DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: California Department
of Social Services
Docket No. 85-159
Audit Control No. 50260-09
Decision No. 816
DATE: December 5, 1986
PARTIAL DECISION
The California Department of Social Services (California, State)
appealed
a disallowance by the Office of Refugee Resettlement (ORR) of
$30,157,810,
for payments to refugees residing in California, for the
period April 1, 1981
through September 30, 1982. ORR later reduced the
disallowance to
$28,163,299. Transcript (Tr.) 7. The costs were
disallowed
primarily because of allegedly inadequate documentation and
eligibility
determinations.
Below, we uphold ORR's determination on the following elements at issue
in
this case: the use and choice of statistical methodology,
improper
determinations of eligibility for refugee aid, and the general right
of
ORR to seek recoupment for improper expenditures without use of
a
"tolerance" level such as that found in the Aid to Families
with
Dependent Children (AFDC) quality control program. However, we
have
reserved ruling on the validity of ORR's determinations on
other
disputed individual cases in the sample underlying the
disallowance,
because we believe the record needs further development
(primarily on
the issue of the relationship of ORR's actions to disallowance
policies
in the AFDC program). We are sending questions separately to
aid the
prompt development of this part of the case.
Background
The Refugee Act of 1980, Public Law 96-212, established ORR and
authorized
assistance and services to refugees residing in the United
States.
Under the refugee resettlement program, cash assistance, medical
services,
and social services were generally provided to refugees under
existing
federally funded programs such as AFDC and Medicaid. For
refugees who
were eligible for these programs, ORR reimbursed the State
for the
non-federal share of the AFDC and Medicaid program costs. If
the
refugees did not meet the eligibility
.
-
2 -
requirements under the existing federal programs, they were
provided
assistance under ORR's Refugee Cash Assistance (RCA) and Refugee
Medical
Assistance (RMA) programs. The cost of the RCA and RMA programs
was
funded entirely by ORR. Under ORR regulations, the RCA and RMA
100
percent federal funding could also be used for state and local
general
assistance payments to refugees.
The California Department of Social Services was responsible
for
administering refugee aid in California (the California Department
of
Health Services administered medical services to refugees under
a
contract with the Department of Social Services). 1/ During the
period
April 1, 1981 through September 30, 1982, the State claimed a total
of
$442,322,390 under the refugee program. Of this amount,
$256,441,911
was claimed for cash assistance payments. 2/
The disallowance in this case is based on an audit by the Office of
Audit,
Office of the Inspector General. The auditors discovered a
number of
different kinds of errors with financial consequences; the two
most prominent
errors were inadequate initial eligibility determinations
and inadequate
updating of continuing eligibility status. Since the
individual case
determinations were voluminous, the auditors used
statistical sampling
techniques in lieu of examining all records to
establish the amount of the
disallowance, an approach upheld in
principle by courts and this Board
before.
The auditors basically used samples of two sets, or universes, of
payments
to arrive at the dollar value of the cash assistance payment
errors.
One universe consisted of about 893,000 payments made in
Alameda, Orange,
Sacramento, San Diego, San Francisco and Santa Clara
counties. The
second sample was selected from 315,491 payments made in
Los Angeles County
(not included were certain AFDC payments for which
records were
unavailable). The counties in these two universes
represented 85
percent of the State's cash assistance payments during
the period.
1/ Eligibility was determined by the local county welfare
departments,
which were also responsible for issuing the cash assistance
payments.
2/ Of the remainder, $101,879,819 was for medical
assistance,
$26,701,099 for social services, $11,942,879 for Supplemental
Security
Income, and $45,356,682 for administration costs.
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Summary of Decision
The issues in this case fall into two categories: issues concerning
the
validity of ORR's sampling process, and issues concerning whether
ORR
correctly determined that California erred in using refugee funds
for
the cases in the samples. Our overall determinations are as
follows:
o We uphold ORR's statistical approach. Below, we
examine that
methodology and find it sound and reasonable. California
attacked the
methodology primarily on two bases. First, the State
alleged that ORR's
use of a "probe" sample as part of the ultimate sample
biased the
sampling process. We find that the record does not support
California's
argument and, indeed, that the use of the "probe" sample was
quite
reasonable in the facts of this case. Second, California proposed
an
alternative methodology which it alleged would produce a
lower
disallowance amount. We find that on balance, ORR's methodology
was the
sounder approach, and that the lower result reached by California
could
be attributable to coincidence or factors which, in any event, do
not
impeach the reliability of ORR's methodology.
o We uphold ORR's position that the State has a burden of
documenting
eligibility of individuals receiving refugee payments.
California
conceded that there was a lack of documentation in certain cases,
and
that documentation for other cases was insufficient. We disagree
with
the State that the disallowance should be reversed based on lack
of
publication of an ORR policy making AFDC provisions (including one
on
monthly reporting by recipients) applicable to the refugee program.
o Concerning ORR's determinations on individual cases for
which the
State alleged its documentation was sufficient, we have determined
that
further record development is needed. Our basic concern relates
to
whether the disallowance would have been authorized in
similar
circumstances under the AFDC program, since ORR has, in effect,
linked
its determinations to policy requirements adopted from that
program. We
have separately addressed questions to ORR to develop the
record on this
issue.
o We uphold ORR's decision that the State was not entitled
to retain
federal refugee funding for payments made to persons incorrectly
found
ineligible for AFDC cash assistance on the basis of the initial
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Discussion
A. The disallowance was properly estimated from a random sample
using
statistical techniques shown to be valid.
The State argued that the disallowance should be reversed, at least
in
part, because the Agency (1) used a probe sample improperly
in
combination with the full sample, and (2) used the allegedly
less
precise method of extrapolating from unallowable rather than
allowable
payments, which arbitrarily increased the disallowance. The
Agency
countered that (1) the use of a small initial sample was to
determine
the size of the full sample, not to decide whether to continue
sampling,
and was validly combined with the larger sample; and (2) that the
method
of extrapolating from unallowable payments was generally more
precise,
was the method reasonably and customarily used by the auditors, and
had
not been shown to be improper here.
1. The State did not show that the use of consecutive samples
here
impeached the estimate on which the disallowance was based.
It is well-established in Board and court precedent that sound
statistical
sampling methodology can be used to determine the amount of
costs properly
charged to HHS programs. See Ohio Department of Public
Welfare,
Decision No. 226, October 30, 1981; and California Department
of Social
Services, Decision No. 524, March 29, 1984, and precedents
cited
therein. Sampling typically is used when a claim for federal
funds is
based on the sum of numerous cost items (each subject to proof
of
allowability) because it is impossible, or at least costly and
impractical,
to examine each item. In such cases, the reviewing
authority will take
.
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a random sample of cost items, examine them, and extrapolate the
findings
to the whole group. If done in accordance with the general
rules and
conventions statisticians have developed, the extrapolated
finding has a high
degree of probability of being close to the finding
which would have been
produced if all the cost items had been
considered. The sampling result
may even be more accurate than a
full-scale examination, since clerical and
other errors can reduce the
accuracy of a 100 percent review. In simple
terms, valid statistical
sampling will produce a result which has a high
degree of probability of
being at least as good as a full-scale review.
The basic issue before
this Board in cases such as the one before us concerns
the validity of
the auditors' sampling process.
In estimating the amount of the disallowance from the sample in this
case,
the auditors established a confidence interval containing a set of
values
which they were 95 percent certain included the true dollar value
of
erroneous payments. 3/ They used the lower limit, or bound, of
this
confidence interval for the disallowance, even though statistically
the
middle figure, or point estimate, represents the most likely true
dollar
value of erroneous payments. Thus, the basis for the
disallowance was
conservative in favor of the State; in fact, the probability
was 95%
that the real (albeit unknown) error amount was higher than the
figure
chosen by ORR.
The plan for the sampling exercise called for a small sample to be
taken
initially in an effort to determine the size of the sample that
should
be used. Appellant's Hearing Exhibit 2. The initial sample
indicated
an optimal sample size of 3000. Id. Based on audit
resources and time
limitations, a sample size of 639 was selected. 4/ It was
undisputed
that
3/ Actually, the confidence level per se was 90 percent,
using the
full confidence interval. However, because the auditors used
the lower
bound, there was a 95 percent probability that the real error
amount was
higher. The State's expert referred to this as a two-sided
90 percent
confidence interval, or lower (or upper) 95 percent confidence
level
(Tr. 87), and ORR's expert agreed (Tr. 204). For convenience, we
refer
to it in this Decision as a 95 percent confidence level.
4/ Appellant's Hearing Exhibit 2; Tr. 303-304; Respondent's
submission
of March 12, 1986. Later, the sample was expanded again, by
167 more
payments. See discussion, infra.
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the smaller sample size was still adequate statistically. 5/
Decreasing
the sample size most likely favored the State in this case, due to
the
auditors' use of the lower bound. Since use of the smaller
sample
increased variability somewhat, the lower bound of the
confidence
interval (and therefore the disallowance amount) was probably a
lesser
dollar amount than if the sample size had been 3000.
In the six-county sample and in Los Angeles, the auditors took a
small
initial sample and combined it with a larger second sample for the
final
sample size used to arrive at the amount of the disallowance. The
State
objected that this procedure was improper. Essentially, the
State's
position appeared to be that a two-step sample required more
complete
and sophisticated preliminary explication to avoid the possibility
that
samplers could manipulate the process unfairly.
The State's objection is not sound. At best, it might involve an
issue
of fairness if ORR had evaluated the first sample and, finding
it
unsatisfactory, decided to enlarge the sample until results more
to
ORR's liking (such as, presumably, a larger disallowance) were
obtained.
As discussed below, ORR did not evaluate the first sample in
this
manner, but used it only to estimate the sample size needed for
a
certain precision--as they had planned to do. But whatever the case,
a
decision to use a larger sample generally would be justified per
se
because the larger the sample, the less variability there is and
thus
the results have greater precision. That a larger sample
coincidentally
results in a larger disallowance does not necessarily make it
less
justifiable. Given the resources, ORR could have chosen to audit
a
larger sample yet, or even every case.
ORR did not dispute that the larger final sample probably did result in
a
larger disallowance than if the smaller initial sample had been the
only
basis, but it pointed out that its analysis of the initial sample
did not
establish a lower bound, so it did not know what the initial
results would
have been. ORR's statistical expert testified that the
lower bound was
not manipulated in any sense because there was "no
decisionmaking in
between." Tr. 260-262.
ORR explained that the decision to conduct the larger sample was
already
made before the smaller sample was taken and that the only purpose
of
the smaller sample was to help the auditors decide how large the
sample
should be. The auditors knew in advance that the initial sample
would
not
5/ Office of Audit policy requires a sample size of at least
200. Tr.
301. - 7 -
give them a usable figure for the dollar value of the errors. ORR
also
noted that much of the testimony of both the State's and ORR's
experts,
relied on by the State, was about the reasons why one should not use
a
probe sample to test for attributes (i.e., why and at what rate
the
payments were erroneous) and did not apply to estimating
variables
(i.e., the dollar value of the erroneous payments, the case
here).
We agree that use of an expanded sample, as described above, was
perfectly
appropriate and sound statistical practice. The State has
produced no
evidence that the sample was analyzed for any purpose other
than the goal of
ascertaining an adequate sample size or that the choice
of sample size was
manipulated to produce a result favoring ORR. ORR's
explanation of what
it did was reasonable, and we find that it was
statistically justifiable.
While we find nothing wrong with the use of an expanded probe
sample
generally, there was a particular circumstance involving Los
Angeles
which requires further analysis. The State alleged that in
this
particular instance, the auditors expanded the sample because the
sample
showed a negative value (minus) for the lower bound. The State
argued
in effect that even if a two-sample approach were valid in
determining
sample size, it is not valid where the decision to expand the
sample is
based on the fact that the initial sample size indicated a lack
of
payment errors (by yielding a negative-value lower bound).
The following facts are undisputed. Because the number of
assistance
payments was known only for Los Angeles, the auditors had to
divide
their review into separate samples for Los Angeles County and for
the
six other counties. The other six counties maintained their records
by
recipient. Los Angeles County was further separated into three
strata:
AFDC; RCA and general assistance (GA); and retroactive payments
to
non-Indochinese refugees (LA RETRO). After the small initial sample,
a
sample size of 395 was selected from Los Angeles County, which
included
57 for the LA RETRO stratum. Later, the LA RETRO stratum was
expanded
to 224. The sizes of the samples for the other two strata were
not
increased after the initial draw.
Thus, of the three initial sample strata in Los Angeles, only LA RETRO
was
subjected to the extra sampling discussed here. California's
position
essentially was that this extra sampling implied that ORR was
inappropriately
reaching beyond initial evidence (in the form of the
negative value) that no
money was owed, until ORR produced evidence that
some money was owed.
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ORR's response essentially was that its auditors did no more than
increase
the sample size to avoid producing an absurd result. ORR
denied that
the LA RETRO stratum was actually evaluated any differently.
Tr.
306-311. ORR argued that the obvious statistical remedy for a
negative
lower bound (when the point estimate was a positive value) was
to increase
the size of the sample, not to eliminate the stratum. ORR
submission of
March 12, 1986.
We have determined that the decision to expand the LA RETRO stratum
was
appropriate. ORR was sampling to establish the dollar value of
the
payment errors, not to discover the error rate. In effect, there
was an
assumption that there were errors (an assumption not contested
in
principle, but only in amount, by California). If there were no
errors,
the dollar value of the lower bound would never exceed zero,
and
California could never be prejudiced by an expansion of the
sample.
Since there was, however, a reasonable and . uncontested assumption
that
there were some errors, ORR was justified in expanding the sample
size
to overcome the negative value. A true negative value was
clearly
impossible in this case: auditors gave a value of zero to each
proper
payment and a positive dollar value to each erroneous payment, so
that
the negative statistical value apparently was produced only because
the
original sample was so small that the variability of the
distribution
values got pushed out, at the edges, into a statistically
theoretical,
but practically impossible, area of negative values.
Clearly, the
auditors were justified in correcting this absurd result by the
simple
expedient of expanding the sample size. The overall context must
be
kept in mind as well: expanding the sample size, assuming
measurement
error is minimized, can only decrease variability and increase
accuracy.
The authorities relied on by the State to support the alleged defects
in
so-called two-step sampling including ORR's expert were clear only as
to
the objections to using such a procedure in attributes (i.e.,
error
rate) sampling. The State's expert was not convincing when he
tried to
apply the same objections to variables (i.e., dollar value)
sampling,
the sampling at issue here, for the reasons discussed above.
ORR also cited, in support of its sampling and estimation methods in
this
case, a report by the General Accounting Office (GAO). ORR
prehearing
brief, Exhibit 5. The report notes that one of California's
criticisms
was that the auditors had increased the size of the LA RETRO
sample after the
auditors had already examined a sample of the payments.
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GAO concluded that the expansion of the sample "was not inappropriate
as
the sample's randomness was not affected." Report, p. 5. 6/ GAO's
review
appears to be comprehensive and objective and reinforces our
conviction
that ORR followed a proper sampling methodology when it expanded
the
sample in this case.
2. The State did not prove that the disallowance should not be
based
on an extrapolation from unallowable payments.
In calculating the disallowance from the results of the sample,
the
auditors based their estimate on the dollar value at the lower bound
of
the confidence interval of unallowable payments. The State argued
that
ORR should not base its disallowance on the estimate thus
obtained
(known
6/ During oral argument, counsel for the State alleged that
GAO had
not had the audit papers and did not engage in extensive
discussions
with ORR as the State's expert had done, and characterized the
basis for
GAO's approval as "very superficial." Transcript of oral argument,
July
22, 1986, p. 38. GAO described the extent of its review:
In conducting our review we interviewed ORR program
officials
and reviewed ORR records to obtain (1) an
understanding of the
Refugee Cash Assistance Program and (2)
data on refugee funds
claimed by and awarded to California since
the enactment of
the Refugee Act of 1980. We also
interviewed officials of the
IG's office, in Washington and
Sacramento, and reviewed the
auditors' workpapers to obtain an
understanding of the
sampling methodology used and the basis for
the conclusions
reached. To clarify possible legal issues,
we met with
attorneys in HHS' Office of General Counsel.
Additionally, in
order to fully understand the State's position,
we interviewed
officials of California's Department of Social
Services (DSS),
including the department's methodology
consultant, and members
of a public interest group representing
the involved counties.
Our review was made in accordance with
generally accepted
government audit standards. [Emphasis
added.]
Report, p. 3. Clearly, the GAO review was
thorough. The State did
not offer any proof to
support its contrary conclusions, and we
reject
them.
- 10 -
as the difference estimate) because other methods suggested by the
State
were better. The State did not contend that the method the
auditors
used was incorrect, however.
The State suggested that better methods, such as the direct
projection
method (resulting in a lower disallowance), involved extrapolating
from
the allowable payments. 7/ In the case of Los Angeles, the
State
contended that the direct projection method was more precise because
the
sampling error was smaller than the sampling error in the method
the
auditors used. 8/
The State also noted that an extrapolation of the total funds claimed
by
the State for the six counties, derived from the auditors'
difference
estimate, would be approximately $149.5 million, $9.5 million more
than
the actual "book value" (i.e., the actual total claim). The total
funds
claimed estimated by the State's direct projection. method was
said to
be approximately the same as the actual book value. 9/
Appellant's
Hearing Exhibit 1. The State argued that ORR could not
validly base a
disallowance on a method which estimated the total value of
the State's
claim (in the six counties) $9.5 million higher than it
actually
7/ The lower bound of the confidence interval in the direct
projection
estimate was $21,416,652. This compares with the lower bound
of
$30,157,810 in the difference estimate. Appellant's Hearing Exhibit
1.
8/ We note that in the six-county sample the result was just
the
opposite. The sampling error derived from the direct projection was
not
only considerably larger than the sampling error obtained by
the
auditors' methodology, but also contained a negative value
($8,675,666)
at its lower bound. The State used instead the value of
the errors
actually found in the sample ($2,791). Appellant's Hearing
Exhibit 1.
9/ The extrapolated amount of total funds claimed in Los
Angeles
County, using the difference estimate of the auditors, was
approximately
$3 million more than the actual book value. State's
submission of
February 7, 1986, first attached summary table. However,
the State's
direct projection estimate of total funds claimed in two of the
three
strata in Los Angeles County was approximately $24 million less than
the
actual book value. Appellant's Hearing Exhibit 1. The State's
expert
indicated that there was a "50/50" chance that a direct
projection
estimate of total funds would be higher or lower than the book
value.
Tr. 72.
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was, particularly when there was at least one alternative method
which
estimated the State's claim at approximately the same as the book
value.
10/
ORR argued that the auditors' difference estimation method was
usually
more precise than the direct projection method, a point on which
both
the State's and ORR's experts agreed (Tr. 65, 265), and that
its
auditors as a rule used difference estimation (for variables
sampling,
as here). ORR also contended that the State's direct
projection method
was subject to measurement errors in using the larger
figures
constituting the allowable payments and California did not dispute
this.
ORR also said that the State's method was subject to
"disallowance
errors" in determining eligibility, payment amount, and funding
source.
11/
We uphold the disallowance as based on the auditors' difference
estimation
methodology. The State did not (and indeed made virtually no
attempt
to) impeach the validity of the auditors' methodology per se: it
was agreed
that the auditors' methodology generally was more precise and
less subject to
measurement errors; and, in the facts of this case,
anomalies in extrapolated
figures which California sought to exploit as
collateral evidence are
accompanied by countervailing anomalies (and, in
any event, appear more
attributable to coincidence or happenstance than
any factor which makes them
more persuasive than the auditors'
findings). The State's own expert
testified that the auditors' method
and its results in this case were
statistically valid and emphasized
that his findings did not impeach the
auditors' methodology. Tr. 66,
74, 76, 106. Both parties tried,
unsuccessfully, to explain why the
difference estimates for the total amount
claimed for the six counties
and for Los Angeles County were so far apart
from the direct projection
of those amounts. We conclude, as suggested
by
10/ The State also briefly suggested the use of the "ratio
estimate"
method. This method yielded an estimated value of funds
claimed for the
six counties some $10 million less than the actual claim, and
for the
combined seven counties, some $35 million less. Appellant's
Hearing
Exhibit 1. This method, which also relies on the allowable,
rather than
unallowable, payments, also produced a disallowance less than
that of
the difference estimate method (the lower bound was
$28,576,308). Id.
We discuss this below at fn. 14.
11/ ORR did not develop the "disallowance errors" point,
apparently
because it concluded that "disallowance errors can be accounted
for."
ORR Post-Hearing Brief, p. 20. - 12 -
ORR's expert (Tr. 278), that there is no reason to expect that the
two
calculations should come out the same, noting the contrasting
methods.
12/ Recalling from fn. 9 that the total funds claimed for Los
Angeles
County calculated by the State's direct projection method
was
approximately $24 million off the alleged book values, it is
surely
happenstance that the direct projection in the LA RETRO sample and
in
the six county sample produced estimates for total funds claimed
so
close to the alleged book values. For that matter, we do not know
that
the figure touted as the book record value was accurate, as it, too,
was
subject to measurement error. We do not think these
erratic
fluctuations resulting from the State's methodology provide a
sufficient
basis for overturning an audit result based on an otherwise
unimpeached
and statistically valid procedure. 13/ We note that GAO also
reviewed
this criticism and concluded, after examining the data, that
the
auditors had used an appropriate method.
12/ To obtain a difference estimate, one multiplies the sample
mean, or
average dollar value of payment errors, by the number of
cases. In
direct projection, one divides the dollar value of the
amounts claimed
by the number of cases. Tr. 71, 205, 206. The
ratio estimate method
was not explained in detail in this record, but we
think the parties
would agree it is basically a method in which a ratio
formed between the
allowable payments in the sample and the total payments in
the sample is
applied to the total population. See, Audit Sampling, a
publication of
the American Institute of Certified Public Accountants, p.
89.
13/ We think this erratic display makes this case distinguishable
from
the situation in New York State Department of Social Services,
Decision
No. 522, March 12, 1984, where the Board said, in dicta (p.
101):
We believe SSA is quite wrong in arguing we should
give
deference to an unexplained choice of alternative
approaches
which could result in a difference of millions of
dollars . .
. It would be indefensibly arbitrary to shield a
huge
differential impact behind the merely incidental fact that
the
methodologies used are both statistically sound.
We stand by this dicta, but note that it does not
justify a state
merely showing that it can use
statistics to produce a lower
disallowance.
The (continued on the next page)
- 13 -
For all the foregoing reasons, we find that California failed to
provide
any substantial evidence that the use of ORR's statistical
methodology
as a basis for the disallowance was improper. We now
proceed to a
consideration of issues concerning the cases in the samples.
14/
13/ (continued from the previous page) ultimate issue is the
relative
validity, precision, and reliability of the
federal methodology and
its implementation.
Here, ORR has succeeded in persuading us that
its
methodology was the more precise one, while the State has
done
no more than use a less precise methodology to
produce an
extrapolated figure from one part of the
sample to produce a figure
which, for unknown
reasons and apparently by happenstance, more
accurately approximates the total claim figure than.
ORR's
extrapolation. In fact, the total claim
figure itself could be
inaccurate because the State
over- or under-claimed. In short, the
State's
position relies only on a statistical curiosity,
while
ORR's measurement of errors is statistically
valid.
14/ Although our discussion focuses on the direct projection method
as
a suggested alternative to the difference estimation used by
the
auditors, we also reject the ratio estimate method for similar
reasons.
Furthermore, ORR's contention that this method was biased
(i.e.
inaccurate) in this case was not disputed by the State. Thus,
in
addition to our other reasons, we do not think ORR should be required
to
base a disallowance (or any part of it) on a method which
is
statistically less acceptable than the one it used.
We note also that in our decision upholding the use
of the
auditors' difference estimate methodology, we
have not found it
necessary to rely on the
declaration of an HHS auditor attached to
ORR's
posthearing brief. The declaration attempted yet
another
speculative explanation of the $9.5 million
difference between the
total amount claimed
estimated by the auditors' methodology and the
alleged book record value. The State objected to the
declaration
because it was submitted after the
hearing and without giving the
State an opportunity
to cross-examine.
- 14 -
B. ORR validly disallowed payments for which the State conceded
that
there was not sufficient documentation to establish eligibility.
The auditors found that for some of the sample cases reviewed, the
file
did not contain a monthly report form (CA-7). The auditors
determined
that the CA-7 was required for refugee cases based primarily on
an
action transmittal issued by ORR. That transmittal
said:
"Recertification and any other State eligibility reports shall
be
required for refugee assistance recipients at least as frequently as
for
AFDC recipients." SRS-AT-76-160, October 22, 1976, State's
prehearing
brief, Exhibit 3. Although AFDC regulations in effect at the
beginning
of the audit period make monthly reporting optional for no-income
cases
(45 CFR 233.28 (1980)), the auditors found that the State
required
monthly reporting for all recipients of AFDC and refugee
assistance.
Specifically, the State's Manual of Policies and Regulations for
the
Refugee Program, section 69.205.3, provides: "A
periodic
redetermination of eligibility shall be made in accordance with
(EAS)
Section 40-181 as it applies to the AFDC program." The Eligibility
and
Assistance Standards (EAS) Manual requires counties to use the CA-7
for
the AFDC program.
The State argued that monthly reporting was not a valid
federal
requirement for the refugee program because the action
transmittal
provision was not published in the Federal Register. The
State relied
on section 552(a)(1)(D) of the Freedom of Information Act (FOIA)
and
section 553 of the Administrative Procedure Act (APA) for
this
proposition and also cited to court decisions requiring publication
of
rules which would have a "substantial impact." See. e.g., United
States
Dept. of Labor v. Kast Metals Corp., 744 F. 2d 1145 (5th Cir. 1984);
and
Herron v. Heckler, 576 F. Supp. 21 (N. D. Cal. 1983).
We disagree that the lack of publication of the action
transmittal
provision provides a basis for reversing this disallowance.
The State
did not deny that it had actual notice of the action transmittal;
the
transmittal was addressed to state program administrators and
such
transmittals are routinely sent to all states. Indeed, the
State
implemented the provision by adopting monthly reporting for
refugee
assistance, as it had for AFDC. Under the cited FOIA provision,
actual
notice is sufficient. While the cited APA rulemaking
requirement
(adopted for HHS grant programs in 1971) arguably might apply to
the
transmittal provision, we do not think it provides a basis for
reversal
- 15 -
under the circumstances here. 15/ Refugee program regulations require
a
state plan to give assurances that the state will follow
official
issuances of the Director, ORR. The State agreed in its State
plan to
do this. State's prehearing brief, Exhibit 7, p. 49. In
fact, with
respect to the RCA, the State explicitly agreed to be bound by
action
transmittals and to use AFDC program policies and standards (with
one
exception not relevant here).
We also note that the State's "substantial impact" argument was based
on
the impact monthly reporting could have on program recipients.
The
issue here is whether federal payments to the State can be
disallowed,
not whether the State can recoup from the recipients.
We do not here resolve the issue of whether, based on the
action
transmittal, a payment can be disallowed solely because Los
Angeles
County did not require a monthly report or its equivalent for each
of
these disputed cases. We are seeking more information from the
parties
on this issue. But we do agree with ORR that (whether or not
monthly
reporting is a substantive condition for federal funding) the
State
generally bears a burden of documenting that the payments for which
it
seeks federal funding were made to individuals who were eligible
under
the federal program. See, e.g., California State Department of
Health,
Decision No. 55, May 14, 1979.
Here, the State conceded that for approximately 20 cases, Los
Angeles
County could produce no documentation showing that the individual
was
eligible for the payment. Tr. 135. The State produced
documentation
which it alleged was sufficient to show eligibility for the
remaining
cases. The State later conceded that the documentation for
some of
these cases was insufficient and ORR accepted the documentation for
a
number of other cases. With respect to the 75
15/ ORR argued that the action transmittal provision was
an
interpretative rule and therefore exempted from the APA
requirement.
This argument, however, was based on the idea that the
provision
implemented a statement in the legislative history of the
refugee
program statute (rather than the statute itself) or that the
provision
interpreted a refugee program regulation (45 CFR 400.62) which was
not
in effect at the time. ORR also pointed to the monthly
reporting
provisions applicable to AFDC; clearly the action transmittal was
not
simply an interpretation of these provisions since it expanded the
scope
of their applicability. Thus, we do not base our conclusions here
on
ORR's analysis.
- 16 -
cases still in dispute, we have determined that we need more
information
(see page 1 above). With respect to the cases for which the
State
submitted no documentation or later conceded had
insufficient
documentation, we uphold the disallowance.
C. ORR properly disallowed 100 percent reimbursement for refugees
who
were found to be eligible for AFDC benefits subsequent to the
initial
classification of the refugee.
ORR disallowed $10,527,334 for refugees who were initially determined
to
be eligible under the Refugee Resettlement Program (RRP), but were
later
found to have been eligible for AFDC benefits. 16/ The State
was
required to first determine eligibility for AFDC and only if a
refugee
was not eligible for AFDC could the State consider the
refugee's
eligibility for cash assistance under the RRP. Action
Transmittal
77-11, dated December 2, 1977; State's prehearing brief, Exhibit
5.
Cash assistance payments to refugees under these two programs could
be
fully reimbursed by the federal government. If a refugee was
determined
to be AFDC-eligible, the State was fully reimbursed, 50 percent
from the
federal share of the AFDC program and 50 percent from the
refugee
program. 17/ If a refugee was determined not to be eligible for
AFDC,
but eligible for refugee aid, the State was reimbursed 100 percent
from
refugee funds. Tr. 177. ORR disallowed 50% of payments for
refugees
who initially had been found ineligible for AFDC (thus producing
100%
refugee funding for the State from the refugee program) where the
same
refugees subsequently were found eligible for AFDC by the State
(thus,
from ORR's perspective, removing eligibility for half the funding
that
was provided).
The principal type of error in the initial determination of
eligibility
was that the applicant was incorrectly found not to have had
enough
"quarters of work" to be eligible for
16/ This was based on a 1982 reevaluation conducted by the State.
See.
State's prehearing brief, Exhibit 1, p. 17. ORR also disallowed
an
additional $780,682 based on a sample of refugees who were found in
the
redetermination to have been eligible for another relief program
for
Cuban-Haitian entrants. See, 22 U.S.C. 2601 and 45 CFR Part
401. The
State did not pursue an appeal from that part of the
disallowance under
this issue, although the sample is included in the
sampling issue,
discussed pp. 4-12, supra.
17/ The State and the federal governments each pay 50 percent of
AFDC
program cash assistance. - 17 -
AFDC. 18/ To be eligible for AFDC, an applicant must have established
a
connection with the work force shown by six or more quarters of
work
within any 13-quarter period ending within one year prior to
the
application for assistance. A quarter of work means a period in
which
the applicant received earned income of not less than $50. 45
CFR
233.100(a)(3). Of a 41-payment sample on which this part of
the
disallowance was based, 34 involved situations in which work
histories,
not obtained in the initial interview, but obtained afterwards
when the
applicants were reinterviewed, revealed that they met the AFDC
criteria
for the requisite work force connection. 19/
The State contended that the failure of its interviewers to obtain
correct
work histories at the time of the initial interview was due to
cultural and
language differences between the interviewers and the
refugees. The
State alleged that by the time these refugees were
reinterviewed, they and
their interviewers experienced less of these
differences and consequently
more accurate work histories were obtained.
The State cited as examples cases
in which interviewers had to determine
the value of "room and board" supplied
to a "prisoner-physician in a
Communist slave labor camp" and of rice grown
by refugees on farms in
Vietnam and Cambodia and bartered for eggs.
These applicants allegedly
told the interviewers that they had not
worked.
The State pointed out that if the refugees had been initially
determined
to be eligible for AFDC, the State would have been fully
reimbursed and
argued that a simple bookkeeping adjustment (replacing 50
percent of the
full reimbursement from the RRP with the 50 percent AFDC
federal
18/ Actually, this is a requirement of the AFDC-U program of aid
to
dependent children of unemployed parents. The references in
this
Decision to the AFDC program also include the AFDC-U program,
although
only the abbreviation AFDC is used.
19/ In four other payments, the initial work history was complete
but
the number of qualifying work quarters was incorrectly evaluated.
In
three other payments, the refugee's eligibility for AFDC was
incorrectly
discontinued. Audit Report, p. 17, State's prehearing
brief, Exhibit 1.
The State did not discuss these seven cases.
- 18 -
share) should be effected in lieu of a disallowance. 20/ The State
cited
California Department of Social Services, Decision No. 245, January
12,
1982, in support of its contention that the Board was empowered
to
direct ORR to perform the indicated adjustment.
ORR noted that the federal auditors had found no evidence that the
State's
initial interviewers had "probed beyond the applicant's basic
statement,"
even where applicants had extended gaps for as long as four
years in their
work histories or had stated that they never worked
during a time that they
had a dependent spouse and children. 21/ Audit
Report p. 19, State's
prehearing brief, Exhibit 1. ORR contended that
it was the State's
responsibility to ensure at the time of application
that the refugees
understood the eligibility criteria.
ORR also rejected the "bookkeeping adjustment" suggested.by the
State
because the RRP and AFDC programs each were funded under
separate
appropriations and separate regulations for claiming
reimbursement. ORR
contended that the main holding in Decision No. 245
supported ORR's view
that the Board cannot cause funds to be transferred
between two legally
separate and distinct programs and that the federal
agency in Decision
No. 245 had agreed in the first place that the State was
entitled to 100
percent federal reimbursement, unlike the case here.
20/ The State's program manager explained that it was not possible
for
the State now simply to ask reimbursement from the AFDC program,
because
to be reimbursed under AFDC, the State must have registered the
refugee
at the time of application as a participant in the Work Incentive
(WIN)
program, a companion program to AFDC, to prepare the applicant
for
employment. Tr. 178 and see, 42 U.S.C. 630. A refugee aid
recipient
does not participate in WIN. The manager alleged that
California was
told that it could not seek retroactively to be reimbursed
AFDC funds
for refugees initially determined eligible under the refugee
program.
21/ Counsel for the State argued that accepting the "never
worked"
statement without probing was defensible because the interviewers
could
not know "how many people scrounged out a living" in Southeast Asia
and
probably did know of situations in the United States where people
with
dependent spouses and children had never worked. Transcript of
July 22,
1986 oral argument, p. 41.
- 19 -
At the outset, we note that, except for a few specific examples cited
by
the parties, we have little basis for evaluating the performance of
the
State's interviewers in the initial eligibility determinations.
The
State did not dispute the federal auditors' finding that there was
no
evidence that the interviewers ever probed beyond the applicant's
basic
statement. The cases which the State cited as examples were
not
documented or described in sufficient detail to serve as a basis for
our
directing ORR to estimate the disallowance without such cases in
the
sample, much less the "equitable relief" of reversing this part of
the
disallowance.
We are also not persuaded that the Board should, or could, reverse
the
disallowance on the basis that ORR should simply arrange with the
AFDC
program to transfer the 50 percent to which the State is no
longer
entitled under the RRP. The agency charged with administering
the AFDC
program is not before us. 22/ Even if it were, there might be
legal
obstacles in their appropriation or in the program regulations or
other
statutes and regulations which would prevent them from transferring
AFDC
funds to the RRP. For example, such a transfer might be considered
an
illegal augmentation of the RRP appropriation. See 31 U.S.C. 628
and
Greene County Planning Board v. F.P.C., 559 F.2d 1227 (2d Cir.
1977),
cert. denied, 434 U.S. 1086. Also, there is the WIN
program
requirement, discussed earlier, which apparently already has resulted
in
a refusal to retroactively give the State AFDC funds in such
a
situation. See fn. 20.
The California decision, No. 245, is inapposite. There, the
Board
upheld the disallowance because the costs in dispute were not
allocable
to one program and could not be reasonably charged to the
other.
California, supra, p. 4. Noting that the respondent agency had
treated
claims against both programs together, the Board directed that
another
amount which the agency auditors found was due the State be
subtracted
from the disallowance instead of requiring the State to
seek
reimbursement. Id. at 18. The "mere bookkeeping
transactions" did not
involve parties not before the Board and apparently
there was no legal
or administrative obstacle to treating the claims
together. Id. at 18.
We do not think that what occurred in California,
as holding
22/ We note that the State did not request that the AFDC
program
administrator be joined as a party. Even if it had, we might
not be
empowered to so extend our jurisdiction. See 45 CFR Part 16,
Appendix
A. Certainly, nothing in this decision precludes California
from
seeking relief from AFDC. - 20 -
or otherwise, is support for our directing ORR to effect
a
cross-appropriation transfer on the basis of the record in this case.
D. ORR was authorized to disallow reimbursement.
The State alleged that there was no statutory, regulatory, or
contractual
authority permitting ORR to recoup payments to recipients by
the State, and
contended that in the absence of specific authority, ORR
could not issue this
disallowance. The State argued also that there was
no authority to base
the disallowance on a sample, particularly without
the use of a tolerance
level as is done in the AFDC program quality
control system.
Among other supporting authorities, ORR cited 45 CFR 400.8, which
makes
FFP available in reimbursement for cash assistance payments only
under
terms and conditions approved by ORR; and Woods v. United States,
724
F.2d 1444, 1449 (9th Cir. 1984), a Food Stamp overpayment case
which
recognized the federal government's "implied power to recover
funds
spent in violation of the express terms and conditions of the
grant."
ORR noted that the State acknowledged that ORR had not incorporated
the
AFDC quality control regulations in its own regulations. ORR
cited
federal court and Board decisions which recognize the use of
statistical
sampling as a means of auditing and determining the amount to
disallow
for erroneous payments.
Under the statute and implementing regulations, ORR was authorized to
fund
only those State expenditures that met basic program requirements
relating to
the eligibility of individuals for cash assistance. In
comparable
circumstances, the Supreme Court has upheld the recoupment of
program funds
by the federal government when states failed to expend
those funds in
accordance with basic program conditions. See Bennett v.
New Jersey,
470 U.S. 632, 636 (1985); and Bennett v. Kentucky, 470 U.S.
656, 663
(1985). The general cost principles governing HHS grantees
declare as
basic policy that grant funds "may be used only for allowable
costs." 45 CFR
74.170. Conversely, courts have held that the federal
government has a
common law right to recoup monies paid in error unless
Congress has clearly
manifested an intent to permit the funds to be
retained. See, e.g.,
United States v. Wurtz, 303 U.S. 414 (1938); and
Woods v. United States,
supra. Here, the State acknowledged that by
execution of the State
plan, a contract was created. State's prehearing
brief, p. 6. As
noted before, the plan obliges the State to comply with
the rules and
regulations of ORR. Thus, in addition to the common law
right, ORR has
in effect a contractual right to issue a disallowance to
- 21 -
recover monies which the State erroneously paid contrary to the rules
and
regulations of ORR and the State plan. Woods v. United
States,
supra.
As noted above, we have previously held that an agency, such as ORR,
may
use statistical sampling as an audit technique and base a
disallowance
on an extrapolation from the sample, even in the absence of
explicit
authorization in the regulations. The record does not indicate
that ORR
had any policy limiting or prohibiting the use of statistical
sampling
and extrapolation for disallowances. We conclude that ORR
could validly
base this disallowance on an extrapolation from a sample.
The State cited only Maryland v. Mathews, 415 F. Supp. 1206 (D.D.C.
1976),
to support its contention that ORR's adherence to a zero
tolerance level for
erroneous payments was an abuse of discretion. In
the Maryland case,
the court found that tolerance levels set by the AFDC
program agency at three
and five percent were arbitrary and capricious
because the levels had been
set without benefit of an empirical study.
The court observed that
elimination of all erroneous payments from the
AFDC program was "totally
unrealistic." Id. at 1212. Actually, this
characterization originated
with the Secretary and was quoted by the
court. 40 Fed. Reg. 21737 (May
19, 1975).
In the Maryland case, the court recognized the principle that
"payments
which are not made properly . . . are not to be matched by
federal
funds." Id. at 1212. On the tolerance level issue, the Maryland
case is
easily distinguished from this one. Maryland does not require
tolerance
levels where there is no statutory requirement for them. The
RRP is not
the AFDC program, and ORR did not undertake to set a tolerance
level for
payment errors. The State alleged that the RRP is a more
complex
program to administer than AFDC and that the states had been
given
little federal guidance, but the State offered very little more than
its
conclusions to support its allegations. Even if these conclusions
were
accurate, we are not empowered to impose a tolerance level of our
own
making. See California v. Settle, 708 F.2d 1380 (9th Cir.
1983),
upholding California Department of Health Services, Decision No.
170,
April 30, 1981. We see no reason in this record to overturn
a
disallowance because of the Maryland holding. See Maryland
Department
of Human Resources, Decision No. 358, November 28, 1982, p. 8.
Conclusion
For the reasons stated above, we uphold ORR's statistical
sampling
methodology; its disallowance based on sampled
- 22 -
cases for which the State produced no documentation of eligibility
or
conceded that the documentation was inadequate; its disallowance
for
funding source errors; and its general authority to take such
a
disallowance without establishing a tolerance system. We have
reserved
ruling on issues related to other disputed individual
case
determinations pending further development of the record in response
to
questions which we are separately transmitting.
________________________________ Judith A. Ballard
________________________________ Donald F. Garrett
________________________________ Norval D. (John)
Settle
Presiding Board