Food Stamp Program: States Face Reduced Federal Reimbursements for
Administrative Costs (Letter Report, 07/23/1999, GAO/RCED/AIMD-99-231).

Pursuant to a legislative requirement, GAO reviewed the Department of
Health and Human Services' (HHS) efforts to reduce future federal
reimbursements of states' administrative costs for the Food Stamp
Program, focusing on: (1) 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; (2)
the reliability of HHS' determinations; and (3) what portion of common
administrative costs could have been charged to the Food Stamp Program.

GAO noted that: (1) HHS' determinations of the portion of common
administrative costs that could have been allocated to the Food Stamp
Program annually exceeded, in aggregate, the states' estimates for these
costs by $61 million; (2) 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; (3) 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; (4) four principal reasons cited by
HHS to explain the differences between its determinations and the
states' estimates were the following: (a) some states did not provide
sufficient data or information within the prescribed timeframes;
therefore HHS relied on a formula to make determinations; (b) some
states omitted administrative costs from their estimates that HHS
believes should have been included; (c) some states incorrectly
calculated or could not support their allocation of common
administrative costs; or (d) 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; (5) regarding the
reliability of HHS' determinations, GAO's review of HHS' determinations
for 10 states found significant calculation errors; (6) specifically,
GAO 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; (7) in addition, the states have raised a
number of concerns with HHS' methodology for calculating these
determinations; (8) in general, these states contend that the
Agricultural 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; and (9) 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

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED/AIMD-99-231
     TITLE:  Food Stamp Program: States Face Reduced Federal
	     Reimbursements for Administrative Costs
      DATE:  07/23/1999
   SUBJECT:  Administrative costs
	     Food relief programs
	     Federal/state relations
	     Intergovernmental fiscal relations
	     State-administered programs
	     Welfare benefits
IDENTIFIER:  Aid to Families with Dependent Children Program
	     Food Stamp Program
	     HHS Temporary Assistance for Needy Families Program
	     Medicaid Program
	     AFDC

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Cover
================================================================ COVER

Report to Congressional Committees

July 1999

FOOD STAMP PROGRAM - STATES FACE
REDUCED FEDERAL REIMBURSEMENTS FOR
ADMINISTRATIVE COSTS

GAO/RCED/AIMD-99-231

Food Stamp Administrative Costs

(150091)

Abbreviations
=============================================================== ABBREV

  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

Letter
=============================================================== LETTER

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 costsï¿½through 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 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. 

   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

HHS' determinations of the portion of common administrative costs
that 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 stateï¿½Illinois.  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. 

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 aggregateï¿½a 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. 

   BACKGROUND
------------------------------------------------------------ Letter :2

Prior to passage of the Welfare Reform Act, most states allocated at
least some common administrative costs related to qualifying
individuals applying for or receiving benefits under multiple public
assistance programsï¿½AFDC, 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 ï¿½primary programï¿½ 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 ï¿½benefiting programï¿½ method of cost allocation.  However, an
exception was made for the public assistance programs because (1) the
federal matching rate for administrative costsï¿½50 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 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 estimatesï¿½they 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 Virginiaï¿½at the
request of HHS' Assistant Secretary for Management and Budget. 
Specifically, the Assistant Secretary asked the Inspector General 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. 

--------------------
\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). 

\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 adjustmentï¿½calculated 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. 

\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 determinationï¿½it
only requires HHS to perform the calculations. 

\7 HHS generally did not consider a state submission to be ï¿½finalï¿½
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. 

\8 The Inspector General concluded that Ohio used the primary program
method and that Texas and Virginia used the benefiting program
method. 

   HHS' DETERMINATIONS OF FOOD
   STAMP ADMINISTRATIVE COSTS
   SUBSTANTIALLY EXCEED STATES'
   ESTIMATES
------------------------------------------------------------ Letter :3

HHS' determinations of the portion of common administrative costs
that should be allocated to the Food Stamp program 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, is included in their
TANF block grants based on common administrative costs attributable
to the Food Stamp Program that were 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 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. 

--------------------
\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. 

      STATES' ESTIMATES
---------------------------------------------------------- Letter :3.1

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. 

--------------------
\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. 

      HHS' DETERMINATIONS
---------------------------------------------------------- Letter :3.2

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 stateï¿½Illinois.  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. 

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 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. 

--------------------
\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 millionï¿½an amount equal to the Medicaid
costs that the state had charged, in its base period, to the Food
Stamp Program. 

\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. 

   CALCULATION ERRORS RAISE
   QUESTIONS ABOUT THE RELIABILITY
   OF HHS' DETERMINATIONS
------------------------------------------------------------ Letter :4

Calculation errors that we noted in reviewing a limited sample of
HHS' determinations raise questions about the reliability of these
determinations.  Specifically, we reviewed HHS' determinations for 10
of the 51 states (including the District of Columbia) and found
significant calculation errors in seven of these determinations.  The
calculation errors found in these determinations generally resulted
in an underestimation of 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 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
      ERRORS FOUND IN SEVEN HHS
      DETERMINATIONS
---------------------------------------------------------- Letter :4.1

In reviewing HHS' determinations for 10 statesï¿½California, Florida,
Kentucky, Maryland, Massachusetts, Nevada, Ohio, Oregon, Texas, and
the 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
statesï¿½Kentucky, 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 state's federal
share of administrative costs.  Specifically, HHS inadvertently
applied the federal matching rate for administrative costsï¿½50
percentï¿½twice 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. 

--------------------
\15 Our analysis focused solely on whether HHS made any calculation
errors while calculating its determinationsï¿½it 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. 

\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. 

      MANY STATES QUESTION HHS'
      DEFINITION OF COMMON
      ADMINISTRATIVE COSTS
---------------------------------------------------------- Letter :4.2

The Ag Reform Act requires HHS to identify the common administrative
costs associated with determining an applicant's eligibility for
benefits 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 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. 

--------------------
\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. 

      MANY STATES ALSO QUESTION
      HHS' ASSUMPTIONS REGARDING
      THE ALLOCATION OF COMMON
      ADMINISTRATIVE COSTS
---------------------------------------------------------- Letter :4.3

Many states also question HHS' assumptions regarding the allocation
of administrative costs that are common to the AFDC, Food Stamp, and
Medicaid programs.  Specifically, these states take issue with the
percentages that HHS uses to distinguish common costs allocated to
AFDC from costs that were unique to this program.  HHS developed
these 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 percentagesï¿½80 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
statesï¿½California and Illinoisï¿½and 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, 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
resolvedï¿½Iowa 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. 

   AGENCY COMMENTS
------------------------------------------------------------ Letter :5

We provided copies of a draft of this report to HHS, USDA, the
National 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 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 states 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
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. 

   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :6

In order to summarize HHS' administrative cost determinations,
related estimates provided by the states to HHS, and the reasons for
any 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
submissionsï¿½primarily 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 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 statesï¿½California,
Maryland, and Massachusettsï¿½to 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. 

--------------------
\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 ï¿½states,ï¿½ HHS required only the 50 states and
the District of Columbia to prepare cost estimate submissions;
similarly, HHS prepared determinations only for these entities. 

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

---------------------------------------------------------- Letter :6.1

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

DESCRIPTION OF HHS' APPROACHES FOR
CALCULATING ESTIMATED
REIMBURSEMENT ADJUSTMENTS FOR THE
FOOD STAMP PROGRAM
=========================================================== Appendix I

In July 1998, the Department of Health and Human Services (HHS)
submitted to the states and the District of Columbia (hereafter
referred to as ï¿½statesï¿½) 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 ï¿½analysis approach,ï¿½ 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 ï¿½optional formula approach.ï¿½ 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. 

      ANALYSIS APPROACH
------------------------------------------------------- Appendix I:0.1

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 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 Medicaidï¿½the 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. 

--------------------
\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. 

      OPTIONAL FORMULA APPROACH
------------------------------------------------------- Appendix I:0.2

Under the optional formula approach, states estimated their proposed
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 Medicaidï¿½also referred to as common costs;
     and

  -- 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. 

--------------------
\26 HHS required the states to document any costs excluded. 

COMPARISON OF STATES' ESTIMATES
WITH HHS' DETERMINATIONS REGARDING
ESTIMATED REIMBURSEMENT
ADJUSTMENTS FOR THE FOOD STAMP
PROGRAM
========================================================== Appendix II

                                  (Dollars in millions)

                                                          Difference in
                                                       state's estimate   Reasons offered
                          Amount of    Amount of HHS'          and HHS'        by HHS for
State              state's estimate     determination     determination       differences
-----------------  ----------------  ----------------  ----------------  ----------------
Alabama                       $1.37             $1.37                $0                \a
Alaska                            0              1.05              1.05              \b,c
Arizona                        5.68              5.68                 0                \a
Arkansas                       1.61              1.61                 0                \a
California                    58.85             58.85                 0                \a
Colorado                        .79              2.77              1.98              \c,d
Connecticut                     .91              2.73              1.82            \d,e,f
Delaware                          0              1.00              1.00              \b,c
District of                     .63              1.62               .99            \d,g,h
 Columbia
Florida                        1.41             14.41             13.00              \e,f
Georgia                           0                 0                 0                \a
Hawaii                            0                 0                 0                \a
Idaho                             0              1.50              1.50              \b,c
Illinois                       9.50              9.16              -.34          \d,f,g,i
Indiana                         .95              1.11               .16            \e,f,g
Iowa                            .98               .98                 0                \a
Kansas                          .99              1.60               .61              \g,h
Kentucky                          0              4.30              4.30              \b,c
Louisiana                         0              1.10              1.10              \b,c
Maine                           .60               .60                 0                \a
Maryland                       1.19              1.19                 0                \a
Massachusetts                  2.08              2.08                 0                \a
Michigan                        .16              4.78              4.62            \d,f,g
Minnesota                      2.38              2.38                 0                \a
Mississippi                     .98              2.10              1.12            \c,d,g
Missouri                          0                 0                 0                \a
Montana                           0               .65               .65              \b,c
Nebraska                          0               .55               .55              \b,f
Nevada                            0              1.78              1.78              \b,c
New Hampshire                   .76               .88               .12              \d,h
New Jersey                     8.67              9.13               .46            \e,f,g
New Mexico                        0              1.42              1.42              \b,c
New York                      55.60             63.33              7.73              \f,g
North Carolina                    0                 0                 0                \a
North Dakota                    .31               .31                 0                \a
Ohio                            .21              5.84              5.63              \c,g
Oklahoma                          0              4.12              4.12              \b,c
Oregon                         2.48              5.37              2.89              \e,h
Pennsylvania                    .10               .10                 0                \a
Rhode Island                      0               .09               .09              \b,f
South Carolina                  .45              1.78              1.33              \d,h
South Dakota                    .18               .18                 0                \a
Tennessee                      2.26              2.26                 0                \a
Texas                             0                 0                 0                \a
Utah                           1.14              1.14                 0                \a
Vermont                           0               .44               .44              \b,c
Virginia                          0                 0                 0                \a
Washington                     2.28              2.28                 0                \a
West Virginia                     0               .57               .57              \b,c
Wisconsin                         0                 0                 0                \a
Wyoming                         .38               .39               .01              \g,h
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. 

APPROACHES USED BY STATES AND
CORRESPONDING HHS ACTIONS TO
CALCULATE ESTIMATED REIMBURSEMENT
ADJUSTMENTS FOR THE FOOD STAMP
PROGRAM
========================================================= Appendix III

Approach used by state         Action by HHS                 Affected states
-----------------------------  ----------------------------  ----------------------------
State claimed adjustment was   HHS concurred with the        7 statesï¿½Georgia, Hawaii,
unnecessary because it         state's claim.                Missouri, North Carolina,
allocated costs on a program-                                Texas, Virginia, and
by-program basis in its base                                 Wisconsin
period (benefiting program
method of cost allocation).

State claimed adjustment was   HHS disagreed with the        11 statesï¿½Alaska, Delaware,
unnecessary because it used    state's claim; HHS prepared   Idaho, Kentucky, Louisiana,
the benefiting program method  its own determination using   Montana, Nevada, New Mexico,
in its base period.            the optional formula          Oklahoma, Vermont, and West
                               approach.                     Virginia

State claimed adjustment was   HHS disagreed with the        2 statesï¿½Nebraska and Rhode
unnecessary because it used    state's claim; HHS prepared   Island
the benefiting program method  its own determination using
in its base period.            the analysis approach.

State calculated its           HHS concurred with the        5 statesï¿½Alabama, Arizona,
adjustment using the optional  state's final submission.     Arkansas, California, and
formula approach.                                            Utah

State calculated its           HHS made corrections to the   6 statesï¿½Kansas, New
adjustment using the optional  states's final submission.    Hampshire, Oregon, South
formula approach.                                            Carolina, Wyoming, and the
                                                             District of Columbia

State calculated its           HHS concurred with the        3 statesï¿½Iowa, Pennsylvania,
adjustment using the analysis  state's final submission.     and South Dakota
approach.

State calculated its           HHS made corrections to the   7 statesï¿½Maine, Maryland,
adjustments using the          state's preliminary           Massachusetts, Minnesota,
analysis approach.             submission; HHS concurred     North Dakota, Tennessee, and
                               with the state's final        Washington
                               submission.

State calculated its           HHS made corrections to the   7 statesï¿½Connecticut,
adjustment using the analysis  state's final submission.     Florida, Illinois, Indiana,
approach.                                                    Michigan, New Jersey, and
                                                             New York.

State calculated its           HHS rejected the state's      3 statesï¿½Colorado,
adjustment using the analysis  submission because of data    Mississippi, and Ohio
approach.                      sufficiency concerns; HHS
                               prepared its own
                               determination using the
                               optional formula approach.
-----------------------------------------------------------------------------------------
Note:  HHS generally did not consider a state submission to be
ï¿½finalï¿½ 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. 

HHS' DETERMINATIONS AS A
PERCENTAGE OF STATES' TOTAL
REIMBURSEMENTS FOR FOOD STAMP
ADMINISTRATIVE COSTS, FISCAL YEAR
1997
========================================================== Appendix IV

                                  (Dollars in millions)

                                State's total
                            reimbursement for
                                   Food Stamp                          HHS' determination
                               administrative                          as a percentage of
                           costs, fiscal year                               state's total
State                                    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
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. 

SUMMARY OF CALCULATION ERRORS GAO
FOUND IN HHS' DETERMINATIONS FOR
SEVEN STATES
=========================================================== Appendix V

                                                 Amount of  Difference
                                                determinat     between
                                                  ion with        HHS'
                                    Descriptio    error(s)  determinat
                         Amount of    n of the   corrected     ion and
                              HHS'  calculatio    based on   corrected
                        determinat  n error(s)         GAO  determinat
State\a                        ion        made    analysis         ion
----------------------  ----------  ----------  ----------  ----------
District of Columbia    $1,619,000          \b  $2,551,365    $932,365
Florida                 14,409,000          \c  14,642,917     233,917
Kentucky                 4,301,000          \d   4,674,784     373,784
Maryland                 1,191,000          \e   2,690,498   1,499,498
Nevada                   1,781,000          \f   1,839,708      58,708
Ohio                     5,840,000          \g  11,399,763   5,559,763
Oregon                   5,370,000          \h   5,512,427     142,427
======================================================================
Total                   $34,511,00              $43,311,46  $8,800,462
                                 0                       2
----------------------------------------------------------------------
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 determinationsï¿½it 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. 

\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 ï¿½other administrative
expendituresï¿½ totaling $6,682,422; however, in fiscal year 1995 (the
base period), the actual total of Nevada's ï¿½other administrative
costsï¿½ 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. 

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. 

INFORMATION ON STATES' APPEALS OF
HHS' DETERMINATIONS
========================================================== Appendix VI

                                            Reason(s)     Requested
State                         Filed appeal  for appeal    mediation
----------------------------  ------------  ------------  ------------
Alabama                       No            \a            \a

Alaska                        Yes           \b, c         Yes

Arizona                       Yes           \d            Yes

Arkansas                      Yes           \d            Yes

California                    No            \a            \a

Colorado                      Yes           \e            Yes

Connecticut                   Yes           \d            Yes

Delaware                      Yes           \b            Yes

District of Columbia          Yes           \f            No

Florida                       Yes           \d            Yes

Georgia                       Yes\g         \e            Yes

Hawaii                        No            \a\           \a

Idaho                         Yes           \d            Yes

Illinois                      Yes           \d            Yes

Indiana                       Yes           \f, h, i, j   Yes

Iowa                          Yes           \e            No

Kansas                        No            \a            \a

Kentucky                      Yes           \e            Yes

Louisiana                     Yes           \d            Yes

Maine                         No            \a            \a

Maryland                      Yes           \d            Yes

Massachusetts                 Yes           \e            Yes

Michigan                      Yes           \d            Yes

Minnesota                     No            \a            \a

Mississippi                   Yes           \d            Yes

Missouri                      No            \a            \a

Montana                       Yes           \i, k         No

Nebraska                      Yes           \d            Yes

Nevada                        Yes           \b            Yes

New Hampshire                 Yes           \c, i, l, m,  Yes
                                            n, o

New Jersey                    Yes           \d            Yes

New Mexico                    Yes           \d            Yes

New York                      Yes           \i, o, p, q   Yes

North Carolina                Yes\g         \d            Yes

North Dakota                  Yes           \d            Yes

Ohio                          Yes           \e            No

Oklahoma                      Yes           \d            Yes

Oregon                        Yes           \i, r, s      Yes

Pennsylvania                  No            \a            \a

Rhode Island                  Yes           \d            Yes

South Carolina                Yes           \e            No

South Dakota                  Yes           \d            Yes

Tennessee                     Yes           \d            Yes

Texas                         No            \a            \a

Utah                          Yes           \d            Yes

Vermont                       Yes           \d            Yes

Virginia                      No            \a            \a

Washington                    No            \a            \a

West Virginia                 Yes           \d            Yes

Wisconsin                     Yes           \e            No

Wyoming                       Yes           \i,o          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 appealï¿½other 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. 

\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 ï¿½substantive
standardsï¿½ 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. 

(See figure in printed edition.)Appendix VII
COMMENTS FROM THE DEPARTMENT OF
HEALTH AND HUMAN SERVICES
========================================================== Appendix VI

(See figure in printed edition.)

*** End of document. ***