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Ruling in Audit Case Allows 'Offsetting' Expenses

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Washington--In an action that could have broad applicability for Education Department grantees, the department's appeal board has ruled that state agencies and school districts can avoid returning improperly expended federal funds by proving that they were offset by other, allowable expenses not charged to the relevant grant.

The board, which decides disputes between the department and its grant recipients, issued the ruling in a case in which the New York State Education Department was charged with misusing federal vocational-education funds.

"This is highly significant, and will be widely cited," said Michael Brustein, a lawyer who argued the case for New York and has represented numerous education agencies in audit disputes.

"Virtually any [grantee] can find something they could have charged to the grant but didn't," he said.

Federal auditors found that New York had been improperly reimbursed for the full-time costs of some employees who had devoted only part of their working hours to administering federal vocational-education funds. The state was overpaid by $504,101 in fiscal 1982, the year covered by the audit.

But workers whose salaries were not officially charged to the federal grant actually spent time worth $530,195 on the vocational program. The state argued that those expenditures should "offset" the incorrectly charged costs.

Officials at the federal department argued that such an "offset" was not permissible under relevant laws and regulations, and demanded that $504,101 be repaid.

The Education Appeal Board held June 27 that the offset was appropriate. Secretary of Education Lauro F. Cavazos, who may overturn board rulings for "good cause," affirmed the decision late last month.

'Unprecedented' Ruling

Officials in the department's office of general counsel refused requests for interviews last week, saying through a spokesman that "each case is different and has to be reviewed on its own merits."

But in documents urging the Secretary to overturn the appeal board's ruling, Lynette A. Charboneau, an attorney in the general counsel's office, called the decision "unprecedented" and said it "would seriously impede the conduct of future audits."

"Indeed, the audit would be transformed from a review of the actual grant charges to a continuing search for allowable costs to be charged to the grant," she wrote.

Ms. Charboneau argued that other relevant decisions only addressed the issue of giving grantees "credit" for portions of expenditures already charged.

But the appeal board cited as one reason for its decision "a well-defined trend of judicial interpretation" pointing to more lenient treatment of grantees.

"This eab panel is persuaded that it is the intention of federal appellate courts reviewing the Secretary's decisions to inject the doctrine of fairness, including application of equitable offset or credit" into audit law, the board said in its decision.

'Gentler' Interpretations

Mitch Laine, assistant inspector general for audit, said the judicial trend and an audit-reform law enacted by the Congress last year have spurred auditors to be "more sensitive to issues of harm" and to make "gentler" recommendations on amounts the department should seek to recover from grantees.

"There are some jobs we would have pursued in the past which we will now pursue carefully or not pursue at all," he added.

The cases cited by the eab include:

  • Bennett v. Kentucky. This case involved the use of Chapter 1 compensatory-education funds for separate 1st- and 2nd-grade classes. The department found that the grantee had violated rules that the funds not be used to "supplant" state and local expenditures.

In 1985, the U.S. Supreme Court upheld a decision by the Secretary of Education that affirmed an eab ruling against Kentucky but also gave the state "credit" for presumed benefits to the students of smaller classes.

  • California v. Bennett. In 1988, the U.S. Court of Appeals for the Ninth Circuit agreed with department officials that the Los Angeles school district had improperly used Chapter 1 funds to hold training conferences in hotels, and that California should repay the misspent funds.

But the court ruled that the department should partially offset the improper expenditures by the amount that would have been expended had the conferences been held in school buildings.

  • Tangipahoa v. U.S. Department of Education. The department alleged that bilingual-education programs in four Louisiana districts contained too many ineligible students and some ineligible instruction. It demanded the return of about $2.6 million.

In a sharply worded opinion, the U.S. Court of Appeals for the Fifth Circuit voided three of the cases on the grounds that the department's audit procedures were inadequate. The court ordered department officials to reconsider the amount they were attempting to recover from the fourth district. (See Education Week, Oct. 7, 1987.)

The judges held that the department could reclaim only the portion of the grant actually spent for ineligible purposes. They said the department and the appeal board must consider "equitable factors"--such as the good faith of school personnel and the extent to which the disputed spending advanced the federal program's objectives--in determining the amount to be repaid.

Board System Replaced

Ironically, the Education Appeal Board has adopted a "doctrine of fairness" just as it is being replaced by an office of administrative-law judges. The change is part of a reform measure inspired by educators' complaints about inequities in the audit-appeal process.

Charges issued by the department after Nov. 28, 1988, will be pro8cessed under the new system, which was created by last year's omnibus education law.

The law also requires department officials to apply "proportionate recovery" principles, and bars them from demanding repayment from agencies that relied on guidance from department officials in deciding how federal money could be spent.

Several state officials said last week that they would like to see further legislation to force changes in regulations the department issued to implement the law. Failing that, they said, litigation will probably be forthcoming.

"We'll challenge them reg by reg," said Michael Hersher, a lawyer for the California education department.

State officials particularly dislike rules that could limit the use of oral hearings and make it difficult to use the "official guidance" defense. The rules specify a formal request process and say guidance can be supplied only by a few high-ranking officials listed in a separate Federal Register notice, although the statute specifically allows guidance to be provided by officials at "the office of the director level or above."

Key members of the House Education and Labor Committee said in a letter that portions of the regulations "may have departed from Congressional intent and their statutory mandate." But a committee aide said it would be difficult to find the will--and the legislative vehicle--to amend the law just a year after its enactment.

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