Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Washington Department of Social and Health Services
DATE: April 23, 1991
Docket No. 90-207
Decision No. 1245
DECISION
The Washington Department of Social and Health Services (State) appealed
a
decision of the Division of Cost Allocation, Department of Health and
Human
Services, Region X (Agency), disallowing $283,659.48 in federal
financial
participation (FFP) for design and development costs
associated with the
acquisition of automated data processing (ADP)
services. The State
charged federal programs with an allocated share of
project development costs
for the period May 1, 1987 through November
30, 1990. 1/ The Agency
determined that claims for FFP for the
Financial Reporting Module (FRM) of
the State's Accounting Systems
Project (ASP) were unallowable because prior
federal approval for the
acquisition of automatic data processing services
for design and
development of the system had not been obtained pursuant to
Subpart F of
45 C.F.R. Part 95.
For the reasons stated below, we uphold the Division of Cost
Allocation's
disallowance of $283,659.48.
I. Regulatory Authority
Department regulations at Subpart F of 45 C.F.R. Part 95 describe
the
conditions under which the Department will approve FFP at the
applicable
rates for the costs of ADP equipment and services under an
approved
State plan under Titles I, IV-A, IV-B, IV-D, IV-E, X, XIV, XVI, and
XIX
of the Social Security Act. 45 C.F.R. 95.601. 2/
The regulations define "automatic data processing services" as:
(b) Services provided by . . . State and local
organizations
other than the State agency to perform such tasks as
feasibility
studies, system studies, system design efforts, development
of
system specifications, system analysis, programming and
system
implementation.
45 C.F.R. 95.605 (1987).
The provision in Subpart F concerning the conditions for prior
approval
states:
95.611 Prior approval conditions.
(a) General-Acquisition requirement. A state shall obtain
prior
written approval from the Department, as specified in
paragraph
(b) of this section, when it plans to acquire ADP equipment
or
services with proposed FFP at the regular matching rate that
it
anticipates will have total acquisition costs of $200,000
or
more in Federal and State funds over a twelve-month period,
or
$300,000 or more in Federal and State funds for the
total
acquisition. . . .
(b) Specific prior approval requirements. The State
agency
shall obtain written approval of the Department: (1) For
the
advance planning document or any change of the
advance
planning document prior to entering into
contractual
agreements or making any other commitment
for
acquisition of ADP equipment or ADP services . . . .
45 C.F.R. 95.611(a) and (b). 3/
The regulations further provide that the conditions of Subpart F
(which
would include the prior approval requirements of section 95.611)
apply
notwithstanding the existence of an approved cost allocation
plan. 45
C.F.R. 95.631.
II. Factual Background
The State initially submitted an advance planning document (APD) to
the
Agency in September, 1986 in order to "seek [HHS] approval for
federal
financial participation" for the design and development costs of
ADP
equipment and services for the ASP. Agency Exhibit (Ex.) A, p.
1. The
object of the ASP was to "develop a systems design which will
integrate
the data and processing functions of the various accounting
processes."
Agency Ex. B, p. 3. No action was taken on this APD by the
Agency since
the State did not respond to questions posed by the Agency about
the
project. Agency Ex. C. The State instead proceeded with the
ASP design
efforts without federal approval. Agency Ex. D, p. A-1.
The subject of the present dispute involves the development of a
component
of the ASP, entitled the "Financial Reporting Module" (FRM).
The APD stated
that the ASP is "a total replacement of the ADP functions
as they relate to
the DSHS accounting systems." Agency Ex. D, p. B-1.
The FRM is the
first module of the ASP to be implemented. The basic
purpose of the FRM
is to replace the current system's reporting routines
with new formats,
improved access, and the ability for users to design
unique reports without
major disruption in the present system's data
entry, accumulation, and
manipulation functions. Agency Ex. D, p. B-4.
The design and development phase of the FRM began on May 1, 1987, and
the
FRM was targeted to become operational on October 1, 1989. Agency
Ex.
D, pp. E-5, G-3. However, the APD for this project was not
submitted to
HHS until April 25, 1989. Agency Ex. D. The State's
transmittal
letter stated that the APD was submitted in accordance with
45 C.F.R. Part
95, for approval of the APD for the operational costs of
the FRM. The
transmittal also stated that "this APD is submitted for
FFP on only the
operational costs of the new system commencing on
October 1, 1989." The
State transmittal further indicated that the
submission of the APD for
operational costs was not a change in the
State's position that the "federal
government has no authority, under 45
C.F.R Part 95, to mandate APDs for
systems used in general
administrative functions," but the APD was
submitted to safeguard
operational FFP. State Ex. F. The APD for
operational costs of the FRM
was approved on July 7, 1989. State Ex.
G.
The ASP/FRM APD indicated that the State had not received prior
approval
for the developmental costs and that the FRM was developed
without
federal funds. Agency Ex. D, p. A-1. However, in
reviewing the ASP/FRM
APD for operational costs, the Agency discovered that
despite the
statement in the APD, the State in fact had been charging
federal
programs for design and development costs of the FRM since the
inception
of the project. State Ex. G. The Agency informed the
State that the
claims for the developmental costs for the FRM must be
withdrawn because
the State had not requested and obtained prior approval for
an APD and,
therefore, had not received the necessary prior approval from the
Agency
for the developmental costs.
On February 15, 1990, the Region X Division of Cost Allocation
Director
disallowed all the ASP/FRM developmental costs charged to
federal
programs. State Ex. J. The State requested
reconsideration by the
Regional Director. The Regional Director
affirmed the disallowance and
the State appealed the disallowance to the
Board.
III. Discussion
A. The applicable regulations require specific prior
approval
of the advance planning document for the ASP/FRM in order
to
receive FFP for ADP services.
There is no dispute that the State proceeded with the ASP/FRM
project
without the prior written approval by HHS of the APD for the
ADP
services necessary for the design and development of the FRM.
Moreover,
there is no dispute that the total acquisition cost of the ADP
services
allocable to the public assistance programs exceeded $300,000 in
federal
and state funds. The State, however, argued that the
provisions of
Subpart F of 45 C.F.R. Part 95 are not applicable to the system
design
and development costs of the ASP/FRM because the ASP/FRM is a
general
administrative accounting system for the State agency, which
renders
financial reporting for the operation of all the departmental
programs.
The State contended that under the provisions of Office of
Management
and Budget (OMB) Circular A-87, Attachment B, Part B, section 1,
which
was incorporated into HHS regulations at 45 C.F.R. 74.171, the costs
of
establishing and maintaining accounting and other information
systems
required for the management of grant programs are allowable without
the
specific prior approval of the grantor. 4/ The State argued that
since
the ASP/FRM was an accounting system, these costs were allowable
without
prior approval under the OMB Circular. 5/
The State argued, in effect, that the OMB Circular A-87
provision
regarding the allowability of costs for accounting systems should
govern
here instead of the Department regulations at Subpart F of 45
C.F.R.
Part 95. The State's arguments, however, ignore the regulation
that
determines when the cost principles in 45 C.F.R. Part 74 should
apply.
That regulation, 45 C.F.R. 74.4(a), provides that Part 74
(which
necessarily would include all cost principles made applicable by
Part
74) "applies:"
Except where inconsistent with Federal statutes, regulations,
or
other terms of a grant . . . .
This provision therefore recognizes that a particular provision of
the
cost principles in OMB Circular A-87, incorporated into Part 74 at
45
C.F.R. 74.171, will not apply where there is an inconsistency
with
applicable statutes and regulations.
In this instance, the specific costs in question are for automatic
data
processing services for designing and developing an automatic
data
processing system capable of performing the necessary accounting
tasks
for the State agency. Agency's Ex. B, p. 3. The APD for the
ASP/FRM
clearly describes the development of an automatic data processing
system
including the creation of data elements, the design of the subsystem
and
general system, and the development of the programs. Agency Ex. D,
p.
G-3. The APD indicated that the State plans to:
Develop and implement a hybrid system of front-end
subsidiary
applications coupled with an enhanced version of
AFRS/TAS
(Agency Financial Reporting System/Treasury Accounting System)
.
. . .
Agency Ex. D, p. C-3. The APD further explains the
functional
requirements of the system as:
The systems must be capable of operating in a real-time,
on-line
input/output mode . . .
The systems must be capable of full integration and
be
compatible with existing and planned DSHS ADP systems
and
hardware. . . .
Agency Ex. D, p. D-1. The APD, thus, confirms that the primary
tasks
involved in developing the ASP/FRM involve the design, development
and
modification of automatic data processing programs.
Under the regulations at 45 C.F.R. 95.611, a state must obtain
specific
prior approval in writing from the Agency for acquisition of
ADP
services or equipment meeting the applicable threshold in
acquisition
costs. Clearly, the services described in the APD fit the
definition of
ADP services in 45 C.F.R. 95.605, and, indeed, the State did
not dispute
that it was contracting with the State central data processing
center to
perform system studies, systems design efforts, and development
of
system specifications as well as system programming and
implementation.
Thus, we conclude that based on explicit requirements stated
in Subpart
F of 45 C.F.R. Part 95, the State was required to obtain prior
approval
of an APD for its ASP/FRM and that even if a provision of OMB
Circular
A-87 were inconsistent with this requirement, it would not apply.
6/
The State cited prior Board decisions as support for its position that
the
OMB Circular provisions should apply here in lieu of Subpart F of 45
C.F.R.
Part 95. The State has clearly misinterpreted these decisions,
however,
which in fact support the Agency's position. In South Carolina
Dept. of
Social Services, DAB No. 256 (1982), the Board concluded on
page 5 that the
"costs of development and implementation of the MMIS
[Medicaid Management
Information System] required prior approval, even
if part of the system was
an accounting system." This decision in any
event could not support the
State's position since it relied on
requirements that predated the
promulgation of Subpart F of 45 C.F.R.
Part 95. Second, in South
Carolina Dept. of Social Services, DAB No.
303 (1982), the Board specifically
determined that 45 C.F.R. 95.611,
which had come into effect just prior to
the time period involved in
that dispute, required prior approval for a
contract for ADP services
even though a system might have attributes of an
accounting system. 7/
Contrary to the State's argument, the Board did not
construe the
provisions of 45 C.F.R. 95.611 to favor OMB Circular A-87,
Attachment B,
Part B, section 1. Rather, the Board merely explained as
a subsidiary
matter that, if 45 C.F.R. 95.611 had not been promulgated, the
contract
would still require prior approval as automatic data processing
costs
under OMB Circular A-87, Attachment B, Part C, section 1, as was
found
in the first South Carolina case.
Thus, we find that this disallowance was properly based on the
prior
approval requirements of Subpart F of 45 C.F.R. Part 95.
B. Subsection (f) of the definition of "service agreement" at
45
C.F.R. 95.605 does not obviate the need for prior approval here.
The State also argued that subsection (f) of the definition of
"service
agreement" in 45 C.F.R. 95.605 obviates the requirement for
prior
approval under section 95.611(a) for the ADP services at issue
here.
Subsection (f) is one of several subsections detailing the contents of
a
service agreement between the State or local central data
processing
facility (the provider) and the state agency administering a state
plan
under various titles of the Social Security Act.
Specifically,
subsection (f) provides that a service agreement must require
that the
provider obtain prior approval under section 95.611(a) whenever
it
acquires ADP equipment or services from commercial sources primarily
to
support the Social Security Act programs. It then goes on to
provide
that equipment or services primarily support the public
assistance
programs when the programs may reasonably be expected to be billed
50
percent of the total charges made to all users or to be directly
charged
the total cost.
The State argued that since the services at issue were provided under
a
service agreement and since the Social Security Act programs were
not
expected to be billed 50 percent of the total charges for the
services
acquired by provider, neither the provider nor the State agency
needed
to obtain prior approval under section 95.611(a).
The State here clearly misconstrued the effect of subsection (f) and
its
relationship to the prior approval requirements in section
95.611(a).
Subsection (f) sets out the circumstances where the provider will
have
to obtain prior approval for ADP equipment and services that it
obtains
from commercial sources when the provider in turn will be providing
that
equipment and services to the state agency administering
public
assistance programs through a service agreement. This
requirement is a
separate, additional requirement imposed on the provider and
in no way
obviates the requirement that the state agency obtain prior
approval
under section 95.611(a) when the state agency acquires ADP services
or
equipment that meet the threshold requirements.
Thus, even if the provider does not have to obtain prior approval
under
subsection (f) for the acquisition of ADP services from
commercial
sources, the state agency still must do so under section 95.611(a)
when
it obtains ADP services from the provider and the threshold
requirements
in section 95.611(a) apply. The regulations essentially
are addressing
two different acquisitions where different considerations may
apply in
determining whether prior approval is justified. Under the
State's
interpretation of subsection (f) of the definition of
"service
agreement," a state could avoid the prior approval requirement
for
acquisitions that greatly exceed the thresholds in section 95.611
merely
because the equipment and services were acquired as part of a
service
agreement and the public assistance programs were expected to be
charged
less than 50 percent of the costs. As we have indicated
previously,
section 95.611(a) sets out the rules for prior approval for
the
acquisition of ADP equipment and services, and these rules apply to
the
State through its State agency whenever threshold acquisition
amounts
apply.
C. Prior approval of the State agency's cost allocation
plan
does not constitute prior approval of the ADP services costs.
The State also argued that it obtained prior approval of the ADP
costs
pursuant to approval provisions in 45 C.F.R. 74.177 because the
design
and development costs for the ASP/FRM were included in the
State
agency's 1985-1987 cost allocation plan, which had been approved by
HHS.
We do not agree. The regulation at 45 C.F.R. 95.631 provides that
the
conditions of Subpart F apply notwithstanding the existence of
an
approved cost allocation plan. Consequently, any approval of a
cost
allocation plan could not substitute for the prior approval
requirements
of Subpart F, and the provisions of 45 C.F.R. 74.177 would not
apply.
Moreover, section 74.177 discusses specifically the
approval
requirements arising out of the cost principles and does not
address
(and, consequently, does not preclude the application of)
the
requirements in Subpart F for prior approval of an APD for
the
acquisition of ADP services. Finally, to the extent that any
provision
in Part 74 concerning approval of costs were inconsistent with
Subpart F
of 45 C.F.R. Part 95, that provision would not apply under 45
C.F.R.
74.4(a).
In any event, the cost allocation provisions submitted by the State
for
the period 1985 through 1987 do not specifically identify, assign
and
distribute the development costs of the ASP/FRM as required by 45
C.F.R.
95.631. In fact, the provisions of the 1985-1987 cost allocation
plan
submitted do not even reference the ASP/FRM project, nor are
development
costs of this project specifically mentioned. State Ex.
B. The
regulation at 45 C.F.R. 95.631(a) requires the state agency
to
specifically identify what items of costs constitute development
costs,
assign these costs to specific cost centers and distribute these
costs
to funding sources based on the specific identification, assignment
and
distribution outlined in the APD. Thus, even if the State had
an
approved 1985-1987 cost allocation plan, the development costs were
not
assigned and claimed in accordance with 45 C.F.R. 95.631(a).
With respect to the period 1987 through 1989, the Division of
Cost
Allocation advised the State on October 19, 1989 that it was
withholding
approval of the revision of the DSHS Administrative Cost
Allocation Plan
which addresses various schedules of DSHS' 1987-1989 cost
allocation
plan which were in need of clarification or modification.
The Division
of Cost Allocation specifically advised the State that the
proposed
allocation basis for the ASP was in error, stating that since
the
project had not received HHS prior approval, the federal programs
cannot
participate in such costs and the costs must be identified as
"State
Only" costs in the cost allocation plan. State Ex. N.
D. The Agency's interpretation of Subpart F of 45 C.F.R.
Part
95 is not unreasonable, arbitrary, or capricious, and the
State
had notice of the interpretation by virtue of the
explicit
requirements of the regulations.
The State argued that the Agency position to impose prior approval
upon
general administrative accounting systems was unreasonable,
particularly
where the amount claimed represented a mere 20 percent federal
share for
the total project costs. The State also argued that its
documentation
burden generally should be lessened if it is not seeking an
enhanced
rate of FFP. Finally, the State argued that the Agency
position of
giving priority to the prior approval requirements of section
95.611(a)
over any inconsistent rules in OMB Circular A-87 required prior
actual
notice before it could be applied to the State here.
As we have discussed throughout this decision, the State had actual
notice
of the Agency's position by reason of the regulatory provisions
then in
effect. Under the explicit requirements of 45 C.F.R. 95.611(a),
a state
must obtain prior approval when it plans to acquire automatic
data processing
services meeting the threshold requirements. There is
no dispute in the
present case that the threshold requirements have been
met for the portion of
the total costs of the ADP services that are
allocable to the Social Security
Act programs. Thus, even though the
federal share of the total project
costs may only have been 20 percent,
the threshold requirements of the
regulations were clearly met, and the
State had notice of those
requirements. Moreover, the regulation makes
no distinction based on
the intended purpose or function of the ADP
services within the public
assistance programs. The State merely must
intend to fund the services
with proposed federal funding from the
public assistance programs.
Thus, it is irrelevant whether the ADP
services are intended for a general
administrative accounting system
used in the programs or for the actual
operation of the programs.
Moreover, the State was clearly wrong when it argued that its burden
here
related to whether it was seeking funding at the regular matching
rate or an
enhanced matching rate. While this Board has frequently held
that a
state has an additional documentation burden to show that an
enhanced
matching rate is available, the issue here is not whether the
state met
documentation requirements but whether it met prior
approval
requirements. Moreover, section 95.611(a) specifically
provides that
the prior approval requirements apply when the State intends to
acquire
ADP services with proposed federal fundings "at the regular
matching
rate."
In response to an Agency argument that retroactive "prior" approval
was
precluded under the regulations, the State argued in its reply brief
(p.
19) that retroactive approval would be appropriate because of
"ongoing
Agency vacillation on the matter" and the vagueness of the
regulations
on the effective date for FFP in ADP approvals. However,
section
95.611(a) expressly requires a "prior" approval as specified in
section
95.611(b). Section 95.611(b) clearly places the State on notice
as to
specific nature of the prior approval requirements, which if not
met,
would preclude FFP for particular acquisition costs that
followed.
Moreover, section 95.611(a) requires states in their requests
to
indicate clearly the Social Security Act titles under which funding
is
requested, the estimated cost for the total acquisition, and
the
estimated amount or percent that is requested for each title. Thus,
a
state would be on notice, by virtue of its own request, of the amount
of
FFP that is in jeopardy.
Finally, the Agency argued that section 95.623 sets out the
only
circumstance where the prior approval requirements may be waived
and
that circumstance would not apply here. The State here did
not
demonstrate otherwise. Further, the preamble discussion of the
purpose
and effect of section 95.623 makes it clear that the Department
would
not approve any requests for retroactive approval that were not
covered
by that section. 51 Fed. Reg. 3337-3338 (Jan. 27, 1986).
Conclusion
For the reasons discussed above, we sustain the Agency's decision
to
disallow $283,659.48 in FFP for ADP services costs related to design
and
development of the State's ASP/FRM for which the State failed to
receive
prior approval as required by 45 C.F.R. Part 95, Subpart F.
_____________________________ Judith A. Ballard
_____________________________ Cecilia Sparks Ford
_____________________________ Donald F. Garrett Presiding
Board
Member
1. The disallowance was originally $481,750, but
was subsequently
reduced to the current amount by the parties' joint
decision.
2. Since the State is seeking reimbursement for the
design and
development costs from the inception of the ASP/FRM project in May
1987,
we will cite to the provisions applicable as of May 1, 1987.
3. 45 C.F.R. 95.611(a) was amended February 7, 1990
to increase the
threshold acquisition costs from $200,000 in federal and
state funds
over a twelve month period or $300,000 in federal and state funds
for
the total acquisition costs to a threshold of $500,000 or more
in
federal and state funds for the total acquisition costs. 45
C.F.R.
95.611 (1990). In any event, the ASP/FRM development costs at
issue
here were in excess of even this revised threshold. The
amended
regulation also continues to require specific written prior approval
by
the Agency of the APD where the State is requesting FFP at the
regular
administrative matching rate of 50 percent.
4. OMB Circular A-87 establishes uniform principles
for determining
costs applicable to grants and contracts with states and
local
governments.
5. The State argued that OMB Circular A-90, entitled
"Cooperating
with State and local governments to coordinate and improve
information
systems," expressly delineated the difference between data
processing
system's cost for federal program support and for administrative
or
other purposes incidental to the conduct of the program. OMB
Circular
A-90, Transmittal Memo. No. 1, 41 Fed. Reg. 38832 (September 13,
1976).
This Circular, however, was rescinded in 1985 with the publication
of
OMB Circular A-130, entitled "Management of Federal
Information
Systems." 50 Fed. Reg. 52730 (December 24, 1985).
Therefore, this
Circular is not applicable to the dispute at issue.
Even if it were,
however, the issue it discusses is at best peripheral to the
underlying
issue raised here.
6. In reaching this conclusion, we do not mean to
imply that the
prior approval requirements of Subpart F are in fact
inconsistent with
any of the principles in OMB Circular A-87, such as those
pertaining to
accounting systems. Arguably, the Subpart F requirements
provide
additional approval requirements for a specialized subcategory of
costs:
automated data processing equipment or services that exceed
specific
cost thresholds. In any event, we do not need to reach the
question of
whether Subpart F is in fact inconsistent with any of the cost
principle
provisions, since, under section 74.4(a), a cost principle
provision
would not apply if inconsistent with Subpart F.
7. In the first South Carolina case, the Board
explained that even
though the system may have attributes which were within
the parameters
of an accounting system, the majority of the tasks involved
in
developing the system were closely related to development
and
implementation of computer programs (ADP). Therefore, the Board
used a
weighing test to determine which of the Circular
provisions
applied--whether the systems were more properly characterized as
an
accounting system which does not require prior approval under
OMB
Circular A-87, Attachment B, Part B, section 1, or as an ADP system,
the
acquisition of which required prior approval under OMB Circular
A-87,
Attachment B, Part C, section