GAB Decision 741
April 11, 1986
Washington Department of Social and Health Services;
Docket No. 85-257;
Audit Control No. 10-46910
Settle, Norval D.; Tietz, Alexander D. Ballard, Judith A.
The Washington Department of Social and Health Services (State)
appealed a determination by the Social Security Administration (Agency)
disallowing interest in the amount of $3,364 incurred by the State
during fiscal years 1980, 1981, and 1982 in connection with a
lease-purchase agreement for dictation equipment. The State did not
dispute that interest costs are unallowable under the applicable
regulations, but argued that the costs should not be disallowed since
the Agency gave prior approval for the lease-purchase agreement. For
the reasons discussed below, we uphold the disallowance.
Applicable Regulations
The costs in question were incurred by the Disability
Determination
Services (DDS) in the Washington Department of Social and
Health
Services. The DDS makes disability determinations for persons
applying
for federal disability insurance benefits under title II of the
Social
Security Act. The regulations setting forth the procedures under
which
states perform the disability determination function for the
Secretary
provide in pertinent part at 20 CFR 404.1626:
(a) We will give the State funds, in advance or by way
of
reimbursement, for necessary costs in making disability
determinations
under these regulations. Necessary costs mean direct as
well as
indirect costs as defined in title 41 CFR Subpart 1-15.7 and in
Federal
Management Circular 74-4, as amended or superseded.
* * *
(b) The State may not incur or make expenditures for items of
cost
not approved by us or in excess of the amount we make available to
the
State.
Section 1-15.713-7 of 41 CFR provided in pertinent part:
Interest on borrowings (however represented), bond discounts,
cost of
financing operations, and legal(2) and professional fees paid
in
connection therewith, are unallowable except when authorized by
Federal
legislation. . . .
This provision was a part of the Federal Procurement Regulations
(FPR),
which were superseded on September 19, 1983 by the Federal
Acquisition
Regulations (FAR). The FAR incorporates by reference Office
of
Management and Budget (OMB) Circular A-87, which contains a
similar
prohibition on interest costs, and which was previously designated
as
Federal Management Circular 74-4. The parties did not identify
any
federal legislation which would have allowed the interest costs
in
question here.
Facts
In 1979, the State entered into a lease-purchase agreement for SONY
System
6000 equipment for physician input dictation. The State obtained
the
prior written approval of the Agency's Regional Office for the
lease-purchase
agreement. (Agency's appeal file, Ex. A) The letter
approving the
agreement does not refer specifically to interest costs,
and the State stated
that the Regional Office most likely did not see a
copy of the agreement,
which identified an interest element. (Tape
recording of telephone
conference call held March 11, 1986) The State
contended, however, that the
Regional Office both knew of and approved
the interest element, and that the
Regional Office as well as the State
was unaware that such costs were
unallowable. /1/
An audit report covering the DDS's operations for the period October
1,
1977 through September 30, 1982 stated that the interest costs
were
unallowable and recommended that the costs be disallowed.
Following the
issuance of the audit report, the Regional Office requested
that the
Agency's Commissioner waive the disallowance on the ground that
the
State had not been aware of the prohibition on payment of
interest
costs. (State's appeal file, memorandum dated January 29,
1985) The
Associate Commissioner responded that a waiver was not justified
since a
copy of OMB Circular A-87, as well as of another publication
specifying
that interest costs are unallowable, had been provided to all
disability
determination services and(3) parent state agencies prior to the
audit
period in question. (State's appeal file, memorandum dated March
13,
1985) The Regional Commissioner subsequently disallowed the
costs.
(State's appeal file, letter dated March 29, 1985) In response to
a
request by the State for reconsideration of the Regional
Commissioner's
decision, the Associate Commissioner upheld the
disallowance. (Letter
dated November 8, 1985) The State appealed to
this Board pursuant to 20
CFR 404.1681.
Discussion
We are not persuaded by the State's argument that the costs are
payable
because the Regional Office approved the lease-purchase
agreement. The
Agency's letter does not address the allowability of the
interest costs
as charges to federal funds, but merely approved the
lease-purchase
transaction. Although 20 CFR 404.1626 provides that a
state will not be
paid for costs not approved by the Agency, this does not
mean that all
costs arising from a transaction approved by the Agency will be
paid.
The same regulation also provides that states will be paid
for
"necessary costs" as defined in 41 CFR Subpart 1-15.7. Thus, costs
must
not only be approved by the Agency, but must also be necessary
costs
within the meaning of the latter regulation. As noted above,
that
regulation specifically provides that interest costs are
unallowabile.
Since the State was on notice that applicable regulations
specifically
prohibited federal funding for interest costs, it could not
reasonably
view the Regional Office's approval of the lease-purchase
agreement as
approving federal payment of such costs nor could it reasonably
rely on
any oral statement by Regional Office officials that such costs would
be
paid. /2/
Moreover, even if the State had reasonably relied on the alleged
Agency
approval of the interest costs, the Agency cannot be estopped
from
taking the disallowance in the absence of affirmative misconduct by
the
Agency official who allegedly approved the interest costs (although
it
is unclear whether even affirmative misconduct would justify
an
estoppel). See Schweiker v. Hansen, 450 U.S. 785 (1981);
Heckler v.
Community Health Services of Crawford County, 467 U.S. 51 (1984).
Here,
the Agency and the State, respectively, suggested that the approval
of
the lease-purchase agreement may have been given in ignorance of
the
interest element in the agreement or in ignorance of the prohibition
on
interest costs. There is no allegation that the Regional
Office
deliberately misled the State regarding the availability of
federal
funding for the costs. While it is unfortunate that the
Regional Office
may have failed to recognize that an interest element is
generally
included in such transactions or may not have been aware that
interest
costs were not allowable under the applicable regulations, this does
not
relieve the State of its responsibility for conducting its program
in
accordance with the regulations.
Conclusion
For the reasons set out above, we uphold this disallowance. /1/
The
State offered to supply
affidavits to establish that the
Regional Office intended to approve payment
of all costs of the
lease-purchase agreement, including interest costs.
(Tape of March 11,
1986 telephone conference call) We have determined that
this would not
be a material fact, for the reasons discussed below, and
proceed to
decide the case without the evidence
offered. /2/ Even if
the
State did not have actual knowledge of the prohibition on interest
costs
in 41 CFR 1-15.713-7 as made applicable by 20 CFR 404.1626,
publication
of a document in the Code of Federal Regulations is sufficient to
give
legal notice. In any event, the DDS conceded that its accountant
was
aware of the interest prohibition, although the accountant was
not
consulted in connection with the lease-purchase agreement. (Tape
of
March 11, 1986 telephone conference)