St AZ v. Thompson, Tommy G.

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued December 7, 2001 Decided March 5, 2002

No. 01-5013

State of Arizona, et al.,

Appellants

v.

Tommy G. Thompson,

Secretary of Health and Human Services and

Dennis P. Williams, Acting Assistant Secretary for

Management and Budget,

U.S. Department of Health and Human Services,

Appellees

Appeal from the United States District Court

for the District of Columbia

(No. 99cv00860)

Charles A. Miller argued the cause and filed the briefs for

appellants. Phyllis D. Thompson entered an appearance.

Anne Murphy, Attorney, U.S. Department of Justice, ar-

gued the cause for appellees. With her on the brief was Scott

R. McIntosh, Attorney.

Before: Edwards, Henderson, and Garland, Circuit

Judges.

Garland, Circuit Judge: Six states seek review of a di-

rective of the Department of Health and Human Services

(HHS) that bars them from using Temporary Assistance for

Needy Families (TANF) grants to pay for the common costs

of administering the TANF, Medicaid, and Food Stamp pro-

grams. We conclude that HHS erroneously determined that

it was without discretion to permit those expenditures.

I

Prior to 1996, three important federal programs provided

assistance to people in need: Aid to Families with Dependent

Children (AFDC), 42 U.S.C. s 601 et seq. (1994); Medicaid,

id. s 1396a et seq.; and the Food Stamp program, 7 U.S.C.

s 2011 et seq. In 1996, Congress passed the Personal Re-

sponsibility and Work Opportunity Reconciliation Act of 1996,

referred to by the parties as the "Welfare Reform Act," Pub.

L. No. 104-193, 110 Stat. 2105 (codified as amended in

scattered sections of Title 42 and other titles of U.S.C.). The

Welfare Reform Act replaced AFDC with the TANF pro-

gram. Unlike AFDC, which was an individual entitlement

program, TANF provides federal block grants that states

may use for their own public assistance programs. See 42

U.S.C. s 601 et seq.; H.R. Conf. Rep. No. 104-725, at 261

(1996); H.R. Rep. No. 104-651, at 1322 (1996). The amount of

a state's TANF grant is based on the amount of the reim-

bursement paid to the state under AFDC during an historical

base period. See 42 U.S.C. s 603. In order to receive a

TANF grant, a state must submit a state plan, which HHS

must approve, describing how the state intends to use the

grant. Id. s 602. A state may spend its grant "in any

manner that is reasonably calculated to accomplish the pur-

pose of" the TANF program, or "in any manner that the

State was authorized to use amounts received" under AFDC.

Id. s 604(a).

This case involves the use of TANF grants to pay the costs

of program administration. Prior to the enactment of the

Welfare Reform Act, the federal government reimbursed 50%

of most state administrative expenditures for each of the

three programs--AFDC, Medicaid, and Food Stamps--with-

out a dollar limit on the amount of administrative expendi-

tures eligible for federal reimbursement. See 42 U.S.C.

s 603(a)(3) (1994) (AFDC); id. s 1396b(a)(7) (Medicaid); 7

U.S.C. s 2025(a) (Food Stamps). This partial reimbursement

scheme continues for Medicaid and Food Stamps. As noted,

however, TANF is a block grant program, under which a

state receives a fixed amount of federal funds. A state may

use those funds to administer the TANF program, but "shall

not expend more than 15 percent of the grant for administra-

tive purposes." 42 U.S.C. s 604(b)(1).

The specific point at issue here is whether states may use

their TANF funds to pay for all of the costs that are common

to the administration of TANF, Medicaid, and Food Stamps.

Such costs may include, for example, the expense of deter-

mining the eligibility of applicants for assistance where the

relevant criteria are common to all three programs, the cost

of leasing offices and hiring employees who administer all of

the programs, and the cost of administering databases con-

taining the records of individuals who receive benefits under

all of the programs.

For the past thirty years, the Office of Management and

Budget (OMB) has issued government-wide standards con-

cerning the allocation of the costs of government programs.1

OMB Circular A-87 provides that, ordinarily, costs that bene-

fit multiple programs funded by federal grants must be

allocated among the benefiting programs "in accordance with

relative benefits received," rather than allocated to a single

program. Cost Principles for State, Local, and Indian Tribal

__________

1 See, e.g., Exec. Order No. 11,541 s 1(a), (b), 35 Fed. Reg. 10,737

(July 2, 1970).

Governments, OMB Circular A-87, Attach. A, p C.3.a (1997).2

The parties refer to this principle as "benefiting program

allocation." Since 1988, HHS has incorporated by reference

OMB Circular A-87 in its own regulations and guidance

documents. See 45 C.F.R. s 92.22; see also id. s 74.27

(adopted in 1994); Implementation Guide for OMB Circular

A-87, Cost Principles and Procedures for Developing Cost

Allocation Plans and Indirect Cost Rates for Agreements with

the Federal Government, ASMB C-10 (HHS April 1997).3

Notwithstanding the benefiting program allocation princi-

ple of OMB Circular A-87, during the life of the AFDC

program HHS permitted states to allocate entirely to AFDC

all costs that were common to administration of the AFDC,

Medicaid, and Food Stamp programs. The parties refer to

this approach, in which common costs are allocated to a single

program, as "primary program allocation." Its application to

the AFDC program was regarded as an exception to the

general rule of Circular A-87.4

Following passage of the Welfare Reform Act and creation

of the TANF program, HHS moved to stop states from

__________

2 The current version of Circular A-87 is a 1997 amendment of

the 1995 version. See Government Wide Grants Management

Requirements, 62 Fed. Reg. 45,934 (OMB Aug. 27, 1997) (amending

Cost Principles for State, Local, and Indian Tribal Governments, 60

Fed. Reg. 26,484 (OMB May 17, 1995)). The 1995 version was, in

turn, a revision of a document published in 1981. See Cost Princi-

ples for State and Local Governments, 46 Fed. Reg. 9548 (OMB

Jan. 28, 1981) (reissuing Federal Management Circular 74-4 as

OMB Circular A-87). The provision cited in the text above has

remained substantively the same throughout these amendments and

revisions.

3 Although HHS issued a revised version of its Implementation

Guide in 1997, after the enactment of TANF, it did so in response

not to TANF but rather to OMB's 1995 revision of Circular A-87.

The Guide does not take account of the TANF legislation. See

Appellees' Br. at 12 n.12.

4 See OGAM Action Transmittal 98-2 (HHS Sept. 30, 1998);

Appellants' Br. at 5-6; Appellees' Br. at 13-14.

continuing to employ primary program allocation. On Sep-

tember 30, 1998, without notice or opportunity for comment,

HHS' Office of Grants and Acquisition Management (OGAM)

issued OGAM Action Transmittal 98-2. The Action Trans-

mittal reconfirms that, as a general rule, Circular A-87

requires that:

[I]f any program benefits from an activity or cost, then

costs must be allocated to each program. Where multi-

ple programs are involved, a single program may not be

designated as the sole benefiting program (primary pro-

gram).

OGAM Action Transmittal 98-2 (HHS Sept. 30, 1998). Al-

though the Action Transmittal recognizes that there are

exceptions to this general rule, it further declares that:

Cost shifting [to a primary program] is not permitted by

most program statutes, except where there is a specific

legislative provision allowing such cost shifting. While

the former AFDC program allowed such an exception,

the TANF legislation that replaced AFDC does not

permit it being designated as the sole benefiting or

primary program. Therefore, the TANF program is

subject to the cost allocation principles of A-87.

Id. (emphasis added). Starting with state fiscal years begin-

ning on or after October 1, 1998, the Action Transmittal

requires state cost allocation plans for the TANF program to

comply with the benefiting program allocation principle. Id.

Six states5 filed suit in the United States District Court for

the District of Columbia seeking to prevent HHS from en-

forcing Action Transmittal 98-2. The States alleged that

they incur common administrative costs that benefit TANF,

Medicaid, and Food Stamps, and that the Welfare Reform

Act permits them to "use their TANF grants to cover costs

that benefit TANF and other programs simultaneously."

Compl. at 18-19. In their papers in the district court, the

__________

5 These include original plaintiffs Arizona, Maryland, Michigan,

New York, and Tennessee, as well as intervenor Florida (hereinaf-

ter "the States").

plaintiffs explained that "because of the fall in welfare case-

loads, states have been unable to use their full TANF grants,

so that they are better off financially by charging all common

costs to the TANF program." Plaintiffs' Mot. for Summ. J.

at 20 n.5.

The States' complaint charged that Action Transmittal 98-2

violated the Administrative Procedure Act (APA) because,

inter alia, it was not in accordance with law (i.e., with the

TANF provisions of the Welfare Reform Act), and because it

was issued without notice and comment. See 5 U.S.C.

ss 553, 706(2)(A), (D). The district court rejected these

contentions and granted summary judgment in favor of HHS.

Arizona v. Shalala, 121 F. Supp. 2d 40 (D.D.C. 2000). The

court concluded that HHS' interpretation of the Welfare

Reform Act deserved judicial deference under Chevron

U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837

(1984), that the Department reasonably interpreted the legis-

lation to bar states from applying the primary program

allocation approach to their TANF grants, that notice and

comment procedures were not required in this case, and that

the plaintiffs' other arguments were without merit.6

II

We review the district court's grant of summary judgment

against the States' APA claims de novo. See Independent

Petroleum Ass'n of Am. v. DeWitt, 2002 WL 191748, at *2

(D.C. Cir. Feb. 8, 2002); Dr. Pepper/Seven-Up Cos. v. FTC,

991 F.2d 859, 862 (D.C. Cir. 1993). We begin--and, in Part

III, end--with the States' first argument: that the Action

Transmittal is "not in accordance with law," 5 U.S.C.

s 706(2)(A), because its interpretation of the TANF provi-

sions of the Welfare Reform Act is inconsistent with the

statute. HHS contends that its interpretation of the legisla-

__________

6 The district court also concluded that Action Transmittal 98-2

constituted final agency action, a prerequisite for review under the

APA. See 5 U.S.C. s 704. HHS does not dispute that conclusion

on appeal, and we agree with the district court's analysis. See

Bennett v. Spear, 520 U.S. 154, 177-78 (1997).

tion must be accorded substantial deference under the rule

announced in Chevron. The States contend, and we agree

albeit for a different reason, that Chevron deference is inap-

propriate in this case.

Chevron instructs reviewing courts to apply a two-step

framework to issues of statutory construction. First, we

must ask "whether Congress has directly spoken to the

precise question at issue," in which case we "must give effect

to the unambiguously expressed intent of Congress." Chev-

ron, 467 U.S. at 842-43. If the "statute is silent or ambigu-

ous with respect to the specific issue," we move to the second

step and must defer to the agency's interpretation as long as

it is "based on a permissible construction of the statute." Id.

at 843.

The States contend that the Supreme Court's recent deci-

sion in United States v. Mead Corp., 121 S. Ct. 2164 (2001),

which was issued after the district court's decision in this

case, makes Chevron deference inapplicable to agency action

of the kind embodied in the Action Transmittal. They point

out that in Mead, the Court said: " '[I]nterpretations con-

tained in policy statements, agency manuals, and enforcement

guidelines' ... are beyond the Chevron pale." Id. at 2175

(quoting Christensen v. Harris County, 529 U.S. 576, 587

(2000)). Action Transmittal 98-2 is a policy statement, the

States contend, and thus does not deserve judicial deference.7

We need not decide whether HHS' decision to announce its

statutory interpretation in the form of an Action Transmittal

deprives that interpretation of judicial deference, because the

Department's pronouncement does not warrant deference for

another reason. The Court's direction in Chevron was to

accord deference to an agency's reasonable policy choice

where Congress delegated to the agency the discretion to

make such a choice. See Chevron, 467 U.S. at 843-44, 845,

865-66. The problem here, however, is that in barring

primary program allocation, HHS did not purport to exercise

__________

7 See generally OGAM Action Transmittal 98-1 (HHS Sept. 30,

1998) ("Action Transmittals ... transmit interpretive rules or gen-

eral statements of policy.").

discretion. To the contrary, the Action Transmittal declares

that "the TANF legislation ... does not permit it being

designated as the ... primary program." Action Transmittal

98-2 (emphasis added). Confirming the point, HHS' briefs

state the Department's view that it has no choice but to

require benefiting program allocation. See Appellees' Br. at

42 (contending that "it is the intent of Congress, rather than

of HHS, that obliges the States to cover costs allocated

outside TANF from programs other than TANF" (emphasis

added)); see also id. at 27. In Chevron terms, then, the

agency itself has stopped at step one: HHS believes that the

statute clearly bars primary program allocation, and that it is

without discretion to reach another result.

Deference to an agency's statutory interpretation "is only

appropriate when the agency has exercised its own judg-

ment," not when it believes that interpretation is compelled

by Congress. Phillips Petroleum Co. v. FERC, 792 F.2d

1165, 1169 (D.C. Cir. 1986); see Transitional Hosps. Corp. v.

Shalala, 222 F.3d 1019, 1029 (D.C. Cir. 2000); Prill v. NLRB,

755 F.2d 941, 942, 948, 956 (D.C. Cir. 1985). The question of

whether benefiting program allocation is actually compelled

by statute is a question of law, which we review de novo. See

Chevron, 467 U.S. at 843 n.9; Transitional Hosps., 222 F.3d

at 1026. It is to that question that we now turn.8

__________

8 In 1999, after notice and comment, HHS issued TANF regula-

tions that, the agency contends, incorporate the benefiting program

allocation principle by requiring conformity with OMB Circular

A-87. See Temporary Assistance for Needy Families Program, 64

Fed. Reg. 17,720, 17,842, 17,895 (Apr. 12, 1999) (codified at 45

C.F.R. s 263.11(b)). Although the present lawsuit challenges only

the 1998 Action Transmittal and not the 1999 regulations, HHS

contends that the use of notice and comment in promulgating the

1999 regulations moots the Mead issue and qualifies the Depart-

ment's determination for Chevron treatment. However, in conclud-

ing that deference is inappropriate here, we have relied not on the

form in which HHS announced its cost allocation principle, but

rather on the Department's conclusion that it was without discretion

to adopt any other position. The 1999 Federal Register notice does

III

The States cite several provisions of the Welfare Reform

Act in support of their challenge to HHS' belief that the

TANF legislation bars the use of primary program allocation.

We need not consider all of the States' arguments, as two key

provisions, subsections (1) and (2) of 42 U.S.C. s 604(a), are

sufficient to decide the case.9 Section 604(a) provides:

[A] State to which a grant is made under [TANF] may

use the grant--

(1) in any manner that is reasonably calculated to

accomplish the purpose of this part ...; or

(2) in any manner that the State was authorized to use

amounts received under part A [the AFDC and Emer-

gency Assistance programs] or F [the Job Opportuni-

ties and Basic Skills program] of this subchapter, as

these parts were in effect on September 30, 1995....

42 U.S.C. s 604(a). We consider these two subsections be-

low.

A

Citing s 604(a)(1), the States contend that they may pay

common administrative costs out of their TANF grants be-

cause such expenditures are "reasonably calculated to accom-

plish the purpose of" the TANF program. That purpose, as

described in 42 U.S.C. s 601(a), is "to increase the flexibility

of the states in operating a program" designed to assist needy

families and end dependence on government benefits.10

__________

not reflect any new understanding that the Department has discre-

tion in the matter.

9 Moreover, because we conclude that these provisions establish

that Action Transmittal 98-2 is "not in accordance with law," 5

U.S.C. s 706(2)(A), we need not consider the States' alternative

argument that it was issued "without observance of procedure

required by law," id. s 706(2)(D), namely the notice-and-comment

procedure of 5 U.S.C. s 553.

10 Section 601(a) states:

HHS does not dispute that states may pay the costs of

administering the TANF program itself out of their TANF

grants. Indeed, a contrary position would be hard to square

with s 604(b)(2), which, in limiting expenditures for adminis-

trative purposes to "15 percent of the grant," clearly assumes

that some such expenditures will be made. HHS contends,

however, that allocating costs of administering Medicaid and

Food Stamps to TANF is not "reasonably calculated" to

accomplish the purpose of the TANF legislation. TANF, the

Department argues, does not benefit from the payment of

costs that are the responsibility of other programs.

But the costs at issue here are not costs that are solely

applicable to other programs. This case is about common

costs, such as the expense of determining eligibility for

programs that have the same eligibility criteria. These are

costs that TANF would have to bear even if the other

programs did not exist, and that are incurred in order to

ensure that a state's TANF program accomplishes its objec-

tives. Accordingly, there is no question but that the TANF

program "benefits" from payment of these common costs;

indeed, the premise of "benefiting program allocation" is that

the costs subject to allocation "benefit" all of the programs at

issue. See Action Transmittal 98-2 (requiring that "costs be

allocated to all benefiting programs based on relative benefits

derived" (emphasis added)).11

__________

The purpose of this part is to increase the flexibility of States

in operating a program designed to--

(1) provide assistance to needy families so that children may

be cared for in their own homes ...;

(2) end the dependence of needy parents on government

benefits by promoting job preparation, work, and marriage;

(3) prevent and reduce the incidence of out-of-wedlock preg-

nancies ...; and

(4) encourage the formation and maintenance of two-parent

families.

42 U.S.C. s 601(a).

11 For the same reason, we reject HHS' contention that the

congressional intent behind the provisions for 50% federal partic-

HHS further argues that the statutory 15% limitation on

administrative expenditures demonstrates congressional con-

cern about excessive administrative spending, and supports

the view that expenditure of TANF funds on administrative

costs allocable to Medicaid and Food Stamps is unauthorized.

Only the first half of this argument is correct. There is no

doubt that Congress imposed a 15% cap in order to limit

administrative expenditures: what other purpose could such a

limit have? But nothing in the primary program allocation

approach preferred by the plaintiffs would permit a state to

spend more than that the 15% limit on administrative funds.

Moreover, while the existence of a cap reflects a concern

about limiting expenditures, it may also indicate Congress'

view that the cap alone is sufficient to satisfy that concern,

and that there is no need to tell the states how to spend their

grant money within that cap as long as the expenditures are

otherwise calculated to advance the purpose of the program.

Finally, HHS contends that OMB Circular A-87 represent-

ed "a well-established background of cost principles for feder-

al grants" against which Congress enacted the TANF pro-

gram. Appellees' Br. at 43. Circular A-87 was in effect

when Congress enacted the Welfare Reform Act, HHS ar-

gues, and "if Congress had wished TANF to be exempt from

these principles, it could have expressly so provided." Id.

Because it did not do so, the Department continues, "it is

reasonable to suppose that Congress understood that TANF

costs would be allocated within the parameters of Circular

A-87." Id. The problem with this argument is that the

"background" against which Congress enacted the Welfare

__________

ipation in the costs of administering the Medicaid and Food Stamp

programs, 42 U.S.C. s 1396b(a)(7); 7 U.S.C. s 2025(a), would be

violated if states were allowed "to shift Medicaid and Food Stamp

costs into TANF so that the full amount of those administrative

costs will be paid in federal dollars." Appellees' Br. at 45. As

noted in the text, primary program allocation does not permit the

shift of "Medicaid and Food Stamp costs," but rather of costs that

those programs share in common with TANF. Neither of the cited

provisions addresses the question of common costs or purports to

disallow expenditures separately authorized by s 604(a)(1).

Reform Act included both Circular A-87's general principle of

benefiting program allocation and its well-recognized excep-

tion for the AFDC program. See supra Part I. Although

that background may not compel the conclusion that Con-

gress intended to continue the AFDC exception for its succes-

sor program, TANF, it hardly proves the opposite.

The benefiting program allocation principle may well be an

appropriate tool for accounting for common costs, but it is

only that--an accounting tool, not a statutory command. It is

not possible to read s 604(a)(1)--which permits a state to use

its TANF grant "in any manner that is reasonably calculated

to accomplish the purpose" of the TANF legislation--as

barring HHS from permitting a state to spend its grant

money on the costs of running the TANF program merely

because those expenditures help run other programs as well.

That conclusion is further reinforced by Congress' declaration

that the "purpose" referenced in s 604(a)(1) is "to increase

the flexibility of States in operating [the] program." Id.

s 601(a); see also H.R. Rep. No. 104-81, pt. 1, at 15 (1995)

(noting "that a major purpose of the [TANF legislation] is to

allow States maximum flexibility in the use of Federal dol-

lars"). Although we do not foreclose the possibility that HHS

could, in the exercise of its discretion, determine that the

allocation of common costs to TANF is not reasonably calcu-

lated to accomplish TANF's purpose, the statute does not

require HHS to reach that conclusion.

B

The States also contend that authorization for primary

program allocation may independently be found in the

"grandfather clause" of s 604(a)(2). That subsection permits

a state to use a TANF grant "in any manner that the state

was authorized to use amounts received" under the AFDC

program. 42 U.S.C. s 604(a)(2). Since states were autho-

rized to use amounts received under AFDC to pay the

common administrative costs of AFDC, Medicaid, and Food

Stamps, the States argue that subsection (a)(2)--like subsec-

tion (a)(1)--authorizes HHS to permit primary program allo-

cation. HHS disputes this view of s 604(a)(2) for two rea-

sons.

First, the Department contends that the key phrase, "au-

thorized to use," refers solely to expenses that were autho-

rized under "state plans," which described the substantive

assistance programs the state intended to run. See 45 C.F.R.

ss 201.2, 201.3 (1995). Administrative costs, by contrast,

were addressed in the states' "cost allocation plans," which

set forth the states' accounting methods. See id. s 95.505

(1995). Since the use of AFDC funds for common adminis-

trative costs was authorized not under "state plans," but

rather under state "cost allocation plans," HHS contends that

the use of TANF funds for such a purpose is not encom-

passed by the grandfather clause of s 604(a)(2).

We disagree. There is nothing in the phrase "authorized

to use" that dictates that it be read as "authorized to use

under a state plan," rather than "authorized to use under a

state cost allocation plan." Once again, although we do not

foreclose the possibility that HHS could, in the exercise of its

discretion, interpret the phrase in that way, it is certainly not

required to do so.

Nor does HHS' reference to the legislative history of s 604

advance its claim that "authorized to use" refers only to

substantive programs. The Department refers us to a sen-

tence in the Conference Report on the Welfare Reform Act,

which states that "activities now authorized under" AFDC

are also authorized under TANF. H.R. Conf. Rep. No.

104-430, at 320 (1995) (emphasis added). HHS contends that

the word "activities" means substantive programs rather than

administrative functions, but again we are not persuaded that

the word can bear only the former meaning. Many adminis-

trative functions can readily be characterized as "activities,"

including the hiring of staff, the determination of eligibility,

and the maintenance of databases. We see no indication that

the Conference Report used a general word like "activities" to

signal an intent to exclude common administrative costs from

the compass of s 604(a)(2).

HHS also offers a second argument for rejecting the

States' claim that primary program allocation is authorized by

s 604(a)(2): the only reason such allocation was permitted

under AFDC, HHS contends, was that the AFDC statute

specifically allowed it. Since TANF contains no such specific

authorization, the Department continues, grandfathering

plainly was not intended. See Action Transmittal 98-2.

The problem with this argument is its premise: in fact, the

AFDC statute did not specifically authorize primary program

allocation. When pressed to identify the statutory provision

allegedly at issue, HHS' counsel conceded that there was no

language in the AFDC statute that addressed the allocation

issue, one way or the other. Instead, HHS relies on the fact

that the eligibility criteria for the three programs were

identical under the prior statutory regime, while TANF per-

mits but does not require the states to use common eligibility

criteria.12 HHS also relies on the fact that, under the prior

regime, it made no difference from the standpoint of the

federal fisc whether administrative costs were allocated to

AFDC or shared among all three programs, because the

federal government paid 50% of those costs for each pro-

gram.13 That is no longer true for TANF, since a state may

pay all of its administrative costs out of its federal grant,

subject only to the 15% cap. See 42 U.S.C. s 604(b)(1).

Once again, these are arguments of policymaking discretion

rather than law. Although the differences between AFDC

and TANF may justify a decision by HHS to depart from the

__________

12 Prior to the Welfare Reform Act, the statutes setting forth

eligibility criteria for Medicaid and Food Stamps each referenced

part A of Title IV of the Social Security Act, 42 U.S.C. s 601 et seq.

(1994), the former AFDC statute. See id. s 1396a(a)(10)(A)(i)(I)

(Medicaid); 7 U.S.C. s 2014(a) (Food Stamps). The Welfare Re-

form Act largely permits the states to determine the eligibility

criteria for TANF, see 42 U.S.C. s 602(a)(1)(B)(iii), but leaves the

criteria for Medicaid and Food Stamps unchanged, see id. s 1396u-

1(a).

13 See 42 U.S.C. s 603(a)(3) (1994) (AFDC); 7 U.S.C. s 2025(a)

(Food Stamps); 42 U.S.C. s 1396b(a)(7) (Medicaid).

method of cost allocation it accepted under the former pro-

gram, they do not compel it to do so. Nor do they establish

that it would be unreasonable for the Department to approve

the allocation method preferred by the States. Although

states are not required to use the same eligibility rules for

TANF as for Medicaid and Food Stamps, they are permitted

to do so. See id. s 602(a)(1)(B)(iii) (leaving criteria for TANF

eligibility up to the states). And, according to the plaintiffs,

in most states many eligibility determinations remain com-

mon to all three programs. See Appellants' Reply Br. at 4.

If it was the existence of common eligibility rules and hence

common costs that justified primary program allocation be-

fore, it is not readily apparent why that justification disap-

pears merely because the common rules are now the result of

voluntary state decisions rather than federal mandates.14

Similarly, although primary program allocation may not have

cost the federal government additional money under the prior

regime, nothing in the TANF legislation compels the conclu-

sion that saving federal (as compared to state) money must be

the guide for cost allocation, particularly since Congress

provided its own solution to the problem of excessive adminis-

trative costs in the form of the 15% cap.15

__________

14 Moreover, some of the common administrative costs subject to

primary program allocation under AFDC did not relate to eligibility

determination at all, but rather to such things as the renting of

space for welfare offices. It is not apparent why a change in

eligibility requirements would be relevant to the question of wheth-

er such non-eligibility costs were grandfathered by s 604(a)(2).

15 The district court found additional, although "hardly disposi-

tive," support for HHS' interpretation of s 604(a)(2) in s 502 of the

Agricultural Research Extension and Education Reform Act of

1998, codified at 7 U.S.C. s 2025(k). See Arizona, 121 F. Supp. 2d

at 54-55. Section 502 directs the Secretary of Agriculture to

calculate the amount included in a state's TANF grant for what the

state would have historically received under AFDC for the common

costs of determining AFDC and Food Stamp eligibility; the Secre-

tary is then directed to reduce, by that amount, the federal payment

to the state for the administrative costs of the Food Stamp pro-

gram. 7 U.S.C. s 2025(k)(2)(B), (3)(A). We do not view s 502 as

C

Finally, we address a contention pressed by HHS at oral

argument: that whatever the import of s 604(a), OMB Circu-

lar A-87 independently deprives the Department of discretion

to permit the use of primary program allocation. According

to HHS, this is because the Circular requires all federal

agencies to use benefiting program allocation in the adminis-

tration of federal grants. Putting to one side questions

raised by the plaintiffs concerning the legal force of Circular

A-87, we reject this contention because the Department did

not regard the Circular as having an effect independent of the

TANF legislation when it issued Action Transmittal 98-2.

See Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 212

(1988) (" 'The courts may not accept appellate counsel's post

hoc rationalizations for agency [orders].' " (quoting Burling-

ton Truck Lines v. United States, 371 U.S. 156, 168 (1962))).

Although Circular A-87 provides that common costs must

ordinarily be allocated among benefiting programs, Action

Transmittal 98-2 recognizes that there are exceptions to that

rule. In particular, it acknowledges that an exception was

made for the former AFDC program because, the Transmit-

tal states, there was "a specific legislative provision allowing

such cost shifting." Although in fact there was no such

specific provision in the AFDC statute, see supra Part III.B,

the statement in the Action Transmittal reflects HHS' under-

lying view that Circular A-87 does not independently con-

strain the Department if a statute allows an alternative

allocation method. That view is also reflected in HHS'

__________

supporting HHS' conclusion that Congress barred states from using

their TANF grants to pay for all common administrative costs.

Rather, s 502 reflects Congress' understanding that historical

"common costs for administering public assistance programs ...

were included in the calculation of each State's new TANF grant,"

and Congress' determination that Food Stamp reimbursements

should therefore be reduced to prevent states from "receiv[ing] a

second reimbursement for common costs in the Food Stamp (and

Medicaid) programs, while retaining their full TANF block grant."

H.R. Conf. Rep. No. 105-492, at 115-16 (1998) (emphasis added).

Implementation Guide for OMB Circular A-87, ASMB C-10,

which states that, while Circular A-87 requires the use of

benefiting program allocation, primary program allocation

may be used "where the head of an awarding agency deter-

mines that the agency's enabling legislation permits" it. Id.

p 2.11 at 2-13. In accord with this analysis, the Action

Transmittal's rationale for applying the general rule of Circu-

lar A-87 to TANF is simply that TANF does not permit an

exception: "[T]he TANF legislation ... does not permit it

being designated as the sole benefiting or primary program.

Therefore, the TANF program is subject to the cost allocation

principles of A-87." Action Transmittal 98-2 (emphasis add-

ed).

In short, HHS' determination that Circular A-87 applies to

TANF was not made without reference to the Department's

construction of the TANF legislation. To the contrary, that

determination was made in reliance on HHS' mistaken belief

that the statute gave it no choice in the matter. Although

nothing we have said necessarily precludes HHS, in the

exercise of its discretion, from relying on the principles of

Circular A-87 to determine the most appropriate cost alloca-

tion rule to apply to TANF, that is not the course the

Department followed in this case.

IV

HHS' Action Transmittal 98-2 does not represent a deter-

mination by the Department that it is reasonable to interpret

the Welfare Reform Act as barring states from allocating

their common administrative costs to TANF. Rather, it

reflects HHS' incorrect assumption that such an interpreta-

tion is the only one that is permissible. As we have said

before, "an agency regulation must be declared invalid, even

though the agency might be able to adopt the regulation in

the exercise of its discretion, if it 'was not based on the

[agency's] own judgment but rather on the unjustified as-

sumption that it was Congress' judgment that such [a regula-

tion is] desirable' " or required. Prill, 755 F.2d at 948

(quoting FCC v. RCA Communications, 346 U.S. 86, 96

(1953)) (alterations in original).16 Accordingly, the decision of

the district court is reversed, and the case is remanded to

that court with instructions to remand to HHS for further

consideration consistent with this opinion.17

Reversed and remanded.

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16 See Transitional Hosps., 222 F.3d at 1029 (remanding where

HHS erroneously interpreted the Medicare statute as barring the

treatment of certain hospitals as "long-term" care facilities); Prill,

755 F.2d at 942 (remanding where the NLRB adopted a definition

of "concerted activities" that it erroneously regarded as "mandated"

by the National Labor Relations Act).

17 Because HHS did not adopt the interpretation contained in the

Action Transmittal as an exercise of its discretion, we have no

occasion to decide whether, if it did so, the same interpretation

would be sustained if promulgated in a form warranting Chevron

deference. See Transitional Hosps., 222 F.3d at 1028.