Administraciónpara El Sustento De Menores (administration for Child Support) of the… v. Department of Health and Human Services of the United States

Of the Federal Circuit, sitting by designation. *
United States Court of Appeals
For the First Circuit
No. 08-2169
ADMINISTRACIÓN PARA EL SUSTENTO DE MENORES
(ADMINISTRATION FOR CHILD SUPPORT) OF THE DEPARTMENT
OF THE FAMILY OF THE COMMONWEALTH OF PUERTO RICO,
Plaintiff, Appellant,
v.
DEPARTMENT OF HEALTH AND HUMAN SERVICES
OF THE UNITED STATES,
Defendant, Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Aida M. Delgado-Colón, U.S. District Judge]
Before
Torruella, Boudin, and Dyk,*
Circuit Judges.
Pedro J. Varela-Fernández, on brief for appellant.
Catherine Y. Hancock and Michael S. Raab, Attorneys, Appellate
Staff, Civil Division, Michael F. Hertz, Acting Assistant Attorney
General, Rosa E. Rodríguez-Vélez, United States Attorney. As Of
Counsel: David S. Cade, Acting General Counsel, Robert E. Keith,
Associate General Counsel, Children, Families & Aging Division,
William Alvarado-Rivera, Chief of Litigation, Children, Families &
Aging Division, on brief for appellee.
December 7, 2009

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TORRUELLA, Circuit Judge. In this appeal, plaintiff-
appellant Administration for Child Support, a unit of the
Department of the Family of the Commonwealth of Puerto Rico
("Puerto Rico"), seeks review of a decision of the district court
granting summary judgment in favor of the United States Department
of Health and Human Services ("HHS" or "Agency") in a proceeding
under the Administrative Procedure Act ("APA") pursuant to 42
U.S.C. § 610(c). Puerto Rico brought this action to challenge the
Agency's assessment of a financial penalty against certain federal
grant money used to fund Puerto Rico's child support enforcement
programs, after HHS determined that Puerto Rico had failed to
satisfy data reporting requirements, or meet performance
benchmarks, in consecutive fiscal years.
Puerto Rico contends that HHS acted in an arbitrary and
capricious manner when it refused to accept data submitted 45 days
after the regulatory deadline, and failed to provide adequate
notice of its intent to assess the penalty. It asserts that both
of these actions were predicated on the Agency's unreasonable
reading of applicable regulations. The district court rejected
these contentions, concluding that the Agency's interpretation of
its regulations was reasonable and entitled to deference. After
careful review, we affirm.

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Puerto Rico is treated as a state for purposes of the TANF 1
program, 42 U.S.C. § 619(5), and Title IV-D of the Social Security
Act, id. § 1301(a)(1).
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I. Background
A. Statutory and Regulatory Framework
Puerto Rico participates in the Temporary Assistance to
Needy Families, or TANF, program, which is administered by HHS
pursuant to Title IV-A of the Social Security Act, 42 U.S.C. §§ 601
-619. The TANF program provides block grants, also known as State
Family Assistance Grants, to eligible states. See 42 U.S.C.
§ 603(a)(1). A central purpose of these grants is to lend a hand 1
to states which "provide assistance to needy families so that
children may be cared for in their own home or in the homes of
relatives." Id. § 601. Eligibility for TANF grants is predicated
on the state's operation of child support enforcement programs --
that is, programs designed to locate non-custodial parents,
establish paternity, and obtain child and spousal support -- in
accordance with Title IV-D of the Social Security Act. See 42
U.S.C. §§ 651-669b; see also 42 U.S.C. § 602(a)(2).
Title IV-D enforces strict performance standards and
reporting requirements on states as a condition of funding. Under
this regime, states may qualify for incentive payments based on the
relative effectiveness of their performance in five areas:
paternity establishment, child support order establishment, current
collections, average collections, and cost effectiveness. 42

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To assess the completeness, reliability, and security of the 2
data submitted by the states and the accuracy of the reporting
systems used in calculating the five performance indicators, the
Secretary is obligated to conduct audits of this data at least once
every three years. 42 U.S.C. § 652(a)(4)(C)(i).
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U.S.C. § 658a(b)(6); 45 C.F.R. § 305.2. Each fiscal year, eligible
states must submit "complete and reliable" data to demonstrate
their performance in each of these areas. 42 U.S.C. § 658a(b)
(5)(B); see also id. § 652(g)(1); 45 C.F.R. § 305.1(i) & (j). Data
is considered "reliable" if it meets a 95% standard of reliability
as determined by the Secretary of HHS, 45 C.F.R. § 305.1(i), and
"complete" if it includes all reporting elements necessary to
compute performance levels and is submitted within the proper
timeframe, id. § 305.1(j). HHS regulations set the deadline for 2
submitting this data as the December 31st following the end of each
fiscal year, i.e., the end of the first quarter following the
conclusion of the fiscal year. See 45 C.F.R. § 305.32(f).
Based on this data, HHS calculates the amount of each
state's incentive payments. 42 U.S.C. § 658a(b). If the Secretary
determines that the data submitted by the state is reliable and
complete, he will determine how the state performed with respect to
each of the five performance measures as compared to other eligible
states; incentive payments are then allocated to each state as a
share of a fixed "[i]ncentive payment pool" set aside by Congress
for each fiscal year. Id. However, if the Secretary determines
that the state has submitted unreliable or incomplete data for any

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The PEP measures a state's success at establishing the paternity 3
of children born out-of-wedlock. 42 U.S.C. § 652(g). A state may
calculate its PEP according to either (1) the percentage of
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particular performance indicator, or has failed to satisfy
applicable performance benchmarks, the state will not receive an
incentive payment for that indicator for that financial year. See
id.
States are also subject to penalties based on their year-
to-year performance in three of these areas: paternity
establishment, support order establishment, and current
collections. See 42 U.S.C. § 609. When in a given fiscal year a
state fails to either submit complete and reliable data or satisfy
substantive performance measures, the next fiscal year
automatically becomes a "corrective action year" in which the state
is required to improve its performance or face penalties. Id.
§ 609(a)(8)(A); 45 C.F.R. §§ 305.40, 305.61(a)-(b). That is, when
a state in consecutive fiscal years fails either the data reporting
requirement and/or the substantive performance requirement
(including a reporting failure in one year and a performance
failure in the other), it is subject to a penalty under the TANF
program.
As is relevant here, states must establish a 90%
"paternity establishment percentage," or PEP, for each year in
order to qualify for an incentive payment for that performance
indicator. 42 U.S.C. § 652(g)(1)(A). If a state's PEP falls 3

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children born out of wedlock statewide for whom paternity is
established, or (2) the percentage of children participating in
state child support programs for whom paternity is established.
See 42 U.S.C. § 652(g)(2); 45 C.F.R. § 305.2.
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below this 90% threshold, however, it may still satisfy this
performance requirement by demonstrating a certain level of
improvement over the previous fiscal year's PEP. Id. § 652(g)
(1)(B)-(F); 45 C.F.R. § 305.40(a)(1). When a state fails to
satisfy the PEP performance and/or reporting criteria in two
consecutive years, it is subject to a penalty. The penalty
assessed is a certain percentage of the TANF grant; the first
failure is penalized by a 1-2% reduction, but subsequent failures
may be penalized by as much as 5%. 42 U.S.C. § 609(a)(8)(B); 45
C.F.R. § 305.61(c). When a penalty is imposed, a state must expend
its own funds to make up the difference. 45 C.F.R. § 262.1(e)(1).
HHS is required to "notify the State in writing" when it
determines that a state is subject to a penalty. 45 C.F.R.
§§ 262.7, 305.66. The notice must inform the state of the
deficiency which is the basis for the penalty, as well as the
reasons for, and amount of, the penalty assessed. 45 C.F.R.
§ 305.66(b). The penalty is imposed in the fiscal year following
the Agency's final decision. 45 C.F.R. § 262.1(c)(2). States may
appeal to the HHS Departmental Appeals Board ("DAB") within sixty
days of receipt of such notice. 42 U.S.C. § 610(b); 45 C.F.R.
§§ 262.7, 305.66.

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HHS permits states to use a reporting period other than the 4
federal fiscal year, provided "like" data are used and compared
from year-to-year. For FY 2000, Puerto Rico submitted data for the
twelve-month period from August 1, 1999 through July 31, 2000.
Accordingly, Puerto Rico was required for FY 2001 to submit data
from August 1, 2000 through July 31, 2001.
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B. Facts and Proceedings Below
The basic facts are not in dispute. On February 7, 2002,
HHS notified Puerto Rico that its auditors had determined that
Puerto Rico's fiscal year ("FY") 2001 PEP data was deficient. As
HHS explained, Puerto Rico had submitted PEP data covering its
performance over an eighteen-month period from January 1, 2000 to
June 30, 2001, rather than the proper twelve-month period from
August 1, 2000 to July 31, 2001. Thus, HHS determined that Puerto
Rico's FY 2001 PEP data was not accurate because it included data
prior to the reporting period, and was incomplete because it was
missing data for July 2001.4
Puerto Rico attempted to submit corrected data on
February 14, 2002. However, in a letter dated March 20, 2002, HHS
informed Puerto Rico that it would not accept the corrected PEP
data for purposes of calculating incentive payments because the
December 31, 2001 deadline set forth in 45 C.F.R § 305.32(f) had
passed. HHS explained that a "cut-off point is necessary for us to
make the required performance determinations and calculations on a
timely basis" because "payments of incentives cannot be made to any
state until the entire process has been completed for all states in

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a given fiscal year." Puerto Rico thus received no PEP incentive
payment for FY 2001. However, because FY 2001 data was used both
to compute incentive payments for FY 2001 and to qualify for FY
2002 incentives based on improved performance, HHS indicated that
it would accept the corrected PEP data covering FY 2001 for the
limited purpose of determining whether Puerto Rico "qualif[ied] for
incentives on the basis of improved performance in FY 2002." The
corrected FY 2001 data showed a PEP of 92%.
For FY 2002, Puerto Rico submitted data which showed a
PEP of 88%. This PEP fell below the minimum threshold of 90% and
did not demonstrate an improvement over the previous fiscal year's
PEP of 92%. Thus, Puerto Rico had failed for two consecutive years
to submit reliable PEP data (FY 2001) or meet substantive PEP
performance targets (FY 2002). Accordingly, HHS notified Puerto
Rico on November 14, 2003 that it would be penalized by 1% on its
FY 2003 TANF grant. HHS ultimately assessed a penalty of $582,365.
Puerto Rico appealed this decision to the DAB and argued
that the Agency had erred both by failing to accept its corrected
data in February 2002, and by notifying Puerto Rico in an untimely
fashion of its penalty. Puerto Rico claimed that each of these
actions was based on an unreasonable interpretation of applicable
regulations. The DAB rejected both contentions and upheld the
penalty. Puerto Rico then filed this APA action in the district
court challenging the Agency's final decision. The district court,

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adopting a magistrate judge's recommendation, agreed with the DAB
and granted summary judgment in favor of HHS. This appeal
followed.
II. Discussion
A. Standard of Review
We review grants of summary judgment de novo. However,
in an APA action, "'judicial review, even at the summary judgment
stage, is narrow.'" Visiting Nurse Ass'n Gregoria Auffant, Inc. v.
Thompson, 447 F.3d 68, 72 (1st Cir. 2006) (quoting Associated
Fisheries of Maine, Inc. v. Daley, 127 F.3d 104, 109 (1st Cir.
1997)). Under the familiar APA standard, we may "only set aside
agency actions, findings, and conclusions if they are 'arbitrary,
capricious, an abuse of discretion, or otherwise not in accordance
with the law.'" Id. (quoting 5 U.S.C. § 706(2)). "[W]here
Congress has entrusted rulemaking and administrative authority to
an agency, courts normally accord the agency particular deference
in respect to the interpretation of regulations promulgated under
that authority." Id. (quoting South Shore Hosp., Inc. v. Thompson,
308 F.3d 91, 97 (1st Cir. 2002)).
B. Late Submission of Performance Data
Puerto Rico first argues that HHS's decision not to
accept the revised FY 2001 data submitted on February 14, 2002 was
arbitrary and capricious. Puerto Rico asserts that because the
data was submitted "only" forty-five days late, HHS had sufficient

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Puerto Rico also argues that HHS has been inconsistent in the 5
application of its guidelines because it has in other cases
accepted modified data past the regulatory deadline. However,
Puerto Rico has identified no instance in which HHS has accepted
untimely data to determine the prior fiscal year's performance for
incentive payment purposes. Rather, Puerto Rico cites to one case
in which HHS requested a state to submit corrected data past the
regulatory deadline for the purpose of measuring the next year's
incentives based on improved performance, as it also did here. See
Nevada v. Department of Health and Human Servs., No. 3:05-cv-00677
(D.Nev. Dec. 28, 2006) (slip op., appended to Appellee's brief).
Accordingly, we reject Puerto Rico's contention that there is an
inconsistency in need of explanation.
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time to consider the corrected data, which would have shown a PEP
of 92% and thus no FY 2001 deficiency. Accordingly, Puerto Rico
contends that HHS had "no logical or reasonable explanation" for
failing to accept the FY 2001 data for purposes of determining
whether reliable and complete information had been submitted for FY
2001.5
We hold that HHS's decision not to accept and consider
Puerto Rico's untimely PEP data to determine its FY 2001
performance for incentive purposes was neither arbitrary nor
capricious. An agency's interpretation of its regulations is
entitled to "substantial deference," and must be given controlling
weight unless it is "plainly erroneous or inconsistent with the
regulation." Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512
(1994) (internal quotation marks omitted). Here, as Puerto Rico
acknowledges, the regulation at issue unambiguously required Puerto
Rico to submit the FY 2001 PEP data by December 31, 2001. 45
C.F.R. § 305.32(f). The regulation further made it clear that only

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data submitted by that date would be considered by HHS for purposes
of determining completeness and reliability. Id. HHS has
explained that this deadline is necessary to allow the Agency
sufficient time to analyze the data and determine each state's
entitlement to incentive payments. See Child Support Enforcement
Program; Incentive Payments, Audit Penalties, 65 Fed. Reg. 82,178,
82,184 (Dec. 27, 2000) (explaining, in preamble to final rule, that
"[a] cut-off point [of December 31st] is necessary for us to make
the required performance determinations and calculations on a
timely basis"). That is, because incentive payments are allocated
to each state as a percentage of a common pool of funds based on
relative performance, 42 U.S.C. § 658a(b), the Agency cannot
reasonably accommodate late submissions without delaying incentive
payments to every eligible state. Puerto Rico has not identified
any evidence in the record that calls the Agency's explanation into
question, nor has it offered any plausible interpretation of its
own. Under these circumstances, the Agency's decision to read its
regulations as written was not plainly erroneous.
Alternatively, Puerto Rico argues that HHS acted in an
arbitrary and capricious manner when it rejected the timely, but
uncorrected, FY 2001 data covering the eighteenth-month period from
January 1, 2000 to June 30, 2001. Because the regulations provide
that, in certain limited circumstances, the Secretary may excuse
noncompliance with Title IV-D reporting requirements, Puerto Rico

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argues that the Agency's decision to reject Puerto Rico's FY 2001
PEP data was an abuse of discretion. The regulation on which
Puerto Rico relies provides that the Secretary may disregard a
state's failure to submit complete and reliable data, and forgo the
assessment of a penalty,
if the Secretary determines that the
incompleteness or unreliability of the data,
or the noncompliance with one or more of the
IV-D requirements, is of a technical nature
which does not adversely affect the
performance of the State's IV-D program or
does not adversely affect the determination of
the level of the State's paternity
establishment or other performance measures
percentages.
45 C.F.R. § 305.62. We agree with HHS that Puerto Rico's failure
to comply with the FY 2001 PEP reporting requirements was not of a
"technical nature" and, therefore, the Secretary had no discretion
to accept Puerto Rico's submission. As the DAB reasonably found,
any calculations based on eighteen months of data -- as opposed to
the proper twelve month period -- would have skewed Puerto Rico's
PEP rate upward for FY 2001 and thus would have "adversely
affect[ed] the determination of the level of the State's paternity
establishment." Under these circumstances, the Agency did not
abuse its discretion when it rejected Puerto Rico's timely FY 2001
data due to the deficiencies identified above, or assessed a
penalty based, in part, on that reporting failure.

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C. Notice
Next, Puerto Rico argues that the district court erred in
concluding that HHS provided adequate notice of its assessment of
the TANF penalty. It contends that HHS's interpretation of the
applicable regulation does not give the state an opportunity to
cure the deficiency, and is arbitrary and capricious because it
frustrates Congress's intent to give states the chance to take
corrective action and avoid the penalty. Puerto Rico emphasizes
that it received notice of the penalty on November 14, 2003 --
thirteen months after the end of FY 2002 and, it asserts, too late
to take corrective action.
HHS regulations provide that "[i]f a State is found by
the Secretary to be subject to a penalty," then it must "notify the
State in writing of such finding." 45 C.F.R. § 305.66(a). The
notice must:
(1) Explain the deficiency or deficiencies
which result in the State being subject to a
penalty, indicate the amount of the potential
penalty, and give reasons for the finding; and
(2) Specify that the penalty will be assessed
in accordance with the provisions of 45 C.F.R.
262.1(b) through (e) and 262.7 if the State is
found to have failed to correct the deficiency
or deficiencies cited in the notice during the
automatic corrective action year (i.e., the
succeeding fiscal year following the year with
respect to which the deficiency occurred.)
Id. § 305.66(b). HHS has consistently interpreted § 305.66 to
require written notice of a penalty only after a state has "failed

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to correct the deficiency or deficiencies . . . during the
automatic corrective action year" and has been "found by the
Secretary to be subject to a penalty." See Ala. Dep't of Human
Res. v. United States HHS, 478 F. Supp. 2d 85, 89 (D.D.C. 2007);
Nevada, No. 3:05-cv-00677, slip op. at 11.
By its plain terms, § 305.66(a) does not require HHS to
give advance notice of its intent to assess a penalty in order to
permit the state to take corrective action. Rather, the
regulations contemplate that the Agency will notify the state "if"
it determines that the state "is . . . subject to a penalty." 45
C.F.R. § 305.66(a). Thus, HHS was required to inform Puerto Rico
of its intent to impose a penalty only after it determined that
consecutive reporting and/or performance failures had occurred.
Puerto Rico contends that this interpretation deprives
states of the opportunity to correct a deficiency before the
assessment of a penalty. However, a state is not subject to a
penalty until there have been performance and/or reporting
deficiencies for two consecutive fiscal years. See 42 U.S.C.
§ 609(a)(8)(A); 45 C.F.R. § 305.61. States have an opportunity to
cure deficiencies, and thus avoid a penalty, during the "corrective
action year" which "automatic[ally]" follows the fiscal year in
which the initial deficiency is found. 45 C.F.R. § 305.66(b)(2);
see also 45 C.F.R. § 305.61 (providing that HHS may only impose
penalty if, "[w]ith respect to the immediately succeeding fiscal

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Indeed, the preamble to § 305.66 emphasizes that 6
the State should not wait or rely upon the Secretary's
determination of a data or a performance deficiency in
order to begin corrective action. Two consecutive years
of failure (either poor data or poor performance) in the
same performance measure criterion will trigger a penalty
imposition.
Child Support Enforcement Program; Incentive Payments, Audit
Penalties, 65 Fed. Reg. at 82,192.
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year, the State failed to take sufficient corrective action to
achieve the appropriate performance levels or compliance or the
data submitted by the State are still incomplete and unreliable");
Ala. Dep't of Human Res., 478 F. Supp. 2d at 89 ("[A] state is not
subject to a penalty until after the end of the corrective action
year which follows immediately and automatically upon a year of
noncompliance. Therefore, a penalty cannot be assessed and notice
is not required, until after the end of, not prior to, the
corrective action year.").
In this case, Puerto Rico was on notice that it could be
subject to a penalty for FY 2002 PEP deficiencies by at least
March 20, 2002, when HHS formally rejected the corrected FY 2001
PEP data. Accordingly, we reject the contention that the Agency's
interpretation of the § 305.66 notice provision is unreasonable
because it prevents states from taking corrective action to avoid
the imposition of a penalty.6
Puerto Rico also claims that the Agency's interpretation
should be set aside because it has not been provided with an

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opportunity to propose and implement a corrective compliance plan,
a procedure available to states before HHS imposes a penalty under
other TANF provisions not at issue in this appeal. See 42 U.S.C.
§ 609(c). However, as Puerto Rico acknowledges, the statute on
which it relies for this contention expressly provides that the
opportunity to propose and implement such corrective compliance
plans "shall not apply" to a penalty, like that at issue here,
assessed for PEP deficiencies pursuant to § 609(a)(8). Id. § 609
(c)(4).
Finally, Puerto Rico asserts, without developed argument,
that "horn book" law and principles of due process prevent the
imposition of a penalty without adequate prior notice. We deem
these arguments waived. See United States v. Zannino, 895 F.2d 1,
17 (1st Cir. 1990).
Thus, we conclude that the Agency's interpretation of the
notice provision is reasonable, and entitled to deference. See
Thomas Jefferson Univ., 512 U.S. at 512.
Affirmed.

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