General Education Provisions ActEnforcement: Equitable Offsets

[[Page 32252]]

DEPARTMENT OF EDUCATION

34 CFR Parts 75, 76, and 81

RIN 1880-AA56

General Education Provisions Act--Enforcement: Equitable Offsets

AGENCY: Department of Education.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Secretary proposes to amend Part 81 of Title 34 of the

Code of Federal Regulations, containing regulations regarding

enforcement under the General Education Provisions Act (GEPA). The

amendment would include regulations clarifying the circumstances under

which equitable offset is taken into account in determining harm to an

identifiable Federal interest under section 453(a)(1) of the GEPA. The

proposed regulations would enhance grantee flexibility and reduce

burden by contributing to the early resolution of audit disputes and

the avoidance of protracted litigation.

The proposed regulations in this notice do not apply to programs

under the Higher Education Act of 1965 or the Impact Aid statutes (Pub.

L. 81-874, Pub. L. 81-815, and Title VIII of the Elementary and

Secondary Education Act of 1965 (ESEA) as amended by Pub. L. 103-382).

DATES: Comments must be received on or before August 4, 1995.

ADDRESSEES: All comments concerning these proposed regulations should

be addressed to Ted Sky, Senior Counsel, U.S. Department of Education,

600 Independence Avenue SW., Washington, DC 20202-2121.

FOR FURTHER INFORMATION CONTACT: Ted Sky. Telephone: (202) 401-6000.

Individuals who use a telecommunications device for the deaf (TDD) may

call the Federal Information Relay Service (FIRS) at 1-800-877-8339

between 8 a.m. and 8 p.m., Eastern time, Monday through Friday.

SUPPLEMENTARY INFORMATION:

I. Recognition of Offset Costs

Section 453(a)(1) of the GEPA, 20 U.S.C. 1234b(a)(1), provides that

a recipient determined to have made an unallowable expenditure, or to

have otherwise failed to discharge its responsibility to account

properly for funds, shall be required to return funds in an amount that

is proportionate to the extent of the harm its violation caused to an

identifiable Federal interest associated with the program under which

the recipient received the award.

The proposed regulations (in Sec. 81.32 (c) and (d)) would state

the circumstances under which the Secretary or an authorized Department

official, in determining the extent of harm to an identifiable Federal

interest caused by a violation, may take into account costs that the

recipient could have charged to the Federal grant or cooperative

agreement in question but in fact did not. These costs are ``offset

costs.'' Issues pertaining to those so-called offset costs have arisen

in connection with administrative litigation before the Office of

Administrative Law Judges (OALJ).

The Secretary believes that regulatory guidance regarding these

issues would be helpful to the field, would enhance grantee

flexibility, would increase the possibilities for early resolution of

disputes, and would reduce the need for protracted litigation arising

from expenditure disallowance and other audit claims under Department

programs, while maintaining proper accountability. The Secretary

solicits additional public comments and suggestions as to how this

balance may best be achieved.

Equitable offset is not a new concept initially proposed in these

regulations. The concept has evolved over time, through case-by-case

adjudication, both in decisions of the Secretary and the courts,

arising from disputes under programs administered by the Secretary. The

proposed regulations are consistent with this precedent.

If finally adopted, it is anticipated that the provisions of

proposed Sec. 81.32 (c) and (d) would apply to existing cases before

the OALJ, but without regard to Sec. 81.32(c)(5) (relating to early

identification of offset costs).

The proposed regulations are based upon the conclusion that the

recognition of offset costs, under appropriate circumstances and

subject to appropriate limitations, is consistent with section

453(a)(1) of the GEPA. The proposed regulations would provide for the

recognition of offset costs under the following circumstances:

--The offset costs must meet all the requirements of the grant or

cooperative agreement, including any applicable recordkeeping

requirements;

--The recipient must demonstrate that the offset costs could have been

charged to the grant or cooperative agreement during the same Federal

fiscal year as the original violation;

--The charging of offset costs to the grant or cooperative agreement

must not result in other violations of applicable requirements, such as

maintenance of effort, matching or non-supplanting requirements;

--The practices and policies that resulted in the original violation

must have been corrected and must not be likely to recur;

--The original violation must not have been intentional or willful.

Under the proposed rule, the Secretary would have the burden of

initially establishing a prima facie case that a violation was willful

or intentional so as to preclude an offset. It is not anticipated that

these cases will be frequent. However, on occasion, circumstances may

suggest the existence of this situation. For example, where a recipient

continues to incur costs or carry out program activities that the

Department has advised the recipient are beyond the purview of the

grant, the issue of whether a violation was willful or intentional

might be presented.

Federal financial assistance under a program subject to a statutory

non-supplanting requirement must supplement and be additional to any

State assistance for the project in question. A recipient of assistance

under this type of program generally must use all Federal funds awarded

for project purposes, irrespective of the use of State or local

funds.1 To permit a recipient to offset disallowed costs under the

federally funded project with State or local-funded costs would

normally be contrary to the non-supplanting requirement and would

result in the diminution of the project to the detriment of the

beneficiaries to be served and contrary to the purposes of the program.

\1\ One exception to this principle is the non-supplanting

requirement in section 614 of the Individuals with Disabilities

Education Act which requires a local educational agency to

supplement what it has expended on special education in the past.

This approach is more similar to a maintenance of effort requirement

than it is to the non-supplanting requirements in other statutes.

(See 34 CFR 300.230.)

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In the case of a program with a non-supplanting requirement,

therefore, a recipient has a particularly heavy burden in showing that

use of State or local funds as offset costs is consistent with the

requirement. The Department has identified a limited number of

situations in which this burden could be met.

(1) State administrative expenses. Where a disallowance involves

State administrative expenditures, and the recipient proposes to offset

other State administrative expenditures that could have been charged to

the grant but were not, the non-supplanting requirement should not

present a bar to the offset. Presumably the State administrative

expenditures would not have been made in the absence of the program.

[[Page 32253]]

(2) Other cases where the offset expenditures would not have been

incurred in the absence of the Federal program. In exceptional

circumstances a recipient may be able to establish that the State or

local expenditures sought to be used as an offset would not have been

incurred in the absence of the program and thus do not give rise to a

question under the non-supplanting requirement. For example, the

recipient might be able to show that a particular cost was so related

to the Federal grant that it would not have been incurred in the

absence of that grant.

(3) Statutorily excluded funds. Under the statute governing the

program in question, there may be categories of expenditures that may

be specifically excluded from the reach of the non-supplanting

requirement. For example, under section 1120A(b)(1)(B) of the Title I

(ESEA) statute, 20 U.S.C. 6322(b)(1)(B), certain State and local funds

may be excluded for purposes of determining compliance with the Title I

non-supplanting requirement. These funds would be available for offset

purposes, despite the non-supplanting requirement, assuming that other

requirements of the proposed rule would be met.

In proposing these rules, the Secretary does not intend to

encourage recipients to incur unallowable costs or engage in activities

that will give rise to accountability issues. On the contrary, the

Secretary believes that the proposed regulations will enable the

Department to more readily focus time on those areas where the most

serious accountability problems occur.

II. Early Identification of Issue

The proposed regulations provide that, if the recipient is apprised

of the violation in a draft audit report or other written communication

issued prior to the final audit report, the offset costs must be

presented to the auditor within a 60-day period. This provision is

designed to ensure that offset claims are raised sufficiently early in

the audit process to permit the auditor to verify the claimed offset

costs and make recommendations regarding those costs, within the

overall context of the auditor's responsibility, prior to the issuance

of the final audit report. Even if an oral rather than a written

communication regarding the violation is made during the audit process,

recipients are encouraged to present offset cost claims to the auditor

so that these matters may be taken into account in the audit report in

an orderly fashion.

If the recipient is first apprised of the violation in the final

audit report, the offset costs must, under the proposed regulations, be

presented to the authorized Department official within a 60-day period

after the issuance of the final audit report. If the recipient is first

apprised of the violation after the issuance of the final audit report,

then the 60-day period runs from this first written notice. In either

event, offset cost ``claims'' must be presented in the form of facts

verified by an independent auditor.

Early notice of these issues is intended to encourage and

contribute to early resolution of disallowance cases (through

alternative means of dispute resolution or otherwise) and reduction of

litigation expense for recipients as well as for the Department.

The early notice provision in Sec. 81.32(c)(5) is also designed to

avoid introduction of offset cost issues late in the audit appeal

process. The introduction of offset cost issues at the litigation stage

in prior and currently pending cases before the OALJ has caused

administrative problems, requiring more audit work long after the

original audit is over, thus delaying resolution of these cases.

However, as indicated above, these advance notice requirements would

not apply to pending cases.

In addition to adding the proposed provisions to 34 CFR Part 81, a

cross-reference is proposed to be added to Subpart G of 34 CFR Part 75

and Subpart H of 34 CFR Part 76.

Executive Order 12866

These proposed regulations have been reviewed in accordance with

Executive Order 12866. Under the terms of the order the Secretary has

assessed the potential costs and benefits of this regulatory action.

The potential costs associated with the proposed regulations are

those resulting from statutory requirements and those determined by the

Secretary to be necessary for administering this program effectively

and efficiently as discussed in those sections of the preamble that

relate to specific sections of the regulations. Burdens specifically

associated with information collection requirements, if any, are

identified and explained elsewhere in this preamble.

Regulatory Flexibility Act Certification

The Secretary certifies that these proposed regulations would not

have a significant economic impact on a substantial number of small

entities. States and State agencies are not considered to be small

entities under the Regulatory Flexibility Act. Small local educational

agencies could be affected by these regulations. However, these

proposed regulations are intended to implement statutory provisions and

are designed to provide greater flexibility and reduce litigation in

the administration of the programs in question. They should not have a

significant economic impact on any small entities affected.

Paperwork Reduction Act of 1980

These proposed regulations have been examined under the Paperwork

Reduction Act of 1980 and have been found to contain no information

collection requirements.

Invitation to Comment

Interested persons are invited to submit comments and

recommendations regarding these proposed regulations.

All comments submitted in response to these proposed regulations

will be available for public inspection, during and after the comment

period, in Room 5400, 600 Independence Avenue SW., Washington, DC,

between the hours of 8:30 a.m. and 4:00 p.m., Monday through Friday of

each week except Federal holidays.

To assist the Department in complying with the specific

requirements of the Executive Order and the Paperwork Reduction Act of

1980 and their overall requirement of reducing regulatory burden, the

Secretary invites comment on whether there may be further opportunities

to reduce any regulatory burdens found in these proposed regulations.

List of Subjects

34 CFR Part 75

Education Department, Grant programs--education, Grant

administration, Incorporation by reference.

34 CFR Part 76

Education Department, Grant programs--education, Grant

administration, Intergovernmental relations, State-administered

programs.

34 CFR Part 81

Enforcement, General Education Provisions Act, Offset costs.

Dated: March 16, 1995.

Richard W. Riley,

Secretary of Education.

(Catalog of Federal Domestic Assistance Number does not apply)

The Secretary proposes to amend Parts 75, 76, and 81 of Title 34

of the Code of Federal Regulations as follows:

PART 81--GENERAL EDUCATION PROVISIONS ACT--ENFORCEMENT

1. The authority citation for Part 81 continues to read as follows:

[[Page 32254]] Authority: 20 U.S.C. 1221e-3, 1234-1234i, 3474,

unless otherwise noted.

2. Section 81.32 is amended by revising the heading and by adding

new paragraphs (c), (d) and (e) to read as follows:

Sec. 81.32 Proportionality; equitable offset.

* * * * *

(c) In determining the extent to which a violation that is not

intentional or willful caused harm to an identifiable Federal interest,

the Secretary or an authorized Department official, as appropriate, may

take into account costs that could have been charged to the Federal

grant or cooperative agreement but in fact were not (offset costs),

only if the recipient has demonstrated that--

(1) The offset costs would have met all the requirements of the

grant or cooperative agreement, including any applicable recordkeeping

requirements;

(2) The offset costs could have been charged to the grant or

cooperative agreement during the same Federal fiscal year as the

original violation;

(3) The charging of offset costs to the grant or cooperative

agreement would not result in other violations of applicable

requirements, such as maintenance of effort, matching, or non-

supplanting;

(4) The practices and policies that resulted in the original

violation have been corrected and are not likely to recur; and

(5) (i) If the recipient was apprised of the violation in a draft

audit report or other written communication from the cognizant auditor

that was issued prior to the final audit report--

(A) The offset costs were presented to the auditor within 60 days

after the issuance of the draft audit report or other written

communication; and

(B) The auditor verified that the costs met the conditions in

paragraph (c) of this section;

(ii) If the recipient was first apprised in writing of the

violation in the final audit report or the costs were timely presented

to but not verified by the auditor, the offset costs were presented to

the authorized Department official, in the form of facts demonstrating

compliance with this paragraph and verified by an independent auditor,

within 60 days of the issuance of the final audit report; or

(iii) If the recipient was first apprised of the violation in

writing after the issuance of the final audit report, the offset costs

were presented to the authorized Department official, in the form of

facts demonstrating compliance with this paragraph and verified by an

independent auditor, within 60 days of the first written notice of the

violation;

(d) In making a verification under paragraph (c)(5) of this

section, the independent auditor may be the auditor that initially

conducted the audit and may base the verification on the original audit

as long as the offset costs were examined as part of that audit and

were not disallowed.

(e) For the purposes of Sec. 81.32(c)(1), in the case of a

discretionary program under which awards are made by the Secretary,

``grant'' or ``cooperative agreement'' means the grant or cooperative

agreement awarded to the recipient.

3. Section 81.40 is amended by redesignating paragraphs (d) and (e)

as (e) and (f), respectively, and by adding a new paragraph (d) to read

as follows:

Sec. 81.40 Burden of proof.

* * * * *

(d) An offset cost should be taken into account in accordance with

Sec. 81.32 (c) and (d), except that the Secretary has the burden of

initially establishing a prima facie case that a violation was willful

or intentional so as to preclude an offset.

* * * * *

4. The Appendix to Part 81 is amended by adding new Examples 14,

15, 16, 17, and 18 to read as follows:

Appendix to Part 81--Illustrations of Proportionality

* * * * *

Equitable Offset Allowed

(14) Administrative costs of a State educational agency (SEA) are

disallowed by the auditor under a program subject to a non-supplanting

requirement because the SEA did not maintain adequate time distribution

records for employees charged to the grant. The SEA demonstrates that

other employees, whose salaries are paid for out of State funds,

performed administrative functions allowable under the Federal grant

during the relevant fiscal period. Adequate records, including any

necessary time distribution records, were maintained for these

employees. Charging these costs to the grant would not violate other

requirements. The non-supplanting requirement does not bar the offset

because it is presumed that the State funds would not have been spent

in the absence of the program. The SEA presents a corrective action

plan to ensure that future recordkeeping violations will not arise.

There is no evidence that the SEA intentionally failed to keep the

required records. The Secretary recognizes the offset costs under the

principles stated in Sec. 81.32 (c) and (d) and reduces the required

recovery by the amount of the offset costs.

Equitable Offset Not Allowed--Violation of Program Requirement

(15) Under the Title I program, a LEA provides remedial reading

services to children residing in ineligible attendance areas. The LEA

proposes to offset the disallowed costs with funds expended for

eligible Title I children under a State compensatory education program

similar to Title I but not excluded from the operation of the non-

supplanting requirement in Title I under section 1120A(b) of the Title

I statute. Even though the costs of the State program would otherwise

have been allowable under Title I, an offset is not allowed because the

use of the State funds would violate the non-supplanting requirement.

Equitable Offset Not Allowed

(16) Under a Federal vocational education program with a

maintenance of effort requirement, the SEA fails to maintain required

time distribution records for employees working on more than one

program. The State proposes to use as offset costs the salaries of

other employees, charged to State funds, who worked exclusively on the

Federal program. If all those costs are not included as State

expenditures, however, the SEA would not have sufficient State

expenditures to satisfy the maintenance of effort requirement under the

Federal program. An offset is not allowed, because the charging of the

offset costs to the Federal grant would have resulted in another

violation of an applicable program requirement (maintenance of effort).

Equitable Offset Partially Allowed

(17) In this example the State needs some but not all of its

proposed offset costs to satisfy the matching requirement applicable to

the program. The State may use the remaining offset costs (i.e., those

not needed to meet the matching requirement) to reduce its liability.

For example, under a program with a 1:1 matching requirement ($1 of

State funds must be spent for every $1 of Federal funds), the State has

spent $100,000 of Federal funds and $100,000 of State funds. However,

the auditors have determined that $20,000 of the Federal funds were not

supported by required time distribution records. The State could not

fully extinguish its liability through an offset, because the State

would not meet the matching requirement. (If $20,000 of State funds

were used as an offset, the State would have left only $80,000 of

allowable matching costs which would not [[Page 32255]] support Federal

expenditures of $100,000 under the 1:1 match requirement.)

Nevertheless, the State liability could be partially reduced by an

offset. The amount of the partial offset is computed by combining the

allowable Federal and State expenditures ($80,000 Federal plus $100,000

State = $180,000), and computing the allowable Federal expenditure that

would be supported by the required State match. The allowable Federal

expenditure would be $90,000 ($180,000 x 50%) which would be supported

under the 1:1 match by $90,000 of State expenditures. Rather than

repaying the full amount of the Federal disallowance ($20,000), the

State would be required to repay $10,000 (the difference between the

amount actually charged to the Federal grant ($100,000) and the

allowable Federal expenditure considering the allowable State matching

costs ($90,000)). The State therefore is credited with a partial offset

of $10,000.

Equitable Offset Not Allowed--Intentional or Willful Violation

(18) Under the Title I program, the State seeks written advice from

the Secretary regarding the allowability of certain expenditures. The

Secretary informs the State that the expenditures are unallowable under

the Title I statute. Nevertheless, the State proceeds to spend its

Title I funds in this manner. An offset is not allowed, even though

other expenditures could have been properly charged to the Title I

program, because the Secretary determines that the State's violation is

intentional and willful.

PART 75--DIRECT GRANT PROGRAMS

5. The authority citation for Part 75 continues to read as follows:

Authority: 20 U.S.C. 1221e-3 and 3474, unless otherwise noted.

6. Part 75 is amended by adding the following cross-reference to

the existing cross-reference in Subpart G immediately following the

heading:

``See 34 CFR 81.32, Proportionality; equitable offset.''

PART 76--STATE-ADMINISTERED PROGRAMS

7. The authority citation for Part 76 continues to read as follows:

Authority: 20 U.S.C. 1221e-3, 3474, and 6511(a), unless

otherwise noted.

8. Part 76 is amended by adding the following cross-reference

immediately following the heading for Subpart H:

``Cross-Reference. See 34 CFR 81.32, Proportionality; equitable

offset.''

[FR Doc. 95-14981 Filed 6-19-95; 8:45 am]

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