Petition for Writ of Certiorari — Pennsylvania Office of the Budget v. Department of Health & Human Services

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Supreme Court of the United States

October Term, .1993

COMMONWEALTH OF PENNSYLVANIA, OFFICE OF THE

BUDGET,

Petitioner,

vs.

DEPARTMENT OF HEALTH AND HUMAN SERVICES,

ALMA R. JACOBS, REGIONAL DIRECTOR, REGION III,

DHHS,

Respondent.

Petition for a Writ of Certiorari to the United States Court of

Appeals for the Third Circuit

PETITION FOR A WRIT OF CERTIORARI

JOHN M. ELLIOTT

Counsel of Record

HENRY F. SIEDZIKOWSKI

TIMOTHY T. MYERS

MARGARET S. CURRAN

ELLIOTT, VANASKIE & RILEY

Attorneys for Petitioner

925 Harvest Drive

Blue Bell, Pennsylvania 19422

(215) 977-1000

4111

fuz

(800) 3 APPEAL « (800) 5 APPEAL « (800) BRIEF 21

QUESTION PRESENTED FOR REVIEW

1. Whether the Court of Appeals erred as a matter of law by

ignoring the express statutory language of the Intergovernmental

Cooperation Act, 31 U.S.C. § 6503(a), as drafted by Congress, and

holding the Commonwealth of Pennsylvania accountable for

interest earned on funds held in self-insurance reserve accounts

pending disbursement to claimants when Congress has expressly

stated “a State is not accountable for interest earned on grant money

pending its disbursement for program purposes.”

TABLE OF CONTENTS

Page

Question Presented for Review ........0cccseeeceses i

Table of Contents ..... be easved@ ee ewe il

Table of CHaHOMS ..o.6é cnt 400s a penne eee ill

Opinions Below ....o 6ssk%sksnee eee ]

Statement Of JurisdictiOR «..6ss05csnaes anes Ve ReE eS ]

Statute Involved... . ssc sss on) eee l

Statement of the Cese . o.. cdic cee seneaee eee 2

Reasons forGrantingthe Writ ...................0.. 4

THE COURT OF APPEALS’ DECISION

CONSTITUTES JUDICIAL LEGISLATION

THAT RE-WRITES THE EXPRESS INTENT

OF CONGRESS WHICH WILL ADVERSELY

AFFECT THE COMMONWEALTH OF

PENNSYLVANIA AND TWENTY-SIX

OTHER STATES WITH SELF-INSURANCE

RESERVES. .. .0<<000 000 ease ee 4

A. The Court Of Appeals’ Interpretation Of The

ICA Is Contrary To The Act’s Plain Meaning. 8

B. Even If The ICA Were Ambiguous, Which It

Is Not, The Court Of Appeals Erred By

Misinterpreting The Legislative History Of

TRO TCA. 2.06 00ss5008e eee 14

Contents

Page

eee Tae ac tc Gece webe enue. Kaeo ee a 16

TABLE OF CITATIONS

Cases Cited:

American Tobacco Co. v. Patterson, 456 U.S. 63 (1982) . 11

Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723

NS 8G ag 8

Caminetti v. United States, 242 U.S.470(1919) ........ i)

Chevron U.S.A. Inc. v. Natural Resources Defense

SE SS MT We. OST LADES) nes cevvnccccas 5

Commissioner of Internal Revenue Service v. Asphalt

Products Co., Inc.,482 U.S. 117 (1987) ............ 5,6,7,8

Consumer Product Safety Commission v. FTE Sylvania,

OT eR Es i 6 | 11

Demarest v. Manspeaker, 498 U.S.184(1991) ......... 5,6

Garcia v. United States, 469 U.S.70(1984) ........... 11

Griffin v. Oceanic Contractors, Inc., 458 U.S. 564 (1982)

os a 8,9,10

Malloy v. Eichler, 860 F.2d 1179 (3d Cir. 1988) ......... 11

Contents

Page

Norfolk and Western Railway Co. v. American Train

Dispatchers Assoc., 499 U.S. 117, 111 S. Ct. 1156, 113

Ei EE a Seca oh abe Kaa e oe 4 ee

Southeastern Community College v. Davis, 442 U.S. 397

PRE ake ones ak Me CRE RR ORR Oke eee 5,8

United States v. American Trucking Association, Inc., 310

es ED 5s Fo 5k he ee cae ee pee ee 8

United States v. Ron Pair Enterprises, Inc., 489 U.S. 235

bo. ere Perr eer eer re rere ere ere 9,11

Statutes Cited:

eR Sol Ye GS em a OR, Rune area Uae ae ]

SCORE 6 65555 bok ee ne ens baNnouKeeee ness 2

Se ee ee, 8 5 alah eae eet a renee eeed l

Fi Stan PEON 365 ds occa ce aa ceueees i, 1,2,4,7,11,12,14

Rules Cited:

supreme Comtt Rte 19.1... occ insceedescsntasanwas 4

supreme Court Rete 10.16) oo oc ccc cece cs eccscces 4

Contents

Other Authority Cited:

H.R. Conf. Rep. No. 1934, 90th Cong., 2d Sess. 12,

reprinted in 1968 U.S.C.C.A.N. 4248 ..........-4..

APPENDIX

Appendix A — Judgment of the United States Court of

Appeals for the Third Circuit Dated June 11,1993 ....

Appendix B — Opinion of the United States Court of

Appeals for the Third Circuit Filed June 11, 1993

Appendix C — Order and Judgment, and Memorandum of

the United States District Court for the Middle District

of Pennsylvania Filed May 18,1992 ...............

Appendix D — Sur Petition for Rehearing of the United

States Court of Appeals for the Third Circuit Dated July

Page

25a

OPINIONS BELOW

The Opinion of the United States Court of Appeals for the

Third Circuit is reported at 1993 U.S. App. LEXIS 13616 (3d Cir.

June 11, 1993) and is reprinted in the Appendix at la-24a. The

Opinion of the United States District Court for the Middle District

of Pennsylvania is not reported, but is reprinted in the Appendix at

25a-43a.

STATEMENT OF JURISDICTION

Petitioner seeks this Court’s review of a decision by the Court

of Appeals reversing an Order of the district court granting

summary judgment in favor of the Commonwealth. The Court of

Appeals reversed the decision of the district court on June 11,

1993. The Commonwealth petitioned the Court of Appeals for

Rehearing or Rehearing En Banc on June 25, 1993. The Court of

Appeals denied the Commonwealth’s Petition for Rehearing or

Rehearing En Banc on July 9, 1993. See 44a. This Court’s

jurisdiction is invoked pursuant to 28 U.S.C. § 1254(1).

STATUTE INVOLVED

The Intergovernmental Cooperation Act, 31 U.S.C. § 6501 et

seq., 1S at issue in this case. Specifically, Section 203(a) of the ICA

(31 U.S.C. § 6503(a)) provides:

Consistent with program purposes and

regulations of the Secretary of the Treasury, the

head of an executive agency carrying out a

grant program shall schedule the transfer of

grant money to minimize the time elapsing

between transfer of the money from the

Treasury and the disbursement by a State,

whether disbursement occurs before or after

the transfer. A State is not accountable for

interest earned on grant money pending its

disbursement for program purposes.

STATEMENT OF THE CASE

The Commonwealth brought this action against the

Department of Health and Human Services (“DHHS”),

Departmental Appeals Board (“DAB”) to establish that it is not

accountable for interest earned on federal grant funds for self-

insurance reserves used to pay workers’ compensation and health

benefit claims by state employees who administered federally

funded programs. The district court had subject matter jurisdiction

pursuant to 28 U.S.C. § 1331. The district court entered summary

judgment for the Commonwealth, holding that under the express

Statutory language of the Intergovernmental Cooperation Act

(“ICA”), 31 U.S.C. § 6503(a) (1988) (amended 1990), the

Commonwealth was not accountable for interest earned on federal

funds held pending disbursement for program purposes.

The federal government provides certain funds and grants to

the states, including the Commonwealth, through various

programs. DHHS is the federal agency responsible for negotiation,

approval, and auditing of the method by which these funds are

allocated. The Commonwealth receives a variety of federal funds,

including grant funds, as reimbursement to the Commonwealth for

its share of the employee costs incurred when state employees

work on federal projects.

Instead of purchasing insurance to cover state workers’

compensation and health benefit claims, the Commonwealth, with

the approval of DHHS, self-insures its own employees. This self-

insurance program utilizes actuarially calculated reserves for

anticipated claims. This program is expressly allowed by federal

regulation. The reserves are retained within the Commonwealth’s

General Fund with specific accounting maintained.

In 1988 and 1989, the Director of Cost Allocation (“DCA”) of

DHHS audited the Commonwealth’s cost allocation plan

regarding the federal funds contributed to the Commonwealth and

demanded that the Commonwealth pay millions of dollars to the

federal government for the purported federal share of interest that

DHHS claimed the Commonwealth allegedly earned during fiscal

years 1988 and 1989. In accordance with available administrative

remedies, the Commonwealth requested that the DHHS Regional

Director review the findings of the DCA. The Regional Director

accepted the findings of the DCA and demanded the payment of

“interest” that purportedly accrued on the insurance reserves

pending disbursement for actual claims made.

The Commonwealth appealed the Regional Director’s

decision to the DAB of DHHS. The DAB, reviewing its own

Regional Director’s decision, affirmed the decision of the

Regional Director that the Commonwealth was required to pay

interest allegedly earned on the self-insurance reserves for fiscal

years 1988 and 1989.

The Commonwealth’s action in the district court sought a

declaratory judgment that it was not required to pay the interest to

the federal government, as well as an injunction prohibiting DHHS

from recapturing such interest. Holding that the plain language of

the ICA is unambiguous and thus dispositive of the issues, the

district court concluded that funds held in the Commonwealth’s

self-insurance accounts were held “pending disbursement for

program purposes.” Accordingly, the Commonwealth was held not

to be accountable for interest earned on those funds.

DHHS appealed the decision of the district court. On review, a

divided panel of the Third Circuit reversed the district court,

finding instead that because the Commonwealth had posited an

alternative theory under which it would also prevail, the ICA is

ambiguous. The majority then reinterpreted the language of the

ICA which clearly provides that “A State is not accountable for

interest earned on grant money pending its disbursement for

program purposes.” The majority held that Congress “intended” to

collect interest if the funds were not “promptly” disbursed. (See

12a-13a).

Despite the clear language of the ICA, the majority found that

this statutory provision “was intended to have a specific and

limited meaning” (see 12a) and applied a rule which, even as the

majority admits, “predates the enactment of Section 203(a)” [31

U.S.C. § 6503(a)] (see 13a). Applying this faulty analysis, the

majority reversed the order of the district court.

REASONS FOR GRANTING THE WRIT

THE COURT OF APPEALS’ DECISION CONSTITUTES

JUDICIAL LEGISLATION THAT RE-WRITES THE

EXPRESS INTENT OF CONGRESS WHICH WILL

ADVERSELY AFFECT THE COMMONWEALTH OF

~ PENNSYLVANIA AND TWENTY-SIX OTHER STATES

WITH SELF-INSURANCE RESERVES.

This Court may grant a petition for a writ of certiorari where

there are “special and important reasons therefor.” See Supreme

Court Rule 10.1. Factors considered in granting certiorari include

whether a Court of Appeals has decided an important question of

federal law which has not been, but should be, settled by this Court

or where a Court of Appeals has decided a federal question in a way

that conflicts with applicable decisions of this Court. See Supreme

Court Rule 10.1(c).

In this case, the Court of Appeals has erroneously interpreted

the ICA in contravention of its plain and unambiguous language. In

support of its interpretation, the Court of Appeals resorts to

selected excerpts from the legislative history of the ICA which it

uses to effectively re-write the statute.

The Court of Appeals’ construction of the ICA is contrary to

the law of this Court which has consistently adhered to the

principal that “ If the intent of Congress is clear, that is the end of

the matter; for the court, as well as the agency, must give effect to

the unambiguously expressed intent of Congress.” Norfolk and

Western Railway Co. v. American Train Dispatchers Assoc., 499

U.S. 117, 111 S. Ct. 1156, 113 L. Ed. 2d 95, 106 (1991) (citing

Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc.,

467 U.S. 837, 842-843 (1984)); see also, Commissioner of Iniernal

Revenue Service v. Asphalt Products Co., Inc., 482 U.S. 117, 120-

121 (1987).

This Court has granted certiorari to review statutory

interpretations of the Courts of Appeals which are contrary to the

plain language of federal statutes. See Southeastern Community

College v. Davis, 442 U.S. 397, 404 (1979) (Court granted

certiorari to review Fourth Circuit’s interpretation of section 504

of the Rehabilitation Act of 1973 because of that section’s

importance to “the many institutions covered by § 504”); Demarest

v. Manspeaker, 498 U.S. 184 (1991) (Court granted certiorari to

review federal statute pertaining to witness fees and Tenth

Circuit’s holding that although language of statute was

“unqualified”, other evidence revealed that Congress did not

intend to permit prisoner witnesses to receive witness fees);

Commissioner of Internal Revenue Service v. Asphalt Products

Co., Inc., 482 U.S. at 120 (Court granted certiorari to review Sixth

Circuit’s construction of tax statute which was in conflict with

another circuit and “in obvious conflict with the plain language of

the statute”).

In Demarest v. Manspeaker, the Tenth Circuit affirmed a

district court’s holding that a federal statute providing for witness

fees did not apply to a prisoner who testified as a witness in a

federal criminal trial. Although the Tenth Circuit found the

language of the statute to be “unqualified”, it nonetheless found

that the statute did not apply to prisoners based on an

administrative construction of the statute, two other court

decisions addressing the same statute, and Congress’ revision to

the statute.

In reversing the Tenth Circuit, this Court stated:

When we find the terms of a statute

unambiguous, judicial inquiry is complete

except in rare and exceptional circumstances.

[citations omitted] We do not believe that this

is one of those rare cases where the application

of the statute as written will produce a result -

“demonstrably at odds with the intentions of its

drafters.” ... We cannot say that the payment

of witness fees to prisoners is so bizarre that

Congress “could not have intended” it.

Demarest v. Manspeaker, 498 U.S. at 190-191 (citations omitted).

In Commissioner of Internal Revenue Service v. Asphalt

Products Co., Inc., this Court granted certiorari to review the Sixth

Circuit’s construction of a tax statute. The statute at issue imposed

a penalty of five percent on taxpayers who, through negligence or

intentional disregard of tax rules or regulations, underpaid federal

income taxes. In reversing the decision of the Court of Appeals

limiting the amount of the negligence penalty based on its

construction of the statute, this Court stated:

Section 6653(a)(1) [tax statute at issue] could

not be any clearer. If “any part of any

underpayment” is due to negligence, the

Commissioner shall add to the tax a penalty of

“5S percent of the underpayment.” It is

impossible further tO explain the statute

without merely repeating its language... .

See 482 U.S. at 120.

Similarly, in this case, the plain language of the ICA cannot be

any clearer. The ICA plainly and unambiguously provides that a

“State is not accountable for interest earned on grant money

pending its disbursement for program purposes.” Despite its plain

language, the Court of Appeals found Section 203(a) of the ICA to

be ambiguous. Considering only selective portions of the

legislative history of the ICA, the Court of Appeals concluded that

the statutory phrase “pending its disbursement for program

purposes” was intended to have a limited meaning because

Congress “would have been shocked by the thought that a state

could keep millions of dollars of interest on federal funds.” See

13a.

The Court of Appeals’ perception of what Congress intended

and what the drafters of Section 203(a) would have thought about

the application of the Act in this case is not a valid basis for re-

writing the express language of the ICA. This Court has stated:

Judicial perception that a particular result

would be unreasonable may enter into the

construction of ambiguous provisions, but

cannot justify disregard of what Congress has

plainly and intentionally provided. Given. . .

the statute’s explicit limitation of other

penalties to the amount of the negligent or

fraudulent underpayment, no conclusion can

be drawn from the provision here at issue

except that Congress desired to impose a

modest penalty (5%) upon underpayments any

part of which was attributable to negligence of

the taxpayer. /t is not our assigned role to alter

that disposition.

See Commissioner of Internal Revenue Service v. Asphalt Products

Co., Inc., 482 U.S. at 121 (emphasis added).

This Court must grant a writ of certiorari to correct the panel

majority’s conclusion which amounts to judicial legislation by re-

writing the I€A in contravention of the express intent of Congress.

The Court of Appeals’ interpretation of the ICA fundamentally and

retroactively alters the delicate balance of federal-state fiscal

relationships.

There are twenty-six (26) states in addition to Pennsylvania

with self-insurance reserve accounts similar to the accounts at

issue in this case. See Commonwealth’s Brief of Appellee at 24.

Currently, there is at least one other case pending before the DAB

where DHHS is demanding interest from the State of Alabama

which DHHS claims it allegedly earned on federal grant funds held

pending disbursement for program purposes. The Court of

Appeals’ interpretation of the ICA sets out a far reaching precedent

which will be applicable to half the states in this country and

millions of dollars in interest.

A. The Court Of Appeals’ Interpretation Of The ICA Is

Contrary To The Act’s Plain Meaning.

The starting point in every case involving statutory

construction is the language of the statute itself. Southeastern

Community College v. Davis, 442 U.S. at 405 (quoting Blue Chip

Stamps v. Manor Drug Stores, 421 U.S. 723, 756 (1975)). See also,

Norfolk and Western Railway Co. v. American Train Dispatchers

Assoc., 499 U.S. at__, 111 S.Ct. at__ , 113 L. Ed. 2d at 106-110;

Commissioner of Internal Revenue Service v. Asphalt Products

Co., Inc., 482 U.S. at 120-121. This is because there is “no more

persuasive evidence of the purpose of a statute than the words by

which the legislature undertook to give expression to its wishes.”

Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571 (1982)

(citing United States v. American Trucking Association, Inc., 310

U.S. 534 (1940)).

In resolving disputes over the meaning of a statute, this Court

has held that:

The task of resolving the dispute over the

meaning of [a statute] begins where ali such

inquiries must begin: with the language of the

statute itself. [citation omitted]. In this case it is

also where the inquiry should end, for where,

as here, the statute’s language is plain, “the sole

function of the courts is to enforce it according

to its terms.” .

United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241

(1989) (quoting Caminetti v. United States, 242 U.S.470(1 919)).

In Griffin v. Oceanic Contractors, Inc., this Court reviewed

the application of a wage penalty statute to a seaman who was

injured while working on a vessel operated by the respondent. The

petitioner seaman brought an action against the respondent for

damages and penalty wages for the respondent’s failure to pay over

earned wages due him upon his discharge. The wage penalty

statute at issue imposed a penalty upon an owner of a vessel who

refused or neglected to pay a seaman his wages.

The respondent argued that a literal construction of the wage

penalty statute would produce an absurd and unjust result which

Congress could not have intended.

Petitioner would receive over $300,000 simply

because respondent improperly withheld

$412.50 in wages. In respondent’s view,

Congress could not have intended seamen to

receive windfalls of this nature without regard

to the equities of the case.

It is true that interpretations of a statute which

would produce absurd results are to be avoided

if alternative interpretations consistent with

the legislative purpose are available. [citations

omitted]. In refusing to nullify statutes,

however hard or unexpected the particular

effect, this Court has stated:

“Laws enacted with good intention,

when put to the test, frequently, and to

the surprise of the law maker himself,

turn out to be mischievous, absurd or

otherwise objectionable. But in such

case the remedy lies with the law

making authority, and not with the

courts.” [citation omitted].

” x ~

It is enough that Congress intended that the

language it enacted would be applied as we

have applied it. The remedy for any

dissatisfaction with the results in particular

cases lies with Congress and not with this

Court. Congress may amend the statute; we

may not.

Griffin v. Oceanic Contractors, Inc.,458 U.S. at 574-576.

In this case, the Court of Appeals similarly concluded that

Congress could not have intended that the states receive the benefit

of interest earned on federal funds pending their disbursement for

program purposes. The Court of Appeals’ perception of what

Congress intended when drafting the ICA cannot justify disregard

for the plain and unambiguous language expressly provided by

Congress.

——————— eee eee

Additionally, this Court and the federal courts have repeatedly

refused to re-write statutes enacted by the Congress and have

consistently held that Congressional purpose is expressed by the

plain meaning of the statutory language and that this language

must be considered conclusive. Norfolk and Western Railway Co.

v. American Train Dispatchers Assoc., supra; United States v. Ron

Pair Enterprises, Inc., supra; American Tobacco Co. v. Patterson,

456 U.S. 63, 68 (1982); Consumer Product Safety Commission v.

GTE Sylvania, Inc., 477 U.S. 102, 108 (1980). To alter Congress’

clear language, there must be “extraordinarily clear evidence ofa

contrary legislative intent.” Malloy v. Eichler, 860 F.2d 1179, 1183

(3d Cir. 1988). Moreover, where the language of the statute is clear,

only “the most extraordinary showing of contrary intentions”

justifies altering the plain meaning of the statute. Malloy v. Eichler,

860 F.2d at 1183 (citing Garcia v. United States, 469 U.S. 70

(1984)). Here, the legislative history is extraordinarily clear that

states are not to be charged interest pending disbursement of

federal funds.

The plain meaning of the ICA clearly provides that states are

not responsible for interest earned on the federal grant funds

pending disbursement for program purposes:

Consistent with program purposes and

regulations of the Secretary of the Treasury, the

head of an executive agency carrying out a

grant program shall schedule the transfer of

grant money to minimize the time elapsing

between transfer of the money from the

Treasury and the disbursement by a State,

whether disbursement occurs before or after

the transfer. A State is not accountable for

interest earned on grant money pending its

disbursement for program purposes.

See 31 U.S.C. § 6503(a) (emphasis added).

As the panel majority of the Third Circuit, the dissent, and the

district court all agreed, these self-insurance reserve funds are

grant funds being held pending disbursement to claimants for

program purposes. Notwithstanding the plain and unambiguous

language of the ICA, the panel majority opinion decides to re-write

Congressionally created legislation by inserting the word

“immediate” or “prompt” into the statute so that the last sentence

would read “pending their immediate disbursement for program

purposes.”' (See 12a-13a).

The Third Circuit’s decision and erroneous interpretation of

the ICA is based on an alternative argument offered by the

Commonwealth to demonstrate that any way the ICA is

interpreted, the Commonwealth is not accountable for interest on

federal funds pending their disbursement for program purposes.

The Commonwealth argued in the alternative that the funds at issue

were disbursed when deposited into the self-insurance reserves

and, therefore, lost their federal grant character at that time.

Accordingly, there was no need to reach the statute, since there was

no interest earned on “federal” funds. The district court did not

reach (or implicitly rejected) this argument, since it found the ICA

1. DHHS repeatedly argued that Congress did not mean what it said in the

ICA, despite Congressional notice, comment and debate on the floor during

enactment, recodification and amendment over the course of twenty years,

which specifically focused on the instant issue of state accountability for

interest. See Memorandum of Law in support of the Commonwealth's Motion

for Summary Judgment at pages 17-22 for the legislative history of the Act.

Instead, DHHS asserts that the DAB actually better “understood the context in

which the ICA was intended to apply.” Brief for Appellants at p. 18 (emphasis

added). See also Brief for Appellants at p. 7 (“Congress ... did not

contemplate”); p. 8 (“as that term was meant”); p. 19 (“whatever other abuses

had to be tolerated” presumably because of the express words of Congress).

Once again, neither DHHS nor the Court of Appeals have the authority to veto

the Congress.

Ds eeeeennte iene teataneetneesieecamamameieaal

expressly relieved the Commonwealth from earning interest while

the grant money was being held pending disbursement for program

purposes.

The majority mischaracterized this alternative argument as a

different “plausible interpretation of the pertinent statutory

language” (see 9a) and used this as an excuse to look behind the

statutory language at legislative history. As noted by the dissent,

the majority’s conclusion is illogical and counterintuitive (see

19a).

In the first instance, the Commonwealth’s alternative

argument was not an “interpretation” of the statutory provision,

but an argument why factually the court need not even reach the

statutory interpretation issue. The district court either did not reach

this argument or implicitly rejected it.? Thus, there is no basis for

going beyond the express unambiguous language of Congress.

Secondly, and as Judge Becker’s dissent points out, even if the

Commonwealth’s alternative argument were a “plausible statutory

interpretation” different from that of the district court, under either

“interpretation” the Commonwealth is not accountable for interest

(see 19a). No one, including the panel majority, offered a plausible

“interpretation” in which the Commonwealth was accountable for

interest. Indeed, Congress’ words are incapable of such an

interpretation. The majority only reached its result by judicial

legislation inserting the word “prompt” into Congress’ language

when Congress intentionally chose not to do so.

2. Judge Becker's dissent concluded that the district court rejected this

factual argument and that the funds in the self-insurance reserves were held

“pending disbursement,” and thus the ICA applied.

B. Even If The ICA Were Ambiguous, Which It Is Not, The

Court Of Appeals Erred By Misinterpreting The Legislative

History Of The ICA.

Even if one looked to the legislative history, the majority’s

conclusion that Congress did not intend what it expressly said is

insupportable. The majority opinion relies heavily on the

legislative history of the ICA as it was debated in the House of

Representatives. The House version of the ICA deleted the

provision which relieved the states from accountability for interest

earned on grant money pending its disbursement.

As the majority noted, the House initially deleted this

provision from the bill, but the Senate retained it, and the Senate

provision was accepted by the Conference Committee (H.R. Conf.

Rep. No. 1934, 90th Cong., 2d Sess. 12, reprinted in 1968

U.S.C.C.A.N. 4248) and enacted. The Senate version of the ICA

was enacted after the “[T]he Comptroller General . . . (House

Report at 29, 1968 U.S.C.C.A.N. at 4247) and the Department of

Health, Education and Welfare (House Report at 18, 1968

U.S.C.C.A.N. at 4238) objected to the provision relieving the

states from accountability for interest.” (See 12a). Yet, as the

majority concedes, every single citation to legislative history on

which it relies for its “legislative intent” argument is from the

House, which had originally adopted the rejected version of

Section 203(a).

The Senate version of the ICA, however, retained this

provision. It was the Senate version that was adopted by the

Conference Committee. The Conference Committee’s decision to

enact the Senate version of the ICA was made after the Controller

General and the Department of Health, Education and Welfare

specifically objected to the provision relieving states from.

accountability for interest.

Despite legislative history which clearly confirms Congress’

intent expressed in unambiguous statutory language to relieve the

states from the accounting for interest earned on federal grants was

deliberate and well considered, the majority instead relies on

selective commentary from the House version of the ICA, a

version which was never enacted by Congress. Rather than follow

the clear intent of Congress, the majority’s decision re-writes the

ICA and judicially legislates where Congress has acted.

Accordingly, the majority’s opinion is based on an erroneous

interpretation of the relevant legislative history which it has used

to re-write the plain language as expressed by Congress.

CONCLUSION

For all of the foregoing reasons, this Court must grant a writ of

certiorari to correct the Court of Appeals’ error of law and judicial

legislation which has effectively re-written the express statutory

language of Congress. The Court of Appeals’ decision will also

adversely affect twenty-six other states with self-insurance

reserves. DHHS is currently attempting to impute interest to some

States, in violation of the express language of the ICA and the intent

of Congress, in the same manner it imputed interest against the

Commonwealth of Pennsylvania. Petitioner therefore respectfully

urges this Court to address the foregoing issues and grant its

Petition for Writ of Certiorari to the United States Court of Appeals

for the Third Circuit.

Respectfully submitted,

JOHN M. ELLIOTT

Counsel of Record

HENRY F. SIEDZIKOWSKI

TIMOTHY T. MYERS

MARGARET S. CURRAN

ELLIOTT, VANASKIE & RILEY

Attorneys for Petitioner

925 Harvest Drive

Blue Bell, Pennsylvania 19422

(215) 977-1000

APPENDIX A -—— JUDGMENT OF THE UNITED STATES

COURT OF APPEALS FOR THE THIRD CIRCUIT

DATED JUNE 11, 1993

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 92-7373

COMMONWEALTH OF PENNSYLVANIA OFFICE OF THE

BUDGET,

Appellee

DEPARTMENT OF HEALTH AND HUMAN SERVICES;

ALMAR. JACOBS, Regional Director, Region III, Department of

Health and Human Services,

Appellants

ON APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE MIDDLE DISTRICT OF PENNSYLVANIA

(D.C. Civil No. 91-00471)

Present: Becker, Alito, and Garth, Circuit Judges

JUDGMENT

This cause came to be heard on the record from the United

States District Court for the Middle District of Pennsylvania and

was argued on January 20, 1993.

On consideration whereof, it is now here ordered and

adjudged by this Court that the judgment of the said District Court

entered May 19, 1992, be, and the same is hereby reversed and the

Appendix A

cause remanded to the district court for further proceedings

consistent with this Court's opinion. Costs taxed against appeilee.

All of the above in accordance with the opinion of this Court.

ATTEST:

s/ P. Douglas Side

Clerk

Dated: June 11, 1993

Costs taxed in favor of Department of Health and Human Services,

Alma R. Jacobs, Regional Director, Region III, HHS as follows:

Total for Brief ee 44.80

Total forAppendix ....... 53.40

Total for Reply Brief __....... 39.20

Total en 137.40

Certified as a true copy and issued in lieu

of a formal mandate on July 19, 1993.

Teste: s/ P. Douglas Side

Clerk, U.S. Court of Appeals for the Third Circuit.

APPENDIX B — OPINION OF THE UNITED STATES

COURT OFAPPEALS FOR THE THIRD CIRCUIT FILED

JUNE 11, 1993

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 92-7373

COMMONWEALTH OF PENNSYLVANIA

OFFICE OF THE BUDGET

Appellee

Vv.

DEPARTMENT OF HEALTH AND HUMAN SERVICES:

ALMA R. JACOBS. Regional Director, Region IIl.

Department of Health and Human Services.

Appellants

ON APPEAL FROM THE UNITED STATES

DISTRICT COURT FOR THE MIDDLE DISTRICT OF

PENNSYLVANIA

(D.C. Civil No. 91-0047 1)

Argued: January 20. 1993

Before: BECKER. ALITO. and GARTH. Circuit Judges

(Opinion Filed: June 11. 1993)

Appendix B

JOHN M. ELUOTT. ESQ.

HENRY F, SIEDZIKOWSKI. ESQ.

(argued)

TIMOTHY T. MYERS. ESQ.

MARGARET S. CURRAN, ESQ.

ELLIOTT, VANASHIE & RILEY

Union Meeting Corporate

Center V

925 Harvest Drive

Blue Bell, Pennsylvania 19422

Attomeys for Appellee

STUART M. GERSON

Assistant Attorney General

JAMES J. WEST

United States Attorney

LEONARD SCHAITMAN

BRUCE G. FORREST (Argued)

Attorneys. Appellate Staff Civil

Division. Room 3338

10th and Pennsylvania Avenue, N.W.

Department of Justice

Washington, D.C. 20530

Attomeys for Appellants

OPINION OF THE COURT

ALITO, Circuit Judge:

The Commonwealth of Pennsylvania Office of the Budget

(“the Commonwealth’) began this action to establish that it

is not accountable for Interest earned on federal grant

funds that were placed in self-insurance accounts used to

pay workers’ compensation and healih benefit claims by

state employees who administer federally funded programs.

The district court entered summary judgment for the

Commonwealth, holding that the Commonwealth Is entitled

to keep such Interest under Sectlon 203(a) of the

Intergovernmental Cooperation Act of 1968. 31 U.S.C.

§ 6503(a) (1988) (amended 1990) [hereinafter “Section

——_~_~ st ttt

Appendix B

203(a)"]. We conclude that the district court's interpretauion

of Section 203(a) was Incorrect. and we therefore reverse.

The federal government provides funding for a variety of

welfare benefit programs that are administered by the

states. Under these programs, the federal government

furnishes money that the states then distribute to program

recipients. In addition. the federal government reimburses

the states for a portion of their administrative expenses.

Among these administrative expenses are the costs of

benefits. such as workers’ compensation and medical

benefits. for state employees who work on the programs.

Rather than purchasing insurance to cover workers’

compensation and__ health benefit claims, the

Commonwealth has chosen to be “self-insuring.” that Is, It

has chosen to pay these cosis out of special accounts

created within its General Fund. The Commonwealth

periodically transfers money into these accounts In order to

maintain reserves that are sufficient. based on actuarial

calculations. to cover expected future obligations. The

Commonwealth assesses the federal government for a

proportionate share of the money transferred into these

accounts.

When the Director of the Division of Costs Allocation of

the federal Department of Health and Human Services

audited the Commonwealth's records for fiscal years 1986

through 1989. he discovered that the Commonwealth had

failed to credit the federal government with Its share of the

interest that the Commonwealth had earned on the money

in these accounts. He therefore concluded that this Interest

had to be refunded to the federal government.'

After an unsuccessful request for reconsideration by

HHS’s Regional Director for Region Ill. the Commonwealth

appealed the determinations regarding fiscal years 1988

and 1989 to the HHS Departmental Appeals Board (‘DAB’).

contending that no Interest had been earned on the federal

1. HHS contends that the interest on the federal monies for fiscal years

1986 through 1989 totals more than $7.5 million.

Appendix B

porticn of the self-insurance accounts and that. In any

event. the Commonwealth was entitled to keep any such

Interest by virtue of Section 203(a) of the ICA. This

provision stated:

Consistent with program purposes and regulations of

the Secretary of the Treasury. the head of an executive

agency carrying out a grant program shall schedule the

transfer of grant money to minimize the time elapsing

between transfer of the money from the Treasury and

the disbursement by a State. whether disbursement

occurs before or after the transfer. A State is not

accountable for interest earned on grant money

pending its disbursement for program purposes.

The DAB found that interest had In fact been earned. and

it rejected the Commonwealth's Section 203(a) argument.

concluding that “the self-insurance accounts were not grant

funds held ‘pending disbursement’ within the meaning of

Section 203." DAB Op. at 10. App. at 17. In enacting

Section 203, the DAB wrote. “Congress was convinced that

any Interest earned on most grant funds between their

uransfer and their disbursement would be so minimal that

it would not be worth the effort to account for the interest.”

id. at 9, App. at 16. By contrast. the DAB observed, “(t]he

self-insurance funds are, in essence, contingency funds to

be tapped. or disbursed. only when claims are filed against

them and paid by the State.” Id. Noting that large amounts

of interest had been earned on the federal contributions

ulone. the DAB found it “doubtful that Congress intended

une ICA to be the vehicle for such a large amount of

federally generated interest to be transferred to the State.”

Id. The DAB therefore upheld the determination that the

Commonwealth was required to refund the interest earned

on the federally contributed funds.

The Commonwealth then began this action in the United

States District Court for the Middle District of

Pennsylvania. seeking a declaratory judgment that it was

not required to refund the interest, as well as an injunction

prohibiting the Department of Health and Human Services

and its Regional Director (hereinafter “HHS") from

Appendix B

recapturing such Interest. The district court subsequently

granted summary Judgment for the Commonwealth, holding

that the Commonwealth was entitled under Section 203{a)

lo keep the Interest. The district court refused to defer to

HHS's interpretation of Section 203({a) on the ground that

HHS is not responsible for enforcing thai provision.

Exercising plenary review. the court then opined that the

language of Section 203(a) Is unambiguous and !s thus

dispositive. The court concluded that funds held in the

Commonwealth's self-insurance accounts were plainly held

“pending disbursement for program purposes” — |l.e..

pending their use to pay employee claims — and that

accordingly the Commonwealth was not accountable for

interest earned on those funds.

Observing that “only the ‘most extraordinary showing of

contrary [legislative] intentions’~ could justify disregarding

the plain meaning of a statute. Dist. Ct. Op. at 15. App. at

77 (quoting Malloy v. Eichler, 860 F.2d 1179. 1183 (3d Cir.

1988)). the court found the legislative history of Section

203(a) Insufficient to meet that burden. The court wrote:

We recognize. and the legislative history reveals. that

Congress designed the ICA to minimize the- Ume

between transfer and disbursement in order to

eliminate the states’ ability to profit from investing

federal funds. However. while Congress may have had

an expectation that a shorter time between transfer and

disbursement would result In less Interest being

accumulated by the states. the idea that states should

disburse funds prompUy was not intended as a

prerequisite to their right to retain Interest. We agree

that the House. Senate or committees voiced a concem

to prevent states from obtaining windfalls. and section

203(a) was enacted to help alleviate this concern.

However. the fact that Congress has not required

“Immediate disbursement” or placed a cap on the

Interest which may be eamed, Indicates that the

statute may be applied to all situations Involving the

receipt of funds pending disbursements. although there

may be occasions when states receive more than a de

minimis amount of Interest.

———~

Appendix B

Id. at 16-17. App. at 78-79 (emphasis in original) (footnote

omitted).

The court also found support for its decision In an HHS

regulation (45 C.F.R. §74.47(b)) and in recent legislative

and administrative developments. The court noted that

after the fiscal years In question In this case. Congress

enacted an amendment of Section 203(a). 31 U.S.C. § 6503,

that generally requires states, effective October 24. 1992, to

pay Interest to the United States on federal funds held ta

state accounts. The court further noted that in 1988 the

Office of Management and Budget had proposed a revision

of a prior nouUce (OMB A-87. 46 Fed. Reg. 9548 (1981)) that

would have expressly prevented states from retaining

Interest on federal funds kept in self-insurance accounts.

Apparenuy viewing these events as evidence that the states

had previously been permitted to retain such Interest, the

court wrote that “|t|hese developments serve to bolster our

decision that existing law does not preclude plainuff from

retaining the Interest In question.” Dist. Ct. Op. at 18. App.

at 80. Finally, the court held that HHS had “abused [its]

discretion by applying a new policy which renderjed] the

plainuff accountable for aclons taken in good-faith reliance

upon the ICA. OMB A-87, and the Department's own

regulations.” Id at 19-20. App. at 81-82. The court

therefore granted summary Judgment in favor of the

Commonwealth and remanded the case to HHS “for entry of

a decision that pursuant to 31 U.S.C. § 6503(a) plainuff is

ented to retain the Interest at Issue in this proceeding.”

Dist. Ct. Order. App. at 84.

HHS then took this appeal.

ll.

A. At the outset. the parties dispute whether the district

court erred in refusing to defer under Chevron U.S.A. Inc. v.

Natural Resources Defense Council, Inc.. 467 U.S. 837

(1984). to HHS’s interpretation of Section 203(a). HHS

argues that deference is appropriate because the President

delegated to OMB the responsibility for prescribing rules

and regulations implementing the ICA (Exec. Order 12.372.

Appendix B

47 Fed. Reg. 30.959 (1982)) and because OMB, In turn,

designated HHS as the agency responsible for developing

instrucUons for grantees. OMB A-87, Attachment A. J.3.

The Commonwealth responds that this “chain of attenuated

delegations” (Appellee Br. at 37) is insufficient to justly

deference.

We do not find it necessary to resolve this dispute.

particularly since the version of Section 203{a) at Issue has

now been amended. Even without deferring to HHS’

interpretation. we are convinced that the district court's

interpretation of Section 203(a) was Incorrect.

B. The district court's decision rests primarily on the

conclusion that the plain language of Section 203(a)

unambiguously supports the Commonwealth's position.

When statutory language is unambiguous. we must of

course heed it except In those “rare cases [in which] the

literal application of a statute will produce a result

demonstrably at odds with the Intentions of Its drafters.”

Griffin .v. Oceanic Contractors, Inc.. 458 U.S. 564. 571

(1982). See also. e.g.. Public Citizen v. United States

Department of Justice. 491 U.S. 440, 454 (1989): Green v.

Bock Laundry Machine Co., 490 U.S. 504. 509-10 (1989).

But, unlike the district court. we think that Secllon 203(a)

is “not a provision in which Congress’ limpid prose puts an

end to all dispute.” Gwaltney of Smithfield, Lid ov.

Chesapeake Bay Foundation, Inc.. 484 U.S. 49. 57 (1987).

Indeed. the district court and the Commonwealth — both of

whom fervently maintain that Section 203{a) Is

unambiguous and both of whom conclude that the

Commonwealth Is entitled to keep the Interest — have

provided a striking demonstration of the ambigulty of

Section 203(a) by proffering two entirely different but

nevertheless plausible interpretations “of the pertinent

statutory language.

The district court had no doubt that the key statutory

phrase — “pending ... disbursement [of federal grant

money] for program purposes” — referred to the time period

during which federal monies were kept In the self-insurance

10a

Appendix B

funds prior to disbursement to _ claimants. This

interpretation of the statutory language. however, is not

without problems. for if It were correct. it would seem

questionable whether Section 293(a) would permit federal

agencies to make contributions to self-insurance funds at

all. As noted, the first sentence of Section 203(a) says that

federal departments and agencies must schedule the

transfer of funds “so as to minimize the time elapsing

between the transfer of the money from the Treasury and

the disbursement by a State.” However. the very nature of

self-insurance funds — in which monies remain on deposit

for lengthy periods — seems Inconsistent with such

minimization. .

Perhaps in_ recognition of this’ problem, _ the

Commonwealth asserts that the statutory language

unambiguously supports a completely differe:it

interpretallon. According to the $Commonwealt'..

disbursement occurs when the federal money is initially

placed in the reserve accounts, not when claims are paid

from those accounts.

In the face of these conflicting interpretaUions, we could

hold that the statutory language is unambiguous only by

concluding that elther the district court's or the

Commonwealth's Interpretation is unreasonable. Cf. New

Casule County v. Hartford Accident & Indemnity Co.. 933

F.2d 1162, 1198 (3d Cir. 1991) (contract term is ambiguous

when capable of two reasonable interpretations); Mellon

Bank, N.A. v. Aetna Business Credit, Inc., 619 F.2d 1001.

1011 (3d Cir. 1980) (same). This we cannot do. Looking

only at the statutory language. we believe that both

interpretations are reasonable. and thus It Is apparent that

the statutory language Is ambiguous. Consequently. it Is

appropriate to look beyond the statutory language and

consider the background, purpose. and legislative history of

Section 203(a). Green. 490 U.S. at 511; Dicson v. United

States, 465 U.S. 482. 491 (1984).

C. Before Section 203 was enacted in 1968. it had long

been established in decisions of the Comptroller General

that interest earned by a grantee on funds advanced by the

lla

Appendix B

United States belonged to the United States rather than the

grantee and had to be refunded unless _ special

authorizaUion was provided. See. e.g.. 42 Comp. Gen. 1289

(1962): 1 Comp. Gen. 652 (1922); see also 64 Comp. Gen.

96 (1984): 59 Comp. Gen. 218 (1980). By 1968, however.

an “‘extraordinary expansion in the dollar amounts and

number of grants-in-ald’” had produced ~‘serious

management difficululles."” H.R. Rep. No. 1845. 90th Cong..

2d Sess. 9 (1968). reprinted in 1968 U.S.C.C.A.N. 4220.

4229 (quoting Advisory Commission) [hereinafter “House

Report”]. The ICA was Intended to correct some of these

problems and alleviate the administrative burdens on the

states.

One of these burdens was the need to account for

interest earned on federal funds. and Section 203(a) was

meant to eliminate this burden while at the same Ume

preventing the states from obtaining a windfall by holding

federal funds for lengthy periods and earming substantial

amounts of interest prior to disbursement. The Senate

Report stated that Section 203 would “minimize the Ume

between the Treasury transfer and the disbursement by the

State.” S. Rep. No. 1456. 90th Cong.. 2d Sess. 15 (1968). “It

is further Intended.” the Senate Report continued. “that

States will not draw grant funds In advance of program

needs.” Id. The Report explained that “new techniques.

such as the letter of credit and sight draft procedures now

used by Treasury. should minimize the amount of grants

advanced. and thus It should not be necessary to continue

to hold States accountable for interest or other Income

earned prior to disbursement.” Id.

In a similar vein, the House Report stated that “Federal

funds will be retained by the U.S. Treasury unul actually

needed by the State for the payment of obligations incurred

under the particular grant program.” House Report at 5.

1968 U.S.C.C.A.N. at 4225. On the floor of the House.

Representative Fascell explained (i114 Cong. Rec. 26.986

(1968)):

Section 203 establishes a procedure designed to

12a

Appendix B

discourage the advancement of Federal grant-iIn-aid

funds for longer Ume periods than are necessary....

Effecuve Government-wide Implementation of this

mechanism should save the Federal Government

considerable amounts of Interest costs.

See also 114 Cong. Rec. 26.979 (1968) (statement of Rep.

Erlenborn) (“To prevent States from gaining an unfair

advantage through eaming Interest on federal funds so

deposited, such funds shall be transferred to States so as

to minimize the’ timelapse between’ transfer and

disbursement.”).

The Comptroller General (House Report at 29. 1968

U.S.C.C.A.N. at 4247) and the Department of Health.

Educaulion. and Welfare (House Report at 18. 1968

U.S.C.C.A.N. al 4238) objected to the provision relieving the

states from accountability for interest. The Secretary of

HEW stated that this provision “might be an Incentive to

States to draw the funds sooner than actually needed,

contrary to the objective of Section 203.” House Report at

29. 1968 U.S.C.C.A.N. at 4247, The House initially deleted

this provision from the bill, but the Senate retained It, and

the provision was accepted by the Conference Committee

(H.R. Conf. Rep. No. 1934. 90th Cong., 2d Sess. 12,

reprinted in 1968 U.S.C.C.A.N. 4248, 4249) and enacted,

presumably based on ihe House's bellef that the scheduling

of transfers would mean that “the amount of such Interest

in the future should be rather small.” House Report at 9.

1968 U.S.C.C.A.N. at 4229.

D. In light of this background, we are convinced that the

statutory phrase “pending its disbursement for program

purposes” was intended to have a specific and limited

meaning. This phrase was Intended to refer to the period

during which a state temporarily holds federal grant-in-aid

money that Is desuned for prompt transfer to the ulUmate

recipients of program benefits. The phrase was clearly not

intended to refer to the long-term holding of federal funds

in reserve accounts. On the contrary. it seems clear that

the congressional committees and the supporters of Section

——EE7~

13a

Appendix B

203(a) would have been shocked by the thought that a state

could keep millions of dollars of Interest on federal funds

placed in such accounts. Congress thought that Section

203(a) would prevent states from holding federal funds for

any appreciable period of time. It intended to “save the

Federal Government considerable amounts of interest

costs” (114 Cong. Rec. 26.986). not to give the states a

huge interest windfall.

As we have noted. before Sectlon 203(a) was enacted, It

was a well-established rule that recipients of federal grants

were required to return any Interest earned on such grants

prior to their use unless they were specifically authorized to

keep It. When Congress enacted Secuion 203(a). It wanted to

modify this rule regarding interest on federal grants, but It

most assuredly did not Intend to sanction what the

Commonwealth tried to do in this case. Statutes that

modify setued rules should **be read with a presumption

favoring the retenuon of long-established and familiar

principles, except when a statutory purpose to the contrary

is evident.’ ” United States v. Texas. 61 U.S.L.W. 4307. 4308

(April 5. 1993) (holding that statute did not abrogate the

long-established rule that states must pay prejudgment

interest on debts to the federal government) (quoting

Isbrandtsen Co. v. Johnson. 343 U.S. 779. 783 (1952)).

Thus. we are reluctant In this case to Interpret Section

203(a) as abrogating the prior. established rule to a far

greater extent than Congress intended.

In sum. we are convinced that the statutory phrase

“pending ... disbursement for program purposes” was not

intended to refer to the long period of Ume during which

federal funds are kept In self-insurance accounts such as

those maintained by the Commonwealth. Entitiement to

interest earned on those accounts. therefore. Is governed by

the rule. which predates the enactment of Section 203(a).

that holders of federal grant money are required, absent

specific authorization. to refund any Interest earned on that

money to the federal government.

————————————————————————————————

l4a

Appendix B

HI.

The remaining arguments advanced by _ the

Commonwealth and the district court do not require

lengthy discussion. Both the Commonwealth and the

district court suggest that a regulation promulgated by

HHS to Implement Section 203(a) (45 C.F.R. 74.47(b))

supports the Commonwealth's entitlement to the Interest in

dispute. We disagree. Whether or not HHS's Interpretation

of Section 203(a) Itself is entitled to deference. we must

certainly defer to WHHS’s Interpretation of its own

regulalions. See Immigration and Naturalization Service v.

National Center for Immigrants’ Rights, Inc.. 60 U.S.L.W.

4052. 4054 (1991): Udall v. Tallman. 380 U.S. |. 16-17

(1965). Moreover. It Is quite clear that this regulation was

simply intended to Incorporate the rule contained In

Section 203(a) and was not Intended to give the states an

even greater exemption from accountability for Interest

earned on federal grant funds.”

We likewise see no merit in the Commonwealth's

argument that “the legislative history of the [1990

amendment of Section 203] provides indisputable evidence

that under current law, states are not accountable for

Interest earned on federal funds pending disbursement for

program purposes unUl commencing October 24, 1992.”

2.45 C.F.R. § 74.47(b) provides In pertinent part (emphasis added):

In accordance with the Intergovernmental Cooperation Act of 1968

(Pub. L. 90-577). States .. . shall not be accountable to the Federal

Government for interest or investment Income ... where this income

ils aliributable to grants-in-aid... .

Thus. the language of this subsection alone makes it clear that HHS

merely intended to incorporate the rule contained in the ICA. Moreover.

subsection (a) of the same provision states that “lelxcept when exempted

by federal statute (see paragraph (b) of this section for the principal

exemption). grantees shall remit to the Federal Government any interest

or other investment income earned on advances of HHS grant funds.” 45

C.F.R. § 74.47{a).

lSa

Appendix B

Appellee Br. at 24. In the first place. “subsequent legislauve

history is a ‘hazardous basis for Inferring the Intent of an

earlier’ Congress.” Pension Benefit Guaranty Corp. v. LTV

Corp., 496 U.S. 633. 650 (1990) (quoting United Slates uv.

Price. 361 U.S. 304. 313 (1960)). Moreover. the only

provision of the legislauve history of the 1990 enactment

cited by the Commonwealth merely restates the general

rule regarding accountability for Interest contained in

Section 203(a). This portion of the legislative history says

nothing whatsoever concerning accountability for interest

earned on self-insurance accounts or any other accounts

similar to those at issue here.’

For similar reasons, we see no significance for present

purposes in OMB's 1988 proposal to modify OMB A-87 to

prevent states from retaining Interest earned on self-

insurance accounts. We see no Indication that this proposal

was anything more than an effort to obviate future

difficulles. We certainly see no Indication that it

represented a concession by the federal government that

states were enUUed to retain such Interest under the

exisung law.‘

3. The Commonwealth relies on the following statement in the 1990

House Report:

Under the current law. the Slates need not account to the Federal

Government for interest earned on Federal funds disbursed to the

States prior to payment to program beneficiaries.

H.R. Rep. No. 696. 101st Cong., 2d. Sess. 5 (1990). reprinted in 1990

U.S.C.C.AN. 1691. 1691-1692.

4. The Commonwealth's reliance on three other actions taken by OMB Is

likewise misplaced. First. the fact that OMB has allowed the states to

place federal money in self-insurance reserves (OMB A-87. Attachment

B. C.4.c.) does not show that OMB meant to allow states to keep the

interest earned on federal funds placed in such accounts. Second. the

fact that another section of the same OMB noUce does not specifically

ist Interest earned on such accounts as an item that must be

(Cont'd)

l6a

Appendix B

We also reject the Commonwealth's argument that HHS.

by seeking to recover interesi earned on self-insurance

accounts, In effect amended OMB A-87 In violaUon of the

Administrative Procedure Act's rulemaking procedures.

HHS simply sought to enforce by adjudication the

Commonwealth's obligation to return Interest owed the

federal government in accordance with a long-established

rule. The rulemaking provisions of the APA are therefore

totally inapplicable.

Finally. we do not reach the Commonwealth's argument

that In fact no Interest was earned on the self-insurance

accounts In question. As previously noted. the DAB

explored and rejected this argument. The district court,

however, did not explicitly address_ this _ point.

Consequently, we do not address this question in the

present appeal. If the Commonwealth chooses to press this

contenUon on remand, the district court will be free to

address It.

The district court’s order will be reversed. and the case

will be remanded for further proceedings consistent with

this opinion.

(Cont'd)

reimbursed is not significant. The list contained in this provision Is, by

Ils Lerms. not exhaustive. See id., Altachment A. C.1.g. Third, we see no

significance for present purposes in a memorandum issued by an OMB

officer to federal agencies in 1986 urging them to refrain from “all

independent interest initiatives” pending enactment of the 1990

legislaulon. Contrary to the Commonwealth's contenUion, we cannot read

this memorandum as an “affirmation by the Execulive Branch” that

States are not accountable for interest earned on self-insurance funds.

17a

Appendix B

Becker, J.. dissenting. -

Section 203(a) of the Intergovernmental Cooperation Act

of 1963, 61 U.S.C. §6503(a) (1988) [hereinafter “ICA"],

accords the Commonwealth of Pennsylvania

("Commonwealth") the right to retain “Interest earned on

grant money pending its disbursement for program

purposes.” Id. In my view, the import of this language Is

clear, and neither the majority nor the Department of

Health and Human Services ("HHS") has offered a

compelling argument that the federal funds in question do

not meet the “pending disbursement” or “program

purposes” requirements of the ICA. Because | believe the

statute's Interest repayment exempUon applies to the facis

of this case. I would hold that the Commonwealth ts

entitled to retain the interest earned on the federal grant

money used in Its self-insurance reserves.'

Stated In full, § 203(a) of the ICA provides:

Consistent with program purposes and regulations of

1. Like the majority, | do not reach the interesling question raised by the

parues — whether we owe deference. under Chevron U.SA., Inc. vu.

Natural Resources Defense Council, Inc.. 467 U.S. 637, 104 S. Cl 2778

(1984), to HHS's interpretation of the ICA when Congress did not

delegate the authority to implement this statute directly to HHS. but

rather to the Treasury Department. Through an execulive order, see

Exec. Order No. 12.372. 47 Fed. Reg. 30.959 (1982). the President has

delegated the authority to implement and administer the ICA to the

Oflice of Management and Biudget ("OMB"), which. in turn. has delegated

authority lo HHS for “developing and Issuing the instructions for use by

grantees in preparation of cost allocation plans.” OMB A-87, Fed. Reg.

9548. 9551 Wan. 28. 1981 fhereinafter “OMB A-87|. | need not address

this Chevron question because. in my view, the language of the ICA Is

clear and on-point. and it is well-established that courts must follow the

language of the statute itself rather than a contrary agency

interpretation when the statute speaks directly and unambiguously on

an issue. See Chevron. 467 U.S. at 842-43. 104 S. Cl. al 2781-82: see

also Imumigralion & Naturalization Serv. v. Cardaza-Fonseca, 480 U.S.

421, 453-54, 107 S. Ct. 1207, 1224-25 (1987) (Scalia. J.. concurring).

18a

Appendix B

the Secretary of the Treasury. the head of an executive

agency carrying out a grant program shall schedule the

transfer of grant money to minimize the time elapsing

between transfer of the money from the Treasury and

the disbursemeht by a State. whether disbursement

occurs before or after the transfer. A State is nol

accountable for interest earned on grant money pending

its disbursement for program purposes.

31 U.S.C. §6503(a) (1988) (amended In 1990) (emphasis

added). In the instant case, there was, admittedly. a

particularly long Ume between the point at which the

Commonwealth “drew down” the money from the federal

government to place In Its self-insurance reserves and the

point at which the Commonwealth disbursed the money to

cover Insurance claims. That, however, does not change the

fact that the federal funds. while they were within the

Commonwealth's self-insurance reserve accounts prior to

their use to satisfy Insurance claims, were “pending ...

disbursement for program purposes.” I agree with the

district court that the disbursement of the money occurred

when the Commonwealth applied it for its ultimate

purpose, the reimbursement of insurance claims. The

period before this act occurred was therefore “pending ...

disbursement.”

The majoxity acknowledges that this Interpretation of §

203(a) Is plausibie, but concludes that this provision Is

ambiguous because the Commonwealth has asserted an

alternative Interpretation which the Majority deems equally

plausible. See Majority Typescript at 8. Specifically, the

Commonwealth submits that under §203(a) the federal

funds were disbursed at the point at which the

Commonwealth received them from the federa! government.

not (as the district court concluded) at the time when the

Commonwealth used the federal funds to satisfy Insurance

claims. According to the Commonwealth, therefore. once

the relevant funds were deposited within Its self-insurance

reserve accounts, the federal government lost all claims on

the funds, as they were then entirely the property of the

Commonwealth. Based on this logic. the Commonwealth

19a

Appendix B

then claims entitiement to any Interest earned. as |t was

interest earned on Its own money.

Accepting the majority's contention that both the

Commonwealth's and the district court's views are plausible

— though as just discussed | adhere to the view of the

district court — the conclusion the majority reaches !s

counterintultive. While crediting the Interpretations of the

Commonwealth and the district court. both of which result

in the conclusion that the Commonwealth tis entitled to

retain the Interest, the majority nonetheless determines

that the federal government retains the Interest. The

majority reaches this surprising result because, having

identified a conflict between the Interpretations of the

district court and the Commonwealth over an arguably

ambiguous clause within §203(a). It then tums to the

legislauive history. not so much to aid Its InterpretaUon of

the clause In question. but to supplant the terms of

§ 203(a) in its enurety, including language that Is clear and

unambiguous.

Even if the ambiguous meaning of “pending .

disbursement” may Justify the majority's decision to look to

the legislative history to interpret that phrase (despite the

fact that both approaches giving rise to the ambiguity lead

to the same result In favor of the Commonwealth), It does

not license the majority to use the legislative history to

reconstrue the statute as a whole. Even though there may

be two equally plausible Interpretations of “pending ...

disbursement” as applied to this case, the majority ignores

what the statute does make clear: a state does not have to

refund the interest on federal funds under either the

district court's or the Commonwealth's interpretatuions.

Moreover, in my view. the Commonwealth has easily met

the second requirement of § 203(a). that the federal funds

be used for “program purposes.” It is undisputed that HHS

has approved Pennsylvania's use of federal money for self-

insurance reserves,” a practice which saved money for both

2.OMB A-87 also contemplates the use of federal funds for self-

(Cont'd)

20a

Appendix B

the Commonwealth and the federal government. Although

HHS has correclly pointed out that the Interest on the

federal funds. when it was_ diverted’ into the

Commonwealth's general revenue accounts, was not put to

use for program purposes, this fact Is Irrelevant under

§ 203(a). Section 203(a) requires that the federal grant

money, not the inilerest It generates. must be used toward

the goals of the federal-state cooperative program.’

In order to avoid the application of the plain language of

§ 203(a). the majority. as I have noted. resorts to the

legislative history of the ICA. which it then uses to

effectively re-write the statute. It Is well-established that.

ordinarily, legislative history does “not trump the [facial

meaning of [a] statute.” because If “the language of the

statute Is clear. only the most extraordinary showing of

contrary Intentions Jjustlflies] altering the plain meaning of

a statute.” American Lung Ass'n of N.J. v. Kean, 871 F.2d

319, 325 (3d Cir. 1989) (citations and Internal quotations

omitted); accord Garcia v. United States. 469 U.S. 70. 75.

105 S. Ct. 479, 482 (1984). TVA v. Hill, 437 U.S. 153. 187

n.33, 98 S. Ct. 2279, 2298 n.33 (1978); Malloy v. Eichler.

860 F.2d 1179, 1183 (3d Cir. 1988). I do not believe that

the majority has made the “extraordinary showing” of

contrary legislative intent necessary to warrant Its disregard

of § 203(a)'s explicit language.

(Cont'd)

insurance reserves. See 46 Fed. Reg. at 9554 (“ContribuUons to a reserve

for a self-insurance program approved by the Federal grantor agency are

allowable.*).

3. In addition. as the Commonwealth points out. HHS did not raise the

argument that the federal funds did not comply with the program

purposes requirement of § 203(a) before the district court. It Is therefore

waived.

21a

Appendix B

The majority correctly points out, see Majority Typescript

at 8, that the general. background purpose of the ICA as a

whole was to “Improve the administration of grants-in-aid

to the States” in order to alleviate the management

problems created by the vast Increase In number and size

of federal grants to the states. H.R. Conf. Rep. No. 1934.

90th Cong.. 2d Sess. 1 (1968). reprinted in 1968

U.S.C.C.A.N. 4248. In addition. as the majority explains.

§ 203(a)'s drafters believed that the period of time between

a state's receipt of federal funds and Its disbursal of those

funds should be minimized. See Majority Typescript at 9

(cling S. Rep. No. 1456. 90th Cong.. 2d Sess. 15 (1968).

Apparently based on the assumpton that there would be a

short lag time between a state's draw-down of the funds

and their disbursal, the drafters of § 203(a) exempted the

states from the burden of accounting for and repaying the

federal government for interest earned on federal funds

thereby relieving them of a previous administrative and

fiscal burden. See S. Rep. No. 1456, 90th Cong., 2d Sess.

15 (1968). Although allowing the Commonwealth to retain

the Interest in this case may call into question the wisdom

of the drafters’ apparent assumpton that there would be a

minimal period between federal and state disbursal. that

assumption, by itself. camnot override the explicit

provisions the drafters Included in the ICA Itself.

Indeed. it seems clear to me that despite this

assumpton, the drafters of §203(a) were willing to place

the burden of minimizing the pre-disbursal Ume period on

the relevant federal agency. not on the states. Congress, in

enacting § 203(a), changed the pre-exisUng rule that state-

grantees were accountable for the interest on federal funds.

See 42 Comp. Gen 289 (1962). The drafters of § 203(a)

could have either retained the pre-existing rule or at least -

retained It In those situations in which states would receive

federal funds for a considerable period before their

disbursement. However. Congress chose not to do so.

The legislative history makes clear that Congress’

decision to free the states from the burden of accounting for

22a

Appendix B

interest earned on federal grants was not inadvertent, but

deliberate and well-considered. Both the Comptroller

General, see H.R. Rep. No. 1845, 90th Cong., 2d Sess.

(1968). reprinted in 1968 U.S.C.C.A.N. at 4247, and the

Secretary of the Department of Housing, Fducation and

Welfare. see id. at 4238. informed Congress of their

objections to § 203{a)’s elimination of the states’ duty to

account for interest on federal grants. The House of

Representatives deleted the provision. while the Senate

retained it. At the joint House-Senate conference, the

current version of §203(a) was adopted, exempting states

from accountability for interest. The legislative history

reveals, therefore. that Congress quite deliberately relieved

the states from their liability for interest. while imposing on

federal agencies the duty of minimizing the time during

which the states would retain federal money before using It.

4.1 reach my conclusion as to the meaning of § 203{a) without resort to

Congress’ recent amendment of the ICA because of the “difficulties

inherent in relying upon subsequent legislative history.” Sullivan uv.

Finkelstein. 496 U.S. 617. 110 S. CL 2658. 2665 n.8 (1990) (ciling United

Slates v. United Mine Workers of Am. 330 U.S. 258. 281-82. 67 S. Ct.

677. 690 (1947)). However. | mote that the subsequent legislative

developments support my interpretation. Specifically. in 1990 Congress

amended the ICA to authorize regulations imposing upon the states the

duty of refunding the interest earned on federal grants prior to their

disbursal. See P.L. No. 101-453. 104 Stat 1058 (1990) (codified at 31

U.S.C.A. §6503{(c)(1) ef seq. (West Supp. 1993)). The House report

accompanying the arnendments to the ICA commented:

Currently. the Intergovernmmental Cooperation Act permits a State to

retaln for its own purposes any interest earned on Federal grant

funds transferred to the Slates ‘pending its disbursement for

program purposes.’ Thus. where a State draws down Federal funds

in advance of payment to program beneficiaries. the Slate may

invest the funds to earn income for the use of the Slate.

H.R Rep. No. 101-696, 101st Cong.. 2d Sess. 5 (1990). reprinted in 1990

U.S.C.C.A.N. 1691, 1693. This interpretation of the unamended version

of the ICA as well Congress’ decision to amend the ICA in order to reach

the result the majority reaches — requiring states to retum pre-

disbursal interest — comports with my conclusion that the ICA. before

its 1990 amendments. allowed states to retain such interest.

23a

Appendix B

Rather than follow Congress’ decision to relieve the states

from refunding the interest on undisbursed federal furds.

the majority relies on the rule which existed prior to the

enactment of the ICA, that all federal grantees must refund

any interest earned on federal grants prior to their

disbursal, absent specific authorization to the contrary. To

do so, the majority Invokes the “presumption favoring the

retenluon of long-established and familiar principles.”

United States v. Texas 61 U.S.L.W. 4307, 4308 (1993)

(citing Isbrandtsen Co. v. Johnson. 343 U.S. 779. 783. 72 S.

Ct. 1011. 1014 (1952)). Yet this presumption in favor of the

retention of a pre-existing common law rule does not apply

when Congress has legislated on the issue. ~‘speak{ing])

directly’ to the question addressed by the common law.” Id.

In the situation at hand. Congress was aware of the old

rule that grantees were responsible fer the interest on

federal money and. through § 203(a). specifically acted to

eliminate that rule. Simply put. Congress has directly

spoken to the common law rule. and has abrogated It with

respect to state grantees. For this reason. adherence to the

pre-exisUng common law rule rather than the statutory rule

which replaced It Is. In my view. improper.

IV.

In sum, | would follow the language of § 203{(a) of the ICA.

which | consider clear. | do not believe the legislative

history so clearly evinces a contrary intention as to Justify

a failure to follow the statute's plain language. At best. the

legisiaulve history reveals an assumption by the drafters as

to the length of Ume during which states would retain

federal funds. The fact that this assumpton has not always

proven correct. however. cannot overcome the plain

language of § 203(a). Applying § 203(a)'s terms to the facts

at hand. | would hold that the federal funds were pending

disbursement after being deposited in the Commonwealth's

self-insurance reserves and prior to being used to satisfy

Insurance claims. In addition, the Commonwealth. by using

24a

Appendix B

the federal funds to supplement its self-insurance reserves,

was using the federal money for a program purpose. |

therefore would hold that the Commonwealth !s entitled to

retain the interest earned on the federal funds, hence |

respectfully dissent.

A True Copy:

Teste:

Clerk of the Untted States Court of Appeals

Sor the Third Circull

25a

APPENDIX C — ORDER AND JUDGMENT, AND

MEMORANDUM OF THE UNITED STATES DISTRICT

COURT FOR THE MIDDLE DISTRICT OF

PENNSYLVANIA FILED MAY 18, 1992

IN THE UNITED STATES DISTRICT COURT

FOR THE MIDDLE DISTRICT OF PENNSYLVANIA

CIVILACTION NO. I:CV-91-471

COMMONWEALTH OF PENNSYLVANIA OFFICE OF THE

BUDGET,

Plaintiff

VS.

DEPARTMENT OF HEALTH AND HUMAN SERVICES,

ALMAR. JACOBS, Regional Director, Region III, HHS

Defendants

ORDER AND JUDGMENT

AND NOW, this 18th day of May, 1992, upon consideration

of the parties’ cross-motions for summary judgment, it is ordered

as follows:

1. Defendants’ motion for summary

judgment is denied.

2. Plaintiff's motion for summary

judgmentis granted.

3. Judgment is hereby entered in favor of

plaintiff and against defendants.

26a

Appendix C

4. This action is remanded to the

Department of Health and Human Services for

entry of a decision that pursuant to 31 U.S.C.

§ 6503(a) plaintiff is entitled to retain the

interest at issue in this proceeding.

5. The Clerk of Court shall close this file.

s/ William W. Caldwell

William W. Caldwell

United States District Judge

27a

Appendix C

IN THE UNITED STATES DISTRICT COURT

FOR THE MIDDLE DISTRICT OF PENNSYLVANIA

CIVILACTION NO. 1:CV-91-471

COMMONWEALTH OF PENNSYLVANIA OFFICE OF THE

BUDGET,

Plaintiff

VS.

DEPARTMENT OF HEALTH AND HUMAN SERVICES,

ALMAR. JACOBS, Regional Director, Region III, HHS

Defendants

M EMORANDUM

I. /ntroduction.

Pending are the cross motions for summary judgment filed by

plaintiff, Commonwealth of Pennsylvania, Office of the Budget,

and defendants, United States Department of Health and Human

Services (the Department) and Alma R. Jacobs, Regional Director

of the Department. Plaintiff instituted this declaratory judgment

action to vacate the decision of the Department Appeals Board,

which required plaintiff to refund to the federal government

interest earned on federal funds advanced for grant-in-aid

purposes. We will examine the motions under the well-settled

standard. Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548,

91 L.Ed.2d 265 (1986).

28a

Appendix C

II. Background

In the early 1980's, plaintiff created three self-insurance

reserve accounts to cover the costs of worker’s compensation

awards and health and hospital benefits for all state employees.

The reserves paid claims directly and the state was uninsured for

worker’s compensation purposes. Plaintiff sought funds from the

federal government to fund part of benefits to be paid to employees

who were involved in federally and jointly funded programs. To

determine the annual outlays necessary to sustain its self-insurance

fund, plaintiff computed a per employee “rate of contribution”

based upon a percentage of payroll dollars which it estimated

would cover the cost of anticipated claims and insure a reasonable

balance for the subsequent year.

The Department was responsible for reviewing and approving

these rates for the federal government. For the years 1983 through

1989, it approved the contribution rates suggested by plaintiff for

its three self-insurance accounts. In each of those years, the

Department issued “letters of credit’’' to plaintiff authorizing

advances of amounts necessary to cover the federal government’s

share of the contribution rates as they were applied to the employee

payrolls. Within a reasonable time, plaintiff would withdraw these

amounts from the U.S. Treasury, deposit them into its general

treasury, and provide benefits to employees whenever claims

arose. Thus, the funds received were not immediately disbursed

and were retained until needed.’

1. A “letter of credit” is defined under the Department's regulations as “an

instrument certified by an authorized official [of the grantor agency] which...

[permits] a recipient to draw funds needed for immediate disbursement.” 45 C.F.R.

§ 74.91.

2. Although plaintiff did not segregate the federal funds in its general treasury,

(Cont'd)

2994

Appendix C

During the years in question, plaintiff routinely invested

portions of the self-insurance reserves, including the federal funds,

in various interest bearing securities. These investments resulted in

increased revenues which plaintiff neither reinvested in the self-

insurance account, nor refunded to the federal government. In

September of 1986, the federal Office of Inspector General (OIG)

reviewed plaintiff’s fund balances and found that it had failed to

credit the federal government with a proportionate share of the

interest earned on those accounts. The OIG concluded that this

interest income constituted an “applicable credit” under regulation

A-87 of the Office of Management and Budget (OMB), and

therefore should have been deducted from plaintiff’s “allowable

costs” and refunded to the federal government.’

The Director of the Division of Cost Allocation for the

Department (DCA) performed subsequent audits of plaintiff’s

records for the fiscal years 1986 through 1989 using the cost

principles applied earlier. The DCA found that plaintiff again had

failed to credit the federal government with its share of interest

earned. Plaintiff filed for reconsideration of the DCA

determination for fiscal years 1988 and 1989, contending that the

Department failed to show that plaintiff actually earned interest on

its self-insurance funds. Moreover plaintiff argues that any such

interest is an allowable cost which would have been paid to a

private insurance carrier (were the state not self insured) and is not

refundable to the federal government.

Defendant, Alma R. Jacobs, a Regional Director of the

(Cont'd)

it maintained ledgers accounting for balances and transactions attributable to each

self-insurance account.

3. Plaintiff has never appealed the Inspector General's conclusions.

30a

Appendix C

Department, rejected plaintiff’s arguments and upheld the DCA

director’s determinations. Upon appeal to the Department Appeals

Board (the Board), plaintiff argued that it was not accountable for

interest earned on its self-insurance funds pursuant to § 203(a) of

the Intergovernmental Cooperation Act (ICA), 42 U.S.C. § 4213

(repealed and codified at 31 U.S.C. § 6503 (a)), which provides as

follows:

[T]he head of an executive agency carrying out

a grant program shall schedule the transfer of

grant money to minimize the time elapsing

between the transfer of the money from the

Treasury and the disbursement by a State,

whether disbursement occurs before or after

the transfer. A State shall not be held

accountable for interest earned on grant

money pending its disbursement for program

purposes.

31 U.S.C. § 6503(a) (emphasis added).

The Board rejected plaintiff's argument, holding that the

ICA’s legislative history, the Board’s prior determinations, and the

cost principles of OMB A-87 indicate that the above exemption is a

“narrow” one and is not applicable to the self-insurance reserve

accounts in question. The Board held that section 203(a) of the ICA

was intended to minimize the time between transfer and

disbursement, and thus reduce the amount of interest states would

be able to earn. The Board reasoned that the last sentence of 203(a)

was added merely to relieve states of the administrative burden of

having to refund what Congress expected to be only small amounts

of interest, and was not designed to allow states to profit or receive

a windfall from interest earned on federal funds.

3la

Appendix C

In its motion for summary judgment, plaintiff argues that the

language of section 203(a) is unambiguous and Congress’ intent

clear that states are not accountable for interest earned on federal

funds pending disbursement for grant-in-aid purposes. The crux of

the present matter is whether the “non-accountability provision” of

203(a) is applicable to self-insurance reserve accounts which do

not involve immediate disbursement, but are contingent in nature

(i.e. funds are disbursed only when needed to pay individual

claims) and thus have a tendency to generate significant amounts

of interest on an annual basis.

III. Discussion

A. Standard of Review

We preface our discussion with our standard of review.

Generally, an administrative agency’s interpretation of the statute

it administers is entitled to deference and may only be overturned if

“arbitrary, Capricious, an abuse of discretion, or otherwise not in

accordance with law.” Administrative Procedure Act, 5 U.S.C.

§ 706(2)(A) (1982); Citizens to Preserve Overton Park Inc. v.

Volpe, 401 U.S. 402, 416, 91 S.Ct. 814, 823-24 (1971); Camp v.

Pitts, 411 U.S. 138, 141-143, 93 S.Ct. 1241, 1244-45 (1973) (per

curiam); Applications Research v. Naval Air. Dev. Center, 752 F.

Supp. 660, 667 (E.D. Pa. 1990).

However, “an agency is not entitled to such deference when it

interprets another agency’s statute or resolves a conflict between

its own statute and the statute of another agency.” Department of

Navy, Military Sealift Command v. Federal Labor Relations

Authority, 836 F.2d 1409, 1410 (3d Cir. 1988); Division of Military

and Naval Affairs v. Federal Labor Relations Authority, 683 F.2d

45, 48 (2d Cir. 1982) (“No great deference is due an agency

32a

Appendix C

interpretation of another agency’s statute”); Whaley v. Schweiker,

663 F.2d 871, 873 (9th Cir. 1981) (no judicial deference need be

given to the Secretary of Health and Human Services’

interpretation of another agency’s statutes and regulations); New

Jersey Air Nat’l Guard v. Federal Labor Relations Authority, 677

F.2d 276, 281 n. 6 (3d Cir. 1982); Tsosie v. Califano, 651 F.2d 719,

722 (10th Cir. 1981) (“[a] court should [only] accord substantial

weight to the interpretation given a statue or regulation by the

agency charged with administering it”) (emphasis added). When

the agency is not charged with administering the statute, “we are

not bound by [the agency’s] construction of th[e] statute even if

reasonable.” Nebraska, Military Dept., Office of Adjutant General

v. Federal Labor Relations Authority, 705 F.2d 945, 948 (8th Cir.

1983) (emphasis added).

The seminal case, Chevron U.S.A., Inc. v. Natural Resources

Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d

694 (1984) is instructive. The Supreme Court stated the following:

When acourt reviews an agency’s construction

of the statute which it administers, it is

confronted with two questions. First, always, is

the question whether Congress has directly

spoken to the precise question at issue. If the

intent of Congress is clear, that is the end of the

matter; for the court, as well as the agency,

must give effect to the unambigously expressed

intent of Congress. If, however, the court

determines Congress has not directly

addressed the precise question at issue, the

court does not simply impose its own

construction on the statute, as would be

necessary in the absence of an administrative

33a

Appendix C

interpretation. Rather, if the statute is silent or

ambiguous with respect to the specific issue,

the question for the court is whether the

agency’s answer is based on a permissible

construction of the statute.

Id. 467 U.S. at 843 (emphasis added).

In the present action, the Board’s decision was based upon its

interpretation of section 203(a) of the ICA, OMB A-87, and its own

regulations. We agree tihat the Departme is charged with the

authority to administer cost-allocation programs for states

according to the cost principles of OMB A-87, and is authorized to

interpret its own regulations. However, the Department has failed

to cite any authority which evidences that it is entrusted by

Congress with the authority to interpret or administer the ICA, a

congressional statute. For that reason, we will not accord the

Department substantial deference in its construction of section

203(a) of the ICA, an interpretation which was central to the

Board’s decision.

Regardless, even if the Department were charged with the

authority to interpret or administer the ICA, the Board’s decision is

not entitled to deference when it is contrary to the clear and

unambiguous language of the statute. “The judiciary is the final

authority on issues of statutory construction and must reject

administrative constructions which are contrary to clear

congressional intent.” Chevron, supra, 467 U.S. at 843, n. 9. We

“must reject administrative constructions of [a] statute, whether

reached by adjudication or by rulemaking, that are inconsistent

with the statutory mandate or that frustrate the policy that Congress

sought to implement.” Federal Election Com. v. Democratic

Senatorial Campaign Committee, 454 U.S. 27, 32, 102 S.Ct. 38,

42, 70 L.Ed.2d 23 (1981).

34a

Appendix C

We will focus our inquiry first upon the statutory language at

issue, and if section 203(a) is clear and unambiguous when applied

to the specific issues at hand, we will look to the legislative history

only as a guide to the statute’s meaning. See, United States v.

Fernandez, 749 F. Supp. 683 (E.D. Pa. 1990) (inquiry into history

of statute is unnecessary when the language of statute is clear).

B. The Plain Meaning of Section 203(a)

The regulation and statute subject to interpretation in the

present matter are OMB A-87 and section 203(a) of the ICA. First,

plaintiff argues that the language of section 203(a) is unambiguous

and clearly expresses Congress’ intent that states are not required

to pay interest on federal funds pending disbursement for grant-in-

aid programs. Specifically, plaintiff avers that funds deposited in

its self-insurance reserve accounts constitute “funds pending

disbursement for program purposes.” Construction of the language

“pending disbursement” is critical to resolving the instant matter.

As indicated, section 203(a) provides: “A State shall not be

held accountable for interest earned on grant money pending its

disbursement for program purposes.” 31 U.S.C. § 6503(a).

Plaintiff contends that nothing in section 203(a) restricts the

amount of interest states may retain or the length of time funds are

“pending disbursement.” Plaintiff argues that if Congress intended

to restrict the language to mean “pending immediate

disbursement,” it would have so specified. Upon careful

consideration, we find that section 203(a) is clear and

unambiguous insofar as it entitles states to retain interest,

regardless of the amount, so long as it is earned on federal funds

advanced for program purposes, which would include the funds at

issue. Defendants have failed to cite contrary authority specifically

dealing with self-insurance reserve accounts.

35a

Appendix C

Section 203(a) does not expressly limit the amount of interest

states may earn or the period of time disbursement may be pending.

Defendants argue that section 203(a) is merely a “narrow”

exception to the general rule that “grantees shall remit to the

Federal Government any interest or other investment income

earned on advances of HHS grant funds.” 45 C.F.R. § 74.47(a)

(emphasis added); see also, 45 C.F.R. § 92.21(i). However, such

“general rule” provides an explicit exception, i.e. “[e]xcept when

exempted by Federal statute,” which clearly applies to section

203(a). /d.*In fact, the Department’s own regulations specifically

provide that:

In accordance with the Intergovernmental

Cooperation Act of 1968 (Pub. L. 90-577),

States, as defined in the act, shall not be

accountable to the Federal Government for

interest or investment income earned by the

State itself, or by its subgrantees, where this

income is attributable to grants-in-aid as

defined in the act (42 U.S.C. 4213).

45 C.F.R. § 74.47 (b). This language does not even limit the

interest earned to a period pending disbursement.

The ICA permits states to receive federal grant-in-aid funds

through letters of credit, which are instruments executed by the

federal grantor agency “which authorize[] a recipient to draw

funds needed for immediate disbursement.” 45 C.F.R. § 74.91.

Congress intended that the letter-of-credit procedure would reduce

the period of time between transfer of funds and disbursement.

4. The Department's construction of 45 C.F.R. § 74.47 (a) is misguided as the

requirement to refund interest to the federal government is on grantees, not states.

36a

Appendix C

Defendants argue, therefore, that section 203(a) and the letter of-

credit procedure were intended to reduce the amount of interest

states could earn prior to their disbursement of grant funds, and

thereby prevent windfalls.°

On that ground, defendants contend that when federal funds

transferred to the states are not immediately disbursed, “the interest

on the remaining amounts is subject to the general accountability

rule and is not excludable.” They contend that section 203(a),

therefore. does not apply to the self-insurance reserves at issue,

because “due to their contingent nature, they roll over from year to

year with large amounts of interest being generated in the interim

and are not disbursed immediately.” (Defendants’s Supporting

Brief, at 25). We reject this argument.

While we agree that the last sentence of section 203(a) was

designed to ease the states’ accounting burden, Congress clearly

required that the federal government forego all interest earned on

funds pending disbursement. Absent an exception with regard to

the situation presented here, we may not interpret the statute in a

manner that is contrary to its clear language.

Defendants rely upon the Board’s interpretation of OMB A-

87, which provides that states are entitled to reimbursement from

5. Toprevent the states from receiving windfalls, Congress initially required

states to refund to the federal government any interest earned during the time between

transfer and disbursement. See, H.R. Rep. No. 1845, 90th Cong., 2d Sess., reprinted

in3 U.S. Code & Cong. Admin. News, 90th Cong., 2d Sess. 4220, 4229 (1968)). Upon

promulgation of the new letter-of-credit procedure, the Senate added the “non-

accountability provision” of section 203(a) to relieve states of the burden of

accounting for what was expected to be only small amounts of interest. However, the

amount of interest that could be earned appeared to be contingent on the federal

government's ability to minimize the time between transfer and disbursement, as

required inthe ICA.

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Appendix C

the federal government for costs incurred in “federally- assisted

programs,” to the extent that such costs are “reasonable and

necessary,” OMB A-87, Attachment A, § C.I(a), but that “no

provision for profit or other increment above cost is intended.”

OMB A-87 { 4 (emphasis added). Specifically, defendants argue

that plaintiff inappropriately profited from its investment of

federal funds, which resulted in a windfall for plaintiff that is

contrary to the spirit and purpose of OMB A-87. Defendant

contends that the interest in question must be deemed an

“applicable credit” which must be refunded to the federal

government or redeposited in the self-insurance reserve account

program, but “interest” is not mentioned in OMB A-87. The Office

of Management and Budget (OMB) was surely aware that interest

could be earned on federal funds, but did not include it in the list of

examples of applicable credits, perhaps because it would conflict

with section 203(a) because the Act allows interest to be retained

while credits must be returned to the government.® Moreover, the

Department contends that the interest at issue is an applicable

credit because had plaintiff redeposited the interest in the reserve

accounts, the federal government would pay less the subsequent

year, because the annual contribution rates are determined

according to the year-end reserve account balance. This contention

is unpersuasive as the same situation would arise for any amount of

interest the states earn on funds pending disbursement, which they

are entitled to retain pursuant to section 203(A) of the ICA.

Plaintiff further argues that had it contracted with a private

insurance company for workers compensation coverage, the

6. Even if the Department were charged by Congress with the authority to

administer A-87 of the OMB, its interpretation of the applicable credit rule under A-

87 is contrary to section 203(a) of the ICA, and thus, we need not accord its

interpretation deference when it “resolves a conflict between its own statute and the

statute of another agency.” Department of Navy, supra, 836 F.2d at 1410.

38a

Appendix C

government would have considered the funds disbursed and would

not be entitled to claim the interest earned on such funds. Thus, by

self-insuring itself plaintiff contends that it saves the government

substantial costs. It argues it should not be required to refund

interest which the government would not have realized in the

former situation. Plaintiff refers to section C.4(c) of Attachment B

to OMB A-87, which provides:

Contributions to a reserve for a self-insurance

program approved by the Federal grantor

agency are allowable to the extent that the type

of coverage, extent of coverage, and the rates

and premiums would have been purchased to

cover the risks.

See, 46 Fed. Reg. at 9554. We agree with defendant that its annual

contribution rate is calculated according to the funds remaining in

the reserves at the end of the year, which would apply also if a

private carrier were used. Nevertheless, the above language

indicates the OMB’s awareness of the existence of self-insurance

programs. The Department is charged with determining

contribution rates according to the cost principles promulgated by

the OMB, and the OMB recognizes self-insurance accounts. Yet no

exception for such accounts has been enacted by it or by Congress

in the twenty years of the ICA’s existence. From this we conclude

that Congress’ intent in the Act is clear that reserve accounts are

not to be distinguished from other funds pending disbursement.

C. Legislative Intent

Defendants contend that section 203(a) is ambiguous in its

applicability to the specific issues in the present action, and

therefore a review of the statute’s legislative history is warranted.

39a

Appendix C

However, although committee and House reports may be an

indicator of legislative intent, they cannot, as a general rule, be

used to replace the intent that is evident in the words of the statute.

Burlington N.R. Co. v. Oklahoma Tax Com., 481 U.S. 454, 107

S.Ct. 1855, 95 L.Ed.2d 404 (1987); Malloy v. Eichler, 860 F.2d

1179, 1183 (3d Cir. 1988) (only the “most extraordinary showing

of contrary [legislative] intentions” justifies altering the plain

meaning of a statute). Nevertheless, we will address the sources

suggested by defendants as a guide to the statute’s meaning.

Defendants argue that legislative history reveals a

congressional intent that the non-accountability provision of

section 203(a) is applicable only when funds are immediately

disbursed, and that states may not profit by keeping federal funds

in reserve accounts and retaining interest on them. First,

defendants cite numerous Board decisions to support their

argument that the interest earned by plaintiff in the present case

was correctly treated as an applicable credit owed to the

government. However, these decisions are distinguishable and

apply to overpayment or similar situations where states were

required to reimburse the principal advanced by the government,

and naturally, any interest earned on the principal was also owed to

the government. Defendants have failed to demonstrate that the

funds advanced to plaintiff were owed to the federal government,

and thus the Department’s prior decisions, which held that interest

constituted an applicable credit, are inapposite.

Second, defendant cites various House and Senate Reports,

statements by committee members, and treatises regarding the

intent behind the non-accountability provision of section 203(a).’

7. See, H.R. Rep. No. 696, 101st Cong., 2d Sess., at 5 (1990) (the U.S. General

Accounting Office “concluded that although the. . . [ICA] permitted a State to retain

interest earned on Federal funds, ‘it does not appear that Congress intended the law to

(Cont'd)

40a

Appendix C

Defendants argue that Congress intended to reduce the amount of

interest states may retain, and that the nonaccountability provision

was added merely to ease the states’ administrative burden to

account for what was expected to be small amounts of interest. S.

Rep. No. 1456, 90th Cong., 2d Sess. at 15 (1968) (“The new

techniques, such as the letter of credit and sight draft procedures

... Should minimize the amount of grants advanced and thus it

should not be necessary to continue to hold States accountable for

interest or other income earned prior to disbursement”).

We recognize, and the legislative history reveals, that

Congress designed the ICA to minimize the time between transfer

and disbursement in order to eliminate the states’ ability to profit

from investing federal funds. However, while Congress may have

had an expectation that a shorter time between transfer and

disbursement would result in less interest being accumulated by

the states, the idea that states should disburse funds promptly was

not intended as a prerequisite to their right to retain interest. We

agree that the House, Senate or committees voiced a concern to

prevent states from obtaining windfalls, and section 203(a) was

enacted to help alleviate this concern. However, the fact that

Congress has not required “immediate disbursement” or placed a

cap on the interest which may be earned, indicates that the statute

(Cont'd)

result in large financial benefits to the States”); see also, Board of Education of

Township H.S. Dist. No. 205 v. Illinois State Bd. of Educ., 1989 LEXIS 10711 (N.D.

Ill. September 8, 1989) (the legislative history behind the ICA “evinces a

congressional concern with the states gaining an unfair advantage through earning

interest on federal funds”); Principles of Federal Appropriations Lawat 13-41 (|sted.

1982) (“The theory behind the ICA was to control the release of grant funds and

thereby preclude situations from arising in which State grantees would be in a

position to earn excessive interest on grant advances. . . The statutory exception was

not intended to create a windfall for State grantees’).

4la

Appendix C

may be applied to all situations involving the receipt of funds

pending disbursements, although there may be occasions when

states receive more than a de minimis amount of interest.* Thus, the

fact that plaintiff may have earned more interest than the

Department would expect does not preclude the applicability of

section 203(a) to plaintiff’s situation.

Finally, Congress amended the ICA, and promulgated the

Cash Management Improvement Act of 1990 (CMIA), 31 U.S.C.

§ 6503, which becomes effective October 24, 1992. The CMIA

will require that states in certain instances refund to the federal

government interest earned on advanced funds. Further, the OMB

has proposed a revision to OMB A-87, which has yet to be

promulgated, that deals specifically with the issue at hand and

would require that states return interest earned on reserve funds.

See 53 Fed. Reg. 40352, October 14, 1988; 53 Fed. Reg. at 40360,

Attachment B, § 23c(2). These developments serve to bolster our

decision that existing law does not preclude plaintiff from

retaining the interest in question.

C. Informal Adjudication

Pursuant to the Administrative Procedures Act (APA), 5

U.S.C. § 551(4), an agency action is delineated as either

“rulemaking” or “adjudicatory.” Plaintiff contends that the Board

8. Section 203(a) was not created to be applied in an ad hoc discretionary

fashion, applicable only when small amounts of interest are earned, but not when

larger amounts are earned. Despite Congress’ expectation that interest earned would

be minimal, that Congress did not specify an exception to 203(a) for funds not

promptly disbursed, funds kept in reserve accounts, or funds which generate

significant amounts of interest, indicates that the statute was intended to have general

application.

42a

Appendix C

abused its discretion by employing adjudication to effectuate a

new policy which is contrary to existing law and is generally

applicable to at least twenty-six states which operate federally

funded self-insurance reserve accounts. Plaintiff argues that

because the new policy will govern widespread future conduct it

should have been effectuated through rulemaking, rather than

adjudication.’ Plaintiff further avers that the Board lacked

authority to administer a change in section 203(a) because the

Statute was clear on its face, and the Board is not charged by

Congress with the power to interpret or administer the statute.

We recognize that an administrative agency is “not precluded

from announcing new principles in an adjudicative proceeding and

[] the choice between rulemaking and adjudication lies in the first

instance within the [agency’s] discretion.” N.L.R.B. v. Bell

Aerospace Co. Div. of Textron Inc., 416 U.S. 267, 294, 94 S.Ct.

1757, 1771 (1974), overruled on other grounds, N.L.R.B. v.

Hendricks County Rural Electric Membership Corp., 454 U.S.

170, 102 S.Ct. 216, 70 L.Ed.2d 323 (1981). S.E.C. v. Chenery

Corp., 332 U.S. 194, 202-203, 67 S.Ct. 1575, 1581, 91 L. Ed. 1995

(1947) (“the choice made between proceeding by general rule or by

individual, ad hoc litigation is one that lies primarily in the

informed discretion of the administrative agency”); /nternational

Union, United Mine Workers v. Federal Mine Safety and Health

Admin. , 920 F.2d 960, 964 (D.C. Cir. 1990) (agencies are afforded

substantial discretion in choosing between rulemaking and

adudication).'° However, we agree with plaintiff that, as indicated,

9. Defendants concede that the Board rendered its decision by informal

adjudication.

10. However, such discretion appears to apply only when the agency is charged

with the duty and power to promulgate the new standard, and we have decided the

Board in the present action is not soempowered.

43a

Appendix C

the Department may only be accorded discretion when it is

entrusted by Congress with the authority to render an adjudication

interpreting a congressional statute, and we have decided that the

Department has no such authority.

Regardless, we find that defendants abused their discretion by

applying a new policy which renders the plaintiff accountable for

actions taken in a good-faith reliance upon the ICA, OMB A-87,

and the Department’s own regulations. This is particularly so when

the precise issue of interest earned on self-insurance reserves is the

subject of proposed legislation enacted by the Department, and is

included in the CMIA, which is not yet effective. Because as the

Department has no authority to interpret section 203(a), and since

the statute is clear and unambiguous on its face, it acted improperly

in enacting a new policy. Even if the Department were entrusted by

Congress to interpret section 203(a), it abused its discretion in

creating an exception which is contrary to the statute and to the

clear intent of Congress.

IV. Conclusion

We conclude that the Board’s decision requiring plaintiff .o

refund to the federal government interest earned on its federally

funded self-insurance reserves cannot be sustained. Accordingly,

we will remand the case to the Department for the entry of a

decision that plaintiff is entitled to retain the interest in question.

An appropriate order will issue.

s/ William W. Caldwell

William W. Caldwell

United States District Judge

Date: May 18, 1992

tha

APPENDIX D — SUR PETITION FOR REHEARING OF

THE UNITED STATES COURT OF APPEALS FOR THE

THIRD CIRCUIT DATED JULY 9, 1993

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 92-7373

COMMONWEALTH OF PENNSYLVANIA, OFFICE OF

BUDGET,

Appellees

DEPARTMENT OF HEALTH AND HUMAN SERVICES,

ALMA R. JACOBS, REGIONAL DIRECTOR, REGION III,

DHHS,

Appellants

SUR PETITION FOR REHEARING

Present: SLOVITER, Chief Judge, BECKER, STAPLETON,

MANSMANN, GREENBERG, HUTCHINSON, SCIRICA,

COWEN, NYGAARD, ALITO, ROTH, LEWIS and GARTH,*

Circuit Judges

The petition for rehearing filed by appellee in the above

entitled case having been submitted to the judges who participated

in the decision of this court and to all the other available circuit

judges of the circuit in regular active service, and no judge who

concurred in the decision having asked for rehearing, and a

majority of the circuit judges of the circuit in regular active service

not having voted for rehearing by the court in banc, the petition for

rehearing is denied.

* Senior Judge Garth as to panel rehearing only.

45a

Appendix D

By the Court,

s/ illegible

Circuit Judge

DATED: JUL09 1993

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