SUBJECT: New Jersey Department of Human Services

DECISION

The New Jersey Department of Human Services (New Jersey) appealed a determination by the Administration for Children and Families (ACF) disallowing $75,447 in federal financial participation claimed by New Jersey under title IV-D of the Social Security Act (Act). On May 1, 2000, New Jersey had submitted a claim for $75,447 on its quarterly expenditure report for the quarter ended December 31, 1999. This amount represented adjusted indirect costs submitted by a county in the State of New Jersey for each of the four quarters of 1994. ACF disallowed New Jersey's claim on the basis that the claim was filed beyond the two-year filing period provided by statute and regulation and that none of the exceptions to the two-year limit applied.

For the reasons discussed below, we find that the disallowed claims did not qualify for the exception for adjustments to prior year costs, as contended by New Jersey. Accordingly, we sustain the disallowance.

Applicable Authority

Section 1132(a) of the Act prohibits the payment of federal funds for any expenditure that has not been claimed within two years after the end of the calendar quarter in which the state made the expenditure, except this subsection is not to be applied "so as to deny payment with respect to any expenditure involving . . . adjustments to prior year costs." (Section 1132(a) also provides for other exceptions not relevant here.) In enacting the two-year filing limitation, Congress addressed the Department's need to plan and administer effectively the budgets for Social Security Act programs by controlling states' ability to make delayed claims. This purpose was discussed in Connecticut v. Schweiker, 684 F.2d 979, 982 (D.C. Cir. 1982), cert. denied, 459 U.S. 1207 (1983):

Until 1980, the Social Security Act contained no time limits for submitting claims for prior-period expenditures. The absence of any time limits apparently made it more difficult for HHS to plan and administer the budget for the various Social Security Act programs . . .

The implementing regulations, found at 45 C.F.R. Part 95, Subpart A, repeat the two-year limitation on the filing of claims, and list the exceptions to the time limits, including "any claim for an adjustment to prior year costs." 45 C.F.R. � 95.19(a). An "adjustment to prior year costs" is defined as "an adjustment in the amount of a particular cost item that was previously claimed under an interim rate concept and for which it is later determined that the cost is greater or less than that originally claimed." 45 C.F.R. � 95.4.

The costs at issue in this case were claimed under the Child Support and Establishment of Paternity Program established under title IV-D of the Act (42 U.S.C. �� 651-669; sections 451-469 of the Act). The title IV-D program is a cooperative federal-state program that was enacted for the purposes of: locating absent parents; enforcing their support obligations; establishing paternity; obtaining child and spousal support; and assuring that assistance in obtaining support be available to all children for whom such assistance is requested. See section 451 of the Act. The program is administered by the Office of Child Support Enforcement in ACF.

Factual Background

The disallowed funds at issue relate to final rate adjustments to indirect cost rates for the period January 1, 1994 through December 31, 1994, claimed by Cape May County, New Jersey, for its Probation and Family Court intake units. The costs were claimed on New Jersey's quarterly expenditure report, submitted on May 1, 2000, for the quarter ending December 31, 1999.

The New Jersey Department of Human Services is the single State agency charged with the administration and supervision of the title IV-D Child Support and Establishment of Paternity Program. New Jersey entered into agreements with the Administrative Office of the Courts (AOC) to perform certain title IV-D duties, with the AOC supervising activities performed by various divisions within the court system in each of the State of New Jersey's 21 counties, including Cape May. Appropriate county court costs were forwarded to the AOC and allocated in accordance with procedures contained in cost allocation plans approved by ACF. The title IV-D portion of these costs was included on New Jersey's quarterly expenditure reports.

On January 1, 1995, New Jersey assumed responsibility for the administration and management of its court systems from the county governments. With this transfer, Cape May County no longer had to submit proposals for indirect cost rates or fringe benefit rates to the AOC for calendar years beginning on January 1, 1995. Cape May County, however, still needed to forward rate settlement computations for 1994. A Cape May County official sent the proposed calendar year 1994 rate settlement computations to the AOC on February 2, 2000. New Jersey used the adjusted rates to calculate the revised indirect costs applicable to the title IV-D Child Support Program, with the revised costs claimed on the quarterly expenditure report for the quarter ended December 31, 1999.

In its disallowance determination, ACF found that New Jersey's claim was made well beyond the two-year filing period allowed under 45 C.F.R. � 95.7 and that the claim did not qualify for any of the exceptions to the two-year limit found at 45 C.F.R. � 95.7. ACF acknowledged that the disallowed costs did represent rate adjustments, but took the position that the exception for adjustments to prior year costs should be interpreted narrowly. ACF quoted the statement from the preamble to the implementing regulations that adjustments to interim rates would be allowed only when they were "unforeseen and unavoidable" because "a broader exception would render the statutory provision a nullity."⁽¹⁾ 46 Fed. Reg. 3527, 3528 (1981). June 30, 2000 disallowance determination at 1 - 2. ACF concluded that the questioned costs did not qualify for the rate adjustments exception because they were not unforeseen and unavoidable. ACF found that in the case of a claim for a 1994 final rate adjustment submitted on May 4, 2000, five years and five months after the end of 1994, New Jersey's delay was "certainly avoidable." Id.

Discussion

New Jersey argued that the disallowed funds represented adjusted indirect costs that fell squarely within the "adjustment to prior year costs" exception of section 1132(a) of the Act. New Jersey maintained that, even if the "adjustment to prior year costs" exception should be interpreted narrowly as ACF put forth, the fact still remained that its claim was in total compliance with the definition of the exception in the regulations. New Jersey insisted that no time limit exists in statute or regulation for submitting a claim based on the "adjustment to prior year costs" exception. New Jersey disputed ACF's reliance on the preamble to the implementing regulations, contending that neither the Act nor the regulations place any time limitations on filing adjustments or require an adjustment to be "unforeseen and unavoidable." New Jersey asserted that ACF's reliance on the preamble was arbitrary, capricious, and contrary to the intent of section 1132(a) by allowing ACF to engage in rulemaking without the notice and comment rulemaking required by the Administrative Procedures Act (APA). New Jersey further argued that the very nature of the rate setting process makes the calculation of adjusted costs "unavoidable" and the amount of the adjustment "unforeseen" since it is unknown at the time the initial costs are calculated exactly what the final amounts will be.

The application of the exceptions to the two-year time limit for submitting claims for FFP has been examined in numerous Board decisions. For example, in New York State Dept. of Social Services, DAB No. 521 (1984), the Board declared:

The exceptions . . . were intended to cover only extreme situations. They were not intended to cover a routine situation where a state simply did not get around to getting its data together in time to file a claim within the statutory requirements. The exceptions are to take care of those cases where it would be patently unfair to a state to outlaw its claim merely because of the passage of time.

At 8. Similarly, in California Dept. of Health Services, DAB No. 1472 (1994), the Board held that "the scope of the exceptions was clearly meant to be limited." At 4. In both these cases, the Board focused on the purpose of section 1132(a) to prevent states from submitting delayed claims that would make it difficult for the Department to plan its budget.

In light of these Board decisions, we find the arguments advanced here by New Jersey unavailing.

As noted above, the parties did not dispute that the disallowed costs do represent an adjustment to prior year costs under the fixed with carry-forward (FCF) indirect cost rate setting methodology employed by New Jersey. Under the FCF system, a county's fixed indirect cost rate for a particular year would reflect the projected indirect costs for that year, and would also include the difference between the fixed rate and the actual indirect costs for the calendar year two years prior to the year to which the indirect cost rate applied (the carry forward adjustment). Thus, the actual indirect costs incurred by the County in 1994 at issue here would, under the FCF system, normally, had not New Jersey assumed responsibility from the County in 1995 for the administration of the court system, been included in the indirect cost rate set for 1996.

With this acknowledgment that the disallowed costs are an adjustment to prior year costs, the question, however, is whether the exception for an adjustment to prior year costs is open-ended as New Jersey argued. Under New Jersey's position, there could theoretically be no time limit on the submission of a claim as there would always be the possibility of an adjustment to a prior year's costs. This unquestionably was not the intent of Congress when it enacted section 1132(a) of the Act in order to facilitate the Department's budget planning.

The preamble to the implementing regulations with its emphasis that adjustments must be "unforeseen and unavoidable" or the two-year limit in section 1132(a) would be rendered a nullity is consistent with congressional intent. New Jersey's position that ACF's reliance on the preamble violated the notice and comment requirements of the APA is unpersuasive. The preamble's wording of "unforeseen and unavoidable" can properly be seen as an interpretative rule which is not subject to the notice and comment rulemaking requirements of the APA because it merely clarifies the scope of the exception consistent with the already expressed congressional intent of section 1132(a) rather than constituting a "legislative" rule that affects the substance of section 1132(a). See, e.g., New York State Dept. of Social Services, DAB No. 1485, at 19 (1984) (addressing issue of legislative versus interpretative rule). Furthermore, the Board has held that, where a statute or regulation is subject to more than one interpretation, the federal agency's interpretation is entitled to deference as long as the interpretation is reasonable and the grantee had adequate notice of that interpretation. Maryland Dept. of Human Resources, DAB No. 1667, at 26 (1998). ACF's interpretation of the "adjustment to prior year costs" exception, as expressed in the preamble, is clearly reasonable in light of the purpose of section 1132(a) that claims be made in a timely manner in order to ensure an efficient budgetary process. There is nothing in the language of the preamble that is inconsistent with the plain meaning of section 1132(a) and the implementing regulations. Furthermore, there is no question that New Jersey had notice of ACF's interpretation as it was published with the implementing regulations. Moreover, in a previous case also involving a claim submitted by New Jersey beyond the two-year filing period, the Board held that the exception for an adjustment to prior year costs did not apply and noted the presence of the preamble's admonition that the exception for adjustments to prior year costs would be interpreted narrowly. New Jersey Dept. of Human Services, DAB No. 1562, at 5 (1996). Furthermore, New Jersey's assertion that the claims at issue were by their nature unavoidable is not supported by the record. While the need to make prior year cost adjustments at some point may have certainly been unavoidable, it is readily apparent from the record that the over five-year delay in submitting the questioned claims for 1994 was not unavoidable on New Jersey's part. ACF submitted a document from the Cape May County Treasurer's Office entitled "Certification of the County's Indirect Cost Allocation Plan." ACF Ex. 1. This document declares that it presents "the information contained in Cape May County's Indirect Cost Allocation Plan for application in the calendar year 1996, based upon actual costs for the year ended December 31, 1994." Id. (emphasis added). This document is dated March 27, 1998. In its brief, ACF questioned why New Jersey took until May 2000 to submit its claim for FFP in the 1994 costs incurred by Cape May County, some two years after Cape May County's actual cost figures for 1994 were available, asserting that this was simply a case where New Jersey failed to gather and present its data in a timely fashion.

New Jersey, in its reply brief, did not deny that the document relied on by ACF showed that Cape May County's actual cost figures were available in March 1998. Moreover, New Jersey provided no explanation why its failure to calculate whatever adjustments were supported by the data and to submit the adjusted claims before it actually did so in May 2000 was unavoidable.

ACF did not dispute either New Jersey's treatment of the questioned costs as an adjustment to a provisional rate or the amount of the claim. We do not conclude as a consequence, however, that New Jersey's claim would be payable regardless of when submitted. This claim represented actual indirect costs incurred in 1994 that would have been carried forward and claimed as part of the indirect cost rate claimed for 1996 had New Jersey not taken over the administration of the court system on January 1, 1995. The timeliness of New Jersey's claim must be evaluated in this context of costs that under ordinary circumstances would have been claimed years earlier. It is evident that the delay until May 2000 in claiming these costs was not unavoidable and unforeseeable, as New Jersey had ample notice of this circumstance in January 1995. In fact, this case presents the very type of situation the timely claims provision was intended to address - a state presenting a claim years after costs were incurred so that amounts due under federal programs could not be finalized.

We therefore find that, under the particular circumstances of this case, the adjustment to prior year costs exception to the two-year filing period is not applicable. Accordingly, we sustain the disallowance.

Conclusion

For the reasons discussed above, we sustain the disallowance.

Cecilia Sparks Ford

M. Terry Johnson

Marc R. Hillson
Presiding Board Member

1. These words from the preamble are taken from a section that reads in its entirety as follows:

An "adjustment to prior year's costs" is limited to claims for services or medical assistance based on interim rates that subsequently are determined to be higher or lower than originally claimed. It has been our experience that in these areas subsequent adjustments are unforeseen and unavoidable. Consequently, we believe they should not be subject to time limits. We believe that a broader exception would render the statutory provision a nullity.