State Hit by $35-Million Penalty on Aid Program

WASHINGTON —  The Reagan Administration slapped California with a $35-million penalty Thursday for making excessive errors in welfare payments in 1981 as it ordered 26 states to repay $81.7 million for high error rates in welfare and Medicaid programs.

California’s penalty far surpassed that for any other state, with the next-highest figure the $6.8 million levied against Washington. Penalties for subsequent years are expected to be levied soon as part of an effort voted by Congress in 1978 to curb waste in the two programs, whose costs are shared by the federal government and the states.

A California congressman and a high state official disagreed over whether Thursday’s action will result in cuts for the state’s recipients of Aid to Families With Dependent Children.

Linda McMahon, director of the California Department of Social Services, said in a telephone interview from Sacramento that the state may appeal the penalty. But even if the penalty sticks, she said, it will not affect welfare recipients and will not be a strain on state or county budgets.

Not Facing Deficit

“Two years ago, it would have broken our back,” she said. “Now, we’re not in a deficit status.”

But California Rep. Robert T. Matsui (D-Sacramento), who said he was furious at the decision, said he expects the state to assess counties for the penalty and he expressed doubt that county governments could avoid making cuts in welfare benefits as a result.

“This is going to hurt poor people,” he said. “I wish the Administration would come down this hard on defense contractors.”

At a House Ways and Means subcommittee hearing where the penalties were announced, Matsui protested that states’ requests to be treated more leniently were unfairly rejected for budgetary reasons. He said the federal Department of Health and Human Services originally indicated that California’s penalty would be only $11 million, and he charged that an upward adjustment obviously had been ordered by the Office of Management and Budget.

A spokeswoman for Health and Human Services Secretary Margaret M. Heckler denied the allegation, saying that the adjustment was made after further legal review.

Heckler rejected the appeals of 22 states, including California, that had excessively high error rates for payments made under the AFDC program. Those states must return $69.2 million of the total.

The secretary also rejected the appeals of nine states with high error rates under Medicaid, the health insurance program for the poor. Those states must return $12.5 million.

Heckler granted waivers to six states with high error rates for AFDC payments and to three states with high error rates for Medicaid. Those waivers can be granted in “extraordinary circumstances”--where the states have made a good-faith effort to meet the goals but still fall short, she said.

“I hope that the stern action I have reluctantly taken today will spur the states to improve their performances even further,” Heckler said. States may appeal their penalties to a special board in Heckler’s department.

Order Reduction

The error rate--defined as overpayments to qualified recipients or payments made to ineligible persons--reached as high as 16.5%. The 1978 law ordered states to reduce the error rate to 4% of total benefit payments or face penalties, beginning in 1981.

Although New York has a welfare program roughly the size of California’s $3.4-billion effort, its $6.3-million penalty ranked far behind California’s $35 million. Ironically, that is because California had one of the nation’s lowest error rates--6%--at the time the penalty system was set up. California was held to a much stricter improvement schedule than was New York and other states, which started with far higher error rates and were given more time to reach the 4% goal.