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October 23, 2000


The opinion of the court was delivered by: Kennedy, District Judge.


The States of Arizona, Maryland, New York, Tennessee, Michigan, and Florida*fn1 (collectively "plaintiffs") filed this action seeking declaratory and injunctive relief to prevent the enforcement of Action Transmittal 98-2 ("AT 98-2"), issued by the Secretary of the United States Department of Health and Human Services ("the Secretary" or "HHS") and the HHS Assistant Secretary for Management and Budget. Plaintiffs contend that AT 98-2, which applies existing government-wide cost allocation principles to the Temporary Assistance for Needy Families ("TANF") block grant program, was issued in violation of section 553 of the Administrative Procedure Act ("APA"), and is inconsistent with the TANF legislation. See 42 U.S.C. § 601 et seq. Before the court are the parties' cross motions for summary judgment. Upon consideration of the motions, the opposition thereto, and the record in this case, the court concludes that there are no genuine issues of material fact in dispute and that defendants' motion for summary judgment must be granted. AT 98-2 does not exceed the Secretary's authority and is a valid interpretative guidance not inconsistent with the TANF legislation.


The expansion of the administrative state and the broadened role of the federal government over the last several decades have had a profound impact on public assistance programs for persons in need. What was once a local endeavor, is now a cooperative effort between the federal government and the states. Three programs, Aid for Families with Dependant Children ("AFDC") (formerly Title IV of the Social Security Act), Medicaid (Title XIX of the Social Security Act) and the Food Stamp program (7 U.S.C. § 2011 et seq.), reflect this balance between federal and state responsibility. Because the three programs were essentially aimed at aiding the same population there were many commonalities in their administration. The AFDC cash assistance program imposed federal eligibility criteria, and individuals who qualified for AFDC cash assistance benefits under these criteria customarily qualified for Medicaid and Food Stamps as well. See 42 U.S.C. § 1396 and 7 U.S.C. § 2014. This linkage meant that the eligibility determination only needed to be calculated once, or in accounting terminology the AFDC eligibility determination "benefited" all three programs. Costs associated with activities that benefit multiple programs are known as common costs.

Pursuant to 42 U.S.C. § 603 eligible states receive block grants with amounts determined based upon recent federal spending on AFDC. In order to receive its TANF grant a state must submit to HHS, and obtain approval for, its state plan. See 42 U.S.C. § 602. To receive the full amount of the grant, however, a state must spend its own non-federal funds at no less than a specified percentage of its historic level of effort.*fn2 If a state fails to satisfy this maintenance of effort requirement ("MOE") the Secretary shall penalize the state by reducing its TANF grant in the following fiscal year by an amount equal to the shortfall. See 42 U.S.C. § 609(a)(7). States may use the TANF grants "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. 42 U.S.C. § 604(a). The statute imposes several specific limitations on grant spending, one of which requires that a state shall not spend more than 15 percent of its TANF grant for administrative purposes. See 42 U.S.C. § 604(b)(1).

The issue before the court centers on the allocation of common administrative costs between TANF, Medicaid, and Food Stamps. In allocating common costs between multiple federally-funded programs, HHS follows government-wide standards promulgated by the Office of Management and Budget ("OMB"). OMB Circular No. A-87 ("Circular A-87") "establishes principles for determining the allowable costs incurred by State, local, and federally-recognized Indian tribal governments (governmental units) under grants . . . with the Federal Government. . . . The principles are for the purpose of cost determination and are not intended to identify the circumstances or dictate the extent of Federal or governmental unit participation in the financing of a particular program or project."*fn3 Circular A-87 Attach. A, ¶ A.1 (emphasis added). The 1981 version of Circular A-87 required that costs be allocated between programs "to the extent of the benefits received." Circular A-87 Attach. A, ¶ C.2.a, 46 Fed. Reg. 9548 (Jan. 28 1981). In 1988 OMB contemplated several changes to Circular A-87, one of which was "moving away from methodologies that do not assign costs based on benefits received." Proposed Revisions to Circular No. A-87 "Cost Principles for State and Local Governments," 53 Fed. Reg. 40352 (Oct. 14, 1988). Subsequently, in 1995 OMB revised Circular A-87 to incorporate this change specifying that common costs are assignable to specific programs "in accordance with relative benefits received," and each activity which benefits from the cost "will receive an appropriate allocation." Circular A-87 Attach. A, ¶ C.3. This is referred to as the benefiting program allocation approach. The requirements of Circular A-87 are applicable to all federal programs except for those "with statutorily-authorized consolidated planning and consolidated administrative funding." Id., Attach. A, ¶ A.3.e.

HHS has incorporated Circular A87's principles by reference into its own regulations, see 45 C.F.R. § 74.27 and 45 C.F.R. § 92.22, and has issued several policy guidances instructing grant recipients as to its application. See OASC 10 "Cost Principles and Procedures for Establishing Cost Allocation Plans and Indirect Cost Rates for Grants and Contracts with the Federal Government", which was superseded in April 1997 by ASMB C-10 "Cost Principles and Procedures for Developing Cost Allocation Plans and Indirect Cost Rates for Agreements with the Federal Government". HHS regulations require states receiving TANF funds to submit cost allocation plans detailing, inter alia, how common costs will be measured and allocated among all programs administered by the recipient. See 45 C.F.R. Part 95, Subpart E. During the existence of the AFDC program HHS routinely approved cost allocation plans that apportioned costs common to AFDC, Medicaid, and Food Stamps, entirely to AFDC. This accounting practice, where common costs are allocated exclusively to one program, is known as primary program allocation. HHS permitted primary program allocation because of the eligibility linkage between AFDC and the other two programs, and because the open-ended entitlement nature of the programs meant that states would receive the same amount of reimbursement no matter which allocation method was used. See Declaration of Joseph E. Cook, Jr., Defs.' Mem. Supp. Summ. J. Ex. 1 ¶ 7 ("Cook Decl."). Defendants cite no specific statutory provision that explicitly permitted this deviation from the general policy of Circular A-87, rather they justify it based on "the legislative and appropriation history of these public assistance programs." Id. Even documents submitted by the plaintiffs demonstrate that "[t]here are . . . a number of indications in the legislation and legislative history . . . which appear to support the `primary program' concept[.]" Tracy Decl. Ex. 1.*fn4 In essence HHS interpreted the AFDC legislation, in conjunction with the overall federal public assistance legislation, to permit such an exception.

This all changed following the passage of PRWORA in 1996 and the creation of TANF. On September 30, 1998 the Office of Grants and Acquisition Management ("OGAM") at HHS issued OGAM Action Transmittal 98-2. AT 98-2 was not promulgated pursuant to formal notice and comment rulemaking under section 553 of the APA. Consistent with earlier policy guidances AT 98-2 interpreted Circular A87 and ASMB C-10 to require:

[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). Exceptions are described in the C-10, Section 2-12 which permit deviation from the A-87 requirements when the head of a Federal agency determines that the program legislation requires that the program absorb costs that would normally be allocable to other programs. Cost shifting is not permitted by most program statutes, except where there is a specific legislative provision allowing such cost shifting.

AT 98-2 ¶ 1. Applying this policy to the TANF legislation AT 98-2 ultimately concluded that:

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.*fn5

Id. (emphasis added). Starting with state fiscal years beginning on or after October 1, 1998, cost allocation plans for the TANF program were required to comply with the benefiting program allocation method embodied in Circular A-87, ASMB C-10, and clarified in AT 98-2. See Id. ¶ 2. Plans prepared based on any other allocation method were required to be resubmitted. See Id.

Plaintiffs filed suit on April 5, 1999 asserting that AT 98-2 constituted a change in well-established HHS policy and as such should have followed the formal APA rulemaking process, and that it is inconsistent with the TANF legislation. They now seek summary judgment on their claims. Defendants seek summary judgment on the grounds that there is no final agency action, the matter is not ripe for adjudication, plaintiffs have failed to exhaust their administrative remedies, and that AT 98-2 is a valid interpretive guidance not subject to formal notice and comment rulemaking.


A. Standard for Summary Judgment

Under Federal Rule of Civil Procedure 56, summary judgment shall be granted if the pleadings, depositions, answers to interrogatories, admissions on file, and affidavits show that there is no genuine issue of material fact in dispute and that the movant is entitled to judgment as a matter of law. Facts "that might affect the outcome of the suit under the governing law" are material. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The non-movant's opposition must consist of more than mere unsupported allegations or denials and must be supported by affidavits or other competent evidence setting forth specific facts showing that there is a genuine issue for trial. See Fed.R.Civ.P. 56(e); Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The nonmovant's evidence must be of a nature "that would permit a reasonable jury to find" in its favor. ...

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