Alabama v. Shalala

• Decision Date: 15 December 2000
• Docket Number: Civil Action No. 99-A-271-N.
• Citation: 124 F.Supp.2d 1250
• Parties: The State of ALABAMA, Plaintiff, v. Donna E. SHALALA, Secretary, United States Department of Health and Human Services, Defendant.
• Court: U.S. District Court — Middle District of Alabama

Page 1250

124 F.Supp.2d 1250

The State of ALABAMA, Plaintiff, v. Donna E. SHALALA, Secretary, United States Department of Health and Human Services, Defendant.

Civil Action No. 99-A-271-N.

United States District Court, M.D. Alabama, Northern Division.

December 15, 2000.

COPYRIGHT MATERIAL OMITTED

Billington M. Garrett, Office of the Attorney General, Montgomery, AL, Jerry Carpenter, Alabama Department of Finance, Montgomery, AL, Malcolm J. Harkins, III, William R. Cowden, Proskauer Rose LLP, Washington, DC, for plaintiff.

Kenneth E. Vines, Redding Pitt, U.S. Attorney, U.S. Attorney's Office, Montgomery, AL, Bruce R. Granger, U.S. Department of Health & Human Services, Atlanta, GA, David W. Ogden, U.S. Department of Justice, Torts Branch, Civil Division, Washington, DC, Sheila M. Lieber, John R. Griffiths, U.S. Department of Justice, Federal Programs Branch, Civil Division, Washington, DC, Elise Harris, U.S. Department of Health & Human Services, Atlanta, GA, for defendant.

MEMORANDUM OPINION

ALBRITTON, Chief Judge.

I. INTRODUCTION

The State of Alabama ("Alabama") appeals an administrative decision by the Departmental Appeals Board ("DAB") upholding Donna E. Shalala's (the "Secretary") decision in her capacity as Secretary of the United States Department of Health and Human Services ("HHS") to disallow certain costs paid to Alabama by the federal government. In particular, Alabama challenges the Secretary's decision that Alabama violated federal cost principles contained in OMB Circular A-87 ("OMB A-87" or "the Circular") by transferring funds from Alabama's State Insurance Fund ("SIF") to the state treasury for purposes unrelated to the SIF. Alabama seeks declaratory and injunctive relief pursuant to the Administrative Procedure Act ("APA"), 5 U.S.C. §§ 701-706, and the Declaratory Judgment Act, 28 U.S.C. § 2201.

After careful review of the administrative record and consideration of the briefs and oral argument of the parties, together with applicable law, the court finds that for the reasons to be discussed, the DAB's decision is due to be AFFIRMED.

II. FACTS AND PROCEDURAL HISTORY

A. The SIF

In 1923, Alabama established the SIF to insure government owned buildings from arson, vandalism, burglary, other manmade disasters, and natural disasters. Ala.Code §§ 41-15-1-41-15-13. The SIF insures all state owned property in Alabama. Alabama law also allows local governments to purchase property insurance coverage from the SIF. Many of the state and local agencies which have SIF coverage received funds from federal grants and used those funds to pay a portion of their SIF premiums.¹ The exact portion of the SIF premiums paid by federal funds varies among the different state and local agencies.

In order for a state to receive federal financial participation for centrally-administered costs, such as a self-insurance fund or pension plan, the state must submit a Cost Allocation Plan ("CAP"). A CAP is "a narrative description of the procedures that the State agency will use in identifying, measuring, and allocating all State agency costs incurred in support of all programs administered or supervised by the State agency." 45 C.F.R. § 95.505. In essence, the CAP identifies the central support services that qualify for federal financial participation and describes how central support agencies allocate the costs. Alabama entered into a number of CAP agreements with HHS during the relevant time period. Each of the CAP agreements listed the SIF as a central support service that qualified for federal financial participation. The CAP agreements also provided that the centrally administered costs must satisfy the Circular's requirements.

B. OMB Circular A-87

The United States Bureau of the Budget originally issued the Circular, which was first called the Budget Bureau Circular A-87. Board of Trustees of Pub. Employees' Retirement Fund v. Sullivan, 936 F.2d 988, 991 (7th Cir.1991). In 1970, the newly-created Office of Management and Budget ("OMB") gained authority over the Circular, which then became known as OMB Circular A-87. Exec. Order No. 11,541, § 1(a), (b), 35 Fed.Reg. 10,737 (July 1, 1970), reprinted in 31 U.S.C. § 501. In 1973, the functions covered in OMB Circular A-87 were transferred to the General Services Administration ("GSA") and, in 1974, the GSA reissued the Circular as the Federal Management Circular ("FMC") 74-4. Exec.Order No. 11,717, § 1, 38 Fed. Reg. 12,315 (May 9, 1973), reprinted in 31 U.S.C. § 501. In December of 1975, these functions were returned to the OMB, but the OMB continued to use the FMC 74-4 designation until 1981. Exec.Order No. 11,893, §§ 1 & 4, 41 Fed.Reg. 1040 (Dec. 31, 1975), reprinted in 31 U.S.C. § 7103. In 1981, OMB reissued the Circular as OMB Circular A-87. 46 Fed.Reg. 9548 (Jan. 28, 1981).²

The Circular "sets forth principles for determining the allowable costs of programs administered by State, local, and federally-recognized Indian tribal governments under grants from and contracts with the Federal Government." OMB A-87, Att. A, (A)(1); 46 Fed.Reg. 9548; R 1673.³ For claimed costs to be allowable under the Circular: the costs, inter alia, must be necessary and reasonable for the proper and efficient administration of the federal program, be allocable to the program, and be net of all applicable credits. OMB A-87, Att. A., (C)(1)(a), (g). As to premiums paid to a self-insurance fund, the Circular provides that

Contributions to a reserve for a self-insurance program approved by the Federal grantor agency are allowable to the extent that the type of coverage, extent of coverage, and the rates and premiums would have been allowed had insurance been purchased to cover the risks.

OMB A-87, Att. B., (C)(4)(c). The Circular also permits grantees to distribute centrally-administered costs under CAPs. OMB A-87, Att. A., (J). The Circular gives HHS the responsibility to negotiate, approve, and audit CAPs submitted by the States. Id. at (J)(4)(a).

C. Transfers

In 1980, the Alabama State Legislature authorized the Governor to transfer up to $25 million from the SIF reserve to Alabama's general fund to be used for Medicaid purposes. 1980 Ala.Acts 90 § 1, repealed by 1984 Ala.Acts 313; R. 1744-45. The statute also provided that the funds may be transferred back to the SIF, with eight percent interest, "whenever the state finance director, with the approval of the Governor, determines that there are sufficient funds in the state general fund." Id. Pursuant to this authorization, the State transferred $10 million from the reserve to Alabama's general fund in September of 1980, and transferred an additional $8,260,000, in September of 1983. On September 24, 1986, the Alabama State Legislature ordered another transfer of $25 million from the SIF reserve to various state organizations.⁴ 1986 Ala.Acts 645 § 1; R. 1747-49. Originally, the 1986 statute required Alabama to repay the transferred funds within the next fiscal year. 1986 Ala.Acts 645 § 2. The Legislature, however, repealed the 1986 statute and passed a new law that states that the funds "may be transferred back to the state insurance fund from the state general fund, whenever the state finance director, with the approval of the governor, determines that there are sufficient funds in the state general fund." 1987 Ala.Acts 809 § 2; R. 1750-51.

D. The Disallowance and the Appeals

In 1990, the Office of Inspector General ("OIG"), with the support of HHS's Division of Cost Allocation ("DCA"), decided to audit the SIF. OIG contracted with the outside accounting firm of Carmichael, Ingle, Saffer & Brasher, P.C. ("HHS Accountants") to conduct the audit. R. 1716. The HHS Accountants issued a report (the "Carmichael Report") on April 15, 1991, covering the SIF for fiscal years 1977 to 1987. R. 1716. According to the Carmichael Report, Alabama had accumulated excess funds in its reserve. R. 1721. Additionally, the HHS Accountants determined that the transfers of funds from the SIF reserve to the State's general fund "were not allowable uses of Federal funds." R. 1721.

In determining the appropriate disallowance amount, the Carmichael Report estimated that state agencies paid 49% of the SIF's premium payments and local entities paid 51% of the SIF's premium payments. R. 1722. The report also used the government's standard estimates. The standard estimates provide that federal funds comprise 20% of the premiums paid by state agencies and 5% of the premiums paid by local entities. R. 1731. Accordingly, the HHS Accountants recommended that Alabama return the federal share of $80,809,879⁵ which the HHS Accountants estimated to be $9,990,023. R. 1731.

After reviewing the Carmichael Report, HHS's Division of Cost Allocation ("DCA") determined that the reserve was excessive and that the transfers violated federal cost principles. R. 1767. By this time, the reserve balance had increased and the excess totaled $125,864,076 ($49,189,551 in the reserve, $43,260,000 in transferred funds, and $33,414,525 in lost interest on the transferred funds). R. 1770. In turn, the DCA issued a disallowance for $13,780,619.⁶ R. 1770.

Alabama appealed the DCA's disallowance to Dr. Thomas T. Williams, the HHS Regional Director for Region IV, pursuant to 45 C.F.R. Part 75 (1996).⁷ R. 1801-06. On October 19, 1992, the Regional Director upheld the DCA's decision, but concluded that Alabama only owed $13,721,353 to the federal government because of a prior miscalculation in the actual reserve balance. R. 1806.

Alabama appealed the Regional Director's disallowance to the Departmental Appeals Board ("DAB"). The DAB "reverse[d] the disallowance for the imputed interest on the transferred funds because DCA did not show that it had authority to recover interest not actually earned on grant funds received by a state" and "reverse[d] the disallowance for the federal share of the SIF Reserve characterized by DCA as excessive, since we conclude that Alabama here...