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U.S. Won't Contest Curb on E.D. Power In Audit Disputes

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Washington--The Justice Department has decided not to appeal an appellate-court ruling that restricts the government's ability to recover federal funds allegedly misspent by school districts, Education Department officials said last week.

In declining to ask the U.S. Supreme Court to review the case, Justice lawyers went against the wishes of the Education Department, according to sources familiar with the issue.

As a result of the Justice Department's decision, three of the four districts involved in the lawsuit may be spared repaying any of the money sought by the Education Department, and the fourth cannot be required to repay the entire amount sought, the lawyer for the districts said.

Moreover, the decision leaves unchallenged a precedent favorable to districts that courts will probably apply to at least some future audit disputes.

Meanwhile, measures that would restrict the Education Department's power in audit cases even further are shaping up as a major topic of debate in an upcoming House-Senate conference on an omnibus education bill.

The U.S. Court of Appeals for the Fifth Circuit ruled in June that the department could not recover disputed money from districts without performing a thorough audit, and that it might not be able to recover an entire grant even if its charges were validated.

The decision in the case, Tangipahoa v. U.S. Department of Education, was the first to hold that "equitable factors" limit the department's right to demand repayments; it also endorsed the principle of "proportionate recovery" of funds. (See Education Week, Aug. 5, 1987.)

The strongly worded opinion was highly critical of the way audits are handled by the department and the Education Appeal Board, which decides cases in which audits are contested.

The case involved bilingual-education programs in four Louisiana districts. The department alleged that the programs contained too many ineligible students and "impermissible" foreign-language instruction, and it demanded the return of about $2.6 million.

Department's Move

The appellate decision remanded the cases to Secretary of Education William J. Bennett, noted Steven Winnick, an associate deputy general counsel in the Education Department.

"I presume he will send them back" to the Education Appeal Board, Mr. Winnick said. "Both sides will then have the opportunity to present their cases in light of the court's decision."

Michael Brustein, the lawyer rep4resenting the districts, said the outlook for three of the districts was especially favorable, because the court found that the department had failed to perform acceptably thorough audits of their spending. The opinion strongly suggested that the cases be dropped, and ordered the department to conduct complete audits before proceeding any further.

In addition, Mr. Brustein said, the federal funds in question were spent between 1978 and 1981, and only money spent in the five years prior to the issuance of an audit determination can be recovered. Therefore, he said, even if full audits are done this year, it would be too late for the department to claim any misspent money.

In the fourth case, Mr. Brustein noted, the Fifth Circuit judges agreed that the auditors' investigation was adequate, but ordered department officials to reconsider the amount they were attempting to recover. The department can demand return only of funds actually spent for ineligible purposes, the court ruled.

Furthermore, the court said, the department and the appeal board must consider "equitable factors"--such as the good faith of school personnel and the degree to which the disputed spending advanced federal education objectives--in determining the amount to be repaid.

Future of Audit Policies

Beyond the impact on the districts that were parties to the suit, questions remain about the wider implications of the Fifth Circuit ruling for the Education Department's audit policies.

Mr. Winnick said department officials had not yet resolved the larger issues of how to change the policies--and whether to drop or amend other pending cases--to comply with the ruling.

"At this point, those questions have not been decided," he said, "and it's possible those issues will be influenced by what happens in further proceedings in these cases."

Lawyers say the ruling would definitely apply to the department's and the appeal board's handling of audits involving school districts in Louisiana, Mississippi, and Texas, the states in the Fifth Circuit's jurisdiction.

Mr. Brustein, who handles many audit cases for state and local education agencies, noted that several such cases were pending in the Fifth Circuit states.

While the Fifth Circuit decision does not directly constrain the department or the appeal board in cases outside that jurisdiction, Mr. Brustein said, the ruling "has a great deal of precedent value."

"We've been citing it, and it will be cited even more," he said.

In addition, if the department continues its current audit policies outside the Fifth Circuit, it is likely to face complaints about disparate treatment of similar cases.

Congressional Issue

Complaints from state and local education officials have already brought the issue of audit reform to the attention of the Congress.

HR 5, the omnibus reauthorization measure passed by the House in May, contains provisions mandating that the recovery of funds be "proportionate" to the offense, barring the department from recovering money from programs approved by department officials; the measure also would replace the appeal board with administrative-law judges.

The bill's Senate counterpart, S 373, approved last week by the Arts, Education, and Humanities Subcommittee, contains no audit provisions, however. That development surprised and worried education lobbyists.

"We are still reviewing that situation, and have not come to any conclusion," said Ann Young, an aide to the subcommittee's chairman, Senator Claiborne Pell, Democrat of Rhode Island. Ms. Young, among the staff members most directly involved in drafting S 373, said the audit issue would receive "careful consideration" when House-Senate differences are ironed out in a conference committee.

The Education Department opposes the audit changes proposed by the House. Department officials argue that the provisions would undermine eligibility standards and erode the department's ability to hold local officials accountable for their administration of federal programs.

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