Unpublished Disposition, 904 F.2d 710 (9th Cir. 1990)

No. 89-15091.

United States Court of Appeals, Ninth Circuit.

Before WIGGINS and NOONAN, Circuit Judges, and A. WALLACE TASHIMA, District Judge^** 

MEMORANDUM^*** 

This appeal involves a dispute over the allocation of costs incurred in administering welfare programs. Defendant Secretary of Health and Human Services ("HHS") disallowed approximately $4.3 million in claimed costs incurred by plaintiff California Department of Social Services ("California"). HHS' administrative decision was upheld by the district court. We affirm.

BACKGROUND

The dispute concerns the allocation of administrative costs between two programs: Aid to Families With Dependent Children ("AFDC") and the Food Stamp programs. Food stamps are provided both to families that receive AFDC and to some families that do not. HHS has federal administrative authority and funding responsibility for those cases in which the family receives food stamps, as well as AFDC assistance. 42 U.S.C. § 610. The Department of Agriculture ("USDA") is responsible for those households that receive only food stamps. 7 U.S.C. § 2013.

California incurred administrative costs in certifying households for receipt of AFDC and food stamp assistance. Because the programs were administered jointly, the costs could not be directly attributed to either program. Pursuant to federal regulations, California prepared a "cost allocation plan" ("CAP"), which was approved by HHS, the agency designated for that purpose by federal law. 45 C.F.R. Sec. 95.507-511 (1988). Under the CAP, both direct costs¹  and indirect costs²  incurred in certifying households were to be allocated to the two programs by determining the percentage of each of the two types of cases that were processed.

California submitted reimbursement claims for the period in question³  to both HHS and USDA pursuant to the CAP. Although HHS paid the amounts claimed, USDA refused to do so because it objected to the method of allocating costs between the two programs. Eventually, California and USDA resolved their disagreement by agreeing to allocate the costs based on a special time study, rather than on the number of cases processed. USDA paid the amount of direct costs due under this new computation. It did not pay "indirect" costs attributable to it.

California did not revise its CAP to reflect the new allocation method under its agreement with USDA. As a result, a substantial portion of the direct costs were allocated to and paid by both HHS under the original CAP and USDA under the bilateral agreement, i.e., there was double recovery of some direct costs. Because USDA did not pay any indirect costs, no double payment occurred for those costs.

About five years later, HHS determined that it had overpaid California approximately $2.2 million in "direct" costs that were not attributed to USDA. In addition, HHS auditors applied the new time study allocation to indirect costs as well and concluded that HHS had also overpaid $2.1 million in "indirect" costs which should have been allocated to USDA. HHS, therefore, disallowed a total of $4.3 million. That decision was affirmed by the HHS Grant Appeals Board (the "Board").⁴ 

California then sought judicial review of the Board decision. The district court granted summary judgment to defendant, affirming the decision of the Board. This appeal followed. The district court had jurisdiction under 5 U.S.C. § 702 and 28 U.S.C. § 1331. We have jurisdiction under 28 U.S.C. § 1291.

STANDARD OF REVIEW

The parties agree that the facts are undisputed. The district court's grant of summary judgment is a question of law reviewable de novo. Cook Inlet Native Ass'n v. Bowen, 810 F.2d 1471, 1473 (9th Cir. 1987). The district court was in no better position to review agency action than is this court. Washington Dep't of Social and Health Serv. v. Heckler, 722 F.2d 1451, 1453 (9th Cir. 1984). Judicial review of the Board's decision is limited to determining whether there was a clear error of judgment and whether the Board had considered the relevant factors. Id. Agency determinations must be affirmed unless they are arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. 5 U.S.C. § 706.

DISCUSSION

Applicable regulations required that California retain its records for only three years;⁵  yet, the audit which resulted in this disallowance was not conducted until five years after the disputed period. California contends that it should be allowed to consider the period closed after the three-year period has expired and to purge its files without the fear that they will be needed for future audits. California seeks, in effect, to transform the record retention period into a statute of limitations.

In response to this argument, the Board ruled that California must show some prejudice from the lack of records:

grantees have a fundamental obligation to account for federal funding which is not defeated per se by passage of the record retention period. [citation] It is also clear, however, that this Board will take into account the prejudice a grantee can prove which is attributable to the loss of records resulting from their innocent loss or destruction after expiration of the record retention period.

The Board found that California had suffered no prejudice because nothing in the records was in dispute in this case; the amounts at issue were agreed upon by all parties. The district court agreed that the three-year record retention period did not establish a statute of limitations and that California had not been prejudiced.

California argues, without citation or elaboration, that it has been prejudiced as a matter of law. It contends that it has no way of showing prejudice, because it cannot prove what was in the purged file, and cannot know what a deceased employee would have said.⁶ 

California's argument is without merit. The United States is not subject to the defense of laches, Chevron, U.S.A., Inc. v. United States, 705 F.2d 1487, 1491 (9th Cir. 1983). In addition, there is no applicable statute of limitations. In fact, HHS is authorized to adjust grants to account for erroneous payments in any prior quarter. 42 U.S.C. § 603(b) (2).

California's only argument is that the record retention period is rendered meaningless if the state must be ready to account for its claims from all prior years. However, the retention period is not entirely meaningless because, as the Board explained, if the state can demonstrate some prejudice resulting from the destruction of its records after the record retention period, it is protected from subsequent audits.

II. Was the Plan Amended?

California argues that the agreement with USDA was simply a settlement which did not affect the CAP. Alternatively, it suggests that the agreement was an overpayment to the USDA. The Board, however, concluded that the agreement was actually a revision to the allocation methodology; accordingly, that California should have revised the CAP and recomputed HHS's liability. The Board concluded that the CAP was not a rigid contract between HHS and California, and that California could not require HHS to abide by the initial CAP.

The district court concluded that the USDA/California agreement could reasonably be interpreted as either a revision or a settlement, and that the Board's decision was therefore reasonable.

As the Board and the district court noted, the State was specifically prohibited from allocating any costs to two programs simultaneously. Office of Management and Budget ("OMB") Circular A-87 provided specifically that "No provision for profit or other increment above cost is intended." Id. at A-87:1. A cost is not allowable if it is "allocable to or included as a cost of any other federally financed program in either the current or a prior period." Id. at A-87:2. By allocating the costs to both the USDA and HHS, California violated those provisions of the OMB Circular.

In addition, 31 U.S.C. § 1301 requires that funds be spent for the purpose for which they were appropriated by Congress. Thus, to the extent that California determined that costs were allocable to USDA for the food stamp program, it could not require HHS to pay for those costs out of money allocated for AFDC assistance. California was therefore required to revise its CAP so as not to claim those same amounts from both agencies. Any allocation of costs to both programs would violate the regulations and the statute. HHS was justified in treating the USDA/California agreement as a revision of the CAP.⁷ 

California argues that even if the agreement with USDA effectively amended the CAP, the additional $2.1 million indirect cost disallowance was improper.

The dispute over indirect costs arises independently because California recovered indirect costs only from HHS and not from both agencies. When California reallocated costs based on the time study, it did not collect any indirect costs from USDA. HHS contends that although there was no double payment of indirect costs, the share of indirect costs attributable to the AFDC program should have been recomputed on the basis of the time study.

Under the original methodology, about 70% of costs had been attributed to HHS programs; under the revised method, the number was only 20%. Thus, 50% of the costs--both direct and indirect--had improperly been attributed to HHS programs.

California offers an alternative. Even if the CAP was amended, it argues, there is no reason to assume that the "revised" CAP would have changed the formula for allocating indirect costs, and that the percentage of indirect costs attributable to HHS programs would have remained at 70%, rather than be reduced 20%. It contends that HHS' contrary reading of the "revised" CAP is pure speculation.

While California's argument is a theoretical possibility, it has never suggested any reason for not using the same ratio to allocate indirect costs and direct costs to the two programs. If, for instance, the time study had shown a different ratio applied to direct and indirect costs, California's objection would be justified. As the Board said, "California has not shown, or even alleged, that the direct/indirect cost relationship it used [under the original CAP] became inaccurate or skewed when used with its time study methodology."

California has argued that under the HHS determination, California is $1.6 million worse off than it would have been had everybody abided by the original CAP. This figure is computed as follows:

Additional money received from USDA

(1) Amount of "additional" Direct Costs recovered from USDA $2.7 million (over and above that due under the original CAP) (based on 65% of attributable costs) (2) Amount of Indirect Costs Recovered from USDA (USDA did not $0 pay indirect costs) -------------- (3) Total additional amount recovered from USDA $2.7 million Amounts to be Repaid to HHS (4) Amount of Direct Costs Overpaid by HHS (based on 50% of ($2.2 million) attributable costs) (5) Amount of Indirect Costs Overpaid by HHS ($2.1 million) -------------- (6) Total amount to be paid back to HHS ($4.3 million) Net gain or loss to California (7) Net loss (line 3 k line 6) ($1.6 million)

As these numbers demonstrate, California is worse off for one reason: USDA did not reimburse for indirect costs.⁸ 

California argues that it is inequitable for it to be penalized $1.6 million because USDA failed to abide by the initial CAP. California urges us to "split the difference" and put it in the position it was in before USDA's refusal to pay. While this may be an appealing suggestion, there is no legal basis for doing so.

It is regrettable that the United States and California were unable amicably to resolve their differences. While it may appear that California is being "penalized" by the inconsistent approaches being taken by HHS and USDA, as we have explained, it was within California's power at least to have inquired at an earlier stage about HHS' acceptance of California's bilateral agreement with USDA. Because of the limited scope of judicial review, the district court did not err in upholding HHS' insistence on the full measure of its legal rights as against California.

The judgment is AFFIRMED.