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Sandra Turner, Debra Scruggs, Jerrylean Baker, on Behalf Ofthemselves and All Others Similarly Situated,plaintiffs-appellees, v. Jerold Prod, Individually and in His Official Capacity Asthe Executive Director of the Department of Socialservices of the State of California; Etal., Defendants-appellants.department of Social Services of the State of California,defendant and Third- Party Plaintiff/appellant, v. Margaret Heckler, Secretary of Health and Human Services,third-party Defendant/appellant
United States Court of Appeals, Ninth Circuit. - 707 F.2d 1109
Argued and Submitted April 11, 1983.Decided June 10, 1983.As Amended Aug. 11, 1983
Gwenda Jones Kelley, Dept. of Health & Human Services, Baltimore, Md., for third party defendants-appellants.
John J. Klee, Jr., Deputy Atty. Gen., San Francisco, Cal., for defendants-appellants.
Mark N. Aaronson, Committee for Urban Affairs, John E. Peer, Guy D. Calladine, Long & Levit, San Francisco, Cal., Marilyn Kaplan, Center on Law & Poverty, Los Angeles, Cal., for plaintiffs-appellees.
Appeal from the United States District Court for the Northern District of California.
Before ELY, SKOPIL and FERGUSON, Circuit Judges.
FERGUSON, Circuit Judge:
In a case of first impression,1 the State of California and the federal Department of Health and Human Services (HHS) appeal a grant of partial summary judgment against them and in favor of a state-wide class of workers receiving Aid to Families with Dependent Children (AFDC). The plaintiff class contends that the income used to calculate a welfare family's needs has never, and does not now, include the funds mandatorily deducted from a worker's paycheck for such items as income taxes because that money is never available to such families for the support of their children. The defendant governments reply that, while prior to 1981 the position of the plaintiffs may have been correct, the congressional AFDC amendments enacted in that year mandated this change in departmental procedures. After careful consideration of legislative history, administrative interpretation and congressional purpose, the district court ruled for the plaintiffs in a decision which has the effect of raising AFDC benefits paid in California an average of $83 a month for each of 45,000 recipient families. Looking primarily to congressional purpose, we affirm, 559 F.Supp. 603.
FACTS:
Plaintiffs are the class of all past, present and future Aid to Families with Dependent Children recipients in California who have been or will be affected by a substantive change recently implemented in the AFDC program, purportedly as a result of the enactment of the Omnibus Budget Reconciliation Act of 1981. Pub.L. No. 97-35, Sec. 2302, 95 Stat. 357, 844-45 (1981), 42 U.S.C. Sec. 602(a) (OBRA). The defendants are those California agencies and officials responsible for administering the California AFDC program. The state, in turn, has brought in the Secretary of Health and Human Services as a third-party defendant.
AFDC is a federal-state public assistance program authorized by the Social Security Act. 42 U.S.C. Secs. 601-76. States which participate provide assistance to those needy families that include a dependent child as that term is defined within the Act. 42 U.S.C. Secs. 606-07. A percentage of the funds expended by a state is reimbursed by the federal government. Id. at Sec. 603. In return for the federal funds, the states are required to administer their programs pursuant to a state plan which is in accordance with federal statutory provisions and HHS regulations governing AFDC. Id. at Sec. 602.
An AFDC family's monthly grant is intended to be limited to the amount which the family needs. The statutes and the regulations attempt to accomplish this purpose by requiring that the state first set a dollar figure, known as the "standard of need," which reflects its view of the amount necessary to provide for essentials such as food, shelter, and clothing for hypothetical families of varying sizes.2 RAM v. Blum, 533 F.Supp. 933, 937 (S.D.N.Y.1982) (hereinafter RAM I). Next, the state determines the "level of benefits" it will pay, which need not be the full "standard of need" amount.3 Rosado v. Wyman, 397 U.S. 397, 408-09, (1970). The state then assesses an applicant-family's income and resources and compares the sum of money found to be available to it with the appropriate predetermined benefit level. If the family falls below that level, its AFDC grant will be the amount necessary to close the gap.
Congress originally brought AFDC into being as part of the first Social Security Act in 1935. Title IV, Part A, 49 Stat. 62; 42 U.S.C. Secs. 601-76. The statute describes itself as having three purposes: (1) to provide adequate income for needy families with dependent children, (2) to keep such families together, and (3) to encourage adult members of such families to get and keep jobs. 42 U.S.C. Sec. 601; Shea v. Vialpando, 416 U.S. 251, 253 & 264, 94 S.Ct. 1746, 1750, 40 L.Ed.2d 120 (1974). In 1981, when Congress extensively amended AFDC as part of OBRA, 95 Stat. 843-60, this language was left unchanged. The purpose of OBRA was to bring the rapid growth of federal spending under control. "Views of the Committee on the Budget," Senate Report No. 97-139 (June 17, 1981), reprinted in 1981 U.S.Code Cong. & Ad.News 397.
Plaintiffs challenge new regulations promulgated by the state Department of Social Services at the direction of HHS following the passage of OBRA. EAS Secs. 44-113.21; 44-113.212-13.4 The regulations change the method by which AFDC benefits are calculated; the state now considers mandatory payroll deductions such as income tax withholding to be "work expenses" incurred by AFDC recipients in obtaining income and subjects them to a maximum monthly $75 cut-off amount rather than allowing them to be deducted in their entirety prior to calculation of grant monies due as was the practice in the past. The practical effect of these regulations is to reduce aid payments to approximately 45,000 AFDC families within the state by the amount of the respective mandatory payroll deductions withheld from the wages of working recipients. In California the average amount of such a deduction is $83 a month.
The Social Security Act, as amended, now requires states to perform a three-step calculation in order to determine AFDC benefits. (1) Determine income amount. (2) Subtract $75 for work expenses from that amount.5 (3) Subtract the adjusted income amount derived from steps 1 and 2 from the dollar figure set in the state's calculation of level of benefits to determine the exact grant payment which will be made to the recipient. RAM I, 533 F.Supp. at 942; Dickenson v. Petit, 536 F.Supp. 1100, 1105-06 (D.Me.1982).
Within this calculation framework, the parties disagree about the meaning of two key terms: "income" and "work expenses." After the 1981 OBRA amendments which, inter alia, instituted the standardized $75 work expenses disregard, 42 U.S.C. Sec. 602(a)(8)(A)(ii), HHS instructed the state agencies that "income" was to be construed as "gross income" and that mandatory payroll deductions for such items as income tax, FICA and disability payments were properly characterized as "work expenses" to be grouped with such expenses as transportation and uniform costs. This entire group of expenses would then be subject only to the standard $75 disregard, regardless of the actual amounts expended or withheld. The State of California has embodied those HHS instructions in the regulations which are at issue in this case. Plaintiffs contend that "income" means net income and thus mandatory payroll deductions are non-income items. Plaintiffs argue that the Social Security Act requires the agencies to deduct both the mandatory tax deductions (at Step 1, determination of income) and the $75 disregard amount (at Step 2, subtract work expenses) in determining the sum necessary to bring the recipient family up to the state's level of benefits.
In 1982, a mother with three children who earned the minimum wage ($3.35 an hour) 40 hours a week, 4.3 weeks a month, would have had $59.52 withheld in California for federal and state income taxes, FICA and state disability insurance. If that amount is offset at Step 1 as plaintiffs urge, her income is determined as follows:
$3.35 x 172 hrs./month = $576.20
- 59.52
See, e.g., Cal. Welf. & Inst. Code Sec. 11450, which sets maximum grant amounts which are identical with those amounts currently set in the standard-of-need statute through family units of ten members
SDSS--EAS Secs. 44-113.211, 44-113.212 and 44-113.213, as amended November 10, 1981, read in relevant part:
Sec. 44-113.21 Computation of Net Nonexempt Earned Income for Aid to Families with Dependent Children
.211 Determine the total amount of commissions, wages or salary earned as an employee during or applicable to the month (i.e., total income irrespective of expenses, voluntary or involuntary deductions)....
.212 Determine the total profit from self-employment by a recipient whose earnings are not exempted under Section 44-111.22 by offsetting the business expenses against the gross income from self-employment.
a. Personal expenses such as income tax payments, lunches, entertainment and transportation to and from work are not classified as business expenses and shall not be deducted from gross income in determining total profit earned from self-employment....
.213 For each recipient, combine any total earnings determined in .211 above with any total profit determined in .212.
For four months at the beginning of an AFDC period of eligibility, a working recipient will also receive a "work incentive" disregard of $30 a month plus one-third of the remaining net income. After the fourth month the recipient will not be eligible again until that individual has been off AFDC entirely for a period of twelve consecutive months. 42 U.S.C. Sec. 602(a)(8)(A)(iv), (B)(ii)(I). No aspect of this disregard is at issue in this case
This four-month program is not to be confused with the old work incentive disregard enacted in 1967 and repealed by OBRA in 1981, the significance of which is discussed and illustrated infra at 1122-1123.
It reads, "the money or other gain received ... by an individual ... for labor or services." Webster's New World Dictionary of the American Language, 711 (2d college ed. 1972)
There have been three predecessor agencies to HHS--the Social Security Board, the Federal Security Agency, and the Department of Health, Education and Welfare. RAM II, at n. 11
The 1940 policy was expressed as follows:
The policies and procedures adopted by the State agency shall be consistent with the following criteria for the consideration of income and resources in the determination of need:
(a) The income or resource shall actually exist. Attributing a definite amount of income to sources or to kinds of property that produce either no income or less than the amount attributed to them is fictitious and such an imputed amount cannot properly be considered as an actual resource.
(b) The income or resource shall be available to the applicant. To be regarded as available, an income or resource must be actually on hand or ready for use when it is needed. Consideration does not mean attributing a resource to sources from which income, contributions, maintenance, or support are not in fact available and forthcoming. Nor does it mean including as available for conversion to cash, ownership in real and personal property that is already meeting established requirements of the needy person or family.
(c) The income or resource shall have some appreciable significance in meeting the requirements of the applicant. The amendments are not intended to require State agencies to bring inconsequential resources under scrutiny in establishing need, such as those resulting from casual earnings, small and unpredictable gifts of indeterminate value, or past income that will not continue in the future.
(d) The income or resource shall be considered from the standpoint of its conservation and its maximum utilization in the interest of the welfare of the applicant. The effect of the resource on need should be taken into full consideration both in regard to the requirements that it provides on one hand, and the expenses that are associated with the applicant's obtaining, conserving, or utilizing it on the other.
It was reiterated nearly verbatim in the 1942 Manual. Bureau of Public Assistance, State of Administration, Part II, Plan of Operation, Recommended Criteria of Need (May 22, 1942) at 2.
The 1967 version of the regulation quoted in Lewis v. Martin, 397 U.S. at 555, 90 S.Ct. at 1283, reads: "[O]nly income and resources that are, in fact, available to an applicant or recipient for current use on a regular basis will be taken into consideration in determining need and the amount of payment." The Supreme Court said the regulation clearly comported with the Act
A similar historical misunderstanding led the Dickenson court to mistakenly cite a 1971 opinion of this circuit in support of its construction of the term "income." 536 F.Supp. at 1111 n. 7. In Arizona Dep't of Public Welfare v. Dep't of Health, Education & Welfare, 449 F.2d 456 (9th Cir.1971), we required that disregards from earned income under Sec. 602(a)(8)(A) be made from the gross amount and assumed a definition of that term which included mandatory payroll withholding. At that time, that subsection of the statute and 45 C.F.R. Sec. 233.20(a)(6)(iv) applied only to the work incentive disregard provision subsequently repealed by OBRA. Because of this, the case has no bearing on the exclusion of mandatory payroll deductions and out-of-pocket work expenses; they were then governed exclusively by Sec. 602(a)(7) and its implementing regulations. We observed then:
[W]e think it entirely reasonable for the Secretary to interpret "earned income" in the Act's disregard provisions, 42 U.S.C. Sec. 602(a)(8)(A), as referring to gross earned income. Nothing in the legislative history negates this broader reading of "earned income," and common usage supports it.
Id. at 470 n. 21 (emphasis added). Arizona v. HEW thus construes a statutory provision which has passed out of existence and grounds in deference to the Secretary. We explain infra why we believe that deference is inappropriate on this issue in the instant case. Moreover, the legislative history briefly outlined above, while fully supportive of the Arizona v. HEW result, does not support the post-OBRA interpretation which the agency now advances in Turner. For all three of these reasons, we think that Arizona v. HEW is in no way helpful in attempting to understand the problem presented by Turner.
The defendants rely heavily on Shea in their argument that mandatory payroll deductions are work-related expenses and that such expenses must be taken from gross income. See Bell v. Hettleman, 558 F.Supp. at 391; Dickenson v. Petit, 536 F.Supp. at 1112 & 1114. We do not find Shea at all helpful to defendants, however. Dickenson does not really rely on Shea, but rather says only that Shea "implies" such an idea and asserts that its own decision is within "the penumbra" of Shea. Id. Even this cautious line is, we think, overstated; the only reference within Shea which even arguably characterizes such deductions as work expenses is grammatically ambiguous. Shea, 416 U.S. at 254-55 & n. 3, 94 S.Ct. at 1750-1755 & n. 3; Turner, 559 F.Supp. at 612-13 n. 6
The holding of Shea, that work expenses cannot be compensated for AFDC recipients in flat sum amounts because the Act required full compensation for any reasonably work-related expenses, has been legislatively overruled, leaving the case as doubtful authority at best. To the extent that Shea survives overruling by OBRA, it seems to us to stand for the twin propositions that in construing AFDC legislation one looks to its wording and the intent of Congress in its enactment. Thus, Shea seems to us to support the position of the plaintiffs in this litigation, as we explain in section D of this opinion infra.
See testimony of Christine Pratt-Marston for the National Anti-Hunger Coalition, Administration's Proposed Savings in Unemployment Compensation, Public Assistance, and Social Services Programs: Hearings Before the Subcommittee on Public Assistance and Unemployment Compensation of the Committee on Ways and Means, House of Representatives, 97th Cong., 1st Sess. 88-89 (1981); Testimony of Marian Wright Edelman, President, Children's Defense Fund, Spending Reduction Proposals, Hearings Before the Committee on Finance, United States Senate, Part 1, 97th Cong., 1st Sess. 277 (1981). Portions of their testimony are reprinted in Bell v. Hettleman, 558 F.Supp. at n. 16
See, e.g., California Department of Social Services, AFDC Social and Economic Characteristics for Families Who Received Aid during July 1980, Program Series Information Report 1982-01, Table 18 (January 1982), which reports that in July 1980, average monthly transportation for California's working AFDC recipients was $48. That figure, as well as being three years old, was low to begin with. Green v. Obledo, 29 Cal.3d 126, 139, 172 Cal.Rptr. 206, 624 P.2d 256 (1981)
According to the Center for the Study of Social Policy, as extensively reported by the U.S. Civil Rights Commission in May 1983, under the present method of calculating AFDC benefits established under the 1982 post-OBRA regulations, AFDC recipients in twelve states, including California, lose money if they work. Those in another nine states earn less than $10 in extra income for a full month of work. In only four states was the amount of increased income greater than $100 and that occurred because the basic benefits were set at a low level in those states. United States Commission on Civil Rights, A Growing Crisis: Disadvantaged Women and Their Children (May 1983) at 28-29 & Table 3.8
The state asserts as well that if the district court interpretation of the law is implemented, the OBRA amendments will cost the government money rather than saving it. It relies on an affidavit of HHS AFDC official Linda S. McMahon to buttress this assertion. The affidavit is unclearly worded and, perhaps because of this, seems internally contradictory. Compare paragraph # 4 with paragraph # 5. Moreover, the assertion which the state and Ms. McMahon make is patently untrue in that they make no allowance for OBRA's chief economizing feature, the repeal of the old work incentive disregard. See example supra at 1122-1123. See Bell v. Hettleman, 558 F.Supp. at 393-94 n. 12 (similar affidavit not relied upon)
Turner, 559 F.Supp. at 615-16 n. 11; Vaessen v. Woods, 131 Cal.App.3d 1025, 182 Cal.Rptr. 725 (1982), hearing & alternative writ of mandate granted (Aug. 9, 1982) (Nos. LA 31617 & LA 31602)