bearing on the authority of OMB. In fact, 41 U.S.C. § 405(h) reads in relevant part, "nothing in this chapter shall be construed to . . . . (2) limit the current authorities of the Director of the Office of Management and Budget." Plaintiff does not contend that the Director of OMB faces any restriction as to issuing guidance regarding the procurement of real property. OFPPA did not limit OMB's authority to issue the Circular, nor does the Act affect the Circular's terms. Thus, the application of OMB A-87 does not violate the OFPPA.
B. HAS HHS CORRECTLY DETERMINED THAT INTEREST EXPENSES RELATING TO THE TEN EYCK BUILDING ARE NOT ALLOWABLE UNDER OMB A-87?
In reviewing an agency's construction of a statute, the threshold question is whether Congress has addressed the precise question at issue. State of New York Department of Social Services v. Shalala, 21 F.3d 485, 491 (2d Cir. 1994). If Congress has done so, a reviewing court must "give effect to Congress's expressed intent." Id. (citing Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-43, 81 L. Ed. 2d 694, 104 S. Ct. 2778 (1984)). When a statute is silent or ambiguous, a court must defer to the agency's interpretation of the statute if that interpretation is based on a permissible construction of the statute and is sufficiently reasonable. Id. at 844-45.
As amended, the Circular permits reimbursement of interest costs relating to the rental of building space only "if the lease is either (a) with a private landlord or (b) for space in publicly-owned buildings which are first occupied after October 1, 1980." OMB A-87, Att. B, § C.2. Plaintiff attacks the DAB's ruling on several grounds, arguing that: (1) the building is privately-owned; (2) the pre-1980 distinction between public and private was unreasonable; (3) the use of an occupancy date cutoff was unreasonable; and (4) that the 1980 extension of reimbursement for publicly-owned buildings should be applied retroactively.
1. Is the Ten Eyck Building publicly or privately owned?
The State contends that the Ten Eyck Building is privately owned, making rental space reimbursable under the version of the Circular in force between 1973 and 1981. As noted above, the building is owned by the Urban Development Corporation ("UDC") and leased to the State through the State Office of General Services ("OGS"). NYSDSS occupied the Ten Eyck space in 1976. As part of the rental costs, the State also pays interest on the forty-year public bonds issued in 1974 to finance the building. When the bonds are paid off, the UDC will transfer its ownership of the building to the State.
The Circular does not itself define public or private ownership. However, both the laws of New York State and the courts have consistently defined the UDC as a public entity. Section 6254(1) of the New York Unconsolidated Laws includes the following language: "There is hereby created the New York State Urban Development Corporation. The Corporation shall be a corporate governmental agency of the state, constituting a political subdivision and public benefit corporation." See also Cine 42nd Street Theater Corp. v. Nederlander Org., 790 F.2d 1032, 1035 (2d Cir. 1986)(the UDC is "a corporate governmental agency of the state, constituting a political subdivision and public benefit corporation."). Courts interpreting § 6254(1) have concluded that while the UDC is distinguishable from the State, it is still a public rather than private entity. U.S. v. Yonkers, 880 F. Supp. 212, 244-45 (S.D.N.Y. 1995)("the UDC is the legal equivalent of a municipality."). The Ten Eyck Building has been owned by the UDC since it was first occupied in 1976. Therefore, the DAB was correct to reject Plaintiffs' characterization of the Ten Eyck Building as privately owned.
2. Was the distinction between public and private buildings reasonable?
Plaintiffs next argue that the distinction between public and private buildings was never a reasonable basis for determining whether interest is reimbursable. Plaintiffs claim this policy is arbitrary and capricious because it results in denial of reimbursement only for publicly-owned buildings first occupied between 1968 and 1980.
The general policy underlying the Circular is to ensure that federally assisted programs "bear their fair share of costs . . . except where restricted or prohibited by law. No provision for profit or other increment above cost is intended." A-87, Att. A, § A.1. Prior to 1980, HHS distinguished between public and private ownership to prevent a state from making a profit from "renting" space from itself in buildings it already owned, and then charging HHS for the cost. The distinction aimed to discourage states from creating "sham" leases that would "obscure the reality of State ownership." DAB Decision No. 1336 at 5. States were entitled to reimbursement for the genuine cost of leasing or renting from a private vendor. A-87, Att. A, § A.1.
As applied here, the State notes that rather than saving HHS money, adherence to this regulation costs HHS money, because the State's lease with UDC was cost effective and did not result in a profit to the state. Even if these assertions are true, as I previously held, "HHS must promulgate regulations that apply to many different agencies, in several contexts. General application is an essential attribute of regulations." State of New York, 1997 WL 73574, at *6, n. 8. Because HHS may pay more money in this instance does not negate the presumptive reasonableness of the regulation or of its application. The pre-1980 distinction between public and private ownership, as applied by Defendants to the Ten Eyck Building, was reasonable.
3. Is the October 1980 Occupancy Requirement reasonable?
The change in October 1980 that allowed reimbursement of interest on rental costs of publicly-owned buildings was not retroactive; the enhanced reimbursements applied only to publicly owned buildings initially occupied after October 1980. Plaintiffs first argue that it was unreasonable for HHS to choose "date of occupancy" as the operative date for reimbursement purposes. Instead, Plaintiffs contend that the State should have permitted reimbursement of all interest costs accrued after October 1, 1980 on all buildings rather than limiting reimbursement only to buildings occupied after that date. Plaintiffs complain that occupancy date is not used for other types of reimbursement, and therefore that it is arbitrary and unreasonable.
I do not find occupancy date to be an unreasonable limitation on reimbursement of interest costs for buildings. First, for public buildings occupied prior to 1980, when the regulation was passed, a grantee had no reason to contract with HHS with this form of reimbursement in mind. Only those grantees who occupied public buildings subsequent to its passage have been induced to reasonably rely on this reimbursement.
Therefore, I find that the use of a occupancy date was a reasonable means of applying the regulation prospectively. Although the State contends that other bases for reimbursement would be more reasonable, e.g. the quarter in which the expense was recorded in state accounting records, the agency's decision need not be the most reasonable as long as it is not arbitrary and capricious.
4. Should the change in the lease provision have been retroactive?
The State next argues that HHS's failure to extend this benefit retroactively was unfair and irrational. Plaintiffs contend that the factors outlined in New York Telephone Co. v. F.C.C., 631 F.2d 1059, 1068 (2d Cir. 1980), are those a court should use "for determining whether an administrative policy should be applied retroactively." Plaintiffs simply misconstrue New York Telephone. That case established factors that a court should use to determine if an agency may issue an administrative policy retroactively, if the agency chooses to do so. Id. at 1067-68. The fact that in some instances a reviewing court may permit an agency to apply changes retroactively does not mean that an agency would otherwise be obliged to apply that change retroactively. New York Telephone does not require a court to compel the agency to make a retroactive change.
With respect to retroactivity, the DAB found that
the establishment of a clear cut-off date . . . promoted certainty, prevented efforts to reopen innumerable prior claims on state buildings, avoided windfalls to states which had no reason to anticipate such additional recovery before the revision, and encouraged states to move operations from private to public facilities (rather than simply mortgaging existing property).
DAB Decision No. 1336 at 13 (citing 45 Fed. Reg. 27,363). These reasons are neither irrational nor unreasonable. In fact, they are eminently sensible. As such, I decline to set aside the DAB's ruling with respect to retroactivity.
C. ARE THE STATE'S INTEREST COSTS FOR THE TEN EYCK BUILDING REIMBURSABLE UNDER THE LEASE PURCHASE PROVISION OF OMB A-87?
Section C.2.e of OMB A-87's Attachment B provides for reimbursement of state grantees' costs of acquiring building space by lease-option-to-purchase or rental-purchase. This provision reads in full: "Occupancy of space under rental-purchase or lease option-to-purchase agreement. The cost of space procured under such arrangements is allowable when specifically approved by the Federal grantor agency [here HHS]." This section falls under the category of "Costs allowable with approval of grantor agency." The other types of costs that may be approved are listed by section: 1) automatic data processing; 2) building space and related facilities; 2a) rental cost; 2b) maintenance and operation; 2c) rearrangement and alterations; 2d) depreciation and use allowance in publicly owned buildings; 3) capital expenditures; and various forms of 4) insurance and indemnification.
Section C.2.e does not limit reimbursement to privately-owned buildings. Plaintiffs contend that because they leased the Ten Eyck Building, they should be reimbursed for interest costs even if the Ten Eyck Building is found to be publicly-owned. The DAB held that § C.2.e is inapplicable here because the State already owns the Ten Eyck Building and therefore is not renting it. In so finding, the DAB ruled that the UDC and the State's interests were so closely aligned that they could not be said to have engaged in the type of arms' length negotiation over building space required to satisfy the rental-purchase or the lease component of this section. While this may be so, it is irrelevant. The State clearly fails to establish a critical requirement for reimbursement under § C.2.e -- approval by HHS.
The DAB found that Plaintiffs had neither sought nor received specific approval from HHS for the Ten Eyck Building lease. While essentially conceding that HHS did not approve the actual cost of leasing the Ten Eyck Building, see Pls.' Mem. at 25, Plaintiffs claimed before the DAB and again on this appeal that the State did not need explicit approval because its Cost Allocation Plans ("CAPs"), which disclose some costs attributable to the use of the Ten Eyck building, had been approved annually by HHS. In other words, the State contends that because HHS approved the procedures to allocate costs among the various agencies using the Ten Eyck space, the lease agreement for the space itself was also approved.
This "implicit" approval method proposed by the State makes no sense, particularly in light of § C.2.e's requirement that specific approval be sought and obtained for all lease-option-to-purchase agreements on building space.
Implicit approval does not qualify as specific approval. I therefore uphold the DAB's finding that the State did not obtain approval for the Ten Eyck building lease.
D. REIMBURSEMENT UNDER THE HANDBOOK FOR PUBLIC ASSISTANCE
The State also contends that section 4532.5 of the Handbook for Public Assistance ("Handbook") required reimbursement of interest costs relating to the use of public buildings from 1963, when it was issued, until the 1980 revision of OMB A-87.
This section permitted acceleration of depreciation claims up to 75 percent of comparable private rental rates, or higher than 75 percent with approval from HHS.
The DAB rejected Plaintiffs' reliance on the Handbook for two reasons: first, because it found that section 4532.5 does not apply, and second, because OMB A-87 superseded the Handbook when it was issued in 1973 insofar as there was any conflict in their provisions.
The DAB concluded that the State misinterpreted section 4532.5, in large part because this section "uses comparable rental only as a benchmark for accelerating depreciation recovery." See DAB Decision No. 1336 at 16. Plaintiff extracts a portion of this lengthy directive -- "Federal financial participation . . . might include the interest on monies secured from public or private sources" -- and attempts to divorce it entirely from its context -- claims for accelerated depreciation. Plaintiffs' only explanation for this novel method of interpretation is that "the Handbook's reference to the accelerated claiming method is on a different page . . . from the interest provision . . . and does not even refer to it." Pls.' Mem. at 8. This is silly. The interest costs reimbursable under section 4532.5 are inextricably connected to a claim for accelerated depreciation, which the State did not claim for the Ten Eyck Building.
The DAB also found that in 1973 the Circular superseded section 4532.5 insofar as there was any conflict between their respective provisions. The DAB found that the Circular plainly states that its content is government-wide, and that its purpose, in part, is to promote "a uniform approach to the problem of determining costs." DAB Decision No. 1336 at 17; 38 Fed. Reg. 26,275; OMB A-87, P 4. Plaintiffs assert that because HHS has stated that the pre-1980 version of the Circular was "silent about rental charges for space in publicly owned buildings," 44 Fed. Reg. 37707 (June 28, 1979), section 4532.5 was not superseded by OMB A-87 because they were not inconsistent. While this argument has a superficial appeal, it does not withstand closer scrutiny. First, OMB A-87 provides detailed methods for calculating the cost of building space used by the State in administering federal programs. The equally detailed provisions of section 4532.5 concerning building space were therefore preempted in their entirety by the Circular. Second, had section 4532.5 remained in effect after the adoption of the Circular in 1973, the 1980 amendment expanding the rental cost provision to newly occupied publicly owned buildings would have been an empty gesture. HHS engaged in notice and comment rulemaking with respect to this change precisely because it was a change in the regulation, not a continuation of existing policy. The DAB's rejection of Plaintiffs' reliance on the Handbook was therefore neither arbitrary nor capricious.
The State has failed to show that federal law requires the federal government to reimburse the State for the interest costs disallowed by HHS. The DAB properly concluded that the interest expenses claimed by the State were not allowable under §§ C.2.a. or C.2.e. of OMB A-87, or under the Handbook. Because DAB Decision Nos. 1336, 1377, 1445, 1506, and 1590 were not arbitrary, capricious, or otherwise not in accordance with federal law, the State's motion for summary judgment on its appeals of those Decisions are denied. The Defendants' cross-motion for summary judgment is granted. The Clerk of the Court is directed to enter judgment in favor of Defendants.
Shira A. Scheindlin
Dated: New York, New York
July 10, 1997