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E.D. May Recoup Funds 'Misspent'By the States

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Washington--The U.S. Supreme Court ruled last week that the Education Department has the right to recover $1.45 million in Title I funds allegedly misspent by the states of New Jersey and Pennsylvania prior to 1978.

The decision allows the federal government to recover monies misspent by any state under the Title I grant program, and will probably have applicability to other federal grant programs, according to Kenneth S. Geller, a deputy solicitor general. Mr. Geller argued the federal government's position before the Supreme Court.

The ruling also affects other states that are involved in similar disputes with the department. According to its attorneys, 30 audit reports are pending against 19 states (including New Jersey and Pennsylvania), involving $63.8 million in Title I claims.

At issue in the case, Bell v. New Jersey and Pennsylvania, was the authority of the department to recover funds paid to states that were determined, through audits, to have "misapplied" them under the terms of Title I of the Elementary and Secondary Education Act of 1965 (esea). (Title I was renamed Chapter 1 in the Education Consolidation and Improvement Act of 1981.)

In a unanimous decision written by Associate Justice Sandra Day O'Connor, the Court reversed a 1981 decision by the U.S. Court of Appeals for the Third Circuit, which said the improper expenditures occurred before the federal government had explicit statutory power to recover them under the General Education Provisions Act of 1978 (g.e.p.a.).

(The U.S. Court of Appeals for the Fourth Circuit reached the opposite conclusion in a case involving West Virginia. The court ordered the state to return to the federal government $125,000 of a 1975 Title I grant.)

In 1980, the department had ordered the two states to return Title I funds based on earlier audits showing that between 1967 and 1973 the states had spent their allocations on some schools that did not qualify for the aid.

Both states took the position that the department could deny future funds but could not apply the 1978 amendments retroactively to force the states to repay funds already spent.

The Court rejected this argument. "... [I]t is hardly likely that Congress intended disadvantaged children to suffer twice: once when the State misspent the funds and once when the State cancels an otherwise eligible program because of the Secretary's refusal to fund it," Justice O'Connor wrote in a footnote.

The Education Department said the 1978 amendments were retroactive; but the Court did not address that issue, ruling instead that the department's authority to recover the misspent funds existed already in the provisions of section 207(a)(1) of esea and section 415 of g.e.p.a

These sections required the federal government to take into account or make adjustments for any overpayment or underpayment in previous grants.

The Court also rejected New Jersey's argument that imposing liability for misused funds interferes with state sovereignty and violates the 10th Amendment.

"Requiring states to honor the obligations voluntarily assumed as a condition of federal funding before recognizing their ownership of funds simply does not intrude on their sovereignty," the opinion states.

The case will now go back to the Third Circuit for a hearing on the issue of whether the states actually misspent the Title I funds.

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