dissenting:
The issue in this case is one of statutory interpretation. It arises in the context of cooperative federalism. Specifically, we are asked to determine how the words “good cause” contained in 42 U.S.C. § 602(a)(8)(B)(i)(III) are to be defined, and if the states are allowed to define this term, whether Hawaii’s definition of “good cause” is overly restrictive and thus in direct contravention of federal welfare policies.
Section 602(a)(8)(B)(i)(III) reads in part: A State plan for aid and services to needy families with children must ... provide that, with respect to any month, in making the determination [of need], the State agency ... shall not disregard ... any earned income of any one of the *1381persons specified [as eligible] if such person ... failed without good cause to make a timely report (as prescribed by the State plan pursuant to paragraph (14) to the State agency of earned income received in such month....)
42 U.S.C. § 602(a)(8)(B)(i)(III) (emphasis added). Neither the statute not its legislative history define the words “good cause.”
The regulations to the statute state:
The applicable earned income disregards 1 ... do not apply to the earned income of the individual for the month in which one of the following conditions apply to him:
(C) An individual failed without good cause (as specified in the State plan) to make a timely report (as defined in § 233.37(c)) of that income.
45 C.F.R. § 233.20(a)(ll)(iii)(C) (emphasis added). The regulations, thus, permit the states to promulgate individual definitions of “good cause.”
Hawaii’s definition of good cause is narrow, encompassing only two specific situations: 1) where an illness prevents the recipient from submitting a timely Monthly Eligibility Report Form (MERF),2 and 2) where a mailing problem outside the recipient’s control caused the filing delay. Haw. Admin.Rules §§ 17-621-40(d)(3)(A) & (B). The Department of Health and Human Services approved Hawaii’s definition. Since Vierra’s failure properly and timely to file her November MERF did not fall into either one of the categories specified in the Hawaii rule, the Department of Human Services denied her AFDC benefits for the month of December.
Vierra first argues that “[njeither the plain language nor legislative history of the ‘good cause’ provision in 42 U.S.C. section 602(a)(8)(B)(i)(III) evidenced any congressional intent to authorize state restrictions on good cause.”
Section § 602(a)(8)(B)(i)(III) was Congress’ response to the concern that AFDC recipients were not reporting their income on a timely basis, resulting in substantial errors and overpayments.
Quality Control reviews show that a large percentage of the payment errors made in the AFDC program relate to earned income and the failure of the recipient to report the correct amount of any changes in amount earned.
Senate Report 96-336, 96th Congress, 2d. Sess., reprinted in 1980 U.S.Code, Cong. & Ad.News 1538. Prior to the statute’s enactment, most states did not require income to be reported on a monthly basis. Further, when state agencies learned that a recipient had unreported earned income in prior months, “they [gave] him the benefit of all the earned income disregards provided in law in calculating the amount of the overpayment. Thus, if a recipient [was] negligent in reporting his earnings even over a long period of time, there [was] no penalty involved.” Id. To eliminate the problems noted in the quality control reviews, Congress enacted § 602(a)(8)(B)(i)(III), thereby instituting a *1382timely monthly reporting requirement. That is the purpose behind the statute.
The “good cause” exception to this monthly reporting requirement is not defined in the statute or the legislative history. Consequently, we must “consider the Secretary’s interpretation of that term." Connecticut Dept. of Income Maint. v. Heckler, 471 U.S. 524, 530, 105 S.Ct. 2210, 2213, 85 L.Ed.2d 577 (1985). The Act expressly provides the Secretary with the authority to publish “such rules and regulations, not inconsistent with this chapter, as may be necessary to the efficient administration of the functions with which each is charged under this chapter.” 42 U.S.C. § 1302. The Secretary published a regulation concerning how the words “good cause” were to be defined: regulation 45 C.F.R. § 233.20(a)(11)(iii)(C) requires each state, with Department approval, to determine what constitutes good cause.
An agency’s interpretation of a statute it is charged with administering is entitled to substantial deference. Simpson v. Hegstrom, 873 F.2d 1294, 1297 (9th Cir.1989). “[C]ourts will overturn an agency action if it is ‘arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law.’ ” Id. Our task is therefore a limited one. First, we must determine whether or not the Secretary’s regulation is “manifestly contrary to the statute.” Chevron U.S.A. Inc. v. Natural Resources Defense Council, 467 U.S. 837, 844, 104 S.Ct. 2778, 2782, 81 L.Ed.2d 694 (1984). Second, we must determine whether or not the regulation is arbitrary or capricious. Id.; Schweiker v. Gray Panthers, 453 U.S. 34, 44, 101 S.Ct. 2633, 2640, 69 L.Ed.2d 460 (1981); Atkins v. Rivera, 477 U.S. 154, 106 S.Ct. 2456, 2461, 91 L.Ed.2d 131 (1986).
The Secretary’s delegation to the states to determine the specific contours of “good cause” is neither manifestly contrary to the statute, nor arbitrary or capricious. First, the AFDC program is a cooperative federal-state program designed to provide federal funds to states “once they establish a plan approved by the Secretary of HHS.” Largo v. Sunn, 835 F.2d 205, 206 (9th Cir.1987). The nature of the statute contemplates broad state participation in formulating specific state programs. Therefore, given the Secretary’s broad authority “to prescribe standards for applying certain sections of the Act,” Schweiker v. Gray Panthers, 453 U.S. at 43, 101 S.Ct. at 2640, and a lack of guidance from Congress in defining a statutory term, it does not seem unreasonable, or contrary to the statute’s structure, for the Secretary to require each state to define “good cause.”3 Further, as the district court held:
[t]his proposition [that the Secretary’s deferral of authority to the states should be respected] is bolstered by the fact that Congress has been explicit elsewhere in the AFDC context when it has assigned only to the Secretary the responsibility for defining “good cause.”_ Thus, where Congress has failed to be so explicit, approval of state “good cause” definitions is entirely acceptable as long as AFDC’s fundamental purpose is not defeated thereby.
Order, p. 12, Case No. 88-00295 (January 23, 1989).
Because the Secretary reviewed and approved the Hawaii regulation, we must review the Hawaii regulation under the same deferential standard of review accorded the Secretary. The key to this review is that the Secretary cannot adopt a state's regulation that would defeat the fundamental purpose of the AFDC program. Batterton v. Francis, 432 U.S. 416, 428, 97 S.Ct. 2399, 2407, 53 L.Ed.2d 448 (1977). The district court held that Hawaii’s regulation did not *1383defeat the AFDC program’s fundamental purpose. In fact, the Hawaii regulation furthers the specific congressional purpose behind the enactment of § 602(a)(8)(B)(i)(III). The Hawaii regulation encourages the reporting of income on a timely basis, in order to avoid substantial errors and overpayments. As the district court stated, “the definition’s rigidity arguably fosters overall efficiency in the State’s administration and disbursement of AFDC benefits. Procedural requirements, although capable of producing harsh results at the perimeter, are necessary for the general streamlining of any benefits program.” Order (January 23, 1989) at 14.
Vierra argues that Hawaii’s narrow construction of good cause defeats the overall goal of the AFDC program which is to help AFDC families “obtain or retain capability for maximum self-support and personal independence.” See 42 U.S.C. § 601. This narrow regulation, Vierra argues, could result in more widespread withholding of the earned income disregards, and thus discourage more AFDC recipients from obtaining jobs. Although this argument has some merit, its weight should be discounted. First, submitting an untimely MERF does not disqualify the participant from the program. Rather, the participant loses benefits for one month. If a timely MERF is submitted in a subsequent month, benefits resume. Losing the earned income disregards for one month cannot be said fundamentally to defeat the purpose of the AFDC program.
Further, as the district court said, “alternatives are open to those persons caught in Vierra’s dilemma, although apparently she failed to realize these options.” Order (January 23, 1989) at 13. Someone else caught in Vierra’s dilemma, therefore, would not necessarily suffer the same result.
Consequently, I respectfully dissent.
. The earned income disregards (EID) provision of the AFDC program
flow from Congress’ recognition that the AFDC system can create a financial incentive not to work_ The EID ... reflected Congress’ awareness that because increased income reduces the size of the AFDC grant, members of AFDC families have little financial incentive to work.
Simpson v. Hegstrom, 873 F.2d 1294, 1295 (9th Cir.1989) (quoting Drysdale v. Spirito, 689 F.2d 252, 254 (1st Cir.1982). To counter this "perverse incentive,” the State disregards certain earned income of AFDC applicants. Id. EIDs effectively reward AFDC recipients who find jobs. For instance, the amount of assistance is usually the difference between income and need. Vierra’s income exceeded her need. Consequently, under the usual formula she did not qualify for benefits. However, under the EID provisions, part of her income was disregarded for purposes of calculating her eligibility for assistance. As a result, she qualified for an AFDC payment of almost $200.
. The MERF form requires disclosure of information relating to employment status and income. Each month a MERF is mailed to every AFDC recipient. The recipient has until the sixth working day of the following month to mail or deliver the MERF back to the caseworker. If the MERF is late, penalties are imposed.
. The language of the statute reads in part: "(III) failed without good cause to make a timely report (as prescribed by a State plan 42 U.S.C. § 602(a)(8)(B)(i)(III). Vierra argues that the parenthetical phrase was only intended to modify "timely report.” Vierra is right in the sense that the plain language of the statute does not expressly give the states the authority to define "good cause." By the same token, the plain language of the statute doesn’t give anyone the authority to define "good cause.” Someone, somewhere, has to make that determination. Given the nature of the program and the statutory scheme, the Secretary’s decision to delegate that responsibility to the states in the first instance is sensible.