[Federal Register Volume 71, Number 187 (Wednesday, September 27, 2006)]
[Proposed Rules]
[Pages 56440-56442]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-15852]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Administration for Children and Families

45 CFR Part 263

RIN 0970-AC15


Cost Allocation Methodology Applicable to the Temporary 
Assistance for Needy Families Program

AGENCY: Administration for Children and Families (ACF), Department of 
Health and Human Services (HHS).

ACTION: Proposed rule.

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SUMMARY: The Administration for Children and Families proposes to 
regulate the cost allocation methodology to be used in the Temporary 
Assistance for Needy Families (TANF) program. The proposed rule would 
require States to use the ``benefiting program'' cost allocation 
methodology required by OMB Circular A-87 (2 CFR Part 225) and 
previously required under HHS' Office of Grants and Acquisition 
Management (OGAM) Action Transmittal (AT) 98-2.

DATES: We will consider all comments received on or before November 27, 
2006.

ADDRESSES: You may download an electronic version of the proposed rule 
at either of the following two Web Sites. You may submit comments, 
identified by Regulatory Information Number (RIN) 0970-AC, by the 
following methods:
     Federal Rulemaking Portal: http://www.regulations.gov.
     Agency Web Site: http://www.regulations.acf.hhs.gov. 
Follow the instructions for submitting comments.
     Mail: Administration for Children and Families, Office of 
Family Assistance (OFA), 5th Floor East, 370 L'Enfant Promenade, SW., 
Washington, DC 20447.
     Hand Delivery/Courier: Office of Family Assistance/ACF, 
5th Floor East, 901 D St., SW., Washington, DC 20447.
    Instructions: All comments received, including any personal 
information provided, will be posted without change to http://www.regulations.acf.hhs.gov. Comments will be available for public 
inspection Monday through Friday 8:30 a.m. to 5 p.m. at 901 D St., SW., 
5th Floor, Washington, DC.

FOR FURTHER INFORMATION CONTACT: Robert Shelbourne, Director, State 
TANF Policy Division at (202) 401-5150, [email protected].

SUPPLEMENTARY INFORMATION:

 I. Statutory Authority

    We are issuing this proposed regulation under the authority granted 
to the Secretary of Health and Human Services (HHS) by 42 U.S.C. 
1302(a). Section 1302(a) authorizes the Secretary to make and publish 
such rules as may be necessary for the efficient administration of 
functions with which he is charged under the Social Security Act.
    The statute at 42 U.S.C. 617 limits the authority of the Federal 
government to regulate State conduct or enforce the TANF provisions of 
the Social Security Act, except as expressly provided. We interpret 
this provision to allow us to regulate the use of a permissible cost 
allocation methodology because States and the Territories need to know 
what they may and may not do to avoid potential misuse of funds 
penalties at 42 U.S.C. 609(a)(1).
    Pursuant to 42 U.S.C. 609(a)(1), we may impose a financial penalty 
whenever a State misuses Federal TANF funds. The TANF regulations at 45 
CFR 263.11 address the proper and improper uses of Federal TANF funds. 
Section 263.11(b) sets forth the circumstances that constitute misuse 
of Federal funds. Use of Federal TANF funds in violation of any of the 
provisions in OMB Circular A-87 is one such circumstance. We are 
accordingly specifying that the ``benefiting program'' cost allocation 
methodology is the only allowable methodology for the proper use of 
Federal TANF funds.
    We are issuing the proposed rule in light of a decision of the 
Circuit Court of Appeals for the District of Columbia in Arizona v. 
Thompson, 281 F.3d 248 (DC Cir. 2002). The Appeals Court invalidated 
HHS' Office of Grants and Acquisition Management (OGAM) Action 
Transmittal (AT) 98-2, dated September 30, 1998, which required States 
to allocate costs to each ``benefiting program'' in accordance with OMB 
Circular A-87.

II. Background

    The Office of Management and Budget (OMB) has issued government-
wide standards for allocating the costs of government programs. 
Specifically, OMB Circular A-87, ``Cost Principles for State, Local and 
Indian Tribal Governments,'' provides that ``A cost is allocable to a 
particular cost objective if the goods or services involved are 
chargeable or assignable to such cost objective in accordance with 
relative benefits received.'' Thus, costs that benefit multiple 
programs may not be allocated to a single program. An illustrative way 
to determine whether multiple programs benefit from costs is to ask, 
for example: In the absence of the TANF program, would another program 
still have to undertake the function? If the answer is yes, there is a 
benefit to each program and the costs should be allocated using the 
``benefiting programs'' cost allocation method.
    The ``benefiting program'' cost allocation method applies to all 
Federal programs, unless there is a statutory or OMB-approved 
exception. Prior to enactment of the TANF program, HHS allowed States 
and the Territories to charge the common administrative costs of 
determining eligibility and case maintenance activities for the Food 
Stamp and Medicaid programs to the AFDC program--a so-called ``primary 
program'' allocation method. This exception to the ``benefiting 
program'' cost allocation requirement of OMB Circular A-87 was 
consistent with Conference Committee language indicating AFDC might pay 
for these common costs because families who were eligible for AFDC (the 
primary program) were also automatically eligible for Medicaid and met 
the categorical, but not necessarily the income, requirements of Food 
Stamps.
    The Personal Responsibility and Work Opportunity Reconciliation Act 
of 1996 (PRWORA) (Pub. L. 104-193) was enacted on August 22, 1996. 
Title I of PRWORA repealed the AFDC program and replaced it with the 
TANF program. Unlike AFDC, TANF eligibility no

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longer automatically makes a family eligible for Medicaid, and 
eligibility for certain TANF services and benefits do not lead to 
categorical eligibility for Food Stamps.
    As a result, HHS issued guidance prohibiting States from continuing 
to use the ``primary program'' allocation methodology. On September 30, 
1998, the Office of Grants and Acquisition Management (OGAM) in HHS 
issued OGAM Action Transmittal (AT) 98-2 which required States to 
allocate costs to each ``benefiting program'' in accordance with the 
provisions in OMB Circular A-87. According to the instructions and 
rationale in OGAM AT 98-2, ``Cost shifting (to a primary program) is 
not permitted by most program statutes, except where there is a 
specific legislative provision allowing such cost shifting. While the 
former AFDC program allowed such an exception, the TANF legislation 
that replaced AFDC does not permit it being designated as the sole 
benefiting or primary program.'' All States submitted revised cost 
allocation plans to comply with this policy and since then have 
continued to allocate Medicaid, Food Stamp and TANF costs in accordance 
with a ``benefiting'' methodology.
    Six States filed suit in District Court to prevent HHS from 
enforcing OGAM AT 98-2 (State of Arizona, et al., v. Tommy G. 
Thompson). The States alleged that they incur common administrative 
costs that benefit the TANF, Medicaid, and Food Stamp programs and 
contended that the ``grandfather provision'' under 42 U.S.C. 604(a)(2) 
permits them to use TANF grants as they did under the AFDC program. 
Section 604(a)(2) provides that States may use Federal TANF funds in 
any manner that the State was authorized to use Federal funds received 
under the State's former AFDC program, the Job Opportunities and Basic 
Skills Training (JOBS) program or the Emergency Assistance program in 
effect as of either September 30, 1995 or August 21, 1996, whichever 
date the State has elected.
    The District Court upheld the Department's position. However, the 
States appealed to the U.S. Court of Appeals for the District of 
Columbia Circuit (Court of Appeals). The Court of Appeals decided, on 
March 5, 2002, that the TANF legislation does not require HHS to 
conclude that States are prohibited from using the ``primary program'' 
cost allocation methodology. The Appeals Court found: ``the background 
against which Congress enacted welfare reform included both Circular A-
87's general principle of benefiting program allocation and its well-
recognized exception for the AFDC program.'' However, the Court left 
open the possibility that HHS could, in the exercise of its rulemaking 
discretion, prospectively prescribe that States use the ``benefiting 
program'' method to allocate common costs among programs. (281 F.3d 248 
(DC Cir. 2002)).

III. Discussion of Regulatory Provisions

    We propose to add the following new section to Part 263, Subpart B 
of the TANF regulations.

Section 263.14 What methodology shall a State use to allocate Federal 
TANF costs?

    In light of the Appeal Court's decision that PRWORA does not 
preclude a State's use of ``primary program'' cost allocation, we 
propose to require that States, the District of Columbia and the 
Territories (hereinafter referred to as the ``States'') shall use only 
the ``benefiting program'' cost allocation methodology. Requiring a 
``benefiting program'' cost allocation methodology is consistent with 
the TANF final rules which make the TANF program subject to 45 CFR Part 
92 and includes the cost principles of OMB Circular A-87.
    One of the fundamental Federal appropriation principles at 31 
U.S.C. 1301(a) states that appropriations can only be used for the 
purposes for which they were appropriated, unless otherwise provided by 
law. OMB Circular A-87 reflects this principle by requiring 
``benefiting program'' cost allocation. The overall purpose of OMB 
Circular A-87 is to achieve more efficient and uniform administration 
of Federal awards and to provide the foundation for greater uniformity 
in the costing procedures of non-Federal governments. Without an 
explicit legislative provision permitting ``primary program'' cost 
allocation, we believe it would be inconsistent with and contrary to 
these appropriation principles to allow TANF funds to be used to pay 
for costs allocable to other programs.
    Since the decision of the Appeals Court, no State has submitted a 
revised ``primary program'' cost allocation plan for allocating the 
common costs of determining eligibility or case maintenance for TANF, 
Food Stamps and Medicaid to HHS for approval. These were the primary 
common costs previously claimed and allowed under a ``primary program'' 
cost allocation methodology under the former AFDC program. We believe 
these are the common costs that could be claimed under the 
``grandfather'' provision of 42 U.S.C. 604(a)(2), if a ``primary 
program'' cost allocation method were allowed.
    Because TANF eligibility no longer automatically makes a family 
eligible for Medicaid, and eligibility for certain TANF services and 
benefits do not lead to categorical eligibility for Food Stamps, the 
common costs of eligibility among the three programs also is now 
limited. This and the 15 percent administrative cost cap under the TANF 
block grant severely restricts the value of using a ``primary program'' 
cost allocation methodology. Therefore, we are exercising the 
Secretary's discretion to require a ``benefiting program'' cost 
allocation methodology under TANF in accordance with OMB Circular A-87. 
This proposed rule, if finalized, will require States to make no 
changes to their TANF cost allocation plans, but instead will affirm 
and lock in place current cost allocation practice.
    Under the President's Management Agenda of improved accountability, 
each program needs to know its full costs using consistent and 
comparable data to assess program trends and measure performance. 
Appropriate program and funding decisions, both now and in the future, 
must be based on the knowledge and accounting of total program costs, 
including those costs incurred under a consistent benefiting program 
methodology. Under the proposed rule, we would no longer permit an 
exception to the benefiting program cost allocation methodology 
generally required under OMB Circular A-87 (as permitted for the AFDC 
program prior to the enactment of the TANF program). Thus, HHS will 
disapprove any TANF cost allocation amendments proposing a ``primary 
program'' cost allocation methodology.

IV. Paperwork Reduction Act of 1995

    This proposed rule contains no new information collection 
activities that are subject to review and approval by the Office of 
Management and Budget (OMB) under the Paperwork Reduction Act of 1995, 
codified at 44 U.S.C. 3507.

V. Regulatory Flexibility Analysis

    The Secretary certifies, under 5 U.S.C. 605(b), as enacted by the 
Regulatory Flexibility Act (Pub. L. 96-354), that this rule will not 
result in a significant impact on a substantial number of small 
entities. The primary impact is on State governments. State governments 
are not considered small entities under the Regulatory Flexibility Act.

VI. Regulatory Impact Analysis

    Executive Order 12866 requires that regulations be reviewed to 
ensure that they are consistent with the priorities and principles set 
forth in the Executive Order. The Department has determined

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that this rule is consistent with these priorities and principles. This 
rule is considered a ``significant regulatory action'' under the 
Executive Order, and therefore has been reviewed by the Office of 
Management and Budget.
    Since all States should be using a ``benefiting program'' cost 
allocation methodology under TANF, we believe the impact of this 
proposed rule is minimal. We do not believe the proposed policy will 
have a significant negative impact or reduce potential Federal 
reimbursement. Funding for TANF is a fixed block grant amount that is 
not affected by the allocation method.
    We welcome comments on our analysis and other circumstances that 
could impact on States and urge States to consider the interaction of 
the proposed policy on their operations. We will carefully consider 
these comments as we finalize the regulations.

VII. Unfunded Mandates Reform Act of 1995

    Section 202 of the Unfunded Mandates Reform Act of 1995 requires 
that a covered agency prepare a budgetary impact statement before 
promulgating a rule that includes any Federal mandate that may result 
in the expenditure by State, local, and Tribal governments, in the 
aggregate, or by the private sector, of $100 million or more in any one 
year.
    The Department has determined that this rule would not impose a 
mandate that will result in the expenditure by State, local, and Tribal 
governments, in the aggregate, or by the private sector, of more than 
$100 million in any one year.

VIII. Congressional Review

    This regulation is not a major rule as defined in 5 U.S.C. Chapter 
8.

IX. Assessment of Federal Regulation and Policies on Families

    Section 654 of The Treasury and General Government Appropriations 
Act of 1999 requires Federal agencies to determine whether a proposed 
policy or regulation may affect family well-being. If the agency's 
determination is affirmative, then the agency must prepare an impact 
assessment addressing seven criteria specified in the law. These 
regulations will not have an impact on family well-being as defined in 
the legislation.

X. Executive Order 13132

    Executive Order 13132 ``Federalism'' requires that Federal agencies 
consult with State and local government officials in the development of 
regulatory policies with Federalism implications. We solicit and 
welcome comments from State and local government officials on this 
proposed rule, consistent with Executive Order 13132.

List of Subjects in 45 CFR Part 263

    Grant programs--Federal aid programs, Penalties, Public assistance 
programs--Welfare programs.

    Dated: July 5, 2006.
Wade F. Horn,
Assistant Secretary for Children and Families.
    Approved: July 7, 2006.
Michael O. Leavitt,
Secretary of Health and Human Services.
    For the reasons set forth in the preamble, the Administration for 
Children and Families proposes to amend 45 CFR chapter II to read as 
follows:

PART 263--EXPENDITURES OF STATE AND FEDERAL TANF FUNDS

    1. The authority citation for 45 CFR part 263 continues to read as 
follows:

    Authority: 42 U.S.C. 604, 607, 609, and 862a.

    2. Add section 263.14 to subpart B to read as follows:


Sec.  263.14  What methodology shall a State or Territory use to 
allocate TANF costs?

    A State or Territory shall use a benefiting program cost allocation 
methodology consistent with the general requirements of OMB Circular A-
87 to allocate TANF costs.

 [FR Doc. E6-15852 Filed 9-26-06; 8:45 am]
BILLING CODE 4184-01-P