fund, and "would violate Louisiana's constitutional right to control its own fiscal affairs." Id. at 30-31 & n. 19. We do not agree. How the State structures its finances is not at issue. The issue, rather, is whether the federal government agreed, through the SWCAPs, to pay risk management costs not reflected in billed premiums. The State arguably may create and administer a self-insurance fund using any number or combination of financing and cost allocation methods and negotiate for federal reimbursement based on those methods. However, if an approved SWCAP indicates that the costs of a particular service will be incurred, funded, and measured according to specified methods and procedures, then only the costs incurred and funded in accordance with those methods and procedures may be claimed. Cf. 45 C.F.R. § 95.517 (a state may claim federal reimbursement for central service costs only in accordance with an approved cost allocation plan); Montana Dept. of Family Services, DAB No. 1266 (noting that section 95.517 is not a mere technical requirement, and that a SWCAP "ensures consistent treatment of costs, avoids duplicate claiming, and ensures that the methods used are reasonable for the time period they cover"). Here, the negotiated SWCAPs indicate that the State intended to recover its risk management costs through annual billed premiums, a funding method required by Louisiana statute. Regardless of how the State now characterizes the unbilled costs, ⁽¹⁶⁾ it has not shown that the SWCAPs put the federal government on notice, through a schedule of imputed revenue or some other means, that these costs might be claimed as section II risk management costs.

In short, the appropriations made in 1989-1996 to pay losses covered by the self-insurance fund were not identified or included in the relevant SWCAPs as section II costs. Consequently, they may not be claimed as risk management costs of the fiscal periods covered by those agreements.

b. The unbilled 1989-1998 costs may not be claimed as an adjustment to current or future self-insurance premiums.

Invoking section III.D of the SWCAPs, the State asserted that it may recoup the federal share of the unbilled section II costs through an adjustment to current or future billing rates (premiums) because those costs represent the variance between the premiums paid for self-insurance in fiscal years 1989-1996, and the actual costs of risk management in those years. DOA Brief at 35-36. For a number of reasons, we find that such an adjustment is not permitted under the cost principles.

Between 1991 and 2000, section III.D provided:

Charges for the services listed in Section II will be billed in accordance with rates established by the State/locality. These rates will be based on the estimated costs of providing the services. Adjustments for variances between billed costs and the actual allowable costs of providing services, as defined by OMB Circular A-87, will be made in accordance with procedures agreed to between the State/locality and the Cognizant Agency.

DOA AF Tabs 6-16.

Section III.D appears to authorize rate adjustments akin to the "carry-forward" adjustments applicable to allocated costs (see 1995 Circular, Att. C, ¶ G.3) and to the billing rate adjustments authorized by Attachment C, ¶ G.4 of the 1995 Circular. In each instance, the adjustment permits the State to seek or make compensation for the under-recovery or over-recovery of costs based on a SWCAP-approved rate. Because a SWCAP is typically negotiated prior to the fiscal year to which it applies, the approved rate or charge may be based on a prior year's costs or a projection of costs for the year under consideration. See OASC-10, at 14-15, 81; see also Kuigpagmiut, Inc., DAB No. 1780 (2001). When actual costs for the period covered by that rate become known, the difference between the actual costs and the estimated or predetermined costs (as reflected in the rate) is carried forward as an adjustment to the rate for some future period. OASC-10, at 81; New Jersey Dept. of Human Resources, DAB No. 1562 (1996).

OASC-10 indicates that carry-forward adjustments should be minimal and not be used to correct for unrealistic cost estimates. OASC-10, at 15 (noting that a "fixed with carry-forward" agreement cannot be used when there is widely fluctuating federal funding, a likelihood of organizational change, or a fluctuating level of operation which would make the projection of costs unrealistic); OASC-10, at 81 (indicating that a fixed rate "should be selected that will closely approximate the actual rate expected to be incurred," and that "[a]n accurate forecast will confine carry-forward amounts to minimal differences"). In addition, the Board has said that carry-forward provisions do not afford a state an open-ended or unconditional opportunity to recover costs years after they were incurred and may not otherwise be used simply to circumvent the two-year timely claims requirement in section 1132(a) of the Social Security Act. See New Jersey Dept. of Human Resources, DAB No. 1773 (2001); New Jersey Dept. of Human Resources, DAB No. 1562 (1996); New York State Dept. of Social Services, DAB No. 521 (1984), aff'd New York v. Sullivan, No. 92 Civ. 2832 (LMM), 1993 WL 266616 (S.D. N.Y. Apr. 7, 1993).

For the reasons that a billing rate adjustment is inappropriate under Attachment C, ¶ G.4, the use of a carry-forward adjustment to recoup the unbilled costs would be inconsistent with section III.D's purpose, which is to allow a state the opportunity to seek reimbursement in the current fiscal year for unanticipated or unexpected costs that were not factored into a prior period's billing rate. The State does not allege that the costs for which it seeks an adjustment -- the loss payments made with appropriated funds in 1989, 1994, 1995, and 1996 -- were unexpected or unforeseen when the SWCAPs for those years, or when the SWCAPs based on the costs for those years (i.e., the 1991, 1996-1996 SWCAPs), were being negotiated. Nor does it show that an adjustment would be designed to correct for the "variance" between billings for certain risk lines and the actual self-insurance costs for those risk lines.

In addition, the State has not acted with the diligence required by the cost principles. In general, absent a fixed time limit, a carry-forward or similar adjustment should be made within a reasonable time after the cost in question becomes known. Cf. OASC-10, at 81 (indicating that a carry-forward adjustments "generally will be carried forward to the second and third fiscal period following the period being adjusted"). Here, when the State requested the offset in February 2000, it had known about the unbilled costs for at least at least four and as many as eleven years. The State has offered no credible explanation for its failure to seek an adjustment before that time, and it does not allege that the delay is consistent with its schedule for updating or developing its premiums. ⁽¹⁷⁾ Moreover, any adjustments now would result in carried-forward costs being borne by a set or mix of programs that did not exist when the costs arose. Prompt adjustments ensure that the programs benefitted by the costs actually pay for them. See Michigan Dept. of Management and Budget, DAB No. 1811 (2002).

Conclusion

For the reasons above, we affirm the disallowance of the fiscal year 1997-2000 costs as well as DCA's demand for an immediate cash refund of $19.2 million. We also affirm DCA's determination that the unbilled fiscal year 1989-1998 costs are "currently nonreimbursable" because they were omitted from the 1989-1998 SWCAPs (which are now closed) and are not eligible to be claimed as an adjustment to current or future premiums.

Cecilia Sparks Ford

Judith A. Ballard

Donald F. Garrett
Presiding Board Member

1. ¹ A later revision (which is not relevant here) was published on August 29, 1997. See 62 Fed. Reg. 45934.

2. Attachment B, ¶ 25.d(1) of the 1995 Circular states that contributions to a reserve are allowable if "[t]he type of coverage and the extent of coverage and the rates and premiums would have been allowed had insurance (including reinsurance) been purchased to cover the risks."

3. According to the State, during fiscal years 1997-2000, ORM calculated the full, actuarially based premium for each agency and insurance line. However, because of "fiscal constraints," OPB selectively reduced the premiums calculated by ORM, designating the specific amount of premium each agency was to be charged. The reductions meant that some agencies did not pay the full actuarially determined premium calculated by ORM. In no fiscal year, said the State, did ORM charge an agency more than its actuarially determined premium for that year. See DOA Brief, Tab A, ¶ 14; DOA Reply Brief, Tab B, ¶ 12.

4. DCA stated in the determination letter that "[t]o charge fiscal year 1989 through 1998 costs against current federally-funded programs would violate appropriation law and requirements of A-87 in that these costs are clearly not current year costs." DOA AF Tab 1, at 2.

5. In Maine, we denied Maine's request to offset its debt with costs for which a reimbursement claim had not been filed. Permitting an offset in the absence of a claim, we said, "could potentially allow a grantee to circumvent time limits and recover costs which it would otherwise not be entitled to receive." Maine, DAB No. 1659, at 9.

6. See Licking County Economic Action Development Study, DAB No. 1159 (1990)(noting that repayment of a disallowance is a matter between the grantee and the affected program); New York City Human Resources Administration (despite the grantor's statement that the city could use more than one method to repay the disallowance, "the use of any method other than the return of the disallowed funds in cash would be solely at the discretion of the Agency"); Mississippi Dept. of Public Welfare, DAB No. 431 (1983)("The Board's powers over appeals and the appeals process do not authorize it to dictate how or when a disallowance is repaid").

7. DCA's choice of a repayment method under Attachment C, ¶ G.4 constitutes "informal agency action." Cf. Wisconsin Dept. of Administration, DAB No. 1766 (2001)(applying an abuse of discretion standard in reviewing DCA's refusal to waive a 60-day capital reserve limitation). We review such action to determine whether it was arbitrary, capricious, an abuse of discretion or otherwise not in accordance with the law. Id.

8. For internal service funds, such as a self-insurance fund, the allowable cost would include an amount sufficient to maintain adequate contingency or operating reserves. See 1995 Circular, Att. C, ¶ G.2.

9. To the extent that costs generate a profit for the service provider, they are unallowable. See ASMB C-10, § 1.6, Q&A 1-4; Idaho Dept. of Financial Management, DAB No. 1822 (2002).

10. As indicated, the State asserted that its programs were charged no more than the actuarially fair premium calculated by ORM. See DOA Brief, Tab A, ¶ 14; DOA Reply Brief at 9 and Tab B, ¶ 12.

11. The State suggested that the overcharges were unavoidable, a necessary response to a "severe budget shortfall." DOA Reply Brief, Tab B, ¶ 3. This circumstance does not justify violation of OMB Circular A-87's consistency requirement. Having chosen to establish a self-insurance fund and use a premium billing method as the means for determining and allocating costs, the State may not reasonably refuse to fund its share of the actuarially determined premiums.

12. To the extent that the loss payments in 1994-1996 were necessitated by the State's failure in previous years to fully finance the premiums budgeted by ORM, those losses were arguably ones that "could have been covered by self-insurance" or commercial insurance but were not. As such, they would not be allowable charges to the federal government. See 1995 Circular, Att. B, ¶ 25.c.

13. This addendum seems to indicate ORM was not charging premiums for the medical malpractice line between 1994 and 1996. Payments of medical malpractice losses constitute the bulk of the unbilled costs that would, under the State's repayment proposal, be used to offset the overcharges. See DCA AF Tab 10.

14. If, as the State contended, the loss payments were made with appropriated funds because losses were "in excess of reserves" within the meaning of the 1995 Circular, then the federal government's obligation to participate in those losses would have arisen only if (1) the State identified them in the SWCAP for the year in which they were paid (or in the SWCAP that was based on the costs for that year), or (2) the losses were factored into premiums charged in some future period in accordance with ORM's normal rate-setting process. Neither of these things happened.

15. Cost allocation plans are analyzed by the cognizant agency to determine, among other things, that the "level of costs incurred are reasonable." OASC-10, at 8 (emphasis added). We are not certain how DCA could have performed this analysis with respect to the State's risk management activities unless information about the substantial amount of unbilled costs was included in the SWCAPs or furnished to DCA during the negotiations for those agreements.

16. We are not persuaded that the loss payments made with appropriated funds can be fairly or accurately characterized as premium payments. For a given fiscal year, ORM presumably set its premiums at the level necessary to ensure that the fund had sufficient assets to absorb losses as they arose. There is no indication or evidence how (if at all) ORM factored the loss payments into its calculation and assessment of premiums for the fiscal years in which the appropriations were made (1989, 1994-1996).

17. In the past, ORM has used a three-year premium development cycle to reduce self-insurance fund deficits. See DOA AF Tab 28, at 33.