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July 6, 1970

MR. X and Mrs. X, his wife et al.
Lloyd W. McCORKLE, Commissioner of the State Department of Institutions and Agencies, et al. Carolyn AMOS, individually and on behalf of her two infant children, etc. v. Irving ENGELMAN, Director of the Division of Public Welfare of the New Jersey Department of Institutions and Agencies, et al.

Adams, Circuit Judge, Augelli, Chief District Judge, and Wortendyke, District Judge.

The opinion of the court was delivered by: ADAMS

ADAMS, Circuit Judge.

 Plaintiffs *fn1" in both these class actions seek to invalidate New Jersey's "Administrative Ceiling" regulations of the Aid to Families with Dependent Children (AFDC) program of that state. Section 615 of the Categorical Assistance Budget Manual. They allege such regulations violate the Equal Protection and Due Process Clauses of the Fourteenth Amendment, contravene sections 402(a)(7), 402(a)(8) and 406(b) of the Social Security Act of 1935, 42 U.S.C. § 602(a)(7), 42 U.S.C. § 602(a)(8), 42 U.S.C. § 606(b), as amended, and conflict with certain HEW regulations promulgated thereunder. *fn2"

 Plaintiffs represent a class of persons who would be entitled to receive some welfare benefits or increased money payments under New Jersey's AFDC program were it not for the application of Section 615. The defendants are the state officials responsible for administering the welfare program in New Jersey.

 The two cases were initially argued before this Court in December, 1969. At that argument the defendants contended that we should decline to reach the merits of the controversy because of the principles of "exhaustion of administrative remedies" and "abstention". Defendants urged abstention by this Court until the New Jersey Supreme Court decided a case brought by one of the named plaintiffs in this action, contesting the validity of section 615.

 On May 4, 1970, the New Jersey Supreme Court issued an opinion in that case, Bailey v. Engelman, 56 N.J. 54, 264 A. 2d 442 (1970), sustaining section 615. There is, therefore, no longer a question of abstention.

 Defendants, however, continue to maintain that the possible conflict between the New Jersey regulations and the federal statute should be resolved through the administrative procedures of the Department of Health, Education and Welfare.

 In Rosado v. Wyman, 397 U.S. 397, 90 S. Ct. 1207, 25 L. Ed. 2d 442 (1970), the Supreme Court made abundantly clear, what earlier cases had already indicated, that "neither the principle of 'exhaustion of administrative remedies' nor the doctrine of 'primary jurisdiction' has any application to the situation" when a state regulation in the welfare area is challenged by recipients or prospective recipients as violating the Constitution. 397 U.S. at 406, 90 S. Ct. at 1215. Despite the dissent of the Chief Justice and Justice Black in Rosado, 397 U.S. at 430, 90 S. Ct. at 1227 and their additional dissents in Lewis v. Martin, 397 U.S. 552, 90 S. Ct. 1282, 25 L. Ed. 2d 561 (filed April 20, 1970), and Wyman v. Rothstein, 398 U.S. 275, 90 S. Ct. 1582, 26 L. Ed. 2d 218 (filed June 1, 1970), the majority of the Supreme Court has decided that federal courts may review state welfare regulations although HEW has not determined their validity.

 Some months after we heard argument in these cases the New Jersey Welfare Department promulgated a revision of regulation 615. The new version was published in the New Jersey Register on April 9, 1970, and became effective May 1, 1970. *fn4" The New Jersey Supreme Court considered the new regulation before releasing its decision in Bailey v. Engelman. Because of the revision of 615 and the New Jersey decision, we heard additional argument on May 20, 1970.

 Plaintiffs raise both constitutional and statutory grounds in support of their position. Although jurisdiction of a three-judge-court depends on the assertion of a constitutional issue, once convened such court has jurisdiction over non-constitutional claims and is obligated to adjudicate such claims in preference to the constitutional one. Rosado v. Wyman, 397 U.S. 397, 90 S. Ct. 1207, 25 L. Ed. 2d 442; Dandridge v. Williams, 397 U.S. 471, 475-476, 90 S. Ct. 1153, 25 L. Ed. 2d 491 (1970); Wyman v. Rothstein, 398 U.S. 275, 90 S. Ct. 1582, 26 L. Ed. 2d 218; King v. Smith, 392 U.S. 309, 312 n. 3, 88 S. Ct. 2128, 20 L. Ed. 2d 1118 (1968). Accordingly, we shall consider plaintiffs' statutory claims.

 Section 615 of the New Jersey Categorical Assistance Budget Manual is comprised of a set of regulations having state-wide effect. These regulations provide, in essence, that when the "available adjusted income" of a family exceeds a set amount, called an "administrative ceiling", members of the family are ineligible for public assistance under the AFDC program. If the family's available adjusted income is less than the administrative ceiling, assistance is limited to the difference between available adjusted income and the administrative ceiling.

 Available adjusted income is calculated by deducting from "gross earned and unearned income of all family budget unit members" certain specific excluded income, mandatory payroll deductions, cost of child care, support paid under court order, $50 for expenses of employment, as provided in Section 410 of the Budget Manual, and other enumerated items.

 The concept or phrase "available adjusted income" was added to section 615 for the first time in the April revision. Under the previous section 615 the administrative ceiling was applied to a family unit's "gross income", less deductions for child care and court-ordered support for children outside the home. By using gross income the regulation failed to take into consideration the amount of money actually available to a family or child. A prime example was that it did not deduct any expenses incurred in earning that income.

 Although under the current section 615, the administrative ceiling varies according to the size of the "family budget unit", and "available adjusted income" excludes a specified amount for business expenses, neither the administrative ceiling nor the definition of "available adjusted income" reduce earned income by the amount of the "statutory disregards" set forth in section 402(a)(8) of the Social Security Act. Plaintiffs allege that the failure to include provisions for this deduction in determining "a 'needy' family for purposes of eligibility for money payments" contravenes the statutory command of section 402(a)(8). In addition they contend that a standardized $50 deduction for expenses of employment is inconsistent with the language of section 402(a)(7) requiring the state to take into consideration "any expenses reasonably attributable to the earning of any such income." *fn5" They also contend that section 615.5 providing for "direct vendor payments" is in "blatant violation" of section 406(b) of the Social Security Act, which defines "aid to families with dependent children" as "money payments" except where otherwise provided in section 405. *fn6" Counsel in the Amos suit also consider that the new administrative ceiling like the old one violates the federal regulation which provides that the income of a stepfather or man assuming the role of a spouse may be included in the resources of a family only if such income is actually available for its use. 45 C.F.R. § 203.1(a), 33 Fed. Reg. 11290 (1968) implementing 42 U.S.C. § 602(a)(7) and 45 C.F.R. § 233.20(a)(ii) 34 Fed. Reg. 1395.


 Before considering the specific contentions in this case, a brief sketch of the history and statutory scheme of the welfare program may be helpful.

 The Federal Government's Aid to Families with Dependant Children (AFDC) program is one of a series of programs promulgated under the Social Security Act of 1935, 42 U.S.C. § 301-1396. *fn7" The AFDC program, as explained by the Supreme Court in King v. Smith, supra, singles out the "dependent child" for welfare assistance. A "dependent child" means a needy child who has been deprived of parental support or care by reason of the death, continued absence from the home, or physical or mental incapacity of a parent, and who is living with any one of several listed relatives and who is age qualified. § 406(a), Social Security Act, 42 U.S.C. § 606(a). The federal government provides funds to the states that participate in the program. §§ 422, 423, Social Security Act, 42 U.S.C. §§ 622, 623.

 Although each state may elect or refuse to participate in the program, New Jersey and all the other states are part of the program. Once a state elects to establish an AFDC program, the plan for the administration of the program must receive the approval of the Secretary of HEW. The Supreme Court has said that each State has "considerable latitude in allocating [its] AFDC resources, since each State is free to set its own standard of need and to determine the level of benefits by the amount of funds it devotes to the program". King v. Smith, 392 U.S. at 318-319, 88 S. Ct. at 2134. For a detailed ...

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