Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: West Virginia Department of Administration
DATE: February 25, 1994
Docket No. A-93-202
Decision No. 1465
DECISION
The West Virginia Department of Administration (West Virginia) appealed
a decision of the Regional Director, Region III, Department of Health
and Human Services (the Agency) disallowing approximately $13,663,344
charged by West Virginia to a number of federal programs. 1/ The
disallowed costs represented funds contributed by these programs to West
Virginia's Public Employees Retirement System (PERS) fund. The Agency
determined that, from July 1, 1985 to June 30, 1989 (state fiscal years
(FY) 1986-1989), West Virginia failed to charge pension costs to
federally funded programs at the same employer's contribution rate that
it charged its own programs, resulting in an $8,131,165 overcharge to
the federal government. The Agency also concluded that West Virginia
was required to return to the federal government interest income earned
from July 1, 1985 through June 30, 1990 on the overcharges. In
addition, the Agency found that West Virginia withdrew $19,108,350 in
pension funds from its PERS fund and used these monies to fund general
obligations of the state and to pay health insurance premiums for
retirees. The Agency calculated that 20 percent of the total amount
withdrawn, or $3,821,670, was contributed by the federal government and
therefore must be refunded to the federal treasury. Finally, the Agency
maintained that West Virginia could not offset the disallowance with
unclaimed insurance costs allegedly chargeable to the federal government
due to underfunding of its Public Employees Insurance Agency (PEIA)
fund.
On appeal before the Board, West Virginia did not deny that it
overcharged the federal government for pension costs or that it diverted
pension funds from PERS for other uses besides pension costs. However,
West Virginia contested the Agency's authority to recover interest
earned on the amount West Virginia overcharged the federal government,
and it challenged the Agency's calculation of the federal share of PERS
withdrawals. Moreover, West Virginia contended that the disallowance
amount should be offset by unclaimed PEIA insurance expenses incurred by
its federal programs.
For the reasons discussed below, we find the following:
o The Agency has authority to recover the interest earned on the amount
which West Virginia overcharged the federal government for pension
costs.
o The amount disallowed for the federal share of the funds which West
Virginia withdrew from PERS and expended for other purposes was
reasonably calculated.
o West Virginia may not offset the disallowance by unclaimed PEIA
insurance costs.
Accordingly, we uphold the disallowance in full.
Background
West Virginia established PERS in 1961 in order to provide a retirement
system for its public employees. PERS covers state employees as well as
county and municipal employees not covered by any other public
retirement system. Under West Virginia's pension benefit plan,
contribution rates are determined using actuarial assumptions so that
PERS has adequate funds available to pay its employees when benefits are
due. Both employers and employees contribute a percentage of payroll to
PERS. During the four-year period at issue, the required employer
contribution rate was 9.5 percent of payroll and the required employee
contribution rate was 4.5 percent of payroll. West Virginia, however,
contributed only 1.68 percent of payroll in total during the subject
period, while charging the federal government 9.5 percent of payroll.
The PERS funds, including federal contributions, were placed in West
Virginia's Consolidated Investment Fund and investment portfolio funds.
West Virginia separates the PERS contributions into several different
accounts, depending on the source of the funds. Contributions made by
the state on behalf of its employees are deposited into the State
Employer Accumulation Fund (EAF-State). Contributions charged to
Federal programs are also deposited into the EAF-State Fund.
Contributions by county and municipal governments on behalf of their
employees are deposited into the Non-State Employer Accumulation Fund
(EAF-Non-State). Public employee contributions made by county and
municipal government employees, as well as state employees, are
deposited into Member Funds. Agency Exhibit (Ex.) 7 (Auditor's
affidavit), 15. During the time period at issue, West Virginia
withdrew $19,108,350 from the EAF-State Fund for general obligations of
the state and to pay health insurance premiums for some retirees.
Analysis
I. Interest payments
West Virginia admitted that it had overcharged federal programs by
claiming the full 9.5 percent employer's contribution from the federal
government at the same time that West Virginia was contributing far less
than its share. West Virginia argued, however, that it did not have to
refund the interest income admittedly earned on the federal government's
excess PERS contributions because the Debt Collection Act of 1982
abrogated the federal government's right to collect interest from
states. The Agency argued that the court cases cited by West Virginia
in support of its position had been overturned by the Supreme Court in
U.S. v. Texas, 113 S. Ct. 1631 (1993).
West Virginia relied on two recent circuit court decisions which held
that the Debt Collection Act of 1982 abrogated the federal government's
right to collect interest from the states on pre-judgment debts owed to
the federal government: Pennsylvania Department of Public Welfare v.
United States, 781 F.2d 334, 341-42 (3d Cir. 1986), and Arkansas v.
Block, 825 F.2d 1254 (8th Cir. 1987). West Virginia did not respond to
the Agency's contention that the Supreme Court in effect overturned both
Pennsylvania and Arkansas in U.S. v. Texas, 113 S. Ct. 1631 (1993). In
Texas the Court conclusively held that the Debt Collection Act's
exemption from interest charges on debts owed to the federal government
applies only to private citizens. The Court ruled that because the Act
was intended to reach only private debtors, the states remain subject to
the federal common law requirement that interest be assessed on debts
owed to the federal government.
The requirement that West Virginia repay interest earned on overcharges
to the federal government is based on the applicable cost principles
which establish that interest constitutes an applicable credit which
must be applied to reduce West Virginia's claims for federal funding.
Office of Management and Budget (OMB) Circular A-87 provides that
applicable credits are "those receipts or reduction of expenditure-type
transactions which offset or reduce expense items allocable to grants as
direct or indirect costs." OMB Circular A-87, Att. A, C.2(a).
According to A-87, a state must apply all applicable credits against its
claims for federal funding. OMB Circular A-87, Att. A, C.1(g).
Interest income falls within the plain meaning of "applicable credit"
since earnings derived from federal funds are clearly receipts which
offset grant costs.
Moreover, this Board has held in a variety of contexts that interest is
an applicable credit within the meaning of OMB Circular A-87. See,
e.g., New York State Dept. of Social Services, DAB No. 588 (1984); North
Carolina Dept. of Human Resources, DAB No. 361 (1982), aff'd, 584 F.
Supp. 179 (E.D.N.C. 1984). These decisions involved interest earned on
Medicaid funds withheld from state providers. In both cases, the Board
reasoned that since the federal government contributed a portion of the
Medicaid funds at issue, the federal government was entitled to a pro
rata share of the interest which those funds had earned. The same
reasoning especially applies here. It is only logical that interest
earned on unallowable charges should be given back to the federal
government. Otherwise, West Virginia would profit from overcharging the
federal government.
Other than the alleged statutory bar of the Debt Collection Act of 1982,
West Virginia has provided no support for its position that it may
retain the interest earned on the excess federal contribution to its
pension fund. 2/ Accordingly, West Virginia must remit this interest to
the federal government. While it is not clear from the record how much
interest West Virginia owes, it appears that the parties agree as to how
this amount should be calculated. 3/ If the parties are unable to reach
agreement on the precise amount owed, West Virginia may appeal this
limited issue to the Board.
II. Withdrawn funds
The Agency concluded that West Virginia had used $15,171,377 withdrawn
from PERS to fund general obligations of the state and $3,936,973 of
PERS funds to pay for health insurance premiums for retired state
employees. West Virginia acknowledged its responsibility to refund the
federal share of the PERS funds used for state purposes; however, West
Virginia argued that the federal share of the withdrawn funds was not
properly calculated. West Virginia also argued that the PERS funds used
to pay health insurance premiums for retired employees should not be
included in the calculation of the federal share. West Virginia
contended that because it could be assumed that some of these retirees
worked on federal programs, the federal government must share in the
cost of insuring them.
We conclude that neither of West Virginia's arguments has any merit.
Since its argument about the funds used for health insurance premiums
affects the calculation issue, we discuss that contention first. While
West Virginia admitted that it should not have used federal money for
state purposes, the state maintained that its use of federal money for
an alleged federal purpose, paying health insurance premiums for
retirees, was permissible. Under applicable cost principles, however,
both uses of federal funds are clearly unallowable. OMB Circular A-87
explicitly states that "[a]ny cost allocable to a particular grant or
cost objective . . . may not be shifted to other Federal grant
programs." OMB Circular A-87, Att. A, C.2(b). Moreover, this Board
has previously held that funds appropriated for a particular federal
program may not be used to fund costs arising from another federal
program. Cayuga County Action Program, Inc., DAB No. 1151 (1990). West
Virginia therefore violated the cost principles and, most likely, the
appropriation authority for individual programs, by diverting funds
intended for pension costs and using them to pay health insurance
premiums for its retired employees.
In addition, West Virginia provided no evidence whatsoever that any of
the retirees receiving funds for their health insurance benefits
actually worked on federal programs. West Virginia merely argued that
"[i]t must be assumed that some of the retirees had worked for federally
funded programs," without providing any basis for making such an
assumption. State Br. at 3. Furthermore, even if some of the retirees
had worked on federal programs, there is no evidence in the record that
the retirees worked on the same federal programs that had made the PERS
contributions at issue here. Nor is there any indication in the record
that the retirees worked on these federal programs during the same
period in which the pension costs were incurred.
West Virginia's position that the PERS funds were properly applied to
health insurance costs is also contrary to state law. In Dadisman v.
Moore, 384 S.E.2d 816 (W. Va. 1988), the West Virginia Supreme Court
directed West Virginia to cease the payment of health insurance premiums
from PERS funds. The court found that the payments violated state law
and were therefore improper.
West Virginia also asserted that the disallowance letter miscalculated
the federal share of the funds withdrawn from PERS. During the audit
which led to the disallowance, West Virginia was asked to identify the
actual federal share of the illegally withdrawn funds. When West
Virginia failed to do so, the auditors estimated the federal share to be
20 percent, based on the average federal contribution to the pension
funds of other states.
In its appeal to the Board, West Virginia contended that the 20 percent
estimate was inaccurate because it represented the federal government's
experience with all states as a whole, rather than just West Virginia.
West Virginia argued that its own estimate of 3.43 percent was a more
accurate estimate of the federal share of withdrawn funds. West
Virginia derived this estimate by comparing the federal government's
annual allowable contributions to PERS (those funds that were matched by
West Virginia's contribution) to the total annual contributions made to
PERS (including all of the county and municipal governments of West
Virginia, as well as all participating public employees) and then
averaging the resulting ratios for each year.
The Agency asserted, and we agree, that West Virginia's ratios were
derived from improper comparisons. First, West Virginia should not have
used only the federal government's allowable contributions in making its
comparisons, since there has been no showing that this anomalous period
would represent the overall federal share of the larger fund. Second,
West Virginia erred by including contributions made by county and
municipal governments to the EAF Non-State Fund and contributions made
by participating employees to Member Funds in determining the ratio of
federal funds to state funds. There is no indication in the record that
West Virginia withdrew any monies from Member Funds. Moreover, it
appears from the record that the Agency did not include in its
calculations any funds withdrawn from the EAF Non-State Fund since West
Virginia's county and municipal employees did not work on federal
programs.
We also agree with the Agency that 20 percent was a reasonable estimate
of the federal share of the withdrawn funds. Initially, the Agency
based its 20 percent estimate on its experience with the federal share
of pension fund contributions in other states. During the appeal
proceeding, the Agency provided the sworn affidavit of one of the
auditors who participated in the on-site audit of West Virginia and
helped prepare the audit report which forms the basis for this
disallowance. To demonstrate the reasonableness of the 20 percent
estimate, the auditor compared the 20 percent figure to the ratio of
total federal contributions to PERS (both allowable and unallowable) to
total contributions actually made by West Virginia to the EAF-State Fund
for each year of the audit period (1986-1989). Agency Br., Ex. 7
(auditor's affidavit) at 2. Since the ratios for each of the years in
question ranged from 20.34 percent to 33.69 percent, the auditor
determined that, in comparison, 20 percent was a conservative estimate.
Moreover, the auditor computed the federal share of PERS withdrawals,
first using the ratio of total federal contributions to West Virginia's
contributions to the EAF-State Fund and then using the 20 percent
estimate, and compared the results. Over the four-year audit period,
the 20 percent estimate resulted in a lower federal share. In addition,
the auditor took the average of the ratios derived from comparing total
federal contributions to PERS to total contributions made by West
Virginia to the EAF-State Fund and calculated the average federal share
of PERS withdrawals during the period at issue. The auditor found that
the federal share derived from applying the average ratio was still
greater than the federal share derived from using the 20 percent
estimate.
Thus, we conclude that the auditors' estimate used as the basis for the
disallowance was conservative since it resulted in a lower federal share
amount than the amount computed using the actual ratios of total federal
contributions to contributions made by the State of West Virginia. 4/
Furthermore, once the Agency explained its view of why West Virginia's
calculations were erroneous and provided further support for the 20
percent figure, West Virginia failed to provide any arguments in reply,
although given the opportunity to do so. In view of the fact that West
Virginia had previously disputed other calculations and persuaded the
Agency to reduce the disallowance where it was warranted, West
Virginia's failure here suggests that it cannot refute the Agency's
calculations.
Thus, we find that 20 percent is a reasonable estimate of the federal
share of PERS withdrawals. We conclude also that the auditors properly
applied the 20 percent estimate to all of West Virginia's PERS
withdrawals, including amounts used for health insurance premiums, and
correctly found that West Virginia owes the federal government
$3,821,670 (20 percent of $19,108,350).
III. Setoff
West Virginia argued that even if the disallowance was proper, it should
be offset by certain unpaid claims which West Virginia had against the
federal government (and by related costs). Specifically, West Virginia
contended that the federal government was liable for a share of West
Virginia's contributions to West Virginia's Public Employees Insurance
Agency (PEIA) for the period of July 1, 1985 through June 30, 1990.
West Virginia alleged that, because the federal government failed to pay
its share, which amounted to $10,373,429, West Virginia was forced to
make supplemental appropriations and borrow from other sources in order
to fully fund the PEIA. West Virginia asserted that, according to an
independent accounting firm which evaluated the allocation of funding
and costs among West Virginia's Federal, General and Special Revenue
Funds, the federal government owes it $9,541,125 for contributions made
to PEIA from FY 1986 through FY 1990. West Virginia also contended that
the federal government owes $832,304 in interest paid on the funds which
West Virginia borrowed to fund PEIA. West Virginia did not allege nor
did the record show that it had ever filed any claims for these costs.
West Virginia alleged that the federal government was clearly aware of
this debt since the PEIA was included within the scope of the subject
audit until the auditors discovered that the federal government would
owe West Virginia a significant amount of money. Accordingly, West
Virginia argued, the federal government should offset the current
disallowance with its own debt. State Ex. 2 (November 13, 1991 briefing
book) at 18.
Since West Virginia has never filed a proper claim for these costs, the
federal government has not had an opportunity to make any determination
regarding the allowability (including allocability) of the PEIA costs
under any federal program. Without such a determination, the federal
government does not owe West Virginia anything. Thus, adjustment of the
current disallowance for these unclaimed and unproven costs is
inappropriate.
In addition, West Virginia must submit its claim to the federal
government within statutory time limits. Under section 1132(a) of the
Social Security Act, claims for federal funding for expenditures for
Social Security Act programs must be filed within two years of the end
of the calendar quarter in which the expenditures were made. 5/ Since
West Virginia asserted that its insurance contributions were for FY 1986
to FY 1990, West Virginia may be precluded from filing claims for the
federal share of these contributions. To allow West Virginia to offset
any unclaimed costs against the disallowance here would allow it to
circumvent these time limits and recover costs which it would otherwise
not be entitled to receive. 6/
Thus, we find that West Virginia may not properly use its insurance
claims against the federal government to offset the disallowance taken
here.
Conclusion
Based on the foregoing analysis, we uphold the disallowance and find as
follows:
o West Virginia must pay the federal government $8,131,865 due as a
result of overcharges made to PERS.
o West Virginia must remit the interest earned on the amount the federal
government was overcharged.
o The interest due should be calculated based on the $8,131,65 in
overcharges and using the actual rates of return at page 17 of West
Virginia's November 13, 1991 briefing book. In addition, interest
should be computed for 5.25 months of every year from July 1, 1985 to
June 30, 1990. The Division of Cost Allocation must agree with West
Virginia's assessment of the total amount of interest due. If the
parties are unable to reach agreement on the precise amount owed, West
Virginia may appeal this limited issue to the Board.
o West Virginia must remit the federal share, or $3,821,670, of the
funds it withdrew from PERS during the period in question.
___________________________
Cecilia Sparks
Ford
___________________________
Donald F.
Garrett
___________________________
M. Terry Johnson
Presiding Board
Member
1. The Regional Director delegated his authority to consider West
Virginia's appeal of a Division of Cost Allocation disallowance
determination to a Hearing Official. As explained later, the exact
amount of the disallowance is uncertain since the Hearing Official
directed West Virginia to recalculate the interest portion of the
disallowance and seek the Division of Cost Allocation's concurrence
regarding the amount calculated.
2. Although West Virginia asserted generally that Agency regulations
preclude the assessment of interest in this case (See West Virginia
Brief (Br.) at 2), West Virginia failed to offer any citation or
explanation for this assertion.
3. The Agency ultimately agreed with West Virginia's contention that
interest should be calculated for 5.25 months of each year, from July 1,
1985 to June 30, 1990, using the actual rates of return. See June 25,
1993 disallowance letter at 4-5. According to the disallowance letter,
the actual rates of return which should be used are at page 17 of West
Virginia's briefing book, dated November 13, 1991. West Virginia did
not dispute that these were the applicable rates, assuming the Board
determined that interest was due. (West Virginia did not appeal to the
Board the Agency's determination that the interest could not be offset
by an unproven loss on the state's investment of the PERS overcharges.)
The interest due should be calculated based on the $8,131,865 which West
Virginia owes the federal government as a result of its inconsistent
funding practices. The disallowance letter directed West Virginia to
calculate the amount and seek concurrence from the Division of Cost
Allocation.
4. The auditors' estimate also seems reasonable in light of a
comparison of the federal government's actual contributions (both
allowable and unallowable) to the sum of West Virginia's contributions
to the EAF-State account plus the amount which West Virginia should have
contributed in order to match the federal government's actual
contribution (in order to adjust for the unusually low percentage of
employer contributions made by West Virginia during those years). Since
the ratios derived from this comparison would range from 18.4 percent to
26.3 percent, these calculations also support 20 percent as a reasonable
estimate for the four-year period.
5. This statutory provision is implemented by 45 C.F.R. Part 95,
Subpart A (1992).
6. The statute and regulations do authorize the Secretary to waive
the timely claims requirements upon determining that there is good cause
for the state's failure to file its claim within the prescribed period.
See 45 C.F.R. 95.19. There is no indication in the record here that
West Virginia has ever made a waiver request for these expenditures.
(West Virginia asserted that the federal government had notice of these
claims from the audit that led to this disallowance, but this alleged
notice is not equivalent to either a timely filed claim or a waiver