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November 21, 1986

OTIS R. BOWEN, Secretary, et al., Defendants

The opinion of the court was delivered by: JACKSON

 This case entails a dispute between the State of New York and the federal government over which is to bear the cost of some $66.3 million spent by plaintiff New York State Department of Social Services ("DSS") in providing certain social services to foster children receiving funds from the Aid to Families With Dependent Children-Foster Children ("AFDC-FC") program under the Social Security Act. Although aware of a pervasive uncertainty as to the matter as early as November, 1976, it was not until mid-1981 that defendant United States Department of Health and Human Services ("HHS") got around to publishing an agency-wide directive declaring that the states were no longer entitled to federal reimbursement for some of their expenditures for such services following major revisions of the Social Security Act in October, 1975. In the meantime, New York, as well as other states, had continued to provide the services in a misbegotten expectation of eventual reimbursement for which it blames HHS. When one of its claims (for approximately $8.5 million) was officially disallowed in October, 1981, New York appealed to HHS' Departmental Grant Appeals Board (the "Board"), which, in July, 1983, affirmed the disallowance. Other claims were later disallowed and similarly affirmed. The parties agree that the several decisions of the Board constitute final agency action with respect to each, and that all are now properly before this Court for review pursuant to the judicial review provisions of the Administrative Procedure Act ("APA"), 5 U.S.C. §§ 701-06 (1982).

 New York seeks declaratory and injunctive relief, contending that the Board's decisions erroneously interpreted the governing statutory law; that HHS inequitably gave retroactive effect to the 1981 directive prohibiting reimbursement, the seemingly authoritative intimations DSS had received to the contrary over the preceding four years having accurately reflected an earlier official agency policy which the 1981 directive reversed; and that the 1981 directive was, in any case, a legislative rule which required notice-and-comment before it could become effective at all. The case is now before the Court on cross-motions for summary judgment. The issue upon which the Court makes disposition of the case being entirely one of law, for the reasons hereinafter set forth plaintiff's motion for summary judgment will be denied, defendant's motion will be granted, and the amended complaint dismissed with prejudice.


 The complex, intricately interrelated statutory scheme under which this controversy arises is meticulously described by the Board in its Decision No. 449, No. 82-117-NY-HD of July 29, 1983 (R. 302-327), and its exposition in full is not relevant for present purposes. In brief and oversimplified summary, from 1961 through 1975 the federal government undertook to subsidize the states' expenditures for certain social services it required the states to furnish its children in foster care who were receiving AFDC income maintenance payments under Title IV-A of the Social Security Act (the "Act"), 42 U.S.C. §§ 601-15 (1982), e.g., their placement in suitable foster homes and development and oversight of appropriate plans of foster care.

 Effective October 1, 1975, Congress amended the Act by adding Title XX, which established a comprehensive program for the provision of social services generally. Pub. L. No. 93-647, 88 Stat. 2337 (1975) (current version at 42 U.S.C. § 1397 (1982 & Supp. III 1985)). *fn1" Section 2002(a)(1) of the new statute authorized federal financial participation in state expenditures for various services to the needy directed at certain statutorily prescribed goals, several of which embraced foster care for children, e.g., preventing child abuse or neglect and preserving the integrity of families. 88 Stat. at 2337-43. Title XX also established an appropriations cap limiting the amount of federal money which could be expended, and prescribed a formula by which a maximum annual allotment for each state would be calculated. Id.

 At the same time it added Title XX to the Act, Congress also amended the section of the Act that authorized payment to the states for their Title IV-A administrative expenses, including AFDC-FC. Pub. L. No. 93-647 § 3, 88 Stat. 2337, 2348 (1975). As amended, section 403(a)(3) of the Act still authorized reimbursement of a percentage of a state's administrative costs for AFDC, with, however, a proviso:

. . . except that no payment shall be made with respect to amounts expended in connection with the provision of any service described in section [2002(a)(1) of this Act] other than services the provision of which is required by [section 402(a)(19) of this Act] to be included in the plan of the State . . . .

 42 U.S.C. § 603(a)(3) (1976) (current version at 42 U.S.C. § 603(a)(3) (1982)). *fn2" It is the significance to be ascribed to the "except clause" that lies at the heart of the current controversy: specifically, whether Congress intended it to bar even non-duplicative reimbursement for administrative costs associated with social services (except for the WIN program) under Title IV-A.

 New York submits its claims for reimbursement to Region II, the field office of HHS overseeing New York. After Title XX went into effect, DSS routinely began to make claims for each county for the social services rendered by foster care caseworkers under Title XX until the state's allotment under that title was exhausted, then it claimed the remainder under Title IV-A, at a lower rate of reimbursement, but without a cap. In November, 1976, the Regional Office disallowed DSS' first claim (for about $ 1.3 million), citing as the reason what might have been merely an accounting error: DSS' failure to allocate costs between income maintenance and social services activities. *fn3" DSS asked for a reconsideration in April, 1977.

 Then, on June 17, 1977, the Regional Office sent DSS an informational copy of a one-page "memorandum," dated May 18, 1977, from a Mildred Hoadley, then director of HHS' Division of Income Maintenance Policy, Assistance Payments Administration, at HHS' Central Office in Washington, D.C., *fn4" to an associate regional commissioner in California, purporting to advise the latter, in response to a query, that "a State may claim [reimbursement] under Title IV-A for carrying out any provision required in Title IV-A." *fn5" Accompanying the memorandum was an informational copy of a Region II Office recommendation to the Central Office that the November, 1976, disallowance of DSS' claim be withdrawn.

 A few days later, a Region II associate commissioner advised DSS (apparently on the basis of the Hoadley memorandum) to amend its Title IV-A cost allocation procedure to classify all AFDC-FC activities, whether related to income maintenance or social services, as reimbursable "administrative" costs. DSS relied upon this apparently authoritative instruction, did as suggested, and assumed henceforth that all doubt had been resolved that it could properly claim reimbursement under Title IV-A for all services its caseworkers rendered, including social services for its AFDC children in foster care, after exhausting its Title XX allotment, which it then proceeded to do for each of the years in issue here. *fn6" Some of its claims were promptly paid without question. Others remained in various stages of bureaucratic limbo for the next four years.

 Finally, on June 24, 1981, HHS issued "Action Transmittal SSA-AT 81-18," the pronouncement HHS contends represents its first "official policy" statement on the subject, declaring that states could not claim reimbursement for any of its caseworker social services to foster care children under Title IV-A (although Title IV-A still required that they be provided) on the ground that the "except clause" prohibited payment for any such services, and had done so since it was enacted in 1975. The Action Transmittal concluded: "state plans and cost allocation plans that allow costs for these services under Title IV-A have been approved in error. HHS Regional Offices will be acting to disallow [reimbursement] under Title IV-A where such claims have been paid or deferred."

 On October 20, 1981, HHS notified DSS that it was disallowing one of its Title IV-A claims for foster care social service costs incurred between July, 1976, and March, 1979, totalling approximately $8.6 million. In July, 1982, New York appealed the disallowance to the Grant Appeals Board, but the Board's Decision No. 449 upheld the disallowance on July 29, 1983, in the comprehensive ruling that became the basis for all disallowances at issue here. On November 28, 1984, DSS filed this action seeking judicial review of Decision Nos. 449 and 552, ...

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