Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: New York State Department of Social Services
DATE: June 15, 1992
Docket Nos. 91-72 and 91-85
Decision No. 1336
DECISION
The New York State Department of Social Services (NYSDSS) appealed
a
determination by the Regional Director of the Division of
Cost
Allocation (DCA) disallowing $9,545,607 in federal
financial
participation (FFP), claimed by NYSDSS under various public
assistance
programs. NYSDSS also appealed a follow-up determination by
the Health
Care Financing Administration (HCFA) disallowing $4,323,996
claimed
under Title XIX (Medicaid) of the Social Security Act (Act) and
included
in the amount disallowed by DCA. The amount in dispute relates
to costs
for the NYSDSS headquarters building in Albany, New York, known as
the
Ten Eyck building, during the period from fiscal year (FY) 1977
through
FY 1989. DCA disallowed claims for lease costs in excess of a
use
allowance calculated by DCA and for certain payments in lieu of
taxes.
Summary
We conclude below that DCA correctly disallowed costs claimed for the
Ten
Eyck building in excess of the use allowance, which is the amount
permitted
under the plain terms of the applicable cost principles, and
rightly
determined that interest costs for the building are unallowable.
We therefore
uphold that part of the disallowance, subject to certain
adjustments in the
calculation discussed below. We also conclude that
the payments in lieu
of taxes were allowable, since DCA did not
establish inconsistent treatment
of such payments, and therefore, we
reverse the part of the disallowance
relating to those payments..
Background
The Ten Eyck building was constructed between 1974 and 1976 by the
Urban
Development Corporation (UDC), a corporate governmental agency
under
state law. N.Y. Unconsol. Law . 6254-6326 (McKinney 1991).
The
construction was financed by public bonds sold by UDC. NYSDSS
Brief
(Br.) at 3. An agreement executed in 1974 between UDC and the
State
Office of General Services (OGS) provided for semi-annual payments
over
40 years from OGS to UDC to retire the construction bonds, as well
as
payments to cover occupancy and maintenance expenses and payments
in
lieu of taxes to the city, county, and school district of Albany,
New
York. DCA Br. at 2; NYSDSS Br. at 3: NYSDSS Exhibit (Ex.) 1.
At the
end of the 40 years, title will pass from UDC to New York State.
NYSDSS
Ex. 1, at 9, 28.
In 1976, NYSDSS began to occupy the building as its headquarters
by
direction of OGS. NYSDSS obtained a figure from OGS for the cost
of
space per square foot in the building and used this figure as a
basis
for calculating its claims for FFP. NYSDSS indicated that this
figure
was based on comparable fair market rental charges and included
OGS
operational and maintenance costs, although no individual components
of
actual costs were separately identified. NYSDSS Br. at 4.
NYSDSS' claims for Ten Eyck costs for FYs 1984 and 1985 were
reviewed
under the Single State Audit program. The auditors questioned
the use
of a comparable market rate, instead of actual costs. NYSDSS
Ex. 3;
NYSDSS Ex. 20, at 25. DCA found that the method used by NYSDSS
to
determine its cost of space was improper. DCA determined that Ten
Eyck
was a publicly owned building occupied by NYSDSS before October 1,
1980,
for which costs could be claimed only on the basis of a use
allowance.
Disallowance determination (April 16, 1991). Further, the
use allowance
could be calculated only from actual, allowable costs, which
did not
include any form of interest payments. DCA also determined
that, since
payments in lieu of taxes were not made on all State-owned
buildings,
reimbursement of those costs in regard to Ten Eyck violated
the
requirement for consistent treatment of costs set out in Office
of
.Management and Budget Circular A-87 (OMB A-87). 1/ DCA
extrapolated
the disallowance to cover a twelve-year period beginning with
NYSDSS'
occupancy of the Ten Eyck Building, from FY 1977 through FY
1989.
NYSDSS Br. at 8.
Analysis
I. No FFP is authorized for space costs in Ten Eyck other than a
use
allowance.
The essence of DCA's argument is that applicable regulations and
cost
principles permit only one methodology for claiming
federal
reimbursement for the costs of space used in a publicly owned
building
under the circumstances here, i.e., a use allowance as provided in
OMB
A-87, Attachment (Att.) B, C.2.d and B.11. 2/ The use allowance is
a
"means of providing compensation in lieu of depreciation," must
be
"based on acquisition cost," and is "computed at an annual rate
not
exceeding two percent." OMB A-87, Att. B, B.11.a, B.11.b, and
B.11.d.
This Board has addressed the question of .alternative methods
of
claiming publicly owned building space before, and has
repeatedly
concluded that "compensation for publicly owned buildings can be
only
through depreciation or use allowance." See, e.g., Hawaii Dept.
of
Social Services and Housing, DAB No. 662, at 2 (1985). In Hawaii,
as
here, the State sought to claim the comparable fair market rental
costs
for space in a government building. (The program involved
was
different, but the same cost principles of OMB A-87
applied.)
Similarly, in Indiana Dept. of Public Welfare, DAB No. 230 (1981),
FFP
was restricted to a use allowance for a building held by
Indiana's
Office Building Commission and leased to the state Medicaid
agency. The
Board concluded that OMB A-87 required that "office space
costs for
State-owned facilities should be calculated on the `use allowance'
basis
and not on purported `lease' costs" and that "even if the
leasehold
method was allowable, no tenant-owner relationship could exist
between
the State and the State Office Building Commission." Id. at 2
of Order
to Show Cause, incorporated into the Decision. We thus find
that DCA's
conclusion that the appropriate method for claiming public space
costs
here is a use allowance is supported by the language of OMB A-87 and
by
our prior decisions.
However, NYSDSS raised a variety of theories under which it sought
to
justify claiming FFP in excess of the use allowance. Some of
these
theories are inconsistent with each other, or with NYSDSS' own
actions.
We discuss each of the proffered bases for claiming FFP in turn
below.
We conclude that NYSDSS did not show any authority under which it
could
properly claim FFP for its costs in occupying Ten Eyck beyond
the
permitted use allowance.
A. Lease purchase provision
NYSDSS argued that the cost of space set forth in the agreement
between
UDC and OGS should have been allowed as a lease purchase
arrangement,
under the following provision in the cost principles:
Occupancy of space under rental-purchase or a lease
with
option-to-purchase agreement. The cost of
space procured under
such arrangements is allowable
when specifically approved by the
Federal grantor
agency.
OMB A-87, Att. B, C.2.e. We find that this provision does not apply
to
the transactions here between various components of the State.
Further,
we find that NYSDSS did not obtain the required specific
approval..
i. The provision for lease purchases in the cost principles
is
inapplicable.
Since the agreement provides for title to be conveyed to the State of
New
York only at the conclusion of the lease term, NYSDSS argued that
the State
did not have a "material equity" in the building as if it were
a direct
purchase. NYSDSS Br. at 25. NYSDSS described the lease as
an
arm's-length transaction, and asserted that accounting
principles
prescribed that such a transaction be treated as if it involved
a
private party. Further, NYSDSS argued that the lease was approved
by
DCA when it approved NYSDSS' cost allocation plan (CAP) for
the
building.
Contrary to NYSDSS' assertions, the State essentially owns Ten
Eyck
already, because title is held by UDC, which is a component of
the
State, created by State law, and funded by State bond offerings.
The
Board has often pointed out that the State as a whole is the
entity
ultimately responsible under applicable regulations for accounting
for
the use of federal funds. 3/ The State may not create
various
components, and seek to treat them as independent entities for
FFP
purposes, when the result is to inflate costs and evade the intent
of
the cost principles by creating a "sham" lease obscuring the reality
of
State ownership. Such self-dealing violates the State's
express
responsibility "for the efficient and effective administration" of
its
grant programs. OMB A-87, Att. A, A.2.a. Thus in this
case,
transferring federal funds from NYSDSS to OGS, and ultimately UDC,
in
the guise of lease payments does not create a "cost".reimbursable by
the
federal program, when all three entities are components of the
grantee.
See also Maryland Dept. of Human Resources, DAB No. 1247, at 6,
n.7
(1991); Louisiana Dept. of Health and Hospitals, DAB No. 1176, at
10
(1990).
The cost principles for state and local government grantees
have
historically distinguished between the costs of obtaining space
in
private buildings and the costs of dedicating space in public
buildings
to federal program purposes. 4/ This distinction is founded
in the
policy that, in determining the costs of public grantees, unlike
in
paying private vendors, federal grantor agencies recognize
"[n]o
provision for profit or other increment above cost." OMB A-87,
Att. A,
A.1. Thus, treating UDC as if it were a private vendor in a
lease
purchase arrangement, rather than a public entity, would permit
the
State to obtain reimbursement greater than that intended.
Even if the arrangement between UDC and OGS could be treated as a
lease
purchase, NYSDSS would not be authorized to claim the full amount of
the
lease payment. The HHS Grants Administration Manual (HHS-GAM)
describes
two kinds of leases in which lease costs are limited: material
equity
leases and less-than-arms-length leases. Payments under such
leases are
allowable only up to the amount permitted under the applicable
cost
principles if title had passed to the lessee immediately.
HHS-GAM,
chapter 6-10 (April 1, 1980). One form of material equity
lease is any
lease which cannot be canceled and which provides for title to
pass to
the lessee after the lease period. Here, the State will take
title
under the lease at the end of its term, and the provisions of the
lease
make the rental obligation "absolute and unconditional." NYSDSS
Ex. 1,
at 28 and 32. Therefore, only the costs allowable for a building
owned
by the State, i.e., a use allowance, are permitted.
The lease is also less-than-arms-length, since "one party . . . is able
to
control or substantially influence the actions of the other."
HHS-GAM,
Chapter 6-10, 6-10-20.B. Such leases include those between
"divisions
of an organization." Id. UDC and OGS constitute two
components of
the State of New York, created and controlled by State
law. Therefore,
again, the State is limited to the costs allowable if
it owned the
building..NYSDSS relied on certain accounting principles to
argue that the
UDC-OGS lease should be treated as a private lease
purchase. NYSDSS
Reply Br. at 7-8; NYSDSS Ex. 21. [Governmental
Accounting Standards Board,
Governmental Accounting and Reporting
Standards . 2000 (1990) (GASB)].
NYSDSS based its claim that these
accounting standards govern allowability on
language in OMB Circular
A-87 which makes one of the seven general factors
governing the
allowability of costs that they "[b]e accorded consistent
treatment
through application of generally accepted accounting
principles
appropriate to the circumstances." OMB Circular A-87, Att.
A, C.1.e.
This provision would prevent a grantee from claiming costs
otherwise
allowable but not treated consistently under accounting
principles. It
does not confer allowability on a cost which is treated
consistently
under appropriate accounting principles but which is
otherwise
unallowable. In any case, NYSDSS did not show that GASB
standards would
in fact result in treating this lease as a private
transaction. GASB
states that, where a public authority is created to
finance construction
of a building to which it then takes title with an
agreement to transfer
it to the state government at the end of a lease
period, "it must first
be determined whether the public authority is part of
the governmental
reporting entity" under criteria set forth in GASB, Section
2100. If it
is part of the governmental reporting entity, the building
should be
reported as an asset of the entity, i.e., treated as if already
owned.
Otherwise, the lease agreement should be "treated in the same manner
as
any other lease agreement." GASB at L20.127. (We note that,
even were
this lease so treated, it would be subject to the specific
approval
requirements discussed below.) NYSDSS did not provide the GASB
criteria
from Section 2100. However, the regulations clearly treat the
State as
a whole as the responsible entity for accounting for federal grants
(see
our discussion above), and UDC is clearly a part of the State,
even
though it is not part of NYSDSS or OGS.
5/. ii. Even if
the
lease purchase provisions could have been used, the grantee did
not
obtain the required specific approval.
In order to apply the lease-purchase provisions, a grantee must
have
specific approval from the grantor agency. OMB A-87, Att. B,
C.2.e.
NYSDSS relied on the approval of its CAP. However, NYSDSS cited
no CAP
provision requesting permission to claim costs under the lease
purchase
provision, but rather simply asserted that the CAP approval covered
the
Ten Eyck lease. NYSDSS Br. at 25-26.
NYSDSS submitted amendments to its statewide CAP dated October 23,
1980
which state that "Ten Eyck Building Rent is being allocated in the
same
way that the A-87 OGS World Trade Center Rent is being allocated,
i.e.,
the rent for this building is being allocated in proportion to
the
number of positions . . . ." NYSDSS Ex. 5, at 1. The World
Trade
Center entry states that its "actual rental" is allocated among
agencies
by number of positions. Nothing in either entry requests
approval to
claim costs under the lease purchase provisions or any other
provision
that NYSDSS now seeks to employ. In fact, each addresses only
the
method by which the State would allocate its costs among
benefitting
agencies or functions, i.e., by space usage. 6/ The mere
references.to
"rent" in the CAP are insufficient to charge DCA with knowledge
that
NYSDSS was seeking approval for a lease purchase. Moreover, the
CAP
does not identify the Ten Eyck building as one which is not
privately
owned.
NYSDSS also submitted a portion of a revised CAP dated July 27,
1984
specifically for Ten Eyck rent, which states that the building is
owned
by UDC, leased to and maintained by OGS, and charged to NYSDSS
in
proportion to its space usage. The plan states that the "costs
incurred
by OGS are annually identified to DSS as charges per square foot
for
space occupied . . . ." NYSDSS Ex. 6, at II.2.1. If anything,
this
description implies that OGS's actual costs are being determined,
as
opposed to the representations made by NYSDSS that its claims
reflected
comparable fair market rental rates. In any case, nothing in
this
language would fairly alert DCA that NYSDSS was seeking approval for
a
lease purchase arrangement with a quasi-governmental entity. If it
was
intended to serve this purpose, the CAP was materially incomplete.
As DCA pointed out, its approval letter for the Ten Eyck CAP, dated
March
25, 1985 contained the following conditions:
1. The approval is based on information
provided by the State and
is void if the information
is later found to be materially
incomplete or
inaccurate.
2. The costs claimed for Federal financial
participation must be
allowable under the law, the
cost principles contained in OMB
Circular A-87 and
program regulations.
NYSDSS Ex. 7, at 1. The letter further stated that "[n]othing
contained
herein should be construed as approving activities not
otherwise
authorized by approved program plans, or Federal legislation
or
regulations." Id. at 2. These disclaimers make evident that
no
approval by DCA could be implied, at least subsequent to March of
1985,
either for any claiming methodology not completely and
accurately
presented by the State or for costs that are not allowable under
OMB
A-87. While specific approval could make a lease
purchase
allowable.under OMB A-87, we have already found that the CAP
disclosed
no request for such approval. Furthermore, the Board has held
in the
past that approval of otherwise unallowable interest may not be
derived
from approval of a lease purchase transaction, because grantees are
held
to be on notice of the specific prohibition on interest in
the
regulations. Washington Dept. of Social Health Services, DAB No.
741,
at 3 (1986). Thus, even if the approval of the CAP were treated
as
approving the lease transaction (which we find it did not), that
would
not be sufficient to make interest costs arising from it allowable.
Generally, the approval of a CAP approves the method of allocating
costs
but does not imply approval of the allowability of particular
cost
items. See Pennsylvania Dept. of Public Welfare, DAB No. 832, at
6
(1987). NYSDSS cited regulations on costs allowable with approval
of
the granting agency which provide that when costs are allocated
pursuant
to a government-wide CAP, "acceptance of the costs as part of [the
CAP]
shall constitute approval." 45 C.F.R. . 74.177 (1991) and
predecessor
provisions. Regardless of whether these CAPs are
"government-wide," a
point which DCA disputed, neither CAP provided DCA with
sufficient
accurate information about how the State would determine the
amount of
building costs to be claimed, as opposed to how it would allocate
those
costs. Thus, we find that the CAP approval here did not serve
to
approve use of the lease purchase provision.
NYSDSS argued that the approval issue was resolved in its favor by
the
Regional Director, because his decision upholding DCA's
determination
did not mention it. NYSDSS Br. at 25. We find no
merit in this
argument. The Regional Director's decision clearly did
not resolve the
issue in NYSDSS' favor. The Regional Director simply
determined that
the only method under which costs could properly be claimed
for the Ten
Eyck building was by a use allowance. If any implication
can be drawn
from the fact that one element of a theory advanced by the State
was not
mentioned, it is that the Regional Director rejected that element
when
he rejected all of the State's alternative claiming theories.
Further,
the Regional Director's determination did not have to recite
every
possible basis for the disallowance. We have required only
that
agencies make their disallowance determinations clear enough to
allow
grantees to understand which costs are disallowed and why and
that
appellants have adequate opportunity to address any issues raised
on
appeal. See, e.g., Dallas County Community Action Committee, DAB
No.
.1265, at 9-11 (1991). NYSDSS has had ample opportunities here
to
address the approval issue.
B. Rental cost provision
NYSDSS alternatively argued that it could claim costs for the Ten
Eyck
building based on OMB A-87, Att. B, C.2.a, which provides:
The rental cost of space in a privately-owned
building is
allowable. Similar costs for
publicly owned buildings newly
occupied on or after
October 1, 1980 are allowable where "rental
rate"
systems, or equivalent systems that adequately reflect
actual
costs, are employed. Such charges must
be determined on the basis
of actual cost (including
depreciation based on the useful life of
the
building, interest paid or accrued, operation and
maintenance,
and other allowable costs.)
This provision does not apply because Ten Eyck was publicly owned and
was
occupied before October 1, 1980. We reject NYSDSS' argument
that
the coverage of rental cost equivalents for public buildings was
a
remedial amendment which should be applied retroactively.
Furthermore,
no evidence was introduced of a rental rate system based on
actual cost
ever having been employed for Ten Eyck.
i. The building was publicly owned.
NYSDSS asserted that "a public building means a building owned in
fee
simple by the grantee prior to the use of the facility for
grantee
purposes." NYSDSS Reply Br. at 7. On this basis, NYSDSS
argued that
the State was not the owner of Ten Eyck, despite "UDC's status as
a
public authority." Id. NYSDSS offered no authority to support
this
extremely narrow interpretation of public ownership, beyond
the
accounting standards discussed above. The drafters of OMB A-87
chose
the broad term "publicly owned," rather than "grantee-owned" or
"fee
simple." We see no reason to decline to give full effect to
the
language chosen by the drafters and adopted by regulation.
ii. Rental costs are not available for
publicly owned buildings
occupied before October 1,
1980.
NYSDSS admitted that it had occupied the building long prior to
the
regulatory deadline, but argued that the.rental cost provision
should
nevertheless be applied retroactively as a "remedial"
amendment. Prior
to the 1980 revisions, this provision consisted
only of the first
sentence, and no allowance was made for rental costs in
public
buildings. See 45 Fed. Reg. 27,363 (1980). NYSDSS argued
that the
distinction between public and private buildings was always
an
irrational one, that the 1980 revision was intended to remedy the
unfair
distinction, that the provision merely codified the rules used in
the
Handbook of Public Assistance, and that the occupancy deadline
included
in that revision is unreasonable and should not be given
effect. NYSDSS
Br. at 28-33. 7/
NYSDSS discussed at length considerations which might justify
retroactive
application of administrative policies. See, e.g., NYSDSS
Br. at
30-33. None of the cases cited by NYSDSS required that a rule
be
applied retroactively in the face of an explicit provision
for
prospective application only. For example, Bradley v. Richmond
School
Board, 416 U.S. 696 (1974), only deals with cases pending at the time
of
the enactment of a new statute. New York Tel. Co. v. FCC, 631
F.2d
1059, 1067-68 (2d Cir. 1980), simply holds that the
Federal
Communication Commission may give retroactive effect to an order
on
tariffs under the circumstances of that case, including evidence
that
petitioner had not greatly relied on prior rulings.
Generally,
retroactivity is not favored or implied. Bowen v. Georgetown
University
Hosp., 488 U.S. 204, 208-09 (1988) (finding no authority to
issue
retroactive regulations absent express statutory authority).
In any case, NYSDSS is incorrect in its assertions that the
occupancy
deadline was unreasonable and that federal.agencies did not rely on
the
old rule. 8/ The establishment of a clear cut-off date for
broadening
reimbursement of the costs of public buildings promoted
certainty,
prevented efforts to reopen innumerable prior claims on state
buildings,
avoided windfalls to states which had no reason to anticipate
such
additional recovery before the revision, and encouraged states to
move
operations from private to public facilities (rather than
simply
mortgaging existing property). 45 Fed. Reg. 27,363
(1980).
Furthermore, the federal agencies certainly relied on the prior rule
in
reviewing claims and would be burdened by an obligation to
reevaluate
them under a new standard. Clearly NYSDSS did not rely on
this rule
revision in its decision to occupy Ten Eyck in 1976, since NYSDSS
could
not have known then that the revision would be adopted.
iii. No rental rate system was actually
employed at the Ten Eyck
building.
Additional support for our finding that NYSDSS did not rely on
this
provision in claiming its costs for Ten Eyck is the absence of
any
evidence that a rental rate system was in fact developed or used by
the
State for Ten Eyck. Where costs for publicly owned buildings are to
be
recovered based on this provision, rental rates must be employed
that
reflect actual costs. NYSDSS did not assert that its claims were
based
on actual costs for the building, but rather acknowledged that
the
claims were based on rent figures obtained from OGS and believed
to
represent comparable fair market rental rates.
9/.
C.
Capital Expenditures
NYSDSS suggested that another alternative under which it might
recover
interest costs for Ten Eyck was a provision for capital expenditures
in
OMB A-87, which reads as follows, in relevant part:
The cost of facilities . . . is allowable when such
procurement is
specifically approved by the Federal
grantor agency. When assets
acquired with
Federal grant funds are [disposed of] . . . the
Federal grantor agency's equity in the asset will be refunded
in
the same proportion as Federal participation in
its cost.
OMB A-87, Att. B, C.3. The short answer to this proposition is the
same
as in regard to lease purchases, i.e., NYSDSS never obtained, or
even
sought, approval for federal participation in the purchase of Ten
Eyck.
Furthermore, NYSDSS did not explain why the "cost of facilities"
here
should be read to include interest, despite the explicit prohibition
on
interest on borrowings in OMB A-87, Att. B, D.7.
D. Handbook of Public Assistance Provisions
NYSDSS further cited to section 4532.5 of the Handbook of
Public
Assistance Administration (HPA) as the one source which "always
allowed
interest as an actual cost of a comparable fair market rental
rate."
NYSDSS Reply Br. at 10. We find that the HPA on its face does
not
support NYSDSS's claims. In any case, we find that this portion of
the
HPA is not applicable because it has been superseded to the extent
it
conflicts with later regulations adopting the cost principles in
OMB
A-87.
The language to which NYSDSS refers reads, in relevant part, as follows:
Federal financial participation is available in
rental charges
based on the initial cost of
construction or purchase of publicly
owned buildings
. . . .. Ordinarily the costs of
initial
construction or purchase are spread over the
life of the building.
For purposes of Federal
financial participation, however, such
charges may
be spread in relation to the comparable rental.
The
spread of costs of construction or purchase on
the basis of the
comparable rental permits the State
agency to secure the cost of
the building at a more
rapid rate than if the cost were spread on
the basis
of the life of the building. Once the initial cost of
a
building has been liquidated in this manner, only
the costs of
service and maintenance may be
charged.
[A discussion follows of the need for adjustment to
reimburse
the federal funds received in excess or normal depreciation
if
the State agency vacates a building before the end of its
useful
life and the consequent need to set a life expectancy "prior
to
a request for participation."]
* * *
Under certain circumstances Federal financial participation
is
available in other expenses as part of the cost of a project
for
the construction or purchase of a publicly owned
building.
These expenses might include the interest on monies secured
from
private or public sources to be used in the financing of
the
building . . . .
* * *
All rental charges for the initial cost of construction
or
purchase of publicly owned buildings . . . not exceeding
75
percent of the lowest appraisal of the comparable rental, may
be
approved by the State agency under standards in its
approved
plan providing for such approval . . . .
In summary, this provision permits acceleration of depreciation claims
up
to 75 percent of comparable private rental rates, or higher
with
approval. The assumption is that the federal government will
ultimately
benefit from a period of cost-free usage of the building
since
depreciation will have been recouped by the state before the end of
the
building's useful life. The state collects the federal share in
its
acquisition cost earlier, but does not receive a greater amount over
the
life of the building than it would have under straight
depreciation.
See Kentucky Dept. for Human Resources,.DAB No. 401, at 9
(1983)
(holding that the federal agency was entitled to some adjustment
where
the state vacated the building earlier and then claimed rent costs
for
different space).
i. The HPA provision does not permit the
claiming method used by
NYSDSS.
This provision is the only one cited by NYSDSS that refers to claims
based
on a comparable fair market rental rate. However, we find that
NYSDSS
misinterpreted the HPA provision, which uses comparable rental
only as a
benchmark for accelerating depreciation recovery. Even if
NYSDSS could
claim amounts higher than the use allowance for the early
years of its
occupancy under this provision, it would have to claim
amounts in later years
lower than those to which it would otherwise be
entitled. In any case,
NYSDSS made no showing that it sought to claim
depreciation, accelerated or
otherwise, by a request for participation
based on a prior calculation of
useful life, as contemplated by the HPA.
In addition, any claim for accelerated depreciation at a rate
exceeding
75% of comparable rental can be approved by the State agency only
based
on specific standards for such approval in its approved plan.
NYSDSS
stated at one point that its claim did not exceed 75%, but
this
assertion conflicts with statements elsewhere that NYSDSS simply
claimed
100% of the comparable rental figures it obtained from OGS.
Compare
NYSDSS Reply Br. at 10 with NYSDSS Br. at 4 and Tr. at 401-402,
415-430.
NYSDSS did not demonstrate that it obtained approval, under
standards in
any approved plan, to exceed 75% of comparable rental in order
to obtain
accelerated depreciation.
NYSDSS asserted that the HPA "always allowed interest as actual cost of
a
comparable fair market rental rate." NYSDSS Reply Br. at 10. We
do
not agree. While it is true that interest costs may be embedded in
the
private rental rates used as a benchmark for accelerating
depreciation,
the HPA did not normally permit grantees claiming under it to
recover
their interest costs. Grantees were still limited in their
total
recovery to their depreciation, except where interest was permitted
in
special circumstances. The exception for possible availability
of
interest under certain circumstances does not support the claim
for
interest costs here, especially since NYSDSS did not present evidence
of
what circumstances have ever been found sufficient to uphold such
a
claim or what special circumstances here would justify it. Even
if
such interest might have been.available under this provision in
special
cases before OMB A-87, it clearly is no longer available, in the face
of
explicit prohibitions in A-87.
ii. This portion of the HPA is no longer in effect.
Further, we find that the HPA provision has been superseded to the
extent
that it conflicts with OMB A-87. OMB A-87 was incorporated into
this
Department's regulations at 45 C.F.R. Part 74 in 1973 (along with
the
administrative requirements from OMB Circular A-102). 38 Fed.
Reg.
26,274 (1973). The preamble notes that program regulations are
also
amended to revoke inconsistent provisions. Id. at 26,275. It
further
points out that the content of OMB A-87 is government-wide.
Id. OMB
A-87 itself states that part of its policy intent is to promote
"a
uniform approach to the problem of determining costs." OMB A-87, .
4.
OMB A-87 addresses, directly and in detail, the methods by which
the
costs of space for use in federal programs may be claimed by
state
governments. Whatever may be the continuing viability of other
portions
of the HPA, 10/ those provisions which directly conflict with
later
regulations must be considered superseded. OMB A-87 preempted the
field
of cost principles for reimbursement of space in public buildings
used
by state governments.
Further, to treat HPA section 4532.5 as having been continuously
available
to states, despite the adoption of OMB A-87 in the
Department's regulations,
would render meaningless the notice and
comment process in which OMB.engaged
in deciding to broaden the rental
cost provision to cover newly occupied
public buildings. 45 Fed. Reg.
27,363 (1980). Since OMB A-87
clearly set forth a limited number of
options for claiming these costs,
NYSDSS could not reasonably avoid its
restrictions by reading in another
method from the HPA.
We conclude that the only method by which NYSDSS could seek FFP in
its
costs for space in the Ten Eyck building was by a use allowance.
II. Interest was not an allowable component of costs for
calculating
the use allowance.
NYSDSS's main objection to DCA's insistence on a use allowance based
on
actual costs is that DCA refused to include the costs of interest
paid
on bonds used to finance the construction. DCA's refusal derived
from
the following provision:
Interest on borrowings (however represented), bond
discounts, cost
of financing and refinancing
operations . . . are unallowable
except when
authorized by Federal legislation and except as
provided for in paragraph C.2.a of this Attachment.
OMB A-87, Att. B, D.7. (Paragraph C.2.a refers to the rental
cost
provision as modified effective October 1, 1980, discussed elsewhere
in
this decision.) NYSDSS contended that the interest prohibition
should
be applied only very narrowly, because it was borrowed from
procurement
regulations and, according to NYSDSS, was construed narrowly in
that
context. Further, NYSDSS suggested that OMB was required by
federal law
to treat state grantees' claims in the same way as federal
agencies'
procurement practices, and therefore to permit interest in
this
situation. We find no merit in these arguments.
A. Breadth of the Interest Prohibition
On its face, the language of the interest prohibition aims to be
inclusive
of every kind of interest cost on borrowed funds. In fact,
this
interpretation and its application to this situation is supported
by a letter
from OMB submitted by NYSDSS which affirms that OMB A-87
"prohibits the
payment of any interest, except for interest incurred to
finance buildings
occupied on or after October 1, 1980. The prohibition
extends to
interest included in lease purchase payments." NYSDSS Ex.
33, at
1. Nevertheless, NYSDSS suggested that, to.the extent that OMB
itself
understood the provision thus broadly, OMB erred in interpreting
language
which it originally borrowed from earlier procurement sources.
See, e.g., Tr.
at 220, 255 -65. NYSDSS pressed this position despite
the fact that the
reading of the interest prohibition DCA advanced here
is long-standing and
has been upheld by this Board in the past. See,
e.g., NYSDSS Ex. 34
(letter from Kevin Moley to Rep. Frank Horton);
Washington Dept. of Social
and Health Services, DAB No. 741 (citing both
to procurement regulations and
OMB A-87 as incorporated therein to
uphold disallowance of interest on lease
purchase of equipment).
NYSDSS argued that an exhaustive review of the history of this
provision
and its predecessors supports an extremely restrictive
interpretation of
the forms of interest intended to be proscribed. 11/
See NYSDSS Ex. 29
(Affidavit of Gerald Townley, Jr.); NYSDSS Ex. 35
(Memorandum of
Congressional Research Service); Tr. at 26-31, 212-242.
NYSDSS argued
that the interest prohibition is only applicable to situations
where the
State "acts as a contractor" to, rather than a grantee of, the
federal
government, and then only to "prevent the State from receiving
interest
on late payments." Tr. at 26. NYSDSS's interpretation of
the parallel
language in the procurement rules is that "interest incurred to
finance
the construction of a building under a lease-purchase contract with
the
federal government" would not be disallowed. NYSDSS Br. at 20.
12/
Rather, NYSDSS read.the prohibition on interest on borrowing
in
procurement cases as limited to interest relating to equity capital
of
contractors, or the analogous "spring borrowing" to raise State funds
to
cover operations before revenue is realized. Tr. at 26. 13/
Elsewhere,
NYSDSS described the scope of the procurement regulation as
limited to
the kind of interest on late payments requiring sovereign
immunity
waiver. In support, NYSDSS cited several procurement
decisions. 14/.The
cited cases simply do not support the position advanced by
the State.
Cases under the old Federal Procurement Regulations (FPR) stand
for the
proposition that interest is not allowable under cost-reimbursement
type
contracts, unless the contractor was forced to borrow to
finance
additional work not initially required by the contract or to
finance
other extra costs incurred because of government action. See,
e.g.,
Bell v. United States, 404 U.S. 975 (Ct.Cl. 1968); Singer
Co,,
Librascope Div. v. United States, 568 F.2d 695, 698 (Ct.Cl.
1977);
Appeal of Ingalls Shipbuilding Div., Litton Systems, ABSCA No.
17579
(1978). In Framlau Corp. v. United States, 568 F.2d 687, 694
(Ct.Cl.
1977), the court refused to extend Bell beyond the situation where
a
contractor could show an actual cost of borrowing money resulting
from
government delays. See NYSDSS Br. at 17.
In American Chemical Society v. United States, 438 F.2d 597 (Ct.Cl.
1971),
the contract negotiators for the government were aware of the
interest
prohibition of the FPR, but at the time the cost principles of
the FPR did
not govern the National Science Foundation (the contracting
agency) and were
used only as a guide. Nevertheless, at the request of
the Comptroller
of the National Science Foundation, the mortgage
interest was treated in the
contract as part of a fixed fee above costs,
rather than as a reimbursable
cost. Thus, the allowance of interest in
that case cannot be considered
as a determination that mortgage interest
was in general an allowable cost
under the FPR.
The Federal Acquisition Regulations (FAR) replaced the FPR in 1983,
and
provides a specific exception to the prohibitions on interest
on
borrowings. 15/ No parallel.provision existed in OMB A-87, until
the
addition of the current exception for public facilities occupied on
or
after October 1, 1980 (discussed above). Any cases decided under
the
FAR thus cannot reasonably be read as interpreting the interest
on
borrowings provisions as narrowly as NYSDSS advocated; rather,
these
cases merely evidence the effect of an exception to that
prohibition
applicable only in the procurement arena. See, e.g., Appeal
of TDC
Management, DOTCAB No. 1802 (1991).
Even if procurement law did make the distinction urged by NYSDSS, we
would
not be bound by procurement decisions. As this Board stated in
Humanics
Associates, DAB No. 860, at 11 (1987):
[W]e are not bound by Board of Contract Appeals decisions,
even
though they decide issues concerning contract
provisions
containing the same wording as grants provisions;
special
considerations may apply in grants administration which do
not
apply to procurement contracts.
Our prior decisions have established that even identical language
in
regulations may be construed differently, in light of the
many
differences in the grant and procurement contexts. 16/
Action
for.Boston Community Development, Inc., DAB No. 349, at 8 (1982).
The state government cost principles adopted by the Department
through
incorporation of OMB A-87 similarly deal with grant relationships
that
are significantly different from procurement. For example, OMB
A-87
explicitly prohibits profit, which would be a normal element for
a
procurement contractor. OMB A-87, Att. A, A.1. Procurement
regulations
allow selling costs which would be inappropriate to a grant
context.
See 48 C.F.R. . 31.205-38; compare OMB A-87, Att. B, B.2. They
differ
in their treatment of particular items, such as training and
education
costs. Compare 48 C.F.R. . 31.205-44 with OMB A-87, Att. B,
B.26.
The federal government may reasonably have different concerns and
policies
when it acts as a donor or partner with a grantee in operating
an ongoing
program, than when it acts as a purchaser seeking a vendor or
contractor.
17/ It is noteworthy also that the cost principles for
state
governments were prepared by OMB and adopted by the Department as
a complete
set and not as an incorporation by reference or in toto of
procurement
regulations. Therefore, each principle should be viewed
primarily in
connection with the total set of principles in A-87, and
not in connection
with the original sources of particular provisions.
Thus, we conclude that
the existence of parallel language in or a common
origin with
procurement.regulations does not compel DCA to apply
language in a grant
context in the same way as in a procurement context.
It is unavailing for NYSDSS to assert that "whenever the Secretary
has
specifically addressed the allowability of interest," he has allowed
it.
NYSDSS Reply Br. at 16. The examples NYSDSS cited are HPA 4532.5
and 42
C.F.R. . 413.153. The HPA provision has already been
discussed. The
cited regulation deals with Medicare cost principles for
providers who
are required to be compensated on the basis of reasonable cost
or
customary charges, whichever is lower. 42 C.F.R. . 413.1 (b)
(1991).
In defining reasonable cost, the regulations expressly include
many
items that would not be allowable in a grant, including a return
on
equity capital, as well as "[n]ecessary and proper interest on
both
current and capital indebtedness." 42 C.F.R. .. 413.153 (a) (1)
and
413.157. All this means is that Medicare providers are subject
to
different rules from state Medicaid agencies acting in their capacity
as
grantees. In regard to state government grantees' costs
of
administering public assistance programs, the Secretary has
specifically
addressed the allowability of interest by adopting OMB
A-87's
prohibition of it.
B. Uniform Treatment of States and Federal Agencies
NYSDSS also took the position that the cost principles could
not
permissibly impose different treatment for state grants and for
federal
procurement, because Congress expressed an intention in enacting
Public
Law No. 93-400 that OMB "establish uniform rules for federal
executive
agencies and states as recipients for federal grants or
assistance."
NYSDSS Br. at 19, citing S. Rep. No. 692, 93rd Cong., 2d Sess,
reprinted
at 1974 U.S. Code Cong. and Ad. News 4622. The statute
provides as
follows:
With due regard to applicable laws and the program activities
of
the executive agencies administering Federal programs of
grants
or assistance, the Administrator [of the Office of
Procurement
Policy] may prescribe government-wide policies,
regulations,
procedures, and forms which the Administrator
considers
appropriate and which shall be followed by such
executive
agencies in providing for the procurement, to the
extent
required under such programs, of property or services . . .
by
recipients of Federal grants or assistance under
such
programs..41 U.S.C. . 405(i)(1). 18/ No evidence was
presented
by NYSDSS of any effort by the Administrator to exercise
this
discretionary authority to require that grants to
state
governments follow all federal procurement procedures, use
the
same forms as in procurement contracts, or otherwise be
treated
identically with executive agencies. 19/ In any
case,
procurement procedures even under grants relate to purchasing
by
grantees and address such matters as competitive
bidding,.while
cost principles govern the reimbursement of costs.
The federal
acquisition regulations adopted under this law expressly
state
that OMB A-87 "sets forth the principles for determining
the
allowable costs" of contracts with state governments and
that
any contract with a state government that refers to the
contract
cost principles "shall be deemed to refer to, and shall have
the
allowability of costs determined . . . in accordance with"
OMB
A-87. 48 C.F.R. . 31.602 and . 31.603 (a) (1991)
(adopted
1983). When these regulations were adopted, the
prohibition on
interest had long been in effect. Thus, to the
extent the
Administrator has spoken on cost principles applicable to
grants
to state governments, he has adopted OMB A-87 as interpreted
by
OMB and DCA here. Furthermore, the law admonishes
the
Administrator to act only with "due regard" to the
"program
activities" of other federal agencies. 20/
Since uniformity of treatment of cost items is not required
between
federal procurement and state grants, we need not address the
various
examples offered by NYSDSS of situations where federal
executive
agencies pay interest. See, e.g., NYSDSS Br. at 19-20,
22-23.
NYSDSS also challenged OMB's authority to amend OMB A-87 to change
the
treatment of interest in the construction of public buildings
after
October 1, 1980. NYSDSS Br. at 23. NYSDSS argued that since
no change
in the statute occurred to make such interest allowable thereafter,
OMB
could not suddenly make it allowable unless it had always
been
allowable. In this position, NYSDSS erred, because.(1) agencies
may
change their interpretations of statutes which they enforce, even if
the
underlying law does not change, so long as both interpretations
are
reasonable and notice of the change is proper, and (2) OMB A-87 is
a
legislative rule rather than an interpretation of a statute, as we
have
noted above. No question has been raised about the adequacy of
notice
of the change, since it was published in the Federal Register.
We find
no basis for NYSDSS' challenge to OMB's authority to change its
position
on public buildings.
In terms of the Secretary's authority to adopt these changes to OMB
A-87
absent a change in the Act, DCA correctly pointed out that the
Social
Security Act accords the Secretary specific authority to determine
what
costs are "necessary . . . for the proper and efficient
administration"
of the program in various areas. See, e.g., Act,
.1903(a)(2); DCA Br.
at 18-19. It is not unreasonable for the Secretary
to refine or change
his determination as to the necessity, propriety, or
efficiency of
particular costs over time.
We conclude that FFP in interest costs relating to the Ten Eyck
building
is prohibited.
III. The uniformity principle does not preclude the payments in lieu
of
taxes here.
A part of the disallowance amounting to $1,218,319 consisted of
actual
costs for Ten Eyck that were attributable to payments made in lieu
of
taxes. Disallowance letter at 2. Payments in lieu of taxes
are
allowable when "the grantee agency is legally required to pay"
them.
OMB A-87, Att. B, B.25. DCA did not allege that NYSDSS was not
required
to make the payments under State law, but rather contended that
such
payments "are not required for all other State buildings in Albany
and
other parts of the State." Disallowance letter at 2. 21/
Therefore,
DCA asserted that "the consistency requirement is not met."
Id. By
this, DCA referred to the requirement that, to be allowable,
costs must
"be consistent with policies, regulations, and procedures that
apply
uniformly to both federally assisted and other.activities of the unit
of
government of which grantee is a part." OMB A-87, Att. A, C.1.d.
We first note that New York made payments in lieu of taxes on all of
the
Ten Eyck building, not only on the part of the building occupied
by
NYSDSS and therefore eligible for FFP. However, DCA interpreted
the
consistency provision of OMB A-87 to mean that the State was the unit
of
government of which NYSDSS was a part, and that therefore no payment
in
lieu of real estate taxes by any part of the State was allowable
unless
all parts of the State are legally obligated to make such payments
on
all their real estate. DCA argued that the State must make payments
on
every State building in order to meet the test of consistency.
DCA's
position was that if any building or any locality was not covered by
a
legal requirement to make such payments, then no payments required
for
any building in any locality could meet the consistency test. Tr.
at
517, 526. NYSDSS argued that the consistency provision meant that
the
State must make payments in lieu of taxes whenever they are
legally
required and must not single out federally assisted activities to
bear a
disproportionate burden of such payments. We agree with NYSDSS
in
reading this provision as directed against an effort by grantees
to
shift costs to the federal government by undertaking costs when
federal
participation is available that are avoided when the grantee must
cover
them alone. We do not think that a rational program which
requires
payments in lieu of taxes only in certain settings (for example
in
cities or counties where State land use burdens the tax base)
is
prohibited, so long as it is not designed to have a differential
impact
on federally assisted activities.
This interpretation is supported by our prior decisions. The Board
has
found violations of the consistency principles when the
federal
government has been charged at a higher rate than the state paid
on
similar cost items, such as retirement benefits (State of
Connecticut,
DAB No. 9, at 5 (1975)) or pension funds (Indiana Public
Employees'
Retirement Fund, DAB No. 314, at 7-9 (1982)). In Florida
Dept. of
Health and Rehabilitative Services, DAB No. 821, at 16 (1987), the
Board
held that the inconsistency which OMB A-87 forbids is between
the
treatment of costs when federal funding is available and when only
other
grantee funds are used.
Here, NYSDSS submitted a number of state laws to support its
assertion
that the State provides for payments in lieu of taxes to
various
localities impacted by State ownership of real estate, regardless of
the
availability of federal reimbursement. NYSDSS Exs. 25, 26 and
27;
Tr..at 522-24. DCA did not show that these state laws made or
resulted
in any distinction between programs with or without federal
funding.
The laws on their face appear part of a rational program to
compensate
localities disproportionately affected by state initiatives,
rather than
a mere subterfuge to obtain additional federal funds.
Therefore, we conclude that the payments in lieu of taxes here
are
allowable, since they were legally required and were not
treated
inconsistently between funding sources.
IV. Other Issues
NYSDSS raised a number of other contentions in its briefs and at
the
hearing. While we have considered all the material in the record,
most
of these contentions need not be addressed in light of the
conclusions
we have reached above. However, several subjects must be
mentioned.
A. The Recalculation Question
NYSDSS contended that the amount of the disallowance should
be
recalculated because NYSDSS was not credited with its actual
operational
and maintenance cost for all of the years in question, but only
for FYs
1984 and 1985. NYSDSS Br. at 10, 38; NYSDSS Reply Br. at 20-21;
NYSDSS
Ex. 12, at 8 (Affidavit of Roger Nelligan). NYSDSS further
argued that
its claims under Title XX of the Act should not have been
affected
because NYSDSS did not claim administrative costs under that program
and
that the amount of taxes paid to the City of Albany and other
entities
was not correctly calculated. Id.
DCA responded that it was willing to review data provided by NYSDSS
to
demonstrate that it incurred allowable operation and maintenance
costs
and to document that no claims were made for administrative costs
under
Title XX. DCA Br. at 29-30.
At the hearing, the parties indicated that they had reached an
agreement
on a method for recalculating the amount of the disallowance.
Tr. at
6-7, 354-55. Therefore, the part of the disallowance upheld by
this
decision is subject to recalculation in accordance with the
agreement
between DCA and NYSDSS.
NYSDSS also raised a question of whether the costs of interim
financing
and acquisition of land should have been removed from the amount of
the
disallowance. Tr. at 7-8, 35. However, DCA indicated that
these
elements were.not components of the disallowance. Id. At
the hearing,
NYSDSS did not substantiate whether the State in fact incurred
interim
financing costs, or the amounts involved. See Tr. at 323.
If NYSDSS
has documentation of allowable costs in this regard, DCA should
review
it as part of the recalculation contemplated above.
If NYSDSS is dissatisfied with the results of the recalculation, it
may
return to this Board for a review of that issue alone. No
further
review of the substantive bases for the disallowance upheld in
this
decision would be permitted at that time.
B. The MMIS System
NYSDSS claimed that a part of the costs disallowed related to space
used
in the design, development and operation of its Medicaid
Management
Information System (MMIS) and was therefore eligible for
reimbursement
at enhanced rates under section 1903(a)(3) of the Act.
NYSDSS Br. at
37. NYSDSS relied on this Board's decision in New Jersey
Dept. Of Human
Services, DAB No. 648 (1985), for the proposition that
interest costs
were included in the "special benefits" Congress intended to
extend to
the states for MMIS.
Nothing in the Act supports NYSDSS' position that unallowable costs
become
eligible for FFP simply because they are expended in relation to
MMIS.
The "special benefits" extended by Congress consist only of the
higher
percentage borne by the federal government for allowable costs
allocable to
MMIS and attributable to its design, development,
operation, etc. In
New Jersey, the Board dealt with indirect costs
about which there was no
dispute as to their allowability and
allocability to MMIS. Id. at 1,
4. The Board rejected a distinction
between indirect costs which were
"directly attributable" to MMIS and
those which were merely
"attributable." Id. at 6. New Jersey provides
no foundation for
NYSDSS' argument that unallowable interest costs are
reimbursable because
they may be attributable to MMIS.
However, to the extent that some of the allowable costs relating to
the
Ten Eyck building were attributable to MMIS, they may be eligible
for
reimbursement at the enhanced rates. NYSDSS may present to DCA
during
the recalculation process documentation of allocability of such costs
to
development or operation of MMIS under any approved CAP applicable
to
the disallowance period.
.
C. Tax Law Implications
NYSDSS submitted a supplemental brief, arguing that interest should
be
allowable here because OMB A-87 contains an exception to the
prohibition
on interest on borrowings "when authorized by federal
legislation" and
that tax law provided such authorization. NYSDSS
Supplemental Br. at 3;
OMB A-87, Att. B, D.7. The provision of the
Internal Revenue Code of
1954 to which NYSDSS cited was section 103, Public
Law No. 591, as
recodified by the Tax Reform Act of 1986, Public Law No.
99-514, 99th
Cong., 2d Sess. This provision excludes interest paid on
state and
municipal obligations from the recipients' gross income subject
to
federal income tax.
NYSDSS cited cases and legislative history of the 1986
recodification
which support the proposition that section 103's exclusion
from income
extends beyond bonds to interest on obligations arising from
lease
purchases. NYSDSS Supplemental Br. at 4-6, and citations
therein.
While some of this material may establish that the federal
government
thought it beneficial if the states could offer interest rates on
its
obligations which were more attractive in competition
with
non-governmental offerings because of the tax exemption, none of
it
supports NYSDSS' interpretation of section 103 as an
"express
encouragement of borrowing by states as a means of obtaining capital
to
operate programs." NYSDSS Supplemental Br. at 8. We find
nothing in
section 103, or its legislative history or case law, that
remotely
suggests an intention to authorize a change in the unallowability of
FFP
for interest on borrowings by the State as a grantee under OMB
A-87.
Further, DCA correctly pointed out that the exception allowing
federal
legislation to authorize FFP for interest costs contemplates a
specific
provision in relevant program legislation, here the Social Security
Act,
which contains no such authorization. DCA Supplemental Submission
at 2.
If anything, the material submitted by NYSDSS in relation to this
issue
supports our analysis of the nature of UDC and the interest paid
here.
NYSDSS asserted that the bonds sold by UDC would qualify for
exclusion
under section 103, and submitted an affidavit from the general
counsel
of UDC affirming this. NYSDSS Supplemental Br. at 5; NYSDSS Ex.
36.
The fact that UDC's obligations are treated as those of the State or
a
political subdivision thereof adds weight to our conclusion above
that
Ten Eyck is a public building, already owned by a component of
the
State, rather than in the process of being purchased. We also note
that
the Congressional reports submitted by NYSDSS state that interest
paid
by governmental units."other than pursuant to exercise of
their
borrowing power . . . is not tax-exempt." See. e.g., S.
Rep. No. 313,
99th Cong., 2d Sess. (1986), at 579. Since NYSDSS
asserted that the UDC
bonds at issue here were qualified for section 103
exemptions, it
follows that their issuance was a borrowing, which supports
the
application of the prohibition of "interest on borrowings."
Conclusion
We conclude that DCA correctly disallowed FFP for the cost of space in
the
Ten Eyck building beyond a use allowance and that interest is
unallowable as
an element of actual costs for the building. Therefore,
we uphold that
portion of the disallowance, subject to the opportunity
for recalculation of
the amount as agreed between the parties and
discussed above. If
dissatisfied with the results of the
recalculation, NYSDSS may return to this
Board for review of that issue
only within 30 days of DCA's decision.
We also conclude that NYSDSS' payments in lieu of taxes in regard to
the
Ten Eyck building did not violate the consistency principle. Since
DCA
did not show that they were otherwise unallowable, that portion of
the
disallowance is reversed.
___________________________
Donald
F.
Garrett
___________________________
Norval
D. (John)
Settle
___________________________
Judith
A.
Ballard
Presiding
Board
Member
1. OMB A-87 contains cost principles applicable to grants to state
and
local governments and was originally issued by OMB in 1969. In
1973,
the authority for issuing cost principles was shifted to the
General
Services Administration, which reissued the circular, without
altering
the text, as Federal Management Circular (FMC) 74-4. The
responsibility
was returned to OMB in 1975 and, on January 1, 1981, OMB
reissued the
circular in its present form, with a change in the treatment of
interest
costs for public buildings occupied after October 1, 1980. OMB
A-87 has
been made applicable to the programs of this Department by
regulation
since 1973 and currently is incorporated by reference at 45 C.F.R.
.
74.171. For the sake of simplicity, we refer to the circular
throughout
as OMB A-87, without distinguishing the time period when it
was
denominated FMC 74-4. We discuss the effect of the change in
treatment
of public buildings where relevant below.
2. The only alternative provided in those provisions is
depreciation,
which would spread the acquisition costs over the expected life
of the
building. However, the State employed the use allowance method
for
other buildings, and NYSDSS did not argue that depreciation should
have
been employed here rather than a use allowance. Tr. at 40-41,
54-56.
3. A grantee is defined by regulation as "the government . . .
entity
to which a grant is awarded and which is accountable to the
Federal
Government for the use of the funds provided. The grantee is
the entire
legal entity even if only a particular component of the entity
is
designated in the award document." 45 C.F.R. . 74.3. Even
where one
component is primarily responsible for administering the program,
the
entity as a whole retains "accountability to the Federal Government
for
the use of the funds provided." Id. The definition
specifically
mentions "State welfare departments" as being "only components
of a
legal entity." Id. Thus, for example, when a state as a
whole gained
financially from retaining funds from the estates of
Medicaid
recipients, we treated as irrelevant the circumstance that the
funds
were held in a component outside the Medicaid agency.
Massachusetts
Dept. of Public Welfare, DAB No. 1288, at 13 and n.9
(1991).
4. We discuss below the 1980 changes that allow rental costs for
new
public buildings.
5. Further, under the GASB standards, lease arrangements between
states
and public authorities are subject to "related-party considerations
of
FASB Statement 13, paragraph 29." Again, NYSDSS did not provide
the
referenced provisions, but the relationship between UDC, OGS, and
NYSDSS
is certainly one of related parties, since they are all components
of
the State. NYSDSS also submitted an excerpt from the Audit
and
Accounting Guide for Audits of State and Local Governmental Units of
the
American Institute of Certified Public Accountants (AICPA
Guide).
NYSDSS Ex. 31. In its discussion of accounting for capital
leases, the
AICPA Guide states that, when "the lessor is a component unit . .
. .
[referring again to GASB Section 2100] such as a building
authority
created by the governmental unit solely to finance construction for
the
governmental unit" then the component's transactions should
be
"consolidated with those of the governmental unit." AICPA Guide
at
85-86. If anything, this guidance suggests that treating
UDC's
transactions as those of the State in regard to this lease, as DCA
has
done, is correct.
6. NYSDSS also submitted an exhibit described as a state-wide CAP
for
fiscal year April 1, 1979 to March 31, 1980. NYSDSS Ex. 28.
This CAP
discusses building use charges and states that OGS identified space
used
by departments providing support services and charged them based on
"two
percent of total construction costs (the rate allowed by Circular
74-4
[later published as OMB A-87] as an allowable use charge in lieu
of
depreciation.)" Id. at 5 (parenthetical in original).
This
demonstrates that the State knew the correct way to claim
public
building costs.
7. To the extent that NYSDSS is suggesting that the Board
should
disregard the explicit provisions of OMB A-87, which is made
binding
here by regulation, DCA correctly pointed out that the Board is bound
by
all applicable regulations. 45 C.F.R. . 16.14 (1991); DCA Br. at
24-26.
Therefore, NYSDSS arguments that the distinction between public
and
private ownership and the October 1, 1980 cutoff are unreasonable
or
inadvisable cannot prevail. See NYSDSS Br. at 28-33.
Furthermore,
there is nothing inherently unfair about setting a cut-off date,
even
though buildings occupied after the date set are treated
differently
than those occupied before that date. Cf. Folden v.
Washington State
Dept. of Social and Health Services, 744 F.Supp. 1507, 1527
(W.D. Wash.
1990).
8. NYSDSS also argued that OMB could not change its interpretation
of
allowable costs for public buildings, because no statutory
change
occurred to precipitate the change. Therefore, NYSDSS concluded
the
current interpretation must always have been applicable. NYSDSS Br.
at
32, n. 14. This argument assumes that the cost principles
involve
statutory interpretation by OMB rather than constituting
administrative
requirements promulgated by this Department under legislative
rulemaking
authority. See, e.g., section 1102 of the Act. Even if
interpretation
is involved, however, we know of nothing which requires a
statutory
change as a prerequisite to a new administrative
interpretation.
9. Since comparable fair market rental rates act as a ceiling on
space
charges even when based on actual costs under OMB A-87, Att. B, C.2,
it
is even possible that OGS was providing the figures to NYSDSS only
so
that NYSDSS could make the required comparison. NYSDSS provided
no
documentation of how or why OGS calculated the figures provided, and
its
testimony on this point was vague and ambiguous hearsay. See, e.g.,
Tr.
at 401, 419-431.
10. The State argued before us in another case that the HPA was
revoked
in 1975, when HHS issued an action transmittal revoking "State
letters"
which had updated the Handbook. New York Dept. of Social
Services, DAB
No. 585, at 5-8 (1984). We rejected this conclusion,
noting that the
Department had been engaged in a lengthy project of
publishing portions
of the HPA in the Federal Register. We concluded
that parts that had
not been revised or revoked by some action of the
Department remain
valid, even if they may have become obsolete or obscure in
some
respects. Id. at 8-9; see also Louisiana Dept. of Health and
Human
Services, DAB No. 647, at 9 (1985); Washington Dept. of Social
and
Health Services, DAB No. 280, at 8 (1982) (HPA is binding where
no
evidence that statute or regulations superseded its standard);
New
Mexico Dept. of Human Services, DAB No. 211, at 2 (1981);
California
Dept. of Benefit Payments, DAB No. 160, at 3 (1981). As
discussed in
the text here, HPA section 4532.5 has been superseded by
regulation.
11. NYSDSS further pointed out that interest as a cost of
construction
is not barred by sovereign immunity as is prejudgment interest
absent a
waiver (i.e., compensation for federal delay in making
payments).
NYSDSS Br. at 23. However, DCA never suggested that the
interest
involved here is barred by sovereign immunity considerations of
kind
raised in Library of Congress v. Shaw, 478 U.S. 310 (1986)
(applying
rule that interest cannot be awarded by Court against the
federal
government absent express waiver). Instead, DCA argued that
mortgage
interest was made unallowable by applicable cost principles.
12. NYSDSS' affiant (a non-lawyer) admitted that he found no
"precise
definition" anywhere, but argued that the chain of development of
the
language was from 19th century cases involving denial of interest
for
federal government failure to make timely payments, through
armed
services procurement rules aimed at excessive profits by
military
contractors, to 41 C.F.R. . 1-15.205-17 (later superseded by the
present
procurement rules discussed above, which include essentially the
same
provision at 48 C.F.R. . 31.205-20), and thence to the original
version
of OMB A-87 in 1968. See Tr. at 224-29. NYSDSS argued
that 41 C.F.R. .
1-15.205-17 was repealed by the Prompt Payment Act of 1982,
Pub. L. No.
97-177 and the Cash Management Improvement Act of 1990, Pub. L.
No.
101-453, which oblige the federal government to pay interest
penalties
for unreasonable delays, thereby making any prohibition of interest
on
borrowings obsolete. NYSDSS Reply Br. at 15-16; NYSDSS Ex. 29,
at
unnumbered page 6. However, since the same prohibition was continued
in
the procurement regulations promulgated after the Prompt Payment Act,
a
more reasonable interpretation is the phrase "interest on
borrowings"
always had a reach broader than that affected by the Prompt
Payment Act.
13. NYSDSS characterized bonds as debt capital not equity capital
and
emphasized that the indebtedness was incurred and the interest paid
by
UDC, not OGS or NYSDSS. NYSDSS Reply Br. at 15, n.2.
Neither
distinction makes a difference here. OMB A-87 does not
distinguish debt
and equity capital, but simply prohibits "interest on
borrowings
(however represented)." As noted above, if such a
distinction exists
elsewhere, it does not apply to grants administration
under OMB A-87.
We have already held that the State as a whole must be
accountable for
its grants and cannot shift costs among its components in an
effort to
receive FFP that would be unallowable otherwise.
14. Also, NYSDSS argued that interest was paid by the
federal
government in a variety of circumstances and therefore was
not
absolutely prohibited. See, e.g., NYSDSS Ex. 18 (Comptroller
General's
opinion permitting agencies to include in contracts provisions
for
payment of interest for government delays). This misconstrues
DCA's
position. DCA did not argue that all payment of interest by the
federal
government was prohibited, but rather that cost principles
prohibited
payment of interest on borrowings under grants to state
governments.
15. The relevant part reads:
Facilities capital cost of money . . . is an imputed
cost
determined by applying a cost-of-money rate to
facilities capital
employed in contract
performance. A cost-of-money rate is
uniformly
applied to all contractors . . . . Capital employed
is
determined without regard to whether its source
is equity or
borrowed capital. The resulting
cost of money is not a form of
interest on
borrowings (see 31.205.20).
48 C.F.R. . 31.205-10(a)(1)(i) (1991). (The referenced section is
the
one paralleling OMB A-87, Att. B, D.7.)
16. The cases cited by NYSDSS for the proposition that the
same
interpretation must be applied are inapposite. In Northcross v.
Board
of Education, 412 U.S. 427 (1972), the Court found that the use
by
Congress of the same language on attorney's fees in two civil
rights
laws would be a "strong indication" of parallel interpretation,
since
the laws had the same purpose and raison d'etre. Id. at
428. The Court
did not state that such an indication could not be
overcome. Here, the
drafter of the provision in question, OMB, has made
clear that its
interpretation is intended to be contrary to that advanced by
the State.
Further, the procurement and grant regulations do not have the
same
purpose and raison d'etre. NYSDSS cited General Electric Co. v.
United
States, 610 F.2d 730 (Ct.Cl. 1979), for the proposition that canons
of
statutory interpretation apply to regulations. However, the
court
states that the "meaning of particular terms is to be derived not
only
by consideration of the words themselves but also by examination of
the
context, the purpose and the circumstances under which the terms
are
used." Id. at 734 (citations omitted). The plain meaning of
the
interest provision supports a broad reading and the context and
purposes
are not the same as the procurement situation.
17. While seeking as much uniformity as possible among cost
principles,
the federal government has also recognized that no one set of
principles
can apply to all situations. The FAR treat commercial
concerns and
educational institutions differently, in "recognition of
differing
organizational characteristics," despite the overall objective that
"all
organizations of similar types doing similar work will follow the
same
cost principles." 48 C.F.R. . 31.101 (1991). There is thus
nothing
untoward in applying different rules to state government agencies
and
commercial vendors.
18. NYSDSS quoted from the original language of Pub. L. No.
93-400
(before a 1983 amendment) to argue that the prior version was
mandatory,
not discretionary. The original version states in part that
"[t]o the
extent he considers appropriate and with due regard to the
program
activities of the executive agencies, [the Administrator] . . .
shall
prescribe policies, regulations, procedures, and forms, which shall
be
in accordance with applicable law and shall be followed by the
executive
agencies" for procurement and in providing for grantee
procurement.
Despite the use of the word "shall," the Administrator was
clearly not
compelled to act except in his discretion. In any case,
either he has
acted, in that procurement regulations explicitly defer to OMB
A-87 for
grants procurement, or he has failed to act, in which case, if
action
was mandatorily compelled, remedy would be against the
Administrator,
not by invalidating this Department's regulations
incorporating OMB
A-87. NYSDSS pointed to nothing in this language
which demanded that
any policies, regulations, procedures, and forms must be
uniform for
both federal procurement and federal grant situations without
regard to
differences. In fact, OMB has sought as much uniformity as
possible in
cost principles, but has distinguished where necessary among
categories
of grantees, such as state governments, hospitals, or
nonprofits. See
45 C.F.R. .. 74.171, 74.173, 74.174.
19. NYSDSS rejected DCA's position that the Administrator simply
never
chose to exercise his discretionary authority, on the basis that
OMB
Circular A-102 was issued partly pursuant to the amended version of
Pub.
L. No. 93-400 and therefore represented an exercise of
the
Administrator's authority by OMB. But as NYSDSS noted, OMB
A-102
incorporated OMB A-87. NYSDSS Reply Br. at 14. Thus,
whenever the
Administrator or OMB acted in regard to state government grants,
it has
been to reaffirm the applicability of OMB A-87; OMB has never to
our
knowledge acted to question or undermine the validity of its
interest
prohibition or the long-standing broad application of that
prohibition.
20. NYSDSS further argued that Pub. L. No. 93-400 is the only
statutory
authority for OMB A-87 and that therefore the circular must be
subject
to Pub. L. No. 93-400, or else is invalid. This argument gets
NYSDSS
nowhere. The procurement rules under Pub. L. No. 93-400 affirm
the
applicability of OMB A-87. OMB A-87 (in one of its versions)
was
already in existence when Pub. L. No. 93-400 was adopted (and,
of
course, when the law was amended in 1983 by Pub. L. No. 98-191).
Thus,
as NYSDSS conceded, OMB's authorization to issue OMB-87 is "a moot
point
since Pub. L. 93-400 supported the 1974 and subsequent reissuances
of
OMB Cir. A-87." NYSDSS Reply Br. at 13, n.1. Furthermore, the
direct
source for applying these cost principles here is 45 C.F.R. Part
74.
Contrary to NYSDSS' statement that this incorporation could not cure
any
defect in OMB's issuance of OMB A-87, the Secretary's adoption of
the
cost principles was an independent act taken under the
Secretary's
authority under 5 U.S.C. . 301 and the Act.
21. At the hearing, DCA's witness raised an argument that the
payments
were not "legally required," because the State had control over
which
laws were passed. Tr. at 509, 518. DCA did not press the
point, and we
find that State laws requiring payment in lieu of taxes were
sufficient
to establish a legal