SUBJECT: Wisconsin Department of Administration

DECISION

The Wisconsin Department of Administration (WDOA) appealed a decision of the Division of Cost Allocation (DCA) of the Department of Health and Human Services (HHS). In that decision, DCA (1) denied WDOA's request for an exception to a federal cost principle that limits the amount of federal funds in a working capital reserve in an internal service fund; (2) disallowed $442,983 as the federal share in the excess portion of the reserve in WDOA's Financial Services Fund for the fiscal year ending June 30, 1999 (FYE99); and (3) requested WDOA to make a cash refund of the disallowed funds. In its appeal, WDOA contended that DCA abused its discretion by not approving an exception to the 60-day working capital reserve requirement and by requesting a cash refund of the federal share of any excess reserve. WDOA also contended that DCA had erred in concluding that the federal share of any excess reserve was $442,983.

The record in this case consists of written arguments and documents filed by the parties and the transcript of an informal conference. Below we discuss the applicable law, the facts presented by this dispute, and the parties' arguments. We uphold the disallowance in principle, concluding that DCA did not abuse its discretion by denying WDOA's request for an exception. We remand this case to DCA to review WDOA's documentation concerning the actual amount of the federal share here at issue and to consider which of three methods of recovery would be appropriate under the criteria specified in ASMB C-10.

A. Applicable Law

This dispute involves cost principles set forth in Office of Management and Budget (OMB) Circular A-87. OMB Circular A-87 provides general principles governing the allowability and allocability of costs incurred by state governments administering federal grant programs.

In order to be allowable, a cost must "be necessary and reasonable for proper and efficient performance and administration of Federal awards." OMB Circular A-87, Att. A, � C.1.a. The cost principles at issue in this case concern what constitutes a reasonable cost for services financed through an internal service fund.

Internal service funds are used to allocate indirect costs to federal grants. Indirect costs are those incurred for a common purpose benefitting more than one program, such as motor pools, purchasing, or personnel and financial services. Id. at Att. A, � F.1.⁽¹⁾ Because indirect costs are not readily assignable to the benefitting program, OMB Circular A-87 establishes a method, known as a "central service cost allocation plan," for identifying and assigning indirect costs to grant programs. Id. at Att. C, � A.1. A central service cost allocation plan calculates and documents the costs of services provided by one governmental unit on a centralized basis to other government departments, and then apportions those costs by allocating to or billing the user department. Id. at Att. A, � B.4. "Billed central services" are centralized services that are billed to the user departments on an individual fee-for-service or similar basis.⁽²⁾ Id. at Att. C, � B.1. In order to account for the financing of the goods or services it provides to the user departments, the governmental unit supplying the billed central service normally establishes an "internal service fund." HHS Guide For State, Local and Indian Tribe Governments (ASMB C-10), Pt. 4, 4.8, 4-6 (DCA Ex. 10, at 35-36).

For each year a state government claims indirect central service costs for federally funded programs, it must submit a cost allocation plan to the cognizant federal agency. OMB Circular A-87, Att. C, � D.1. As part of the cost allocation plan, a state government must provide specific documentation about internal service funds, including a fiscal year-end reconciliation schedule showing the revenues, costs, and year-end balance. Id. at Att. C, � E.3.b(1), G.4.

Because internal service funds typically operate pursuant to periodic billing cycles, the cost principles provide for a working capital reserve for such funds. OMB Circular A-87, Attachment C, � G.2 states:

Working capital reserves. Internal service funds are dependent upon a reasonable level of working capital reserve to operate from one billing cycle to the next. Charges by an internal service activity to provide for the establishment and maintenance of a reasonable level of working capital reserve, in addition to the full recovery of costs, are allowable. A working capital reserve as part of retained earnings of up to 60 days cash expenses for normal operating purposes is considered reasonable. A working capital reserve exceeding 60 days may be approved by the cognizant Federal Agency in exceptional cases.

Thus, the reasonable cost of operating an internal service fund includes charges in excess of the full recovery of the costs of the services. However, such charges are limited to those which will establish and maintain a working capital reserve of up to 60 days of cash expenses for normal operating purposes.⁽³⁾

Without this allowance for a working capital reserve, the fiscal year-end balance on the A-87 reconciliation for an internal service fund would have to be zero because federal grantees are not allowed to make a profit by charging the federal grant more than the cost of the services. Id. at Att. C., � G. 4; ASMB C-10, Pt. 1, 1.6, 1-4 (DCA Ex. 10, at 15). Further, while the fiscal year-end balance (determined through the reconciliation process under OMB Circular A-87) can include as much as 60 days of cash expenses for normal operating purposes, such cash expenses may not include depreciation, principal payments, or capital expenditures. ASMB C-10, Pt. 4, 4., 4.7, Ill. 4-7, Pt. I.5. (DCA Ex. 10, at 32-33).

In "exceptional cases," the cognizant federal agency may approve a working capital reserve exceeding 60 days. OMB Circular A-87, Att. C, � G.2. The need for such an exception must be "fully documented and justified." ASMB C-10, Pt. 4, 4.8, 4-10(7) (DCA Ex. 10, at 37).

If the fiscal year-end balance of an internal service fund exceeds the permissible working capital reserve, an adjustment must be made for the difference between the revenue generated by the fund and the allowable costs. OMB Circular A-87, Att. C., � G.4.; ASMB C-10, Pt. 4, 4.7, Ill. 4-7, Pt. I.6. (DCA Ex. 10, at 32). The adjustment is made by one of the following methods:

(a) a cash refund to the Federal Government for the Federal share of the adjustment, (b) credits to the amounts charged to the individual programs, (c) adjustment to future billing rates, or (d) adjustments to allocated central service costs. Adjustments to allocated central services will not be permitted where the total amount of the adjustment for a particular service (Federal share and non-Federal share) exceeds $500,000.

OMB Circular A-87, Att. C., � G.4.

As to the criteria that will be used to select the method of recovery, ASMB C-10 provides:

The primary concern would be the assurance that the Federal programs charged in a given year receive an equitable and appropriate adjustment for the over/under billings. Consideration must also be given to the makeup of the user community in future periods as well as the level of support they will require.

ASMB C-10, Pt. 4, 4.8, 4-14 (DCA Ex 10, at 38).

B. Summary of Facts

HHS has been designated by OMB as the cognizant federal agency for the Wisconsin Department of Administration and is responsible for review of Wisconsin's Statewide Cost Allocation Plan (SCAP) under OMB Circular A-87. 51 Fed. Reg. 552 (January 6, 1986). Pursuant to this authority, DCA conducted the review at issue in this case.

This dispute involves the working capital reserve in the Financial Services Fund, an internal service fund authorized in Wisconsin's SCAP and managed by WDOA. WDOA uses this fund to provide accounting, auditing, payroll, and other fiscal services to state agencies operating federally funded programs. Wisconsin State Controller's Office Publication (DCA Ex.13, at 1).

The record in this case indicates that WDOA's Financial Services Fund operated as follows. An annual budget was developed for a fiscal year (July 1 to June 30) based on actual prior fiscal year workloads by user agencies; annual bills were issued in January or February; and payment from the individual agencies was technically due within 30 days. Id. However, WDOA did not or could not enforce this deadline, so that the effective deadline for the payments was June 30, 2000. DCA letter dated June 1, 2000 (DCA Ex. 5, at 1); WDOA letter dated June 16, 2000 (DCA Ex. 6, at 1). WDOA indicated that it could modify its billing system in the future to issue bills by October and would therefore request "a five month or 150 day reserve (operating cash) to cover costs for the first five months of our fiscal year, assuming an annual billing cycle." Id. However, the record also indicates that under Wisconsin's cash management practices, the Financial Services Fund's expenses are paid regardless of its cash balances in the State treasury, if it has a sufficient appropriation. The Fund therefore was not required to have a positive cash balance during the fiscal year in order to disburse cash to pay its expenses. DCA letter dated June 30, 2000 (DCA Ex. 7, at 1).

Each year, WDOA submits a federally required central service cost allocation plan to HHS. OMB Circular A-87, Att. C, � D.1. DCA reviews WDOA's plan to ensure that WDOA is adhering to applicable federal cost principles. Affidavit of DCA Accountant (DCA Ex. 14, � 6). For FYE98, DCA found that the working capital reserve reflected in the A-87 reconciliation for the Financial Services Fund exceeded the 60-day cash operating expense limit by $867,178.⁽⁴⁾ DCA then reviewed the FYE99 A-87 reconciliation statement for this fund to determine whether that more recent reserve exceeded the 60-day cash operating expense limit.⁽⁵⁾ DCA found that the excess in the working capital reserve in the Financial Services Fund had grown from $867,178 for FYE98 to $2,214,913 for FYE99. DCA calculated the federal share to be $442,983 (20% of $2,214,913). Id. at � 15.

On May 3, 2000, DCA formally notified WDOA that it had an excess working capital reserve in its Financial Services Fund for FYE99. DCA letter dated May 3, 2000 (DCA Ex. 3). DCA requested that WDOA calculate the federal share of the excess portion of the fund within 30 days or DCA would issue a determination letter for 20% of the excess portion. WDOA responded that DCA should approve a working capital reserve balance of more than 60 days cash operating expenses, as permitted by OMB Circular A-87. WDOA letter dated May 10, 2000 (DCA Ex. 4). DCA denied WDOA's request for an exception. DCA letter dated June 1, 2000 (DCA Ex. 5). On June 30, 2000, DCA issued its final decision, denying WDOA's request for an exception to the 60-day working capital reserve and requesting a cash refund of $442,983. DCA letter dated June 30, 2000 (DCA Ex. 7). DCA stated that WDOA could appeal the denial of the exception and request for a refund to the Board and WDOA filed a timely appeal. Because the question of the amount of the federal share was secondary to the question of whether DCA properly denied WDOA's request for an exception, the Board requested the parties to first address the exception issue. The parties agreed that if the Board found, as it has, that DCA properly denied the waiver request and requested a refund of the federal share, they would then discuss what constituted the federal share prior to seeking Board review on that question.⁽⁶⁾

C. Analysis

1. Whether DCA abused its discretion in declining to approve WDOA's request for a working capital reserve exceeding 60 days

OMB Circular A-87 gives the cognizant federal agency the discretion to approve a working capital reserve exceeding 60 days in exceptional cases and the discretion to determine how an adjustment for any excess will be made. In its review of disallowances, the Board has routinely applied an abuse of discretion standard to those waiver or prior approval decisions that are expressly authorized by agency regulations or policies. See e.g., New Opportunities for Waterbury, Inc., DAB No. 1512 (1995). Therefore, we review DCA's denial of an exception, which is likewise a decision committed by regulation to the federal agency's discretion, to determine whether DCA's decision was arbitrary, capricious, an abuse of discretion or otherwise not in accordance with the law. This is the standard of review that a court would use under the Administrative Procedure Act, when ruling on a challenge to informal agency action. 5 U.S.C. � 706. The "arbitrary and capricious" standard of review has been stated to be a highly deferential one, which presumes the agency action to be valid. The standard precludes a court from substituting its judgment for that of the agency; it mandates judicial affirmance if a rational basis for the agency's decision is presented, even though the court might otherwise disagree. Environmental Defense Fund v. Costle, 657 F.2d 275, 283 (D.C. Cir. 1981). The burden of overcoming the presumption of the validity of agency action is upon the party challenging it. DAB No. 1512, at n.28.

WDOA argued that DCA abused its discretion in declining to approve a working capital reserve exceeding 60 days for the following reasons. First, WDOA argued that the Financial Services Fund required a greater reserve because it used an annual billing cycle pursuant to which it carried 180 days of cash burden for the services provided to the user agencies. WDOA stated:

The State's General Fund carries 180 days of cash burden for this operation until the annual billing is issued. Operating cash flow is not based on a monthly billing as in standard business practice, but based on annual individual agency transaction data not available until the end of each state fiscal closing. This means the department prepares and issues invoices to agencies well into the Oct-December quarter at the earliest.

WDOA letter dated May 10, 2000 (DCA Ex. 4).⁽⁷⁾

Second, WDOA asserted that its reserve was comprised "predominantly" of the depreciated value of a non-cash asset - the WiSMART accounting system - rather than cash. WDOA letter brief dated September 1, 2000. WDOA cited two considerations which required it to maintain an actual cash balance in the reserve: its biannual payments for the WiSMART system and the requirements of Wisconsin Statutes � 20.903. WDOA argued a greater than 60-day reserve was required because WDOA needed sufficient cash twice during the year to make the master lease payments for WiSMART. Tr. at 11-12.⁽⁸⁾ WDOA also stated that Wisconsin Statutes � 20.903 prohibits the Financial Services Fund from having a negative cash balance at the end of the fiscal year. As result of this statute, WDOA argued, the fund required a sufficient cash reserve to prevent a negative balance in the event revenues did not cover expenses at the end of a fiscal year. Tr. 7.

Third, in its reply letter, WDOA asserted that it thought DCA had previously granted an exception to the 60-day reserve provision. WDOA represented that, in prior years, specifically FYE97, DCA did not object to a reconciliation statement that reflected a greater than 60-day reserve and DCA had approved cost allocation plans that reflected annual billing cycles. WDOA letter brief dated November 15, 2000, at 2; Tr. at 14. WDOA argued that if it had been using the 60-day standard from 1997, it would have been able to reduce the fund's balance by adjusting billing rates sooner. It also indicated that since WDOA was not told until March 2000 that DCA objected to its working capital reserve, the earliest it could reduce the balance was with the FYE01 billing. WDOA explained that "[t]his billing will be significantly lower based on this revelation and on the fact that our master lease payments will be declining significantly." Id.

Below, we explain why DCA did not abuse its discretion in declining to find that WDOA's Financial Services Fund is an "exceptional case" justifying a cash reserve in excess of 60 days within the meaning of OMB Circular A-87, Attachment C, � G.2.

• During FYE98 and FYE99 this reserve grew dramatically because the charges billed by the Financial Services Fund greatly exceeded the Fund's allowable expenditures. For FYE98, the Fund's revenues exceeded allowable expenditures by $800,507.34. Reconciliation of Retained Earnings Balance for FYE98 (DCA Ex. 1). For FYE99, the Fund's revenues exceeded allowable expenditures by $1,363,306.40. Reconciliation of Retained Earnings Balance for FYE99 (DCA Ex. 2). Thus, the retained earnings balances or reserve of the Financial Services Fund became excessive over the years ($1,226,273.67 for FYE97, to $2,026,781.01 for FYE98, to $3,390,087.41 for FYE99) because revenues repeatedly and significantly exceeded expenditures.
  
  
• Revenues in internal service funds are allowable only to the extent that they "provide for the establishment and maintenance of a reasonable level of working capital reserve in addition to the full recovery of costs." OMB Circular A-87, Att. C, � G.2. As to such working capital reserves, OMB set 60 days as the extent to which the federal government will routinely participate in financing services in advance of payment for those services. This provision is consistent with other federal provisions which promote "efficient use of Federal funds by reducing the time between their transfer from the Federal Treasury, and their expenditures by States to carry out Federal programs." S. Rep. No. 36, 102nd Cong., 1st Sess. 1991, 1991 WL 60583 (Leg.Hist.) discussing the Cash Management Improvement Act of 1990, Public Law No. 101-453. DCA represented that "many, if not most" internal services funds operate within this limit by using a monthly billing cycle and that WDOA was the first governmental unit to request an exception to the 60-day working capital reserve from the Central States Field Office. Affidavit of DCA Director, Central States Region (DCA Ex. 15, at �� 6, 11).⁽⁹⁾

• WDOA chose to structure the FinancialServices Fund's billing on an annual cycle under which the Fund provides services without reimbursement for over four months - well in excess of the 60-day standard.⁽¹⁰⁾ WDOA's request for a greater than 60-day reserve to accommodate this billing cycle is inconsistent with OMB's assumptions about how federal funds in internal service fund reserves should be managed. Moreover, while WDOA stated that an annual billing cycle was cost effective for the state, WDOA failed to show how its practices affected federal programs or that it could not accomplish equivalent objectives using modified billing practices. For example, we can see how annual billing may operate to a state's advantage since the state funds at issue are always under the control of a state's various departments. In contrast, however, WDOA's annual billing results in the federal government's loss of use of federal money for an extended period of time and a period beyond what has been determined by OMB to be reasonable.
  
  
• The record indicates that the growth of the reserve was not related to WDOA's reliance on an annual billing cycle. WDOA conceded that Wisconsin's fiscal practices provide for payment of the Funds's operating costs whether or not it has a sufficient cash balance in its account. Additionally, WDOA indicated that growth of the reserve in the Fund was related to its acquisition of the WiSMART accounting system because WDOA had financed its acquisition over 7 years but depreciated the system over 10 years. WDOA letter brief dated September 1, 2000. DCA postulated that the Fund's excess revenues were caused by billing rates based on the WiSMART financing schedule rather than the WiSMART depreciation schedule. DCA submission dated December 14, 2000 ; Tr. at 2. DCA asserted that this practice would violate OMB Circular A-87, Att. B, �� 15(a) and 19(b) which provide that the costs of capital assets may not be directly charged to a federal grant but must be recovered through depreciation or use allowance. WDOA did not dispute DCA's interpretation of A-87 or its conclusion as to why the billing rates have greatly exceeded revenues.



• WDOA's representation (in its letter dated September 1, 2000) that it could and would reduce the working capital reserve to 60 days of allowable cash expenses by FYE02 by reducing its billing rates supports a finding that the annual billing cycle did not create an actual need for a greater than 60-day reserve and that the reserve build-up was related to the need to make payments for the WiSMART system.



• As to the biannual WiSMART payments, WDOA failed to show how the need to make such payments, which are not allowable costs under OMB Circular A-87, is relevant to the question of what constitutes a reasonable working capital reserve for this fund. Further, even if we assume WiSMART lease payments are relevant, WDOA failed to establish exactly when those payments are due and their amount. Therefore, there is no way to determine what amount of cash reserve would be required or whether the 60-day provision is inadequate in this case.



• Accepting for the purposes of argument that Wisconsin Statutes � 20.903 requires WDOA to maintain some cash balance in this fund in order to protect the fund against the risk of a year-end negative cash balance, this fact alone does not justify a reserve in excess of 60 days. WDOA introduced no evidence or reasons which would tend to show why a 60-day reserve provision does not provide sufficient protection against the risk of a year-end negative cash balance.



• Finally, DCA denied that it had ever approved WDOA's use of a greater than 60-day capital reserve and asserted that there was nothing in the record to support WDOA's allegations that DCA had approved such a reserve. As to the FYE97 reconciliation statement, DCA personnel stated that they reviewed that statement at the time they reviewed the FYE98 and FYE99 statements and, in the course of that review, had informed WDOA of the problem. Tr. 18. As to WDOA's disclosure of its billing cycle in its cost allocation submissions, DCA argued that WDOA was confusing the 60-day working capital reserve rule with billing cycles. DCA explained that it does not approve or disapprove billing cycles because OMB Circular A-87 does not require internal service funds to operate on a specific billing cycle. Therefore, DCA asserted that the fact that one or another type of billing cycle may be reflected in documents submitted by states as part of the cost allocation process does not mean that DCA has approved the use of such a cycle. Although WDOA was given an opportunity to submit additional material, such as the 1997 documents on which it relied, it did not do so, and the record before us fails to substantiate that DCA actually approved a nine-month working capital reserve.
  

For the preceding reasons, we conclude that DCA did not abuse its discretion in concluding that WDOA failed to document or justify a need for an exception to the 60-day limit on working capital reserves in internal service funds established by OMB Circular A-87, Attachment C, � G.2.

2. Whether DCA acted arbitrarily in requesting a refund of the federal portion of the FYE99 excess reserve

As indicated earlier, OMB Circular A-87 provides for an adjustment for the federal share of the excess in a working capital reserve. As applicable here, the adjustment may be made by one of the following methods: a cash refund to the federal government for the federal share of the adjustment; credits to the amounts charged to the individual programs; or adjustment to future billing rates. OMB Circular A-87, Att. C., � G.4; see also ASMB C-10, Pt. 4, 4.8, 4-14 ( DCA Ex. 10, at 37-38).

DCA requested WDOA to make a cash refund. WDOA argued that DCA should have allowed it to reduce the excess balance by adjustments to future billing rates. WDOA asserted that it never meant to overcharge the federal government; that DCA's delay in reviewing its reconciliation statements and objecting to the build-up of the excess reserve contributed to the build-up of the reserve; and that through billing rate adjustments it could comply with the reserve standard by FYE02.

The criteria for determining the method of recovery are as follows:

The primary concern would be the assurance that the Federal programs charged in a given year receive an equitable and appropriate adjustment for the over/under billings. Consideration must also be given to the makeup of the user community in future periods as well as the level of support they will require.

ASMB C-10, Pt. 4, 4.8, 4-14 (DCA Ex. 10, at 37-38).

In their briefing, neither party addressed these criteria or how they applied to the facts of this case. Since, pursuant to the parties' agreement, we are remanding the case for the calculation of the federal share, we also remand the question of the method of recovery so that DCA can reaffirm or modify its decision in relation to the criteria in ASMB C-10.

Conclusion

As explained above, we conclude that DCA did not abuse its discretion by denying WDOA's request for an exception to the working capital reserve limit. We remand this case to DCA to review WDOA's documentation concerning the actual amount of the federal share here at issue and to consider which method of recovery would be appropriate under the criteria specified in ASMB C-10. If DCA continues to request a cash refund to the Federal Government for the Federal share of the adjustment and WDOA is dissatisfied with DCA's determination, it may file a new appeal with respect to the limited issues considered on remand pursuant to 45 C.F.R. Part 16 within 30 days of receiving DCA's final determination. DCA should inform WDOA as to these appeal rights in that determination.

Judith A. Ballard

M. Terry Johnson

Donald F. Garrett
Presiding Board Member

1. Grants may also involve direct costs. Direct costs are costs that can be identified specifically with the performance of a grant program such as compensation to employees working for the program or costs of materials used to provide the program. Id. at Att. A, � E.1., 2.

2. "Allocated central services" are centralized services that benefit user departments, but are not billed on a fee-for-service or similar basis. Id. at Att. C, � B.2.

3. We note that even the establishment of 60-day working capital reserve is not automatic. ASMB C-10, Pt. 4, 4.8, 4-10 (DCA Ex. 10, at 37). Rather, that section of ASMB C-10 sets forth factors to be considered in "establishing reserves and determining whether they will be allowable." Id.

4. The reviewer made this determination in the following manner:

I determined that the Financial Services ISF had an excess ending fund balance (working capital reserve) in FY98 by deducting Financial Services ISF's FY98 annual depreciation expenses, $1,130,412, from its FY98 allowable expenses, $8,086,638, and multiplying the result, $6,956,226, by 16.67% [60 days divided by 360 days] to find the allowable working capital reserve of $1,159,603. I then compared the $1,159,603 to the actual reserve of $2,026,781 [$2,026,781 - $1,159,603 = $876, 178] .

Affidavit of DCA Accountant (DCA Ex. 14, � 10).

This is the methodology that is set out in ASMB C-10, Part 4.7, Illustration 4-7, Part I.5. DCA Ex. 10, at 32-33.

5. The DCA reviewer indicated that when a fund has an excess reserve balance in one year, she reviews the fund's performance for the subsequent year if information is available. If the excess balance has disappeared in the subsequent year, she does not usually recommend a refund of the federal share of the excess balance in the earlier year. If the excess balance declines in the subsequent year, she usually recommends a refund of the federal share of the subsequent year's reduced excess balance. Affidavit of DCA Accountant (DCA Ex. 14, at � 12).

6. DCA stated that its request for a refund of 20% of the excess reserve was based on its experience with federal grants. Affidavit of DCA Accountant (DCA Ex. 14, at �16). WDOA represented that its information indicates the federal share is 11.3%. WDOA letter brief dated September 6, 2000. DCA responded that it "remains willing to accept WDOA's calculation if WDOA submits acceptable supporting documentation." DCA Br. at 6, n. 6.

7. The only explanation in the record concerning WDOA's reasons for using an annual billing cycle was the following statement:

Not only is an annual bill less burdensome to administer for all agencies involved, but it is the only practical way to gather and allocate the information needed to create the basis for the bill. If we tried to bill monthly, we would have to use estimates for the first 5-6 months and then adjust to actual near the end of the year. This would also require more payment and receipt processing from all agencies, as well as computer usage time.

WDOA letter dated June 16, 2000 (DCA Ex. 6).

8. The sole evidence as to this justification consisted of the following statement made in the informal conference conducted in this case:

These are basically large payments that are scheduled, I believe, in August and February each year. So we get - we reach that requirement to make those large payments very soon in the fiscal year following the close of the fiscal year. Obviously, if we couldn't meet the scheduled payments, we would jeopardize the credit rating of the state.

Tr. at 12.

9. In response to DCA's assertion that no state had asked for an exception to the 60-day reserve standard, WDOA introduced a letter from the Minnesota Department of Finance dated October 1997 which addressed problems the standard created for internal service funds which had to finance a large amount of capital equipment. However, Minnesota did not ask for a greater than 60-day reserve. Rather, Minnesota suggested changes to the types of expenditures which are included in the working capital reserve calculation or allowing internal service funds to create a separate retained earnings category to accumulate reserves to purchase capital equipment which would not be included in the 60-day operating reserve. WDOA failed to explain how the issues Minnesota addressed were relevant to the issues presented by this case.

10. Actually, the record shows that, in the past, WDOA has financed services for far greater than four months. WDOA letter dated June 16, 2000 (DCA Ex. 6). This apparently has to do with the fact that the benefitting agencies are not actually required to reimburse WDOA until the end of each fiscal year. Therefore, even if bills are issued in October, WDOA may not receive payment until June.