Arizona v. Thompson, 01-5013.

• Decision Date: 05 March 2002
• Docket Number: No. 01-5013.,01-5013.
• Citation: 281 F.3d 248
• Parties: State of ARIZONA, et al., Appellants, v. Tommy G. THOMPSON, Secretary of Health and Human Services and Dennis P. Williams, Acting Assistant Secretary for Management and Budget, U.S. Department of Health and Human Services, Appellees.
• Court: U.S. Court of Appeals — District of Columbia Circuit

281 F.3d 248

State of ARIZONA, et al., Appellants, v. Tommy G. THOMPSON, Secretary of Health and Human Services and Dennis P. Williams, Acting Assistant Secretary for Management and Budget, U.S. Department of Health and Human Services, Appellees.

No. 01-5013.

United States Court of Appeals, District of Columbia Circuit.

Argued December 7, 2001.

Decided March 5, 2002.

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Appeal from the United States District Court for the District of Columbia (No. 99cv00860).

Charles A. Miller argued the cause and filed the briefs for appellants. Phyllis D. Thompson entered an appearance.

Anne Murphy, Attorney, U.S. Department of Justice, argued the cause for appellees. With her on the brief was Scott R. McIntosh, Attorney.

Before: EDWARDS, HENDERSON, and GARLAND, Circuit Judges.

GARLAND, Circuit Judge:

Six states seek review of a directive of the Department of Health and Human Services (HHS) that bars them from using Temporary Assistance for Needy Families (TANF) grants to pay for the common costs of administering the TANF, Medicaid, and Food Stamp programs. We conclude that HHS erroneously determined that it was without discretion to permit those expenditures.

I

Prior to 1996, three important federal programs provided assistance to people in need: Aid to Families with Dependent Children (AFDC), 42 U.S.C. § 601 et seq. (1994); Medicaid, id. § 1396a et seq.; and the Food Stamp program, 7 U.S.C. § 2011 et seq. In 1996, Congress passed the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, referred to by the parties as the "Welfare Reform Act," Pub.L. No. 104-193, 110 Stat. 2105 (codified as amended in scattered sections of Title 42 and other titles of U.S.C.). The Welfare Reform Act replaced AFDC with the TANF program. Unlike AFDC, which was an individual entitlement program, TANF provides federal block grants that states may use for their own public assistance programs. See 42 U.S.C. § 601 et seq.; H.R. CONF. REP. No. 104-725, at 261 (1996); H.R. REP. No. 104-651, at 1322 (1996). The amount of a state's TANF grant is based on the amount of the reimbursement paid to the state under AFDC during an historical base period. See 42 U.S.C. § 603. In order to receive a TANF grant, a state must submit a state plan, which HHS must approve, describing how the state intends to use the grant. Id. § 602. A state may spend its grant "in any manner that is reasonably calculated to accomplish the purpose of" the TANF program, or "in any manner that the State was authorized to use amounts received" under AFDC. Id. § 604(a).

This case involves the use of TANF grants to pay the costs of program administration. Prior to the enactment of the Welfare Reform Act, the federal government reimbursed 50% of most state administrative expenditures for each of the three programs — AFDC, Medicaid, and Food Stamps — without a dollar limit on the amount of administrative expenditures eligible for federal reimbursement. See 42 U.S.C. § 603(a)(3) (1994) (AFDC); id. § 1396b(a)(7) (Medicaid); 7 U.S.C. § 2025(a) (Food Stamps). This partial reimbursement scheme continues for Medicaid and Food Stamps. As noted, however, TANF is a block grant program, under which a state receives a fixed amount of federal funds. A state may use those funds to administer the TANF program, but "shall not expend more than 15 percent of the grant for administrative purposes." 42 U.S.C. § 604(b)(1).

The specific point at issue here is whether states may use their TANF funds to pay for all of the costs that are common to the administration of TANF, Medicaid, and Food Stamps. Such costs may include, for example, the expense of determining the eligibility of applicants for assistance where the relevant criteria are common to all three programs, the cost of leasing offices and hiring employees who administer all of the programs, and the cost of administering databases containing the records of individuals who receive benefits under all of the programs.

For the past thirty years, the Office of Management and Budget (OMB) has issued government-wide standards concerning the allocation of the costs of government programs.¹ OMB Circular A-87 provides that, ordinarily, costs that benefit multiple programs funded by federal grants must be allocated among the benefiting programs "in accordance with relative benefits received," rather than allocated to a single program. Cost Principles for State, Local, and Indian Tribal Governments, OMB Circular A-87, Attach. A, ¶ C.3.a (1997).² The parties refer to this principle as "benefiting program allocation." Since 1988, HHS has incorporated by reference OMB Circular A-87 in its own regulations and guidance documents. See 45 C.F.R. § 92.22; see also id. § 74.27 (adopted in 1994); Implementation Guide for OMB Circular A-87, Cost Principles and Procedures for Developing Cost Allocation Plans and Indirect Cost Rates for Agreements with the Federal Government, ASMB C-10 (HHS April 1997).³

Notwithstanding the benefiting program allocation principle of OMB Circular A-87, during the life of the AFDC program HHS permitted states to allocate entirely to AFDC all costs that were common to administration of the AFDC, Medicaid, and Food Stamp programs. The parties refer to this approach, in which common costs are allocated to a single program, as "primary program allocation." Its application to the AFDC program was regarded as an exception to the general rule of Circular A-87.⁴

Following passage of the Welfare Reform Act and creation of the TANF program, HHS moved to stop states from continuing to employ primary program allocation. On September 30, 1998, without notice or opportunity for comment, HHS' Office of Grants and Acquisition Management (OGAM) issued OGAM Action Transmittal 98-2. The Action Transmittal reconfirms that, as a general rule, Circular A-87 requires that:

[I]f any program benefits from an activity or cost, then costs must be allocated to each program. Where multiple programs are involved, a single program may not be designated as the sole benefiting program (primary program).

OGAM Action Transmittal 98-2 (HHS Sept. 30, 1998). Although the Action Transmittal recognizes that there are exceptions to this general rule, it further declares that:

Cost shifting [to a primary program] is not permitted by most program statutes, except where there is a specific legislative provision allowing such cost shifting. While the former AFDC program allowed such an exception, the TANF legislation that replaced AFDC does not permit it being designated as the sole benefiting or primary program. Therefore, the TANF program is subject to the cost allocation principles of A-87.

Id. (emphasis added). Starting with state fiscal years beginning on or after October 1, 1998, the Action Transmittal requires state cost allocation plans for the TANF program to comply with the benefiting program allocation principle. Id.

Six states⁵ filed suit in the United States District Court for the District of Columbia seeking to prevent HHS from enforcing Action Transmittal 98-2. The States alleged that they incur common administrative costs that benefit TANF, Medicaid, and Food Stamps, and that the Welfare Reform Act permits them to "use their TANF grants to cover costs that benefit TANF and other programs simultaneously." Compl. at 18-19. In their papers in the district court, the plaintiffs explained that "because of the fall in welfare case-loads, states have been unable to use their full TANF grants, so that they are better off financially by charging all common costs to the TANF program." Plaintiffs' Mot. for Summ. J. at 20 n.5.

The States' complaint charged that Action Transmittal 98-2 violated the Administrative Procedure Act (APA) because, inter alia, it was not in accordance with law (i.e., with the TANF provisions of the Welfare Reform Act), and because it was issued without notice and comment. See 5 U.S.C. §§ 553, 706(2)(A), (D). The district court rejected these contentions and granted summary judgment in favor of HHS. Arizona v. Shalala, 121 F.Supp.2d 40 (D.D.C.2000). The court concluded that HHS' interpretation of the Welfare Reform Act deserved judicial deference under Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984), that the Department reasonably interpreted the legislation to bar states from applying the primary program allocation approach to their TANF grants, that notice and comment procedures were not required in this case and that the plaintiffs' other arguments were without merit.⁶

II

We review the district court's grant of summary judgment against the States' APA claims de novo. See Independent Petroleum Ass'n of Am. v. DeWitt, 279 F.3d 1036, 2002 WL 191748, at *2 (D.C.Cir. Feb. 8, 2002); Dr. Pepper/Seven-Up Cos. v. FTC, 991 F.2d 859, 862 (D.C.Cir.1993). We begin — and, in Part III, end — with the States' first argument: that the Action Transmittal is "not in accordance with law," 5 U.S.C. § 706(2)(A), because its interpretation of the TANF provisions of the Welfare Reform Act is inconsistent with the statute. HHS contends that its interpretation of the legislation must be accorded substantial deference under the rule announced in Chevron. The States contend, and we agree albeit for a different reason, that Chevron deference is inappropriate in this case.

Chevron instructs reviewing courts to apply a two-step framework to issues of statutory construction. First, we must ask "whether Congress has directly spoken to the precise question at issue," in which case we "must give effect to the unambiguously expressed intent of Congress." Chevron, 467 U.S. at 842-43, 104 S.Ct. at 2781. If the "statute is silent or ambiguous with respect to the specific issue," we move to the second step and must defer to the agency's interpretation as long as it is "based on a permissible construction of the statute." Id. at 843, 104 S.Ct. at 2782.

The States...