Texas Office of the Governor, DAB No. 1608 (1997) Department of Health and Human Services DEPARTMENTAL APPEALS BOARD Appellate Division SUBJECT: Texas Office of the DATE: January 30, 1997 Governor Docket No. A-96-30 Decision No. 1608 DECISION The Texas Office of the Governor (Texas) appealed the decision of the Division of Cost Allocation (DCA) to disallow $14,143,444, representing the federal contributions to a reserve fund of approximately $98 million accumulated as of September 1, 1992 by the health insurance plan that Texas operates for its state employees. DCA took the disallowance because Texas, on that date, enrolled in the health insurance plan some 55,000 employees from insurance plans maintained by state colleges and universities. Texas, however, did not authorize any additional reserve funding for the new members. DCA determined that the reserve fund had accumulated for the benefit of the original programs and activities (which included federally funded programs and activities) to which its costs had been charged since its creation. DCA further determined that, following the enrollment of the new members, the pre-existing federal contributions to the reserve fund improperly benefited the programs and activities of the state colleges and universities because those programs and activities had not made any contributions to the reserve fund. DCA determined, as a consequence, that the entire federal share of the reserve fund should be disallowed. The record in this appeal consists of the parties' written submissions and the transcript of a hearing held by the Board. For the reasons explained below, we conclude that the applicable cost principles require an adjustment in the federal funding for the existing reserve fund as of the enrollment date of the higher education employees because the higher education employees improperly benefited from the existing federal contributions to the reserve fund. We further conclude, however, that Texas is liable to DCA for only a proportionate share of the federal contribution to the reserve fund balance and not the entire amount of the federal contribution as DCA had determined. Finally, we conclude that we must remand the disallowance to DCA for further proceedings since the current record is insufficient to enable us to compute what part of the reserve fund should be returned to the federal government. If Texas disputes DCA's amended computation of the disallowance amount, it may return to the Board on that issue alone within 30 days after receiving DCA's determination. Background This disallowance concerns federal financial participation in the reserve fund maintained by the Uniform Group Insurance Plan (UGIP), Texas' health insurance plan for its state employees. UGIP was created by the Texas Legislature effective September 1, 1976, bringing together approximately 100,000 Texas employees and retirees ("state employees") who had previously been covered under some 60 health insurance plans maintained by individual or groups of state agencies. Texas initially considered but rejected including higher education employees in UGIP at the time of its creation in 1976. Transcript (Tr.) 166-69. UGIP is funded through contributions by Texas and by its employees, who pay uniform contribution rates and receive a uniform schedule of benefits. Many of the Texas state agencies administer federal grants and are thus entitled to have some of their employer contributions to UGIP reimbursed by the federal government. The UGIP contribution rates are determined yearly by the Board of Trustees of Texas' Employees Retirement System (ERS), which oversees UGIP, and are set to provide adequate revenue to cover the coming year's projected claims and expenses. A portion of the year's contribution rate may also be used to assure an adequate reserve fund. The reserve fund generates investment income and protects UGIP against unforeseen funding shortfalls, such as could be caused by underestimating upcoming employee health care claims. A sufficient reserve fund benefits members of the health plan by allowing lower contribution rates than would otherwise be required. The ERS Board of Trustees determines the amount of the reserve fund based on certain parameters, such as a Texas legislative requirement that the fund balance be at least 10 percent of the following year's projected expenses, a 1986 Board resolution targeting a balance of at least 35 percent of the total annual contributions, and a recommendation by the U.S. General Accounting Office that the health insurance program for federal employees maintain a reserve equal to two months' benefits and expenses. Tr. 220-24; Texas Exhibit (Ex.) E. The federal government participates in the reserve fund to the extent that Texas' employer contributions to UGIP are eligible for federal reimbursement under various federal programs for which Texas receives funding. Effective September 1, 1992, by which time UGIP's enrollment had grown to approximately 139,000 members, the Texas legislature enrolled in UGIP approximately 55,000 employees of Texas state colleges and universities ("higher education employees") previously covered by different health plans. These employees brought with them into UGIP none of the assets (including reserve funds) or liabilities of their former health plans, which continued to be responsible for claims incurred before September 1, 1992. 1/ Nor did Texas provide funding to increase the UGIP reserve fund balance at the time that it enrolled the higher education employees. In a letter dated June 26, 1995, the Acting Regional Director of DCA sought repayment of the federal share of the $98,409,713 reserve fund balance as of September 1, 1992, which was calculated as $14,143,444. Texas sought reconsideration of that determination before the Regional Director of the Department of Health and Human Services (HHS), pursuant to 45 C.F.R. Part 75. The Regional Director affirmed the disallowance in a decision dated September 25, 1995, and Texas appealed to the Board. Applicable Regulations The allowability of costs claimed for reimbursement by Texas in its administration of federal programs is governed by Office of Management and Budget (OMB) Circular A-87. 2/ To be allowable generally, costs must be necessary and reasonable for the proper and efficient administration of the federal grant program, and must be "allocable" to the program. OMB Circular A- 87, Attachment (Att.) A, C.1.a. Other provisions of Attachment A of OMB Circular A-87 address the requirement of allocability more specifically: C.2.a. A cost is allocable to a particular cost objective to the extent of benefits received by such objective. C.2.b. Any cost allocable to a particular grant or cost objective under the principles provided for in this Circular may not be shifted to other Federal grant programs to overcome fund deficiencies, avoid restrictions imposed by law or grant agreements, or for other reasons. A state's employer contributions to health insurance plans for employees who work on federally funded programs are allowable as employee benefits under OMB Circular A- 87, Att. B, B.13.b. Such benefits must be granted under approved plans and be distributed equitably to grant programs and to other activities, and are subject to basic requirements affecting allowability of costs set out in the Circular. The federal government participates in a state's contributions to health insurance plans for employees working on federally funded programs, pursuant to a cost allocation plan approved by HHS, which is the cognizant agency on behalf of the federal government. Texas Ex. DD. Parties' Arguments DCA argued that the cost principles require that UGIP's $98 million reserve fund balance should only properly be used to benefit those state programs and activities that had funded it, including those that had received federal reimbursement. When the 55,000 higher education employees, who had not contributed to the reserve fund, were transferred into UGIP, DCA argued, they diluted the existing federal interest in the reserve. A portion of the cost of conducting the activities of Texas' higher education function was thus, in DCA's view, shifted to those state programs and activities that had received federal funding. DCA argued that the health insurance costs of the higher education employees were thus subsidized by the federal share of the reserve fund. DCA argued that this cost shifting could have been avoided if the higher education employees had brought with them a pro rata equivalent reserve fund balance upon their entrance into UGIP. DCA estimated that $32,864,000 should have been added to the reserve fund when the higher education employees entered UGIP in order to achieve "fund balance parity." Failing that, DCA argued, fund balance parity could also have been achieved if the existing UGIP membership, like the higher education employees, had also brought no fund balance with them when the higher education employees were enrolled in UGIP. Accordingly, DCA disallowed the entire federal share of the reserve fund, which it determined to be $14,143,444. DCA also argued initially that transferring the 55,000 higher education employees into UGIP was a merger of the health plans and thus a change in Texas' method of accounting for costs for which Texas had failed to get prior approval as required under the terms of its Statewide Cost Allocation Plan (SWCAP). Texas denied that the costs of insuring the higher education employees had been shifted to the federally funded programs of the Texas state government or that there had been any dilution of the federal interest. Texas stated that the higher education employees proved to be substantially less expensive to insure during their first year of UGIP membership than the state employees, generating a $38 million surplus for the reserve fund for FY 1993. This positive claims experience enabled the contribution rates for all UGIP members to be set lower than they would have been in the absence of the higher education members. Accordingly, Texas asserted, the benefits that the higher education members enjoyed by joining UGIP did not come at the expense of any other employees or programs, and it was the higher education employees who ended up subsidizing the state employees. Texas argued that it did not make sense to look at the UGIP reserve fund balance only as of September 1, 1992, as this approach failed to disclose how the program benefited by the admission of the higher education employees. Texas also argued that DCA has never demanded that Texas contribute a proportionate reserve fund balance in the past when Texas hired large numbers of state employees to work on new initiatives, including non-federal activities. Texas noted that the lines of federal funding are not as clearly demarked as DCA implied, in that many state employees who are UGIP members do not receive any federal funding support while a significant number of the newly enrolled higher education employees do. Texas argued that under DCA's analysis, a dilution of the federal interest occurs every time a new employee is hired to work on state-only activities, and that DCA's position would require states to keep track of their employees by funding source and make constant contribution rate and fund balance adjustments for new employees in order to stave off claims that one group of employees is benefiting at the expense of another. Texas cautioned that an onerous administrative burden would result from sustaining DCA's position. Texas also disagreed with DCA's methodology for calculating the disallowance. Texas argued that even assuming the validity of DCA's legal position, DCA should be entitled to recover only a pro rata share of the federal contribution reflecting the relative proportion of the UGIP membership made up by the higher education employees, rather than the entire federal share of the reserve fund. Analysis In section one below, we discuss the cost principles underlying the disallowance and conclude that these principles require that the federal share of the UGIP reserve be adjusted as of the time Texas enrolled the higher education employees. We first discuss the basic guidelines on allocability and the other requirements of OMB Circular A-87 that would also support the disallowance here. We then address Texas' arguments concerning the cost principles, and finally DCA's alternative basis for the disallowance. In section two, we discuss why DCA is not entitled to recover the entire federal share of the reserve fund, but only that portion of the reserve allocable to the higher education enrollees. In section three, we discuss why it is necessary to remand the disallowance to DCA to enable the parties to document how the required adjustment in the disallowance should be computed. 1. The cost principles require an adjustment in the existing federal share of the UGIP reserve fund. A. The basic guidelines on allocability and other requirements OMB Circular A-87 provides as a "basic" guideline that a cost must be allocable to the grant program in order to be an allowable cost of that program. The Circular further provides that a cost is allocable to a particular cost objective of the grant program only to the extent of benefits received by such objective. We here conclude that Texas violated these provisions of the cost principles when it enrolled the higher education employees into the UGIP health insurance plan without refunding to HHS a proportionate share of the UGIP reserve fund balance that now benefits the higher education employees and, concomitantly, no longer benefits the federal programs that contributed to the reserve fund in the first place. As we discussed above, a wide range of federal programs contributed to the UGIP reserve fund for a period of approximately 16 years prior to the enrollment of the higher education employees. This reserve fund could remain allocable to the contributing federal programs only to the extent that the reserve fund continued to benefit those programs in proportion to their contributions. When Texas enrolled the higher education employees without providing any increase in the reserve fund, a proportionate share of the existing reserve fund no longer benefited the contributing programs and became allocable to the new members. Since this proportionate share of the reserve fund was no longer allocable to the contributing programs, it may properly be disallowed under the cost principles. OMB Circular A-87 also forbids for any reason the shifting of costs properly allocable to one or more federal programs to other federal programs. This provision prohibits the retention of costs as chargeable to HHS' programs when those costs are no longer properly allocable to those programs. Following the enrollment of the higher education employees into the UGIP health insurance plan, those employees received the benefit of a proportionate share of the existing reserve fund of that plan. The cost of that share of the fund is thus properly allocable to the programs that support the higher education employees and not to the programs that had previously supported the employees in UGIP. Paragraph C.2.b precludes the shifting of any of these costs back to the federal programs that had traditionally supported the UGIP employees since the costs are no longer allocable to those programs. In its post-hearing submission, Texas cited the language from paragraph C.2.b which forbids shifting of costs "to overcome fund deficiencies," and argued that there had been no violation here because no fund deficiency was transferred to UGIP. Texas Post-Hearing Brief (Br.) at 9. However, the quoted sentence ends, "or for other reasons" and so is reasonably read as forbidding shifting of costs to federal programs regardless of motivation. A grantee that receives funding for contributions to a reserve fund in a health insurance plan does not have the right to unilaterally make those reserves available to programs that had not contributed to them. If the federal government tolerates this type of manipulation, it in effect permits violations of appropriations laws by permitting states to shift costs intended for one purpose to being used for another purpose. Texas' actions here were the same as if it had removed the portion of the reserve fund balance now allocable to the higher education employees and used that funding for purposes that were completely unrelated to the purposes of the original funding programs. The Board has long held that a grantee which receives federal funds has the affirmative duty to document that those funds were used for the purposes for which they were awarded. Rural Day Care Association of Northeastern North Carolina, DAB No. 1489, at 8 (1994); National Urban League, Inc., DAB No. 289, at 2 (1982). The principle that funds be used for the purposes of the programs under which they were awarded is apparent from the general requirement in OMB Circular A-87 that costs, to be allowable, must be necessary and reasonable for the proper and efficient administration of the grant program. OMB Circular A-87, Att. A, C.1.a. See, e.g., California Dept. of Finance, DAB No. 1592 (1996); Texas Dept. of Human Resources, DAB No. 617 (1985); Oregon Dept. of Human Resources, DAB No. 493 (1983). Additionally, a longstanding ruling of the Comptroller General imposes on grantees the obligation to use grant funds for the purposes of the grant, and holds that the government has a reversionary interest in funds that are expended for unallowable purposes. 42 Comp. Gen. 289, 294 (1962), cited in McLean Hospital, DAB No. 258 (1982). Where, as here, the awarded funding is used to pay health insurance costs, the affirmative duty to document that funding was used to support the reserve fund continues for the duration of the health insurance plan. A health insurance reserve fund protects health insurance plans against unforeseen funding shortfalls such as could be caused by underestimates of employee health care claims for a given period. Had Texas placed the higher education employees in a new health insurance plan on September 1, 1992, instead of enrolling them in UGIP, Texas would have been required to make sure that these employees had an adequate reserve fund, either by creating a brand new reserve fund from its general revenues or by setting the contribution rates high enough to accumulate a reserve fund. 3/ Admission of the higher education employees to UGIP with its substantial reserve fund eliminated the need to fund a separate reserve for the higher education employees. Texas and the higher education employees realized substantial benefits and cost savings through the existence of the UGIP reserve. Not only was Texas protected from the costs of having to establish a new reserve fund for higher education employees, it was also protected from having to reassess the sufficiency of the accumulated reserve fund balances of the existing higher education health insurance plans. Texas' witnesses were unable to provide the Board with any information as to the amount of the accumulated reserve funds of those plans or the ultimate disposition of those funds beyond the payment of pre-existing claims incurred by the higher education employees. Tr. 184-85, 282-83. Moreover, the fact that Texas could add 55,000 employees to UGIP without increasing the reserve is in effect an admission that the reserve had excess amounts. This suggests that prior UGIP contribution rates had been set too high and that Texas thus claimed more federal funding than was necessary for the proper and efficient administration of the programs which provided funding for UGIP and the reserve. See OMB Circular A-87, Att. A, C.1.a. A statement of a DCA witness indicates that Texas state agencies performing federal program administration functions had in this instance been allowed to charge health insurance costs greater than necessary for the purpose of developing a contingency reserve excess. Witness Statement of J.L. Myers, 5. The evidence establishes that excess reserve funds may be used to lower contribution rates. See n. 3. Had the excessive UGIP reserves been so applied here, the amount of federal funding claimed by Texas in its health insurance costs would have been lower. 4/ Finally, the cost principles also require consistent treatment of costs. 5/ The Board has found violations of the consistency principles when the federal government has been charged at a higher rate than the state paid on similar cost items, such as pension funds. Indiana Public Employees' Retirement Fund, DAB No. 314, at 7-9 (1982), aff'd, Board of Trustees of the Public Employees' Retirement Fund of the State of Indiana v. Sullivan, 936 F.2d 988 (7th Cir. 1991), cert. denied, 502 U.S. 1072 (1992). These principles were violated here because the funding sources of the higher education programs provided no UGIP reserve funding, while other funding sources, including federal funding sources, were required to bear the entire cost of the UGIP reserve fund. Had the reserves which had accumulated for the higher education employees been applied to the UGIP reserve, as were the reserve funds from the original UGIP members, the reserve would have been even greater, which would have permitted even greater reductions in contribution rates and thus lowered claims for federal funding. B. Texas' arguments Texas made several arguments as to why the cost principles would not support a disallowance. We reject these arguments for the following reasons: o It is irrelevant to our analysis here that some of the original programs contributing to the UGIP reserve may not have received any federal funding or that some of the programs supporting the higher education employees prior to their enrollment in UGIP may have. This disallowance only focuses on the federal funding contributed to the UGIP reserve fund as of September 1, 1992. To the extent that some of the participating UGIP employees may not have been funded at all by federal programs prior to that date, the reserve fund balance attributable to them would not be affected by this disallowance. Moreover, while some of the higher education employees may also have been supported by federal programs prior to their enrollment in UGIP, that funding obviously in no way contributed to the funding balance at issue here. Texas asserted and DCA did not dispute that many Texas colleges and universities receive federal funding and that many of the higher education employees work on programs eligible for federal funding. What is critical here, however, is that none of the federal funding for higher education employees prior to their enrollment in UGIP ever became part of the UGIP reserve fund. Even funding that may have been applied to the reserves for the higher education health insurance plans never became part of the UGIP fund reserve because Texas did not authorize any transfer of these reserves to the UGIP plan. Texas never identified what became of those reserves beyond paying the pre-existing claims of the higher education employees. o Texas' argument that no costs were shifted to federal programs because the higher education employees as a group had a positive claims history that generated surplus reserve funds is an after-the-fact rationalization and fails to focus on the point in time at which the cost principles were violated. Texas and the higher education programs received the benefits of the UGIP reserve immediately upon their enrollment into the plan and it was at that time that the applicable cost principles were violated. The federal government was entitled to seek recovery of the improperly allocated reserve funds as of that time. Moreover, there was no way of knowing at that time what the claims experiences of the higher education employees would ultimately turn out to be. Further, while the claims history of the higher education employees has been initially positive, that experience could change. There also is no basis within the makeup of the plan for examining the claims history of the higher education employees apart from other members of UGIP. While different groups of UGIP members may have variously different claims experiences, they are treated uniformly through uniform contribution rates and reap uniform benefits through the existence of the reserve, without regard to the extent to which they may utilize the reserve fund. Any differences in claims among various groups of employees should not be a basis to continually revisit the issue of the reserves that arose at the time the higher education employees were enrolled in UGIP. o It has no bearing on this disallowance that DCA could have but did not take disallowances for other UGIP expansions. These expansions included employees engaged in primarily state-funded activities, as with the 20,000 employees that Texas' witnesses reported were hired by the Texas Department of Criminal Justice. Tr. 194-95, 238-39; Texas Ex. K. Those changes in UGIP membership, as well as more routine expansions and contractions which Texas warned would lead to further disallowances and require the tracking of each employee based on funding source and activity, are different from the instant facts in both nature and scope. Changes in health plan membership resulting from ongoing work force and programmatic changes may be expected in the course of state government operations. Such changes affect the number of state agency employees covered by an existing insurance plan, rather than, as here, the incorporation into an existing plan of a substantial number of employees who historically had been insured under other health plans and accounted for in other cost centers. The enrollment of the higher education members is also distinguishable from the enrollment of new employees as any reserves that remain in the new employees' former plans benefit their successors in interest in those plans, whereas here the higher education employees' former health plan reserves covered only pre-existing liabilities and were then dissolved. o The expansion of UGIP through enrollment of the higher education employees was also of far greater scope than the examples of programmatic expansions cited by Texas. It resulted in an immediate increase in UGIP's membership by almost 40 percent without any addition to the reserve fund which had accumulated over 16 years for the benefit of the existing programs which had funded it. Thus, this was clearly a material change to the way Texas claimed health insurance costs for federal reimbursement. In any event, whether or not DCA acts in a consistent fashion regarding other changes to UGIP membership is not relevant here and not a bar to upholding this disallowance. o Finally, the situation here is materially distinguishable from the routine enrollment of new employees in UGIP. Texas' argument that it was not familiar with any other instance of new enrollees in a health plan bringing with them a reserve fund balance misses the point entirely. Texas here had complete control over the process by which the higher education employees were removed from their previous health insurance plans and enrolled in UGIP, and could have provided funds for an equivalent reserve for the higher education employees if it had wished to avoid any adjustment in the existing federal contributions to the reserve. Our decision does not require that every new Texas employee be required to contribute to a reserve fund upon enrollment in UGIP. C. DCA's alternative basis for the disallowance Texas also took issue with DCA's determination, contained in its initial disallowance letter dated June 26, 1995 and in the final decision of the HHS Regional Director dated September 25, 1995, that the enrollment of the higher employees was a change in Texas' method of accounting for costs claimed under its SWCAP for which prior approval from HHS was required under the terms of the plan. The provision in question requires prior approval of the cognizant federal agency for "changes to the method of accounting for costs which affect the amount of reimbursement resulting from the use of the statewide cost allocation plan" and advises that the failure to obtain prior approval may result in cost disallowances. SWCAP, Section II.B, Texas Ex. DD. Texas argued that this provision was not applicable because DCA, in invoking it, had erroneously characterized the transfer of the higher education employees from their former health plans into UGIP as a "merger" of the health plans. Texas argued that the transfer of the higher education employees from their former health plans into UGIP was not a merger and did not represent a change in its method of accounting for costs requiring prior approval, because UGIP did not acquire any of the assets or liabilities of the employees' former health plans. Texas suggested that what occurred here was indistinguishable from other instances of plan accretion which could not reasonably be viewed as changes to the method of accounting for costs. Since we sustain the disallowance in principle on the basis that Texas violated the provisions of OMB Circular A-87 when it enrolled the higher education employees without making an appropriate adjustment to the federal government's contribution to the reserve fund, we do not need to address DCA's initial determination that Texas may have violated the provisions of its SWCAP. 6/ In any event, DCA appears to have abandoned this position during proceedings before the Board since its witnesses conceded that the inclusion of the higher education employees in UGIP was not technically a merger of the health plans for accounting purposes, and DCA did not argue that a merger occurred or cite this basis for the disallowance in its brief or in its post-hearing submission. Tr. 36-37, 111-12, 139-40. 2. Texas must only return the federal share of the reserve fund allocable to the higher education employees as of September 1, 1992. As discussed above, we conclude that Texas violated applicable cost principles by enrolling the higher education employees in UGIP without providing an appropriate adjustment to the federal government from the UGIP reserve fund. However, we do not agree with DCA's determination to disallow the entire amount of federal funding in the $98 million reserve that had accumulated as of September 1, 1992. DCA disallowed all federal funding in the UGIP reserve so that the existing UGIP membership would "start out" in the expanded UGIP on the same level as the higher education employees with respect to the reserve: that is, with no reserve. Tr. 39. However, this remedy results in the same sort of shifting of costs and benefits that led DCA to take the disallowance in the first place. DCA complained that the higher education activities benefited from a federally funded reserve to which they had not contributed. As Texas correctly pointed out, removing all federal funds from the reserve would result in the federal programs and activities benefiting from a UGIP reserve consisting entirely of state funds. Instead of the higher education activities being subsidized by the federal programs and activities which contributed to UGIP, as DCA argued was now the case, the federal funding sources would be subsidized by the exclusively state funds remaining in the reserve. Disallowance of the entire federal portion of the UGIP reserve fund is also not consistent with DCA's position that the federal share of the UGIP reserve fund should benefit only those operations and activities which generated it. DCA Br. 7. The federal interest in the reserve fund was diluted, not eliminated, by the entrance of the higher education members, and the operations and activities which generated the reserve fund continued to benefit from it, although to a lesser extent. We thus conclude that the full disallowance amount proposed by DCA would not be authorized by the cost principles supporting this disallowance. These principles did not affirmatively require Texas to increase or decrease the size of the reserve fund at the particular time that Texas enrolled the higher education employees. Texas had the discretion to reassess the appropriate level of the reserve fund at that time by looking at the needs of the health insurance plan as a whole. The cost principles do, however, call for a reassessment of the proper allocation of the costs and benefits for the reserve fund's contributing programs following Texas's decision. The appropriate disallowance remedy following such a reassessment is not for Texas to return the entire federal share of the reserve fund but rather the federal share of that part of the reserve fund as of September 1, 1992 that became allocable to the higher education employees. 3. A remand is necessary to allow the parties to complete the proper calculation of this disallowance. The computation of the disallowance in this appeal is a three-step process. Based on the analysis in the previous sections, the first step involves a computation of the part of the existing reserve that would be allocable to the higher education employees immediately following their enrollment into UGIP. This amount can be computed by completing the following formula using the appropriate amounts as of September 1, 1992: the number of the newly enrolled higher education employees divided by the entire UGIP enrollment times the amount of the reserve fund. The second and third steps in the computation involve an isolation of the employer portion of this part of the reserve fund from the employee portion and then finally an isolation of the federal share of the employer portion. While the parties have provided some evidence for computing each of the three steps and have stipulated as to the enrollment totals and the proportion of the UGIP membership composed of higher education employees, they have not reached precise agreement concerning the results. 7/ They have, however, indicated that they would be willing to cooperate in attempting to develop an accurate computation of an adjusted disallowance. Accordingly, we are remanding this appeal to DCA so that it can work with Texas in attempting to develop an accurate computation of an adjusted disallowance consistent with the analysis of this decision. Conclusion On the basis of the foregoing, we conclude that the cost principles require an adjustment in the existing federal share of the UGIP reserve fund at the time that the Texas legislature enrolled 55,000 higher education employees and failed to increase the size of the reserve fund to reflect their newly acquired interest. We remand this appeal to DCA so that it can work with Texas in computing that part of the reserve fund that must be returned to the federal government. If the parties are unable to reach an agreement concerning the amount, Texas may return to the Board within 30 days of receiving DCA's determination of the amended disallowance amount. Judith A. Ballard M. Terry Johnson Donald F. Garrett Presiding Board Member * * * Footnotes * * * 1. The parties described the number of higher education employees transferred into UGIP on September 1, 1992 as ranging from 50-60,000 and subsequently stipulated the number of employees as "some 55,000." The parties also stipulated that there were approximately 139,000 UGIP members immediately prior to September 1, 1992. Joint Stipulation Nos. 1, 2. However, it appears that this figure understates the UGIP membership. UGIP enrollment figures supplied by Texas show that for fiscal year (FY) 1991-92 there were 139,399 active UGIP members, 27,633 retirees and surviving spouses, and 1,314 "COBRA" participants. Texas Ex. H. 2. The provisions of OMB Circular A-87 apply to all federal agencies responsible for administering programs that involve grants and contracts with state and local governments. 46 Fed. Reg. 9548 (1981). Regulations at 45 C.F.R. § 74.171(a) in effect at the time applicable to this disallowance make the cost principles of OMB Circular A-87 applicable to programs administered by HHS; other federal agencies have similar regulations. See current 45 C.F.R. § 74.27, 59 Fed. Reg. 43,760 (August 25, 1994). A revised version of OMB Circular A-87 was published in the Federal Register on May 17, 1995 (60 Fed. Reg. 26,484). Citations in this decision are to the earlier version. The Board has held that a state as a whole must be viewed as a single unit responsible for the administration of grant funds. This is apparent from the definition of "grantee" at 45 C.F.R. § 74.3. Oregon Dept. of Human Resources, DAB No. 1298, at 14 (1992); Louisiana Dept. of Health and Hospitals, DAB No. 1176, at 10 (1990). See current 45 C.F.R. § 74.2, definition of recipient. 3. The evidence readily establishes that the existence of a reserve fund affects rate setting and that a sufficiently large reserve permits lower contribution rates than if there is a small or no reserve fund balance: o Philip S. Dial, a consulting actuary who appeared as a witness for Texas, stated that a reserve fund balance removes the need for a margin to protect against adverse experience and allows contribution rates to be established at a level that is lower than what otherwise would be required, and that an excessive fund balance permits contribution rate credits. Tr. 197, 263-64; DCA Ex. 3. o The provision of the Texas Insurance Code requiring a fund balance of at least 10 percent of the claims expected to be paid in the following year also requires that the contribution rates include contributions to the fund balance if it drops below that level. Texas Ins. Code, Art. 3.50-2, § 5(f), as amended, Texas Ex. E. o The report of the U.S. General Accounting Office that Texas introduced reflects concern that reducing reserves to one month's benefits would result in larger annual premium (contribution rate) increases to replenish the reserves in less time. Texas Ex. Q at 10. o Language in the Texas Legislature's general appropriations bill for FY 1992-1993 directs ERS to use surplus UGIP funds to reduce the state's share of UGIP premiums for FY 1992. Texas Ex. T at I-99. o A letter dated April 21, 1992 from Philip S. Dial to the ERS Board of Trustees states that excess income earned on UGIP funds would reduce the contribution rates charged to program members. Texas Ex. V at 2. o Federal law governing federal employee health plans provides that reserves accumulated by those plans may be used, among other things, to reduce the contributions of the government and the enrollees or to increase the benefits provided by a plan. 5 U.S.C. § 8909(b); see also U.S. v. Littriello, 866 F.2d 713, 714 (4th Cir. 1989) (the balance of the fund is examined when calculating the amount of the next year's premium--the more money in the fund, the lower the premium). 4. Texas also could reasonably be viewed as having received a rebate of the amounts of excess employer contributions which it should have treated as a credit, applicable to the programs to which the original employer contributions were charged. In effect, Texas treated the excess reserve as available for its own purposes -- to substitute for the reserves which otherwise would have had to be maintained for the higher education employees. Texas' actions are analogous to the situation in California Dept. of Finance, DAB No. 1592 (1996), where the state used excess earnings on employee contributions to a pension fund to pay its employer contributions, in which federal funding was then claimed. (That decision is currently being appealed.) Texas is asserting ownership over an amount of funds by reason of its role as employer, without recognizing the federal share in the employer contributions that gave rise to the funds. 5. Costs must be: consistent with policies, regulations, and procedures that apply uniformly to both federally assisted and other activities of the unit of government of which the grantee is a part; and accorded consistent treatment through application of generally accepted accounting principles appropriate to the circumstances. OMB Circular A-87, Att. A, C.1.d, e. Employee fringe benefits must be granted under approved plans and be distributed equitably to grant programs and to other activities. Att. B, B.13.b. 6. The provision at issue merely states that failure to obtain prior approval "may" result in cost disallowances. A disallowance presumably may occur if DCA subsequently determines as here that the changes violated the cost principles or other applicable rules or policies. Thus, the disallowance would not stem directly from the prior approval requirement in the SWCAP but from other authorities. 7. While the higher education employees would appear to comprise 28 percent of total UGIP membership, based on the stipulated UGIP enrollment figures of 139,000 UGIP members and 55,000 higher education employees, the parties stipulated that the higher education employees represented approximately 24 percent of total participation in UGIP; witnesses referred to this figure as 24.4 percent. Tr. 101-06; Texas Ex. U. As noted above, however, the enrollment figures do not accurately reflect total UGIP enrollment as reflected in Texas' exhibits. Texas Exs. H, U; See n. 1. (..continued)