oversight

Food Stamp Program: States Face Reduced Federal Reimbursements for Administrative Costs

Published by the Government Accountability Office on 1999-07-23.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                       United States General Accounting Office

GAO                    Report to Congressional Committees




July 1999
                       FOOD STAMP
                       PROGRAM
                       States Face Reduced
                       Federal
                       Reimbursements for
                       Administrative Costs




GAO/RCED/AIMD-99-231
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Resources, Community, and
      Economic Development Division

      B-282992

      July 23, 1999

      The Honorable Richard S. Lugar
      Chairman
      The Honorable Tom Harkin
      Ranking Minority Member
      Committee on Agriculture, Nutrition, and Forestry
      United States Senate

      The Honorable Larry Combest
      Chairman
      The Honorable Charles W. Stenholm
      Ranking Minority Member
      Committee on Agriculture
      House of Representatives

      Prior to the passage of the Personal Responsibility and Work Opportunity
      Reconciliation Act of 1996 (Welfare Reform Act), much of the nation’s
      federally funded public assistance was delivered under three programs:
      Aid to Families With Dependent Children (AFDC), providing cash assistance
      to needy families to help meet their living expenses; the Food Stamp
      Program, furnishing low-income recipients with coupons to increase their
      food purchasing power; and Medicaid, providing health insurance for
      eligible low-income families and aged, blind, or disabled people. The
      states, which were responsible for implementing these programs, usually
      charged certain administrative costs considered common to all three
      programs—such as participant eligibility determinations—to AFDC. With
      the passage of the Welfare Reform Act, AFDC was replaced by Temporary
      Assistance for Needy Families (TANF), a federal block grant program that
      serves AFDC’s target population. The act based each state’s TANF block
      grant on the state’s prior AFDC spending levels, including spending for
      common administrative costs. However, with AFDC’s termination, the
      states could now charge these costs directly to the Food Stamp Program
      and/or Medicaid, creating the potential for the states to receive duplicative
      funding based on these costs—through the TANF block grant and from the
      programs directly.

      The Congress addressed this potential problem in the Agricultural
      Research, Extension, and Education Reform Act of 1998 (Ag Reform Act).
      Among other things, this act required the Department of Health and
      Human Services (HHS), which administers TANF and Medicaid, to determine
      how much of the common administrative costs for determining eligibility




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                   that were previously charged to AFDC could have been charged to the Food
                   Stamp Program and Medicaid, respectively. The act also required the U.S.
                   Department of Agriculture (USDA), which administers the Food Stamp
                   Program, to reduce future federal reimbursements of states’ administrative
                   costs for the Food Stamp Program by an amount equal to HHS’
                   determination for this program. The act requires that GAO review and
                   report on the adequacy of HHS’ methodology for making its determinations.

                   Regarding this mandated study, you asked us to (1) summarize HHS’
                   administrative cost determinations, related estimates provided by the
                   states to HHS, and the reasons for any differences between HHS’
                   determinations and the states’ estimates, and (2) assess the reliability of
                   HHS’ determinations. You also asked us to focus our work on that portion
                   of common administrative costs that could have been charged to the Food
                   Stamp Program.


                   HHS’ determinations of the portion of common administrative costs that
Results in Brief   could have been allocated to the Food Stamp Program annually exceeded,
                   in aggregate, the states’ estimates for these costs by $61 million.
                   Specifically, the states, including the District of Columbia, estimated that
                   about $166 million, in aggregate, was included in their Temporary
                   Assistance for Needy Families block grants for common administrative
                   costs attributable to the Food Stamp Program. In contrast, HHS determined
                   this annual amount to be about $227 million; because HHS’ determinations
                   are final, federal reimbursements to the states under the Food Stamp
                   Program will be reduced by this amount, even though such determinations
                   are subject to an administrative appeal process. HHS’ determinations were
                   greater than the individual estimates for 28 states and less than the
                   estimate for one state—Illinois. For example, federal Food Stamp
                   administrative cost reimbursements to Florida and New York will be
                   reduced by an additional $13 million and $7.73 million respectively. Four
                   principal reasons cited by HHS to explain the differences between its
                   determinations and the states’ estimates were the following: (1) Some
                   states did not provide sufficient data or information within the prescribed
                   time frames; therefore HHS relied on a formula to make determinations;
                   (2) some states omitted administrative costs from their estimates that HHS
                   believes should have been included; (3) some states incorrectly calculated
                   or could not support their allocation of common administrative costs;
                   and/or (4) some states incorrectly decreased their food stamp estimates by
                   an amount equal to the Medicaid costs that the states had charged to the
                   Food Stamp Program.



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             Regarding the reliability of HHS’ determinations, our review of HHS’
             determinations for 10 states found significant calculation errors.
             Specifically, we found errors in seven of these determinations that
             generally resulted in underestimating costs attributable to the Food Stamp
             Program by $8.8 million in aggregate—a 20-percent underestimate for
             these seven states; thus, the amount of the federal reimbursement for the
             Food Stamp Program for these states could have been reduced even more.
             In addition, the states have raised a number of concerns with HHS’
             methodology for calculating these determinations. For example, many
             states disagree with HHS’ definition of the administrative costs associated
             with determining a program participant’s eligibility. In general, these states
             contend that the Ag Reform Act calls for a narrow definition of these costs
             that includes only the time that staff in local welfare offices spend
             completing and processing participant applications; in contrast, HHS’
             definition includes other costs, such as those for maintaining case files and
             electronic databases and for training. Many states also question HHS’
             determination of the percentages of administrative costs that were either
             common to the Aid to Families With Dependent Children, Food Stamp,
             and Medicaid programs or unique to the Aid to Families With Dependent
             Children program. Among other things, these states assert that HHS has
             underestimated the percent of administrative costs that were unique to the
             Aid to Families With Dependent Children program, resulting in an
             overestimation of the costs common to all three programs. Because of
             these concerns, 40 states have appealed HHS’ determinations.

             Because the 40 states’ appeals are currently the subject of an
             administrative dispute resolution process, we make no recommendations
             regarding HHS’ determinations.


             Prior to passage of the Welfare Reform Act, most states allocated at least
Background   some common administrative costs related to qualifying individuals
             applying for or receiving benefits under multiple public assistance
             programs—AFDC, Food Stamps, and/or Medicaid—to AFDC for federal
             reimbursement. This method of assigning common costs to just one of
             several programs is known as the “primary program” method of cost
             allocation. In contrast, the Office of Management and Budget generally
             requires that common costs be allocated by program according to the
             extent to which each program benefits from the activities associated with
             these costs;1 this approach is known as the “benefiting program” method

             1
              This requirement is found in the Office of Management and Budget’s Circular A-87, Cost Principles for
             State, Local and Indian Tribal Governments (Aug. 29, 1997).



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of cost allocation. However, an exception was made for the public
assistance programs because (1) the federal matching rate for
administrative costs—50 percent or higher—was generally the same for all
three programs and (2) these programs were entitlement programs,
meaning there was no specified limit on federal payments that could be
made under these programs. Because AFDC was the oldest of these
programs, the states were allowed to charge common administrative costs
to this program.2

With the passage of the Welfare Reform Act, AFDC was replaced with TANF.
While there was no limit to federal matching of state administrative costs
attributable to AFDC, the amount of each state’s TANF block grant is fixed,
as is the portion—up to 15 percent—of this block grant that can be used
for administrative expenditures. As a result of this change, according to
the conference report for this legislation, the states now have an incentive
to allocate common administrative costs previously charged to AFDC to the
Food Stamp Program and Medicaid for reimbursement because these
programs continue to offer a 50-percent or higher federal match without
any specified limit.3 However, because the size of the TANF block grant
received by each state was based on the state’s prior AFDC expenditures,
the Welfare Reform Act inadvertently provided funding for common
administrative costs attributable to the Food Stamp Program and Medicaid
in these block grants. Thus, the potential exists for states to receive
duplicative funding. In 1998, the Congressional Budget Office estimated
that eliminating duplicative funding based on the Food Stamp Program’s
administrative costs could result in federal savings totaling $1.3 billion for
fiscal year 1999 through fiscal year 2002.4

The Ag Reform Act requires HHS, in consultation with USDA and the states,
to, among other things, identify for each state the common administrative
costs for determining eligibility that were charged to AFDC for those states
that allocated costs using the primary program method during specified



2
 The states charged common administrative costs to AFDC in accordance with cost allocation plans
approved by HHS. Moreover, a USDA regulation found at CFR 7 part 277.9 required the states to
charge administrative costs common to the Food Stamp Program and AFDC to the latter program.
3
 HHS has also issued written guidance that requires the states to allocate costs on a
program-by-program basis. This guidance is found in Action Transmittal 98-2 (Sept. 30, 1998), issued
by the Department’s Office of Grants and Acquisition Management.
4
 According to the Congressional Budget Office, the annual reimbursement adjustment—calculated by
HHS as $227 million—represents the minimum annual federal savings each year. The budget office
maintains that actual savings will be higher because some states will reduce their total administrative
spending for the Food Stamp Program in response to the reimbursement adjustments.



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base periods.5 The act also requires that HHS determine how much of these
common costs could have been charged to the Food Stamp Program or
Medicaid. Furthermore, after HHS completes these determinations, the act
requires USDA to reduce future federal reimbursements for each state’s
Food Stamp administrative costs by an amount equal to HHS’ determination
for the Food Stamp Program.6 These reductions are to be made annually
for fiscal year 1999 through fiscal year 2002.

To determine the amounts of common administrative costs that should be
allocated to the Food Stamp Program and Medicaid, HHS first requested the
states to prepare estimates of these costs. HHS provided the states with two
approaches to estimating common administrative costs: (1) the analysis
approach for states that had a large amount of program-specific cost
allocation data for their base periods and (2) the optional formula
approach for those states that did not. These approaches are discussed in
greater detail in appendix I.

Once the states had prepared their cost estimates—they were due to HHS
by October 15, 1998—their submissions were reviewed by several HHS
offices. The initial review was performed by field staff in the Division of
Cost Allocation in accordance with written guidance issued by the
Department. In addition to reviewing each state’s submission for
completeness, these staff had the option of recalculating a state’s cost
allocations using the optional formula approach if the state’s submission
lacked sufficient support for the analysis approach. The submissions were
then reviewed by the Office of the Assistant Secretary for Management
and Budget.7 Staff in this office had the option of making additional
corrections to the states’ submissions. In addition, the Office of Inspector
General reviewed the submissions for three states—Ohio, Texas, and
Virginia—at the request of HHS’ Assistant Secretary for Management and
Budget. Specifically, the Assistant Secretary asked the Inspector General




5
 The determination of the costs charged to AFDC for calculating each state’s TANF block grant was
based on the greater of (1) the average of the state’s total AFDC claims for fiscal years 1992 through
1994, (2) the state’s total AFDC claim for fiscal year 1994, or (3) the state’s total AFDC claim for fiscal
year 1995.
6
 The act does not require HHS to reduce each state’s Medicaid reimbursements by an amount equal to
its Medicaid determination—it only requires HHS to perform the calculations.
7
 HHS generally did not consider a state submission to be “final” until the Division of Cost Allocation
had reviewed the submission and provided the state with preliminary feedback. The final state
submissions were then provided to the Assistant Secretary of Management and Budget for formal
review.


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                       to confirm whether these states used the primary or benefiting program
                       method of cost allocation, as claimed in their respective submissions.8

                       The final review of the state cost estimates was performed by the
                       Secretary of Health and Human Services. At the Secretary’s discretion,
                       further changes to a state’s submission were possible. Once approved by
                       the Secretary, the state submissions, as amended, became HHS’ final
                       administrative cost determinations for the Food Stamp Program and
                       Medicaid, subject to appeal. HHS notified each state in writing of the
                       Department’s final determination for that state. HHS also explained in
                       writing the reasons for any difference between HHS’ determination and the
                       state’s original cost estimate.

                       In accordance with provisions of the Ag Reform Act, the states may appeal
                       HHS’ final administrative cost determinations. Such appeals must first be
                       brought before an administrative law judge. The judge’s ruling may be
                       appealed to HHS’ Departmental Appeals Board. The act also specifies that
                       the results of the appeal process will not be subject to judicial review. In
                       addition, during the appeal process, the act requires the Secretary of
                       Agriculture to continue reducing a state’s Food Stamp Program
                       administrative payments by the amount equal to HHS’ determination for
                       that state.


                       HHS’ determinations of the portion of common administrative costs that
HHS’ Determinations    should be allocated to the Food Stamp program exceeded, in aggregate,
of Food Stamp          the states’ estimates for these costs by $61 million. Specifically, the states,
Administrative Costs   including the District of Columbia, estimated that about $166 million, in
                       aggregate, is included in their TANF block grants based on common
Substantially Exceed   administrative costs attributable to the Food Stamp Program that were
States’ Estimates      formerly charged to AFDC during the states’ respective base periods. In
                       contrast, HHS determined this amount to be about $227 million.9 The
                       following four principal reasons were cited by HHS to explain the
                       differences between its determinations and the states’ estimates: (1) Some
                       states did not provide sufficient data or information within the prescribed
                       time frames; therefore HHS relied on the optional formula to make the
                       determinations; (2) some states excluded administrative costs from their
                       estimates that HHS believes should have been included; (3) some states


                       8
                        The Inspector General concluded that Ohio used the primary program method and that Texas and
                       Virginia used the benefiting program method.
                       9
                        States also estimated in their submissions that the total determination for Medicaid would be
                       $245 million. HHS determined this amount to be $300 million.



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                      incorrectly computed or could not support their allocation of common
                      administrative costs; and/or (4) some states incorrectly decreased their
                      Food Stamp estimates by an amount equal to the Medicaid costs that the
                      state had charged, in their base period, to the Food Stamp Program.


States’ Estimates     The states’ estimates of the portion of common administrative costs that
                      could have been allocated to the Food Stamp Program totaled about
                      $166 million; this is the amount formerly charged to AFDC that was
                      inadvertently included in the states’ TANF block grants.10 The aggregate
                      total of $166 million is based on cost estimates submitted by 31 states,
                      including the District of Columbia; the other 20 states said that they had
                      allocated common administrative costs using the benefiting program
                      method during their base period and thus did not require a reimbursement
                      adjustment to their Food Stamp Program. Of those states that submitted
                      cost estimates, 11 chose to use the optional formula approach to calculate
                      their cost estimates because they lacked program-specific administrative
                      cost data, faced tight time frames, or preferred not to use the more
                      complex analysis approach, according to HHS. The remaining 20 states
                      used the analysis approach to arrive at their estimates.


HHS’ Determinations   HHS determined the aggregate amount included in the states’ TANF block
                      grants that were based on common administrative costs attributable to the
                      Food Stamp Program and charged to AFDC during the states’ respective
                      base periods to be about $227 million, or about $61 million more than the
                      aggregate state estimate. Specifically, HHS determined that future
                      reimbursements should be reduced by an amount greater than the state’s
                      estimate for 28 states, including the District of Columbia, and by an
                      amount less than the state estimated for one state—Illinois. The increased
                      reductions ranged from a low of $10,000 for Wyoming to a high of
                      $13 million for Florida; the decreased reduction for Illinois was about
                      $300,000. In addition, HHS agreed with the estimates submitted by 22 of the
                      states. In HHS’ view, $227 million represents the amount of the annual
                      reduction that should be made to the states’ reimbursements for the Food
                      Stamp Program’s administrative costs. Appendix II provides further
                      information on the cost estimates and HHS’ determinations for each state
                      and the District of Columbia.




                      10
                        States’ initial estimates totaled $157 million. As a result of HHS’ preliminary discussions with the
                      states, the states, in aggregate, revised their final estimates to $166 million.



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HHS increased the estimates for 13 of the 20 states that stated they did not
require a reimbursement adjustment because they had used the benefiting
program approach to cost allocation during their base periods. In
aggregate, these increases amounted to about $19 million. In general, HHS
increased the estimates for these states because their individual
submissions either lacked sufficient information to support the statement
that they did not require a reimbursement adjustment or because the
information they provided contradicted this claim.11 In recalculating these
estimates, HHS generally used the optional formula approach; however, it
used the analysis approach for two states that were able to provide
program-specific cost data.

HHS  also increased the cost estimates of 15 states, including the District of
Columbia, that had stated they had used the primary program method of
allocation during their base periods and thus were subject to a
reimbursement adjustment under the Food Stamp Program. In aggregate,
these increases amounted to about $42 million. In general, HHS cited four
major reasons for increasing these estimates: (1) Some states did not
provide sufficient data or information within the prescribed time frames;
therefore HHS relied on the optional formula to make determinations;
(2) some states omitted administrative costs that should have been
included, such as costs for maintaining case files and electronic databases,
making referrals, holding hearings and appeals, investigating fraud, and
conducting training; (3) some states incorrectly calculated or could not
support their allocation of administrative costs, including those they
claimed were unique to AFDC;12 and/or (4) some states incorrectly
decreased their Food Stamp estimate by amounts equal to the Medicaid
costs that the states had charged, in their base periods, to the Food Stamp
Program.13 In recalculating these estimates, HHS used the optional formula
approach for nine states, including the District of Columbia; however, it
used the analysis approach for six states that were able to provide

11
 Documentation to demonstrate that a state used the benefiting program method of cost allocation
may include (1) relevant excerpts from the state’s public assistance cost allocation plan, as approved
by HHS, that show that the state intended to allocate costs by program; (2) copies of correspondence
or manuals prepared by the state instructing its public assistance employees on how to categorize and
count various day-to-day tasks for purposes of allocating costs by program; and (3) summary
schedules, including examples of the time sheets or time-and-effort reports that underlie these
schedules, that show that the state’s public assistance employees recorded their time charges on a
program-by-program basis, as appropriate.
12
  For example, according to HHS, Colorado did not provide adequate support for its claim that more
than 93 percent of the administrative costs it allocated to AFDC during its base period were unique to
this program.
13
  For example, according to HHS, Florida incorrectly decreased its Food Stamp estimate by
$13 million—an amount equal to the Medicaid costs that the state had charged, in its base period, to
the Food Stamp Program.



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                        program-specific data. Appendix III provides further information on the
                        approaches HHS used to recalculate state submissions.

                        The potential impact of HHS’ reimbursement adjustment determinations
                        varies widely by state. For example, several states stand to lose less than 5
                        percent of their federal reimbursements for Food Stamp administrative
                        costs, while a number of others could lose 20 percent or more of their
                        reimbursements. From a national perspective, HHS’ aggregate
                        determination of $227 million represents about 12 percent of the
                        $1.838 billion in Food Stamp administrative reimbursements made to the
                        states, including the District of Columbia, in fiscal year 1997, the most
                        recent year for which these data were available.14 Appendix IV provides
                        information on the percentage reduction, if any, to each state’s federal
                        reimbursement for Food Stamp administrative costs that results from HHS’
                        determinations.


                        Calculation errors that we noted in reviewing a limited sample of HHS’
Calculation Errors      determinations raise questions about the reliability of these
Raise Questions         determinations. Specifically, we reviewed HHS’ determinations for 10 of the
About the Reliability   51 states (including the District of Columbia) and found significant
                        calculation errors in seven of these determinations. The calculation errors
of HHS’                 found in these determinations generally resulted in an underestimation of
Determinations          the costs attributable to the Food Stamp Program, totaling, in aggregate,
                        about $8.8 million. In one case, HHS understated these costs by more than
                        $5 million.

                        In addition, many states have raised concerns with the methodology HHS
                        used to calculate its determinations. For example, many states question
                        HHS’ definition of the administrative costs associated with determining a
                        program participant’s eligibility. In general, these states contend that the
                        Ag Reform Act calls for a narrow definition of these costs that includes
                        only the time that staff in local welfare offices spend completing and
                        processing participant applications. In contrast, HHS’ definition includes a
                        number of other costs, such as those for maintaining case files and
                        electronic databases and for conducting training, that were allocated on a
                        primary program basis. Many states also question HHS’ assumptions
                        regarding the percentages of common administrative costs attributable to
                        AFDC, the Food Stamp Program, and Medicaid; HHS developed these
                        percentages to help states lacking program-specific cost data to calculate

                        14
                          Total federal spending for the Food Stamp Program in fiscal year 1997, including administrative cost
                        reimbursements and program benefits, was about $22.9 billion. In addition, the states’ spending for
                        administrative costs totaled about $1.8 billion.



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                          those portions. Among other things, these states assert that HHS has
                          underestimated the percentage of administrative costs that were unique to
                          AFDC and therefore overestimated the costs that are common to all three
                          programs. Because of their concerns regarding HHS’ definition and
                          assumptions, 40 states (including the District of Columbia) are appealing
                          HHS’ determinations.



Significant Calculation   In reviewing HHS’ determinations for 10 states—California, Florida,
Errors Found in Seven     Kentucky, Maryland, Massachusetts, Nevada, Ohio, Oregon, Texas, and the
HHS Determinations        District of Columbia—we found a number of calculation errors.
                          Specifically, we found errors in seven of these determinations that
                          generally caused HHS to underestimate common administrative costs
                          attributable to the Food Stamp Program by a total of $8.8 million.15 For
                          example, we found that HHS inconsistently or incorrectly applied the
                          optional formula approach to the determinations for five of these
                          states—Kentucky, Ohio, Oregon, Nevada, and the District of
                          Columbia—accounting for about $7.1 million of this underestimation. In
                          addition, the Department inconsistently or incorrectly applied the analysis
                          approach to the determinations for two states—Florida and
                          Maryland—accounting for about $1.7 million of the underestimation.
                          Whereas HHS determined the amount to be $34.5 million for these seven
                          states, we determined the amount to be $43.3 million. The $8.8 million
                          difference represents a 20-percent underestimate.

                          The errors we noted in HHS’ application of the optional formula and
                          analysis approaches to the determinations for these states were generally
                          related to HHS’ (1) neglecting to include all administrative costs that,
                          according to its own definition, are subject to the Food Stamp
                          reimbursement adjustment, such as costs for the Family Assistance
                          Management Information System; (2) failing to exclude certain costs, such
                          as those for the Child Care Program,16 that were outside the scope of HHS’
                          definition primarily because they did not relate to assistance payments;
                          and/or (3) miscalculating its determinations because of simple arithmetic
                          errors. For example, HHS underestimated its determination for Ohio by
                          more than $5 million because of an arithmetic error in calculating the

                          15
                            Our analysis focused solely on whether HHS made any calculation errors while calculating its
                          determinations—it makes no attempt to modify HHS’ definition or assumptions. Ultimately, any such
                          changes will be the product of the ongoing appeals process between HHS and the states. We also
                          recognize that some of the states we reviewed might provide additional data during mediation that
                          could significantly change their Food Stamp adjustments.
                          16
                           The Child Care Program provides payments to day care providers who watch the children of program
                          participants. This program does not provide direct financial benefits to program participants.



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                            state’s federal share of administrative costs. Specifically, HHS inadvertently
                            applied the federal matching rate for administrative costs—50
                            percent—twice in its calculations.17 HHS officials told us that time
                            constraints may have contributed to the calculation errors we noted.
                            According to these officials, the Department had less than 1 month to
                            develop determinations for all 50 states and the District of Columbia.

                            The extent to which HHS’ determinations underestimate the common
                            administrative costs attributable to the Food Stamp Program could be as
                            much as $15.3 million if HHS were to consistently follow its own rules
                            regarding required documentation, the need to reconcile states’ estimates,
                            and the assumptions about the percentage of costs that were unique to
                            AFDC. Specifically, in three of its determinations—those for Florida,
                            Oregon, and the District of Columbia—HHS accepted state data that were
                            not adequately supported; and in its determination for Maryland, HHS did
                            not reconcile administrative costs in the state’s submission with those
                            costs actually claimed by the state in its base year.

                            Appendix V provides more detailed information on the errors made in the
                            determinations for each of these states. It also provides information on the
                            extent to which these errors caused HHS to underestimate the
                            reimbursement adjustments for these states.


Many States Question HHS’   The Ag Reform Act requires HHS to identify the common administrative
Definition of Common        costs associated with determining an applicant’s eligibility for benefits
Administrative Costs        under AFDC, the Food Stamp Program, and Medicaid that were allocated to
                            AFDC for reimbursement. HHS’ definition of these costs has been one of the
                            most controversial aspects of the Department’s cost determinations. Many
                            states contend that HHS exceeded the statutory authority of the Ag Reform
                            Act, which, according to the states, intended that common administrative
                            costs be defined narrowly, essentially including only staff costs (salaries
                            and expenses) related to completing and processing program participants’
                            applications. However, the Department’s definition also includes other
                            costs, as discussed, such as those for maintaining case files and electronic
                            databases,18 making referrals, holding hearings and appeals, investigating
                            fraud, and conducting training. Specifically, HHS management concluded

                            17
                             In addition to its calculation error regarding application of the federal matching rate, HHS failed to
                            exclude about $1.1 million in costs for the Child Care Program. This latter error partially offset the
                            matching rate error.
                            18
                             One of these databases is the Family Assistance Management Information System. Local welfare
                            offices use this database to maintain information on their TANF, Food Stamp Program, and Medicaid
                            participant cases.



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                              that the legislation required all administrative costs in support of the
                              eligibility process be subject to adjustment if they were allocated
                              following the primary program method.


Many States Also Question     Many states also question HHS’ assumptions regarding the allocation of
HHS’ Assumptions              administrative costs that are common to the AFDC, Food Stamp, and
Regarding the Allocation of   Medicaid programs. Specifically, these states take issue with the
                              percentages that HHS uses to distinguish common costs allocated to AFDC
Common Administrative         from costs that were unique to this program. HHS developed these
Costs                         percentages to help the states that lacked program-specific cost data to
                              prepare their cost estimates; in particular, HHS was concerned that these
                              states not include costs that were unique to AFDC in these estimates.
                              However, the states generally contend that the percentages—80 percent
                              for common costs and 20 percent for unique costs—underestimate the
                              portion of administrative costs that are unique to AFDC and thus overstate
                              the costs common to all three programs.

                              In developing these percentages, HHS recognized some of the costs charged
                              to AFDC for eligibility determinations were common to all three welfare
                              programs, while other costs were unique to AFDC. For example, the costs
                              claimed for reimbursement under AFDC for completing and processing a
                              joint public assistance application for AFDC, Food Stamp, and Medicaid
                              benefits would include costs common to all three programs—such as
                              those for collecting information on an applicant’s name, address, and date
                              of birth—and costs unique to AFDC, such as comparing an applicant’s
                              earned income with AFDC’s eligibility criteria. Furthermore, in developing
                              the percentages, HHS focused on the public assistance application forms
                              used by two states—California and Illinois—and one municipality—New
                              York City. HHS chose the application forms for these jurisdictions as
                              examples because their public assistance programs are relatively large in
                              terms of the number of participants and the dollar value of benefits. On the
                              basis of its analysis using these forms, HHS determined that approximately
                              80 percent of the states’ eligibility-related administrative costs charged to
                              AFDC were common to AFDC, Food Stamps, and Medicaid, and about
                              20 percent benefited AFDC only. Relatedly, California performed an
                              informal assessment of its eligibility-related administrative costs and
                              reached a similar conclusion regarding the relative shares that were
                              common and unique.

                              In its guidance to the states for preparing cost estimates, HHS advised them
                              to use these percentages if they lacked program-specific cost data. Thus,



                              Page 12                     GAO/RCED/AIMD-99-231 Food Stamp Administrative Costs
                  B-282992




                  whether using the optional formula approach to calculate their costs or, in
                  certain circumstances, the analysis approach, the states may assume that
                  20 percent of their eligibility-related administrative costs are unique to
                  AFDC, even in the absence of supporting documentation. However, a state
                  may use a higher percentage for unique costs if it has adequate
                  documentation.

                  HHS’  guidance acknowledges that its development of a 20-percent standard
                  for costs unique to AFDC was based on a limited analysis of public
                  assistance application forms. According to HHS, its analysis consisted of
                  first counting all of the questions on the California, Illinois, and New York
                  City application forms that benefit all three welfare programs (AFDC, the
                  Food Stamp Program, and Medicaid) and then dividing the tally for each
                  form by the total number of questions on the form. Many states have taken
                  issue with HHS’ 20-percent standard, contending that the portion of their
                  eligibility-related administrative costs unique to AFDC is significantly
                  greater than 20 percent; these states also maintain that HHS should not
                  impose a special documentation burden on the states in which this
                  percentage does not apply. In response, HHS maintains that the tight time
                  frames for preparing its cost determinations, as provided for in the Ag
                  Reform Act, precluded it from doing a more extensive analysis. However,
                  the Department also indicated that the jurisdictions selected for its
                  analysis were reasonably representative of the nation and that it continues
                  to believe the 80-20 split is appropriate.

                  As of early April 1999, 40 states, including the District of Columbia, had
                  filed notice with an administrative law judge that they are appealing HHS’
                  determinations, contending, in many cases, that HHS exceeded its statutory
                  authority in the way that it calculated these determinations. Thirty-four of
                  these states have agreed to submit their appeals to a mediation process in
                  accordance with provisions of the Administrative Dispute Resolution Act.
                  The appeals of the remaining states have been stayed pending the results
                  of the mediation process. As of June 1999, two state appeals had been
                  resolved—Iowa dropped its appeal in late April 1999, and Indiana settled
                  its appeal in late May 1999. Appendix VI identifies the states that filed
                  appeals and the reasons for these appeals.


                  We provided copies of a draft of this report to HHS, USDA, the National
Agency Comments   Governors’ Association, and the American Public Human Services
                  Association for review and comment. We met with officials from HHS’
                  Office of the Assistant Secretary for Management and Budget, including



                  Page 13                     GAO/RCED/AIMD-99-231 Food Stamp Administrative Costs
B-282992




the Deputy Assistant Secretary for Grants and Acquisition Management,
and USDA’s Food and Nutrition Service, including the Service’s Associate
Administrator and its Deputy Administrator for Financial Management. We
also met with the associations’ Washington, D.C., offices. In addition, HHS
provided us with a letter summarizing its general comments (see app. VII).
USDA, the National Governors’ Association, and the American Public
Human Services Association generally agreed with the facts presented in
the report. HHS offered several comments regarding this presentation.

HHS  noted our report does a good job of explaining the difficult
requirements of the Ag Reform Act and HHS’ efforts to comply with this
law. However, the Department also said that the report does not fully
reflect the time constraints that HHS faced in preparing its determinations,
which may have contributed to the calculation errors that we found in
reviewing 10 of these 51 determinations. We agree that the statutorily
imposed time frame for completing the determinations may have been a
factor in contributing to these errors and have noted this in our report. In
addition, HHS indicated that both the states and HHS understood that the
appeals process could be used to provide additional data sufficient to
make determinations more precise and that the additional time provided
by this process has allowed many of the initial errors in calculation to be
remedied or rendered moot. We do not agree that it is sufficient for HHS to
rely on the appeals process to identify and correct errors in its
determinations. Finally, HHS noted that the number of states filing appeals
does not necessarily call into question the reliability of the Department’s
determinations. We agree and have modified the report accordingly.

We also sent excerpts from a draft of this report to three state offices that
we visited during the course of our audit work for review and comment.
These offices are California’s Department of Social Services,
Massachusetts’ Department of Transitional Assistance, and Maryland’s
Department of Human Resources. Officials of the California and
Massachusetts offices generally agreed that the information in the report
for their state was accurate. Maryland officials, however, generally
disagreed with the calculation errors we noted in HHS’ determinations for
their state. Notably, the Maryland officials cited differences in the
methodology or assumptions used to make the state’s determination as the
basis for the calculation errors we noted in that determination. We
continue to believe that HHS’ determination for Maryland contains
significant calculation errors, a fact that is not disputed by HHS. In
determining these calculation errors, we used the methodology and
assumptions contained in HHS’ guidance documents; the appropriateness



Page 14                     GAO/RCED/AIMD-99-231 Food Stamp Administrative Costs
              B-282992




              of this methodology and these assumptions is, in part, the subject of the
              ongoing appeals process. Therefore, we have not changed our report.

              HHS, USDA, the National Governors’ Association, and the American Public
              Human Services Association also provided a number of technical changes
              and clarifications to the report, which we incorporated as appropriate.


              In order to summarize HHS’ administrative cost determinations, related
Scope and     estimates provided by the states to HHS, and the reasons for any
Methodology   differences, we obtained and reviewed the cost estimates for all 50 states
              and the District of Columbia, as well as HHS’ determinations.20 In addition,
              we obtained and reviewed the letters that HHS sent to each state and the
              District of Columbia explaining why its determinations differed. As
              needed, we also discussed the states’ submissions, HHS’ determinations,
              and the associated correspondence with HHS officials, particularly those
              assigned to the Department’s Division of Cost Allocation.

              To review HHS’ methodology for making its determinations, we first looked
              at the written guidance that HHS provided to the states and to its own
              employees. The guidance to the states was contained in HHS’
              Implementation of Cost Allocation Determinations Under the Agriculture
              Research, Extension and Education Reform Act (Sept. 2, 1998). Among
              other things, this document explained the optional formula and analysis
              approaches for preparing state cost estimates. The written guidance that
              HHS provided to its own staff is found in Guide for the Review of State
              Submissions Required as a Result of the Agriculture Statute to Identify and
              Allocate Common Costs Included in the TANF Block Grant (Sept. 17, 1998).
              In general, this document was intended to ensure that the reviews of
              states’ cost estimate submissions—primarily the responsibility of field staff
              in the Division of Cost Allocation—would be done consistently
              nationwide. We also discussed these guidance documents with HHS
              officials in Washington, D.C., and in the Department’s Northeastern Field
              Office.

              To obtain the states’ views regarding HHS’ methodology, we interviewed
              officials from the National Governors’ Association, National Conference of


              20
                The Food Stamp Act of 1964, as amended, authorizes a regular Food Stamp Program for the 50 states,
              the District of Columbia, Guam, and the U.S. Virgin Islands. Variants of the regular program also
              operate in Puerto Rico, American Samoa, and the Northern Mariana Islands. Because the Ag Reform
              Act requires HHS to prepare cost determinations for the “states,” HHS required only the 50 states and
              the District of Columbia to prepare cost estimate submissions; similarly, HHS prepared determinations
              only for these entities.



              Page 15                             GAO/RCED/AIMD-99-231 Food Stamp Administrative Costs
B-282992




State Legislatures, American Public Human Services Association, Center
on Budget and Policy Priorities, and the National Association of State
Human Services Finance Officers. We also met with public assistance
officials in three states—California, Maryland, and Massachusetts—to
obtain their views of HHS’ methodology. We selected Maryland and
Massachusetts because, among other reasons, each state used the analysis
approach to calculate its cost estimate; California was selected because it
helped develop the optional formula approach, which it used to calculate
its estimate. In addition, we reviewed documentation that describes the
basis for the appeals filed by 40 states, including the District of Columbia.

To see how HHS’ methodology was applied, we conducted detailed reviews
of the cost estimates prepared by 10 states, including the District of
Columbia, and the related HHS determinations. This effort included
reviewing the estimates and determinations for California, Florida,
Kentucky, Maryland, Massachusetts, Nevada, Ohio, Oregon, and Texas, as
well as the District of Columbia. We selected the estimates and
determinations for these entities to ensure, among other things, that we
reviewed (1) at least one state covered by each of the Division of Cost
Allocation’s four field offices; (2) a mixture of states that used either the
primary program method or the benefiting program method of cost
allocation; (3) a mixture of states that used either the optional formula
approach or analysis approach to calculate their estimates; (4) several
states in which HHS’ determination differed from the state’s cost estimate;
and (5) a mixture of states with relatively small, modest, or large
determinations of their Food Stamp reimbursement adjustments. We
discussed the cost estimates and determinations for these states with staff
in field offices of HHS’ Division of Cost Allocation. We also discussed these
estimates and determinations with staff of the Department’s Assistant
Secretary of Management and Budget. In addition, we reviewed the results
of an analysis prepared by HHS’ Office of the Inspector General in which
the Inspector General sought to determine whether Ohio and Texas used
the primary or program benefiting method of cost allocation to charge
common administrative costs to AFDC.21

We conducted our review from November 1998 through June 1999 in
accordance with generally accepted government auditing standards. We
did not independently verify the accuracy of the data contained in the
states’ cost estimates or in HHS’ related determinations.



21
  The Inspector General also performed a similar analysis for Virginia’s cost estimate submission.



Page 16                               GAO/RCED/AIMD-99-231 Food Stamp Administrative Costs
B-282992




We are sending copies of this report to appropriate congressional
committees; interested Members of Congress; the Honorable Dan
Glickman, Secretary of Agriculture; the Honorable Donna Shalala,
Secretary of Health and Human Services; the Honorable Jacob Lew,
Director of the Office of Management and Budget; and other interested
parties. We will also make copies available to others on request.

If you or your staff have any questions about this report, please contact me
or James Jones, Jr. at (202) 512-5138. Key contributors to this report were
Elaine Boudreau, Stephen Cleary, Brian Frasier, and Patricia Gleason.




Lawrence J. Dyckman
Director, Food and
Agriculture Issues




Page 17                    GAO/RCED/AIMD-99-231 Food Stamp Administrative Costs
Contents



Letter                                                                              1


Appendix I                                                                         20

Description of HHS’
Approaches for
Calculating Estimated
Reimbursement
Adjustments for the
Food Stamp Program
Appendix II                                                                        24

Comparison of States’
Estimates With HHS’
Determinations
Regarding Estimated
Reimbursement
Adjustments for the
Food Stamp Program
Appendix III                                                                       26

Approaches Used by
States and
Corresponding HHS
Actions to Calculate
Estimated
Reimbursement
Adjustments for the
Food Stamp Program




                        Page 18   GAO/RCED/AIMD-99-231 Food Stamp Administrative Costs
                         Contents




Appendix IV                                                                                        27

HHS’ Determinations
as a Percentage of
States’ Total
Reimbursements for
Food Stamp
Administrative Costs,
Fiscal Year 1997
Appendix V                                                                                         29

Summary of
Calculation Errors
GAO Found in HHS’
Determinations for
Seven States
Appendix VI                                                                                        32

Information on States’
Appeals of HHS’
Determinations
Appendix VII                                                                                       35

Comments From the
Department of Health
and Human Services


                         Abbreviations

                         AFDC       Aid to Families with Dependent Children
                         GAO        General Accounting Office
                         HHS        Department of Health and Human Services
                         TANF       Temporary Assistance for Needy Families
                         USDA       U.S. Department of Agriculture


                         Page 19                  GAO/RCED/AIMD-99-231 Food Stamp Administrative Costs
Appendix I

Description of HHS’ Approaches for
Calculating Estimated Reimbursement
Adjustments for the Food Stamp Program
              In July 1998, the Department of Health and Human Services (HHS)
              submitted to the states and the District of Columbia (hereafter referred to
              as “states”) for their comment a draft approach to be used by the states in
              estimating their administrative cost determinations for the Food Stamp
              Program and Medicaid.22 This approach, known as the “analysis
              approach,” was designed to provide the states with a means to determine
              (1) the administrative costs that were related to determining program
              participants’ eligibility and that were common to Aid to Families With
              Dependent Children (AFDC), the Food Stamp Program, and/or Medicaid,
              but that previously had been charged to AFDC only,23 and (2) the portion of
              these costs that could have been charged to the Food Stamp Program and
              Medicaid if a state had allocated costs on a program-by-program basis. In
              using the analysis approach, the states were required to have available
              program-specific cost data and related documentation to substantiate the
              manner in which they allocated common administrative costs during
              selected base periods.24

              In its comments on the draft approach, California proposed an alternative
              approach, suggesting that HHS make this approach available to the states
              lacking the specific data needed to use the analysis approach; among other
              things, this alternative approach made certain assumptions to compensate
              for the absence of data. HHS accepted California’s suggestion, with some
              modifications; this approach was called the “optional formula approach.”
              The Department’s final written guidance to the states regarding the
              calculation of reimbursement adjustments included both approaches.

              The allocation of costs common to several programs to just one of these
              programs, such as AFDC, is known as the primary program method of cost
              allocation. The allocation of common costs on a program-by-program
              basis according to the relative degree each program benefited from the
              activities associated with these costs is known as the benefiting program
              method of cost allocation.




              22
               The calculation of these determinations was required by the Agricultural Research, Extension, and
              Education Reform Act of 1998 (P.L. 105-185, June 23, 1998).
              23
                Before being replaced by another program, AFDC provided cash assistance to needy families to help
              meet their living expenses. The Food Stamp Program furnishes low-income recipients with coupons to
              increase their food purchasing power. Medicaid provides health insurance to eligible low-income or
              needy participants.
              24
                Each state’s base period was the corresponding year or years associated with the greater of (1) the
              average of the state’s total AFDC claims for fiscal years 1992 through 1994, (2) the state’s total AFDC
              claim for fiscal year 1994, or (3) the state’s total AFDC claim for fiscal year 1995.



              Page 20                               GAO/RCED/AIMD-99-231 Food Stamp Administrative Costs
                    Appendix I
                    Description of HHS’ Approaches for
                    Calculating Estimated Reimbursement
                    Adjustments for the Food Stamp Program




Analysis Approach   Under the analysis approach, a state first identified the activities and
                    associated costs that were related to determining the program
                    participant’s (or applicant’s) eligibility.25 The costs to be considered were
                    those related solely to administering the state’s AFDC assistance payments.
                    Accordingly, a state was allowed to exclude any administrative costs
                    charged to AFDC for other assistance programs, such as Foster Care,
                    Emergency Assistance, Job Opportunities and Basic Skills, and At-Risk
                    Child Care.

                    According to HHS’ definition, common costs subject to reimbursement
                    adjustments included those costs associated with staff actions in the local
                    welfare offices to complete and process a program participant’s
                    application for public assistance during a state’s base period. HHS’
                    definition also included costs associated with a number of other activities,
                    such as holding hearings and appeals to settle disputes regarding a
                    program participant’s eligibility; investigating fraud and abuse related to
                    the misuse of program benefits; maintaining case files, including the
                    periodic review of a program participant’s eligibility; staff training; and the
                    development of electronic databases, such as the Family Assistance
                    Management Information System, used to maintain information on
                    program participants. Relevant costs within the scope of HHS’ definition
                    also include those for local welfare office functions such as maintenance
                    and operations, including utility costs; general and administrative,
                    including management or overhead costs; and indirect, including the
                    purchase of office supplies.

                    A state then determined which of the costs associated with eligibility
                    determinations were allocated to AFDC following the primary program
                    method. HHS instructed the states to make these determinations by
                    reviewing their public assistance cost allocation plans in effect during
                    each state’s base period. Once a state made this determination, it had to
                    calculate the amount of these costs that were common to AFDC, the Food
                    Stamp Program, and/or Medicaid. These costs were considered common
                    because program applicants were often eligible for benefits under two or
                    more of these public assistance programs simultaneously. Data on the
                    number of applicants eligible for each of these programs or concurrently
                    eligible for two or more of these programs are known as case-mix data.

                    To determine the common costs associated with completing and
                    processing a participant’s application forms, a state used its case-mix data

                    25
                     States opting to use the analysis approach were given the flexibility to tailor it to their particular cost
                    accounting practices and the nature of the available data. Where certain data no longer existed, HHS
                    permitted the states to use approximations.



                    Page 21                                GAO/RCED/AIMD-99-231 Food Stamp Administrative Costs
                       Appendix I
                       Description of HHS’ Approaches for
                       Calculating Estimated Reimbursement
                       Adjustments for the Food Stamp Program




                       to calculate the costs of filling out these forms for this group. However,
                       this calculation applied only to the relevant portions of the form; some of
                       the information sought on an application form is unique to one program,
                       such as comparing an applicant’s earned income with AFDC’s eligibility
                       criteria. In cases in which a state lacked data on how much of its eligibility
                       determination costs were unique to AFDC, HHS guidance allowed the state to
                       assume 20 percent. On the other hand, if the state had the data needed to
                       substantiate a higher percentage, the guidance allowed the state to use this
                       larger number.

                       Once a state had calculated the total amount of its common costs related
                       to eligibility determinations, it had to determine the portions of these costs
                       that would constitute the reimbursement adjustments for the Food Stamp
                       Program and Medicaid. If available, the portion for each adjustment was
                       calculated using case-mix data. Accordingly, for cases involving applicants
                       eligible for all three programs—AFDC, the Food Stamp Program, and
                       Medicaid—the state assigned each program a one-third portion of the total
                       common administrative costs. For cases in which the applicants were
                       eligible for only two of the programs, either AFDC and Food Stamps or AFDC
                       and Medicaid, the state assigned each program a one-half portion of these
                       costs. If a state lacked case-mix data, HHS guidance provided that the state
                       should simply assign to each program a one-third portion of the state’s
                       common administrative costs related to eligibility determinations.


Optional Formula       Under the optional formula approach, states estimated their proposed
Approach               Food Stamp Program and Medicaid determinations by

                   •   starting with the federal share of total AFDC administrative costs for the
                       base period;

                   •   excluding any costs not related to AFDC assistance payment programs,
                       such as Emergency Assistance, Foster Care, Job Opportunities and Basic
                       Skills, and the At-Risk Child Care programs, to the extent they were
                       charged;26

                   •   deducting 20 percent of the administrative costs that were related to
                       assistance payments as being unique to AFDC; the remaining 80 percent
                       were assumed to be common to AFDC, the Food Stamp Program, and
                       Medicaid—also referred to as common costs; and


                       26
                         HHS required the states to document any costs excluded.



                       Page 22                             GAO/RCED/AIMD-99-231 Food Stamp Administrative Costs
    Appendix I
    Description of HHS’ Approaches for
    Calculating Estimated Reimbursement
    Adjustments for the Food Stamp Program




•   calculating the state’s Food Stamp and Medicaid determination as being
    one-third of the state’s computed common costs in each case.

    HHS allowed the states to modify the optional formula approach under
    certain circumstances. For example, if a state were able to show that it
    had allocated some of its base period AFDC costs following the benefiting
    program method, HHS allowed the state to exclude the AFDC share of these
    costs from its calculation. However, the state was required to document
    any costs excluded.




    Page 23                       GAO/RCED/AIMD-99-231 Food Stamp Administrative Costs
Appendix II

Comparison of States’ Estimates With HHS’
Determinations Regarding Estimated
Reimbursement Adjustments for the Food
Stamp Program
Dollars in millions
                                                                Difference in state’s
                       Amount of state’s     Amount of HHS’      estimate and HHS’      Reasons offered by
State                          estimate       determination            determination    HHS for differences
                                                                                                           a
Alabama                           $1.37               $1.37                       $0
                                                                                                           b,c
Alaska                                   0             1.05                     1.05
                                                                                                           a
Arizona                             5.68               5.68                        0
                                                                                                           a
Arkansas                            1.61               1.61                        0
                                                                                                           a
California                        58.85               58.85                        0
                                                                                                           c,d
Colorado                             .79               2.77                     1.98
                                                                                                           d,e,f
Connecticut                          .91               2.73                     1.82
                                                                                                           b,c
Delaware                                 0             1.00                     1.00
                                                                                                           d,g,h
District of Columbia                 .63               1.62                      .99
                                                                                                           e,f
Florida                             1.41              14.41                    13.00
                                                                                                           a
Georgia                                  0               0                         0
                                                                                                           a
Hawaii                                   0               0                         0
                                                                                                           b,c
Idaho                                    0             1.50                     1.50
                                                                                                           d,f,g,i
Illinois                            9.50               9.16                     –.34
                                                                                                           e,f,g
Indiana                              .95               1.11                      .16
                                                                                                           a
Iowa                                 .98                .98                        0
                                                                                                           g,h
Kansas                               .99               1.60                      .61
                                                                                                           b,c
Kentucky                                 0             4.30                     4.30
                                                                                                           b,c
Louisiana                                0             1.10                     1.10
                                                                                                           a
Maine                                .60                .60                        0
                                                                                                           a
Maryland                            1.19               1.19                        0
                                                                                                           a
Massachusetts                       2.08               2.08                        0
                                                                                                           d,f,g
Michigan                             .16               4.78                     4.62
                                                                                                           a
Minnesota                           2.38               2.38                        0
                                                                                                           c,d,g
Mississippi                          .98               2.10                     1.12
                                                                                                           a
Missouri                                 0               0                         0
                                                                                                           b,c
Montana                                  0              .65                      .65
                                                                                                           b,f
Nebraska                                 0              .55                      .55
                                                                                                           b,c
Nevada                                   0             1.78                     1.78
                                                                                                           d,h
New Hampshire                        .76                .88                      .12
                                                                                                           e,f,g
New Jersey                          8.67               9.13                      .46
                                                                                                           b,c
New Mexico                               0             1.42                     1.42
                                                                                                           f,g
New York                          55.60               63.33                     7.73
                                                                                                           a
North Carolina                           0               0                         0
                                                                                                           a
North Dakota                         .31                .31                        0
                                                                                                 (continued)



                               Page 24                  GAO/RCED/AIMD-99-231 Food Stamp Administrative Costs
                              Appendix II
                              Comparison of States’ Estimates With HHS’
                              Determinations Regarding Estimated
                              Reimbursement Adjustments for the Food
                              Stamp Program




Dollars in millions
                                                                              Difference in state’s
                      Amount of state’s              Amount of HHS’            estimate and HHS’             Reasons offered by
State                         estimate                determination                  determination           HHS for differences
                                                                                                                                      c,g
Ohio                                   .21                         5.84                          5.63
                                                                                                                                      b,c
Oklahoma                                 0                         4.12                          4.12
                                                                                                                                      e,h
Oregon                                2.48                         5.37                          2.89
                                                                                                                                      a
Pennsylvania                           .10                          .10                              0
                                                                                                                                      b,f
Rhode Island                             0                          .09                            .09
                                                                                                                                      d,h
South Carolina                         .45                         1.78                          1.33
                                                                                                                                      a
South Dakota                           .18                          .18                              0
                                                                                                                                      a
Tennessee                             2.26                         2.26                              0
                                                                                                                                      a
Texas                                    0                            0                              0
                                                                                                                                      a
Utah                                  1.14                         1.14                              0
                                                                                                                                      b,c
Vermont                                  0                          .44                            .44
                                                                                                                                      a
Virginia                                 0                            0                              0
                                                                                                                                      a
Washington                            2.28                         2.28                              0
                                                                                                                                      b,c
West Virginia                            0                          .57                            .57
                                                                                                                                      a
Wisconsin                                0                            0                              0
                                                                                                                                      g,h
Wyoming                                .38                          .39                            .01
Total                             $165.88                      $226.58                        $60.70

                              a
                                  No difference between the state’s submission and HHS’ determination.
                              b
                               Information contained in the state’s submission either failed to support or contradicted the state’s
                              claim that it allocated costs on a program-by-program basis (the benefiting program method of
                              cost allocation) rather than allocating common costs to one program (the primary program
                              method of cost allocation).
                              c
                               HHS used the optional formula approach to calculate its determination. This approach is
                              generally used in cases in which states lack reliable, program-specific cost data.
                              d
                               The state miscalculated the portion of its base period administrative costs that was common to
                              AFDC, the Food Stamp Program, and/or Medicaid.
                              e
                               The state miscalculated the portion of its common administrative costs that were attributable to
                              the Food Stamp Program and Medicaid.
                              f
                               HHS made adjustments to the state’s Food Stamp proposal using the analysis approach. This
                              approach is generally used in cases in which reliable, program-specific cost data are available.
                              g
                               The state did not include all of the base period administrative costs that HHS determined should
                              be included.
                              h
                                  HHS made adjustments to the optional formula approach as applied by the state.
                              i
                              The state included certain base period administrative costs that HHS determined should not have
                              been included.

                              Source: GAO’s analysis of HHS’ data and related correspondence.




                              Page 25                               GAO/RCED/AIMD-99-231 Food Stamp Administrative Costs
Appendix III

Approaches Used by States and
Corresponding HHS Actions to Calculate
Estimated Reimbursement Adjustments for
the Food Stamp Program
Approach used by state                          Action by HHS                                     Affected states
State claimed adjustment was unnecessary        HHS concurred with the state’s claim.             7 states—Georgia, Hawaii, Missouri, North
because it allocated costs on a program-by-                                                       Carolina, Texas, Virginia, and Wisconsin
program basis in its base period (benefiting
program method of cost allocation).
State claimed adjustment was unnecessary        HHS disagreed with the state’s claim; HHS 11 states—Alaska, Delaware, Idaho,
because it used the benefiting program          prepared its own determination using the  Kentucky, Louisiana, Montana, Nevada,
method in its base period.                      optional formula approach.                New Mexico, Oklahoma, Vermont, and
                                                                                          West Virginia
State claimed adjustment was unnecessary        HHS disagreed with the state’s claim; HHS 2 states—Nebraska and Rhode Island
because it used the benefiting program          prepared its own determination using the
method in its base period.                      analysis approach.
State calculated its adjustment using the       HHS concurred with the state’s final              5 states—Alabama, Arizona, Arkansas,
optional formula approach.                      submission.                                       California, and Utah
State calculated its adjustment using the       HHS made corrections to the states’s final        6 states—Kansas, New Hampshire,
optional formula approach.                      submission.                                       Oregon, South Carolina, Wyoming, and the
                                                                                                  District of Columbia
State calculated its adjustment using the       HHS concurred with the state’s final              3 states—Iowa, Pennsylvania, and South
analysis approach.                              submission.                                       Dakota
State calculated its adjustments using the      HHS made corrections to the state’s               7 states—Maine, Maryland,
analysis approach.                              preliminary submission; HHS concurred             Massachusetts, Minnesota, North Dakota,
                                                with the state’s final submission.                Tennessee, and Washington
State calculated its adjustment using the       HHS made corrections to the state’s final         7 states—Connecticut, Florida, Illinois,
analysis approach.                              submission.                                       Indiana, Michigan, New Jersey, and New
                                                                                                  York.
State calculated its adjustment using the       HHS rejected the state’s submission      3 states—Colorado, Mississippi, and Ohio
analysis approach.                              because of data sufficiency concerns;
                                                HHS prepared its own determination using
                                                the optional formula approach.
                                               Note: HHS generally did not consider a state submission to be “final” until the Division of Cost
                                               Allocation had reviewed the submission and provided the state with preliminary feedback. The
                                               final state submissions were then provided to the Assistant Secretary of Management and Budget
                                               for formal review.

                                               Source: GAO’s analysis of HHS’ information.




                                               Page 26                             GAO/RCED/AIMD-99-231 Food Stamp Administrative Costs
Appendix IV

HHS’ Determinations as a Percentage of
States’ Total Reimbursements for Food
Stamp Administrative Costs, Fiscal Year
1997
Dollars in millions
                       State’s total reimbursement
                                    for Food Stamp                                 HHS’ determination as a
                        administrative costs, fiscal                             percentage of state’s total
State                                     year 1997       HHS’ determination               reimbursement
Alabama                                      $28.68                    $1.37                              5
Alaska                                         7.44                      1.05                            14
Arizona                                       17.00                      5.68                            33
Arkansas                                      17.78                      1.61                             9
California                                   261.03                    58.85                             23
Colorado                                      14.60                      2.77                            19
Connecticut                                   13.32                      2.73                            20
Delaware                                       6.91                      1.00                            14
District of Columbia                           7.96                      1.62                            20
Florida                                       88.55                    14.41                             16
Georgia                                       53.39                        0                              0
Hawaii                                        10.26                        0                              0
Idaho                                          6.19                      1.50                            24
Illinois                                      67.59                      9.16                            14
Indiana                                       29.74                      1.11                             4
Iowa                                           9.83                       .98                            10
Kansas                                         8.65                      1.60                            18
Kentucky                                      27.64                      4.30                            16
Louisiana                                     41.01                      1.10                             3
Maine                                          6.36                       .60                             9
Maryland                                      18.88                      1.19                             6
Massachusetts                                 33.97                      2.08                             6
Michigan                                      68.93                      4.78                             7
Minnesota                                     31.96                      2.38                             7
Mississippi                                   26.09                      2.10                             8
Missouri                                      36.89                        0                              0
Montana                                        5.12                       .65                            13
Nebraska                                       7.83                       .55                             7
Nevada                                         7.03                      1.78                            25
New Hampshire                                  3.41                       .88                            26
New Jersey                                    73.42                      9.13                            12
New Mexico                                    15.52                      1.42                             9
New York                                     185.02                    63.33                             34
North Carolina                                37.50                        0                              0
North Dakota                                   4.36                       .31                             7
                                                                                                (continued)

                            Page 27                    GAO/RCED/AIMD-99-231 Food Stamp Administrative Costs
                           Appendix IV
                           HHS’ Determinations as a Percentage of
                           States’ Total Reimbursements for Food
                           Stamp Administrative Costs, Fiscal Year
                           1997




Dollars in millions
                      State’s total reimbursement
                                   for Food Stamp                                               HHS’ determination as a
                       administrative costs, fiscal                                           percentage of state’s total
State                                    year 1997                HHS’ determination                    reimbursement
Ohio                                           79.37                                5.84                               7
Oklahoma                                       25.14                                4.12                              16
Oregon                                         21.67                                5.37                              25
Pennsylvania                                   92.50                                 .10                      less than 1
Rhode Island                                    6.32                                 .09                               1
South Carolina                                 18.47                                1.78                              10
South Dakota                                    4.85                                 .18                               4
Tennessee                                      28.51                                2.26                               8
Texas                                        136.89                                    0                               0
Utah                                            8.85                                1.14                              13
Vermont                                         5.45                                 .44                               8
Virginia                                       54.53                                   0                               0
Washington                                     35.55                                2.28                               6
West Virginia                                   7.43                                 .57                               8
Wisconsin                                      30.15                                   0                               0
Wyoming                                         2.68                                 .39                              15
Total                                     $1,838.22                             $226.58                               12

                           Source: GAO’s analysis of HHS’ and U.S. Department of Agriculture’s data.




                           Page 28                            GAO/RCED/AIMD-99-231 Food Stamp Administrative Costs
Appendix V

Summary of Calculation Errors GAO Found
in HHS’ Determinations for Seven States


                                                                                     Amount of
                                                                                  determination          Difference
                                                                                   with error(s)      between HHS’
                                         Amount of Description of                     corrected       determination
                                              HHS’ the calculation               based on GAO         and corrected
              Statea                  determination error(s) made                      analysis       determination
              District of
                                                                             b
              Columbia                     $1,619,000                                $2,551,365             $932,365
                                                                             c
              Florida                      14,409,000                                14,642,917               233,917
                                                                             d
              Kentucky                      4,301,000                                 4,674,784               373,784
                                                                             e
              Maryland                      1,191,000                                 2,690,498             1,499,498
                                                                             f
              Nevada                        1,781,000                                 1,839,708                58,708
                                                                             g
              Ohio                          5,840,000                                11,399,763             5,559,763
                                                                             h
              Oregon                        5,370,000                                 5,512,427               142,427
              Total                      $34,511,000                               $43,311,462            $8,800,462
              Note: We reviewed the Food Stamp adjustments that HHS calculated for each of these states.
              These adjustments are based on HHS’ definition of common administrative costs for determining
              eligibility and assumptions regarding the percentage of these costs that were unique to Aid to
              Families With Dependent Children (AFDC). Our analysis solely focused on whether HHS made
              any calculation errors while calculating its determinations—it makes no attempt to modify HHS’
              definition or assumptions. Ultimately, any such changes will be the product of the ongoing
              appeals process between HHS and the states. We also recognize that some of the states we
              reviewed, for which the optional formula was applied to calculate their Food Stamp adjustments,
              might provide additional data during the mediation process that could significantly change the
              states’ Food Stamp adjustments.



              a
               Florida and Maryland used the analysis approach to estimate their food stamp adjustments; the
              optional formula approach was used to estimate the adjustments for the other states.
              b
                HHS initially determined that the appropriate base period for the District of Columbia was fiscal
              year 1994. However, HHS based its determination on partial accounting records and work
              sampling study data for fiscal year 1995 because it did not realize that it had data for the District
              of Columbia for fiscal year 1994. Using fiscal year 1994 data, HHS’ determination for the District
              of Columbia should have been $2,551,365, or about $932,365 more than HHS determined using
              fiscal year 1995 data.
              c
               In trying to compensate for errors that Florida made in estimating its food stamp adjustment,
              HHS added the state’s estimated adjustments for the Food Stamp Program and Medicaid
              together and allocated half of this total to each program. However, using Florida’s random
              moment work sampling data to distinguish which common costs could have been allocated
              specifically to the Food Stamp Program, we determined that HHS’ simplified approach
              underestimated Florida’s food stamp adjustment by $233,917.
              d
               In its determination for Kentucky, HHS did not exclude Child Care Program costs that averaged
              $570,809 annually from fiscal year 1992 through fiscal year 1994. In addition, HHS did not include
              an average of $3,517,658 in costs per annum related to maintaining the Family Assistance
              Management Information System during these years. The net result of these revisions yields a
              corrected determination of $4,674,784, or about $373,784 more than HHS determined.




              Page 29                               GAO/RCED/AIMD-99-231 Food Stamp Administrative Costs
Appendix V
Summary of Calculation Errors GAO Found
in HHS’ Determinations for Seven States




e
 In preparing its determination, HHS relied on Maryland’s cost estimate, overlooking a number of
errors in this estimate. Specifically, these errors included the state’s (1) failure to exclude all costs
related to the Emergency Assistance-Foster Care program, as provided for in HHS’ written
guidance; (2) inclusion of administrative costs in its allocation for Medicaid that should have been
allocated to the Food Stamp Program; (3) inclusion of costs associated with the state’s own public
assistance program in its allocations for Medicaid; (4) miscalculation of the total amount of
common administrative costs; and (5) miscalculation of the portion of the common costs that
should comprise the Food Stamp Program and Medicaid adjustments. Correcting these errors
yields an estimated reimbursement adjustment of $2,690,498, or $1,499,498 more than HHS’
determination.
f
 HHS applied the optional formula solely to “other administrative expenditures” totaling
$6,682,422; however, in fiscal year 1995 (the base period), the actual total of Nevada’s “other
administrative costs” was $8,634,705. HHS also incorrectly calculated the federal share of these
costs. In addition, HHS did not include costs related to the Family Assistance Management
Information System ($5,159,510) and the Systematic Alien Verification for Entitlements Program
($3,592). These errors resulted in HHS’ underestimating Nevada’s determination by $58,708.
g
  HHS did not exclude all costs associated with the Child Care Program, totaling $1,099,945 in
fiscal year 1994 (the base period), from its determination for Ohio. HHS also included only about
half of the AFDC administrative costs that the state claimed in that year—$21,374,556 instead of
$42,749,111. The net result of these revisions yields a corrected determination of $11,399,763,or
about $5,559,763 more than HHS’ determination.
h
 In fiscal year 1995, the total federal share of administrative costs claimed by Oregon was
$30,999,145; this was $908,380 higher than the amount HHS used in applying the optional
formula approach to calculate its determination for this state. This error resulted in HHS’
understating Oregon’s determination by $142,427.

The extent to which HHS’ underestimated its determinations for these seven states could be as
much as $15,291,253, in aggregate, if the Department had consistently followed its own written
guidance with respect to its determinations for the District of Columbia, Oregon, Maryland, and
Florida. Specifically, in the case of two of its determinations—those for the District of Columbia
and Oregon—HHS accepted state data that were not adequately supported. In the case of
Maryland, HHS failed to consider all base period administrative costs that potentially could have
been included in the Department’s determination. In the case of Florida, HHS accepted a
common cost rate that exceeded the 80-percent rate usually allowed by the Department.

The District of Columbia claimed that 52.8 percent of its administrative costs charged to AFDC
were unique to this program, a rate considerably higher than the 20-percent rate usually allowed
by HHS without documentation. Although it noted that the District of Columbia had not provided
adequate documentation, HHS accepted this rate. If the standard 20-percent were used, the
corrected determination for the District of Columbia (including corrections for the calculation
errors we previously noted) would be $4,324,347, or about $2.7 million more than HHS’
determination.

Oregon claimed that only 67 percent of its administrative costs were related to assistance
programs, whereas HHS’ guidance requires the states to assume that 100 percent of these costs
are related to these programs unless otherwise documented. HHS accepted Oregon’s claim,
even though the Department noted the claim was not adequately supported in the state’s
submission. If the 100-percent standard were used, the corrected determination for Oregon
(including corrections for the calculation errors we previously noted) would be $7,993,129, or
about $2.6 million more than HHS’ determination.




Page 30                                GAO/RCED/AIMD-99-231 Food Stamp Administrative Costs
Appendix V
Summary of Calculation Errors GAO Found
in HHS’ Determinations for Seven States




With respect to Maryland, we identified about $36.8 million in additional base period
administrative costs that were not considered by HHS. Specifically, HHS did not reconcile the
administrative costs included in Maryland’s cost estimate with the administrative costs actually
claimed by Maryland in its base year. Applying the optional formula approach on this amount
using a common cost rate of 31.97 percent (a rate that was determined by Maryland and
accepted by HHS), the total corrected determination for Maryland (including corrections for
calculation errors previously noted) could be as high as $6,617,361, or about $5.4 million more
than HHS’ determination.

Regarding Florida, our analysis of this state’s Food Stamp and Medicaid cost estimates indicates
that Florida used, in effect, a common cost rate of at least 90 percent for some of its costs.
However, HHS’ acceptance of this rate is inconsistent with the Department’s written guidance,
which sets the upper limit of common administrative costs at 80 percent (the other 20 percent
would be considered unique to AFDC). If the standard 80-percent rate is used, the corrected
determination for Florida (including corrections for calculation errors previously noted) would be
$12,953,161, or about $1.5 million less than HHS’ determination.

Source: GAO’s analysis of HHS’ data.




Page 31                              GAO/RCED/AIMD-99-231 Food Stamp Administrative Costs
Appendix VI

Information on States’ Appeals of HHS’
Determinations


                                                           Reason(s) for      Requested
               State                  Filed appeal         appeal             mediation
                                                           a                  a
               Alabama                No
                                                           b, c
               Alaska                 Yes                                     Yes
                                                           d
               Arizona                Yes                                     Yes
                                                           d
               Arkansas               Yes                                     Yes
                                                           a                  a
               California             No
                                                           e
               Colorado               Yes                                     Yes
                                                           d
               Connecticut            Yes                                     Yes
                                                           b
               Delaware               Yes                                     Yes
                                                           f
               District of Columbia   Yes                                     No
                                                           d
               Florida                Yes                                     Yes
                                           g               e
               Georgia                Yes                                     Yes
                                                           a                  a
               Hawaii                 No
                                                           d
               Idaho                  Yes                                     Yes
                                                           d
               Illinois               Yes                                     Yes
                                                           f, h, i, j
               Indiana                Yes                                     Yes
                                                           e
               Iowa                   Yes                                     No
                                                           a                  a
               Kansas                 No
                                                           e
               Kentucky               Yes                                     Yes
                                                           d
               Louisiana              Yes                                     Yes
                                                           a                  a
               Maine                  No
                                                           d
               Maryland               Yes                                     Yes
                                                           e
               Massachusetts          Yes                                     Yes
                                                           d
               Michigan               Yes                                     Yes
                                                           a                  a
               Minnesota              No
                                                           d
               Mississippi            Yes                                     Yes
                                                           a                  a
               Missouri               No
                                                           i, k
               Montana                Yes                                     No
                                                           d
               Nebraska               Yes                                     Yes
                                                           b
               Nevada                 Yes                                     Yes
                                                           c, i, l, m, n, o
               New Hampshire          Yes                                     Yes
                                                           d
               New Jersey             Yes                                     Yes
                                                           d
               New Mexico             Yes                                     Yes
                                                           i, o, p, q
               New York               Yes                                     Yes
               North Carolina         Yesg                 d
                                                                              Yes
                                                           d
               North Dakota           Yes                                     Yes
                                                           e
               Ohio                   Yes                                     No
                                                           d
               Oklahoma               Yes                                     Yes
                                                                                     (continued)


               Page 32                      GAO/RCED/AIMD-99-231 Food Stamp Administrative Costs
Appendix VI
Information on States’ Appeals of HHS’
Determinations




                                                         Reason(s) for           Requested
State                               Filed appeal         appeal                  mediation
                                                         i, r, s
Oregon                              Yes                                          Yes
                                                         a                       a
Pennsylvania                        No
                                                         d
Rhode Island                        Yes                                          Yes
                                                         e
South Carolina                      Yes                                          No
                                                         d
South Dakota                        Yes                                          Yes
                                                         d
Tennessee                           Yes                                          Yes
                                                         a                       a
Texas                               No
                                                         d
Utah                                Yes                                          Yes
                                                         d
Vermont                             Yes                                          Yes
                                                         a                       a
Virginia                            No
                                                         a                       a
Washington                          No
                                                         d
West Virginia                       Yes                                          Yes
                                         g               e
Wisconsin                           Yes                                          No
                                                         i,o
Wyoming                             Yes                                          Yes
Total                               40 states                                    34 states

Note: HHS did not require the states to cite the reasons for their appeals. The reasons included in
this appendix are those cited by states in their letters of appeal—other reasons might also apply.



a
    Not applicable.
b
 The state disagrees with HHS’ conclusion that the state charged all common administrative costs
to AFDC (the primary program method of cost allocation) during the state’s base period.
c
 The state contends that HHS’ determination fails to recognize that program applicants who were
determined to be eligible for AFDC benefits in the state were categorically (automatically)
considered eligible for the Food Stamp Program and/or Medicaid.
d
 The state maintains that HHS’ determination is inconsistent with provisions of the Agricultural
Research, Extension, and Education Reform Act of 1998 (Ag Reform Act).
e
    Reason not specified in state’s letter of appeal.
f
 The state contends that HHS failed to provide an adequate explanation, back-up documentation,
and/or calculations to support the adjustments HHS made to the state’s submission.
g
    The state is appealing HHS’ Medicaid determination only.
h
 The state disagrees with HHS’ conclusion that the state inappropriately allocated common
administrative costs between the Food Stamp Program and Medicaid.
i
The state contends that the scope of HHS’ definition of common administrative costs related to
making eligibility determinations exceeds the definition intended by the Ag Reform Act.




Page 33                                   GAO/RCED/AIMD-99-231 Food Stamp Administrative Costs
Appendix VI
Information on States’ Appeals of HHS’
Determinations




j
 The state maintains that some of the costs HHS included in making its determination were not
allocated to AFDC using the primary program method; instead, the state indicates that it allocated
these costs on a program-by-program basis (the benefiting program method of allocation), and
thus these costs should not have been included in HHS’ determination.
k
 HHS used the optional formula approach, which includes a number of assumptions regarding
the allocation of costs between programs, to calculate its determination for the state. The state
offers an alternative approach using program-specific cost data that the state contends will
provide a more accurate result.
l
The state maintains that HHS’ determination relies on uncertain and/or unsubstantiated
assumptions, unfairly burdening the state to disprove these assumptions.
m
 The state contends that HHS should have accepted the state’s method for excluding
administrative costs related to the Child Care and Emergency Assistance Programs from the
state’s submission.
n
 The state asserts that HHS, in developing its determination methodology, did not consult with the
state as required by the Ag Reform Act.
o
 The state contends that reductions in federal reimbursements for the state’s food stamp
administrative costs, as required by Ag Reform Act, violates the intent of the Unfunded Mandates
Reform Act of 1995. This latter act seeks to eliminate federal mandates that, in the absence of
related federal funding, may displace essential state, local or tribal governmental priorities by
shifting costs to these authorities.
p
 The state maintains that HHS mistakenly based its determination for the state on the amount of
the administrative cost reimbursement claimed by the state in its base year rather than the
amount of the reimbursement actually received by the state.
q
 The state contends that HHS’ issuance of written guidance that the states were required to follow
in calculating their administrative cost reimbursements constitutes the promulgation of
“substantive standards” subject to provisions of the Administrative Procedures Act, as amended.
Among other things, this act requires that federal agencies provide notice and an opportunity for
comment before adopting new substantive rules; the state asserts that HHS did not comply with
this provision.
r
The state questions how HHS, in preparing its determination for the state, calculated the portion
of the state’s administrative costs that were common to AFDC, the Food Stamp Program, and
Medicaid.
s
 The state disagrees with HHS’ determination of the portions of common administrative costs
attributed to the Food Stamp Program and Medicaid.

Source: GAO’s analysis of HHS’ and states’ information.




Page 34                              GAO/RCED/AIMD-99-231 Food Stamp Administrative Costs
Appendix VII

Comments From the Department of Health
and Human Services




               Page 35   GAO/RCED/AIMD-99-231 Food Stamp Administrative Costs
           Appendix VII
           Comments From the Department of Health
           and Human Services




(150091)   Page 36                       GAO/RCED/AIMD-99-231 Food Stamp Administrative Costs
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