B-149720, NOV. 29, 1962

B-149720: Nov 29, 1962

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SIGNED BY THE ADMINISTRATIVE ASSISTANT SECRETARY REQUESTING OUR ADVICE AS TO WHETHER THE DEPARTMENT OF AGRICULTURE SHOULD INSIST UPON THE PAYMENT TO THE UNITED STATES BY THE STATES OF ALABAMA AND ARKANSAS OF RECEIPTS FROM THE SALES OF TREE SEEDLINGS UNDER THE CONSERVATION RESERVE PROGRAM THAT ARE IN EXCESS OF THE COSTS INCURRED BY THE STATES IN PRODUCING THE SEEDLINGS. ADVICE IS ALSO REQUESTED AS TO WHETHER. IF PAYMENT IS REFUSED. UNDER THE AUTHORITY THEREOF COOPERATIVE AGREEMENTS WERE ENTERED INTO BETWEEN THE FOREST SERVICE AND 39 STATES FOR THE PURPOSE OF DEVELOPING NURSERY FACILITIES AND PRODUCING TREE PLANTING STOCK FOR SALE TO PARTICIPANTS IN THE CONSERVATION RESERVE PROGRAM. THE AGREEMENTS WITH THE STATES OF ALABAMA AND ARKANSAS WERE DATED JULY 27.

B-149720, NOV. 29, 1962

TO THE SECRETARY OF AGRICULTURE:

WE REFER TO A LETTER DATED AUGUST 14, 1962, SIGNED BY THE ADMINISTRATIVE ASSISTANT SECRETARY REQUESTING OUR ADVICE AS TO WHETHER THE DEPARTMENT OF AGRICULTURE SHOULD INSIST UPON THE PAYMENT TO THE UNITED STATES BY THE STATES OF ALABAMA AND ARKANSAS OF RECEIPTS FROM THE SALES OF TREE SEEDLINGS UNDER THE CONSERVATION RESERVE PROGRAM THAT ARE IN EXCESS OF THE COSTS INCURRED BY THE STATES IN PRODUCING THE SEEDLINGS. ADVICE IS ALSO REQUESTED AS TO WHETHER, IF PAYMENT IS REFUSED, THE EXCESS RECEIPTS MAY BE COLLECTED BY SETOFF AGAINST FUNDS OTHERWISE PAYABLE TO THE STATES BY THE FEDERAL GOVERNMENT.

SECTIONS 111 (A) (7 U.S.C. 183 (A) ( AND 120 (B) (7 U.S.C. 1808 (B) ( OF THE SOIL BANK ACT PROVIDE RESPECTIVELY AS FOLLOWS:

"SEC. 111. (A) THE SECRETARY MAY PURCHASE OR PRODUCE CONSERVATION MATERIALS AND SERVICES AND MAKE SUCH MATERIALS AND SERVICES AVAILABLE TO PRODUCERS UNDER THE CONSERVATION RESERVE PROGRAM TO AID THEM IN ESTABLISHING VEGETATIVE COVER OR WATER STORAGE FACILITIES, OR OTHER SOIL-, WATER-, WILDLIFE-, OR FOREST-CONSERVING USES, UNDER CONTRACTS AUTHORIZED BY THIS SUBTITLE B, MAY REIMBURSE ANY FEDERAL, STATE, OR LOCAL GOVERNMENT AGENCY FOR CONSERVATION MATERIALS AND SERVICES FURNISHED BY SUCH AGENCY, AND MAY PAY EXPENSES NECESSARY IN MAKING SUCH MATERIALS AND SERVICES AVAILABLE, INCLUDING ALL OR PART OF THE COSTS INCIDENT TO THE DELIVERY, APPLICATION, OR INSTALLATION OF MATERIALS AND SERVICES.

"SEC. 120. * * * (B) ALL FUNDS AVAILABLE FOR CARRYING OUT THE PURPOSES OF THIS TITLE SHALL BE AVAILABLE FOR TRANSFER TO SUCH AGENCIES OF THE FEDERAL OR STATE GOVERNMENTS AS THE SECRETARY MAY REQUEST TO COOPERATE OR ASSIST IN CARRYING OUT THIS TITLE; AND FOR TECHNICAL ASSISTANCE IN FORMULATING AND CARRYING OUT THE PROGRAMS AUTHORIZED BY THIS TITLE. THE SECRETARY MAY MAKE SUCH PAYMENTS IN ADVANCE OF DETERMINATION OF PERFORMANCE.'

UNDER THE AUTHORITY THEREOF COOPERATIVE AGREEMENTS WERE ENTERED INTO BETWEEN THE FOREST SERVICE AND 39 STATES FOR THE PURPOSE OF DEVELOPING NURSERY FACILITIES AND PRODUCING TREE PLANTING STOCK FOR SALE TO PARTICIPANTS IN THE CONSERVATION RESERVE PROGRAM. THE AGREEMENTS WITH THE STATES OF ALABAMA AND ARKANSAS WERE DATED JULY 27, 1956, AND AUGUST 6, 1956, RESPECTIVELY.

THE AGREEMENTS PROVIDE (CLAUSE 1) THAT THE STATE WILL DEVELOP NURSERY FACILITIES AND FURNISH FOREST PLANTING STOCK AND (CLAUSE 2) THAT THE STATE WILL SUBMIT TO THE FOREST SERVICE FOR REVIEW AND CHANGE ANNUAL FINANCIAL PLANS SHOWING ESTIMATED FISCAL YEAR EXPENDITURES TO BE RETURNED FOR CONCURRENCE AND SIGNATURE. CLAUSE 3 PROVIDES AS FOLLOWS:

"3. THE FOREST SERVICE WILL PAY TO THE STATE, BY REIMBURSEMENT OR ADVANCE PAYMENTS, AT SUCH TIMES AND IN SUCH AMOUNTS AS MUTUALLY AGREED UPON, FOR:

"/A) EXPENSES INCURRED FOR THE DEVELOPMENT OF NURSERY FACILITIES AS PROVIDED IN THE APPROVED PLAN OF OPERATION, AND

"/B) THE NET COST INCURRED BY THE STATE FOR THE PRODUCTION OF PLANTING STOCK FOR USE IN THE PROGRAM: PROVIDED, THAT PAYMENTS IN ANY FISCAL YEAR SHALL NOT EXCEED THE AMOUNT OF THE APPROVED FINANCIAL PLAN FOR THE FISCAL YEAR.'

CLAUSE 7 PROVIDES THAT UPON TERMINATION OF THE AGREEMENT THE STATE WILL REFUND TO THE UNITED STATES AN AMOUNT EQUAL TO THE DIFFERENCE BETWEEN THE TOTAL AMOUNT ADVANCED TO THE STATE AND THE APPROVED EXPENSES AND COSTS AS PROVIDED IN CLAUSE 3. CLAUSE 13 PROVIDES THAT THE UNITED STATES SHALL HAVE THE RIGHT TO TERMINATE THE AGREEMENT BY GIVING 30 DAYS' NOTICE UPON CESSATION OF THE PROGRAM AND THAT THE UNITED STATES OR THE STATE SHALL HAVE THE RIGHT TO TERMINATE THE AGREEMENT BY GIVING 90 DAYS' NOTICE IF THE OTHER PARTY TO THE AGREEMENT FAILS, NEGLECTS, OR REFUSES TO PERFORM ANY OF THE TERMS OR CONDITIONS THEREOF.

THE ADMINISTRATIVE ASSISTANT SECRETARY SAYS THAT IT WAS THE INTENT FROM THE BEGINNING THAT ALL FINANCIAL ACTIONS TAKEN WOULD FOLLOW "THE BASIC PRINCIPLE OF EQUITABILITY--- WHAT WOULD ORDINARILY BE EQUITABLE BETWEEN THE PARTNERS OF ANY ENTERPRISE OF MUTUAL INTEREST," AND THAT UNDER THIS PRINCIPLE, QUESTIONS ARISING UNDER THE GENERAL TERMS OF THE COOPERATIVE AGREEMENT WOULD BE SETTLED ON THAT BASIS.

HE FURTHER SAYS THAT IT WAS CONTEMPLATED THAT IN EVERY CASE THE STATE WOULD HAVE PRODUCTION COSTS IN EXCESS OF SALES RECEIPTS AND THAT THIS DIFFERENCE WOULD BE PAID BY THE FOREST SERVICE. FOR THAT REASON NO MENTION WAS MADE IN THE COOPERATIVE AGREEMENT OF PROFITS OR OF THE SHARING OF PROFITS. DUE TO SOME EXCELLENT GROWING SEASONS, HOWEVER, GERMINATION OF THE SEED PLANTED WAS MUCH HIGHER THAN NORMAL THUS INCREASING PRODUCTION WITH NO INCREASE IN GROWING COSTS.

WHEN THE FOREST SERVICE LEARNED THAT SOME STATES WOULD PROBABLY HAVE RECEIPTS IN EXCESS OF COSTS, IT EXPRESSED THE VIEW AT MEETINGS WITH VARIOUS STATE OFFICIALS THAT THE UNITED STATES WAS ENTITLED TO SUCH EXCESS RECEIPTS.

IN APRIL 1958, THE "ADMINISTRATIVE PROCEDURES FOR CONSERVATION RESERVE FORESTATION PROGRAM" (CRP HANDBOOK) WAS ISSUED. THIS HANDBOOK WAS SENT ON MAY 23, 1958, TO THE STATES WHO HAD ENTERED INTO THE AGREEMENT. PARAGRAPHS 2 AND 3 OF SECTION 1.11 OF THE HANDBOOK WHICH IS ENTITLED ,INTERPRETATION OF PLANTING STOCK AGREEMENT" READ IN PART AS FOLLOWS:

"UNDER THIS PROGRAM THE ANNUAL RECAPITULATION OF EXPENDITURES AND RECEIPTS FOR PLANTING STOCK WILL SHOW A NET EXPENDITURE OR NET GAIN BY THE STATE. THE FEDERAL GOVERNMENT HAS MONEY INVESTED IN THIS PROGRAM THROUGH ADVANCES OR REIMBURSEMENTS DURING THE CURRENT OR PREVIOUS FISCAL YEARS. IT HAS AN ADDITIONAL RESPONSIBILITY TO SAVE THE STATE FROM ANY CRP LOSSES TO THE EXTENT AGREED TO IN THE APPROVED FINANCIAL PLAN. ALSO,THE PRIMARY SOURCE OF THE CRP NURSERY STOCK SALE RECEIPTS IS INDIRECTLY THE FEDERAL GOVERNMENT THROUGH ITS CONTRACTS UNDER THE CR PROGRAM TO REIMBURSE FARMERS FOR UP TO 80 PERCENT OF THE COST OF PLANTING STOCK. UNDER THESE CONDITIONS, IT IS EQUITABLE WHEN RECEIPTS EXCEED EXPENDITURES IN ANY YEAR THAT THE FEDERAL GOVERNMENT RECEIVE THE BENEFIT OF EXCESS RECEIPTS.

"UNDER PRESENT PRICING POLICY OF MOST STATES, NO EXCESS RECEIPTS ARE ANTICIPATED. HOWEVER, SHOULD A STATE IN ANY FISCAL YEAR COLLECT RECEIPTS IN EXCESS OF EXPENDITURES FOR THIS PROGRAM, THE AMOUNT OF THE EXCESS RECEIPTS WILL BE CONSIDERED AS AN ASSET OF THE FEDERAL GOVERNMENT AND A LIABILITY OF THE STATE.'

IN JULY 1961, THE STATE OF ARKANSAS WAS BILLED FOR RECEIPTS FROM THE SALE OF CONSERVATION RESERVE PROGRAM STOCK IN EXCESS OF NURSERY COSTS. THEY REPAID THE REIMBURSEMENTS MADE TO THE STATE REPRESENTING THE EXCESS OF COSTS OVER SALES RECEIPTS IN SOME FISCAL YEARS, BUT WROTE TO THE REGIONAL FORESTER ON AUGUST 10, 1961, AND SAID,"WE ARE NOT PERMITTED TO REMIT CASH FOR PROFITS WE HAVE MADE ON OUR NURSERY SEEDLING PRODUCTION.' BOTH OF THE STATE FORESTERS OF ALABAMA AND ARKANSAS HAVE STATED VERBALLY THAT THEY THINK THEY WOULD BE MAKING AN ILLEGAL EXPENDITURE OF STATE FUNDS UNDER THE TERMS OF THE SIGNED COOPERATIVE AGREEMENTS IF THEY WERE TO MAKE PAYMENTS TO THE FEDERAL GOVERNMENT FOR THESE RECEIPTS. IT WAS, THEREFORE, DECIDED BY THE REGIONAL FORESTER OF ATLANTA NOT TO BILL THE STATE OF ALABAMA UNTIL IT WAS ASCERTAINED THAT THE GOVERNMENT WAS LEGALLY ENTITLED TO THESE MONEYS. THE FOREST SERVICE HAD MADE PAYMENTS TO BOTH STATES UNDER CLAUSE 3 (A) OF THE COOPERATIVE AGREEMENT FOR DEVELOPING ADDITIONAL NURSERY CAPACITY TO MEET PROGRAM NEEDS.

ON JUNE 8, 1960, THE REGIONAL MANAGER OF THE UNITED STATES GENERAL ACCOUNTING OFFICE IN ATLANTA, GEORGIA, WROTE TO THE REGIONAL FORESTER WITH REGARD TO THE REVIEW MADE BY THE GAO OF THE STATE AND PRIVATE FORESTRY ACTIVITIES IN THE SOUTHERN REGION. THE FOLLOWING IS QUOTED FROM THIS LETTER:

"NEED FOR AN AGREEMENT ON DISPOSITION OF SOIL BANK NURSERY OPERATING PROFITS. THE COOPERATIVE AGREEMENTS WITH STATES UNDER THE SOIL BANK NURSERY PROGRAM DO NOT SPECIFICALLY PROVIDE FOR THE DISPOSITION OF PROFITS, IF ANY, THAT MAY BE REALIZED BY THE STATES THROUGH SOIL BANK NURSERY OPERATIONS. AS A RESULT, THE STATES NOW CONTEND THAT OPERATING PROFITS CURRENTLY BEING REALIZED BY THE STATES BELONG TO THEM RATHER THAN TO THE FOREST SERVICE. ALTHOUGH THE FOREST SERVICE BELIEVES THAT THE PROFITS SHOULD REVERT TO THE GOVERNMENT UNDER THE THEORY OF EQUITABILITY, THE STATES HAVE DISAGREED AND HAVE STATED THAT UNDER THE TERMS OF THE LOOSELY DRAWN AGREEMENTS CONTAINING NO SPECIFIC PROVISION ON DISPOSITION OF PROFITS, THE STATES ARE NOT OBLIGATED TO PAY THE PROFITS TO THE GOVERNMENT.

"THIS MATTER IS BECOMING INCREASINGLY SIGNIFICANT. WE ESTIMATE THAT ACCUMULATED PROFITS BY THE STATES IN REGION 8 THROUGH FEBRUARY 1960 WILL AMOUNT TO APPROXIMATELY $502,410. IT APPEARS THAT THE CONTROVERSY OVER DISPOSITION OF NURSERY OPERATING PROFITS COULD HAVE BEEN AVOIDED IF A SPECIFIC PROVISION IN THIS REGARD HAD BEEN INCLUDED IN THE COOPERATIVE AGREEMENTS WITH THE ATES.'

THE ADMINISTRATIVE ASSISTANT SECRETARY CONCLUDES HIS LETTER TO US AS FOLLOWS:

"AS MENTIONED ABOVE, IT WAS THE INTENT FROM THE BEGINNING THAT ALL FINANCIAL ACTIONS TAKEN UNDER THE PROGRAM WOULD FOLLOW THE BASIC PRINCIPLE OF EQUITABILITY ALTHOUGH THE AGREEMENTS WITH THE STATES DID NOT EXPRESSLY STATE THAT EXCESS RECEIPTS OVER EXPENDITURES FOR PRODUCING SEEDLINGS WOULD BE PAID TO THE UNITED STATES. WE ARE COGNIZANT OF THE FACT THAT FAILURE TO INCLUDE SUCH EXPRESS LANGUAGE IN THE AGREEMENTS TO SOME EXTENT WEAKENS OUR POSITION FOR PAYMENT OF THE EXCESS FUNDS TO THE UNITED STATES. HOWEVER, FOLLOWING RECEIPT BY THE STATES OF THE CRP HANDBOOK IN 1958 WHICH IS QUOTED ABOVE, THE STATES CONTINUED TO SIGN THE ANNUAL PLAN OF OPERATION AND FINANCIAL PLAN, SAMPLES OF WHICH ARE GIVEN AT PAGES 37 THROUGH 57 OF THE ATTACHED CRP HANDBOOK. FURTHERMORE, IN THE STATES WHERE THE REVERSE SITUATION EXISTED, NAMELY, AN EXCESS OF COSTS OVER RECEIPTS, THE UNITED STATES PAID THE STATES IN LINE WITH THE EQUITABLE PRINCIPLE. UNDERSTAND THAT THE AUDITORS OF THE GENERAL ACCOUNTING OFFICE HAVE REVIEWED THE SETTLEMENTS IN THOSE CASES AND DID NOT FILE OBJECTIONS THERETO. IN VIEW THEREOF AND THE INTENT OF THE AGREEMENTS, IT APPEARS THAT COLLECTION OF THE EXCESS RECEIPTS FROM THE STATES OF ARKANSAS AND ALABAMA IS APPROPRIATE. IF YOU CONCUR IN THIS VIEW, PLEASE INFORM US WHETHER THIS DEPARTMENT SHOULD PRESS FOR PAYMENT AND IF PAYMENT IS REFUSED THEN SET OFF, AGAINST THE PAYMENTS CLAIMED FROM EXCESS RECEIPTS RECEIVED BY THE STATES, EQUIVALENT AMOUNTS FROM FUNDS OTHERWISE DUE THEM FROM THE 25 PERCENT OF NATIONAL FOREST RECEIPTS PAYABLE UNDER THE ACT OF MAY 23, 1908, AS AMENDED (16 U.S.C. 500), FUNDS PAYABLE UNDER SECTION 2 OF THE CLARKE-MCNARY ACT (16 U.S.C. 565), OR ANY OTHER FUNDS PAYABLE TO THE STATES.'

TO SUMMARIZE, PURSUANT TO THE CONSERVATION RESERVE PROGRAM THE FOREST SERVICE PREPARED COOPERATIVE AGREEMENTS, WHICH WERE SIGNED BY THE STATES. SUCH AGREEMENTS PROVIDED THAT THE STATES WOULD DEVELOP NURSERY FACILITIES AND PRODUCE TREE PLANTING STOCK FOR SALE TO PARTICIPANTS. CONSIDERATION THEREOF THE FOREST SERVICE WOULD PAY TO THE STATES THE EXPENSES INCURRED BY THEM FOR THE DEVELOPMENT OF NURSERY FACILITIES AND THE "NET COST" OF PROVIDING THE SEEDLINGS. "NET COST" WAS UNDERSTOOD TO MEAN THE EXCESS OF PRODUCTION COSTS OVER THE RECEIPTS FROM SALES. THE FOREST SERVICE DID NOT ANTICIPATE THAT ANY STATE WOULD HAVE AN EXCESS OF RECEIPTS OVER EXPENDITURES FOR PRODUCTION OF SEEDLINGS. THEREFORE, THERE WAS NO EXPRESS PROVISION THAT THE STATES PAY SUCH EXCESS RECEIPTS TO THE FOREST SERVICE. SUBSEQUENTLY AND AFTER THE PROGRAM WAS WELL UNDER WAY THE FOREST SERVICE WITH NO FORMAL AMENDMENT TO THE AGREEMENTS ANNOUNCED AS AN "INTERPRETATION" OF THE AGREEMENT THAT IT WAS EQUITABLE THAT ANY STATE WHICH HAD AN EXCESS OF RECEIPTS FOR SEEDLING SALES OVER EXPENDITURES WOULD BE LIABLE THEREFOR TO THE FEDERAL GOVERNMENT. THE STATES CONTINUED TO SUBMIT AND SIGN THE ANNUAL PLANS AND ALL THE STATES IN THE SOUTHERN REGION WERE REIMBURSED FOR EXPENSES INCURRED FOR DEVELOPMENT OF NURSERY FACILITIES. SUCH ANNUAL PLANS MADE NO MENTION OF STATE LIABILITY FOR EXCESS RECEIPTS. TWO STATES HAVE SUBSTANTIAL EXCESS RECEIPTS FROM SEEDLING SALES WHICH THEY ARE UNWILLING TO PAY TO THE UNITED STATES.

IT HAS BEEN HELD THAT NEITHER ABSTRACT JUSTICE NOR THE RULE OF LIBERAL CONSTRUCTION JUSTIFIES THE CREATION OF A CONTRACT FOR THE PARTIES WHICH THEY DID NOT MAKE OR THE IMPOSITION UPON ONE PARTY TO A CONTRACT OF AN OBLIGATION NOT ASSUMED COLLINS V. NORTHWEST CASUALTY CO., 39 P.2D 986. FURTHER IT IS NOT FOR THE COURTS TO CONSTRUE EQUITIES INTO A CONTRACT. WHITE V. SOLOMON, 42 N.E. 104. COURTS CANNOT MAKE FOR THE PARTIES BETTER AGREEMENTS THAN THEY THEMSELVES HAVE BEEN SATISFIED TO MAKE OR REWRITE CONTRACTS BECAUSE THEY OPERATE HARSHLY OR INEQUITABLY AS TO ONE OF THE PARTIES. INDIAN TERRITORY ILLUMINATING OIL CO. V. ROSAMOND, 120 P.2D 349; PRANGE V. INTERNATIONAL LIFE INS. CO. OF ST. LOUIS, 46 S.W.2D 523; GRIFFIN V. FAIRMONT COAL CO., 53 S.E. 24. NEITHER IS THERE ANY BASIS FOR REFORMATION OF THE AGREEMENT BECAUSE THE FOREST SERVICE WAS UNDER MISAPPREHENSION AS TO THE PROBABILITY OF EXCESS RECEIPTS AT THE TIME THE AGREEMENTS WERE DRAWN, THERE BEING NO MUTUAL INTENT TO INCLUDE A PROVISION RELATING TO SUCH EXCESS RECEIPTS IN THE AGREEMENTS AT THE TIME THEY WERE EXECUTED. POWER SERVICE CORPORATION V. JOSLIN, 175 F.2D 698; MARYLAND CASUALTY CO. V. UNITED STATES, 169 F.2D 102; RUSSEL V. SHELL PETROLEUM CORPORATION, 66 F.2D 864. THE CRP HANDBOOK IS NOT A PART OF THE STATUTORY REGULATIONS ISSUED BY THE SECRETARY OF AGRICULTURE PURSUANT TO THE SOIL BANK ACT NOR MAY IT BE CONSIDERED AS ESTABLISHING THE INTENT OF THE PARTIES TO THE AGREEMENTS WHICH WERE EXECUTED PRIOR TO ISSUANCE OF THE CRP HANDBOOK. WE, THUS, CONCLUDE THAT THE AGREEMENTS MAY BE NEITHER INTERPRETED NOR REFORMED SO AS TO IMPOSE UPON THE STATES A LEGAL OBLIGATION TO PAY TO THE UNITED STATES ANY PROFITS REALIZED FROM EXCESS RECEIPTS FROM THE SALE OF SEEDLINGS TO PARTICIPANTS IN THE CONSERVATION RESERVE PROGRAM.

WE, LIKEWISE, CAN SEE NO BASIS FOR IMPOSING SUCH LIABILITY UPON THE STATES BECAUSE THEY CONTINUED TO SUBMIT AND AGREE TO THE ANNUAL OPERATION AND FINANCIAL PLANS UNDER WHICH THEY WERE PAID FOR THE EXPENSES OF DEVELOPING THEIR NURSERY FACILITIES. SUCH ANNUAL PLANS MADE NO REFERENCE TO THE PURPORTED LIABILITY FOR EXCESS RECEIPTS NOR WAS IT CONTEMPLATED THAT ANY SUCH PROVISION WOULD BE A PART OF THE OPERATION OR FINANCIAL PLANS. ALTHOUGH THE STATES, WHEN THEY SUBMITTED LATER PLANS, MAY HAVE BEEN AWARE OF THE UNILATERAL INTERPRETATION OF THE AGREEMENT AS CONTAINED IN THE CRP HANDBOOK, THIS INTERPRETATION WAS NOT PART OF THE CONTRACT AND THERE IS NO INDICATION THAT THE STATES ASSENTED TO THE INTERPRETATION.

ACCORDINGLY, WE ARE OF THE OPINION THAT THERE IS NOT A SUFFICIENT BASIS FOR THE UNITED STATES TO INSIST THAT THE STATES PAY OVER THE RECEIPTS FROM SALES OF SUCH SEEDLINGS WHICH ARE IN EXCESS OF THE COSTS INCURRED BY THE STATES IN PRODUCING THEM.