New York State Dept. of Labor v. USDOL, 83-CTA-90 (ALJ July 7, 1992)
DATE: July 7, 1992
Case No. 83-CTA-90
In the matter of:
NEW YORK STATE
DEPARTMENT OF LABOR
Complainant
v.
U.S. DEPARTMENT OF LABOR
Respondent
DECISION AND ORDER UPON RECONSIDERATION ON REMAND
The Secretary of Labor, by Order Asserting Jurisdiction and
Remand dated May 4, 1992, vacated the Findings of Fact and
Conclusion of Law - and Order entered herein on March 12, 1992,
and directed a reconsideration and redetermination of the merits
of this matter, together with a consideration of Complainant's
post-hearing brief.
The following is entered pursuant to such directive.
FINDINGS OF FACT
1. This is a proceeding brought under the Comprehensive
Employment and Training Act, 29 U.S.C. § 801 et seq.
(hereinafter, "CETA" or "the Act"), and the regulations
promulgated thereunder (20 C.F.R. § 675 et seq.),
wherein the Grant officer issued a Final Determination and an
amended Final Determination disallowing, inter alia,
$116,399 in mis-spent CETA costs (Government's Exhibits 11 and
16).
2. The State of New York appealed these Final
Determinations to the Office of Administrative Law Judges, where
it is currently pending upon remand from the Secretary of Labor.
3. A hearing was held in this matter on December 5,
1991, before the undersigned, at which time the parties advised
that they had agreed that no testamentary evidence was necessary,
and, by stipulation, agreed to the entry into evidence of all the
relevant documents necessary for the decision in this matter. A
schedule for the submission of simultaneous Briefs was set in
this case, and the Grant Officer's Post-Hearing Brief was
submitted pursuant to that scheduled on January 10, 1992.
Complainant's brief was filed on March 13, 1992.
4. This case arose because the Grant Officer for the
United States Department of Labor disallowed, inter alia,
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$116,399 against New York State Department of Labor (the "Prime
Sponsor") (Government's Exhibits 11 and 16) based upon an audit
conducted by the U.S. Department of Labor's Office of the
Inspector General (Government's Exhibit 3).
5. This disallowance was based upon the fact that the
New York State Department of Labor conducted an audit of CETA
expenditures incurred by one of its subgrantees, Corpac
Container, Ltd. (Complainant's Exhibit 18), during the period
June 11, 1979 through April, 1980, and found unallowable costs of
$130,871.43 incurred by the subgrantee (Complainant's Exhibit 1),
which unallowable costs were subsequently reduced to $116,399.29
disallowed (Complainant's Exhibit 2). Thereafter, New York State
made efforts to have the remaining disallowed costs recovered
from the subgrantee, but its efforts were unsuccessful
(Complainant's Exhibits 2 through 20).
6. The subgrantee, Corpac Container Ltd., began
existence in February, 1979 (Complainant's Exhibit 1, page 23).
Despite the fact that this subgrantee was completely new and
unproven, the State of New York awarded it a CETA subgrant for
$585,400 commencing on June 11, 1979, when the subgrantee had
been in existence only four (4) months (Complainant's Exhibit 18,
page 129). Despite this, the State of New York did not bond this
subgrantee (Complainant's Exhibit 5, page 69). Had the State of
New York done so, there would be no case today. In addition, the
audit reflects that
CORPAC staff, with years of experience in the private
sector, were accustomed to a work force that was stable
and who brought a minimum of problems to the job. It
seems that CORPAC was not prepared for, nor aware of the
necessary adjustments needed to employ and service CETA
target group members. COD [the CETA Operations Division
of the Prime Sponsor] staff were aware of these problems,
but were apparently reluctant to intervene. (Complainant's
Exhibit 1, page 33, emphasis supplied).
7. New York State also produced evidence of costs which
it wished to offset against the $116,399 disallowed herein. The
program costs offered for such offset were from the 1983
Adolescent Vocational Exploration Program (AVE) (Complainant's
Exhibit 16). At the hearing, the parties stipulated that the AVE
program was designed to train and counsel inner city youths, and
expose them to job opportunities. The parties further stipulated
that in 1983, the participants' allowances were funded by Federal
CETA funds, while the administration, training and service costs
were funded with State dollars. Finally, the parties stipulated
that it was the 1983 State funded portions program (which program
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ran from June, 1983 through September, 1983) with which the State
wished to offset the disallowed CETA costs.
CONCLUSIONS OF LAW
1. This is a proceeding brought under the Comprehensive
Employment and Training Act, 29 U.S.C. §801 et seq.
(hereinafter, "CETA" or "the Act"), and the regulations
promulgated thereunder (20 C.F.R. §675 et seq).
2. The first issue here is whether New York State is
responsible for and must repay disallowed costs incurred by one
of its subgrantees.
3. The CETA regulations, at 20 C.F.R . §676.37(a),
provide in relevant part:
(a) Recipient responsibility. (1) The recipient is
responsible for development, approval and operation of all
contracts and subgrants and shall require that its
contractors and subrecipients adhere to the requirements
of the Act, regulations promulgated under the Act, and
other applicable laws.
(2) The recipient shall require contractors and
subrecipients to maintain effective control and
accountability over all funds, property and other assets
covered by the contract or subgrant.
(3) The recipient ;hall ensure that contractors and
subrecipients maintain and make available for review by
the recipient and the Department of Labor all records
pertaining to the operations of programs under such
contracts and subgrants, consistent with the maintenance
and retention of records requirements.[1]
4. The issue of the Prime Sponsor's liability for mis-
spent CETA costs incurred by a subgrantee is well settled. The
United States Courts of Appeals for the Third, Fourth, Sixth,
Seventh, and Ninth Circuits have all held that the Prime Sponsor
is responsible for the CETA programs run by its subgrantees, and
is liable for the payment of any funds required by improprieties
of these subgrantees.
5. As the Ninth Circuit said in San Diego Regional
Employment and Training Consortium v. U.S. Department of
Labor, 713 F.2d 1441, 1444 (citing the Sixth Circuit's ruling
in Commonwealth of Kentucky, Department of Human Resources v.
Donovan, 704 F.2d 288, 293-294):
[T]he Prime Sponsor is given the major responsibility to
ensure that employment programs are operated properly and
effectively. In accepting CETA funds for distribution, a
prime sponsor "must also accept the supervisory role
envisioned by the Act" and "must police and enforce those
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regulations and ensure that the program within its
geographic area runs smoothly and according to law...
That responsibility and its ensuing liability for
violations were intended and implicit in the original 1973
CETA statute, and were yet more clearly set out in the
1978 amendments: "Nothing in this section shall be deemed
to reduce the responsibility and full liability of the
prime sponsors and other recipients which receive funds
directly from the Secretary." Furthermore, although the
Secretary is authorized to act directly against
subgrantees for their actions, this fact "does not relieve
a recipient who receives financial assistance directly
from the Secretary from being responsible for the actions
and omissions of its subgrantees, and subcontractors."
6. The other Circuit Court cases standing for this
proposition are as follows: Atlantic County, New Jersey v.
U.S. Department of Labor, 715 F.2d 834 (3d Cir. 1983) [Prime
Sponsor liable for disallowed subgrantees costs]; Montgomery
County, Maryland v. Department of Labor, 757 F.2d 1510 (4th
Cir. 1985) (Prime Sponsor liable for disallowed subgrantee
costs]; North Carolina Commission of Indian Affairs v. U.S.
Department of Labor, 725 F.2d 238 (4th Cir. 1984 [Prime
Sponsor liable for disallowed subgrantee costs]; Commonwealth
of Kentucky, Department of Human Resources v. Donovan, 704
F.2d 288 (6th Cir. 1983) [Prime Sponsor liable for backpay to an
improperly terminated subgrantee CETA employee]; Milwaukee
County v. Peters, 682 F.2d 609 (7th Cir. 1982) [Prime Sponsor
jointly and severally liable for backpay to an improperly
terminated CETA subgrantee employee]; and City of Oakland v.
Donovan, 703 F.2d 1104 (9th Cir. 1983) [Prime Sponsor liable
for disallowed subgrantee costs].
7. In addition to the Circuit Courts, the Secretary has
held the Prime Sponsor liable for implementing corrective action
required by a subgrantee's failure. Bruce Lee Caukin v. City
of Chula Vista, Case No. 80-CETA-74 (February 25, 1982,
Decision of the Secretary).
8. Further, U. S. Department of Labor Administrative Law
Judges have routinely held the Prime Sponsor responsible for the
CETA programs run by its subgrantees, and liable for the payment
of any funds required by improprieties of these subgrantees.
Town of Marblehead v. Massachusetts Balance of State CETA,
Case No. 79-CETA-267 (December 10, 1980, Decision of
Administrative Law Judge Robert L. Ramsey); Municipality of
Anchorage v. U.S. Department of Labor, Case No. 80-BCA/CETA-
61 (January 7, 1981, Decision of Administrative Law Judge Rhea M.
Burrow); County of
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San Mateo, California, Case No. 80-BCA/CETA-120 (November 12,
1981, Decision of Administrative Law Judge Harry B. Lasky);
City of Los Angeles, California, Case No. 81-CTA/A-168
(October 29, 1982, Decision of Administrative Law Judge Steven E.
Halpern); CETA 18 v. Tri-County CETA Consortium,
Wisconsin, Case No. 82CETA-2 (May 26, 1983, Decision of
Administrative Law Judge Samuel B. Groner); Intergovernmental
Manpower Services v. U.S. Department of Labor, Case No. 82-
CPA-47 (September 4, 1985), Decision of Administrative Law Judge
Stuart A. Levin); Gioielli v. Donovan, Case No. 79-CETA-
148 (February 9, 1983, Decision of Administrative Law Judge Roy
P. Smith); Bellamy v. Tennessee Department of Employment
Security, Case No. 79-CETA-176 (February 3, 1981, Decision of
Associate Chief Administrative Law Judge Everette E. Thomas);
Knudson v. Bristol Area Teenage Memorial Association, Case
No. 79-CETA-214 (June 30, 1980, Decision of Administrative Law
Judge William A. Pope II); Genoveva de la Cuadra v. Hispanos
of Nevada, Case No. 80-CETA-30-R (September 9, 1981, Decision
of Administrative Law Judge John V. Evans); Jerry W.
Jones, Case No. 80-CETA-156 (January 12, 1981, Decision of
Administrative Law Judge Rudolf Sobernheim); Arizona
Department of Economic Security, Case No. 80-CET-191 (October
6, 1982, Decision of Administrative Law Judge G. Marvin Bober);
Emerson Roads, et al, Town of Marblehead v. Massachusetts
Balance of State CETA, Case No. 80-CETA-341 (May 26, 1981,
Decision of Administrative Law Judge Robert M. Glennon); and
Wiles and Dix v. Akron-Summit Tutorial Program and National
Alliance of Business. Case No. 81-CETA-143 (April 20, 1983,
Decision of Administrative Law Judge Charles W. Campbell).
9. Accordingly, New York State will be held liable for
misspent CETA costs incurred by its subgrantee. There is no need
to address the issue of whether New York State would be held
liable if it had done all that it could to prevent the
misspending of CETA funds and to recover the misspent funds
because New York State did not "do all that it could." Four
months after the new and unproven subgrantees came into
existence, New York State awarded it a CETA subgrant for
$585,400, did not bond this subgrantee, and, according to the
audit, was aware of problems with the subgrantee but was
"reluctant to intervene."
10. Thus the state of New York did not "do everything it
could." Although the State did take action to collect the funds
after they were disallowed, it did nothing before
awarding the subgrant and during the course thereof to protect
the CETA funds and ensure that they were properly expended.
11. Under these circumstances, the State of New York is
liable for the $116,399 in mis-spent CETA funds incurred by its
subgrantee.
[PAGE 6]
12. The second issue is whether the State of New York can
repay disallowed 1979-1980 costs by replacing them with allegedly
allowable 1983 charges not previously submitted for
reimbursement.
13. The CETA regulations specifically prohibit the use of
grant funds from one grant and one grant period for the benefit
of another grant. "Any cost allocable to a particular grant ...
may not be shifted to other federal grant programs to overcome
fund deficiencies, avoid restrictions imposed by law or grant
agreements, or for other reasons." 41 CFR §l-15.703-2(b).[2]
14. The Secretary has affirmed the disallowance of costs
"for legal and consultation representation services related to
contesting disallowances of the audits of prior, expired CETA
grants" rather than the CETA and JTPA grants to which they were
charged. ORO Development Corp. v. U.S. Department of
Labor, Case No. 86-JTP-6 (Secretary's Decision, February 18,
1988). The United States Court of Appeals for the Tenth Circuit
affirmed the Secretary's decision, stating that "The Secretary
properly disallowed the subject legal and consulting costs on the
ground that they did not relate to the grants to which they had
been charged." ORO Development Corp. v. U.S. Department of
Labor, No. 88-1363 (Order and Judgment dated June 19, 1990).
15. The Secretary reaffirmed this ruling in
Motivation, Education and Training Inc., v. U.S. Department of
Labor, Case No. 86-JTP-10 (Secretary's Decision, January 29,
1990). The MET case was appealed to the United States
Court of Appeals for the Fifth Circuit, but the appeal was
withdrawn.
16. In the instant case, New York State did not and could
not match the grant period of the disallowed costs with the grant
period of the costs the State wishes to offset against the
disallowed costs. The disallowed costs were incurred in an
earlier expired grant period (1979-1980), whereas the costs
offered for offset against these disallowed costs were incurred
in 1983. Under ORO and MET, supra, the
substitution of these 1983 costs for disallowed costs from a
prior, expired CETA grant is improper and illegal.
17. Further, any costs offered to substitute for
disallowed costs must be allowable under the CETA regulations;
otherwise, they would be no better than the unallowable costs for
which they are to be substituted. See, 41 CFR §1-
15.703.1. The Prime Sponsor offered no evidence that the
proffered substitute costs had ever been audited[3] , which is
the only assured method of determining their allowability. New
York State has not demonstrated that any of those costs were
allowable under CETA.
18. Even if these costs were otherwise allowable, the
substitution would violate the maintenance of effort provisions
of 20 CFR §676.73 which prohibits the use of Federal funds
to
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supplant local funds. The AVE Program was funded by a
combination of state and federal dollars during 1983. Under the
CETA maintenance of effort provision, Federal money cannot be
used to pay for a program which the State would have funded in
any event. Here, the State not only "would have funded" the
program in any event, it in fact did fund the program.
19. For the reasons stated in Paragraphs 13 through 18
supra, the substitution of 1983 AVE costs for the 1979-
1980 disallowed costs herein is illegal and improper and cannot
be permitted.
20. The burden of proof in a CETA case is on the party
requesting the hearing (20 CFR §676.90(b)), once the Grant
Officer makes his prima facie case, which may be done by
introducing the Administrative File, which includes the audit.
State of Maine v. U.S. Department of Labor, 669 F.2d 827
(1st Cir. 1982); Quechan Indian Tribe v. U. S. Department of
Labor, 723 F.2d 733 (9th Cir. 1984). The Administrative File
which included the audit was introduced into evidence herein (see
par. 22 infra). The Grant Officer thus established his
prima facie case supporting the disallowance, and the
burden of proof lay with New York State to prove that it should
not be held liable for disallowed costs incurred by its
subgrantee, and that the costs it sought to substitute for the
disallowed costs could legally be so substituted.
21. As set forth above, both of these issues have been
well-settled in the case law contrary to New York State's
position.
22. Complainant's post-trial brief raises the two issues
discussed above and resolved in favor of Respondent, in addition
to the assertions that Respondent has failed to establish a
prima facie case and has also failed to provide a
statutory/regulatory based reason for the subject disallowances
of costs (Compl't Br.; at 10, 11). First, the audit report upon
which the Final Determination is based (No. 02-1-1370-L-017) is,
contrary to Complainant's contention, contained in the record
evidence.[4] Thus, a prima facie evidentiary record
exists. Moreover, the appropriate regulatory-based reason for
disallowance of costs is indeed provided at GX 16 (at pg 3) which
superseded the original determination (GX 11). Complainant's
insistence to the contrary is accordingly unavailing.
23. Therefore, as Complainant has failed to meet its
burden of proof of non-liability and/or legal substitution of
costs, an order requiring the New York State Department of Labor
to repay the sum of $116,399.29 in cash to the U.S. Department of
Labor is warranted.
24. It is hereby ordered, upon reconsideration on remand,
that the New York State Department of Labor repay the sum of
$116,399.29 in cash, from non-Federal funds, to the U. S.
Department of Labor within thirty (30) days.
SO ORDERED;
RALPH A. ROMANO
Administrative Law Judge
[ENDNOTES]
[1] These regulations went into effect on April 3, 1979. Since
the subgrant at issue herein was for the period June 11, 1979
through April, 1980, these are the applicable regulations. The
prior regulations, 29 CFR § 94 et seq., provide
virtually identical language at 29 CFR § 98.27(d).
[2] 20 CFR 676.31(b) makes 41 CFR Part 29-70 applicable to CETA
grantees. 41 CFR §29-70-103(a) makes 41 CFR Part 1-15.7
applicable to CETA grantees. Both 41 CFR Part 1-15.7 and 41 CFR
Part 29-70 were replaced on April 1, 1984, by 48 CFR
§§31.602 and 31.603. However, as explained in the 1990
edition of 41 CFR Parts 1 to 100, the regulations at 48 CFR
§§31.602 and 31.603 apply only to grants and contracts
entered into on or after April 1, 1984. For prior grants and
contracts, 41 CFR Part 1-15.7 and 41 CFR Part 29-70 continue to
apply.
[3] Indeed, the record suggests the contrary. Exhibit 16, at
page 115, states: "Costs incurred by the State of New York in
connection with the 1983 AVE Program are well documented and
readily auditable."
[4] As GX 3 at the very front of the government exhibit folder.
Audit Report No. 02-2-061-L-039 is also contained in a second GX
3.
