Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Arkansas
Disability DATE: October 14,
1993
Determination for Social Security Administration
Audit
Control Nos. A-06-87-00076 A-06-93-21677 Docket
Nos.
A-93-162 and A-93-198 Decision No. 1443
DECISION
The Arkansas Disability Determination for Social Security
Administration
(Arkansas) appealed two determinations of the Social
Security
Administration (SSA) disallowing certain amounts claimed by Arkansas
for
providing eligibility determination services to the social
security
program under titles II and XVI of the Social Security Act. In
the
first determination, SSA disallowed interest in the amount of
$44,320
earned between May 1983 and September 1987 on federal funds which
were
drawn down by Arkansas in order to pay administrative costs of
making
the disability determinations. SSA also disallowed $12,000 paid
by
Arkansas in satisfaction of a judgment entered in a personal
injury
claim based on an Arkansas employee's negligence. See Arkansas
Brief
(Br.), Tabs A, B, C and D. In the second determination, SSA
disallowed
interest in the amount of $4,500 earned between October 1987
and
September 1988 on federal funds which were drawn down by Arkansas
in
order to pay administrative costs of making the
disability
determinations. 1/
For the reasons stated below, we uphold the disallowance in full.
We
find that Arkansas was accountable to the federal government
for
interest earned on funds drawn down to pay disability
determination
costs under applicable statutes, regulations, and cost
principles. We
further find that Arkansas' payment in satisfaction of a
judgment
entered in favor of a former disability applicant was not an
allowable
cost under applicable program guidelines and cost principles.
ANALYSIS
Titles II and XVI of the Social Security Act provide benefits to
eligible
persons who are unable to engage in any type of substantial
gainful activity
due to a long-term or terminal physical or mental
impairment which is
medically determinable. Social Security Act, ..
216(i)(1) and
1614(a)(3). States which perform disability
determinations under titles
II and XVI of the Social Security Act under
contract with SSA are
periodically audited by SSA to determine whether
the state's administrative
expenditures for the program, which are paid
by SSA, were consistent with
cost principles contained in the Federal
Procurement Regulations (FPR) and
written guidelines in effect at the
time the expenditures were
incurred. 20 C.F.R. .. 404.1626(e) and
416.1026(e) (1988). In
addition to the cost principles contained in the
Federal Procurement
Regulations, cost principles applicable to contracts
and grants with state
and local governments which were in effect during
the time covered by this
disallowance are those contained in Office of
Management and Budget (OMB)
Circular (Cir.) A-87. 2/
I. Interest Earned on Funds Drawn Down to
Pay Administrative Costs
of Making Social Security Disability Determinations
Must Be Refunded to
the Federal Government.
Arkansas did not deny the underlying factual findings upon which
the
interest portion of the disallowances was based. Arkansas admitted
that
the interest earned was the result of a requirement under Arkansas
law
that funds be available for payment prior to Arkansas starting
the
payment process, thus making it necessary for Arkansas to draw
down
funds prior to paying administrative costs under the programs.
Arkansas
Br. at 2. Arkansas admitted that the money in question was
deposited in
an interest-bearing account, that interest accrued on the funds
in
question, and that the interest accrued to the State of Arkansas and
not
to the SSA account.
Both the FPR and OMB Circular A-87 provide that a cost must be "net of
all
applicable credits" in order to be allowable. See OMB Cir. A-87,
Att.
A, . C.1.g.; 41 C.F.R. . 1-15.703-1(g) (1983). These provisions
define
applicable credits as "those receipts or reduction of
expenditure-type
transactions which offset or reduce expense items
allocable to grants as
direct or indirect costs." OMB Cir. A-87, Att.
A, . C.3.a.; 41 C.F.R. .
1-15.703-3(a) (1983). 3/ In a variety of
factual situations which the
Board has considered, the Board
consistently has held that interest earned on
federal funds is an
applicable credit which must be used to offset program
costs. See,
e.g., Pennsylvania Office of the Budget, DAB No. 1234
(1991) (interest
earned on funds invested for self-insurance); Tennessee
Dept. of Human
Services, DAB No. 1054 (1989) (interest earned on collected
child
support funds); Wisconsin Dept. of Health and Social Services, DAB
No.
623 (1985) (interest earned on Medicaid provider refunds).
In
particular, the Board has held that interest earned on federal
funds
advanced for social security disability determinations constitutes
an
applicable credit which must be accounted for to the federal
government.
See, e.g., West Virginia Division of Vocational Rehabilitation,
DAB No.
869 at 3 (1987); New York State Dept. of Social Services, DAB No. 910
at
5, n.4 (1987), affirmed following remand DAB No. 1186 (1990),
affirmed
on reconsideration Docket No. 90-198.
Moreover, the Program Operations Manual System (POMS) for the
social
security disability program expressly provides for the
quarterly
reporting of interest earned on federal funds and for
appropriate
adjustments to cash based on that interest earned. POMS .
39506.857.
Arkansas argued that this section is not applicable here because
the
Arkansas state treasury, and not Arkansas itself, received the
earned
interest. Arkansas Br. at 3. However, a subdivision of the
state which
performs disability determinations on behalf of the state acts as
an
agent of the state, and the subdivision is therefore bound to
comply
with all federal requirements which the state accepted as a
direct
obligation of its receiving federal funds to administer a
disability
review program. This includes the obligation to account for
interest
earned on the federal funds. See West Virginia at 5.
Arkansas argued that it was not required to account for the interest
to
the federal government, citing section 74.47(a) of 45 C.F.R. and
the
Intergovernmental Cooperation Act (ICA), 31 U.S.C. . 6503(a)
(1983).
Id. Arkansas Br. at 2. Section 74.47(a), which contains
uniform
requirements for most HHS grants, specifically states that, except
where
exempted by federal statute, grantees shall remit to the
federal
government any interest or other investment income earned on advances
of
HHS funds. Arkansas argued that it was exempted by federal statute
from
paying interest to the federal government because the ICA, for
the
applicable time period, stated in pertinent part that "[a] state is
not
accountable for interest earned on grant money pending its
disbursement
for program purposes." See Arkansas Br. at 3-4; 31 U.S.C.
. 6503(a).
The language of section 6503(a) in effect during the relevant time
period
exempts a state from accounting for interest earned on grant
money. SSA
Br. at 6. The ICA specifically provides that a grant does
not include
--
a payment to a State or local government as
complete
reimbursement for costs incurred in paying benefits or
providing
services to persons entitled to them under a law of the
United
States.
31 U.S.C. . 6501(4)(C)(vii) (1983). The Board has previously found
that
funds advanced to states for making disability determinations
under
titles II and XVI of the Social Security Act fall squarely within
this
exclusion from the definition of "grant." See West Virginia at 2,
n.2;
New York, DAB No. 910 at 4. The funds that accrued interest here
were
funds designed to reimburse Arkansas for its administrative costs,
not
funds advanced to pay or to provide services to beneficiaries.
Thus,
the interest earned on the advanced funds here was not earned on
grant
funds within the meaning of the ICA, and the ICA therefore would
not
exempt Arkansas from being held accountable to the federal
government
for the interest under section 74.47(a). 4/
Arkansas also argued that the passage of the Cash Management
Improvement
Act of 1990 (CMIA) subsequent to the Board's holdings that
interest was
an applicable credit under the cost principle provisions
indicated that
the Board was mistaken in these previous holdings.
Arkansas Br. at 2-3.
The CMIA amended the ICA to provide that states must pay
interest on
funds from the time they are deposited in a state's account until
the
time funds are paid by the state for federal program
purposes.
Likewise, states are entitled to interest payments from the
federal
government if they advance their own monies for federal program
purposes
until such time as they receive federal reimbursement. 5/
Arkansas
argued that there would have been no reason to enact such a law
had
interest already been considered a credit for which a state
was
accountable to the federal government. Arkansas Br. at 3.
However, the CMIA and its legislative history do not discuss the
credit
provisions of OMB Circular A-87 or the FPR. Rather, the
legislative
history refers specifically to the ICA and the manner in which
it
allowed states to retain interest on grant funds under previous
law.
See H.R. Rep. No. 696, 101st Cong., 2d Sess., (September 13, 1990) at
5,
reprinted in 1990 U.S.C.C.A.N. 1691, 1693. It is clear that the
CMIA
was intended to amend the interest provisions of the ICA and not
to
address the credit provisions of the more generally-applicable
cost
principles. Arkansas failed to recognize the section of the
ICA
(discussed supra) which clearly excluded the type of interest at
issue
in this matter from the interest exclusion provisions of the ICA.
Thus,
passage of the CMIA had no effect on the type of interest at issue
here.
For the above reasons, we find that SSA properly required Arkansas
to
account for interest earned on funds advanced for the social
security
disability program, and we uphold the disallowances of interest.
II. Funds Paid in Settlement of a Personal Injury
Claim are Not
Allowable Costs Under the Program.
In 1985, Arkansas paid $12,000 to satisfy a judgment to a
former
disability claimant following a finding by the Arkansas
Claims
Commission that the negligence of an Arkansas employee caused
personal
injury to the former claimant. See generally Arkansas Br. at
4-5; Tabs
B and L. The injury occurred as a result of erroneous
evidence being
placed in the claimant's disability determination file
indicating that
the claimant had a serious heart condition when in fact he
did not.
This resulted in the claimant being awarded benefits on a false
basis
and in the claimant dropping out of the workforce for several
years,
thus reducing his future employability. Id., Tab L at 1.
When the
error was ultimately discovered, the claimant successfully brought
an
action before the Arkansas Claims Commission. Id. SSA
disallowed the
$12,000 payment to the former claimant on the grounds that it
was not an
allowable cost under the guidelines applicable to the grant.
We agree with SSA that this payment was not an allowable cost under
the
disability program. The POMS provides that --
[a]n appropriate share of the cost to the State agency
of
protecting the State agency against financial responsibility
for
injury to person or property is properly charged to the
SSA
disability program when such expenses are in the form
of
premiums for public liability or property damage insurance.
The
cost of awards, judgments, or settlements arising from injury
to
person or property are not chargeable to SSA.
POMS . 39518.225(B) (emphasis in original). This provision is
similar
to the more broadly applicable sections of OMB Circular A-87,
which
provide that costs of insurance are allowable to the extent that
they
are approved by the grantor agency or are within the general
state
government policy and sound business practice. OMB Cir. A-87,
Att. B, .
C.4. Section C.4. further provides 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.
Id., Att. B, . C.4.d.
Arkansas argued that, due to the circumstances of the injury, POMS
section
39518.225(B) was not applicable on the grounds that "[i]t is
doubtful that
such liability insurance would have applied in this
instance." Arkansas
Br. at 4. Arkansas did not elaborate on why
liability insurance would
not have covered this type of occurrence or
injury. Arkansas argued
that POMS section 39518.227 applied instead.
This section provides that the
federal government, and not the State
agency performing disability
determinations, is responsible for
defending court challenges to disability
determinations and related
procedures brought under sections 205(g) and
1631(c)(3) of the Social
Security Act. Arkansas Br. at 5, citing POMS .
39518.227(A).
We find that SSA is correct that POMS section 39518.225(B) is
applicable
to this matter. That section states explicitly that a state
can charge
an appropriate share of the cost of public liability insurance to
the
SSA disability program, but that SSA will not be responsible for
awards,
judgments or settlements arising from personal injuries occurring
under
the program. Arkansas has not provided the Board with any
evidence that
public liability insurance to protect against employee error
was not
available to it, particularly in light of the fact that
section
39518.225(B) specifically contemplates that a state will obtain
this
type of insurance. 6/
Moreover, we do not agree with Arkansas that POMS section
39518.227(A)
applies here. This provision is contained in a section
titled,
"Substantive Challenges to Determinations or Procedures." On
its face,
section 29518.227(A) is clearly intended to address situations
where
states apply federal regulations and procedures in specific cases
to
reach determinations, and those determinations are challenged as
being
in error. Arkansas suggested that this section was applicable
because
it was the faulty procedure applied by Arkansas which allowed the
error
and resulting injury to occur in this case. Arkansas Br. at
4-5.
However, the Arkansas Claims Commission found that the injury
occurred
due to the negligence of Arkansas. It did not find that the
injury was
caused by the state applying faulty procedures. Id., Tab L at
1.
Therefore, there was no challenge to the procedures which were
applied
and no reason to invoke the provisions of this section.
Moreover, the section states that it applies to actions brought
under
sections 205(g) and 1631(c)(3) of the Social Security Act, which
involve
challenges in federal district court to findings made regarding
a
person's eligibility for benefits. It does not apply to cases such
as
this where an action was brought for personal injury before a
state
claims commission. In the case at hand, the claimant was not
asserting
that he had been wrongly denied benefits to which he was
entitled. In
fact, he had been receiving benefits for which he may or
may not have
been otherwise entitled. Rather, the claimant was arguing
that he had
been emotionally injured, as well as disadvantaged in the
workforce, by
the placing of erroneous information in his disability
file. See
Arkansas Br., Tab L at 4-6.
Throughout section 39518 of the POMS, which addresses general
personnel
matters within the scheme of the disability program, it is evident
that
the federal government is only financially responsible for
resolving
matters where there is a federal interest. There is a
distinct federal
interest in defending challenges to the results of
particular
determinations, as well as defending challenges to federal
regulations
and procedures which could have widespread implications for the
program.
However, throughout section 39518, it is clear that the state
is
required to assume the responsibility and liability for the actions
of
state employees. 7/ For instance, section 39518.227(C) provides
that
the state is responsible under the regulations for such matters
as
providing training and employing qualified personnel. Consequently,
it
is the state that is in the best position to prevent the type of
injury
that occurred in this case.
For the above reasons, we find that the $12,000 paid to a
former
disability claimant as a result of a judgment of the Arkansas
Claims
Commission is not an allowable cost under the program.
CONCLUSION
We uphold the disallowances of $44,320 in interest earned between May
1983
and September 1987; $4,500 in interest earned between October 1987
and
September 1988; and $12,000 paid to satisfy a judgment entered by
the
Arkansas Claims Commission in a dispute with a former
disability
claimant.
____________________________
Donald
F. Garrett
___________________________
Norval
D. (John) Settle
_____________________________
M.
Terry Johnson Presiding
Board
Member
1. The first determination, which was based on an audit
covering
1977-1987, is Docket No. A-93-162. The second determination,
which was
based on an audit covering 1987-1988, is Docket No. A-93-198.
At
Arkansas' request, with which SSA acquiesced, these matters
were
consolidated by the Board.
2. The FPR were repealed effective April 1, 1984. They were
replaced
with the Federal Acquisition Regulations, which designate OMB Cir.
A-87
as the governing cost principles for contracts with state
governments.
Therefore, the FPR are only applicable to part of the time
period at
issue in the first disallowance while OMB Circular A-87 is
applicable to
the entire period of both disallowances. See 48 C.F.R. .
31.602 (1987).
3. As Arkansas pointed out, while both provisions list examples
of
applicable credits, neither lists interest. Arkansas Br. at
2.
However, the Board has held that the list of applicable credits is
not
exhaustive. E.g., Oregon Dept. of Human Resources, DAB No. 1298 at
9
(1992).
4. We also find that section 74.47(a) is not applicable to
this
matter. Part 74 is applicable to grants to states, rather than
to
negotiated agreements to provide services as under the
disability
program. See West Virginia at 2, n. 2.
5. These provisions are effective July 1, 1993 or the first day
of a
state's fiscal year beginning in 1993, whichever is later. See
31
U.S.C. . 6503 (1993 supplement).
6. Arkansas has offered no evidence that public liability
insurance is
prohibited under Arkansas law or is otherwise not available to
cover
this type of occurrence or injury, nor has Arkansas shown that it
cannot
self-insure.
7. In addition to section 39518.225(B) addressing state
liability
insurance, section 39518.227(B) states that the state
disability
determination agency and its employees are considered to be
independent
contractors rather than agents of the federal government; thus,
the
state agency and not the federal government is liable for claims
filed
against the agency or its employees under the Federal Tort
Claims