GAB Decision 132
Docket No. 99-218-NV-SS
October 31, 1980
Nevada Department of Human Resources;
Coster, Clarence; Przybylinski, Donald Settle, Norval
This is an appeal of a disallowance of $89,165 claimed by the State
of Nevada under Title IV-A of the Social Security Act, as amended.
Title IV-A is the basis for the Aid to Families with Dependent Children
-- Foster Care program (AFDC-FC). By letter dated November 15, 1979,
the State timely requested the Board to reconsider the decision of the
Social Security Administration (Agency) that the disallowed amount
reflected expenditures for foster child care in profit-making
institutions, in violation of statutory and regulatory provisions
requiring use only of nonprofit private facilities.
Background
Section 408(b) of the Social Security Act states that the term "aid
to families with dependent children" includes care --
1. in the foster family home of any individual, whether the payment
therefore is made to such individual or to a public or nonprofit private
child-placement or child-care agency, or
2. in a child-care institution, whether the payment therefore is
made to such institution or to a public or nonprofit private
child-placement or child-care agency . . . .
Section 408(f) defines "child-care institution" to mean "a
nonprofit
private child-care institution."
The applicable regulation (45 C.F.R. 233.110(b)(2)) states --
Federal financial participation is available in AFDC-FC payments made
to an individual providing care in a foster family home, to a private
nonprofit child care institution, or to a cooperating public or
nonprofit private child placement or child-care agency.
The record in this case includes an audit report and a Regional
Commissioner's Decision which cite the foregoing and quote substantially
identical provisions from Nevada's approved State plan for AFDC-FC and
from the State's own Eligibility and Payments Manual for the AFDC-FC
program (see the Board's Order to Show Cause, May 9, 1980, pp. 4-5).
Discussion
The Agency disallowance was based on audit findings that the State
had placed AFDC-FC children in eight ineligible profit-making
institutions during the period July 1, 1975, through September 30,
1978.The audit report states that the State "did not consider whether
child care institutions were profit-making or nonprofit before placing
AFDC-FC children." (p. 5).
In its response dated July 17, 1979, to the audit report, the State
said "we concur with the findings of the audit that FFP (i.e., federal
financial participation) under AFDC-FC was claimed (on) behalf of
children placed in eight institutional facilities that were determined
to be profit making institutions." But the State disagreed with the
proposed disallowance, arguing that Nevada is in a "very unique
position" because there are "almost no" facilities in the State
for
placement of children with emotional problems, so that Nevada often must
use out-of-state facilities. Nevada said it used out-of-state
facilities in 23 out of 30 cases. The State's argument essentially
appeared to be that expediency required that children sometimes be
placed without regard to the nature of the receiving facility. Two
months later, the State expanded its argument to point out that there
were no "federal guidelines . . . relative to what constitutes
verification of a facility's non-profit or profit-making status"
(State's letter of March 20, 1979, to the Agency's Assistant Regional
Commissioner for Family Assistance; see also the State's letter of July
23, 1979, to the Associate Commissioner of the Social Security
Administration).
On May 9, 1980, the Board issued an Order to Show Cause which reached
the tentative conclusion that the State's appeal should be denied
because the law and regulations clearly made the costs in question
unallowable. In its response of June 2, 1980, to that Order, the State
relied solely on its argument that the term "non-profit" was undefined
and ambiguous.
By letter dated September 25, 1980, the Board served both parties
with a list of questions designed to elicit information clarifying the
use of the "non-profit" standard. In response to a request for any
evidence which would show the eight facilities were nonprofit under
State standards, the State submitted documentation pertaining only to
four facilities, as follows:
1. The State submitted documents indicating that all stock in one
proprietary organization (Secret Harbor Farms, Inc., one of the eight
facilities for which costs were disallowed) was willed in 1977 to the
Johnson-Gallagher Foundation (JGF), an organization determined by the U.
S. Internal Revenue Service in November, 1978, to be tax exempt. The
documents indicate that JGF was established as a nonprofit organization,
but that JGF's ownership of Secret Harbor Farms stock would be effective
only upon the effective date of the bequest of the stock; the latter
would only occur upon distribution of estate assets, which was not to be
completed until July 3, 1979 (see letter of June 18, 1979, from Secret
Harbor Farms, and letter dated April 7, 1978, from Jones, Grey and
Bayley, Attorneys-at-Law). Thus, there is no evidence that this
organization was other than proprietary during the period audited,
whatever its later status may have become.
2. The State also submitted articles of incorporation filed in 1972
in California for a "Western Institute Foundation," showing it to
be
organized under the general nonprofit corporation law of California.
However, the audit report questioned expenditures attributable to a
"Western Institute for Human Resources." No connection between the
two
was argued by the State, nor is any apparent from the record. The State
has had ample opportunity to submit evidence to the auditors and the
Agency that the two entities are the same, and has not done so. For
purposes of our review, the material submitted is irrelevant.
3. The State submitted articles of incorporation filed in November,
1978, for California Living Centers, Inc., which purport to show that
organization's nonprofit status. However, the status of this
organization after September, 1978, is not relevant to the period for
which costs were disallowed.
4. The State submitted an incomplete set of articles of
incorporation for the Ahern Ranch Treatment Center, dated May, 1977,
with a blank for the day left unfilled and without all signatures for
whom names were typed on the last page. Furthermore, unlike other
submissions, this document was unaccompanied by any evidence of when or
whether it was filed with proper State authorities in California. The
audit report indicated that Ahern Ranch was incorporated as a nonprofit
institution on June 28, 1977, and the disallowed costs associated with
this organization appear to be attributable to the period before that
date. Thus, this evidence at best only supports the audit findings.
The foregoing materials were submitted in response to the Board's
request for State documentation "which shows that, at the time the
children were placed, the eight institutions questioned by the auditors
were nonprofit under State standards." The materials submitted by the
State do not show that. In the case of three of the disputed
organizations (Secret Harbor Farms, Inc., California Living Centers,
Inc., and Ahern Ranch), the materials support the Agency's position that
there is no evidence that the organizations were non-profit during the
period audited.In the fourth case, the material simply is not relevant.
The State submitted no information concerning the other four
organizations.
The State said in its response of September 25, 1980, that "the State
used the Articles of Incorporation as a general standard to show
non-profit status," and the submitted materials show that the State did,
indeed, base its determinations of nonprofit status largely on articles
of incorporation. In its response dated October 16, 1980, the Agency
stated that "the Federal Agency utilizes the generally accepted practice
of analyzing the facility's articles of incorporation." *
Based on the foregoing, the Board finds the State's arguments
unsupported in the record. The State had an admitted obligation, clear
from even its own plan and manual, to determine whether an organization
was proprietary or nonprofit. The State's argument that the term
"non-profit" is fatally ambiguous -- aside from the argument's
appearance of being a post-hoc rationalization -- is without merit
because however ambiguous the term may be, the State was consistently
using a measure of nonprofit status which the Agency acknowledges is
valid. This finding is highlighted by the State's own submission, in
response to a specific request for evidence supporting the eligibility
of any of the questioned organizations, of material made up almost
exclusively of articles of incorporation. Unfortunately for the State,
the submitted materials did not relate to the time frame in question or
were otherwise irrelevant.
Even if the foregoing did not otherwise compel us to reject the
State's arguments, it still would not be clear that the term "nonprofit"
is so ambiguous as to require definition through rule-making, for the
term seems to envision a fairly narrow and obvious range of evidentiary
choices.
There is no substantial evidence in the record to support any
conclusion other than that the State failed to meet a clear and
acknowledged obligation to determine the proprietary or nonprofit status
of the organizations with which it dealt. What the State did may have
been fair and expedient for its needy children, but Federal law
specifically provides that Federal financing is available only where the
organization involved in AFDC-FC is non-profit. Thus, the State must
bear these costs from non-Federal funds.
CONCLUSION
For the foregoing reasons, the appeal of the State of Nevada is
denied. * There is some dispute in the record whether the State was at
some point told by the Agency to use Internal Revenue Service tax
exemptions (see State's letter of September 25, 1980, and discussion in
Agency's response of October 16, 1980, p. 2). But, as indicated above,
the record shows that the State depended upon articles of incorporation
"as a general standard," and as a specific basis for eligibility in
the
case of at least four of the questioned organizations. In any event,
the State has submitted no evidence of eligibility under an IRS standard
where a determination of ineligibility resulted (or would have) from use
of articles of incorporation.
OCTOBER 04, 1983