State of Louisiana Dept. of Labor v. USDOL, 94-JTP-13 (ALJ Oct. 23, 1995)

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USDOL/OALJ Reporter
State of Louisiana Dept. of Labor v. USDOL, 94-JTP-13 (ALJ Oct. 23, 1995)

U.S. Department of Labor
Office of Administrative Law Judges
Heritage Plaza Bldg, 5th Floor
111 Veteran's Memorial Boulevard
Metairie, LA 70005

Date: OCTOBER 23, 1995

Case No. 94-JTP-13

In the Matter of

STATE OF LOUISIANA
DEPARTMENT OF LABOR
Complainant

versus

U.S. DEPARTMENT OF LABOR
Respondent

APPEARANCES:

ROBERT J. ROUX, Esq.
Office of the Secretary
Department of Employment and Training
Legal Division
1001 North 23rd Street
Baton Rouge, Louisiana 70804-9094
For Complainant

SCOTT GLABMAN, Esq.
U.S. Department of Labor
Office of the Solicitor
200 Constitution Avenue, N.W.
Suite N-2101
Washington, DC 20210
For Respondent

BEFORE: JAMES W. KERR, JR.
Administrative Law Judge

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DECISION AND ORDER

This case arises under title II of the Job Training Partnership Act ("JTPA or the Act"), 29 U.S.C. §§ 1601-1605, 1631-1634 (1982), and its implementing regulations at 20 C.F.R. Parts 629-630 (1986-1988).¹ In accordance with a signed grant between Employment and Training Administration ("ETA") and the state of Louisiana ("Louisiana or the state"),² the grant program in question gave the state federal money to provide job training services for disadvantaged youths and adults. 20 C.F.R. 627.1. Louisiana received grant funds from the United States Department of Labor ("USDOL") and disbursed the funds to a subrecipient, New Orleans JTPA Service Delivery Area ("New Orleans"), who contracted with the New Orleans Client Center ("Client Center") and Technical Training Designs, Inc. ("Technical Training"), to provide job findings workshops, basic computer training, and remedial education for JTPA participants. (TR 19-20). In October of 1988, the Office of Inspector General ("Inspector General") audited New Orleans's JTPA programs. The Inspector General issued an audit report on February 6, 1991, which questioned total grant costs of $6,434.235. (RX 1).³

Out of the $6.4 million questioned in the audit report, all but $894,615, which was paid pursuant to fixed unit price contracts with Client Center and Technical Training, were resolved separately in an Administrative Law Judge Decision, Case No. 92-JTP-27. The matter was forwarded for resolution to the Employment and Training Administration. On January 5, 1994, the Grant Officer issued a Final Determination which disallowed costs of $894,615 and required Louisiana as the recipient of the funds from ETA to repay the funds.⁴ On January 25, 1994, Louisiana appealed the Grant Officer's Final Determination to the Office of Administrative Law Judges. A hearing was held in this matter on July 7, 1994 in Baton Rouge, Louisiana. Complainant submitted three exhibits, and Respondent submitted one exhibit. This decision will be based on the evidence in the record.

ISSUES

(1) Whether the Grant Officer correctly disallowed the New Orleans's JTPA fixed unit price contract payments of $101,442 to the Client Center; and

(2) Whether the Grant Officer correctly

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disallowed New Orleans's fixed unit price contract payments of $793,173 to Technical Training.

SUMMARY OF THE FACTS

Beginning in October of 1988, New Orleans's JTPA programs in 1985-1987 were audited by the USDOL's Office of Inspector General. (TR 125) (RX 1 p. 41). The Inspector General indicated that the audit objective was to identify potential problems areas dealing with contractor performance and procurement. (TR 194). After finding some problems, the auditors extended that audit period through June 30, 1990 without notifying New Orleans of the extension.⁵ (TR 20, 126-27, 185). Thus, the audit covered the period from January 1986, which is the second half of the 1985 program year, through June 1990, which in the 1989 program year.⁶ (TR 20). On February 6, 1991, the Inspector General released its final report on the audit of New Orleans's JTPA programs to the ETA. (TR 78) (RX 1 p. 31-92). After receipt of the report, the ETA provided Louisiana and in this case the subrecipient, New Orleans, a copy of the report and directed Louisiana to resolve the audit with New Orleans and then submit an audit resolution report. On June 19, 1992, Louisiana responded to Findings C and D of the audit report. (TR 22-23) (RX 1 p. 121-183).

After reviewing Louisiana's response, the Grant Officer refused Louisiana's resolution report and issued an Initial Determination. (RX 1 p. 21-29). Louisiana was provided with a copy of the Initial Determination and given an opportunity to submit additional documentation and discuss the findings. (RX 1 p. 184-185). After receiving and reviewing additional documentation submitted by Louisiana as well as considering the prior information,⁷ the Grant Officer issued a Final Determination on January 5, 1994, which disallowed payments of $894,615 in association with payments made under several fixed unit price contracts.⁸ (RX 1 p. 9-19).

Finding C of the Final Determination dealt with a fixed unit price contract awarded to the Client Center to provide a workshop and pre-employment skills to about 2,400 participants and disallowed costs of $101,442. These costs were disallowed because of questionable procurement ⁹ and unnecessary and unreasonable costs allocated to the JTPA program. (RX 1 p. 13-15) (TR 30-32). Finding D of the Final Determination concerned two fixed unit price contracts awarded to Technical Training to provide youth competency training and disallowed costs of $894,615. (RX 1) (TR 20, 30). These costs were disallowed due to flawed procurement procedures, conflicts of

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interest, and unnecessary and unreasonable costs allocated to the program. (RX 1 p. 13-19) (TR 44-47). The findings in the Final Determination were based on 20 C.F.R. 627.37 (1984-1988) which provides that allocable costs must be necessary and reasonable for the proper and efficient administration of the program. (RX 1 p. 13-19).

DISCUSSION

Under 20 C.F.R. §629.57 (1987), the United States Department of Labor shall have the burden of production to support the Secretary's decision. To this end, the Secretary shall prepare and file an administrative file in support of the decision. This means that USDOL must put forth sufficient evidence to establish a prima facie case in support of the alleged violations. This burden requires USDOL to produce relevant evidence "sufficient to enable a reasonable person to draw from it the inference sought to be established." McCormick, Evidence, 789-790 (2ed. 1972). Thereafter, the party, Louisiana, seeking to overturn the Secretary's decision shall have the burden of persuasion. Thus, USDOL must establish first that Louisiana violated JTPA regulations based on substantial evidence. Then, the burden shifts to Louisiana to show that it complied with the pertinent provisions of the JTPA.

I. The disallowed costs under the fixed unit price contract with the Client Center

1. Record keeping Requirements

With regard to Finding C of the Final Determination, the Grant Officer found that costs of $101,442 were unreasonable, unnecessary, and unallocable because the costs represented excess payments under the fixed unit price contract in the program year 1985. Specifically, the Grant Officer disallowed the costs because the Client Center failed to maintain reliable and adequate records to trace the level of expenditures under the contract. (RX 1 p. 13-15). The Grant Officer's finding is based on the audit report which stated that the Client Center's financial records were so unreliable and irregular that allocable costs under the fixed unit price contract could not be determined with any certainty. (RX 1 p. 54-58). The Grant Officer's finding is based on Section 165(a)(1) of the JTPA (1982) which required that the recipients of the funds keep records that are sufficient to permit the tracing of funds to a level of expenditure to insure that the funds have not been spent unlawfully. 29 U.S.C. § 1575; 20 C.F.R. 629.35 (1984-1988).

In addition, the Grant Officer argued that the disallowance of the unrecorded costs were proper because

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Louisiana's failure to keep adequate records of grant costs constituted a recoverable expenditure of those costs as a matter of law. See Montgomery County, Maryland v. Department of Labor, 757 F.2d 1510, 1513 (4th Cir. 1985); City of Oakland v. Donovan, 703 F.2d 1104, 1107, modified, 707 F.2d 1013 (9th Cir. 1983). Although these cases involved contracts under CETA, the CETA provision in the above cases ¹⁰ is very similar to the JTPA requirement at issue. Based on the above, the Court finds that USDOL has established a prima facie case based on substantial evidence that Louisiana through its subrecipient violated the JTPA and its regulations by not maintaining adequate control over its record keeping systems so that there were no accurate and reliable records to trace the level of expenditures of program funds.

Louisiana argued that the record requirement is not applicable under a fixed unit price contract. Although the contractor did not submit any documentation to support these costs such as a cost allocation plan, Mr. Kenneth Lane Christian, who is an auditor for Louisiana Department of Labor, stated that it was not the contractor's responsibility. He explained that the contractor only has to keep records regarding its performance of the services required in the fixed unit price contract, but the contractor does not have to keep records regarding its cost of doing business under a fixed unit price contract. However, Mr. Christian could not cite any statute or regulation that supported his opinion. He stated that if the regulation did not specifically state that the contractor had to specifically do something, then the contractor did not have to keep such records. (TR 136, 145-146, 169-170).

However, Section 165 of the JTPA requires that Louisiana, through its contractor, to keep accurate records so the expenditures can be traced. 29 U.S.C. § 1575 (1982). There is no distinction in the regulations between record requirements for a cost reimbursement contract and a fixed unit price contract.¹¹ Ms. Martha Secuskie, the head auditor for the Inspector General in the New Orleans audit, stated that there was nothing in the Act or its regulations that exempted fixed unit price contracts from maintaining financial records. Further, she reasoned that contractors have to keep financial records to show that they are in compliance with the regulation that requires them to have allocable, necessary, and reasonable costs under the program. (TR 180, 195, 198). Thus, the Court finds that there is a requirement under the JTPA requiring the state, through its contractor, to keep a record of expenditures. 29 U.S.C. § 1575.

In addition, although Louisiana admitted that there was no record of indirect costs, Louisiana argued that USDOL

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should have considered these costs by using a percentage of the direct costs. (TR 215-218). However, the burden is on Louisiana not USDOL to show that it kept records which established the level of expenditures; this burden was not met by Louisiana.¹² Finally, Louisiana argued that there were a number of costs incurred for the contract which were not considered such as the cost of the test instrument,¹³ supplies, insurance, facility rent, staff costs, and lunches for participants. (RX 1 p. 122). However, Louisiana did not submit any documentation which recorded these expenses. (TR 33-35, 102-104, 109-110) (RX 1 p. 15). As discussed above, Louisiana failed to met it burden of keeping records of these expenditures.

Consequently, the Court finds that Louisiana failed to establish that it complied with the record keeping regulations under the JTPA. Because Louisiana violated the Act, the questioned cost of $101,442 in the Final Determination is subject to federal debt collection.

2. Conflicts of Interest

The Grant Officer also disallowed the costs because the initial contract was flawed by conflicts of interest and other irregularities in New Orleans' procurement of the initial contract. (RX 1 p. 13-15, 52-54). The auditors found that the Client Center and Technical Training were closely related companies that shared officers and many business transactions. The audit revealed that the Client Center and Technical Training had inter-company lease agreements that were less than arm's length. (RX 1 p. 50-51, 53) (TR 184-185). In fact, in view of the two companies' commingling of officers and transactions, the auditors concluded that the companies were not separate entities. (RX 1 p. 58). For example, Technical Training's 1984 JTPA contract proposal to New Orleans stated that Technical Training was doing business as the Client Center, and the Client Center was not incorporated as a separate company until the day after the contract started. (RX 1 p. 49, 53, 72). Based on these conflicts of interest, the auditors questioned the allocability of JTPA payments to the Client Center. (TR 48-50).

However, Mr. Donahue admitted that there was nothing in the JTPA or ETA issuances on conflict of interest during the periods in question.¹⁴ (TR 48-50). Because there was nothing on conflict of interest in the JTPA, he stated that Louisiana had to follow state and local laws for procurement. 20 C.F.R. Part 629.34. Although there was no cite to any violation of any federal, state, or local law, Mr. Donahue stated that a conflict of interest existed based on the statement in the audit report. He explained that the conflict of interest findings were part of the whole findings in

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the Final Determination; specifically, he reasoned that the costs were disallowed because the costs were not necessary, reasonable, and allocable to the contract, and the failure to demonstrate that a fair and reasonable price was negotiated based on a cost and price analysis. (TR 95-99, 209-215, 229-233).

Although there appears to be related party transactions, there is nothing in the Act or its regulations which prohibit such activity as long as the performance of the contract is satisfactory. The Grant Officer did not question performance under this contract. Due to the lack of any violation of any federal, state, or local law, USDOL has failed to establish a prima facie case of any violation of the JTPA under this allegation. Thus, this finding in the Final Determination must be reversed because it is not based on substantial evidence.

3. Procurement Procedures

The Grant Officer disallowed the costs under the Client Center contract as unnecessary costs because New Orleans failed to consider cost effectiveness when the contract was awarded. He explained that the excess payments under the fixed unit price contract could have been avoided if the award had been made as a modification to the existing cost reimbursement contract or as a new cost reimbursement contract.¹⁵ (RX 1 p. 13-15). The auditors found that the Client Center's operations were already being funded by a cost reimbursement contract when the fixed unit price contract was awarded. The fixed unit price contract provided a workshop on job hunting for 2,700 youths for two weeks (June 6, to June 20, 1986) during the last month of the cost reimbursement contract. The cost reimbursement contract provided service to 2,400 youths, and on June 25, 1986, the contract was modified to provide service for 2,521 participants. The Client Center was already providing services of intake, eligibility determination, and assessment of clients. Thus, both contracts were provided instructions on pre-employment skills such as how to get ready for a job. Also, the Grant Officer felt that there was some overlapping of the same individuals. (RX 1 p. 13-15, 58, 72, 75) (TR 32-34, 41-42).

Since the participants covered by these two contracts appeared to have been largely the same people, the Grant Officer decided that the contract would have been more cost effective to add the two week workshop as a modification to the cost reimbursement contract rather than to create a new fixed unit price contract. (TR 32-33, 41-42). The auditors found that it was highly irregular to award a fixed unit price contract to a contractor in the last month of a cost reimbursement contract without any pre-award cost analysis of projected expenses. (RX 1 p. 75) (TR 181-182). Such a blind selection of a service provider

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violated the JTPA requirement to give "primary consideration" to, inter alia, the cost effectiveness of the provider's last delivery of comparable services. 29 U.S.C. § 1517(a).

Thus, the Grant Officer concluded that New Orleans did not consider the costs when awarding the service provider contract. Under Section 107(a) of the JTPA, New Orleans should have considered the cost effectiveness of the contract in providing services to largely the same people.¹⁶ (RX 1 p. 13-15) (TR 32-33, 41-42, 228-234). Although Mr. Donahue stated that there was nothing in the regulations to prohibit New Orleans from creating a new contract, and the regulations did not require that the contracts be awarded in the least costly manner, the Act requires that costs must be considered in awarding the contract to determine if the contract is based on a fair and reasonable price for fiscal accountability. (TR 36-44, 91-94) (RX 1 p. 13-15).

New Orleans procurement materials gave no indication that New Orleans did any pre-award cost analysis of the Client Center's proposal. (TR 33-34, 36-38). There was nothing in the evidence which indicated that the staff of the New Orleans service delivery area or the Private Industry Council (Council) considered the cost of the contract and determined that the Client Center's contract price was fair and reasonable. (TR 36-42). Specifically, New Orleans staff review committee left its evaluation form on the Client Center blank. Mr. Donahue asserted that the Council was suppose to review and evaluate the proposal, but no evaluation was demonstrated on the evaluation sheet. The minutes of the Council meeting indicated that Mr. Bernard Alluli made a presentation in support of the Client Center's proposal, and that the Council summarily accepted the proposal even though two members complained that they did not have a copy of the proposal. (RX 1 p. 132-139) (TR 36-40).

In addition, Louisiana submitted a notice for request for proposal, the log of proposals received, and a copy of the Client Center's proposal. The Grant Officer determined that the proposal and the log of proposals for 1986 were for the wrong program year and were not in competition with the Client Center for services under the fixed unit price contract for 1985. Mr. Donahue stated that New Orleans did not follow proper procurement procedures because the Client Center's proposal was not responsive to the request for proposal for the 1986 program year and was not in competition with the other proposals for the 1986 program year. (RX 1 p. 13-15, 72, 124-140) (TR 35-40, 134).

Furthermore, the Client Center's proposal did not contain any budget or cost information as required under the

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procedures in the request for proposal. Instead, the Client Center's proposal simply stated an estimated slot cost without providing any basis for determining whether the price was fair and reasonable. Subsequently, New Orleans conducted a survey of professional testing technicians which established that Client Center's slot cost of $57 per participant was reasonable. The Grant Officer stated that the slot cost survey did not show that the procurement of the Client Center's contract was proper because the survey was conducted after the award. Thus, the survey did not show that New Orleans considered the cost-effectiveness of the Client Center's proposal as required by the Act before awarding the contract. (RX 1 p. 13-15, 72, 124-161) (TR 35-44). Finally, although Louisiana alluded to a post award slot cost survey in its letters on June 19, 1992 and May 18, 1993, Louisiana did not submit the post award slot cost survey or any of its supporting data to the Grant Officer. (TR 26-51, 97-99, 112-113, 134-135) (RX 1 p. 15, 121-122).

Based on the above, the Court finds that USDOL has established a prima facie case based on substantial evidence of a JTPA violation. The above evidence shows that Louisiana violated Section 107(a) of the Act because it did not consider cost to determine if the contract was based on a fair and reasonable price when awarding the contract to the Client Center.

Thus, the burden shifts to Louisiana to show that it complied with Section 107(a) of the Act. 29 U.S.C. § 1517. The Court finds that Louisiana failed to establish that it complied with the regulation. Although Louisiana was not required to perform a written cost analysis ¹⁷ or engage in competitive procurement when awarding a contract, evidence must exist which established that New Orleans considered and determined that the contract was based on a fair and reasonable price. Louisiana submitted the testimony of Mr. A.C. Wilkinson ¹⁸ and Mr. Kenneth Christian ¹⁹ who stated that New Orleans complied with the procurement procedures; however, they did not discuss whether New Orleans considered the cost effectiveness of the contract at the time the contract was awarded. Thus, their opinions are not persuasive on this issue. Further, Mr. David Thompson, who is in charge of the monitoring unit and audit resolution with the New Orleans Office of Employment, Training, and Development, stated that New Orleans performed a pre-award analysis of the reasonableness of the cost of Client Center's proposal during the verbal contract negotiations. (TR 134-135). His testimony alone is not sufficient to establish that New Orleans complied with Section 107(a) based on the other evidence regarding the Private Industry Council's meeting and the lack of discussion about the cost of the contract during that meeting.

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Further, although Louisiana conducted a post award slot cost survey which showed that the cost of the contract with the Client Center was reasonable, this does not establish that cost was considered when the contract was awarded. Therefore, because Louisiana violated Section 107(a) of the Act by not considering cost during the negotiation process of the contract, the questioned costs of $101,442 must be repaid by Louisiana with non-federal funds to USDOL.

II. The disallowed costs under the fixed unit price contract with Technical Training

1. Record keeping Requirements

With regard to Finding D of the Final Determination, the Grant Officer disallowed the excess payments of $793,173 made under the two fixed unit price contracts in 1986 and 1987 as unnecessary, unreasonable, and unallocable costs. Specifically, the Grant Officer determined that Technical Training's financial records were inadequate to trace the level of expenditures. The auditors had to subpoena the records, and the records did not include a general journal or adequate identification of contract expenses. (RX 1 p. 78-79). Consequently, the auditors had to reconstruct Technical Training's contract expenses and could find allocable costs of only $285,877. The disallowed costs represent the difference between the total payments under Technical Training's two fixed unit price contracts and the allocable expenses. (RX 1 p. 16-19, 78-83) (TR 47-48).

This disallowance is based on the JTPA record keeping requirements in Section 165(a)(1) and Part 629.35(a) which require that recipients of the funds keep records that are sufficient to permit the tracing of funds to a level of expenditure to insure that the funds have not been unlawfully spent. Section 165(a)(1), 29 U.S.C. § 1575 (1982); 20 C.F.R. 629.35 (1984). As discussed earlier, the Grant Officer's finding is proper because Louisiana's failure to maintain adequate records of grant funds constitutes a recoverable expenditure of those funds. See Montgomery County, Maryland v. Department of Labor, 757 F.2d 1510, 1513 (4th Cir. 1985); City of Oakland v. Donovan, 703 F.2d 1104, 1107, modified, 707 F.2d 1013 (9th Cir. 1983).

Consequently, based on the above, the Court finds that USDOL established a prima facie case based on substantial evidence that Louisiana through its subrecipient violated the record keeping requirements of the Act by not maintaining adequate records to trace the level of expenditures of program funds.

Louisiana used the same arguments as discussed above that the record keeping requirements are not applicable to a

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fixed unit price contract. (TR 169-170). However, as the Court found above, Section 165(a)(1) is applicable to all contracts, and as a result, Louisiana was required to keep adequate records to allow the tracing of expenditures. (TR 180, 195, 198). Further, Louisiana argued that the Grant Officer did not consider indirect costs such as utility bills and rental space. (TR 169). However, the burden is on Louisiana to submit records or documents which exhibit the incurred expenses or provided a formula in a cost allocation plan for the auditors to determine the indirect costs. (TR 215-218). Thus, because Louisiana did not provide adequate documentation of these expenditures, the Grant Officer was correct in not considering these expenses. (TR 169, 183, 215-218) (RX 1 p. 18-19).

As Louisiana failed to establish that it complied with the record keeping requirements of the Act and its regulations, the Court finds that Louisiana violated Section 165(a)(1) of the Act. Consequently, the questioned costs of $793,127 in the Final Determination are subject to federal debt collection.

2. Conflicts of Interest

The Grant Officer also disallowed the costs because the costs were unreasonable and unnecessary due to conflicts of interest between Technical Training and the Client Center. (RX 1 p. 13-19). Technical Training and the Client Center had a number of corporate officers in common. According to the contracts, final payment was contingent upon the participants' passing a competency test certified by the Client Center. The father of Technical Training's president was the Client Center official who certified the competency results attained. (RX 1 p. 16-19, 83) (TR 48-50). The Grant Officer based the disallowance of the disputed costs on Section 629.37(a) which provides:

To be allowable, a cost must be necessary and reasonable for proper and efficient administration of the program, be allocable thereto under these principles, and, except as provided herein, not be a general expense required to carry out the overall responsibilities of the Governor's subrecipient. Costs charged to the program shall be consistent with those normally allowed in like circumstances in nonfederal sponsored activities and with applicable State and local law, rules or regulations as determined by the Governor.

20 C.F.R. 629.379(a).

In view of the two companies' intermingling of officers and transactions, the Grant Officer determined that it was questionable whether any fixed unit price contract payments to

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Technical Training were reasonable because performance may have been faulty. Under a fixed unit price contract, payment is only proper once satisfactory performance has occurred. (TR 31, 205). However, there was no indication in the record that satisfactory performance was not achieved according to the terms of the contract. (TR 146-147).

Further, as discussed above, Mr. Donahue admitted that there was no JTPA regulation in effect that addressed conflicts of interest during that time. Further, there was no allegation that Technical Training violated any state or local law on conflicts of interest. (TR 48-50, 95-99, 208-209, 232-233). Although there appears to be a conflict of interest, USDOL has not cited any violation of any federal, state, or local law which prohibits conflict of interest as long as performance is attained. As there was no question about the performance, the Court finds that USDOL failed to establish a prima facie case. Thus, the conflict of interest finding in the Final Determination must be reversed because it is not based on substantial evidence.

3. Procurement Procedures

Finally, the Grant Officer disallowed costs due to New Orleans' inadequate procurement procedures. The Grant Officer found that New Orleans awarded that contract to Technical Training without conducting a pre-award analysis of training costs. (RX 1 p. 16-19, 83) (TR 45-47). Further, the auditors found that Technical Training agreed to provide the same training in its program year 1988 contract for $150 less per participant than in the questioned contracts for program years 1986 and 1987. The Grant Officer's disallowance was based on Section 107(a) of the Act which requires service delivery area's to give primary consideration in selecting a service provider to demonstrated performance, cost effectiveness, quality of training, and characteristics of participants. Section 107(a), 29 U.S.C. § 1517 (1982). Further, Section 104(a) requires that the service delivery area take into account fiscal accountability. Section 104(a), 29 U.S.C. § 1514 (1982). Thus, Section 107(a) of the Act required New Orleans to consider the cost effectiveness of the contract when awarding the contract. (TR 213, 228)

Louisiana submitted that request for proposal for year 1986 and the log of proposals received. (RX 1 p. 125-130). However, there was no evidence that New Orleans considered cost when awarding the 1986 contract. The proposal did not contain adequate budget information on which to consider cost effectiveness in which to establish a contract price. Further, New Orleans did not provide any materials for the program year 1987 contract. (RX 1 p. 18). Further, Mr. Donahue stated that the log showed that a number of proposals were submitted, but it failed to show what services were being performed under the proposal. Also, none of

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the proposals were submitted to the Grant Officer. Thus, Mr. Donahue stated that there was no way of determining if New Orleans considered cost and determined that the price of the contract was fair and reasonable. (TR 51-52).

Further, Louisiana performed a slot cost survey to indicate that the cost of the contract with Technical Training was reasonable. However, the survey was performed on June 10, 1992, which is after the contract was awarded. (TR 134). Thus, the survey does not indicate that New Orleans considered cost and determined that the contract price was fair and reasonable when the contract was awarded. (TR 48-52). Further, the service providers surveyed were not the other applicants in the 1986 and 1987 program competitions but rather the City's other service providers for those program years. (TR 131).

Based on the above, the Court finds that USDOL established a prima facie case based on substantial evidence that Louisiana through its subrecipient violated Section 107(a) of the Act because New Orleans failed to consider the cost effectiveness of the contract when the contract was awarded.

Louisiana failed to meet its burden that it complied with the regulation. As discussed above, Louisiana submitted the testimony of Mr. Thompson who stated that New Orleans considered the reasonableness of the cost in the verbal contract negotiations, and that there was no requirement that a cost analysis had to be in writing. (TR 134-135). Although the cost consideration did not have to be in writing,²⁰ his testimony is the only evidence that verbal communications existed with regard to cost consideration. This evidence alone does not establish that New Orleans considered the cost effectiveness of the contract because his testimony is outweighed by the majority of evidence discussed above. Furthermore, the testimony of Mr. Wilkinson and Mr. Christian that the contracts were properly procured is not persuasive because their opinions do not discuss whether New Orleans performed a pre-award cost analysis.

In addition, although New Orleans conducted a post award slot cost survey which showed that the cost of the contract with Technical Training was reasonable, this does not establish that cost was considered when the contract was awarded. Therefore, Louisiana failed to establish that it considered the cost effectiveness of the contract at the time it was awarded pursuant to Section 107(a) of the Act. As Louisiana through its subrecipient violated that Act, the questioned costs of $793,173 must be repaid by Louisiana to the USDOL with non-federal funds.

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Conclusion

The Court finds that USDOL has established that the questioned costs of $101,442 under the fixed unit price contracts between New Orleans and the Client Center are subject to federal debt collection because Louisiana through its subrecipient failed to maintain adequate records and awarded contracts based on improper procurement procedures. Further, USDOL has established that the questioned costs of $793,173 under the fixed unit price contracts between New Orleans and Technical Training are also subject to federal debt collection because Louisiana failed to maintain adequate records as required by the Act and procured the contracts improperly. However, the Court reversed the findings of conflict of interest in the Final Determination because they were not based on substantial evidence.

ORDER

Accordingly, it is ORDERED that the State of Louisiana is responsible for repaying United States Department of Labor for grant funds in the amount of $894,615 with non-federal funds for violating the Job Training Partnership Act based on the Final Determination of the Grant Officer.

Entered this 23rd day of October, 1995, at Metairie, Louisiana.

JAMES W. KERR
Administrative Law Judge

JWK/td

[ENDNOTES]

¹ Since the disallowed costs in question here were incurred between June 6, 1986 and October 14, 1988, the 1982 version of JTPA applies to the period when the disallowed costs were incurred. 29 U.S.C. § 1501 et seq. However, amendments to the stature govern some of the subsequent procedural events and are cited accordingly.

² The agreement states that guidelines, interpretations, and definitions adopted by the governor of Louisiana shall be accepted by the Secretary as long as they are consistent with the Act and regulations. See 20 C.F.R. 627.1.

³The following abbreviations will be used in citations to the record: CTX - Court's Exhibit, CX - Complainant's Exhibit, RX -

Respondent's Exhibit, and TR - Transcript of the Proceedings.

⁴ The JTPA and its regulations provides that the recipient of the money, the state, is responsible for repaying the grant funds to ETA; thus, because Louisiana was the one who received the funds from ETA, it has to repay the funds if the Court finds that the funds are subject to federal debt collection. 29 U.S.C. §1574(d).

⁵ Martha Secuskie, who is an auditor for the United States Department of Labor, Office of Inspector General, testified that she was the auditor in charge of the New Orleans audit wherein she supervised the auditors, conducted the field work, and prepared the findings. (TR 174-175). She explained that New Orleans was not notified of the extended audit period and was not given an opportunity to review the draft audit report due to the emergency nature of the audit findings and the serious risk to the millions of JTPA dollars given to New Orleans. New Orleans was designated as a high risk subgrantee due to the discovered problems such as a inadequate procurement system, invalid placements of contractor performance, conflict of interest, and excessive costs. (TR 176-177, 185) (RX 1 p. 33, 41-42, 46). Further, she stated that the auditors were not bound by the scope of the original audit period. Under the Inspector General's Act of 1978, she reasoned that the Office of the Inspector General had broad statutory authority "to prevent and detect fraud and abuse in...[federal] programs and operations." 5 U.S.C. app. § 2(2)(B) (1982). When problems are discovered such as the conflict of interest and trouble contacting the OETD, she stated that the auditor can go beyond the scope of the audit without notification to New Orleans based on statutory authority. (TR 186, 199-200).

⁶ The program years for the applicable sections of the JTPA run from July 1 to June 30. (RX 1 p. 90).

⁷ Mr. Edward J. Donahue, Jr., who is a grants and contracts compliance specialist at Employment and Training Administration, stated that he prepared the January 5, 1994 Final Determination which the Grant Officer signed. He explained that he considered all of documents submitted by Louisiana both prior to and after the Initial Determination. (TR 17-18, 24).

⁸ There are two types of contracts that are awarded under the JTPA program, the fixed unit price contract and the cost reimbursement contract. In a fixed unit price contract, the contractor receives a contractually agreed unit price for the number of participants who achieve the unit of training or placement in question. In a cost reimbursement contract, the contractor is paid according to its necessary and reasonable allocable costs for performing the required service. (TR 31).

⁹ Subject to the provisions of Section 107 of the act, recipients and subrecipients shall administer procurement system that reflect applicable state and local laws, rules, and regulations as determined by the governor. 20 C.F.R. 629.34 (1984-1987).

¹⁰ 29 U.S.C. § § 801-999 (Supp. II 1978), repealed by the Job Training Partnership Act, 29 U.S.C. §§ 1501-1781 (1982).

¹¹ At the time of the contract period, 1985 to 1986, Part 629.38(e)(2) was in effect which allowed for fixed unit price contracts. 20 C.F.R. 629.38(e)(2) (1988). However, there was nothing in the regulation which exempted these contracts from the record keeping requirements of the Act. Part 629.38 is no longer part of the regulations. (TR 67).

¹² Although the scope of the audit was expanded, and Louisiana was not given an exit conference at the end of the audit, Louisiana was not prejudiced by these protective measures because the state was given ample opportunity to submit these records in response to the audit report, initial determination, and final determination. (RX 1 p. 12, 23-29, 121-185). Further, Louisiana had the chance for at least two and a half years to examine the contractors' financial records but has not taken advantage of that opportunity. (RX 1 p. 13). The JTPA regulations require recipients to resolve audit findings concerning their subrecipients. 20 C.F.R. 629.42 (1991). Thus, the burden is on Louisiana to submit the records which establish the expenditures of program funds.

¹³ Mr. Donahue indicated that the test instrument for this program had been paid by a prior fixed unit price contract. (TR 33-35).

¹⁴ Subsequently, the JTPA was amended to indicate that conflict of interests were undesirable. (TR 95).

¹⁵ In a fixed unit price contract, the contractor receives a contractually agreed unit price for the number of participants who achieve the unit of training or placement in question. In a cost reimbursement contract, the contractor is paid according to its necessary and reasonable allocable costs for performing the required service. (TR 31).

¹⁶ Specifically, Section 107(a) provides that "the primary consideration in services delivery area shall be effectiveness of the agency or organization in delivering comparable or related services based on demonstrated performances, in terms of the likelihood of meeting performance goals, cost, quality of training, and characteristics of participants...". Section 107(a), 29 U.S.C. § 1517 (1982) (emphasis added). Further, "each job training plan shall contain ... procedures, consistent with Section 107, for selecting service providers which take into account past performance in job training or related activities, fiscal accountability, and ability to meet performance standards." Section 104(b)(5), 29 U.S.C.§ 1514 (1982) (emphasis added).

¹⁷ The Act now requires that a cost analysis be performed effective July 1, 1993. 20 C.F.R. 627-420(e).

¹⁸ Mr. Wilkinson is the assistant director for JTPA programs in Louisiana. As head of the audit resolution team, he reviewed Findings C and D of the audit report and the documentation submitted by New Orleans and then issued determinations on the findings with a team of people. (TR 101-102, 104). In response to the ETA, the audit resolution team concluded that documentation was sufficient to allow the cost. The response explained that the procurement was proper, and the costs were reasonable. (RX 1 p. 121) (TR 105). Thus, he opined that there were no disallowed costs as to Findings C and D that should be repaid to the USDOL. (TR 102-104).

The Court notes that Mr. Wilkinson had not reviewed copies of the Client Center's proposal; he only reviewed the Council minutes approving the contract and New Orleans survey of test technicians. (TR 110) (RX 1 p. 121). With regard to Finding D, Mr. Wilkinson stated that he only reviewed the survey of service providers and did not review New Orleans' evaluation of the cost reasonableness of the contract. He stated that he reviewed New Orleans' request for proposals and the submitted proposals. (TR 110-112). Thus, because he did not review all of the documents in the record, his opinion is not persuasive.

¹⁹ Mr. Christian is an auditor for the Louisiana Department of Labor. He stated that his job duties required him to conduct financial and compliance audits of the JTPA funds. (TR 136). He stated that he reviewed the audit report of New Orleans which included Findings C and D and the documentation submitted by New Orleans. He also reviewed federal, state and local law. L.R.S. 39. (TR 139). He stated that he also reviewed the audit report and criticized the report; however, he stated that he did not review the working papers of the audit report. After reviewing the above, he allowed all the costs because the contracts were procured in accordance with federal, state, and local law. (TR 140-149, 156, 161-171) (CX 4).

²⁰ Although during the program years of 1986 and 1987, there was no requirement to perform a cost analysis, the Act now requires that a cost analysis be performed effective July 1, 1993. 20 C.F.R 627-420(e) (1993).