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February 19, 1997

THE STATE OF NEW YORK and the NEW YORK STATE DEPARTMENT OF SOCIAL SERVICES, Plaintiffs, against DONNA E. SHALALA, as Secretary of the United States Department of Health and Human Services, SHIRLEY CHATER, as Commissioner of the United States Social Security Administration, and ALICE M. RIVLIN, as Director of the Office of Management and Budget, Defendants.

The opinion of the court was delivered by: SCHEINDLIN


 Plaintiffs New York State Department of Social Services ("NYSDSS") and the State of New York (collectively "the State" or "Plaintiffs") appeal from several decisions of the Departmental Appeals Board ("DAB") of the United States Department of Health and Human Services ("HHS"). Plaintiffs seek judicial review of HHS's denial of federal reimbursement for interest costs the State incurred in the acquisition of computer equipment and building space used by the State to administer several social service programs that are partly funded by the federal government. Plaintiffs now move for summary judgment on their appeals of the DAB decisions denying them reimbursement for their computer equipment claims. Defendants cross-move for summary judgment on these same decisions. For the reasons stated below, Plaintiffs' motion is denied, and Defendants' motion is granted.


 A. Statutory and Regulatory Framework

 The disallowed administrative costs at issue in this action involve twelve federal public assistance programs that provide a variety of services to low income people. The programs include Social Security Disability ("SSD"), 42 U.S.C. § 420 et seq. ; Supplemental Security Income ("SSI"), 42 U.S.C. § 42 U.S.C. § 1381 et seq. ; Aid to Families with Dependent Children ("AFDC"), 42 U.S.C. § 601 et seq. ; Child Support Enforcement, 42 U.S.C. § 651 et seq. ; Foster Care and Adoption Assistance, 42 U.S.C. § 670 et seq. ; Refugee Assistance, 8 U.S.C. § 1521 et seq. ; Medicaid, 42 U.S.C. § 1396 et seq. ; Food Stamps, 7 U.S.C. § 2011 et seq. ; Home Energy Assistance, 42 U.S.C. § 8601 et seq. ; Work Incentive ("WIN"), 42 U.S.C. § 635 et seq. ; Job Opportunities and Basic Skills Training, 42 U.S.C. § 681 et seq. ; and Vocational Education programs, 20 U.S.C. § 2301 et seq. & 29 U.S.C. § 701 et seq. ("the Statutes").

 Plaintiff NYSDSS is responsible for administering and supervising at the state level all public assistance programs in New York, including federal programs. See Soc. Serv. Laws § 20. As part of its duties, NYSDSS files and pursues claims for federal reimbursement of the federal government's portion of the State's administrative costs incurred in running these programs. *fn1" Defendant HHS administers many of these programs at the federal level, with the exception of the SSD and SSI programs, which are administered by the Social Security Administration ("SSA"). *fn2" SSA processes state claims for reimbursement under those programs. See 42 U.S.C. §§ 421(e) & 1383(a).

 HHS and SSA have specific authority to determine what costs are "necessary" for the proper and efficient administration of the programs they run. See, e.g., 42 U.S.C. § 1396(b)(7) (Medicaid). After a determination that a cost is necessary, HHS and SSA decide whether all components of that necessary cost are "allowable". This decision is based on Office of Management and Budget ("OMB") Circular A-87 (the "Circular"), which sets forth cost principles for federal grants to State and local governments. *fn3" The Circular has the force of a regulation and is incorporated by reference at 45 C.F.R. § 74.27(a). In addition to describing general cost principles, the Circular delineates specific costs that are unallowable under federal grants. The provision of the Circular under which the costs at issue in this case were disallowed provides in relevant part:

Interest and other financial costs. Interest on borrowings (however represented), bond discounts, cost of financing and refinancing operations, and legal and professional fees paid in connection therewith, are unallowable except when authorized by Federal legislation.

 OMB Circular A-87, Attachment B, § D.7.

 B. The Appeals

 The administrative decisions under appeal here originated with three disallowances taken by components of HHS in the early 1990's. The first involved lease costs for the NYSDSS headquarters building in Albany, New York during the period from fiscal year 1977 through fiscal year 1989. A second disallowed interest payments on twelve lease purchase agreements entered into by the State's Department of Health for the procurement of computer hardware and software and related equipment for the period October 1, 1982 to March 31, 1988 ("the capital leases cases"). The third disallowance concerned interest paid on lease purchase agreements and certificates of participation ("COPS") by which the State purchased computer equipment for the period January 1, 1981 to March 31, 1991 (the "COPS case"). See Administrative Record of DAB Proceedings in DAB Nos. 1360, 1417 and 1537 ("AR") at 1016.

 The disallowance in the COPS case is the subject of this summary judgment motion. COPS are financing instruments utilized under the Internal Revenue Code to issue tax free bonds. Answer P 75. Prior to using COPS, NYSDSS had acquired computer equipment for the administration of various programs through a series of leases and purchase contracts with private computer companies. Id. at P 72. The State continued to lease computers until 1986, when it began refinancing the equipment with COPS. The proceeds from the sale of the bonds to investors were used to acquire the computer equipment, and repayment of the bonds satisfied the debt. Id. at P 75. The State alleges that COPS were the most economical method of procuring computer equipment, resulting in savings of at least $ 4.5 million. AR 1037.

 The COPS disallowances originated with two audits conducted by the HHS Office of the Inspector General. Answer P 80. These audits concluded that federal reimbursement for the interest on the COPS were improper. See HHS Audit, AR 1668-91. HHS adopted these conclusions and issued disallowances to NYSDSS in the amounts of $ 1,315,222 and $ 690,726 for the period April 1984 through March 1993. See AR 1016, 1513.

 The State appealed to the DAB. The DAB held that interest costs incurred pursuant to the issuance of COPS for the purchase of computer equipment were unallowable under the Circular, Att. B, § D.7. New York State Department of Social Services, DAB No. 1417 (1993), AR 37. *fn4" The DAB also upheld a later disallowance involving COPS, which is also on appeal and the subject of this motion. New York State Department of Social Services, DAB No. 1537 (1995), AR 47.

 On appeal from the DAB, the State argues that these disallowances were improper for a myriad of reasons. First, the State argues that HHS's application of the Circular to the State's interest costs conflicts with and therefore violates the various federal statutes governing all twelve programs. Next, the State asserts that HHS's application of the Circular is arbitrary and capricious. Finally, the State argues ...

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