Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Oklahoma Office of State Finance
Docket No. A-98-9
Decision No. 1668
DECISION
The Oklahoma Office of State Finance (Oklahoma) appealed the decision of the Division of Cost Allocation (DCA) to disallow $7,715,064 in federal funds that Oklahoma received, under various federal programs, for a portion of the costs of group health insurance premiums paid on behalf on state employees. The disallowance consisted of $7,426,672 in federal funding provided for premiums, plus $288,392 in imputed interest. During the year ending June 30, 1997, the premiums were placed in a clearing fund within Oklahoma's insurance system, and the Oklahoma legislature removed the premiums from the clearing fund and used them for higher education expenses during that year. DCA took the disallowance on the basis that the health insurance costs charged to the federal programs in question did not in fact benefit the federal programs to which the costs had been charged, in violation of federal cost principles and other applicable authorities. DCA also cited cost principles requiring the refund of interest imputed on federal funds that have been transferred out of a self-insurance reserve fund and used for other purposes.
Oklahoma did not dispute the basic facts, or DCA's calculation of the federal share of the premiums. Oklahoma argued that the transfer of the insurance premiums did not violate the cost principles and other applicable authorities, and that DCA was not permitted to recover imputed interest on the transferred funds.
The record in this appeal consists of the parties' written submissions and accompanying exhibits. As explained below, we sustain the disallowance of $7,426,672, representing federal funding transferred out of the group insurance system, because Oklahoma used those funds for purposes other than those for which the funds were awarded, in violation of the cost principles and other applicable authorities. We reverse the disallowance of $288,392 in interest that DCA imputed on the transferred funds, because we find that the provision in the cost principles permitting the recovery of imputed interest does not apply.
Background
The Oklahoma State and Education Employees Group Insurance Board (OSEEGIB) provides health, life, disability and other insurance to employees of the state of Oklahoma, local governmental entities and school districts, and various other groups. Affidavit of Terry Hill, DCA Br.; Oklahoma State and Education Employees Group Insurance Act, Okla. Stat. tit. 74, . 1301 et seq. Insurance premiums paid by the employees and their employers, including employer contributions paid by Oklahoma on behalf of its state employees, are deposited into the appropriate OSEEGIB reserve fund, such as for health, dental, and life insurance, and are invested to generate income and used to pay claims and other related expenses. Okla. Stat. tit. 74, . 1312 (1995). To the extent that its employees work on federally funded programs, Oklahoma may receive federal reimbursement for a portion of its contributions to the OSEEGIB made on behalf of those employees; the amount of federal funding Oklahoma receives is based on the amount of its contributions.
Effective September 1996, the Oklahoma legislature amended the Oklahoma law governing the OSEEGIB, the State and Education Employees Group Insurance Act, to provide that Oklahoma state agencies, instead of paying premiums into the OSEEGIB reserves, would pay their employer contributions into a fund called the State Employees Group Insurance Clearing Fund (Clearing Fund). The amendment required that the first $31,500,000 received by the Clearing Fund during the year beginning July 1, 1996 (after the effective date of the act) would be distributed to the Oklahoma State Regents for Higher Education, with any funds remaining to be deposited in the appropriate OSEEGIB reserve fund. 1996 Okla. Sess. Laws Ch. 275, . 2; Okla. Stat. tit. 74, . 1312.3 (1998 electronic update). Oklahoma reported that it used the first $31.5 million in employer contributions for group health insurance premiums for state employees to fund needed expenditures in its system of higher education. Oklahoma reported that the transfer of funds was based on a perception that the OSEEGIB reserve funds were more than sufficient to cover anticipated claims. Oklahoma Br. 1. Oklahoma asserted that the underlying transaction was a transfer of accumulated OSEEGIB reserve funds, but that the payments were made instead with premium contributions because it was considered impractical to liquidate reserve investments.
Analysis
1. Oklahoma must refund federal funds awarded for OSEEGIB premiums but transferred to higher education.
The allowability of costs claimed by state governments under federal grants is governed by Office of Management and Budget (OMB) Circular A-87. 45 C.F.R.
.. 74.27(a) and 92.22(b). A state's employer contributions to health insurance plans for employees who work on federally funded programs are generally allowable as employee fringe benefits, so long as they meet the basic requirements affecting allowability of costs set out in the OMB A-87. A-87, Att. B, . 11.d(5).
OMB A-87 provides that, to be allowable charges to federal awards, costs must be necessary and reasonable for the proper and efficient administration of the federal awards and allocable to those federal awards. Att. A, .. C.1.a, b. The Circular further provides that-
A cost is allocable to a particular cost objective if the goods or services involved are chargeable or assignable to such cost objective in accordance with relative benefits received. Att. A, . C.3.a.
The federal government awarded the disallowed funds to pay a portion of Oklahoma's employer contributions for health insurance for its state employees, to the extent that those employees work on federally funded programs. Oklahoma would ordinarily have deposited the premiums into the OSEEGIB reserves, where they would have generated income and been used to pay health insurance claims and other related expenses. Okla. Stat. tit. 74, . 1312 (1995). Instead, Oklahoma removed the funds from its group insurance system and used them to pay the costs of higher education.
The higher education expenditures were not necessary and reasonable for the provision of health insurance for state employees working on federal programs, the purpose for which the funds were awarded. The higher education costs did not benefit and consequently were not allocable to those federal awards. The education costs were thus not allowable charges to federal awards under OMB A-87.
By using the federal funds for higher education expenses, Oklahoma also violated the basic principle of appropriations law that federal funds must be used for the purposes for which they were awarded. Additionally, the various federal program statutes and regulations (and appropriation statutes) that authorize the use of federal funding for payment of administrative costs require that the funding be used only for the authorized programmatic purpose. For example, the Medicaid program limits reimbursement for administrative costs under that program to amounts "found necessary by the Secretary for the proper and efficient administration of the State plan." Section 1903(a)(7) of the Social Security Act. Similar provisions have existed in other Social Security Act programs, such as the former Aid to Families with Dependent Children (AFDC) Program (section 403(a)(3)) and the Title IV-E Foster Care and Adoption Assistance Program (section 474(a)(3)). Moreover, the Board has repeatedly held that under the cost principles, a grantee has the burden of documenting the allowability of costs charged to federal funds. See, e.g., Nebraska Health and Human Services System, DAB No. 1660, at 8 (1998); Alabama Dept. of Finance, DAB No. 1635, at 7-8 (1997), and cases cited therein. Oklahoma here ignored its basic obligation to document that federal funds which had been awarded for health insurance premiums for state employees working on federal programs were expended consistent with that objective.
Oklahoma argued that no benefits were lost to federal programs because state employees received full coverage and all health insurance benefits notwithstanding the transfer of the $31.5 million. No employees who work on federally funded programs, Oklahoma asserted, were denied health insurance coverage as a result of the $31.5 million transfer. Oklahoma argued that it transferred OSEEGIB reserves, but not the "benefit" to federal programs in the form of insurance coverage.
Oklahoma's argument fails to consider the essential nature of self-insurance funds. Self-insurance is the practice of undertaking to absorb losses internally, without buying insurance from an outside source. Pennsylvania Office of the Budget, DAB No. 1234 (1991), aff'd, 996 F.2d 1505 (3rd Cir. 1993), cert. denied, 510 U.S. 1010 (1993). The very nature of self-insurance requires that a fund balance be carried over from year to year. "The self-insurance funds are, in essence, contingency funds to be tapped, or disbursed, only when claims are filed against them and paid by the State." Pennsylvania at 9. The fund balance is maintained in the form of a reserve fund, which generates investment income and protects the self-insurance plan against unforeseen funding shortfalls, such as could be caused by, in the case of a health insurance plan, underestimating upcoming employee health care claims. A sufficient reserve fund benefits health plan members by allowing lower contribution rates than would otherwise be required. See Texas Office of the Governor, DAB No. 1608, at 2 (1997). The disallowed funds here would have been placed in the OSEEGIB reserves, had Oklahoma not first removed them from the Clearing Fund and transferred them to higher education.
The importance of a reserve fund to a self-insurance system such as OSEEGIB is demonstrated by Oklahoma's concession that--
Due in part to these transfers, OSEEGIB is presently in somewhat of a funding crisis, in that reserves are less than what is expected to be needed to cover future claims and premiums are rising dramatically.
Oklahoma Br. 3.
Thus, as a result of the transfer of the $31.5 million that would normally have funded the OSEEGIB reserves, premiums have been increased, resulting in potentially higher employer contributions and correspondingly higher claims for federal funding than would have been the case if the transferred funds had been maintained in the reserves.
Once the federal government participated in Oklahoma's employer contributions for health insurance for state employees who work on federal programs, the cost principles and other programmatic authorities required Oklahoma to use the federal funding for authorized programmatic purposes. Accordingly, to fulfill its burden as a grantee to document that federal funds were used for allowable program expenditures, Oklahoma was required to show that the federal funds used to pay health insurance premiums were either maintained in the OSEEGIB reserves, or used to pay claims and other OSEEGIB-related expenditures. From the point in time that these funds were removed from the reserves, the funds no longer benefited the original contributing programs and no longer fulfilled the terms of the original authorizing legislation. See Alabama at 8-9. As the Board observed in Texas, 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. Moreover, the grantee's affirmative duty to document that funding was used to support the reserve fund is not limited in time and continues for the duration of the health insurance plan. Texas at 8-9. When the Oklahoma legislature diverted state contributions from its health insurance system, prior to their being placed in the reserves, it abrogated not only its responsibility to the federal government but also the expectations of the various state entities that had funded the premiums that they would be invested to pay for future claims and reduce future premium rates. The cost principles and the authorizing statutes and regulations created an ongoing obligation to account for these funds and to ensure that funds authorized to cover health insurance premiums remained in and continued to benefit the programs which funded the premiums and, through the premiums, the OSEEGIB reserves. See Alabama at 9-10.
Oklahoma argued, however, that the OSEEGIB was not a self-insurance fund as envisioned by OMB A-87, noting that it operates like any private health insurance provider, although it is a creation of the state. The record demonstrates otherwise. The State and Education Employees Group Insurance Act defines the health insurance plan (as well as the life and dental insurance plans) as a self-insured plan. Okla. Stat. tit. 74, . 1303(i) (1995). The law also requires that all employee and employer contributions be deposited in a reserve fund, which is invested and used to pay claims and expenses. Id., . 1312. Oklahoma did not demonstrate why this statutory characterization was inaccurate or should be ignored. Furthermore, the descriptions in the record of the OSEEGIB and its operations -- such as the fact that it has maintained a large reserve fund, and that premiums are placed in the reserve fund and then invested -- indicate that it is a self-insurance plan. If the OSEEGIB was not a self-insurance plan it would not need to maintain a large reserve fund, the size of which directly affects premium rates.
While not disputing DCA's calculation of the federal share of the diverted premiums, Oklahoma also argued that the disallowance should be reduced because state employees on whose behalf the premiums were paid comprised only 16% of OSEEGIB membership. Oklahoma argued that since the underlying transaction was a transfer of reserve funds accumulated on behalf of the entire OSEEGIB membership, Oklahoma's federally funded contributions for state employees represented a correspondingly small portion of the transferred funds. Oklahoma cited Texas for the principle that employees who had not contributed to reserve fund balances should not benefit at the expense of others who had, and argued that the disallowance should reflect the relative benefit of the reserve fund that was attributable to non-state employees.
Had Oklahoma paid the $31.5 million to higher education from accumulated OSEEGIB reserve funds, rather than from premium payments made on behalf of state employees only that had never been placed in the reserves, then this argument might have some merit. In that case, the non-state programs which contribute to OSEEGIB on behalf of their non-state employees, which presumably receive little or less federal funding than the state programs, would have borne the majority of the $31.5 million transfer. Significantly, however, the state legislature chose to transfer only premiums that Oklahoma contributed on behalf of its state employees. The federal government provided funding for those contributions, to the extent that those state employees worked on federally funded programs. Those federal funds were awarded to pay for health insurance premiums. By using them for other purposes, Oklahoma violated the cost principles and other applicable authorities, and incurred unallowable charges to federal awards. Those federal funds are directly traceable in the $31.5 million that was diverted to higher education. By mandating that the $31.5 million transfer be made from premiums contributed on behalf of state employees only, the Oklahoma legislature assured that the federal government would pay a much larger share of the $31.5 million transfer than if the payment had been made from the actual OSEEGIB reserves, which included contributions made on behalf of other, non-state employees. Thus, DCA was not required to reduce the disallowance to reflect the non-state employee membership of OSEEGIB, since those non-state employees' premiums were not transferred out of the OSEEGIB.
In Alabama, the Alabama legislature removed monies from the reserve fund maintained by Alabama's self-insurance plan for state-owned property and transferred them to the state's general fund, to be used for other purposes. The reserve fund included federal funds because many of Alabama's state and local government agencies administered federal grant programs and were entitled to have a portion of the insurance premiums on state property used in the administration of those programs reimbursed by the federal government. The Board there held that once the legislature transferred the funds out of the reserve, they no longer benefited the original contributing programs and could no longer be considered as having been applied to the costs of insurance premiums allocable to the federally funded programs to which they were charged. Alabama at 2, 8-9. That principle applies just as forcefully here, where Oklahoma never placed its employer health insurance premiums into the OSEEGIB reserves, but transferred them directly from the Clearing Fund. Once diverted, those funds no longer benefited, and were no longer allocable to, the federal programs which contributed them. Federal participation in Oklahoma's employer health insurance contributions was based on federal legislation authorizing the federal government to pay part of the costs of administering certain programs, including the costs of fringe benefits such as health insurance for state employees. See Pennsylvania at 10, Alabama at 9-10. Oklahoma failed in its duty to use the federal funds for the costs of self-insurance when it removed the premiums from the Clearing Fund and used them for higher education.
2. DCA may not recover imputed interest on the transferred federal funds.
DCA disallowed $288,392 in interest imputed on the $7,426,672 disallowance from September 1, 1996 to October 8, 1997, the date of DCA's overpayment determination letter to Oklahoma. DCA Br. 4-5, 9-10, Att. D. DCA sought to recover the interest under the following provision of OMB Circular A-87:
(5) Whenever funds are transferred from a self-insurance reserve to other accounts (e.g., general fund), refunds shall be made to the Federal Government for its share of funds transferred, including earned or imputed interest from the date of transfer. OMB A-87, Att. B, . 25.d.(5).
We find that this provision is not applicable here because the disallowed funds were never deposited in the OSEEGIB reserves. Instead, Oklahoma's employer insurance contributions were collected by the statutorily-created Clearing Fund, which transferred them directly to Oklahoma State Regents for Higher Education; only funds in excess of the transferred $31.5 million were deposited in the OSEEGIB reserves. Because the disallowed federal funds never became part of the OSEEGIB reserves, they were not transferred out of a reserve fund within the meaning of the cited provision of OMB A-87.
This Board and the courts have held in a variety of contexts that grantees may be held accountable for interest actually earned by them on investments of federal grant funds in their possession. See, e.g., Pennsylvania; Wisconsin Dept. of Health and Social Services, DAB No. 623 (1985); New York State Dept. of Social Services, DAB No. 588 (1984); New Jersey Dept. of Human Services, DAB No. 480 (1983), aff'd, Civil No. 84-2771 (N.J. Nov. 13, 1986); and North Carolina Dept. of Human Resources, DAB No. 361 (1982), aff'd, 584 F.Supp. 179 (E.D. N.C. 1984). The Board has also held, however, that in the absence of express authority to recover imputed interest, a federal agency may not recover interest on federal funds that could have been earned by the grantee but was not. Alabama; Pennsylvania; New York State Dept. of Social Services, DAB No. 910 (1987). Thus, in the absence of an applicable provision permitting the refund of imputed interest, DCA may only recover interest that was actually earned by the federal funds that Oklahoma received for insurance premiums but used for other purposes.
DCA argued that the provision of OMB A-87 permitting recovery of imputed interest on federal funds transferred out of a self-insurance reserve applied here because (as Oklahoma argued) the transfer was in effect a transfer of OSEEGIB reserve funds. We disagree. Oklahoma law called for the Clearing Fund to transfer the funds to higher education instead of depositing them in the OSEEGIB reserves, a point which DCA recognized in its statement that the transfer prevented the funds from being deposited in the OSEEGIB reserves. DCA Br. 10. As Oklahoma argued, if the transfer had been made from funds in the OSEEGIB reserves, then the transferred funds would have included premiums paid on behalf of all participants in OSEEGIB, and not just state employees, who comprise only 16% of OSEEGIB members, a figure which DCA did not dispute. In that case, the federal share of the $31.5 million that was transferred to higher education would have been smaller than the $7,426,672 currently disallowed.
DCA may thus recover only interest that Oklahoma actually earned on the $7,426,672 that was awarded for insurance premiums but spent on other purposes. DCA's October 8, 1997 determination letter to Oklahoma states that DCA was recovering imputed interest, and the record contains no showing by DCA that Oklahoma actually earned any interest on the transferred funds. If DCA can establish that Oklahoma earned interest on federal funds before applying them to higher education, then it may reinstate a disallowance for the interest actually earned.
Conclusion
Based on the above analysis, we sustain the disallowance of $7,426,672 in federal funds that Oklahoma transferred out of its group insurance system. We reverse the disallowance of $288,392 in imputed interest on the transferred funds.
Judith A. Ballard
Cecilia Sparks Ford
Donald F. Garrett
Presiding Board Member