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Com. of Pa. Office of Budget v. Department of Health and Human Services

filed: June 11, 1993; As Corrected June 23, 1993.



Before: Becker, Alito, and Garth, Circuit Judges.

Author: Alito


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 health 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 Section 203(a) of the Intergovernmental Cooperation Act of 1968, 31 U.S.C. § 6503(a) (1988) (amended 1990) [hereinafter "Section 203(a)"]. We conclude that the district court's interpretation 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 costs 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.*fn1

After an unsuccessful request for reconsideration by HHS's Regional Director for Region III, 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 portion 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 transfer 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, "the 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 alone, the DAB found it "doubtful that Congress intended the 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 recapturing such interest. The district court subsequently granted summary judgment for the Commonwealth, holding that the Commonwealth was entitled under Section 203(a) to 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 that provision. Exercising plenary review, the court then opined that the language of Section 203(a) is unambiguous and is thus dispositive. The court concluded that funds held in the Commonwealth's self-insurance accounts were plainly held "pending disbursement for program purposes" -- i.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 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 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.

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 in state accounts. The court further noted that in 1988 the Office of Management and Budget had proposed a revision of a prior notice (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. Apparently viewing these events as evidence that the states had previously been permitted to retain such interest, the court wrote that "these developments serve to bolster our decision that existing law does not preclude plaintiff 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 rendered the plaintiff accountable for actions taken in good-faith reliance upon the ICA, OMB A-87, and the Department's own ...

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