The opinion of the court was delivered by: LOUIS L. STANTON
Plaintiff State of New York Department of Social Services ("NYDSS" or the "State") seeks a declaratory judgment that it lawfully earned interest on funds that it received from the federal government for administering federal disability compensation programs, and an injunction barring defendants from disallowing its entitlement to those amounts. Both sides move pursuant to Fed. R. Civ. P. 56 for summary judgment. NYDSS also moves to supplement the administrative record.
The costs incurred by NYDSS in administering disability compensation programs under the Social Security Act (the "Act"), 42 U.S.C. §§ 401 et seq. and §§ 1381 et seq., are paid by the federal government "in advance or by way of reimbursement." 42 U.S.C. § 421(e). The amount of employee fringe benefits available to NYDSS under this arrangement is determined by annual agreements between the New York State Comptroller and the federal Department of Health and Human Services (the "HHS") Division of Cost Allocation (the "DCA"). At issue in this action is the timing of the State's requests for those benefit funds and its use of interest-bearing accounts. The State seeks to prevent the Social Security Administration (the "SSA") from recovering interest earned between 1980 and 1987 on federal funds designated for the State Public Employees' Retirement System ("PERS").
In 1987, the federal Department of Health and Human Services' Departmental Appeals Board (the "Board") held that the State's procedures for drawing funds were improper, but that the SSA had produced insufficient evidence to establish the amount of interest earned by the State. After additional audits, however, the Board subsequently affirmed SSA disallowances totaling $ 2,610,015. The State challenges those disallowances here.
This court may set aside decisions of the Board only if they are "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706(2)(A). See Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 416, 91 S. Ct. 814, 824, 28 L. Ed. 2d 136 (1971) ("The court is not empowered to substitute its judgment for that of the agency."). Furthermore, an agency's interpretation of a statute that it is charged to administer should be followed "'unless there are compelling indications that it is wrong.'" Weeks v. Quinlan, 838 F.2d 41, 43 (2d Cir. 1988), quoting Red Lion Broadcasting Co. v. FCC, 395 U.S. 367, 381, 89 S. Ct. 1794, 1802, 23 L. Ed. 2d 371 (1969).
2. Motion to Supplement the Record
NYDSS moves to supplement the administrative record with two agreements between the New York State Comptroller and the DCA dated 1984 and 1987. Defendants acknowledge that the agreements were the subject of attention throughout the administrative process, and have thoroughly briefed the relevant issues here. Since there is no unfair prejudice, the motion to supplement the record is granted. See Esch v. Yeutter, 278 U.S. App. D.C. 98, 876 F.2d 976, 991 (D.C. Cir. 1989) (administrative record may be supplemented "when an agency considered evidence which it failed to include in the record").
The Board reasonably concluded that the State was required to time its cash advances from the federal government closely to its actual disbursements into PERS. The regulations do not permit the State to retain funds beyond immediate cash needs. See 31 C.F.R. § 205.4(a):
Cash advances to a recipient organization shall be limited to the minimum amounts needed and shall be timed to be in accord only with the actual, immediate cash requirements of the recipient organization in carrying out the purpose of the approved program or project. The timing and amount of cash advances shall be as close as is administratively feasible to the actual disbursements by the recipient organization for direct program costs and the proportionate share of any allowable indirect costs.
The Board appropriately rejected the State's contention that it had complied with the regulations, finding that the "disbursements" occurred when funds were actually disbursed by the State, and not when the obligations accrued under the State's accounting system. It also reasonably concluded that interest earned by the State's premature acquisition of the funds constituted an "applicable credit," and therefore could not be retained. See 41 C.F.R. § 1-15.703-3(a)(1980-84)("applicable credits" defined as "those receipts or reductions of expenditure-type transactions which offset or reduce expense items allocable to grants as direct or indirect costs"); § 1-15.703-(g) (states are limited to reimbursement for necessary costs "net of all applicable credits"); ...