B-201636.OM, APR 7, 1981

B-201636.OM, APR 7, 1981

SUBJECT: USE OF PRIVATE DONATIONS FOR STATES' NON-FEDERAL MATCHING SHARE UNDER TITLE XX (FILE B-201636; CODE 911519)

DIRECTOR, AFMD:

THIS RESPONDS TO A REQUEST FROM MR. ROBERT WILLIAMS, ALBANY SUBOFFICE, FOR OUR VIEWS CONCERNING CERTAIN ASPECTS OF STATES' ADHERENCE TO THE STATUTORY AND ADMINISTRATIVE CONDITIONS FOR THE USE OF PRIVATE DONATIONS BY STATES FOR THE PURPOSES OF MATCHING THE FEDERAL GOVERNMENT'S SHARE UNDER TITLE XX SOCIAL SERVICES PROGRAM (42 U.S.C. SEC. 1397 ET SEQ.).

STATES' MATCHING FUNDS MAY BE PROVIDED BY THEIR OWN FUNDS OR BY FUNDS DONATED FROM VARIOUS PRIVATE SOURCES. HOWEVER, DONATED FUNDS MAY BE USED FOR MATCHING PURPOSES ONLY IF THE FUNDS (1) ARE PLACED UNDER THE ADMINISTRATIVE CONTROL OF THE STATE OR LOCAL AGENCY; (2) ARE NOT SUBJECT TO ANY RESTRICTIONS AS TO THEIR USE (WITH CERTAIN EXCEPTIONS NOT RELEVANT HERE); AND (3) DO NOT REVERT TO THE DONOR'S FACILITY OR USE IF THE DONOR IS OTHER THAN A NONPROFIT ORGANIZATION (42 U.S.C. SEC. 1397AA)(7)(D)).

THE GAO AUDIT STAFF HAS IDENTIFIED CERTAIN CASES INVOLVING STATE AGENCY PURCHASES OF SOCIAL SERVICES FROM PRIVATE NONPROFIT ORGANIZATIONS WHICH MAY NOT BE IN COMPLIANCE WITH THE ABOVE CONDITIONS. IN THESE CASES THE NONPROFIT ORGANIZATION (OR AN AFFILIATED NONPROFIT ORGANIZATION) AGREED TO DONATE FUNDS TO THE STATE AGENCY AT THE SAME TIME THE STATE AGENCY AGREED TO PURCHASE SERVICES FROM THAT ORGANIZATION. THESE COMMITMENTS WERE SET FORTH IN TWO SEPARATE AGREEMENTS - A "DONOR" CONTRACT AND A "SOCIAL SERVICES" CONTRACT. GAO AUDIT STAFF HAS QUESTIONED THIS TYPE OF AN ARRANGEMENT AS BEING A CIRCUMVENTION OF THE STATED CONDITIONS.

FOR THE REASONS STATED IN ATTACHMENT I, WE BELIEVE THAT SUFFICIENT EVIDENCE EXISTS AS TO THE INTERDEPENDENT NATURE OF THE TWO WRITTEN AGREEMENTS TO REASONABLY SUPPORT A CONCLUSION THAT THE SUBSTANCE OF THE OVERALL ARRANGEMENTS CONSTITUTE A CIRCUMVENTION OF THE STATUTORY AND ADMINISTRATIVE CONDITIONS. THE AGREEMENTS PROVIDE FOR DONATIONS THAT ARE RESTRICTED TO USE SOLELY BY THE DONOR. THE ACTING GENERAL COUNSEL, DEPARTMENT OF HEALTH AND HUMAN SERVICES (HHS), HAS ESSENTIALLY CONCURRED WITH OUR VIEW, STATING THAT THE AGREEMENTS AS WE HAVE DESCRIBED THEM "ARE HIGHLY SUSPECT AND THEREFORE SUGGESTIVE OF A VIOLATION OF TITLE XX REQUIREMENTS." (SEE ATTACHMENT II).

GAO AUDIT STAFF HAS ALSO IDENTIFIED AN ONGOING PRACTICE OF THE TEXAS DEPARTMENT OF HUMAN RESOURCES WHICH ALLOWS A DONOR ORGANIZATION TO STIPULATE THE SPECIFIC TYPE OF SERVICES FOR WHICH THE DONATED FUNDS ARE TO BE USED, EVEN THOUGH THAT ORGANIZATION MAY BE A PROVIDER OF SUCH SERVICES. WE ARE OF THE OPINION THAT THIS PRACTICE CONFLICTS WITH 42 U.S.C. SEC. 1397A (A)(7)(D)(II), WHICH ALLOWS DONATED FUNDS TO BE RESTRICTED TO SPECIFIC SERVICES BUT ONLY BY A "DONOR WHO IS NOT A SPONSOR OR OPERATOR OF A PROGRAM TO PROVIDE THOSE SERVICES." THE ACTING GENERAL COUNSEL, HHS, HAS ALSO AGREED WITH THIS OPINION.

IN CLOSING, WE NOTE THAT THE UNDERLYING STATUTORY PROVISIONS FOR THE SOCIAL SERVICES PROGRAM WERE RECENTLY AMENDED TO TEMPORARILY EXCLUDE TRAINING PROGRAMS FROM THE SUBJECT CONDITIONS (SEC. 204 OF PUB. L. NO. 96-272, JUNE 17, 1980, 94 STAT. 524). THE STATED PURPOSE OF THIS TEMPORARY EXCLUSION WAS TO ALLOW FOR THE USE OF RESTRICTED PRIVATE MATCHING FUNDS IN ORDER TO ENCOURAGE PRIVATE ORGANIZATIONS TO CONTRIBUTE TO THE STRENGTHENING OF STATE TRAINING PROGRAMS, THEREBY IMPROVING THE STATE'S CAPACITY TO DELIVER SERVICES TO THOSE WHO NEED THEM.

YOUR DIVISION OR HRD MAY WISH TO CONSIDER WHETHER ENFORCEMENT OF THE SUBJECT CONDITIONS TO PREVENT THE SIMULTANEOUS AGREEMENTS, WITH RESPECT TO SOCIAL SERVICE PROGRAMS OTHER THAN TRAINING PROGRAMS, WILL NOT MERELY DISCOURAGE, BUT WILL EFFECTIVELY TERMINATE DONATIONS FROM PRIVATE NON- PROFIT ORGANIZATIONS. THIS SEEMS A DISTINCT POSSIBILITY, SINCE THE CONTRIBUTORS APPEAR TO HAVE BEEN ESTABLISHED NOT FOR ELEEMOSYNARY PURPOSES BUT TO PROVIDE, WITHOUT PROFIT, SOCIAL SERVICES TO THE NEEDY, AND TO HAVE BEEN UNWILLING TO MAKE DONATIONS WITHOUT THE SIMULANTEOUS AGREEMENT THAT EFFECTIVELY ASSURES A RETURN OF THE DONATION. IF ENFORCEMENT OF THE STATUTORY CONDITIONS WOULD ELIMINATE THESE DONATIONS, A PRINCIPLE UNDERLYING THE CONDITIONS, I.E., THAT STATES UNDER SOME CIRCUMSTANCES MAY USE DONATIONS FROM NON-PROFITS TO SATISFY THEIR MATCHING REQUIREMENTS, IS ILLUSORY. IN THIS EVENT, CONGRESS MIGHT WISH TO REPEAL THE FIRST TWO CONDITIONS, AT LEAST WITH RESPECT TO ALL OR SOME PROGRAMS ADMINISTERED BY NON-PROFITS, IN ORDER TO CONTINUE ENCOURAGEMENT OF THESE DONATIONS. OR, TO THE CONTRARY, IT MIGHT WISH TO ENLARGE THE SCOPE OF THE THIRD CONDITION -THE ONE THAT PROHIBITS REVERSION OF DONATIONS TO FOR-PROFIT ORGANIZATIONS - TO COVER NON-PROFITS AS WELL. CONGRESS MAY WISH TO TAKE THIS ACTION OUT OF CONCERN THAT BY APPEARING TO PERMIT STATES TO USE DONATIONS IN SOME CIRCUMSTANCES TO SATISFY MATCHING REQUIREMENTS, IT IS IN EFFECT INVITING STATES TO INITIATE FEDERAL SUPPORT OF LOCAL PROGRAMS FOR WHICH THE STATES ARE UNWILLING OR UNABLE TO PROVIDE THEIR OWN MATCHING FUNDS.

ATTACHMENT I

DIGEST:

UNDER TITLE XX SOCIAL SERVICES PROGRAM, WHERE STATE AGENCIES PURCHASE SOCIAL SERVICES FROM PRIVATE NONPROFIT ORGANIZATIONS PURSUANT TO "DONOR" CONTRACT AND "SOCIAL SERVICES" CONTRACT UNDER CIRCUMSTANCES DESCRIBED, SUCH ARRANGEMENTS CONSTITUTE CIRCUMVENTION OF STATUTORY AND ADMINISTRATIVE CONDITIONS FOR USE OF PRIVATE DONATIONS FOR PURPOSES OF MATCHING FEDERAL GOVERNMENT'S SHARE.

I. BACKGROUND

TITLE XX OF THE SOCIAL SECURITY ACT (42 U.S.C. SEC. 1397 ET SEQ.), PROVIDES FOR A COMPREHENSIVE SOCIAL SERVICES PROGRAM (E.G., DAY CARE CENTERS) FOR ELIGIBLE INDIVIDUALS AND FAMILIES. THESE SERVICES ARE DELIVERED EITHER DIRECTLY BY PUBLIC SOCIAL SERVICES AGENCIES OR INDIRECTLY THROUGH PURCHASE FROM PRIVATE PROFIT OR NONPROFIT ORGANIZATIONS. TITLE XX IS A MATCHING PROGRAM, WITH THE FEDERAL GOVERNMENT BASICALLY PAYING 75 PERCENT OF THE COSTS (UP TO THE STATE'S ALLOCATION) AND THE STATES PAYING THE REMAINING 25 PERCENT.

STATES' MATCHING FUNDS MAY BE PROVIDED BY THEIR OWN FUNDS OR BY FUNDS DONATED FROM VARIOUS PRIVATE SOURCES. HOWEVER, BEFORE STATES CAN USE DONATED FUNDS FOR MATCHING PURPOSES CERTAIN CONDITIONS MUST BE SATISFIED. THESE CONDITIONS ARE STATED IN 42 U.S.C. SEC. 1397A (A)(7)(D), AS FOLLOWS:

"(7) NO PAYMENT MAY BE MADE UNDER THIS SECTION TO ANY STATE WITH RESPECT TO ANY EXPENDITURE -

"(D) WHICH IS MADE FROM DONATED PRIVATE FUNDS, UNLESS SUCH FUNDS -

"(I) ARE TRANSFERRED TO THE STATE AND ARE UNDER ITS ADMINISTRATIVE CONTROL, AND

"(II) ARE DONATED TO THE STATE WITHOUT RESTRICTIONS AS TO USE, OTHER THAN RESTRICTIONS AS TO THE SERVICES WITH RESPECT TO WHICH THE FUNDS ARE TO BE USED IMPOSED BY A DONOR WHO IS NOT A SPONSOR OR OPERATOR OF A PROGRAM TO PROVIDE THOSE SERVICES, OR THE GEOGRAPHIC AREA IN WHICH THE SERVICES WITH RESPECT TO WHICH THE CONTRIBUTION IS USED ARE TO BE PROVIDED, AND

"(III) DO NOT REVERT TO THE DONOR'S FACILITY OR USE IF THE DONOR IS OTHER THAN A NONPROFIT ORGANIZATION: ***"

THE APPLICABLE ADMINISTRATIVE REGULATIONS SUBSTANTIALLY REFLECT THE ABOVE STATUTORY PROVISIONS (SEE 42 C.F.R. SEC. 228.54(A)).

THE GAO AUDIT STAFF HAS IDENTIFIED CERTAIN CASES INVOLVING STATE AGENCY PURCHASES OF SOCIAL SERVICES FROM PRIVATE NONPROFIT ORGANIZATIONS WHICH MAY NOT BE IN COMPLIANCE WITH THE ABOVE CONDITIONS. IN THESE CASES THE NONPROFIT ORGANIZATION (OR AN AFFILIATED NONPROFIT ORGANIZATION) AGREED TO DONATE FUNDS TO THE STATE AGENCY AT THE SAME TIME THE STATE AGENCY AGREED TO PURCHASE SERVICES FROM THAT ORGANIZATION. THESE COMMITMENTS WERE SET FORTH IN TWO SEPARATE AGREEMENTS - A "DONOR CONTRACT" AND A "SOCIAL SERVICES" CONTRACT. THE GAO AUDIT STAFF HAS QUESTIONED THIS TYPE OF AN ARRANGEMENT AS BEING A CIRCUMVENTION OF THE STATED CONDITIONS. ALTHOUGH IT IS DIFFICULT TO DOCUMENT, THE STAFF IS CONVINCED THAT THERE IS AN EXPLICIT OR IMPLICIT UNDERSTANDING BETWEEN THE PARTIES CONCERNED THAT THE DONOR WOULD RECEIVE THE SOCIAL SERVICES CONTRACT ONLY IF THE DONATION WAS MADE; OR CONVERSELY, THAT THE DONATION WOULD BE MADE ONLY IF THE AGENCY AWARDED THE SERVICES CONTRACT. JUDGING FROM RECENT FINDINGS BY THE HUMAN RESOURCES DIVISION THAT SEVERAL OTHER STATES HAVE SIMILAR ARRANGEMENTS WITH NONPROFIT ORGANIZATIONS, THE GAO AUDIT STAFF IS CONCERNED THAT THIS MAY BE A WIDESPREAD PRACTICE.

II. QUESTION:

WHERE STATE AGENCIES PURCHASE SOCIAL SERVICES FROM PRIVATE NONPROFIT ORGANIZATIONS PURSUANT TO A "DONOR CONTRACT" AND A SOCIAL SERVICES CONTRACT" UNDER THE CIRCUMSTANCES DESCRIBED, ARE SUCH ARRANGEMENTS IN COMPLIANCE WITH THE STATUTORY AND ADMINISTRATIVE CONDITIONS CONTAINED IN TITLE XX FOR THE USE OF PRIVATE DONATIONS FOR THE PURPOSES OF MATCHING THE FEDERAL GOVERNMENT'S SHARE.

ANSWER: NO.

III. ANALYSIS

AS INDICATED ABOVE, DONATED FUNDS MAY BE USED FOR MATCHING PURPOSES PROVIDED THE FUNDS (1) ARE PLACED UNDER THE ADMINISTRATIVE CONTROL OF THE STATE OR LOCAL AGENCY, AND (2) ARE NOT SUBJECT TO ANY RESTRICTIONS AS TO THEIR USE (WITH CERTAIN EXCEPTIONS WHICH ARE NOT RELEVANT FOR PURPOSES OF THIS GENERAL DISCUSSION); AND (3) DO NOT REVERT TO THE DONOR'S FACILITY OR USE IF THE DONOR IS OTHER THAN A NONPROFIT ORGANIZATION. THE LEGISLATIVE HISTORY OF THE APPLICABLE STATUTORY PROVISIONS (S. REP. NO. 93-1356, 93D CONG. 2D SESS. (1974) AND H. R. REP. NO. 93-1490, 93D SESS. (1974) DOES NOT PROVIDE ANY EXPLANATION OF THE UNDERLYING PURPOSES OF THESE CONDITIONS.

HOWEVER, SINCE THE EARLY 1960'S THE DEPARTMENT OF HEALTH, EDUCATION, AND WELFARE (NOW THE DEPARTMENT OF HEALTH AND HUMAN SERVICES (HHS)) HAS ADMINISTRATIVELY IMPOSED THESE CONDITIONS ON THE USE OF PRIVATE DONATED FUNDS FOR MATCHING PURPOSES UNDER FEDERAL ASSISTANCE PROGRAMS (INCLUDING THE SOCIAL SERVICES PROGRAM). ON THIS BASIS, IT APPEARS THAT THE UNDERLYING PURPOSE OF THESE CONDITIONS IS TO INSURE THAT A STATE OR LOCAL AGENCY BASES ANY DECISION REGARDING THE PROVISION OF SOCIAL SERVICES IN AN INDEPENDENT AND OBJECTIVE MANNER, THE SOLE CRITERIA BEING THE NEED FOR SUCH SERVICES. IN OTHER WORDS, THE CONDITIONS ARE DESIGNED TO PREVENT A PRIVATE ORGANIZATION FROM COMPROMISING OR OTHERWISE INFLUENCING A STATE AGENCY IN THE AWARD OF A SOCIAL SERVICES GRANT (I.E., BY CONDITIONING ITS DONATION ON THE AWARD OF A GRANT). THIS PURPOSE CAN BE READILY ASCERTAINED FROM THE HHS GUIDE TO FEDERAL FINANCIAL PARTICIPATION UNDER TITLE XX DATED JUNE 10, 1980:

"REGARDING DONATIONS OF CASH FROM PRIVATE SOURCES, THE TERM UNDER ITS ADMINISTRATIVE CONTROL MEANS THAT THE DECISION TO EXPEND THE FUNDS RESTS WITH THE STATE AGENCY. OTHER WORDS, THE STATE OR LOCAL AGENCY MUST BE PERMITTED TO EXERCISE ITS JUDGMENT IN USING THESE DONATIONS IN THE IMPLEMENTATION OF ITS TITLE XX PROGRAM."

"THE REGULATION PROVIDES FOR FUNDS CONTRIBUTED BY A PRIVATE NONPROFIT SOURCE TO BE USED TO PURCHASE SERVICES FROM THAT SOURCE AS LONG AS IT IS AN INDEPENDENT DECISION ON THE PART OF THE STATE AGENCY TO DO SO. INDEPENDENT DECISION MEANS THE STATE AGENCY MAKES A DECISION WITHOUT BEING INFLUENCED BY FACTORS OUTSIDE THE AGENCY EXCEPT FOR ALLOWABLE RESTRICTIONS IMPOSED BY A DONOR, AS PREVIOUSLY DISCUSSED.

"A STATE IS CONSIDERED TO HAVE MADE IN INDEPENDENT DECISION IN THE PURCHASE OF SERVICES FROM A DONOR IF THE CONDITIONS ESTABLISHED BY THE DONOR DID NOT PLACE ANY UNALLOWABLE RESTRICTIONS ON THE USE OF THE DONATION."

THE AGREEMENTS IN QUESTION - THE "DONOR" CONTRACTS AND THE "SOCIAL SERVICES" CONTRACTS - ON THEIR FACE DO NOT APPEAR TO CONFLICT WITH STATUTORY CONDITIONS, AS THE DONOR CONTRACTS EXPRESSLY STATE THAT THE FUNDS WERE BEING DONATED AND PLACED UNDER THE CONTROL OF THE STATE AGENCIES CONCERNED ON AN UNRESTRICTED BASIS. WE ALSO RECOGNIZE THAT IT MAY PROVE DIFFICULT TO FULLY DOCUMENT THAT EXPLICIT OR IMPLICIT UNDERSTANDINGS EXISTED BETWEEN THE STATE AGENCIES AND DONOR ORGANIZATIONS CONCERNED WHICH OTHERWISE RESTRICTED THE DONATIONS.

HOWEVER, WE BELIEVE THAT SUFFICIENT EVIDENCE EXISTS AS TO THE INTERDEPENDENT NATURE OF THE TWO WRITTEN AGREEMENTS TO SUPPORT A CONCLUSION THAT THE SUBSTANCE OF THE OVERALL ARRANGEMENTS CONSTITUTES A CIRCUMVENTION OF THE STATUTORY AND ADMINISTRATIVE CONDITIONS. FIRST, THE AGREEMENTS WERE EXECUTED SIMULTANEOUSLY BY THE SAME PARTIES, REFERRING TO THE SAME TYPE OF SOCIAL SERVICES (E.G., DAY CARE CENTERS). SECOND, THE CONTRIBUTION AND REIMBURSEMENT SCHEDULES STIPULATED IN THESE AGREEMENTS WERE CLEARLY RECIPROCAL. THAT IS, THE DONOR ORGANIZATIONS AGREED TO PAY CONTRIBUTIONS (E.G., $1,000 A MONTH) WHICH WERE IDENTICAL TO THE PROPORTIONAL AMOUNT THE STATE AGENCIES AGREED TO PAY THOSE ORGANIZATIONS AS REIMBURSEMENT FOR THEIR COSTS IN PROVIDING THE SOCIAL SERVICES (E.G., OUT OF A TOTAL AMOUNT OF REIMBURSEMENT OF $4,000, THE FEDERAL GOVERNMENT WOULD PAY $3,000 AND THE STATE AGENCY $1,000). IN OTHER WORDS, THE DONOR'S CONTRIBUTIONS TO THE STATE AGENCIES IN EFFECT REVERTED TO THE DONORS' OWN CONTRACTS WITH THOSE AGENCIES AS REIMBURSEMENT FOR THEIR COSTS. THUS, THE DONATIONS ARE RESTRICTED TO USE SOLELY BY THE DONOR ORGANIZATION.