State of Texas Dept. of Commerce v. USDOL, 94-JTP-20 (ALJ Nov. 3, 1995)

	U.S. Department of Labor Office of Administrative Law Judges

www.oalj.dol.gov

[skip navigational links] Search | A-Z Index

Find It! on DOL | OALJ Home | OALJ Law Library | About Us

September 23, 2008 DOL Home > OALJ Home > WIA/JTPA/CETA Collection

USDOL/OALJ Reporter
State of Texas Dept. of Commerce v. USDOL, 94-JTP-20 (ALJ Nov. 3, 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: NOVEMBER 3, 1995

CASE NO.: 94-JTP-20

In the Matter of

STATE OF TEXAS
DEPARTMENT OF COMMERCE
Complainant,

and

MIDDLE RIO GRANDE
DEVELOPMENT COUNCIL
Intervenor and
Party in Interest,

versus

UNITED STATES
DEPARTMENT OF LABOR
Respondent.

ORDER GRANTING IN PART THE MOTION FOR PARTIAL SUMMARY DECISION,
DENYING MOTION FOR SUMMARY DECISION,
AND GRANTING IN PART THE MOTION FOR PROTECTIVE ORDER

This case arises under the Job Training Partnership Act ("JTPA or the Act"), 29 U.S.C. § 1501 et seq., and its implementing regulations at 20

[Page 2]

C.F.R. Part 629.¹ The purpose of the JTPA is to establish programs to prepare youth and unskilled adults for entry into the labor force and to afford job training to those economically disadvantaged individuals and others facing serious barriers to employment. 29 U.S.C. § 1501 (1982).

Pursuant to 29 U.S.C. § 1511(a)(1) (1982), the Governor of Texas, through his designated agent, the Texas Department of Commerce ("TDOC"), was required to allocate its JTPA funding from the United States Department of Labor ("USDOL") among its service delivery areas ("SDA"). According to the allocation plan set forth in 29 U.S.C. § 1511(4)(a) (1982), TDOC allocated the appropriate share of Title II JTPA funding to the Middle Rio Grande Development Council ("MRGDC").

The United States Department of Labor, Office of the Regional Inspector General for Audit ("OIG"), performed an audit of MRGDC's compliance with the Federal and State JTPA requirements. The OIG issued an audit report containing its findings March 23, 1993 wherein the audit report questioned $885,525 in the JTPA expenditures. The OIG forwarded the audit report to the Employment and Training Administration ("ETA") for resolution. On March 31, 1993, the Grant Officer also forwarded the audit report to TDOC with instructions to resolve the findings with MRGDC and submit its audit resolution report to ETA.

On September 30, 1993, TDOC submitted its audit resolution report and supporting documentation. The Grant Officer did not agree with TDOC's resolution of the findings; therefore, he issued an Initial Determination on December 15, 1993 proposing to disallow $885,525 of MRGDC's JTPA expenditures. The Grant Officer offered TDOC the opportunity to engage in informal resolution. During the informal resolution period, TDOC met with Regional Office staff and provided additional documentation in support of its position. The Grant Officer reviewed the information and issued his Final Determination on March 14, 1994 which allowed $63,268 and disallowed $822,257 in expenditures which is subject to federal debt collection.

The TDOC appealed the Grant Officer's Final Determination to the Office of Administrative Law Judges ("Court" or "Judge") on April 12, 1994 which was docketed as 94-JTP-20. Thereafter, on April 21, 1994, MRGDC requested that it be permitted to intervene in the proceeding, and that request was docketed as 94-JTP-21. The Court granted MRGDC's request to intervene, and the cases were consolidated as 94-JTP-20.

[Page 3]

Both TDOC and MRGDC request that the Grant Officer's Final Determination that TDOC must repay to the United States Department of Labor $822,257 due to misspent funds under the JTPA be reversed. TDOC raised five issues on appeal in its request for a trial. (RX 1 at 4-6). Pursuant to Section 18.40 of the Rules of Practice and Procedure for Administrative Hearing before the Office of Administrative Law Judge, the Grant Officer filed a motion for partial summary decision contending that he is entitled to judgement as a matter of law on three of the five arguments raised as there are no genuine issues of material fact, with respect to those arguments. 29 C.F.R. 18.40(c) (1993-1995). In addition, MRGDC filed a motion for a summary decision and argued that the Grant Officer's motion for summary decision should be denied. Finally, the Grant Officer filed a motion for a protective order to stay all further discovery until the Court issues orders on the motions for summary decision.

STATEMENT OF FACTS

Pursuant to 29 U.S.C. § 1511(4)(a) (1982), TDOC allocated the appropriate share of Title II JTPA funding to the Middle Rio Grande Development Council ("MRGDC") for the operation of job training programs throughout its geographic area.² In addition to JTPA programs, MRGDC also administered economic development activities throughout its region. (RX 1 at 157). MRGDC's internal policy described three major types of employment generating activities ("EGA"):

(1) industry targeting projects, aimed at recruiting specific industrial sectors,

(2) working with a specific firm or group of potential investors, and

(3) targets of opportunity. (RX 1 at 160).

The OIG audited MRGDC for the period 1989 through 1992, and the scope of the audit was limited to EGAs funded under Title IIA of JTPA, whether internally operated or externally contracted and performed between July 1, 1989 and June 30, 1992. (RX 1 at 158). The audit report identified three findings and questioned costs of $885,525 in JTPA expenditures.³ (RX 1 at 160-165).

Upon reviewing TDOC's response to the Initial Determination, the Grant Officer issued a Final Determination which identified three findings. (RX 1 at 17-26). In Finding 1, based on the audit report, the Grant Officer determined that MRGDC failed to comply with Sections 164(a)(1)⁴ and 165(a)(1)⁵ of the Act, and Part 629.35(a)(2)⁶ of the regulations

[Page 4]

because it failed to maintain the documentation necessary to demonstrate that JTPA funds were spent on allowable JTPA activities. The Grant Officer reported that the auditors determined that two of the MRGDC employment generating activities were actually economic development activities which are prohibited under JTPA. Thus, the cost associated with those activities were unallowable because there was no way of knowing what costs were associated with what activities from MRGDC's accounting records. The Grant Officer determined that since neither TDOC nor MRGDC submitted documentation to show how the costs were allocated, the finding remained uncorrected. (RX 1 at 18-19).

In Finding 2, the Grant Officer disallowed $42,296 in costs incurred for economic development activities. MRGDC argued that the specific activities identified as economic development activities were allowable EGA, and that they were intended to benefit JTPA eligible individuals. Again, the Grant Officer found that neither TDOC nor MRGDC provided documentation to demonstrate how MRGDC's projects directly resulted in the placement of JTPA eligible individuals and participants into jobs created by these contracts. (RX 1 at 19-21). Thus, the Grant Officer concluded that the costs were for prohibited economic development activities based on the House Conference Report No. 97-889.⁷

In Finding 3, the Grant Officer disallowed $822,257 ⁸ in JTPA expenditures because MRGDC exceeded by that amount its fifteen percent cap on administrative expenditures. See 20 C.F.R. 629.39(a)(1) (1989-1991). The Grant Officer explained that the MRGDC exceeded its administrative cap after the auditors reclassified $724,085 of EGA expenditures from the participant support cost category and $257,410 of EGA expenditures from the training cost category to the administration cost category. The Grant's Officer based his decision to accept the auditors' reclassification primarily on Section 108(b)(2)(A) of the Act and Part 629.38(e)(5) in the regulations. 29 U.S.C. § 1518(b)(2)(A) (1982); 20 C.F.R. 629.38(e)(5) (1989-1991).⁹ Section 108(b)(2)(A) provides that not more than thirty percent of the JTPA funding may be expended for administration and work experience, supportive services, and/or need based payments. 29 U.S.C. § 1518(b)(1) & (2)(A). The Grant Officer found that neither TDOC nor MRGDC submitted documentation to demonstrate that the EGA costs were incurred to provides services that fit the definition of work experience, supportive services, or need based payments. 20 C.F.R. 629.38(b) (1989)¹⁰ (RX 1 at 24-25).

[Page 5]

DISCUSSION

I. Motion for Summary Decision

A. Grant Officer's Motion for Partial Summary Decision

TDOC raised five issues in its request for a trial. The Grant Officer contends that he is entitled to a partial summary decision as a matter of law on three of the five issues. MRGDC also raises several issues and requests judgement as a matter of law. The Judge may enter summary judgement for either party if the pleadings, affidavits, material obtained by discovery or otherwise, or matters officially noticed show that there is no genuine issue as to any material fact and that a party is entitled to summary decision. 29 C.F.R. 18.40(c) (1995).

The first issue involves whether, under Section 108(b)(1) and (2)(A) of the Act, expenditures incurred for employment generating activities can be charged to the participant cost category and the training cost category in instances where the grantee cannot demonstrate that the JTPA participants benefitted directly from the employment generating activities. 29 U.S.C. § 1518 (1982). The Grant Officer contends that the Act and its regulations require that EGAs costs be charged to administration unless costs charged to the participant support category directly enable the eligible individuals to receive training. However, TDOC contends that the disallowed costs charged to the training category were appropriate because they were training expenses and not EGA, and that charging EGA to the participant support category was a correct cost allocation for the program years at issue.

In its motion for summary decision, MRGDC contends that JTPA participants and JTPA eligible individuals have benefitted directly by MRGDC's expenditure of funds disallowed by the Grant Officer. MRGDC argues that Section 108(b) of the JTPA does not provide that JTPA participants must directly benefit from the EGA in order for it to be charged to the participant support cost category, as indicated by the Grant Officer. It is clear from Section 204(19) of the Act that EGA need only be intended to increase job opportunities for eligible individuals in the area. 29 U.S.C. § 1604(19) (1982). Thus, MRGDC contends that the Act does not limit EGA expenditures to "participants;" rather, the expenditures can be designed to benefit "eligible individuals." Further, the Grant Officer's interpretation of Section 108(b)(2)(A) is too narrow ¹¹ and inconsistent with other provisions of the Act and its regulations. Section 108(a) of the JTPA provides that costs of program support (such as counseling) which are directly

[Page 6]

related to the provision of education or training and such additional costs as may be attributable to the development of training described in Section 204(28) shall not be counted as part of the cost of administration. 29 U.S.C. § 1518(a) (1982). If EGA of this type cannot be charged to administration, MRGDC argued that it must be charged to participant support since the regulations prohibit the charging of EGA to the training cost category.

Further, MRGDC argues that the definition of "supportive services" is extremely broad in its definition and includes "special services" which are not defined under the Act and may include a wide variety of services and "other reasonable expenses required for participation in the training program." See 29 U.S.C. § 1503(24) (1982). Thus MRGDC asserts that the term "other reasonable expenses" gives the states broad latitude to define and enumerate those activities and services included in the term "supportive services." In addition, MRGDC contends that Section 629.38(e)(4)¹² demonstrates further that the scope of the participant support cost category is much broader than the four subcategories included in Section 108(b)(2) of the Act. Thus, the regulations expressly provide the states with the opportunity to determine what "other participant support costs" are necessary at the state level. Accordingly, based on the above referenced provisions of the JTPA and its regulations, MRGDC argues that the participant support cost category is much broader than the interpretation the Grant Officer has accorded it.

The Act provides that grantees may use federal funds to engage in employment generating activities which increase job opportunities for eligible individuals in the area. Section 204, 29 U.S.C. § 1604(19) (1982). However, Section 204 does not indicate how EGA may be charged against a JTPA award, except to state that all costs of employment generating activities to increase job opportunities for eligible individuals in the area are not allowable training costs. See 29 U.S.C. § 1604 (1982); 29 U.S.C. § 1518(b)(2)(a) (1982); 20 C.F.R. 629.38(e)(5) (1989-1991). These are the only references to the employment generating activities in the Act or regulations. Thus, the Act and its regulations do not define the phrase "employment generating activities," do not define what constitutes allowable EGA, and do not indicate what cost category, administrative or participant support, these costs should be charged.

In order to determine the proper allocation of JTPA funding, Congress enacted Section 108 which establishes three cost categories: training, administration, and participant support,

[Page 7]

and identifies to which category expenditures shall be charged. 29 U.S.C. § 1518 (1982 & Supp. 1986); 20 C.F.R. 629.38(a) (1989-1991). Specifically, administrative costs include costs associated with the management of the program and which do not directly benefit the participants but are necessary for the effective delivery of services. The costs of administration cannot exceed more than fifteen percent of the funds. 20 C.F.R. 629.39(a)(2) (1989-1991); S. Rep. No. 97-469, 97th Cong., 2d Sess. 3, reprinted in 1982 U.S. CODE CONG. & ADMIN. NEWS 2652. The participant support category includes work experience expenditures,¹³ need based payments,¹⁴ and

supportive services.¹⁵ 29 U.S.C. § 1518(b). There is a thirty percent limitation on the combined administration and participant support costs. 29 U.S.C. § 1518(a) & (b); 20 C.F.R. 629.39(c)(2) (1989-1991). Thus, at least seventy percent of the funds must be expended on direct training expenses. 20 C.F.R. 629.39(c)(1) (1989-1991); S. Rep. No. 97-469, 97th Cong., 2d Sess. 3, reprinted in 1982 U.S. CODE CONG. & ADMIN. NEWS 2639.

With regard to costs charged to the participant support category, the Grant Officer contends that the only costs that can be charged under the participant support category are work experience costs, need based payments, and supportive services which enable an eligible individual to participate in the training program. See 29 U.S.C. § 1518(b) (1982); S. Rep. No. 97-469, 97th Cong., 2d Sess. 3, reprinted in 1982 U.S. CODE CONG. & ADMIN. NEWS 2639. Thus, employment generating activities are not allowable under the participant support category unless the EGA costs arise under one of the subcategories of participant support and such costs directly benefit eligible individuals by allowing them to participate in training programs as stated in the statute. Further, Section 629.38(b) provides that costs are allocable to a particular cost category to the extent that benefits are received by such category. 20 C.F.R. 629.38(b) (1989-1991).

The Grant Officer asserts that the Employment and Training Administration has interpreted the phrase "and other reasonable expenses required for participation in the training program" in the definition of "supportive services" to include EGA that directly benefits JTPA participants.¹⁶ Thus, before a cost can be charged to the participant support cost category, the grantee must be able to show a direct link between the activity and the eligible individuals. The Grant Officer cites State of Colorado, City and County of Denver v. United States Dept. of Labor, 93-JTP-3 (June 22, 1995)¹⁷ to support this interpretation. In this case, the court held that EGA expenditures

[Page 8]

cannot be charged to the participant support cost category unless the grantee can demonstrate that the activity fits within one of the four subcategories under Section 108(b)(2)(A) of the Act. The judge found that he statutory language and its legislative history supports USDOL's position that Congress did not intend for EGA to be charged to participant support unless there is a direct link between the activity and an actual JTPA participant.

The Court finds that the Grant Officer interpreted the Act correctly.¹⁸ The specific statutory language limits the costs that can be charged to the participant support category and provides only four subcategories that costs must arise under to charge a cost to that category. This interpretation is consistent with the purpose of the Act which is to provide training to individuals facing serious barriers to employment. See 29 U.S.C. § 1551. Also, the limited amount of expenditures that could be used for services other than training supports this interpretation. See 29 U.S.C. § 1518(b)(1). Thus, employment generating activities cannot be charged to the participant support category unless such costs benefit eligible individuals within the meaning of this category, and such costs arise under any of the subcategories allowed in the participant support category such as work experience expenditures, need based payments, or supportive service payments. See 29 U.S.C. § 1518(b) (1982).

MRGDC's argument that the language of this Section 108(b)(2)(A) permits other costs to be charged to the participant support cost category besides the four subcategories listed in the statue is without merit. The Court finds that MRGDC has cited the language of the statue out of context. "Cost of program support" cited in Section 108(a) refers to counseling as indicated in the statute and is an allowable expense under the training category. See 29 U.S.C. § 1518(a) (1982). Consequently, program support is not synonymous with EGA as asserted by MRGDC.

Further, EGA costs are not covered under the "supportive services" subcategory because they are not other reasonable expenses as contemplated by the statue. See 29 U.S.C. § 1503(24) (1982). As discussed in footnote seventeen, the Court notes that supportive services include services that physically enable a eligible individual to participate in the program such as child care or shelter. Thus, EGA costs are not the this type of supportive service costs. Finally, "other participant support costs which are determined to be necessary at the local level" in Section 629.38(e)(4) refer to support costs such as need based payments allowable under the participant support cost category. See 20 C.F.R. 629.38(e)(4) (1989-1991). This interpretation is consistent with

[Page 9]

the language in the definition of need based payments which indicates that the formula or procedure for developing need based payments can be developed at the local level. See 20 C.F.R. 629.21(a) (1989-1991).

Next, TDOC argues that USDOL should be estopped from re-classifying the expenses to the administrative cost category because USDOL's course of conduct both before the audit of MRGDC and after the audit would lead a reasonable person to believe that the EGA activities classified by MRGDC as participant support were properly classified. While it is undisputed that EGA activities were allowable JTPA expenses, TDOC noted that the only regulatory guidance to the states during the covered time period on appropriate cost categories to assign EGA expenses was that EGA could not be charged to the training cost category. See 20 C.F.R. 629.38(e)(5) (1989-1991). Thus, TDOC contends that USDOL should be estopped from disallowing costs because it failed to provide guidance to the states regarding the proper allocation of EGA expenditures, and the regional Department of Labor allowed EGA costs to be classified as participant support. However, the Court finds that MRGDC has failed to prove that it has met any of the elements necessary for estoppel against the Government.

In a line of cases dealing with the issue of equitable estoppel against the Government, the Supreme Court has held that the Government cannot be estopped from taking action in the same manner as private litigants. See Heckler v. Community Health Servs., 467 U.S. 51, 60 (1983). See also Federal Crop Ins. Corp. v. Merrill, 332 U.S. 380, 381 n.1 (1947); Office of Personnel Management v. Richmond, 496 U.S. 414, 419 (1989). The Court explained that the Government is charged with protection of public monies, and thus cannot be bound by actions, whether improper or not, of its agents. See Heckler, 467 U.S. at 63. While the Court has repeatedly stated that it has not decided under what circumstances the Government could be estopped from taking action or recouping payment, the Court reasoned that a private party cannot prevail without at least demonstrating that the traditional elements of an estoppel are present. Id. at 60-61.

Several United States Court of Appeals have established specific criteria in order to make this determination. If estoppel were to be applied against the Government, four requirements must be met: (1) the party to be estopped must know the facts; (2) he must intend that his conduct will be acted upon or must so act that the party asserting the estoppel had the right to believe that it was so intended; (3) the latter must be ignorant of the true facts; and (4) he must rely on the former's conduct to his injury. See United States v. Wingfield, 822 F.2d 1466, 1476 (10th Cir. 1987) (citation omitted). Also, the Court

[Page 10]

indicated that public policy should also be considered. Id. at 1476. The Ninth Circuit added an additional requirement that must be met which was recognized by the Tenth Circuit.¹⁹ The Ninth Circuit explained that a party seeking to raise estoppel against the government must establish "affirmative misconduct going beyond mere negligence"; even then, "estoppel will only apply where the government's wrongful act will cause a serious injustice, and the public's interest will not suffer undue damage by imposition of the liability." Morgan v. Heckler, 779 F.2d 544, 545 (9th Cir. 1985); Mukherjee v. INS, 793 F.2d 1006, 1008-09 (9th Cir. 1986).

TDOC has not addressed nor proven the elements of estoppel, discussed above, against the Government. Further, TDOC has neither alleged nor proven that any Government employee's action rose to the level of affirmative misconduct required by the courts.

The Court finds that TDOC is responsible for knowing the law and taking actions that are consistent with the provision of the Act even in instances where either it received improper information or no information at all. See Heckler, 467 U.S. at 63-66. USDOL's mere failure to inform or assist does not justify application of equitable estoppel. See Lavin v. March, 644 F.2d 1378 (9th Cir. 1981). Although USDOL never issued any specific written policy regarding the proper allocation of employment generating activities, that alone does not constitute affirmative misconduct on the part of the Government. Id. Further, the statute clearly defines the four cost subcategories to which participant support costs may be charged. Accordingly, the Court finds that TDOC has failed to establish that it is entitled to equitable estoppel against the Government.

Consequently, the Grant Officer is entitled to judgement as a matter of law on this issue, and MRGDC's motion for summary decision is DENIED on this issue. However, TDOC and MRGDC are entitled, during the trial, to prove that these EGA expenditures fall under one of the subcategories of the participant support cost category and that such costs directly benefitted eligible individuals to participate in the training program as contemplated by the statute.

Next, the Grant Officer alleges that in order for a cost to be charged under the training category, the regulations require that the costs be directly related to training. See 29 U.S.C. § 1518 (1982); S. Rep. No. 97-469, 97th Cong., 2d Sess. 3, reprinted in 1982 U.S. CODE CONG. & ADMIN. NEWS 2639. Further, Section 629.38(e)(5) provides that all costs of employment generating activities to increase job

[Page 11]

opportunities for eligible individuals in the area are not allowable training costs. 20 C.F.R. 629.38(e)(5) (1989-1991). The Grant Officer argues that employment generating activities may not be charged under the training costs category as required by the regulations. TDOC and MRGDC do not appear to challenge this statement. However, TDOC and MRGDC argue that MRGDC did not charge any EGA activities to the training cost category; rather, the costs charged to the training category were actual training costs. (RX 1 at 59). Because the documentation recently submitted by TDOC must be examined to determine if the costs were in fact allowable job development costs which can be charged to the training cost category, the Court finds that this is a genuine issue as to material fact. Thus, the granting of a summary decision on this issue is not proper, and neither the Grant Officer nor MRGDC ²⁰ is not entitled to judgement as a matter of law on this issue. The motion for summary decision is hereby DENIED.

The second issue is whether the JTPA requires the Grant Officer to make a determination, under Section 164(e)(2), regarding the appropriateness of waiving liability against the State for disallowances incurred by its subrecipient prior to issuing a Final Determination. 29 U.S.C. § 1574(e)(2) (1982). TDOC argues that the Grant Officer is required to make such a determination before he can establish a debt against the State. (RX 1 at 5-6). The Grant Officer contends that there is no language in Section 164(e)(2) that requires that Grant Officer to make such a determination with respect to every recipient that incurs disallowed costs as a result of an audit or investigation. However, the Grant Officer states that Section 164(e)(2) does provide that before a determination regarding waiver can be made, the grantee must be able to demonstrate that it has met the criteria set forth in Section 164(e)(2).

Section 164(e)(2) of the Act gives the Secretary discretion to waive a recipient's liability for the actions of its subrecipients. However, such a determination will only be made after the recipient has demonstrated that it has met the four criteria to justify a waiver.²¹ 20 C.F.R. 627.704(a) (1993-1995). The regulations at

Section 627.704(b) set forth the process the recipient must follow before the Secretary will consider waiver in a particular case. According to Section 627.704, a waiver may only be granted if requested by the recipient during the informal resolution period and accompanied by documentation demonstrating substantial compliance with the criteria waiver listed in Section 164(e)(2) of the Act.²² 20 C.F.R. 627.704 (1993-1995). In The Matter of Commonwealth of Pennsylvania, Dept. of Labor & Indus. v. United States Dept. of Labor, 92-JTP-12 (April 5, 1995), the Secretary held that

[Page 12]

compliance with Section 164(e)(2) is a statutory prerequisite to a waiver of liability for recovery of funds misspent under the Act.

Based on the above, the Court finds that the Act and its regulations do not require that the Secretary\Grant Officer make a determination of whether TDOC is entitled to a waiver of liability before the Final Determination is issued. Section 627.704 states specifically that before a waiver can be considered, a debt must be established. 20 C.F.R. 627.704 (1993-1995). Further, in addition to the requirements in Section 627.704, TDOC must prove that it complied with Section 164(e)(2) before the Secretary decides whether a waiver is proper. See 29 U.S.C. § 1574(e)(2) (1982); 20 C.F.R. 627.704 (1993-1995).

Consequently, the Court finds that TDOC's interpretation of the statues is erroneous. Section 164 and Section 166 of the Act are not contradictory. Section 164 and its implementing regulations allow the recipients of the funds to escape liability for violations of its subrecipient. When the subrecipient has violated the Act, the state or recipient of the funds can issue a final determination indicating that it monitored the subrecipient and took corrective action once it learned of the violations. See 29 U.S.C. § 1574(e)(2) (1982 & Supp. 1992). By issuing a final determination disallowing the misexpenditure and establishing a debt, the state does not eliminate its right to appeal a finding of its liability or lose the right to request a waiver of liability. See 29 U.S.C. § 1576 (b) -(d) (1982 & Supp. 1992); 20 C.F.R. 627.704 (1993-1995).

Therefore, the Court finds that the Grant Officer is not required to make a determination regarding the appropriateness of waiving liability prior to issuing a Final Determination. Rather, the Act requires that once a Final Determination has been issued, the Secretary must first determine whether the recipient has demonstrated the four requirements listed in Section 164 of the Act before imposing sanctions. The Court finds that the Grant Officer is entitled to judgement as a matter of law on this issue.

In addition, the Court finds that TDOC cannot avail itself of a waiver of liability under Section 164(e)(2). Section 164(e)(2) requires TDOC to take prompt and appropriate corrective action upon becoming aware of any evidence of a violation of the Act or its regulations by such subgrantees. 29 U.S.C. § 1574(e) (1982 & Supp. 1992). TDOC has not compiled with the requirement because TDOC continues to believe that MRGDC did not violate any statutory mandate with respect to EGA based on TDOC's audit resolution report and the appeal of the Final Determination. TDOC has not issued a final determination

[Page 13]

disallowing the costs and establishing a debt, instead TDOC opined that the costs charged to the participant support costs category were not in violation of the Act or its regulations based on the audit resolution report and the appeal of the Final Determination. Finally, TDOC has failed to demonstrate that it has met the requirements for waiver set forth in the statute. Thus, TDOC cannot seek a waiver of liability under Section 164(e)(2) because it has failed to satisfy the criteria for utilizing the waiver provision.

The third issue involves whether the Grant Officer can require TDOC to repay the disallowed amount from non-federal funds. TDOC argues that "[t]here has been no determination made that there has been a misexpenditure of funds due to willful disregard of the requirements of the JTPA, gross negligence, or failure to observe accepted standards of administration. (RX 1 at 6). Thus, TDOC concludes that the Grant Officer cannot require repayment from non-federal funds unless he determines that a Section 164(e)(1) violation has occurred. 29 U.S.C. § 1574(e)(1) (1982 & Supp. 1992). The Grant Officer contends that TDOC's argument is inconsistent with the unambiguous language of Sections 164(d) and 164(e)(1), and is contrary to the Supreme Court's ruling in Bennett v. New Jersey, 470 U.S. 632 (1985).

The Court finds that TDOC's interpretation of Section 164(e)(1) is erroneous. With regard to repayment of disallowed costs, Sections 164(d)&(e)(1) of the Act must be read together. These sections provide that the funds can be recouped from the recipient in two ways for a violation of the Act or its regulations.²³ First, the funds can be repaid by the recipient or the Secretary may grant an offset from future funds. However, the Secretary cannot grant the offset if the Secretary determines that the recipient should be held liable under Section 164(e)(1).²⁴ Section 164(e)(1) provides that each recipient shall be liable to repay such amounts, from funds other than funds received under this Act, upon a determination that the misexpenditure of funds was due to willful disregard of the requirements of the Act, gross negligence, or failure to observe accepted standards of administration. 29 U.S.C. § 1574(e)(1) (1982 & Supp. 1992). Thus, if the recipient is liable under Section 164(e)(1), the only way to recoup the funds from the recipient is through repayment with non-JTPA funds.

Although there has been no determination that TDOC acted with willful disregard for the requirements of the Act, the Court finds that TDOC can be required to repay the money if the disallowed costs in the Final Determination are upheld due to non-compliance of the Act because TDOC did not request an offset which

[Page 14]

is the other option under the Act to recoup misspent funds.²⁵ Further, the repayment must be from non-federal funds because Section 164(e)(2) which is more specific with regard to repayment provides that the repayment cannot be from funds awarded the JTPA. 29 U.S.C. § 1575(e)(1). Further, there is no indication in Section 164(d) that permits recipients to repay the disallowed costs with federal funds. It would be absurd to suggest that Congress drafted legislation requiring recipients of federal funds to repay misspent funds under one federal program with funds awarded under another federal program. Most of the funds awarded under federal programs are restricted and can only be spent for specific purposes.

Thus, the Court finds that Congress did not intend to permit grantees to repay a federal debt with funds from other federal sources. The Court notes that this finding is consistent with other cases that have required states and/or their subrecipients to repay grant awards from non-federal funds to the United States Department of Labor. See In the Matter of Commonwealth of Pennsylvania, Dept. of Labor v. United States Dept. of Labor, 92-JTP-12 (April 5, 1995) (citing Milwaukee County, Wisconsin v. Donovan, 771 F.2d 983, 993 (7th Cir. 1985). Accordingly, the Court finds that the Grant Officer is entitled to a summary decision on this issue as a matter of law.

B. MRGDC's Motion for Summary Decision

MRGDC filed a motion for summary decision and argued that the Court should grant the motion for several reasons. The Court will address each reason below; however, some of the contentions have been discussed above in the Grant Officer's motion for partial summary decision. This Court may enter summary judgement for either party if the pleadings, affidavits, material obtained by discovery or otherwise, or matters officially noticed show that there is no genuine issue as to any material fact and that a party is entitled to summary decision. 29 C.F.R. §18.40(c).

First, MRGDC argues, in its motion for summary decision, that the amounts spent on EGA were allowable costs based on the policy guidance issued by the Governor of Texas. MRGDC contends that in the absence of specific statutory language,²⁶ the Governor can issue guidelines and policies that interpret the Act as long as such guidelines and interpretations are consistent with the Act. See 20 C.F.R. 627.1 (1989-1991). However, this does not appear to be an issue in this case; as discussed above, EGA is an allowable expense under the Act. The Court notes that it is undisputed that the Governor of Texas had to right to define "employment generating activities" under the Act due to

[Page 15]

the lack of a definition in the Act or regulations. The Governor's authority to define EGA and the validity of his definition was confirmed by several USDOL employees.

Also, the Grant Officer acknowledged that TDOC's policy guidance regarding the proper allocation of EGA costs was not inconsistent with the Act or regulations. (Grubb deposition at 9-11). However, the Grant Officer contends that the actual expenditures incurred by MRGDC were not properly charged to the participant support category because the EGA associated with the expenditures did not fit within the statutory criteria for this category as defined in the Act. See 29 U.S.C. § 1518(b)(2) (1982). As discussed above, the Court finds that the Act provides clearly that employment generating activities as a matter of law cannot be charged under the participant support category if the costs do not fall within one of the four subcategories enunciated in that section and such costs do not directly enable an eligible individual to participate in a training program. Because MRGDC's contention is not at issue in this case, this contention does not entitle MRGDC to a judgement as a matter of law. Consequently, the motion for summary decision is DENIED.

Second, MRGDC contends that USDOL's methodology for the audit was "fatally flawed" which entitles MRGDC to a summary decision. Although the auditors performed the audit under the mistaken premise that all EGA costs were only chargeable under the administration category,²⁷ the Grant Officer who issued the Final Determination indicated that he knew that this premise was incorrect, and that EGA could be charged to the participant support cost category in certain circumstances.²⁸ Thus, although the audit may contain some incorrect statements interpreting the Act, the Grant Officer who disallowed the costs based his determination on correct interpretations of the Act. In addition, the Grant Officer's first issue in his motion for partial summary decision indicates that EGA costs can be charged to the participant support cost category in certain instances. Thus, the Court finds that MRGDC is not entitled to a judgement as a matter of law under this contention, and the motion for summary decision is DENIED.

Third, MRGDC asserts that Finding 2 of the Final Determination which questioned costs of $42,296 spent on videos and graphic material, business analysis projects, contracts for professional series, and the "Asian Incentive" were legitimate JTPA charges. First, MRGDC reports that the costs of the videos and graphic design materials were charged either to MRGDC's "EDA grant," JTPA administration category, or

[Page 16]

JTPA participant support services depending on the content of the product and the purpose for which it was being produced. However, MRGDC did not submit any documentation to show which costs were charged to which categories. Further, the Court notes that MRGDC's EDA grant is not an allowable cost under the JTPA, and that economic development activities are not an allowable cost under the Act.

Although MRGDC's contends that the materials refer to JTPA and directly benefit JTPA participants, it has failed to show that these materials were not economic development activities or to produce documentation as to which EGA costs were charged to which categories under the Act.²⁹ The Court finds that MRGDC failed to offer any documented support for its position, and instead relied on the affidavit of Mr. Paul Edwards, MRGDC's Director of Planning and Economic Development, proffered several years after the period at issue. Without documentation to support the statements of Mr. Edwards, the Court is unable to determine whether such costs were allowable EGA expenditures or unallowable economic development expenditures. The Act and the regulations mandate clearly that the recipient of federal funds must maintain documentation sufficient to support expenditures made under the Act. See 29 U.S.C. § 1575(a)(1) (1982); 20 C.F.R. 629.35(a)(1) & (2) (1989-1991). Thus, the documentation of MRGDC must be examined to determine which were allowable costs. Therefore, because genuine issues of material fact exist, neither MRGDC nor the Grant Officer is entitled to summary decision on this issue. The motion for summary decision is hereby DENIED.

Fourth, MRGDC argues that USDOL actions violated its constitutional right to due process. MRGDC asserts that it had no notice prior to the audit that EGA costs could not be charged to the participant support cost category. There is no provision in the JTPA or its regulations that prohibit the charging of EGA to the participant support cost category. Grant Office Grubb testified that USDOL was aware that several states were classifying EGA as participant support.³⁰ MRGDC further argues that USDOL was aware that TDOC issued a policy that allowed its service delivery areas to charge EGA to the participant support cost category, and that the Regional Administrator, Mr. Floyd Edwards, encouraged TDOC to change its policy and only charge EGA to administration cost. MRGDC admits that Mr. Edwards was acting outside the scope of his authority because he had no authority to dictate such a change. Until Mr. Edwards told TDOC to change its policy, MRGDC argues that it had no notice that the charging of EGA to the participant support category was not permitted. Thus, MRGDC argues the USDOL's attempt to

[Page 17]

disallow MRGDC's EGA costs charged to the participant support category violates MRGDC's constitutional right to due process.

The Court finds that MRGDC's argument is without merit. The policy regarding charging EGA costs never changed; the plain reading of the subcategories of the participant support cost category indicate which costs are allowable costs under that category. Further, MRGDC admitted that Mr. Edwards acted outside the scope of his authority in that he could not change the existing law under the Act.³¹ Thus, MRGDC's due process argument appears to be an estoppel argument in which the Court has ruled on supra. However, the reliance on Mr. Edwards testimony does not appear to be detrimental to MRGDC because it recognized that Mr. Edwards acted outside the scope of his authority by advising that EGA costs be charged to the administration cost category.

With regard to due process argument, the Court finds that TDOC and MRGDC's due process rights were not violated. It is undisputed that neither the Act nor the regulations address the question of whether EGA can be charged to the participant support cost category, and that the USDOL never issued a formal policy on this statement. However, Section 108(b)(2) describes clearly the types of activities that are properly chargeable to the participant support cost category. See 29 U.S.C. § 1518(b)(2) (1982). Both TDOC and MRGDC had notice of the plain language of the statutes with regard to the classification of costs under the participant support cost category. TDOC and MRGDC had an opportunity to present arguments and evidence in support of its position on the issue of classification of EGA costs.³² Further, both the Act and regulations provide TDOC and MRGDC the opportunity to challenge the Grant Officer's interpretation of the Act in the Final Determination through its appeal to this Court.³³ Thus, the Court finds that TDOC and MRGDC's due process rights have been fully satisfied under the statutory and regulatory provisions, and its request for summary judgement on this issue must be DENIED.

Fifth, MRGDC argues that USDOL violated its constitutional right to equal protection because USDOL treated MRGDC differently from other similarly situated service delivery areas in Texas who have charged EGA costs to the participant support cost category. However, the Court finds that MRGDC has failed to establish that it has met the criteria necessary to establish an equal protection violation under the Fourteenth Amendment. U.S. Const. amend. XIV. MRGDC has not only failed to prove that it met the elements necessary to establish a equal protection violation, it did not even address the elements when asserting the claim.

[Page 18]

In Zahra v. Town of Southold, 48 F.3d 674 (2d Cir. 1995), the United States Court of Appeals for the Second Circuit set forth specific criteria that must be met before a litigant can establish successfully an equal protection violation due to selective enforcement. The Court ruled that a claim is proper where it is established that:

(1) the person, compared with others similarly situated, was selectively treated, and (2) the selective treatment was motivated by an intention to discriminate on the basis of impermissible considerations, such as race, religion, to punish or inhibit the exercise of constitutional rights, or by a malicious or bad faith intent to injure their person.

Id. at 683 (citations omitted). The evidence does not demonstrate that MRGDC was "singled out" nor discriminated against by either the OIG or ETA.

The Grant Officer reported that the OIG and ETA conducted a series of reviews across the country for different purposes. OIG was contemplating a nationwide review of EGA and had begun some survey work to determine the feasibility of a national audit. (Riggs deposition at 14-16). MRGDC was one of the many SDAs surveyed during that time. After the survey work was completed, Congress amended the JTPA and prohibited grantees from using JTPA funding on EGA. Thus, OIG decided not to pursue the nationwide audit in light of the JTPA amendment. (William's deposition at 21-22).

Although OIG did perform a full audit of MRGDC and determined that MRGDC was improperly charging EGA to the participant support cost category, the Region VI OIG performed at least three other audits during the same period wherein the issue of EGA costs were questioned and subsequently disallowed in one.³⁴ (Riggs deposition at 19-21). Given the fact that other EGA audits were performed and costs disallowed as a result of the audits, the Court finds that MRGDC's argument that it was "singled out" and subject to discriminatory actions is without merit. The Court notes that OIG has an obligation to ensure that grant funds are spent in accordance with the law, and the audit in MRGDC was consistent with the OIG's obligations under the Act.

Further, with regard to the other Texas service delivery areas, USDOL stated that ETA instituted a nationwide monitoring effort of service delivery areas' procurement systems and on the job training programs prior to the MRGDC audit. The reviews were not detailed audits but reviews of specific programs run by the SDAs. (Hall deposition at 56-58) (Rodriguez deposition at 7). In the course of the reviews, ETA staff from the Region VI

[Page 19]

office discovered two instances where two other Texas SDAs were charging EGA expenditures to the participant support cost category. TDOC was notified and asked to investigate the SDAs accounting systems to determine whether the SDAs were properly allocating their EGA expenditures. TDOC and the SDAs were able to demonstrate that JTPA participants benefitted directly from the EGA; thus, USDOL found that the expenditures were properly charged to participant support. (Rodriguez deposition at 15-17).

In addition, MRGDC seem to misstate the testimony of Mr. Eloy Rodriguez, who is employed with ETA, concerning the treatment of MRGDC like the other Texas SDAs. Counsel for MRGDC hypothetically asked Mr. Rodriguez if MRGDC could demonstrate that JTPA participants benefitted from its EGA would the costs have been allocable to participant support. Mr. Rodriguez stated that if MRGDC had been able to document that JTPA participants benefitted directly from the EGA, the issue would have been resolved as it was in the other two instances. (Rodriguez deposition at 21). Thus, because MRGDC was not "similarly situated" with the other Texas SDAs, the Grant Officer asserted it was not entitled to the same result as was reached in those instances. Accordingly, the Court finds that MRGDC cannot claim that it was denied its rights to equal protection of law, and its request for summary decision on this issue must be denied. As discussed above, MRGDC is entitled to submit documentation that demonstrates that the EGA costs benefitted JTPA participants directly.

Conclusion

The Grant Officer's motion for partial summary decision is GRANTED IN PART. The Grant Officer's motion is DENIED with regard to the issue of allowable training costs. MRGDC's motion for summary decision is DENIED.

II. Motion for Protective Order

The Grant Officer filed a motion for protective order on October 20,1995 to stay all further discovery until the cross motions for summary decision were addressed by the Court. The Grant Officer received a request for admissions and a second request for documents from MRGDC's counsel. The Grant Officer contends that the majority of the issues pending before the Court may be resolved on summary decision, thus it would be inefficient, burdensome and ultimately unnecessary to engage in discovery at this point. Furthermore, the Grant Officer notes MRGDC has already engaged in extensive discovery arguing such discovery was necessary to prepare a response to the Grant Officer's motion. MRGDC filed its response to the motion for partial summary decision; thus, the

[Page 20]

Grant Officer contends that any argument regarding the immediate need for further discovery is without merit.

The procedural rules of the Office of Administrative Law Judges authorize the issuance, "for good cause shown" of "any order which justice requires to protect a party or person from annoyance, embarrassment, oppression, or undue burden or expense." 29 C.F.R. 18.15(a) (1995). The Court rule on protective orders closely follows the language of Rule 26(c) of the Federal Rules of Civil Procedure. The federal courts have interpreted Rule 26 as giving them broad discretion to postpone discovery pending resolution of dispositive motions, including motions for summary judgement. Scroggins v. Air Cargo, Inc., 534 F.2d 1124, 1133 (5th Cir. 1976); Brennen v. Local Union No. 639, Int'l Bd. of Teamsters, 494 F.2d 1092, 1100 (D.C. Cir. 1974). The basis for this decision is the principle of judicial parsimony, or conservation of judicial resources, which counsels postponing discovery that may be entirely obviated by a dispositive motion until that motion has been resolved. See Sinclair Roofing Co. v. Jenkins Petroleum Process Co., 289 U.S. 689, 693 (1932); Ellingson Timber Co. v. Great Northern Ry., 424 F.2d 497, 499 (9th Cir.), cert. denied, 400 U.S. 957 (1970); Dunn v. Printing Corp. of America, 245 F. Supp. 875, 882 (E.D. Pa. 1965).

The motion for protective order to prohibit further discovery with regard to specific discovery listed below is GRANTED. The Request for Admissions submitted by MRGDC's is an undue burden on USDOL. The request for admissions contains information and questions that have already been decided in this order granting the partial summary decision because the request for admissions pertain to the permissible charging of EGA costs to the participant support category. Further, some of the requests contain irrelevant and duplicate information. Thus, USDOL is not required to answer these admissions because they have been disposed of in the partial summary decision.

Second, MRGDC's second request for documents from USDOL also request documents that pertain to the allowable EGA costs. Because this issue was disposed of in the partial summary decision discussed above, this information is irrelevant and unnecessary. Thus, the request for documents regarding the allowable charging of EGA costs to the participant support category are unnecessary requests, and the only documents that will be admissible are those that relate specifically to whether the EGA costs fall under one of the four subcategories under Section 108(b), whether the costs disallowed by the Grant Officer were actual training costs, whether such costs directly enabled an eligible individual to participant in a training program, and

[Page 21]

whether the disallowed costs in Finding 2 of the Final Determination are allowable EGA costs as these are the only issues remaining for the trial.

Accordingly, because there are only four issues remaining, the Court denies the Grant Officer's motion for an extension of thirty days to submit the documents requested in MRGDC's request for documents, and the Court denies MRGDC's request to continue this case.

ORDER

It is therefore ORDERED, ADJUDGED and DECREED that the Grant Officer's motion for partial summary decision is GRANTED IN PART, MRGDC's motion for summary decision is DENIED, and the Grant Officer's motion for a protective order is GRANTED IN PART.

It is further ORDERED that the Grant Officer's request for an extension is DENIED, and MRGDC's request for a continuance is DENIED.

Entered this 3rd day of November, 1995, at Metairie, Louisiana.

JAMES W. KERR
Administrative Law Judge

JWK:td

[ENDNOTES]

¹ The program years at issue in this proceeding are 1989 and 1991; therefore, the substantive regulations in effect for these years are located at 20 C.F.R. Part 629 (1989-1991). Procedural issues dealing with the audit resolution processor appeal rights are found at 20 C.F.R. 627 (1993) and 29 C.F.R. Part 18 (1995).

² The Governor also allocated Title II funds, funds for Section 123 and 124 for state education coordination grants and training programs for older individuals to MRGDC. The expenditure of those funds is not at issue in this case.

³ To comply with the limitations on certain costs contained in Section 108 of the Act, allowable costs shall be charged against the following cost categories: training, administration, and participant support. 20 C.F.R. 629.38(a) (1989).

⁴ Section 164(a)(1) states, in part, "[e]ach State shall establish such fiscal control and fund accounting procedures as may be necessary to assure the proper disbursal of, and accounting for, Federal funds paid to the recipient under titles II and III...." 29 U.S.C. § 1574 (1982).

⁵ Section 165(a)(1) provides, in part, "[r]ecipients shall keep records that are sufficient ... to permit the tracing of funds to a level of expenditure adequate to insure that the funds have not been spent unlawfully." 29 U.S.C. § 1575 (1982).

⁶ Part 629.35(a)(2) provides that "[t]he Governor shall ensure that financial systems within the State provide fiscal control and accounting procedures sufficient to ... [p]ermit the tracing of funds to a level of expenditure adequate to establish that funds have not been used in violation of the restrictions on the use of such funds;..." 20 C.F.R. 629.35(a)(2) (1989-1991).

⁷ The JTPA Conference Report, No. 97-889, 103 (September 28, 1982) provides that "[t]he House recedes with an amendment to assure that employment generating services are not to be used as a substitute for economic development activities or for funds available for similar activities under other Federal programs."

⁸ The Final Determination notes that $822,257 includes the $42,296 disallowed in Finding 2. (RX 1 at 21).

⁹ Part 629.38 provides that all costs of employment generating activities to increase job opportunities for eligible individuals in the area ... are not allowable training costs. 20 C.F.R. 629.38 (1989-1991).

¹⁰ Costs are allowable to a particular cost category to the extent that benefits are received by such category. 20 C.F.R. 629.38(b).

¹¹ USDOL argues that the JTPA prohibits a state from charging EGA to the participant support cost category unless it can demonstrate that the activity fits within one or more of the four subcategories in the participant support category.

¹² 20 C.F.R. 629.38(e)(4) (1989-1991) provides "[t]raining costs do not include supportive services costs as defined in Section 4 of the Act or other participant support costs which are determined to be necessary at the local level."

¹³ Work experience expenditures include work experiences expenditures that meet the requirements under Section 108(b)(3) as well as work experience expenditures that do not meet the above section. 29 U.S.C. § 1518(B)(3) (1982).

¹⁴ Based on a locally developed formula or procedure, payments based on need may be provided to individual participants where such payments are necessary to enable individuals to participate in a training program funded under the Act. 20 C.F.R. 629.21(a) (1989-1991).

¹⁵ Supportive services are defined in Section 4(24) as:

services which are necessary to enable an individual eligible for training under this Act, but who cannot afford to pay for such services, to participate in a training program funded under this Act. Such supportive services may include transportation, health care, special services, and materials for the handicapped, child care, meals, temporary shelter, financial counseling, and other reasonable expenses required for participation in the training program and may be provided in kind or through cash assistance.

29 U.S.C. § 1503(24) (1982) (emphasis added).

¹⁶ The Grant Officer uses JTPA participants and JTPA eligible participants interchangeably. The regulation states that costs are allowed if they directly enable an eligible individual to participate in the program. Accordingly, the Court finds that use of both phrases is proper. See 29 U.S.C. § 1503(24) (1982). Thus, MRGDC's argument regarding that the Grant Officer only allows costs that directly benefit JTPA participants is without merit.

¹⁷ Colorado appealed the court's decision to the Secretary who declined to accept the case for review. Pursuant to 29 U.S.C. § 1576(c), the court's decision is the final decision of the Secretary. The case has been appealed to the Court of Appeals for the Tenth Circuit.

¹⁸ TDOC notes that the definition of "supportive services" was later amended to include additional categories of expenses. At a minimum salaries, fringe benefits, equipment, supplies, space, staff training, transportation, and other related costs of personnel directly engaged in providing training related and/or supportive services are properly charged to training related and supportive services cost category. 20 C.F.R. 627.440(d)(3)(I)(A) (1995). Thus, the expenses listed under the term "supportive services" in effect at the time period covered in the audit were intended only to provide examples of possible supportive services and were not intended to be an exhaustive list. 29 U.S.C. § 1503(24) (1985).

However, the Court finds that the 1985 listing of supportive services pertains to physical assistance to an individual such as child care or shelter that would enable an eligible individual to participant in the training program directly. Whereas, although employment generating activities would benefit the whole program, it is not the same kind of physical assistance contemplated in the

regulation that would enable an individual to participant in a training program. Further, although the definition of supportive services was amended later, the definition in effect at the time of the audit is the regulation binding on TDOC and MRGDC, and that the Court must apply in this case. See Bennett v. New Jersey, 470 U.S. 632, 640-41 (1985). Finally, even if the subsequent amendments were applicable in this case, the Court notes that the amendments prohibit specifically the use of JTPA funds for employment generating activities. 29 U.S.C. § 1551(q) (1992).

¹⁹ Penny v. Giuffrida, 897 F.2d 1543, 1546 (10th Cir. 1990).

²⁰ MRGDC argued that it was entitled to a summary decision against USDOL on the training cost issue. MRGDC's request is denied for the same reasons as USDOL's request because genuine issues of material fact exists with regard to whether the costs constitute allowable training costs.

²¹ Section 164(e)(2) of the Act, 29 U.S.C. § 1574(e)(2) (1982 & Supp. 1992) (emphasis added), provides:

In determining whether to impose a sanction authorized by this section against a recipient for violations by a subgrantee of such recipient under this Act or the regulations under this Act, the Secretary shall first determine whether such recipient has adequately demonstrated that it has--

(A) established and adhered to an appropriate system for the award and monitoring of contracts with subgrantees which contain acceptable standards for ensuring accountability;

(B) entered into a written contract with such subgrantee which established clear goals and obligations in unambiguous terms;

(C) acted with due diligence to monitor the implementation of the subgrantee contract; including the carrying out of the appropriate monitoring activities (including audits) at reasonable intervals; and

(D) taken prompt and appropriate corrective action upon becoming aware of any evidence of a violation of this Act or the regulations under this Act by such subgrantees.

²² Section 627.704, 20 C.F.R. 627.704 (1993-1995) (emphasis added) provides:

(b) A waiver of the recipient's liability can only be considered by the Grant Officer when:

(1) the misexpenditure was not a violation of [S]ection 164(e) of the Act, or did not constitute fraud;

(2) the misexpenditure of JTPA funds occurred at a subrecipient level;

(3) the recipient has issued a final determination which disallows the misexpenditure, the recipient's appeal process has been exhausted, and a debt had been established; and

(4) the recipient requests such waiver and provides documentation to demonstrate that it has substantially complied with the requirements of [S]ection 164(e)(2) (A), (B), (C), and (D) of the Act.

²³ Even if TDOC demonstrated that it complied substantially with its statutory responsibilities or acted in good faith, "substantial compliance" with the conditions of the grant does not affect the Secretary's right to recoup the misspent funds. Nor does the absence of bad faith absolve a state from liability if funds were in fact spent contrary to the terms of the grant agreement. Although recovery of misspent funds clearly is intended to promote compliance with the requirements of the grant program, a demand for payment is more in the nature of an effort to collect a debt than a penal sanction. See Bennett v. Kentucky Dept. of Educ., 470 U.S. 656, 663-664 (1985).

²⁴ Section 164(d), 29 U.S.C. § 1574(d(1) (1982 & Supp. 1992) (emphasis added), provides:

[e]very recipient shall repay to the United States amounts found not to have been expended in accordance with the [Act]. The Secretary may offset such amounts against any other amount to which the recipient is or may be entitled under this chapter unless he determines that such recipient should be held liable pursuant to subsection (e) of this section. No such action shall be taken except after notice and opportunity for a hearing have been given to the recipient.

²⁵ With regard to an offset, Section 627.708 provides, in pertinent part,:

(a) In accordance with Section 164(d) of the Act, the primary sanction for misexpenditure of JTPA funds is repayment.

(b) A recipient may request that a debt, or portion thereof, be offset against amounts chargeable by the recipient as administrative costs under the current or a future JTPA entitlement....

29 C.F.R. 627.708 (1993-1995).

²⁶ TDOC argues that USDOL has never issued policy guidance prohibiting grantees from allocating EGA expenditures to the participant support cost category, and, thus, the Governor properly determined that such expenditures could be charged to that cost category. (RX 1 at 5).

²⁷ Mr. David E. Williams, the auditor for the United States Department of Labor, Office of Inspector General, in Region VI, testified that EGA costs can only be charged to the administration category. (Williams deposition at 42-46).

²⁸ Mr. Lance Grubb, the Grant Officer who reviewed and signed the Final Determination, testified that there were circumstances where EGA could be charged to participant support. (Grubb deposition at 59-65). Further, Mr. Edward Donahue, the United States Department of Labor employee who wrote the Final Determination, testified that he disagreed with every statement in the audit report that indicated that charging EGA to anything but administrative costs conflicted with the Act and its regulations. (Donahue deposition at 198-200).

²⁹ As discussed above, if these costs were not economic development activities, these EGA costs could only be charged to the participant support category if the costs arise within one of

the four subcategories and directly enabled an eligible individual to participate in a training program. The nature of these costs do not appear to met these requirements.

³⁰ The Court notes that USDOL does not dispute that EGA costs can be charged to the participant support cost category; however, as discussed above, EGA costs can only be charged to this category if the costs can be classified in one of the four subcategories and directly enables an eligible individual to participate in the training program as enunciated in the statute.

³¹ With regard to government agents acting outside the scope of their authority, the Supreme Court in Federal Crop Ins. Corp. v. Merrill, 332 U.S. 380, 384 (1947) held that "[w]hatever the form in which the Government functions, anyone entering into an arrangement with the Government takes the risk of having accurately ascertained that he who purports to act for the Government stays within the bounds of his authority."

³² After receipt of the audit report, TDOC was given an opportunity to perform an audit resolution. TDOC was given a chance to appeal the findings in the audit report and to respond to the initial determination. (RX 1).

³³ The grantee may contest any matter raised in the Final Determination. 20 C.F.R. 627.801(c) (1993-1995) provides:

A request for a hearing under this section shall state with specificity those issues of the Final Determination upon which review is requested.... Only alleged violations of the Act, regulations promulgated thereunder, grant or other agreement under the Act fairly raised in the determination and the request for hearing are subject to review.

Further, 29 U.S.C. § 1574(d) (1982) provides "[e]very recipient shall repay to the United States amounts found not to have been expended in accordance with this Act.... No such action shall be taken except after notice and an opportunity for a hearing have been given to the recipient."

³⁴ One of those audits raised the same issues as in this case. See State of Colorado, City and County of Denver v. United States Department of Labor, 93-JTP-3 (June 22, 1995), discussed supra.