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CASE | DECISION | ANALYSIS | JUDGE | FOOTNOTES

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


SUBJECT: Maryland Department of Human Resources,
New York State Office of
Children & Family Services,
New Jersey Department of
Human Services, and
South Carolina Department of
Social Services

DATE: October 28, 2004

           
 


 

Docket No. A-03-87, A-03-83, A-04-14, and A-04-133
Decision No. 1949
DECISION
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DECISION

This decision addresses a common legal issue raised by four states in their appeals of disallowances by the Administration for Children and Families (ACF) of federal funding claimed under title IV-E of the Social Security Act (Act). The disallowances resulted from "primary" reviews of State compliance with the IV-E eligibility requirements. In addition to disallowing claims for foster care maintenance payments made in cases that ACF identified as not meeting eligibility requirements, ACF disallowed claims for administrative costs that it determined were associated with these cases. The common legal issue raised by the States is whether ACF has authority to disallow administrative costs associated with ineligible cases that are identified in a primary review.

The Maryland Department of Human Resources (Maryland) requested reconsideration of a Board decision that resolved this issue in ACF's favor. Maryland Dept. of Human Resources, DAB No. 1886 (2003). The appeals of the New York State Office of Children & Family Services (New York), the New Jersey Department of Human Services (New Jersey), and the South Carolina Department of Social Services (South Carolina) were, with the parties' consent, consolidated with Maryland's request for reconsideration in order to ensure consistent treatment of the common legal issue. (1)

The dispute here arises out of the process ACF now uses to review whether states have erred in determining that foster care children (and their placements) were eligible for title IV-E foster care maintenance payments. The process regulations provide for primary and secondary reviews. When a primary review identifies eligibility errors, the disallowance will be taken only "on the basis of individual cases" in the review sample. A secondary review can lead to a disallowance based on extrapolation from a sample to the universe of state claims for the review period. The States did not dispute that when ACF identifies eligibility errors in a primary review, it may disallow maintenance payments claimed under IV-E as a result of those errors. Based on the language of the regulations, however, the States argued that ACF may not disallow claims for associated administrative costs.

Under the title IV-E statute and regulations, however, FFP is available in administrative costs only if they are properly allocated to IV-E using approved allocation methods. Such methods necessarily rely on case counts of eligible IV-E children or similar ways of associating those costs to IV-E. Thus, the States' errors in determining eligibility potentially resulted in improperly allocating to title IV-E administrative costs not properly considered IV-E costs. Since the statute contemplates that ACF will adjust for overpayments of FFP to states, the States could have no reasonable expectation that they could retain FFP in such unallowable costs unless the process regulations clearly precluded ACF from exercising its authority to disallow such costs.

No provision of the process regulations suggests that ACF intended to waive its authority to disallow administrative costs pursuant to a primary review. Even if a technical correction pertaining to secondary reviews introduced an ambiguity in the regulation as the States argued, ACF clarified its policy in a simultaneous issuance specifying that disallowances based on primary reviews would include administrative costs associated with ineligible cases. There is no evidence that the States relied on any contrary interpretation of the regulation to their detriment, or that ACF itself had a contrary interpretation at any time.

Accordingly, for reasons explained more fully below, we affirm our conclusion in Maryland regarding this common legal issue.

The record in this case includes the States' consolidated brief and appeal file, ACF's response to the consolidated brief, and the transcript of an oral argument held on August 24, 2004. In addition, it includes the record for DAB No. 1886, as well as the submissions related to Maryland's request for reconsideration of that decision that were made before that case was consolidated with the other States' appeals.

Statutory and Regulatory Background

Section 472(a) of title IV-E, as amended by the Adoption and Safe Families Act of 1997, Public Law No. 105-89, provides that states with approved IV-E plans shall make foster care maintenance payments with respect to a child in foster care who would have been eligible for Aid to Families with Dependent Children under title IV-A (as in effect as of June 1, 1995) if the child had not been removed from the home pursuant to a voluntary placement agreement or as a result of a judicial determination meeting certain requirements.

Under section 474(a)(1) of the Act, federal funding is available for amounts expended by states as "foster care maintenance payments under section 472 for children in foster family homes or child-care institutions." In addition, section 474(a)(3) authorizes federal funding for "amounts . . . found necessary by the Secretary . . . for the proper and efficient administration of the State plan." These amounts include expenditures for training (section 474(a)(3)(A) and (B)), for state-wide mechanized data collection and information retrieval systems (section 474(a)(3)(C) and (D)), and for unspecified expenditures (section 474(a)(3)(E)). Section 1356.60(c) of 45 C.F.R. states in part:

Federal matching funds for other State and local administrative expenditures for foster care and adoption assistance under title IV-E. Federal financial participation is available at the rate of fifty percent (50%) for administrative expenditures necessary for the proper and efficient administration of the title IV-E State plan. The State's cost allocation plan shall identify which costs are allocated and claimed under this program.

The remainder of section 1356.60(c) identifies costs that are deemed allowable administrative costs (section 1356.60(c)(1)), lists examples of other types of allowable administrative costs (section 1356.60(c)(2)), and identifies certain costs that do not constitute allowable administrative costs (section 1356.60(c)(3)).

The title IV-E regulations were amended on January 25, 2000 (with a March 27, 2000 effective date) and implemented certain provisions of the Adoption and Safe Families Act of 1997. The amended regulations set out a new process for review of state compliance with IV-E child and provider eligibility requirements. ACF found that the former process "allowed for the recovery of funds by ACF" but "did not necessarily lead to correcting the deficiencies identified by reviewers." 63 Fed. Reg. 50,058, 50,081 (Sept. 18, 1998) (preamble to proposed regulation). Under the new process, 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 during a primary review must submit a program improvement plan (PIP) and, after completion of the PIP, is subject to a secondary review of a larger sample of cases. Id. Section 1356.71(j) provides in pertinent part:

(j) Disallowance of funds. The amount of funds to be disallowed will be determined by the extent to which a State is not in substantial compliance with recipient or provider eligibility provisions of title IV-E, or applicable regulations in 45 CFR parts 1355 and 1356.

(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 been determined to be ineligible. (2)

The phrase "including administrative costs" in the penultimate sentence above was added to the regulations as part of "technical corrections" published on November 23, 2001. 66 Fed. Reg. 58,672, 58,677.

An initial primary review found each State in noncompliance, and ACF disallowed claims for FFP in foster care maintenance payments in individual cases found to be ineligible. In addition, ACF disallowed FFP in administrative costs it determined were associated with those individual cases, the disallowances at issue here. According to ACF, the methodology it used to calculate these disallowances "included only those categories of administrative costs that would not include costs expended even in part on ineligible cases . . . ." ACF Br. at 6. Thus, ACF excluded the categories of eligibility determinations, pre-placement planning, and Statewide Automated Child Welfare Information System (SACWIS) operational costs because these costs are allowable not only if the activities are performed for IV-E-eligible children but also if they are performed for candidates for IV-E. (3) Id.

The Maryland Decision

In its prior decision in Maryland, the Board addressed Maryland's contention that the disallowance of its administrative costs must be reversed because the second sentence of section 1356.71(j)(2) expressly provides for the disallowance of administrative costs associated with cases found to be ineligible during a secondary review, whereas the first sentence of that section does not mention administrative costs in providing for a disallowance pursuant to a primary review. The Board concluded that the placement of the phrase "including administrative costs" only in the second sentence of section 1356.71(j)(2) does not have the significance Maryland attributed to it and that the regulations "cannot reasonably be read to preclude a disallowance of administrative costs associated with sample cases determined to be ineligible during a primary review." DAB No. 1886, at 8-9. The Board noted that the preamble to the final regulation published on January 25, 2000 states 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), and that a similar statement appears in the preamble to the technical corrections. DAB No. 1886, at 8-9. In addition, the Board found that it was clear from a statement in ACF's Title IV-E Foster Care Eligibility Guide that ACF intended to disallow administrative costs associated with ineligible sample cases identified in a primary review. DAB No. 1886, at 9.

The Board further concluded that "the mere absence of a specific provision [in the title IV-E regulations] stating that certain costs will be disallowed does not undercut this Department's general authority" in section 474(b)(2) of the Act to adjust for any overpayment that is made to a state in a prior quarter. DAB No. 1886, at 9. The Board also cited as authority for the disallowance 31 U.S.C. § 1301(a), which states that "[a]ppropriations shall be applied only to the objects for which the appropriations were made . . . ," concluding that this "basic principle of appropriations law" requires that "title IV-E funds must be used for title IV-E purposes." DAB No. 1886, at 9. The Board pointed out that section 474(a) of the Act provides for funding for expenditures "found necessary by the Secretary . . . for the proper and efficient administration of the State plan" and went on to explain that-

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 . . .) 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.

DAB No. 1886, at 10.

Finally, the Board relied on applicable government-wide cost principles which 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 . . . ," and that 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." DAB No. 1886, at 10, quoting 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 Board stated that "[t]o 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." DAB No. 1886, at 10. The Board ultimately concluded 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." DAB No. 1886, at 2. Since the record did not contain a copy of Maryland's cost allocation plan or any information regarding the bases in the plan for distributing administrative costs to title IV-E, the Board remanded the case to ACF to recalculate the disallowance consistent with the cost allocation plan.

In essence, the Board found in Maryland that there was statutory authority, as well as regulatory authority other than section 1356.71(j), for the disallowance of administrative costs pursuant to a primary review. The Board concluded that ACF therefore properly disallowed such costs unless ACF had determined that it would not exercise this authority. The Board rejected Maryland's argument that section 1356.71(j)(2) represented such a determination in light of evidence that ACF consistently interpreted the statute and regulations to permit a disallowance.

The States' challenge to DAB No. 1866

In these consolidated cases, the States disputed the Board's conclusion in Maryland regarding ACF's authority to disallow administrative costs pursuant to a primary review. The States argued principally that the Board erred in concluding that section 1356.71(j)(2) did not represent a determination by ACF to allow states to retain federal funds paid for administrative costs associated with ineligible cases identified pursuant to a primary review. The States maintained that the plain language of the regulation precludes a disallowance of such costs. They further argued that the statutory and other regulatory authorities on which the Board relied in Maryland do not require repayment of the disallowed administrative costs because ACF recognized that states need the funds for other IV-E administrative costs. In addition, the States argued that the Board erred in relying on the Review Guide and the preambles to the final regulation, all of which they asserted were unclear. The States maintained, moreover, that the fact that ACF initially disallowed only foster care maintenance payments (and not administrative costs) after primary reviews in 17 states showed that ACF originally interpreted section 1356.71(j)(2) as precluding the disallowance of administrative costs. The States took the position that this "contemporaneous interpretation" carried more weight than conflicting subsequent interpretations.

ANALYSIS
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We start from the premise that, since administrative costs associated with ineligible cases are not allowable costs, FFP for those costs constitutes an overpayment under section 474(b)(2) of the Act. Below, we first explain why we conclude that the States are not entitled to retain the overpayments merely because they may have other unclaimed administrative costs. We next explain our conclusion that, even if the Secretary has authority to permit states to retain some FFP for unallowable costs, the regulation at section 1356.71(j)(2) is not a determination that ACF should be precluded from disallowing federal funds paid for administrative costs associated with ineligible cases nor does this regulation reflect a determination that states may retain such funds. Finally, we explain our conclusion that, to the extent that there was an ambiguity in the regulation, ACF clarified its intent in its November 2001 Review Guide and never had a contrary interpretation, and that, in any event, there was no evidence that the States relied on any contrary interpretation to their detriment.

1. FFP for the administrative costs constitutes an overpayment that must be repaid pursuant to section 474(b)(2) of the Act.

As indicated earlier, in Maryland, the Board relied on the provision in section 474(a) authorizing payment of administrative costs found necessary by the Secretary for the proper and efficient administration of the State plan, on the general authority in section 474(b)(2) of the Act to adjust for any overpayment that is made to a state in a prior quarter, on the principle in 31 U.S.C. § 1301(a) that funds must be used for the purpose for which they are appropriated, and on the requirement in the government-wide cost principles that costs be properly allocated. The States took the position that these authorities are not a proper basis for disallowing the administrative costs in question, however. The States did not dispute that administrative costs claimed for some activities listed in section 1356.60(c) as IV-E activities but which are related to ineligible cases are not allowable IV-E costs. (4) However, the States took the position that, having received payments for these unallowable administrative costs, they were entitled to keep the payments.

Specifically, the States argued that section 474(b)(2) "is sufficiently broad so as to permit the Secretary to allow a State to keep what might in other circumstances be considered an overpayment for use during a subsequent quarter if the Secretary in doing the estimate finds that the funds are needed for future expenses." States' Br. at 48. The States maintained that such future expenses could properly include the cost of implementing a program improvement plan (PIP), which is required by the regulations where a state is found noncompliant during a primary review. (5) The States also maintained that a state could retain the funds it received for otherwise unallowable administrative costs to offset other allowable administrative costs if a state did not have a PIP. Tr. at 32. Consequently, the States asserted, permitting a state to retain these funds does not violate 31 U.S.C. § 1301(a) "because the funds continue to be used for the purpose for which they were appropriated, title IV-E administration." States' Br. at 49. (6)

The States' argument is tantamount to saying that a state may substitute presumably allowable expenditures that have not yet been claimed for already claimed expenditures that have been determined to be unallowable. (7) The Board has previously held that such an action is generally not permissible because it runs afoul of the requirement that a state must support its claims with documentation that is related in both subject matter and in amount to the claims made in the state's Quarterly Expenditure Report. If, as would be the case here, the documentation supporting the unclaimed costs does not relate to the existing claim, the state in effect has made a new claim. See, e.g., New York State Dept. of Social Services, DAB No. 1827 (2002), and decisions cited therein. A state could not simply retain an overpayment in lieu of filing a new claim, however, since this could potentially allow a grantee to circumvent the requirement in section 1132 of the Act that a claim be filed within two years of the end of quarter in which the expenditures claimed were incurred, and thus recover costs which it would otherwise not be entitled to receive. Id.; Maine Department of Administrative and Financial Services, DAB No. 1659 (1998), and decisions cited therein. (8) Moreover, the States' argument is entirely speculative, since the States did not assert that they had in fact incurred other expenditures that would be allowable under title IV-E.

The States also argued that section 474(b)(2) of the Act does not require that otherwise unallowable administrative costs be repaid since it provides that the amounts paid by the Secretary shall be reduced to the extent of "any" overpayment rather than all overpayments. Tr. at 32. Arguably, the Secretary has the authority to provide by regulation that ACF will refrain from disallowing certain amounts that might otherwise be considered overpayments if this would promote administrative efficiency. Cf. section 1102 of the Act (giving the Secretary general rulemaking authority); Florida Dept. of Health and Rehabilitative Services, DAB No. 1520, at 12 (1995) ("while the Secretary may have the discretion to establish payment tolerance error rates, the Secretary is not required to do so. See California v. Settle, 708 F.2d 1380 (9th Cir. 1983), involving the Medicaid program; and Maryland Dept. of Human Resources v. Dept. of Health and Human Services, 762 F.2d 406 (4th Cir. 1985), involving the AFDC program."). If the Secretary did exercise such authority, however, one would expect the regulations to clearly specify this and the preamble to explain the rationale. (9) This is especially so if the Secretary had intended to permit FFP in administrative costs associated with ineligible cases since, to be allowable, administrative costs must be found by the Secretary to be necessary for the proper and efficient administration of the State plan. As indicated below, however, the plain language of the regulation does not provide that ACF will not disallow otherwise unallowable administrative costs, nor is the regulatory history dispositive.

The States argued in addition that the administrative costs did not constitute overpayments because ACF calculated only the "average cost," rather than the actual cost, per child. States' Br. at 36. This is at heart an argument about the accuracy of the methodology used to calculate the disallowances. Since that is an issue reserved for separate proceedings, we do not address it here.

Accordingly, the Board correctly concluded in Maryland that FFP for the administrative costs constitutes an overpayment that must be repaid under section 474(b)(2) of the Act.

2. The plain language of section 1356.71(j)(2) does not preclude the disallowance of administrative costs pursuant to a primary review.

The States pointed out here, as Maryland did in the proceedings leading to DAB No. 1886, that, although the second sentence of section 1356.71(j)(2) expressly refers to administrative costs (in the phrase "including administrative costs"), the first sentence of section 1356.71(j)(2) does not. The first sentence of that section describes the basis for computing a disallowance where a state is found in noncompliance during a primary review. Since all four of the States were found in noncompliance, this provision is applicable here. (However, although the States treated the phrase "including administrative costs" as if it were part of the regulation during all the relevant time periods, the phrase was added to section 1356.71(j)(2) after the review period in Maryland (April 1 through September 30, 2001).) The States argued that ACF deliberately omitted a reference to administrative costs from the first sentence, reflecting its intent not to disallow administrative costs pursuant to a primary review. (10) It does not necessarily follow from the use of this phrase in one place and not the other that this was ACF's intent. Instead, the placement of the phrase "including administrative costs" in the description of how disallowances based on secondary reviews will be extrapolated from a sample may have been driven by the fact that the amount of such a disallowance can be quite large, sometimes leading states to question the methodology used to calculate the disallowance. ACF may have been attempting to avert some questions about its methodology by specifically stating in the second sentence of section 1356.71(j)(2) that the universe for the extrapolation would include administrative costs. This would explain why ACF labeled the addition of this phrase merely a technical correction. In any event, the placement of this phrase at most introduces an ambiguity into the regulation since the regulation does not specifically state that ACF will not disallow administrative costs pursuant to a primary review.

The States also relied on language in the first sentence of section 1356.71(j)(2) stating that disallowances will be determined "on the basis of individual cases reviewed and found to be in error . . . ." The States argued that this language requires that a disallowance be linked to individual children. Thus, the States reasoned, this language encompasses only the disallowance of foster care maintenance payments, which are made on behalf of individual children, not administrative costs, which are claimed on the basis of a cost allocation plan pursuant to 45 C.F.R. § 1356.60(c).

The States' assumption that only foster care maintenance payments can be linked to individual children is flawed, however. Most of the activities listed in section 1356.60(c) as giving rise to allowable administrative costs are case-related (e.g., case planning and management). Theoretically, some of these costs could be directly identified with individual cases if caseworkers kept detailed time records, but this would be costly and time-consuming. Other costs might be harder to tie to individual cases, although one can roughly estimate the percentage of the costs that are fairly attributable to IV-E cases. Thus, states are permitted to allocate these kinds of administrative costs using cost allocation methodologies that provide an equitable means of associating the costs to particular cases or groups of cases, and therefore to particular programs. This is the object not only of case count methods (which allocate certain costs according to percentages derived from comparing cases identified with a particular program to all of the cases of a particular type such as foster care), but also of other methods, such as random moment time studies (which associate caseworker costs with programs by determining what activity a caseworker is engaged in at any moment). To the extent that a cost allocation plan uses a case count method as a basis for allocating administrative costs among programs, every case identified by a state as IV-E eligible results in allocating additional administrative costs to the IV-E program. Moreover, if a random moment time study bases allocation on what case the caseworker is working on during the random moment and if the caseworker is working on a IV-E eligible case, this would result in an allocation of costs to the IV-E program. Accordingly, administrative costs claimed in accordance with a cost allocation plan are linked to individual cases in this sense. The broad reference in section 1356.71(j)(2) to costs claimed "on the basis of" each case therefore suggests that disallowances would include costs that could not be directly identified with ineligible cases, not that ACF is precluded from disallowing administrative costs. (11)

There is also a simpler explanation than that advanced by the States for the language "individual cases reviewed and found to be in error" in the first sentence of section 1356.71(j)(2). This language pertains specifically to disallowances taken where states are found in noncompliance during the primary review. Significantly, this language is absent from the second sentence of section 1356.71(j)(2), describing disallowances taken where states are found in noncompliance during the secondary review. That sentence states that, for such states, "an additional disallowance will be determined based on extrapolation from the sample to the universe of claims paid . . . ." Thus, the language "on the basis of individual cases reviewed and found to be in error" may simply be used to distinguish a disallowance comprised of amounts associated with the sampled cases themselves from a disallowance based on an extrapolation.

The States also relied on language in the second sentence of section 1356.71(j)(1) stating that the amount of disallowance will be computed "on the basis of payments associated with ineligible cases . . . ." Section 1356.71(j)(1) describes how the disallowance is determined where the state is found in substantial compliance during a primary review. The States asserted that this phrase should be read into the provision in section 1356.71(j)(2) regarding disallowances for states found in noncompliance during a primary review. Tr. at 23-24. (For purposes of this decision, we assume that this reading is correct.) The States took the position that "payments" refers to the term "foster care maintenance payments," which is defined in 45 C.F.R. § 1355.20 as "payments made on behalf of a child eligible for title IV-E foster care to cover the cost of (and the cost of providing) food, clothing, shelter, daily supervision, school supplies, a child's personal incidentals, liability insurance with respect to a child, and reasonable travel for a child's visitation with family, or other caretakers . . . ." The States argued that since this definition does not include costs incurred by a state in administering the title IV-E program, section 1356.71(j)(1), and by extension, section 1356.71(j)(2), does not contemplate a disallowance of administrative costs. The States also argued (citing the rule of construction "expressio unius est exclusio alterius") that in referring to foster care maintenance payments and not to the other categories of IV-E costs eligible for reimbursement - administration, training and SACWIS, the regulation evidences ACF's intent not to disallow any of the latter costs. Tr. at 25-26, 97.

We are not persuaded that the word "payments" necessarily refers to "foster care maintenance payments" as defined by section 1355.20, however. Part 1356 of the regulations is replete with references to "foster care maintenance payments." Thus, if ACF intended section 1356.71(j)(1) to refer to "foster care maintenance payments," it could have used that term instead of referring to it in an abbreviated way in this one instance. As used in section 1356.71(j)(1), "payments" likely refers more generally to the federal share of IV-E funds paid to a state since that is what the federal government must recover through a disallowance. These payments are not only for expenditures for foster care maintenance payments but also for any types of costs eligible for IV-E funding, including administrative costs. Contrary to what the States argued, that ACF did not disallow any training or SACWIS costs pursuant to primary reviews does not mean that "payments" includes only payments for foster care maintenance costs. As ACF pointed out, it could reasonably choose not to disallow costs such as training or SACWIS which were less directly related to ineligible cases than administration. Tr. at 98-99.

Moreover, even assuming that "payments" refers to "foster care maintenance payments," the regulation does not state that only such payments will be disallowed, but rather that the disallowance will be "on the basis of payments associated with ineligible cases . . ." (emphasis added). The States' reading of this broad language as limiting disallowances to foster care maintenance payments is thus unreasonable. Like the reference in section 1356.71(j)(2) to costs claimed "on the basis of" each case, this language suggests instead that disallowances would include costs that could not be directly identified with ineligible cases.

Accordingly, we are not persuaded that the plain language of section 1356.71(j)(2) precludes the disallowance of administrative costs pursuant to a primary review. (12) The States are therefore reduced to relying on a mere inference that ACF intended to exclude administrative costs from disallowances resulting from primary reviews, based on the technical correction specifically including administrative costs in the universe of claims for disallowances based on extrapolation in secondary reviews. Such an inference is simply not a reasonable one in light of the statutory and regulatory provisions discussed above.

3. ACF's November 2001 Review Guide gave the States adequate and timely notice of ACF's interpretation of section 1356.71(j)(2).

We further conclude that ACF could properly disallow administrative costs associated with ineligible cases pursuant to a primary review since the States had adequate and timely notice that ACF interpreted section 1356.71(j)(2) as authorizing such a disallowance. Although section 1356.71(j)(2) does not specify that the calculation of the disallowance after a primary review will include administrative costs, the language of the regulation is broad enough to encompass such a disallowance. Moreover, ACF's interpretation of the regulation is consistent with the statutory and regulatory authorities discussed in the preceding section. ACF's interpretation is therefore reasonable. In general, the Board has held that where a statute or regulation is subject to more than one interpretation, the federal agency's interpretation is entitled to deference as long as the interpretation is reasonable and the grantee had adequate and timely notice of that interpretation or, in the absence of notice, did not reasonably rely on its own contrary interpretation. See Alaska Dept. of Social and Health Services, DAB No. 1919, at 14 (2004), citing Louisiana Department of Health and Hospitals, DAB No. 1772 (2001), and Community Action Agency of Franklin County, DAB No. 1581 (1996). (13) Thus, if ACF gave the States adequate and timely notice that it read the regulation as contemplating the disallowance of administrative costs pursuant to a primary review, we will apply that interpretation.

ACF took the position that it gave adequate notice of its interpretation of section 1356.71(j)(2) in its November 2001 Title IV-E Foster Care Eligibility Review Guide (States' Ex. 7), which was issued at the same time as the technical correction to section 1356.71(j)(2). (14) As the Board noted in Maryland, the Review Guide states 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." States' Ex. 7, at 6. This statement, which appears in a section of the Review Guide captioned "Disallowances," expresses ACF's intent to disallow precisely the type of costs in question here.

The States argued, however, that the Review Guide did not give adequate notice "because of the lack of clarity as to which of the two reviews it was addressing and the omission of the precise methodology . . . ." States' Br. at 14. We disagree. We see no reason why the Review Guide needed to set out a methodology for calculating a disallowance of administrative costs in order to clearly communicate to states that ACF intended to disallow administrative costs pursuant to primary reviews. Moreover, even if the Review Guide contains some general guidance applicable to both primary and secondary reviews, the language quoted above from the "Disallowances" section of the Review Guide clearly delineates the situations that may give rise to a disallowance, and specifies that administrative costs may be disallowed pursuant to a primary review where a state is found in noncompliance.

The States also claimed the Review Guide did not give adequate notice of ACF's interpretation because the following language from a section of the Review Guide captioned "Steps in the Review Process" does not contain any reference to administrative costs:

States 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 will enter into a PIP and undergo a secondary review of 150 cases.

States' Ex. 7, at 8. However, this wording is not significant in light of the express statement in the "Disallowances" section of the Review Guide that administrative costs will be disallowed pursuant to a primary review where a state is found noncompliant. (Moreover, as discussed earlier with respect to section 1356.71(j)(2), the language "on the basis of individual cases reviewed" does not limit disallowances to foster care maintenance payments.)

In addition, the Glossary at the end of the Review Guide leaves no doubt as to ACF's intent, stating under the definition of "Noncompliance":

. . . . For States found not to be in substantial compliance during the primary reviews, a disallowance will be assessed on the basis of payments associated with error cases for the total of the title IV-E foster care maintenance payments made during the entire period that these cases are in error. Administrative costs associated with the error cases will be disallowed.

States' Ex. 7, at 25-26.

The States also noted that the 2001 Review Guide did not require states to provide information "concerning the administrative activities on any of the individual cases it reviewed," while requiring information on the payment history of each sample case. States' Br. at 32. The States argued that this indicated that ACF did not intend to disallow administrative costs pursuant to a primary review. Such a conclusion is not reasonable in light of the express statements in the Review Guide regarding the disallowance of administrative costs. Moreover, as the States elsewhere recognized, the information they said should have been collected if ACF intended to disallow administrative costs--on administrative activities for individual cases--did not exist. In any event, the purpose of requesting a complete payment history for the sample cases was in part to enable ACF to identify "duplicate payments, overpayments, erroneous payments and related fiscal issues" during the review. ACF Br. at 26, citing 65 Fed. Reg. at 4020, 4071. No such issues arise with respect to administrative costs. Thus, ACF could have reasonably decided to wait until after the review to obtain information necessary to calculate a disallowance of administrative costs associated with ineligible cases.

The States also asserted that the 2001 Review Guide was not entitled to any weight since there were inconsistencies in other "iterations of the 'Review Guide' and its appendices." States' Br. at 2. The States pointed out that a document dated June 2000 does not refer to the disallowance of administrative costs, and that a document dated April 2003 requires the computation of only amounts of ineligible maintenance payments. (In fact, there is no reference at all to disallowances in the former document.) However, the documents on which the States relied are checklists and instructions intended for use in the field rather than as guidance on ACF disallowance policy. Thus, the lack of any comprehensive statement in these documents with respect to the treatment of administrative costs is not significant.

The States also took the position that, although a May 2003 document finally clarified ACF's interpretation, it was not intended to be applied retroactively. The States cited the following sentence in the document: "Refer to the instruction for calculating administrative cost disallowances and formula calculation spreadsheet for initial and primary reviews issued June 2, 2003." States' Ex. 9, at 20. This appears to be a reference to the new, uniform methodology for calculating administrative cost disallowances that ACF was in the process of developing. It does not address the issues of whether or how ACF would calculate disallowances for prior periods.

The States further argued that the interpretation in ACF's 2001 Review Guide is not entitled to deference because after primary reviews in 17 states (including New Jersey) conducted during federal fiscal years 2000 through 2002, ACF initially disallowed foster care maintenance payments for ineligible cases without disallowing administrative costs. States' Br. At 9, citing States' Ex. 1 (Declaration of Jane Eichelberg, ¶6). The States alleged, and ACF did not dispute, that ACF did not take steps to disallow administrative costs for any of the 17 states until the summer of 2003. States' Br. at 10; Tr. at 8. (According to the States, ACF imposed the later disallowances "for purposes of defending against the New York appeal" since it took this action only after New York's notice of appeal requested a list of the states for which ACF had disallowed foster care maintenance payments but not administrative costs. States' Br. at 10, n.3.) The States maintained that this was evidence of a prior, conflicting interpretation which made deference to the interpretation in the 2001 Review Guide inappropriate under relevant case law. States' Br. at 27, citing Watt v. Alaska, 451 U.S. 259, 273 (1981) and INS v. Cardoza-Fonseca, 480 U.S. 421, 446, at n.30 (1987) (An agency's contemporaneous interpretation of a relevant provision which conflicts with the agency's earlier interpretation is "entitled to considerably less deference" than a consistently held agency view). The States made essentially the same point when they argued that the Board should draw an adverse inference from the fact that ACF did not provide any information from the regional offices explaining their "omission" of administrative costs, and should presume that the reason ACF did not provide such information (which was within ACF's control) was that "ACF understood the regulation to mean that the disallowance was for maintenance costs only." Tr. at 27.

That some regions took disallowances of foster care maintenance payments and did not simultaneously take any action to disallow associated administrative costs based on primary reviews is not convincing evidence of a prior, conflicting interpretation by an authorized official, however. The States provided no direct evidence that any region had specifically addressed the issue of administrative costs and determined to omit such costs from their disallowance calculations. The regions' inaction can just as reasonably be attributed to a simple failure to think about the impact on administrative costs of finding individual cases to be ineligible or to difficulties in determining how to calculate the associated administrative costs, as to any ACF policy not to take such disallowances. (15)

In addition, ACF asserted, and the States did not dispute, that prior to May 2003, disallowances of administrative costs occurred in eight of its ten regions (although, within some regions, there were some disallowances that did not include administrative costs and some that did). ACF Br. at 12; Declaration of Paul Kirisitz (enclosed with ACF Br.), ¶2. The lack of consistency among and within regions undercuts any inference that the failure to disallow administrative costs pursuant to some primary reviews reflected ACF policy not to disallow these costs.

Moreover, while regional officials may be authorized to take disallowances, the States did not argue that these officials had the authority to set policy for ACF, nor (despite extensive discovery) did the States uncover any written ACF policy not to disallow administrative costs associated with ineligible cases found during primary reviews. Even if, as the States suggested, there was Central Office approval of the regional office disallowances, we have no basis for concluding that the Central Office reviewers considered the issue of whether additional disallowances should be taken, as opposed to simply reviewing whether the disallowances proposed by the regions were supportable.

Indeed, inferring that ACF had a policy to allow costs based solely on its failure to disallow those costs would be inconsistent with section 474(a)(3) of the Act, which authorizes IV-E funding only for specific types of administrative costs or administrative costs found by the Secretary to be necessary for the proper and efficient administration of the State plan. Inaction cannot reasonably be viewed as an affirmative finding that costs are necessary for this purpose.

Since there is no evidence that ACF had a prior, inconsistent interpretation, it is of no consequence here that ACF treated different states differently with respect to whether administrative costs were initially disallowed pursuant to a primary review. See, e.g., National Behavioral Center, Inc., DAB No. 1760 (2001); Edison Medical Laboratories, Inc., DAB No. 1713 (1999); Rural Day Care Association of Northeastern North Carolina, DAB No. 1489 (1994) (allegations of disparate treatment, even if true, do not prohibit an agency of this Department from exercising its responsibility to enforce statutory requirements).

We therefore conclude that ACF's 2001 Review Guide provided adequate notice to the States that ACF interpreted the regulation to permit it to exercise its authority (set out elsewhere) to disallow administrative costs pursuant to a primary review. We will apply this reasonable interpretation provided that the notice was timely. The States pointed out that the Review Guide was issued after the review period in Maryland, thereby suggesting that the notice was not timely as to that State. (16) We disagree that Maryland or any other State lacked timely notice, however. As indicated by our earlier discussion, administrative costs associated with ineligible cases would ordinarily be treated as overpayments that must be repaid. The States raised the question here whether the authorities that the Board found required this treatment (sections 474(a) and 474(b)(2) of the Act, 31 U.S.C. § 1301(a), and the applicable cost principles) were, in effect, superseded by section 1356.71(j)(2). As discussed earlier, however, the States' interpretation that ACF intended to exclude administrative costs from disallowances pursuant to primary reviews derives its only plausible support from the technical correction specifically including administrative costs in the universe of claims for disallowances based on extrapolation in secondary reviews. At virtually the same time the technical corrections were published, however, the Review Guide was issued. (The technical corrections were published on November 23, 2001, with the same effective date. 66 Fed. Reg. 58,672. The transmittal for the Review Guide was dated November 30, 2001 and was addressed to all state agencies administering title IV-E programs. The States did not dispute that they received the Review Guide on or about the date of its issuance.) Since the Review Guide was issued as soon as there was any plausible basis for the States' interpretation of section 1356.71(j)(2), the Review Guide gave the States timely notice that section 1356.71(j)(2) contemplated the disallowance of administrative costs pursuant to a primary review.

In any event, as indicated above, the Board has held that it will apply a federal agency's reasonable interpretation even in the absence of timely notice where the grantee fails to show that it relied on its own contrary, reasonable interpretation. Here, the States did not allege, much less point to any evidence, that any State had a contrary interpretation during the relevant time period. Moreover, there is no indication in the record that any State would not have incurred the administrative costs in question had it realized that ACF intended to disallow administrative costs associated with ineligible cases based on a primary review, or would otherwise have relied to its detriment on ACF's interpretation. Thus, we would apply the interpretation in the 2001 Review Guide even if the States did not have timely notice of that interpretation.

Accordingly, we conclude that ACF properly disallowed the administrative costs in question here based on the interpretation of section 1356.71(j)(2) in ACF's 2001 Review Guide.

Conclusion

For the foregoing reasons, we conclude that ACF was authorized to disallow administrative costs associated with cases identified as ineligible for IV-E payments based on a primary eligibility review. We leave for resolution in separate proceedings questions as to the allowability of the particular administrative costs disallowed here by ACF.

JUDGE
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Daniel Aibel

Donald F. Garrett

Judith A. Ballard
Presiding Board Member

FOOTNOTES
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1. New York appealed ACF's June 2, 2003 determination to disallow $806,011 claimed as federal financial participation (FFP) under title IV-E, of which $304,104 constitutes administrative costs. New Jersey appealed ACF's October 1, 2003 determination to disallow $93,402 FFP, which consisted solely of administrative costs. (ACF issued a separate determination disallowing solely foster care maintenance payments which was reversed in part and upheld in part in New Jersey Dept. of Human Services, DAB No. 1797 (2001).) South Carolina appealed ACF's June 21, 2004 determination to disallow $149,601 FFP, of which $29,195 constitutes administrative costs.

2. Language similar to the first paragraph of section 1356.71(j) appears in section 1356.71(h)(1), providing that "[d]isallowances will be taken . . . based on the extent to which a State is not in substantial compliance . . . ."

3. As the Board indicated in Maryland, we have previously recognized that some administrative activities may be necessary for the proper and efficient performance of the State plan if performed for candidates for IV-E. DAB No. 1886, at 13-14, citing New York State Dept. of Social Services, DAB No. 1428 (1993), and Missouri Dept. of Social Services, DAB No. 844 (1987).

4. The States did raise questions about whether the particular amounts disallowed here represented unallowable administrative costs (as well as questions about the methodology used to calculate the disallowances) which will be addressed separately from this decision.

5. The States argued that ACF's alleged determination not to disallow administrative costs pursuant to a primary review could be explained as a recognition by ACF that states would need the funds to offset the increase in administrative costs in implementing a PIP. States' Br. at 48-49. However, the States indicated that there was no "quid pro quo" (Tr. at 31), which we take to mean that the States were not claiming that Congress or ACF specifically authorized states to use funds claimed for otherwise unallowable administrative costs to implement their PIPs.

6. The States also noted that the purpose of the government-wide cost principles is, by their own terms, "determining allowable costs only," not "to identify the circumstances or to dictate the extent of Federal and governmental unit participation in the financing of a particular Federal award." Id. at 51, n.26, quoting OMB Circular A-87, ¶5 ("Policy"). However, this language refers to the fact that most government programs require some cost-sharing, and simply means that the cost principles do not provide for funding all allowable costs.

7. Contrary to the States' suggestion, this situation is not analogous to the situation where a grantee may use equipment acquired with federal funds in the program for which it was acquired even after the program is no longer supported by federal funds, or, if the equipment is no longer needed in that program, in other activities currently or previously supported by federal funds. See 45 C.F.R. § 92.32(c). Unlike here, there is no question in that situation that federal funds were originally used for grant purposes.

8. The Board has recognized that such an offset is nevertheless permitted pursuant to specific statutory authority (consistent with the exception in 31 U.S.C. § 1301(a)). See, e.g., Iowa Dept. of Human Services, DAB No. 1874 (2003) (while Congress authorized states to use AFDC overpayment recoveries for other AFDC payments, there was no authority to use such overpayment recoveries for unclaimed TANF costs once the AFDC program was abolished). The States did not claim that there was any such statutory authority here.

9. The States asserted that the fact that a penalty for nonconformity based on a child and welfare services review is suspended during a program improvement period (and may never be collected) shows that ACF is not always required to disallow overpayments of FFP. Tr. at 82. However, there is specific statutory authority for the suspension of this type of penalty. See section 1123A(b)(4)(C) of the Act. No such authority exists with respect to overpayments of FFP identified as a result of an eligibility review. Moreover, section 1356.71(j) clearly contemplates that disallowances will be taken as a result of primary reviews, regardless of the need for or results of a program improvement period.

10. The States originally cited in support of this argument the rule of construction "expressio unius est exclusio alterius," i.e., "the expression of one thing is the exclusion of others." States' Br. at 26. As ACF pointed out, however, this rule is not applicable here since "there is no series of two or more items from which the Secretary has made a deliberate choice to omit an item as a signal of its exclusion." ACF Br. at 10, citing Chevron U.S.A. Inc. v. Echazabal, 536 U.S. 73, 80-81 (2002). At the oral argument, the States did not pursue this argument, although, as discussed below, they relied on the same rule of construction in support of another argument.

11. The issue addressed here is separate from that raised by the States' argument that the "average monthly cost per child" methodology used by ACF to calculate the disallowances did not accurately identify the unallowable administrative costs associated with ineligible cases. We will address the latter issue in separate decisions after further proceedings (except in the case of Maryland since DAB No. 1886 remanded this issue to ACF). However, to the extent that the States intended to suggest that, because the administrative costs were claimed in accordance with a cost allocation plan, there is no reasonable way to identify the costs associated with ineligible cases, we reject that suggestion here.

12. The States also argued that the regulatory history is dispositive even if the language of the regulation is not. The States argued that the "total absence . . . of the word 'administrative costs'" from an extended discussion of section 1356.71(j) in the preamble to the notice of proposed rulemaking (at 63 Fed. Reg. 50,058 (Sept. 18, 1998)) meant that ACF did not originally intend to disallow administrative costs pursuant to a primary review. States' Br. at 42. The States then reasoned that since ACF had "limited authority to expand the scope of the final rule beyond the issues presented for public comment in the [proposed rule]," the express statement that "administrative costs . . . will be disallowed" in the preamble to the January 2000 final regulation, as well as a similar statement in the preamble to the November 2001 technical corrections, could not have referred to disallowances of administrative costs pursuant to a primary review. States' Br. at 45, quoting 65 Fed. Reg. 4020, 4022. However, ACF's silence regarding administrative costs in the preamble to the proposed regulation does not clearly signify that ACF did not intend to disallow such costs pursuant to a primary review. Indeed, the text of the proposed regulation provides that a disallowance will be "assessed . . . for the ineligible cases" (63 Fed. Reg. 50058, 50097), which is also broad enough to include costs that cannot be directly identified with ineligible cases. (We comment later on ACF's reliance on the language in the preamble to the final regulation.)

13. The States argued that, under Christensen v. Harris County, 529 U.S. 576 (2000), the interpretation of a federal agency in issuances such as opinion letters, policy statements, agency manuals, and enforcement guidelines, all of which lack the force of law, is not entitled to deference, but "only the respect they have by their 'power to persuade'." States' Br. at 28, quoting Christensen at 587; see also Tr. at 10. As the Board has previously indicated, however, the standard the Board applies in determining the degree of deference due to an interpretation of a regulation is for all practical purposes the same standard that the States maintained is applicable here under Christensen. See Oklahoma Health Care Authority, DAB No. 1924, at 11 (2004).

14. ACF further contended that the express statements regarding the disallowance of administrative costs which appear in the preambles to the January 25, 2000 final regulation and the November 23, 2001 technical corrections also provided the requisite notice. The Board cited these preamble statements in Maryland (at pages 8-9) since they are general enough to cover any review. However, these statements do not definitively show that ACF provided adequate notice of its interpretation to the States since, as the States pointed out, the statements appear as part of discussions of secondary reviews.

15. The States cited two court decisions for the proposition that "when an agency's divisions have different interpretations of a regulation, the courts have held that the regulation does not provide adequate notice . . . ." Tr. at 28, citing General Electric Company v. United States EPA, 53 F.3d 1324, at 1332 (D.C. Cir. 1995), and Rollins Environmental Services v. EPA, 937 F.2d 649 (D.C. Cir. 1991). These decisions are inapposite here since we conclude that there is no evidence of disagreement within the agency as to the proper interpretation of a regulation.

16. The Review Guide indicates that disallowances would cover "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" (emphasis added). Thus, while Maryland's review period was before the date of the Review Guide, some of Maryland's disallowed administrative costs may have been incurred after that date. Conversely, although the review periods in New York, New Jersey and South Carolina were after the date of the Review Guide, some of these States' disallowed administrative costs may have been incurred before that date.

CASE | DECISION | ANALYSIS | JUDGE | FOOTNOTES