City of Gary, Indiana v. USDOL, 79-CET-164 (Sec'y July 1, 1985)
Date: July 1, 1985
Case No. 79-CETA-164
In the Matter of:
CITY OF GARY, INDIANA,
Petitioner
v.
U.S. DEPARTMENT OF LABOR,
Respondent
DECISION AND ORDER
of the
SECRETARY OF LABOR
Before me for review[1] is the July 16, 1980, Decision and
Order (DO) of Administrative Law Judge (ALJ) Glen Robert Lawrence
in this matter. Both the United States Department of Labor (DOL)
and the City of Gary, Indiana (City), request review and
modification of the ALJ's decision.
Judge Lawrence's decision states,
This proceeding arises under the Comprehensive Employment
and Training Act of 1973, as amended, 29 U.S.C. § 801 et
seq., (hereinafter referred to as the "Act" of "CETA"), and
the regulations issued pursuant thereto, including the new
regulations at 20 C.F.R. § 656.88, 44 Fed. Reg. 20035-36 (1979).
DO at 1. The ALJ's decision, attached hereto, accurately states
the issues that were before the ALJ and the facts of the case.
Therefore, only an abbreviated statement of facts is provided
here.
In 1974 DOL granted $2,060,613 to City to operate a Summer
Program to Employ Disadvantaged Youth (SPEDY), authorized under
Title III of the Act. City subsequently subcontracted with
School City of Gary (School City) to operate the SPEDY program.
In response to allegations that ineligible individuals were being
allowed to participate in the program, in 1974 and 1975 DOL
conducted an audit of the program, using accepted statistical
sampling methods. The audit report recommended a total amount of
$993,853 be disallowed. As the ALJ explained,
[PAGE 2]
In response to this audit, the City of Gary caused a 100
percent survey to be taken in an attempt to determine
participant eligibility. A team of five individuals, headed
by the then Manpower Administration, reviewed all of the
applications, interviewed school social workers who were
actually involved in the program's participant intake, and
reviewed school records and city welfare records in order to
determine the total number of ineligible participants (Tr.
215). The audit divided the applications into three
classifications: 1) eligible, 2) ineligible, and 3)
undetermined (Tr. 216). These categories were further
divided into: 1) those participants who were terminated
early because of ineligibility, and 2) those participants
who completed the program. The findings of the City's audit
were as follows:
ineligible participants
399 terminated early
540 completed program
939 total
undetermined participants
80 terminated early
290 completed program
370 total
DO at 4. Under the results of this audit, completed in May 1975,
the maximum amount that would be recoverable was $462,515. City
also further responded to the government audit in the Fall of
1975.
The Grant Officer reviewed the evidence on both audits. In
May 1976 he found the government audit generally acceptable and
disallowed costs of $641,824.33. City requested a hearing, which
was held in November 1979 and January 1980.
At the hearing evidence on the audits was submitted. City
also submitted a ten per centum sample survey taken in November
1979. The parties stipulated that $367.63 was to be disallowed
for any ineligible participant and also stipulated an additional
amount of $8459.46 to cover unallowed expenditures.
Judge Lawrence accepted the stipulations of the parties. He
found City's May 1975 audit credible and that it refuted the DOL
audit findings. Accordingly accepting the figures from City's
audit, he further determined that he would allow the costs for
the 479 ineligible and undetermined enrollees who were removed
from the program prior to its completion. A disallowed cost of
$305,132.90 for the 830 ineligible and undetermined enrollees who
completed the program plus the disallowed costs of $8459.46 for
[PAGE 3]
other expenses brought the total disallowed costs to $313,592.36.
The ALJ also rejected contentions of City that liability should
only lie with the subgrantee School City and that City could not
be ordered to reimburse DOL out of non-CETA funds.
City contends that it is not liable for School City's
failure to comply with the CETA regulations. City argues that,
because it subcontracted the administration and implementation of
the program, its only remaining duty was to monitor the program.
City's argument is not supported by the regulations. The ALJ
properly determined,
The City as prime sponsor is responsible for all costs
incurred in violation of the Act, its regulations and
applicable program policies pursuant to the regulations at
29 C.F.R. §§ 97.11, 95.31 and 97.19 (June 4, 1974, Federal
Register). Further, the prime sponsor agreed to such
liability in the Assurances and Certifications provision
under the grant agreement. The City cannot avoid liability
by assigning the program operation to a third party.
DO at 9. Moreover, the ALJ's decision is consistent with
decisions of the United States Courts of Appeals, including the
circuit in which this case arises, seeMilwaukee County
v. Peters, 682 F.2d 609 (7th Cir. 1982), that under the Act a
prime sponsor must accept responsibility for the actions of its
subgrantees and that it can be held accountable for those
actions.
The CETA program is a two-way street. The prime sponsor
receives funds to distribute in its geographic area, but
must also accept the supervisory role envisioned by the
Act. [See 29 U.S.C. § 815(a)(1)(B)(1973).] It cannot
passively sit by while the subgrantees and contractors
violate the Act and regulations. It must police and
enforce those regulations and ensure that the program
within its geographic area runs smoothly and according to law.
Commonwealth of Kentucky, Department of Human Resources v.
Donovan, 704 F.2d 288, 293-4 (6th Cir. 1983). Accordingly,
City's argument is rejected.
City next argues that the 1978 amendments to CETA cannot be
applied in this case since they were not in effect in the summer
of 1974 and the Act of 1973 does not authorize the Secretary to
require repayment for misspent funds from non-CETA sources. The
ALJ relied on 29 C.F.R. § 98.48 (1974)[2] for determining
that reimbursement from non-CETA funds "effectuate[d] the
purposes" of the Act and therefore was a proper remedy. DO at 9.
It is
[PAGE 4]
axiomatic that a regulation can grant no broader authority than
that granted by the act it implements. Dixon v. United
States, 381 U.S. 68, 85 S.Ct. 1301 (1965).
The ALJ's conclusion that reimbursement from non-CETA funds
is a proper remedy is correct. The Third, Fourth, Eighth and
Ninth Circuits have recently held that the Secretary had the
authority under the 1973 Act to require repayment for misspent
CETA funds. Atlantic County, New Jersey v. United States
Department of Labor, 715 F.2d 834 (3d Cir. 1983); North
Carolina Commission of Indian Affairs v. United States Department
of Labor, 725 F.2d 238 (4th Cir. 1984); Texarkana
Metropolitan Area Manpower Consortium v. Donovan, 721 F.2d
1162 (8th Cir. 1983); California Tribal Chairman's Association
v. United States Department of Labor, 730 F.2d 1289 (9th Cir.
1984). My holding is consistent with those decisions.
In Atlantic County, the seminal decision, the court
found controlling the decision of the Supreme Court in Bell v.
Jersey and Pennsylvania, __ U.S.__ , 103 S.Ct. 2187
(1983).[3] In Bell, the Court held that the Secretary of
Education was entitled to order recoupment of misspent grant
funds under the Elementary and Secondary Education Act of 1965
(ESEA), 20 U.S.C. § 2701 et seq. (1976 ed. Supp. V),
prior to its amendment in 1978, when that authority was made
explicit. See 20 U.S.C. 2835(b).
In Atlantic County, the court centered on the
language of Section 602(b) of the 1973 Act, 29 U.S.C. 982(b),
which, inter alia, authorizes the Secretary to make
"necessary adjustments in payments on account of overpayments and
under payments" and ruled that in Bell the Supreme Court
had found a similar provision "plain[ly]" allowed the federal
government to demand repayment. 715 F.2d at 835-6. Moreover, the
argument which City makes to me, that 29 U.S.C. §§
818(b)(2) and 982(b)[4] by their terms limit the sanctions
available to the Secretary, can be rejected on the basis of the
rulings in Atlantic County and California Tribal
Chairman's Association that the 1973 Act by its terms did not
make the specified sanctions exclusive. Indeed, Section 982(b)'s
use of the permissive "may" ("may also withhold funds") supports
a conclusion that withholding of funds is not an exclusive
remedy. 715 F.2d at 837; 730 F.2d at 1291. Accordingly, City's
argument that the language of the 1973 Act restricts the
Secretary's right to recover misspent funds must be rejected.
The courts also rejected the contention, made here, that
Congress intended a change in law in passing the provision of the
1978 Act which expressly provides that the Secretary may require
repayment for misspent funds from non-CETA sources, 29 U.S.C.
§ 816(d)(1). The courts concluded that the legislative
history of CETA and administrative practice prior to CETA's
amendment support a conclusion that the 1978 amendments of CETA
were
[PAGE 5]
intended only to clarify what had been authorized and practiced
under the 1973 Act. 715 F.2d at 836; 730 F.2d at 1291.[5] The
courts, again finding the Bell decision controlling,
concluded that the legislative history and administrative
interpretation of CETA closely paralleled ESEA's, on which the
Supreme Court had relied, and therefore ruled that they, along
with the language of the 1973 Act, support a conclusion that the
Secretary was authorized under the 1973 Act to require repayment
for mis-used funds.
The courts found that it had been administrative practice
under the programs that CETA superseded and CETA, prior to the
amendment, for the Secretary to require recoupment.[6] The
courts also found that the debates on the 1978 amendments support
a conclusion that Congress was presumptively aware of the
Secretary's interpretation of the 1973 Act and that Congress's
failure to indicate any disapproval of that interpretation
evidences that Congress ratified the Secretary's interpretation
when it specifically provided for recoupment in the 1978
amendments.
I therefore affirm the ALJ's finding repayment a proper
remedy on the basis that recoupment was authorized by the 1973
Act. However, I alternatively rule that, even if the 1973 Act
did not authorize requiring reimbursement from non-CETA funds, I
would apply Section 816(d)(1), as enacted in 1978, and approve
the ALJ's requiring City to reimburse DOL.[7] See 29 C.F.R.
§ 676.91(c).[8] DOL properly contends that the decision of
the United States Supreme Court in Bradley v. School Board of
City of Richmond, 416 U.S. 696, 947 S.Ct. 2006 (1974), would
control here.[9] In Bradley the Court held that, if the
law which controls a case is changed while the case is pending,
to decide the case,
a court is to apply the law in effect at the time it renders
its decision, unless doing so would result in manifest
injustice or there is statutory direction or legislative
history to the contrary.
Id. at 712.
There is no statutory direction on whether Section
816(d)(l)'s sanction of requiring reimbursement from non-CETA
sources should be applied retroactively. Moreover, contrary to
City's argument, there also is no legislative history on the
issue.[10]
Since the legislative history does not direct me to apply
Section 816(d)(1) only prospectively, I must examine whether it
would result in manifest injustice, under Bradley, to
apply it to this case. In City of Great Falls v. U.S.
Department of Labor,
[PAGE 6]
673 F.2d 1065 (9th Cir. 1982), the court examined whether the
1978 amendment when specifically provided for back pay awards, 29
U.S.C. § 816(f) (1978), could be applied to a case arising
under the 1973 Act. It applied the principles of Bradley
and decided that applying the back pay provisions of the 1978 Act
to the 1973 Act case before it would result in manifest
injustice. However, the court found the issue "close."
Id. at 1069. Using the decision of Great Falls to
guide me in applying the standards of Bradley I conclude
that no manifest injustice would result from applying 29 U.S.C.
§ 816(d)(1) and 29 C.F.R. § 676.91(c) to this case.
The court in Great Falls stated,
In determining whether it would work an injustice to apply a
change in law to a pending case, the Supreme Court has
directed courts to consider "(a) the nature and identity of
the parties, (b) the nature of their rights, and (c) the
nature of the impact of the change in law on those rights."
Bradley v. School Board of City of Richmond, supra, 416 U.S.
at 718, 94 S.Ct. at 2019. No one factor is dispositive, and
there is a general presumption that changes in law apply to
cases being reviewed on appeal. See Dobbins v. Schweiker,
641 F.2d 1354, 1360 n.8 (9th Cir. 1981).
In discussing the first factor, the Supreme Court has
distinguished litigation involving "great national
concerns," and parties who are public entities, from private
cases between individuals. Id., 416 U.S. at 718-19, 94
S.Ct. at 2019-20[.]
673 F.2d at 1068. As in Great Falls, that City and DOL
are public entities favors application of the 1978 amendment. In
Great Falls, however, the court determined that there was
no "great national concern" involved in the litigation before it.
Regarding the issue in this case, however, I believe it is of
great national concern whether DOL is denied its only remaining
sanction under the Act simply because CETA has been discontinued.
It would be contrary to public policy to allow sponsors who
misused CETA money under the 1973 Act to escape any sanction for
that misuse no matter how great the abuse or how much funding was
involved. Accordingly, application of Bradley's first
factor would militate applying Section 816(d)(1) retroactively.
The other two factors can best be discussed together here.
The Ninth Circuit stated these factors thus:
The second factor requires us to consider the nature of the
rights affected by the retroactive application of the
[PAGE 7]
change in law. In this regard, the issue is whether
application of the new law "would infringe upon or deprive
a person of a right that had matured or become
unconditional." United States v. Fresno Unified School
District, 592 F.2d 1088, 1094 (9th Cir. 1979) ....
The third factor focuses on whether the new law effected a
change in the "substantive obligations of the parties" such
that there would have been a difference in behavior which
would have rendered the litigation unnecessary.
Bradley, 416 U.S. at 721, 94 S.Ct. at 2021.
673 F.2d at 1069. The court, while stating that a sponsor has
"no vested or unconditional right to CETA funds," id.,
found it crucial in considering both factors that implementation
of back pay awards would subject CETA sponsors to unanticipated
liability. No such consideration applies here. Under the 1973
Act City would have been liable for the same amount. The
Secretary could have reduced the monetary level of a subsequent
grant but required that City retain the full program activity
despite the reduced funding level. Requiring reimbursement from
non-CETA funds neither infringes any right of City nor changes
any "substantive obligation of the parties." Accordingly,
consideration of all three factors would mandate applying Section
816(d)(1) to this case.
The final issue before me is whether I should approve the
amount disallowed by Judge Lawrence. City's brief makes no
contention that the ALJ erred in his assessment of costs.[11]
Its brief merely delineates its financial difficulties and
states, "Even if the City of Gary was ordered to repay the
disallowed costs, it could not do so." Brief p. 17. Its brief
does not indicate how or why its legal liability would be
affected by its financial problems[12] and I find no support for
its argument.
DOL's only contention is that the ALJ overstepped the
authority provided by the applicable regulation, 29 C.F.R. §
676.96(c), in allowing the costs of those ineligible and
undetermined enrollees who were terminated prior to the end of
the SPEDY program.[13] Section 676.91(c) provides in pertinent
part,
Contents of decisions. The decision of the Administrative
Law Judge shall state the factual and legal bases for the
decision and shall state the relief to be ordered ....
29 C.F.R. § 676.91(c). DOL urges that the ALJ failed to
state any legal basis for allowing the costs for the terminated
participants and that 20 C.F.R. § 676.91(d) "clearly
requires that when CETA funds are improperly spent, they must be
returned
[PAGE 8]
to the federal government." DOL Brief at 15. The ALJ reasoned
as follows:
With respect to disallowed costs associated with 1)
ineligible participants, and 2) those participants whose
eligibility was undetermined and who were terminated early
as the result of the Cities (sic] internal investigation,
it is my decision to allow these costs. It is inherent in
a program such as the one at hand that ineligible
participants are going to slip by the intake officers
despite efforts to weed them out. Through monitoring
procedures, however, these ineligible enrollees were
discovered and terminated before the program's end.
Further, the money spent on these enrollees was not wasted.
The enrollees, although technically ineligible, did work
for the program while they were paid. Therefore, I do not
feel as though the City should be penalized for costs
associated with these ineligible enrollees resulting from a
program laden with problems.
DO at 8.
DOL miscontrues Section 676.91(d). The regulation provides
that the ALJ "may" order "that unexpended funds be returned or
that funds otherwise payable under the Act be withheld...." DOL
recognized the permissive nature of the word "may" when arguing
that 29 U.S.C. § 982(b) did not preclude the sanction of
requiring reimbursement from non-CETA funds.[14] The same
reasoning applies here.
Moreover, DOL's argument that the ALJ erred in failing to
state a "legal basis" for his allowing costs for the terminated
participants is misplaced. Under the regulation 20 C.F.R. §
676.91(c), see n. 8, the ordering of a remedy is not an issue of
law; rather, the ALJ exercises "broad remedial discretion" in
ordering relief thereunder. Milwaukee County, 682 F.2d at
612. DOL has provided no argument as to why I should determine
that the ALJ abused his discretion in allowing the costs.
Accordingly, the ALJ's decision is affirmed.
WILLIAM E. BROCK
Secretary of Labor
[ENDNOTES]
[1] Jurisdiction was asserted over this case on August 14, 1980,
pursuant to 20 C.F.R. § 676.90(f).
[2] Section (f) of the regulation provides,
Content of orders. The final decision may provide for
suspension or termination of, or refusal to grant or
continue Federal financial assistance, in whole or in part,
under the program involved in accordance with the Act, and
may contain such terms, conditions, and other provisions as
are consistent with and will effectuate the purposes of the
Act and regulations issued thereunder, including provisions
designed to assure that no Federal financial assistance will
thereafter be extended under such program to the respondent
determined by such decision to be in default in its
performance of an assurance given by it pursuant to the Act
or regulations issued thereunder, or to have otherwise
failed to comply with the Act or regulations issued
thereunder, unless and until it corrects its noncompliance,
and satisfies the Secretary that it will fully comply with
the Act and regulations issued thereunder.
[Emphasis added] 29 C.F.R. § 98.48(f).
[3] The Fourth Circuit relied on Bell and stated that its
decision was "in accord" with the Third Circuit's decision. 725
F.2d at 239. The Eighth Circuit found the Third Circuit's
reasoning "compelling," 721 F.2d at 1164, and the Ninth Circuit's
reasoning closely followed the Third Circuit's. 730 F.2d at 1291.
The Eighth Circuit also ruled that its conclusion "is also
consistent with earlier decisions of this circuit in which we
have recognized a common law right of government to recover
improperly spent federal funds." 721 F.2d at 1164.
[4] Sections 818(b)(2) and 982(b) mandate the Secretary make no
further CETA payments, revoke the sponsor plan and require the
return of any unexpected funds. They further allow the Secretary
to withhold funds for other programs.
[5] City makes the following argument:
The legislature was aware of the limitations of the 1973 Act
and sought to remove them by enacting the 1978 amendments.
Senate Report No. 95-891, 95th Cong., 2nd Sess. 15 reprinted
in [1978] U.S. Code Cong. and Ad. New 4480, 4495, which
discusses the 1978 amendments, specifically states that "the
complaints and sanction section expands...existing
law."
[emphasis added by City] City's Brief at 13. City elided the
crucial phrase "and clarifies," thereby materially altering the
import of the sentence. Accordingly, rather than supporting
City's claim that Congress changed the law with the 1978
amendments, the report is consistent with the view that Section
816(d)(1) merely clarified prior administrative practice.
[6] In arguing that it was administrative practice to require
repayment prior to the 1978 amendments, DOL relies on a decision
of the Comptroller General of the United States, "In the Matter
of Emergency Employment Act of 1971 -- Recovery of Grant Funds,"
dated February 10, 1978. The pertinent provision of the
Emergency Employment Act of 1971, which CETA superseded, was
exactly like 29 U.S.C. § 982(b) in that it explicitly
provided only for withholding of funds. The Comptroller General
held that DOL had a responsibility to seek recoupment. I find
this decision persuasive and City's attempt to discredit it
misplaced. City relies on a report by the Comptroller General,
Information on the Buildup in Public Service Jobs, issued
March 6, 1978, to establish "the Comptroller General either
realized he had erroneously interpreted the 1971 Act or did not
interpret the 1973 CETA statute in the same manner." City's
Brief at 13. City also argues that, since this report was relied
on by Congress in passing the 1978 amendments, Congress was aware
of the need to include in the amendments the sanction of
requiring reimbursement from non-CETA funds. City's argument is
not supported by the report. The report addressed problems in
administering Title VI of CETA. The part referred to by City,
pages 21 through 22, only states that there was no sanction when
a sponsor terminated an ineligible participant from a Title VI
program within the 60 days allowed by the Title VI regulations to
determine eligibility. See 29 C.F.R. § 99.43(b).
[7] The courts did not address the contention that the 1978
amendment could be applied retroactively to a case arising under
the 1973 Act. I address the issue here because the Seventh
Circuit has not yet addressed whether it agrees with the Third,
Fourth, Eighth, and Ninth Circuits that the 1973 Act authorized
repayment.
[8] The regulation provides in pertinent part,
The Administrative Law Judge shall have the full authority
of the Secretary in ordering relief, including direct action
against the subrecipients as authorized by section 106(d)(1)
of the Act. Orders for relief provide for suspension or
termination of, or refusal to grant or continue federal
financial assistance in whole or in part, and may contain
such terms, corrective action, conditions, sanctions
(including awards of back pay), reallocations, and other
provisions as are consistent with and will effectuate the
purposes of the Act and regulations issued thereunder,
including provisions designed to insure that no federal
financial assistance will thereafter be extended under such
program unless and until the prime sponsor, recipient or
subrecipient correct its noncompliance and makes
satisfactory assurance that it will fully comply with the
Act and regulations.
29 C.F.R. § 676.91(c).
[9] See Justice White's concurring opinion in Bell
that he would have decided the case on the basis that the 1978
amendments of ESEA could be applied retroactively under the
principles of Bradley. 103 S.Ct. at 2198.
[10] City argues that comments of Senators Schweiker and Javits,
124 CONG. REC. S14445 (Daily ed. August 25, 1978), establish that
Congress intended no retroactive effect of the sanction at issue
here. City quotes the following exchange:
Mr. SCHWEIKER....[My] amendment is very similar to one
adopted by the House....
I want to make clear in response to some concern expressed
on the House floor, that this amendment would have no
retroactive application.
Mr. JAVITS. Mr. President, will the Senator yield?
Mr. SCHWEIKER. I yield.
Mr. JAVITS. That was the only thing I was going to ask
the Senator. The amendment deals with strict application
of the law, but I think retroactivity would be very
unfortunate. The Senator makes that clear, that there will
be no retroactivity.
Mr. SCHWEIKER. I thank the Senator for that suggestion.
We have incorporated that. I agree with him. As a matter
of basic fairness, I feel enforcement standards and policy
should be clear in advance. Therefore, only conduct
occurring after enactment of this bill would be
specifically covered by this amendment.
[City's emphasis] Id. The amendment being discussed, while
including the specific reimbursement sanction provided in Section
816(d)(1), also specified certain proscribed abuses. In the
words of Senator Schweiker, the amendment "deal[t] with the
problem of substitution of regular local government employees
with CETA workers and other flagrant abuses, such as kickbacks,
political patronage, nepotism, and the like." Id. Because
this conduct, which was not proscribed by the 1973 Act, was made
illegal by the 1978 Act, the Senators were remarking that, if
such conduct predated the 1978 Act, it should not be sanctioned.
They were not saying that the sanctions specified in the
amendment should not be applied to conduct which was illegal
under the 1973 Act, as in this case.
[11] City does direct arguments against DOL's audit. The quality
of DOL's audit is not at issue on appeal since the ALJ accepted
City's audit and DOL does not contest that determination of the
ALJ.
[12] In its exceptions City argued that I should waive all
alleged disallowed costs pursuant to 29 C.F.R. § 676.88(c),
which allows certain costs when five conditions are fulfilled,
but made no such argument in its subsequently-filed brief. In
response, DOL argued first that Section 676.88(c) applies only to
the Grant Officer. Alternatively, DOL argued that, even if it
were applicable, the fifth condition of Section 676.88(c), [t]he
magnitude of questioned costs or activities is not substantial,"
was not fulfilled. I need not address whether the Grant Office
alone can waive costs under Section 676.88(c) because I agree
with DOL that, in any case, the fifth condition of the regulation
was not fulfilled.
[13] DOL states that the costs the ALJ allowed City for the
participants who were terminated is $325,325.92. I find no
support for this figure. Inasmuch as the stipulated cost per
enrollee was $367.63 and DOL does not dispute that the number of
ineligible and undetermined participants who were terminated was
479 (399 ineligible plus 80 undetermined), I find that the
disputed amount of allowed costs is $176,094.77.
[14] Section 982(b), 29 U.S.C., provides that the Secretary may
withhold funds in order to recover any amounts expended in
violation of CETA in the current or immediately prior
fiscal year. The use of the permissive term "may" instead
of the mandatory "shall" implies that the Secretary has the
discretion whether or not to apply this remedy. This
clearly was not the sole remedy available to the Secretary.
DOL's Brief at 7.
