The opinion of the court was delivered by: SCHEINDLIN
SHIRA A. SCHEINDLIN, U.S.D.J. :
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. A full explanation of the facts is found in this Court's previous Opinion, State of New York v. Shalala, 959 F. Supp. 614, 1997 WL 73574, at *1-2 (S.D.N.Y. 1997). Familiarity with that opinion is presumed. NYSDSS is responsible, inter alia, for administering and supervising federal public assistance programs. See Soc. Serv. Laws § 20. Its duties include filing and pursuing claims for federal reimbursement of the State's administrative costs incurred in running these programs. 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"). SSA processes state claims for reimbursement under those programs. See 42 U.S.C. §§ 421(e) and 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. 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 currently 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 A-87, Attachment ("Att.") B, § D.7. Prior to 1980, the Circular also provided that "the rental cost of space in a privately-owned building is allowable." A-87, Att. B, § C.2.a. The provision was amended in 1980 to allow "similar costs for publicly owned buildings newly occupied on or after October 1, 1980." See 45 Fed. Reg. 27363 (1980).
The administrative decisions appealed here involve lease costs for the NYSDSS headquarters building in Albany, New York during the period from fiscal year 1977 through fiscal year 1989. The Urban Development Corporation ["UDC"] arranged for construction between 1974 and 1976 of the Ten Eyck Building, located at 40 North Pearl Street, Albany, New York. Construction was financed through tax-free bonds. On April 15, 1974, UDC leased space in the Ten Eyck Building to the New York State Office of General Services ("OGS"), pursuant to a forty-year lease-purchase contract. Plaintiffs' Local Rule 3(g) Statement PP 7, 10, and 12. Rental costs were computed on the basis of development costs, interest on the bonds, appropriate maintenance and insurance costs, and payments in lieu of taxes. OGS assigned space to Plaintiffs who have occupied it since December 1976. OGS reports the cost of the space to NYSDSS which in turn claims federal reimbursement. Between April 1977 and March 1995, HHS reimbursed the State for building costs, including interest costs on the lease-purchase contract for the Ten Eyck Building on an annual basis. In 1995, HHS issued five disallowances for these interest costs, totaling $ 9,473,649. Id. at P 32.
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, 28 L. Ed. 2d 136, 91 S. Ct. 814 (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, 23 L. Ed. 2d 371, 89 S. Ct. 1794 (1969)).
A. DID HHS'S APPLICATION OF OMB A-87, PROHIBITING FEDERAL REIMBURSEMENT OF NEW YORK'S INTEREST ...