STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

DEPARTMENT OF HEALTH AND )

REHABILITATIVE SERVICES, )

)

Petitioner, )

)

vs. ) CASE NO. 82-1874

)

APALACHEE COMMUNITY MENTAL )

HEALTH SERVICES, INC., )

)

Respondent. )

)

RECOMMENDED ORDER

This matter came on for hearing in Tallahassee, Florida, before the Division of Administrative Hearings by its duly designated Hearing Officer, Robert T. Benton, II, on April 1, 1983. The parties were represented by counsel:

APPEARANCES

For Petitioner: Joseph L. Shields, Esquire

Department of Health and Rehabilitative Services

1317 Winewood Boulevard

Tallahassee, Florida 32301

For Respondent: Ronald W. Brooks, Esquire

863 East Park Avenue Tallahassee, Florida 32301

In these proceedings, petitioner seeks to recover moneys already paid for the fiscal year ending June 30, 1977, on the basis of an audit adjustment proposed to respondents cost report for that period.

ISSUES

Whether depreciation of buildings or other property purchased with federal grants in prior years was an allowable expense, requiring reimbursement by petitioner under its contract with the District II-B Mental Health Board and/or its predecessor for community mental health and related services? Whether disallowing such depreciation was a break with prior practice and, if so, whether an agency can lawfully make such a change without rulemaking?

FINDINGS OF FACT

1. For the fiscal year ended June 30, 1977, respondent reported depreciation of $18,540 for purposes of state reimbursement on account of building or equipment constructed or purchased with federal grants before July 1, 1976. The amount of depreciation is not in dispute between the parties.

2. Petitioner, Department of Health and Rehabilitative Services (HRS), contracted with District Mental Health Board Number IV on June 30, 1976, Respondent's 1/ Exhibit No. A-1, and with the successor District Mental Health Board Number II-B on January 1, 1977, Respondent's Exhibit No. A-2, for community mental health and related services in Franklin, Gadsden, Jefferson, Leon, Liberty, Madison, Taylor and Wakulla Counties for the fiscal year July 1, 1976, through June 30, 1977. The District Mental Health Board, both as originally constituted and as renamed and reconstituted (The Board), in turn subcontracted with respondent to provide the community mental health and related services called for in its contracts with petitioner. Subsequently, The Board assigned to respondent its interest in the contracts with petitioner relative to fiscal year 1976-1977.

   
   

3. Both contracts, Respondent's Exhibit Nos. A-1 and A-2, provide that the parties mutually agree, inter alia:

   
   

   That both parties have read and will comply with the following:

   1. 45 CFR Part 228 (as amended)

      Title XX Regulations

   2. HRSM 55-1, Title XX Eligibility Determination Manual

      
      

      This language appears in Part III of each contract under the heading "Federal and State Laws, Standards and Directive." The parties stipulated that 45 CFR Part 74 is incorporated by reference in 45 CFR 228.9 and, therefore, in the contracts in issue. In Part II of each contract in a section styled "Participation in Title XX Funding Program," The Board agrees:

      
      

      To participate in the Department's data reporting systems as required by the Department and Federal rules

      and regulations for the Title XX funding program in order to receive any funding under the terms of this agreement. Also, to comply with Rules, Regulations and Guidelines, and Instruction established by 45 CFR Part 228 and the Department

      of Health and Rehabilitative Services for one Title XX funding program. (See Attachment #1)

      
      

      Neither Respondent's Exhibit No. A-1 nor Respondent's Exhibit No. A-2 had any attachments. All disbursements called for by the contracts are "subject to funds being made available by the Florida Legislature or other sources."

      
      

4. At the time each of these contracts was entered into and until at least as late as April of 1977, petitioner had consistently, in auditing programs, allowed depreciation on buildings built or property acquired with federal, county or donated moneys so long as they were built or acquired before the contract year began. (Expenditures of such moneys were not reimbursed in the year made, however.) This practice did not change with promulgation and use of the first version of the form now known as HRS-MH Form 1025, "Title XX Quarterly Services Summary," Respondent's Exhibit No. G-2. Under the heading "Unit Cost," Respondent's Exhibit No. G-2 and its predecessors have had, at all pertinent times, three columns labeled "Total," "State" and "Title XX," respectively. On

   the basis of these "Quarterly Services Summaries," HRS draws down Title XX funds. In the spring of 1981, HRS disallowed depreciation like that at issue here, claimed by respondent for fiscal year ended June 30, 1976, Petitioner's Exhibit No. 1, but this did not lower respondent's actual reimbursement; and no administrative hearing was requested or objection noted.

   
   

5. From January 1, 1975, until December 31, 1976, Rule 10E-4.07(3)(s), Florida Administrative Code, was in full force and effect and provided:

   4300 Rental of Buildings Reimbursable:

   1. Rental of buildings or office

      space for facility or board up to

      the maximum of the state office rental rate schedule published annually by the Department of General Services.

      See Exhibit 6.

   2. Donated Space-Cost absorbed by others. Those facilities or boards with space furnished free may claim as reimbursable an allowance for rent not to exceed the state office rental

      rate schedule published annually by the Department of General Services. See Exhibit 6.

      
      

      Non-reimbursable:

   3. If a facility or board owns a building or equipment and rents it to another facility or board, the rent or the depreciation may be claimed as a reimbursable expense,

   but not both. Respondent's Exhibit C.

   
   

   In preparing the foregoing findings of fact, the hearing officer has had the benefit of respondent's recommended findings of fact and conclusions of law. The proposed findings have been largely adopted, in substance. To the extent they have not been, they have been deemed immaterial, cumulative or unsupported by the weight of the evidence.

   
   

   CONCLUSIONS OF LAW

   
   

6. The State of Florida, not the Federal Department of Health and Human Services, reimburses the Board's, and indirectly respondent's, expenses. In the chapter on mental health under the title "Financial Provisions," state statutory law provides:

   
   

   Expenditures subject to state reim- bursement shall include expenditures for approved salaries of personnel; approved facilities and services provided through contract; operation,

   maintenance, and service cost; depreciation of facilities; and such other expenditures

   as may be approved by the district administrator. . . Section 394.76(7), Florida Statutes (1981).

   
   

   The plain language of the statute provides that "depreciation of facilities" is reimbursable, but this provision evidences no purpose to abrogate overriding principles disallowing depreciation of, for example, facilities already depreciated or, as both parties agreed, of facilities acquired with state funds. The federal regulations indirectly incorporated by reference in the contracts between petitioner and respondent's assignor provide:

   
   

   Section 74.175 Subgrants and cost-type contracts. Title 45

   
   

   1. The cost principles applicable to a subgrantee or cost-type con- tractor under an HHS grant will not necessarily be the same as those applicable to the grantee. For example, where a State government awards a subgrant or cost-type contract to an institution of

      higher education, OMB Circular No. A-21 would apply to the costs in- curred by the institution of higher education, even though Federal Management Circular 74-4 would apply to the costs incurred by

      the State.

   2. The principles to be used in determining the allowable costs

      of work performed by for-profit organizations (other than hospitals) under cost-type contracts awarded

      to them under HHS grants are in 41 CFR Subpart 1-15.2. [45 FR 22576,

      Apr. 3, 1980, as amended at 45 FR

      34273, May 22, 1980]

      
      

      Among the principles stated in 41 CFR Subpart 1-15.2 is the following:

      
      

      No depreciation, rental, or use charge shall be allowed on property

      acquired at no cost from the Government by the contractor or by any division, subsidiary, or affiliate of the con- tractor under a common control. [41 CFR 1-15.205-9(f)].

      
      

      Respondent is a "cost-type contractor under an HHS grant" as shown by the Title XX Quarterly Services Summary forms it introduced. According to respondent's own witness, forms like these came into use in 1975 or 1976, with the beginning of Title XX funding for programs like some of those respondent provides. The record suggests that the state funds used to reimburse respondent's assignor are not "pure Title XX money," but the regulations disallow any "depreciation . . . charge . . . on property acquired at no cost from the Government."

7. To the extent state funds used to reimburse respondent do represent moneys supplied by the Federal Government, allowing as an expense depreciation of property acquired with federal money amounts to the Federal Government's paying for the property a second time. A Florida policy allowing depreciation as a reimbursable expense of property acquired by contractors like respondent at no cost might be justified as a sort of matching to encourage such donations, but this rationale would not hold in any situation where the donor specified that depreciation was not to be reimbursed, as the Federal Government has done in regulations incorporated by the parties in their contracts in the present case.

   
   

   CHANGED INTERPRETATION

   
   

8. This case is not an isolated incident. Presumably in order to continue the flow of Title XX moneys, HRS has set about enforcing a changed auditing standard. The record is clear that a change in reimbursement policy as regards depreciation of federally financed property is what petitioner proposes. Respondent has not been singled out in this respect.

   
   

9. Respondent contends that a settled staff practice like petitioner's auditors' allowance of depreciation of property acquired through federal funding cannot be changed, except by rule-making, citing Walker v. State Department of Transportation, 366 So.2d 96 (Fla. 1st DCA 1979) and price Wise Buying Group v. Nuzum, 343 So.2d 115 (Fla. 1st DCA 1977). Of course, the only formal HRS pronouncement on the issue, the Final Order entered on November 24, 1982, District II-A Mental Health Board v. Department of Health and Rehabilitative Services, No. ASAS 81-74, goes against respondent. 2/ But, assuming arguendo that citizens generally may insist that a dramatic change in policy affecting them be accomplished by promulgation of a rule, see Anheuser-Busch, Inc. v. Department of Business Regulation, 393 So.2d 1177 (Fla. 1st DCA 1981), but see McDonald v. Department of Banking and Finance, 346 So.2d 569 (Fla. 1st DCA 1977) (change in agency practice to implement incipient policy contemplated by APA) and E.M. Watkins Co. v. Board of Regents, 414 So.2d 583 (Fla. 1st DCA 1982)(deviation even from rule permissible if explained), the present case is a contract dispute and respondent's rights and obligations are primarily those of a party to a contract.

   
   

   CONTRACT CONTROLLING

   
   

10. If respondent or its assignor has contracted for a changed arrangement with petitioner, nothing in the Administrative Procedure Act authorizes either party to disregard the contract. In the present case, as in Graham Contracting, Inc. v. Department of General Services, 363 So.2d 810 (Fla. 1st DCA 1978), there "can be no doubt that the Department's contract . . . calls for agency action which potentially affects . . . substantial interests," 363 So.2d at 812, of the petitioning contractor. Cf. Solar Energy Control, Inc. v. State Department of Health and Rehabilitative Services, 377 So.2d 746 (Fla. 1st DCA 1979)(reh. den. 1980) (disappointed bidder substantially affected). See Section 120.52(10)(a), Florida Statutes (1979).

    
    

11. In Graham Contracting, Inc. v. Department of General Services, 363 So.2d 810 (Fla. 1st DCA 1978), the petitioner sought "additional money and construction time under its contract," 363 So.2d at 813, with a state agency. The court found no difficulty . . . with sovereign immunity," 363 So.2d at 813, and held that a contractor with a state agency could invoke the Administrative Procedure Act in order to enforce its contract, even though the contract purported to establish another method for settling the contract dispute.

12. A clause in the contract at issue in the Graham Contracting case contemplated agency action outside the parameters of Chapter 120, Florida Statutes, in resolving certain disputes under the contract, whereas nothing in the two successive contracts on which respondent predicates its claim in the present case purports to limit the full reach of the Administrative Procedure Act. In construing a contract, the same rules apply in an administrative forum as apply elsewhere.

    
    

13. By proof of past practice, respondent may be said implicitly to have invoked the parol evidence rule, which allows proof of extrinsic facts to clear up ambiguity in written agreements. But the parol evidence rule does not permit such proof where, as here, the contract unambiguously calls for application of certain federal regulations in the parties' dealings among themselves, including a prohibition against reimbursing claims for depreciation against property acquired with federal funds. "[T]here is surely an overriding public policy requiring that a contractor with state government who voluntarily agrees to forego a claim against the public fisc be held to the agreement in administrative proceedings like these." Pan American Corporation v. Department of Health and Rehabilitative Services, No. 80-112 (DOAH; Recommended Order entered December 10, 1981), adopted by Final Order dated April 29, 1982, 4 FALR 2019-A, 2025-A.

RECOMMENDATION

Upon consideration of the foregoing, it is RECOMMENDED:

That petitioner take steps to recover from respondent eighteen thousand five hundred forty dollars ($18,540.00).

DONE and ENTERED this 3rd day of June, 1983, in Tallahassee, Florida.

ROBERT T. BENTON II

Hearing Officer

Division of Administrative Hearings The Oakland Building

2009 Apalachee Parkway

Tallahassee, Florida 32301

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 3rd day of June, 1983.

ENDNOTES

1/ Respondent's Exhibits were labeled (before the hearing) as "Plaintiff's Exhibits." Because it seeks to change the status quo by recovering money in respondent's possession, the Department of Health and Rehabilitative Services has been designated petitioner.

2/ Respondent's counsel has objected to consideration of this Final Order on grounds that different evidence was adduced there than was adduced here.

COPIES FURNISHED:

Joseph L. Shields, Esquire Department of Health and

Rehabilitative Services 1317 Winewood Boulevard

Tallahassee, Florida 32301

Ronald W. Brooks, Esquire 863 East Park Avenue Tallahassee, Florida 32301

David H. Pingree, Secretary Department of Health and

Rehabilitative Services 1323 Winewood Boulevard

Tallahassee, Florida 32301

=================================================================

AGENCY FINAL ORDER

=================================================================

STATE OF FLORIDA DEPARTMENT OF HEALTH

AND REHABILITATIVE SERVICES

DEPARTMENT OF HEALTH AND REHABILITATIVE SERVICES,

Petitioner,

vs. CASE NO. 82-1874

APALACHEE COMMUNITY MENTAL HEALTH SERVICES, INC.,

Respondent.

/

FINAL ORDER

This cause came on before me for the purpose of issuing a final agency order. The Hearing Officer assigned by the Division of Administrative Hearings (DOAH) in the above-styled case has submitted a Recommended Order to the Department of Health and Rehabilitative Services (HRS). A copy of that Recommended Order is attached hereto.

(A) Apalachee - meaning Apalachee Community Mental Health Services, Inc. - filed three Exceptions to the Recommended Order. A copy of Apalachee's Exceptions is attached hereto as Exhibit A.

HRS RULING AND STATEMENT ON THE EXCEPTIONS

(AA) Apalachee Exception (1) - The Exception is denied. The mistake pointed out by Apalachee amounts to no more than harmless error. The cost principle expounded in 45 CFR 74.174(a) applies to the State and Apalachee as well. See Section 74.140, titled "Basic policy; Scope of subpart." With respect to depreciation, Section 74.174(a) states that OMB Circular A-122 must be used in determining allowable cost:

Circular No. A-122 - Attachment B

Selected Items of Cost

1. The computation of use allowances or depreciation will exclude:

   
   

   1. The-cost of land;

      
      

   2. Any portion of the cost of buildings and equipment borne by or donated by the Federal Government....

Note: OMB Circular A-122 is reprinted in 41 CFR 1-15.603.

Section 394.76(7), Florida Statutes (1981), is a general principle regarding depreciation of facilities. The general principle remains valid, even though it does not override the specific prohibition of Subsection 9.C., Attachment B, OMB Circular A-122. Exception (1) is denied.

(AA) Apalachee Exceptions (2) and (3) - The Hearing Officer is correct on the issues. These Exceptions are denied.

FINDINGS OF FACT

The Department hereby adopts and incorporates by reference the findings of fact made by the Hearing Officer.

CONCLUSION OF LAW

The Department hereby adopts and incorporates by reference the conclusion of law stated by the Hearing Officer, but as corrected and modified in the HRS Statement and Ruling On The Exceptions. Accordingly,

It is ADJUDGED that the Recommendation submitted by the Hearing Officer is made final.

ORDERED this 22nd day of May, 1984, in Tallahassee, Florida.

DAVID H. PINGREE

Secretary

COPIES FURNISHED:

Ronald W. Brooks, Esquire 863 East Park Avenue Tallahassee, Florida 32301

Office of General Counsel Department of HRS

1323 Winewood Boulevard

Tallahassee, Florida 32301

Robert T. Benton II, Hearing Officer Division of Administrative Hearings The Oakland Building

2009 Apalachee Parkway

Tallahassee, Florida 32301

Harden King, Agency Clerk Department of HRS

1323 Winewood Boulevard, Suite 407

Tallahassee, Florida 32301

Roy J. McCaslin, Administrator HRS Audit Services

1317 Winewood Boulevard

Tallahassee, Florida 32301

Docket for Case No: 82-001874

Orders for Case No: 82-001874