SECRETARY OF EDUCATION, UNITED STATES DEPARTMENT OF EDUCATION,
PETITIONER V. COMMONWEALTH OF KENTUCKY, DEPARTMENT OF EDUCATION

   No. 83-1798

   In the Supreme Court of the United States

   October Term, 1983

   The Solicitor General, on behalf of the Secretary of Education,
petitions for a writ of certiorari to review the judgment of the
United States Court of Appeals for the Sixth Circuit in this case.

   Petition for a Writ of Certiorari to the United States Court of
Appeals for the Sixth Circuit

            TABLE OF CONTENTS
   Opinions below
   Jurisdiction
   Statute and regulation involved
   Statement
   Reasons for granting the petition
   Conclusion
   Appendix

                            OPINIONS BELOW

   The opinion of the court of appeals (App., infra, 1a-16a) is
reported at 717 F.2d 943.  The decisions of the Education Appeal Board
and the Secretary of Education (App., infra, 17a-42a) are not
reported.

                             JURISDICTION

   The judgment of the court of appeals (App., infra, 43a) was entered
on September 14, 1983, and a petition for rehearing was denied on
December 5, 1983 (App., infra, 44a).  On February 28, 1984, Justice
O'Connor extended the time for filing a petition for a writ of
certiorari to and including May 3, 1984.  The jurisdiction of this
Court is invoked under 28 U.S.C. 1254(1).

                    STATUTE AND REGULATION INVOLVED

   Title I of the Elementary and Secondary Education Act of 1965, 20
U.S.C. (1976 ed.) 241e(a)(3)(B), provided in relevant part:  /1/

      Federal funds made available under this subchapter will be so
      used (i) as to supplement and, to the extent practical, increase
      the level of funds that would, in the absence of such Federal
      funds, be made available from non-Federal sources for the
      education of pupils participating in programs and projects
      assisted under this subchapter, and (ii) in no case, as to
      supplant such funds from non-Federal sources * * *.

   45 C.F.R. 116.17(h) (1974) provided in relevant part:

         Each application for a grant * * * shall contain an assurance
      that the use of the grant funds will not result in a decrease in
      the use for educationally deprived children residing in that
      project area of State or local funds which, in the absence of
      funds under Title I of the Act, would be made available for that
      project area and that neither the project area nor the
      educationally deprived children residing therein will otherwise
      be penalized in the application of State and local funds because
      of such a use of funds under title I of the Act.  * * * Federal
      funds made available for that (Title I) project (1) will be used
      to supplement, and to the extent practical increase, the level
      of State and local funds that would, in the absence of such
      Federal funds, be made available for the education of pupils
      participating in that project;  (2) will not be used to supplant
      State and local funds available for the education of such pupils
      * * *.

                          QUESTION PRESENTED

   Under a decision of the Secretary of Education interpreting Title I
of the Elementary and Secondary Education Act of 1965 (20 U.S.C. (1976
ed.) 241a et seq.) and regulations issued thereunder, the Commonwealth
of Kentucky misspent a portion of its Title I grant.  The court of
appeals concluded that the Secretary's interpretation of the statutory
and regulatory requirements was reasonable and could be applied
prospectively.  However, the court held that the Secretary's
interpretation could not be applied retroactively to require repayment
of the misspent federal funds, since the statute and regulations were
not unambiguous and the State's position was also reasonable.

   The question presented is whether the right of federal agencies to
recoup misspent grant funds is limited to cases which no reasonable
argument can be adduced to justify the expenditure.

                               STATEMENT

   1. Title I of the Elementary and Secondary Education Act of 1965,
as amended by the Education Amendments of 1978, 20 U.S.C. 2701 et
seq., was enacted to provide federal funding for "meeting the special
educational needs of educationally deprived children" (20 U.S.C.
2701).  State and local educational agencies obtain federal funds upon
providing assurances to the Secretary of Education that the funds will
be spent only on qualifying programs and in full compliance with
statutory requirements.  20 U.S.C. (1976 ed.) 241e(a), 241f(a).  In
1970, Congress added a provision requiring that the federal funds be
used to supplement the level of funds that would, in the absence of
federal funding, "be made available from non-Federal sources for the
education of pupils participating in programs and projects assisted
under (Title I)" (20 U.S.C. (1976 ed.) 241e(a)(3)(B)(i)).  The
provision went on to state that in no case could federal funds be used
"to supplant such funds from non-Federal sources" (20 U.S.C. (1976
ed.) 241(a)(3)(B)(ii)).  /2/

   In Fiscal Year 1974 (the year involved in this case), the
Secretary's regulations required grant applications submitted by local
school districts to contain an assurance that the federal grant would
not cause "a decrease in the use for educationally deprived children
residing in (the) project area of State or local funds which, in the
absence of (Title I) funds * * *, would be made available for that
project area and that neither the project area nor the educationally
deprived children residing therein will otherwise be penalized in the
application of State and local funds because of such a use of (Title
I) funds" (45 C.F.R. 116.17(h) (1974)).  The regulations also required
that Title I funds in fact be used to supplement the state and local
funds that would otherwise be "made available for the education of
pupils participating in (the Title I) project" 45 C.F.R. 116.17(h)(1)
(1974) and not "to supplant State and local funds available for the
education of such pupils" (45 C.F.R. 116.17(h)(2) (1974)).

   2. The present dispute arose when auditors from the Department of
Health, Education, and Welfare (now the Department of Education)
determined that, during Fiscal Year 1974, 50 different school
districts in the Commonwealth of Kentucky had spent $704,237 of Title
I grant funds in violation of the prohibition against using Title I
funds to supplant state and local funds (C.A. App. 35).  At issue were
federally funded classes run by these school districts for children
who were not prepared to enter first or second grade.  A substantial
portion of the children in these classes were expected to move on to
the next grade level following their year of "readiness" instruction.
The auditors concluded that federal funding of the readiness classes
had replaced the state and local funds that would otherwise have been
spent on first or second grade for these children.  C.A. App. 34-35.

   The State disagreed with the auditors' recommendation, essentially
on the ground that there had been no decrease in state and local
funding of the schools or grade levels involved.  The State took the
position that this was sufficient to satisfy the supplanting
prohibition and that the federal statute and regulations should not be
interpreted to require maintenance of state and local funding for the
particular deprived children enrolled in the Title I program.  C.A.
App. 35-36.  After administrative review a final determination letter
was issued, sustaining the auditors' findings (C.A. App. 50).

   The State appealed to the Education Appeal Board, which affirmed
the auditors' findings (App., infra, 17a-32a).  The State then sought
review by the Secretary, who remanded to the Board for further
consideration (id. at 33a-35a).  Following the Board's reaffirmance of
its initial decision (id. at 36a-37a), the Secretary again considered
the case.  The Secretary upheld the determination that a violation of
the supplanting prohibition had occurred, but he reduced to $338,034
the amount the State was required to repay.  /3/ App., infra, 38a-42a.
 /4/

   3. The State appealed to the court of appeals pursuant to 20 U.S.C.
1234d and 2851.  The court of appeals sustained the Secretary's
interpretation of the supplanting prohibition (App., infra, 8a-9a
(footnote omitted)):

      It cannot be said that the interpretation posited by the
      Secretary is "unreasonable." The statutory and regulatory
      prohibitions against supplanting State and local funds with
      Title I funds can reasonably be applied with reference to
      expenditures at the level of the individual educationally
      deprived pupil, rather than at the level of either the (local
      educational agency), the school, the grade, or the classroom.

   Nevertheless, the court concluded that the Secretary's
interpretation could not be applied retroactively to require the
repayment of funds spent in violation of Title I, because "the
statutory and regulatory provisions at issue were (not) sufficiently
clear to apprise the Commonwealth of its responsibilities" (App.,
infra, 9a-10a).  Noting that "Congress left to the discretion of the
participating States the responsibility to establish programs with
Title I funds" (id. at 11a), the court observed (id. at 12a-13a
(footnote omitted)):

         This is not to say that the interpretation * * * posited by
      the Commonwealth is controlling.  On the contrary, the
      interpretation of the Secretary governs all future dealings.  We
      hold only that in the absence of unambiguous statutory and
      regulatory requirements, and in the presence of a specific grant
      of discretion to the Commonwealth to develop and administer
      programs it believes to be consistent with the intentions of
      Title I, it is unfair for the Secretary to assess a penalty
      against the Commonwealth for its purported failure to comply
      substantially with the requirements of law, where there is no
      evidence of bad faith and the Commonwealth's program complies
      with a reasonable interpretation of the law.

                   REASONS FOR GRANTING THE PETITION

   Only last Term, this Court "established the right of the Federal
Government to recover funds misused by the States" in the same
statutory context presented here -- Title I grants under the
Elementary and Secondary Education Act of 1965.  Bell v. New Jersey,
No. 81-2125 (May 31, 1983), slip op. 17.  The decision of the court of
appeals effectively eviscerates that right and seriously jeopardizes
the federal government's ability adequately to monitor grants-in-aid
for compliance with statutory requirements.  Moreover, the decision
below conflicts with the decisions of other courts of appeals and
potentially affects the recoupment of millions of dollars annually.
For these reasons, review by this Court is warranted.

   1. In Bell v. New Jersey, No. 81-2125 (May 31, 1983), this Court
unanimously held that the federal government may recover misused funds
"advanced as part of a federal grant-in-aid program under Title I of
the Elementary and Secondary Education Act" (slip op. 1).  The Court
emphasized that states are required "to honor the obligations
voluntarily assumed as a condition of federal funding" (slip op. 16)
and that when a state "fail(s) to fulfill those assurances, * * * it
(becomes) liable for the funds misused, as the grant specified" (slip
op. 17).

   The court of appeals acknowledged that, in light of Bell v. New
Jersey, supra, "the federal government has * * * the authority to
recover misspent funds from states which had received grants under
Title I" (App., infra, 4a).  The court of appeals also stated that,
"if supplanting occurred" here, "the Secretary has the authority to
order a refund" (ibid.).  Finally, the court upheld as reasonable the
Secretary's determination that supplanting had in fact occurred in the
State during the year at issue (id. at 8a-9a).  Despite these
conclusions, however, the court of appeals denied reimbursement,
holding that "it is unfair for the Secretary to assess a penalty
against the Commonwealth for its purported failure to comply
substantially with the requirements of law, where there is no evidence
of bad faith and the Commonwealth's program complies with a reasonable
interpretation of the law" (id. at 12a).

   a. There is no justification for the court of appeals' cramped
construction of the federal government's recoupment remedy.  The
crucial issue in a refund proceeding is whether the grant recipient
has used federal funds in a manner that violates the terms and
conditions of the grant statute and regulations.  On that issue doubts
must be resolved in favor of the administrative interpretation, not
against it.  Here, however, the court of appeals refused to allow
recoupment despite its determination that the Secretary's
interpretation of the supplanting provisions was reasonable, simply
because it found that the State's interpretation was also reasonable.
The court below thus ignored the controlling legal principle that a
court should defer to a federal agency's reasonable interpretation of
its governing statute and regulations.  Udall v. Tallman, 380 U.S. 1,
16 (1965).  Indeed, in view of the key role played by the Department
of Education and its predecessors in developing the Title I
legislation, /5/ the congressional expectation that the agency would
actively enforce the statute, /6/ and the expert nature of the
enforcement determinations that the agency must make, /7/ this is a
situation in which deference to the administrative determination is
particularly appropriate.

   To be sure, the court of appeals announced that the Secretary's
interpretation of the supplanting provisions "governs all future
dealings" (App., infra, 12a).  But this statement only highlights the
anomaly of the court of appeals' ruling.  Having found that the
Secretary's interpretation of the statute was reasonable, the court of
appeals erred in overruling the administrative decision to proceed by
adjudication and in limiting the Secretary to prospective application
of his interpretation.  It has long been established that agencies may
choose to develop interpretations of the law retroactively through
adjudication rather than prospectively by rulemaking.  SEC v. Chenery
Corp., 332 U.S. 194, 202-203 (1947).  This is not a case in which
retroactive application would produce "substantial inequitable
results." Chevron Oil Co. v. Huson, 404 U.S. 97, 107 (1971) (quoting
Cipriano v. City of Houma, 395 U.S. 701, 706 (1969)).  The Secretary's
decision did not "establish a new principle of law, either by
overruling clear past precedent on which litigants may have relied or
by deciding an issue of first impression whose resolution was not
clearly foreshadowed" (Chevron Oil Co. v. Huson, 404 U.S. at 106
(citations omitted).  /8/ In any event, even if this case involved a
new legal principle, the Secretary would "not (be) precluded from
announcing new principles in an adjudicative proceeding * * *.  (T)he
choice between rulemaking and adjudication lies in the first instance
within the (agency's) discretion" (NLRB v. Bell Aerospace Co., 416
U.S. 267, 294 (1974)).

   b. Although the federal government's right to recover misused grant
funds is now beyond dispute, see Bell v. New Jersey, supra, that right
would be largely theoretical under the court of appeals' approach.
The decision below holds that there may be no recovery in any case in
which the grant recipient can show some colorable justification for
the erroneous expenditure -- i.e., that its "program complies with a
reasonable interpretation of the law" (App., infra, 12a).  /9/ And in
determining whether the grant recipient's interpretation of the
governing statute and regulations was reasonable, the court of appeals
appears to have contemplated an exceedingly low standard of
reasonableness.

   Here, for example, the court of appeals concluded that "the
statutory and regulatory provisions at issue were (not) sufficiently
clear to apprise the Commonwealth of its responsibilities under the
Act" (App., infra, 9a-10a) despite overwhelming evidence to the
contrary.  The Secretary's focus on the level of state and local funds
spent for the particular children in the Title I Program was expressly
required by the statute, which provided that federal funds must
supplement non-federal funds available "for the education of pupils
participating in (Title I) programs." 20 U.S.C. (1976 ed.)
241e(a)(3)(B)(i) (emphasis added).  The statutory language was made
even more explicit by the Secretary's regulations, which provided
(during Fiscal Year 1974) that "neither the project area nor the
educationally deprived children residing therein will otherwise be
penalized in the application of State and local funds because of such
a use of funds under title I * * *.  Federal funds * * * will be used
to supplement * * * the level of state and local funds * * * available
for the education of pupils participating in that (Title I) project
(and) * * * will not be used to supplant State and local funds
available for the education of such pupils." 45 C.F.R. 116.17(h), (1)
and (2) (1974) (emphasis added).  And the Secretary's determination
was further supported by the Education Appeal Board's finding that the
State's arrangement diverted to other uses state and local funds that
would otherwise have been spent on educationally deprived children
participating in the Title I program -- the precise evil at which the
supplanting prohibition was directed.  /10/ Accordingly, the court of
appeals' conclusion that the State's strained interpretation of this
fundamental provision /11/ was sufficiently justified to excuse it
from the duty to repay misspent funds amounts in effect to the
recognition of a "good faith" defense to the repayment obligation.

   There is no reason why the Secretary's right to recoup misspent
grant funds should depend upon a showing that the State acted in bad
faith in its use of the funds.  When Congress passed the Elementary
and Secondary Education Act in 1965 and authorized recoupment of
misused Title I funds, it acted against the background of numerous
decisions of this Court recognizing that the federal government may
recover monies improperly paid or used for an improper purpose.  See
United States v. Wurts, 303 U.S. 414, 415 (1938);  Grand Trunk W. Ry.
v. United States, 252 U.S. 112 (1920);  Wisconsin Cent. R.R. v. United
States, 164 U.S. 190 (1896);  United States v. Carr, 132 U.S. 644
(1890);  United States v. Barlow, 132 U.S. 271, 281-282 (1889);
United States v. Burchard, 125 U.S. 176, 180-181 (1888).  None of
these cases suggests that recoupment is contingent on proof other than
the erroneous nature of the payment;  there is no indication that the
government must also show bad faith on the part of the recipient of
the funds.  /12/

   Indeed, rather than supporting the implication of a "good faith"
defense, Title I and its legislative history show that Congress had no
intent to create such a broad exception to the State's obligation to
repay misspent federal funds.  In 1970, when Congress amended the Act
to "make clear its intention that States return misused funds" (Bell
v. New Jersey, slip op. 10), the Senate Committee recognized that
"there may be difficulties arising from recovery of improperly used
funds." Nevertheless, the Committee stated, "those (audit) exceptions
must be enforced if the Congress is to carry out its responsibility to
the taxpayers." S. Rep. 91-634, supra, at 84.  Congress later
attempted to deal with some of the "difficulties" associated with
Title I audit claims by imposing a five-year statute of limitations
and by authorizing the compromise of audit claims of $50,000 or less,
where collection is not practical or in the public interest and the
practice that resulted in the claim has been corrected.  20 U.S.C.
1234a(g) and (f).  Significantly, Congress did not choose to include a
"good faith" exception in this ameliorative legislation, although it
was aware that the Secretary had asserted audit claims in cases of
good faith dispute.  /13/ Such an exception should not be created by
judicial fiat.

   c. Finally, nothing in Pennhurst State School & Hospital v.
Halderman, 451 U.S. 1 (1981), supports the court of appeals' decision.
 Pennhurst held that, absent clear and unambiguous statutory language,
the Court would not assume that Congress intended to impose, as a
condition of federal grants, a "massive obligation" requiring "the
States to fund new, substantive rights" of "largely indetermined"
scope.  451 U.S. at 18, 24.  But as this Court noted in rejecting a
similar contention in Bell v. New Jersey, slip op. 16 n.17, "Pennhurst
arose in the context of imposing an unexpected condition for
compliance -- a new obligation for participating States -- while here
our concern is with the remedies available against a noncomplying
State." Accordingly, there can be no question that "Pennhurst's
requirement of legislative clarity" (ibid.) does not prevent the
Secretary from ensuring that federal funds are spent in accordance
with congressional restrictions.  No grant recipient could ever have
thought otherwise.

   2. The court of appeals' decision conflicts with the decision of
the Fourth Circuit in West Virginia v. Secretary of Education, 667
F.2d 417 (1981).  In that case, as here, the propriety of a school
district's expenditure of Title I grant funds hinged on whether the
Secretary or the State was correct in its interpretation of the
statute and regulations.  As the Fourth Circuit analyzed the case (667
F.2d at 420):

      Neither legislative history nor other decisions of the Secretary
      provide any clues as to what that interpretation should be.  In
      such circumstances courts, of course, give deference to an
      agency's interpretation of a statute governing it and its own
      regulations.

   The Fourth Circuit could see "no reason why that principle should
not be followed in this instance" and, despite the statutory
ambiguity, it upheld the Secretary's order requiring the State to
refund misspent federal grant funds (ibid.).

   Similarly, in Indiana v. Bell, 728 F.2d 938 (1984), the Seventh
Circuit sustained the Secretary's finding of an audit deficiency under
Title I, stating that it would "defer to agency interpretations of the
statutes committed to its administration, especially where, as here,
see 20 U.S.C. 242(b) (1982), Congress has delegated rule-making
authority to the agency" (728 F.2d at 940).  The Seventh Circuit's
discussion suggests that at least one of the positions advanced by the
State might have met the Sixth Circuit's standard of "reasonableness."
Nevertheless, the Seventh Circuit upheld the Secretary's order
requiring the State to refund misspent federal grant funds.  Id. at
942 (teacher aide program).

   In this case, by contrast, the court of appeals refused to decide
the recoupment dispute based on "the reasonableness of the Secretary's
interpretation of Title I" (App., infra, 9a).  Unlike the Fourth and
Seventh Circuits, the court below held that the State's obligation to
repay misspent grant funds must be measured by "the fairness of
imposing sanctions upon the Commonwealth of Kentucky for its 'failure
to substantially comply' with the requirements of" the Act (id. at 9a
& n.7 (expressly disagreeing with West Virginia v. Secretary of
Education, supra)).  This approach cannot be reconciled with the
decisions of the Fourth and Seventh Circuits.

   3. The court of appeals' decision, unless reversed, can be expected
to have a substantial adverse impact on the Secretary's ability to
recoup the approximately $68 million in currently outstanding Title I
audit claims.  /14/ Indeed, we are informed by the Department of
Education that the decision is already being routinely relied upon by
the states in pending audit cases.  Moreover, the decision of the
court of appeals creates a substantial disincentive for Title I
recipients to adhere scrupulously to the terms of federal grants in
the future, because it disables the Secretary from recouping misspent
funds in any debatable case.

   The impact of this erroneous decision is, of course, not limited to
the Title I program.  Instead, it threatens to change drastically the
ground rules for the audit of state and local expenditures of all
federal grant funds -- a figure that today stands at approximately $90
billion annually.  See OMB, Exec. Off. of the President, Special
Analyses, Budget of the U.S. Government, Fiscal Year 1984, H-16
(1983).  The Office of Management and Budget informs us that a survey
of a sample of the major federal granting agencies, responsible for
approximately 38% of the total Fiscal Year 1983 grants, shows that
there are currently $830 million in audit exceptions outstanding.
/15/

   In effect, the court of appeals' decision invites grantees to adopt
their own relaxed interpretations of federal expenditure restrictions
and to resist audit exceptions whenever some interpretation can be
devised to justify an erroneous expenditure.  The decision thus will
seriously impede the settlement of outstanding claims and, in the long
run, will diminish the ability of federal agencies to enforce
congressional restrictions on the use of grant funds.

                              CONCLUSION

   The petition for a writ of certiorari should be granted.

   Respectfully submitted.

   REX E. LEE

      Solicitor General

   RICHARD K. WILLARD

      Acting Assistant Attorney General

   KENNETH S. GELLER

      Deputy Solicitor General

   HARRIET S. SHAPIRO

      Assistant to the Solicitor General

   ROBERT E. KOPP

   ROBERT V. ZENER

      Attorneys

   MAY 1984

   /1/ Title I has been revised on several occasions since its
original enactment.  The statute and regulations in effect during
Fiscal Year 1974, the year involved in this case, are set forth in the
text.  Title I was amended and reorganized in the Education Amendments
of 1978 (Pub. L. No. 95-561, 91 Stat. 2143, 20 U.S.C. 2701 et seq.)
and superseded by Chapter 1 of the Education Consolidation and
Improvement Act of 1981 (Pub. L. No. 97-35, 95 Stat. 464, 20 U.S.C.
3801 et seq.).  However, apart from certain provisions of the 1978
legislation discussed in the text, the subsequent legislation does not
affect the issues in this case.

   /2/ The supplanting prohibition for the current Chapter I program
(see note 1, supra) is in 20 U.S.C. 3807(b).  See also 34 C.F.R.
200.62.

   /3/ This reduction reflected the Secretary's determination that the
pupil-teacher ratio in the readiness classes (13:1) was substantially
smaller thatn the ratio prevailing elsewhere in the State (27:1).  The
Secretary concluded that the children in readiness classes had
therefore received some benefit beyond what they would have received
from the regular program, and that a pro rata state-federal allocation
of the readiness class costs, reflecting the improved pupil-teacher
ratio, was an appropriate way to calculate this benefit.  App., infra,
3a.

   /4/ The final amount of the refund -- $338,034 -- represents
approximately 1% of the more than $32 million in Title I funds granted
to Kentucky for the year in question (App., infra, 19a, 42a).

   /5/ When Congress first recognized that use of Title I funds to
supplant state and local funds was a serious problem, it relied on
information developed by the Office of Education.  See S. Rep. 91-634,
91st Cong., 2d Sess. 9 (1970).

   /6/ In adopting the express prohibition against supplanting, the
Senate Committee made clear that it expected the Commissioner of
Education "to exercise fully his authority and responsibility under
the law" to see that Title I funds are properly spent.  S. Rep.
91-634, supra, at 10.  Cf. id. at 14-15.

   /7/ Under the Act, "the determination of the existence and amount
of the (audit) liability are committed to the agency in the first
instance" (Bell v. New Jersey, slip op. 17-18).  In making that
determination in supplanting cases, the Secretary must review a myriad
of varying state and local administrative arrangements, a task that is
aided by his background and expertise in educational administration.

   /8/ Nothing in the record suggests that the State substantially
changed its position in reliance on an authoritative contrary
interpretation of the statute and regulations.  In any event, a change
in position would not have been reasonable.  The supplanting
prohibition was well known in the educational community (see Nicholson
v. Pittenger, 364 F. Supp. 669, 673-674 (E.d. Pa. 1973)), and the
Title I grant applications completed by each of the local Kentucky
school districts and reviewed by the State contained a question
clearly indicating that the prohibition required maintenance of
existing state and local funding for the educationally deprived
children in the program (App., infra, 27a).  See also pages 11-13,
infra.

   /9/ See also App., infra, 9a & n.8 ("we are concerned with the
fairness of imposing sanctions upon the Commonwealth of Kentucky for
its 'failure to substantially comply' with the" Act).  The court of
appeals misunderstood the statutory scheme in devising its
"substantial compliance" test.  The court relied on 20 U.S.C. 1234b(a)
and 1234c(a), which authorize the Secretary to withhold grant funds
and to issue cease-and-desist orders when a recipient of federal funds
has failed to "comply substantially" with federal requirements.
However, the provisions authorizing the Secretary to make audit
determinations do not contain a "substantial compliance" standard.  20
U.S.C. 1226a-1, 1234a(e), 2835.  This statutory distinction recognizes
that withholding or cease-and-desist proceedings may result in
immediate cessation of an ongoing program, while an audit involves
only an after-the-fact adjustment of accounts.  Indeed, in audit
proceedings Congress specifically placed on the grantee the burden of
"demonstrat(ing) the allowability of expenditures disallowed in the
final audit determination." 20 U.S.C. 1234a(b).

   /10/ The Board found that "by maintaining State and local funds at
the grade level while Title I paid for instructional costs of the
readiness program, the (Kentucky school districts) assured that
additional State and local funds were devoted to non-Title I pupils --
funds which in the absence of Title I would have paid for the
instruction of the educationally deprived children" (App., infra,
24a).  Such use of Title I funds directly violated the congressional
intent that "the funds are (to be) concentrated on the priority needs
of poor children and are not (to be) diverted to meeting other needs
of school systems, however pressing these other needs may be" (S. Rep.
91-634, supra, at 10).

   /11/ The Board's finding (not challenged by the court of appeals)
that the State used federal funds to free state and local monies for
non-Title I purposes (App., infra, 24a) establishes that the misuse
was not a mere "technical violation of the agreement" or a "violation
rest(ing) on a new regulation or construction of the statute issued
after the state entered the program and had its plan approved." Bell
v. New Jersey, slip op. 2 (White, J., concurring).  To the contrary,
the State ignored the fundamental statutory purpose of insuring that
federal funds enhance the educational opportunities of deprived
children rather than provide general subsidies for school systems.
See note 10, supra.

   /12/ The court of appeals incorrectly assumed (App., infra, 9a)
that the recovery of misused grant funds would "impos(e) sanctions" or
a "penalty" on the State.  Grant-in-aid agreements, however, are "much
in the nature of a contract." Pennhurst State School & Hospital v.
Halderman, 451 U.S. 1, 17 (1981).  In a recoupment action, the
Secretary merely attempts to recover monies that were not spent in
accordance with the federal statute and regulations with which the
State undertook to comply;  the remedy is compensatory, not punitive.
Congress has provided other remedies for the knowing misuse of federal
funds.  See, e.g., 31 U.S.C. 3729;  United States v. Bornstein, 423
U.S. 303 (1976);  Dixson v. United States, No. 82-5279 (Feb. 22,
1984).

   /13/ Congress did authorize the Secretary to return to the states
up to 75% of the repaid funds where the practices that led to the
misuse have been corrected and where the returned funds will, to the
extent possible, be used to benefit the population affected by the
misuse and will serve to achieve the purposes of the approved state
program (20 U.S.C. 1234e(a)).

   The grantback provision has been exercised by the Secretary on
several occasions.  See, e.g., 47 Fed. Reg. 20343-20345 (1982)
(grantback to Wisconsin of 75% of repaid funds determined to have been
misapplied by the State during the 1967-1972 audit period);  47 Fed.
Reg. 23002-23003 (1982) (grantback to the District of Columbia of 75%
of repaid funds misapplied during the audit period from 1973-1977).

   /14/ Supplanting claims, which would be most directly affected by
the decision below, constitute approximately $33 million of the Title
I disputes.

   /15/ There are 88 cases pending before the Education Appeal Board
alone, involving approximately $104 million in audit claims.

                               APPENDIX