SUBJECT: State of Oregon Mass Transit Assessment

SUPPLEMENTARY DECISION

Procedural Background

The Director of Cost Allocation of Region X requested the Board to reconsider Board Decision No. 402 in order that the Board "may address remaining unresolved issues critical to the case."

In Decision No. 402 the Board determined that an Oregon mass transit assessment on State agencies participating in federal grant programs was a "tax" or "payment in lieu of a tax", and therefore an allowable cost under a specific provision of the cost principles in Office of Management and Budget Circular A-87. Attachment B, B.25. Because of the way Region X had presented the case to the Board, we specifically declined to reach further issues of allowability under the cost principles.

Region X had originally determined that payment of the transit assessment, in addition to not qualifying as a tax, was not "necessary and reasonable for the proper and efficient administration of the grant programs," as required by A-87, Attachment A, C.1.a. The Region also determined that maintenance of a public transportation system was a cost of general government and therefore also not allowable under Attachment A, C.1.a. An additional ground for disapproval of the mass transit assessment was that commuting costs were the responsibility of the employees and should not be borne in part by federal grant programs.

Later, in its presentation to the Board, Region X chose to develop only the tax issue, so that the Board considered itself constrained to a determination on that issue alone, based on the record before it. We noted, however, that we questioned whether the assessment met the "necessary and reasonable" requirement (Decision No. 402, p. 7) anticipating that the Agency might issue a new or modified disallowance if it intended to pursue the matter. Id., p. 9. Instead, the Director sought reconsideration, asking the Board to reopen the case to examine the "necessary and reasonable" issue and the other requirements of Attachment A, C.1.a. The Director did not request reconsideration of our determination on the tax issue.

Thus, while it is questionable whether this process should properly be characterized as a reconsideration, the Board determined that it would be economical and efficient to take the additional substantive issues under consideration in response to the reconsideration request. We therefore proceeded to reopen the case to consider the general guidelines of Attachment A of A-87, particularly the necessary and reasonable requirement of C.1.a., offering the State a full opportunity to brief.

Based upon the briefs of the parties and a telephone conference, we uphold the Agency's original determination that payment of the mass transit assessment was not an allowable cost under the cost principles in A-87, because the assessment was not "necessary and reasonable for the proper and efficient administration of the grant programs." A-87, Attachment A, C.1.a.

Whether the Board Should Consider the Issues Unresolved in Decision No. 402

The State of Oregon objected to review of the issues previously not considered primarily because the Agency had not alleged a clear error of law, since the respondent "neither asserted nor briefed the issue of whether, and how, Attachment A might have impacted upon the subject of this appeal." State memorandum in opposition to request for reconsideration, p. 2.

In reopening the record to allow further briefing on the unresolved issues, we too pointed out that the Agency had not alleged "a clear error of fact or law," under 45 CFR 16.13. We called attention, however, to other language in 45 CFR 16.13 which authorized the Board "to take any other action necessary to resolve disputes in accordance with the objectives of these procedures." We stated it would be elevating form above substance if we required the Agency to proceed differently where it was clear what relief the Agency sought. Board response to reconsideration request, May 11, 1983, p. 2, note.

The Board recently commented on allowing reconsideration on a new ground. McLean Hospital, Decision No. 288, April 30, 1982, Reconsidered Decision, April 29, 1983.

[W]e do not see why the Board's decision may not turn on new issues raised by the Agency as long as the appellant has an adequate opportunity in proceedings before the Board to address to those issues. (Citations of Board decisions omitted; p. 15)

The Board in McLean Hospital also addressed an argument similar to that made here, that an administrative agency is bound by the reasons given in its decision. We said on this point:

The federal district court and courts of appeals decisions cited by the hospital for the proposition that an administrative agency is bound by the reasons articulated in its decision are clearly distinguishable from the instant case on the ground that a decision issued by the Board is the decision of the Department. Since the Board thus occupies the position of an administrative agency in relation to a reviewing court, whatever considerations militate against the hearing of new Agency arguments by a reviewing court are not relevant here. (p.16)

Moreover, in this case the grounds which we did not resolve in Decision No. 402 were hardly new to the State. The Agency based its original determination by the Director of Cost Allocation on the very same grounds that it argued in reconsideration. The Regional Director, in affirming the Director of Cost Allocation, adopted the same grounds. The State therefore had the opportunity to address them in its opening brief as appellant, but did not do so. The State in its original brief had only two assignments of error: first, that the assessment was a tax under Attachment B; second, that the standards prescribed by A-87 are too imprecise to be enforced. The State did not have to address the general cost principles in its oral argument because the Agency stated it was not relying on them. However, the State has had additional opportunity to brief these general cost principles on our reopening of the case. The State has now had the full opportunity to answer these same arguments made by the Agency when this dispute first arose. Therefore it is not unfair to the State for the Board to consider the issues under the general cost principles not resolved in Decision No. 402.

The Specific Issues under the Cost Principles

The finding in Decision No. 402 that the mass transit assessment was a tax or payment in lieu of tax under Attachment B of A-87 does not answer the question whether it is allowable under Attachment A. Attachment B specifically states at the beginning that the allowability of the selected items of cost is "subject to the general policies and principles stated in Attachment A of this Circular." Attachment B, A-87, A.2. Therefore, if the assessment does not meet those requirements in Attachment A, it is not allowable even though it is a tax under the language of Attachment B.

The Cost Principles in Attachment A

Below, we consider whether under the cost principles in Attachment A payment of the mass transit assessment is necessary and reasonable for the proper and efficient administration of the federal grant programs. In this connection we consider whether commuting expenses are the personal responsibility of employees. Because of our decision, we do not need to reach the question whether maintenance of a basic public transportation system is an expense of general government. We consider also whether the mass transit assessment discriminates against federally assisted programs, but conclude that this is irrelevant since the assessment does not meet the necessary and reasonable requirement.

1. Whether the Mass Transit Assessment is Necessary

Basic Guideline, C.1.a., requires that to be allowable, costs must:

a. Be necessary and reasonable for proper and efficient administration of the grant programs. . . .

While no definition or explanation of "necessary" appears in the Circular, we see no reason why we cannot accept the ordinary everyday use of the term, as something "essential", so that the grant programs could not be run properly and efficiently without it. ⁽¹⁾ So the question becomes: Is the cost of a local mass transit system essential to the proper and efficient administration of the various federally assisted grant programs administered by the State? For instance, does Oregon need to pay an assessment for a mass transit system for the State to run its Medicaid program properly and efficiently?

The State did not provide convincing arguments as to why the State employees who work on the federally funded programs in Oregon are so benefited by a mass transit system that the cost should be allowable. ⁽²⁾ It may be faster and more economical for the State employees to get to work if they use mass transit, but that does not equate to necessity. The State did not contend, nor do we believe it reasonable to contend, that State employees working on federally funded grants could not get their work done properly and efficiently without a mass transit system. Moreover, as we discuss in greater detail below, commuting costs are not considered a necessary cost of running a grant program. Accordingly, we find that the assessment clearly does not meet the "necessary and reasonable" requirement of the cost principles.

2. Whether the Mass Transit Assessment Discriminates against Federally Assisted Programs In Decision No. 402 the Board first found that the mass transit assessment was a tax under the language of Attachment B of A-87. We then observed that an opinion of the Attorney General of Oregon (Exhibit B) appeared to say that the mass transit assessment could cause federally assisted programs to bear more than their fair share of costs (Attachment A, A.1.). The Attorney General's opinion was based on the fact that in some of the mass transit districts there was no equivalent tax levied on all private employers in the district.

The State devoted a substantial part of its brief on reconsideration attempting to answer this concern of the Board. The State pointed out that in two mass transit districts, Portland and Eugene, there was a payroll tax by the districts on all private employers in the district, which corresponded in nature and amount with the mass transit assessment on the State as employer in those districts. Therefore, argued the State, in those districts the mass transit assessments did not cause the federal programs to bear more than their fair share of the tax burden.

In other areas of the State mass transit funding is based on ad valorem property taxes. The State admitted in its brief on reconsideration that "[C]osts associated with state workers in other districts, however, cannot as faithfully be matched with the tax burdens undertaken by the general citizenry of these other districts." State brief, p. 6.

The State argued that the issue with regard to assessments in these other districts is whether the transit assessments "bear such an insufficient nexus to the local tax district's tax contribution to the transit program that an unfair extra burden is imposed upon federal funds." Id.

The State further argued that the wording of the cost principle provides no guidance as to its application because any "reasonableness" standard is so broad that "formulation of a test of general 'reasonableness' approaches the impossible." Id. We discuss this issue separately below on page 8.

The State also argued that the federal fisc is sufficiently protected from unfair or discriminatory treatment because "[F]ederal funds, in the first instance, are only incidentally involved in the assessment program" because the estimated federal involvement was only "one-sixth of the cost to the state." State brief on reconsideration, p. 8. We cannot agree with such a conclusion. The cost to the federal programs of approximately one million dollars is hardly de minimis. The State could simply have appropriated seven million dollars to the local mass transit districts. Instead it devised an assessment whereby it levied a six million dollar appropriation on itself as employer, and then in effect levied another million dollars on the federally assisted programs. We are not prepared to say the federal involvement is only incidental because the federal funds sought to be reached are only one-sixth of what amounts to the State's appropriation to itself. ⁽³⁾

The State may be correct in its assertion that, at least in the Portland and Eugene districts, the mass transit assessment does not discriminate against federal grant programs in the sense implied in the Attorney General's letter. However, since we have found above that the assessment does not meet the "necessary and reasonable" requirement, we still reach the same result.

3. Allowable Taxes and Fringe Benefits

In the telephone conference on August 11, 1983, the Board asked the Agency to identify examples of taxes levied by a state on itself as employer which were generally accepted as allowable costs in a cost allocation plan. The Agency specified workmen's compensation and unemployment insurance as two such costs. The Agency said these were routinely allowed as being a necessary cost of doing business.

A discussion then ensued as to where the line would be drawn on a hypothetical continuum of taxes. At one end some taxes, such as unemployment compensation, are universally recognized as allowable costs. At the other end, an airport tax would probably not be allowed, simply because having a modern airport might make it easier for state employees working on federally assisted grants to travel on grant business.

The difficulty with this approach is that the taxes mentioned by the Agency, namely, unemployment compensation and workmen's compensation, are listed as allowable costs in Attachment B of A-87, not as costs but as employee fringe benefits. B.13.b. Costs similar to those listed ("and the like") are presumably allowable as fringe benefits if they meet the conditions specified in the cost principles. The principle is still the same, however, for where the line should be drawn. Employers' contributions to life and health insurance plans and retirement pension plans, for example, are universally recognized as being fringe benefits, which benefit all employees. We do not believe that subsidizing mass transit has yet reached the same generally accepted status as a fringe benefit.

But even if payments toward mass transit could be considered a universal fringe benefit, there would still be the same problem as there is with it as a tax. It may be allowable under Attachment B of A-87, but it still has to be "reasonable and necessary" for the grant programs, under Attachment A. We do not believe that, whether called a tax or fringe benefit, the mass transit assessment meets the general requirements of Attachment A.

4. Commuting Costs are Unallowable

The Agency gave as a separate ground for not allowing the mass transit assessment as part of the statewide cost allocation plan the reason that the costs of commuting are considered the responsibility of the employees. ⁽⁴⁾ Such commuting costs should therefore not be borne in part by federal grant programs.

This reason is not a separate cost principle. It does, however, support the position of the Agency that the mass transit assessment is not "necessary" or "reasonable" for the federally assisted grant programs. If the cost of commuting is not considered as a necessary expense of running a grant program, then a tax to provide more convenient commuting is not necessary or reasonable for the grant programs.

Since we find that the mass transit assessment is not necessary and reasonable for the grant programs, we do not need to reach the question whether it is an expense of general government.

The "Indefiniteness" of the Regulations

The State has contended that the cost principles are too indefinite to be applied. It has cited many cases which state general principles regarding the necessity of definite standards in regulations.

The cost principles are not new. They were first published in the Federal Register as applicable to state and local government grantees of the Department of Health, Education, and Welfare, on September 19, 1973. 38 Fed. Reg. 26274. The preamble explains that the principles had been in use in Circular A-87 by the Department for some time before that. They had been distributed to the states in the form of Guides, even though never published in the Federal Register before. The language "necessary and reasonable for the proper and efficient administration" did not emerge full blown in the cost principles at the whim of the Secretary of the Department (formerly HEW, now HHS). The statutes pertaining to the various public assistance programs not only use similar language, but empower the Secretary to determine what is "necessary" for administration of the programs. For example, we refer to the program of Aid to Families with Dependent Children (AFDC) in Title IV-A of the Social Security Act (the Act). Section 403 provides for "Payment to States" under approved state AFDC plans. Section 403(a)(3) refers to payment of amounts expended "as found necessary by the Secretary . . . for the proper and efficient administration of the State plan." In the Medicaid program (Title XIX) under Section 1903 of the Act, certain payment to states are based on amounts expended "as found necessary by the Secretary for the proper and efficient administration of the State plan." Section 1903(a)(6).

The language of the cost principles, "necessary and reasonable for proper and efficient administration", is almost a verbatim restatement of the statutory language, "necessary for the proper and efficient administration" of the State plan. The only addition is the word "reasonable." This word does not change the meaning of the cost principle. It adds a logical addition, that something has to be "reasonable" in amount and application, as well as "necessary." ⁽⁵⁾

Finally, we note that the principles at issue here were designed to cover a broad range of costs under widely differing grant programs. The terms are specific enough to set common sense limits on what is allowable. It would be virtually impossible to provide detailed guidelines as to what is "necessary and reasonable" for every aspect of the programs affected. Moreover, application of the standards Ln the present instance is not unpredictable or impossible as the State argued. The relationship of the mass transit assessment to the grant programs here is so tangential that the State should have known that there would be a question as to whether the cost could be "necessary" for the proper and effective administration of the programs.

Retroactive Application

The State argues that even if the Board should find that the mass transit assessment does not comply with the cost principles, this holding should not be applied retroactively. It argues that "equitable principles should preclude any denial of the costs which the DCA seeks to have disallowed retroactively." State brief on reconsideration, p. 13.

This is not a case of retroactive application of a regulation. The Agency has not promulgated new cost principles and then attempted to apply them to a cost allocation plan submitted before the cost principles were adopted. The cost principles have been in effect in substantially the same form for many years. The fact that first the Agency and now this Board differ with the State in how these principles are to be applied in this particular instance does not make it a retroactive application.

The State points out that the Board's final decision will not be issued until the Oregon legislature will have disbanded its 1983 session; therefore, there will be no opportunity to legislate "so as to ameliorate the serious financial impact of any adverse decision." Leaving aside that special sessions of legislatures are not uncommon, the State's internal financial problems cannot affect the Board's obligation to decide an appeal as it sees the issues. It is unfortunate if the failure of the Agency to articulate all the pertinent arguments before the Board at the first opportunity has caused unnecessary hardship to the State. However, the State was put on notice long ago that the Division of Cost Allocation would not allow the mass transit assessment, and the reasons given included the reasons on which we rely.

CONCLUSION

We find that the mass transit assessment does not meet the requirements of Attachment A of the cost principles in A-87. We therefore uphold the determination of the Regional Director that the assessment on the federally assisted grant programs in Oregon is not an allowable cost under the statewide cost allocation plan.

Donald F. Garrett

Norval D. (John) Settle

Alexander G. Teitz
Presiding Board Member

1. WEBSTER'S Third New International Dictionary includes the following in definitions of necessary: "ESSENTIAL, INDISPENSABLE."

2. There also has been no argument that the costs should be allowable because of benefit to recipients of the grant programs from a mass transit system; we therefore do not consider this.

3. The federal government apparently contributed $71 million in fiscal year 1982 to grantees in the State of Oregon specifically for mass transit purposes, through the U.S. Department of Transportation. See Agency Response to Petitioner's Brief in Docket No. 82-135, p. 6, n. 1.

4. The Internal Revenue Service does not allow commuting fares as deductible expenses, since they are not "ordinary and necessary business expenses." See, MERTENS, Law of Federal Income Taxation, Vol. 4A, �25.96.

"How employees get themselves to work has customarily been the responsibility and obligation of the individual employee, who must provide his or her own transportation at his or her own expense." Letter opinion from Senior Counsel, Oregon Department of Justice, March 3, 1981, Exhibit 8, p. 2.

"Another personal expense everyone is familiar with is commuting. The employee is expected to be at work; how he chooses to get there is entirely his own business." Principles of Federal Appropriations Law, U.S. General Accounting Office, Office of General Counsel, June 1982, p. 3-160.

5. The test of "reasonableness" is a common one in the law. The aw of torts uses the test of what a "reasonable" person would do under certain circumstances.