City of Gary, Indiana v. USDOL, 79-CET-164 (ALJ July 16, 1980)
Date: July 16, 1980
Case No. 79-CETA-164
In the Matter of:
CITY OF GARY, INDIANA
Petitioner
vs.
U.S. DEPARTMENT OF LABOR
Respondent
Charles A. Ruckman, Esq., Corporation Counsel
Dora A. Arechiga, Esq., Arlene D. Colvin, Esq., of Counsel
For the Petitioner
William C. Posternack, Esq., Jane M. Graney, Esq.
Office of the Solicitor
For the Respondent
Before: GLENN ROBERT LAWRENCE, Administrative Law Judge
DECISION AND ORDER
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" or "CETA" and the
regulations issued pursuant thereto, including the new
regulations at 20 C.F.R. §656.88, 44 Fed. Reg. 20035-36
(1979). This dispute arises from a determination by the Grant
Officer finding the City of Gary liable for $641,824.33 in
disallowed costs arising out of the operation of the 1974 Summer
Program to Employ Disadvantaged Youth (SPEDY).
This matter was heard before the undersigned Administrative
Law Judge on November 7, 1979, January 8, 1980, and January 9,
1980. All parties were represented at the hearing, were afforded
full opportunity to be heard, to adduce evidence and to examine
as well as cross-examine witnesses. A Stipulation of Uncontested
Facts was entered into between the City of Gary and the
Government and is incorporated in the record herein. A proposed
Decision and Order and Findings of Facts and Conclusions of Law
were submitted by the Government. Briefs that were submitted
also have been duly considered.
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Upon the entire record contained herein, including the
aforesaid stipulations, and from all of the testimony and
evidence at the hearing, including my observation of the demeanor
of the witnesses, I make the following findings, conclusions and
recommendations:
Findings of Fact
On or about June 24, 1974, the City of Gary, Indiana and the
United States Department of Labor (USDOL) entered into Grant
Agreement No. 18-4021-32 under which the USDOL agreed to fund and
the City of Gary agreed to operate a SPEDY Program in the City of
Gary for the period from June 24, 1974 to October 1, 1974
(Stipulation, Para. 5). The City of Gary was provided $2,060,613
in funds for the program (Stipulation, Para. 7).
The SPEDY Program conducted in the City of Gary during the
summer of 1974 was a program designed to provide summer
employment and other services and activities to persons who met
the eligibility criteria set forth in Regulation 29 CFR 97.12
(May 13, 1974). The program was funded under Title III of the
Comprehensive Employment and Training Act of 1973 (Tr. 77; 29 CFR
Part 97 (May 13, 1974)). To qualify for participation in the
program, a person had to be economically disadvantaged as defined
by 29 CFR 94.4 and be between the ages of 14 and 22. The
regulations at 29 CFR 94.4 define economically disadvantaged as a
person who was a member of a family which received cash welfare
payments, or whose annual income in relation to family size did
not exceed the poverty level determined in accordance with
criteria established by the office of Management and Budget (OMB)
(29 CFR 94.4 (March 19, 1974)). On May 28, 1974; the Grant
Officer provided the City of Gary with the OMB criteria referred
to in 29 CFR 94.4 to be used in determining eligibility for the
1974 Summer SPEDY Program (Tr. 79-80; ETA Exhibit-- No. 4).
Prior to, as well as during, the operation of the 1974 SPEDY
Program, the Department of Labor provided the City of Gary and
its subgrantee, School City of Gary, assistance and guidance in
the operation of the program in the way of letters and
directives. With respect to the application of the income
criteria to be applied in determining eligibility, the Grant
Officer on July 31, 1974 provided the City of Gary with CETA
Letter No. 6 (Tr. 79 and 81; ETA Exhibit No. 5). CETA Letter No.
6 was an update of the income criteria provided by OMB and
contained similar guidelines on selection procedures as had been
provided previously to School City of Gary under the Neighborhood
Youth Corp Program (Tr. 89-91, 125-129; ETA Exhibits Nos. 5, 9
and 10). Assistance was also provided in May 1974 in a document
identified as RMA Letter 154 (Tr. 78; ETA Exhibit No. 3).
With respect to guidelines for the operation of the
recreational and transportation aspects of the SPEDY Program, RMA
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Letter 159 was provided on June 17, 1974 (Tr. 98, 99; ETA Exhibit
No. 6).
In 1974 and 1975, in response to a request from the Manpower
Administration which had received allegations that SPEDY included
a high percentage of ineligible participants, the USDOL Audit
branch conducted a financial and compliance audit of the Gary
1974 SPEDY program (TR. 86). Applying statistical sampling
methods to project the numbers of ineligibles, the examination
was made in conformity with the "Standards for Audit of
Governmental Organizations, Programs, Activities and Functions"
issued by the Comptroller General of the United States (ETA
Exhibit No. 2). The audit took a sample of 307 applications out
of the total 6112 applications on file with the City of Gary
(Stipulation, Para. 14). From the sample, those applications
containing deficient or inaccurate responses were sifted out and
divided into categories with each category representing an
alleged defect on the face of the application. The auditors then
determined the ineligible applications in the following manner:
Firstly, those applications clearly indicating on their face that
the person was ineligible were considered as such; secondly,
those applications containing insufficient information to make a
determination of whether the person should be allowed in the
program were considered ineligible; and thirdly, those
applications which raised questions as to the veracity of the
responses were considered to be ineligible (Tr. 14). From the
ineligible applications, as determined from the sample, the total
number of ineligible participants was projected. This number was
then multiplied by the cost per enrollee in order to arrive at a
total ineligible participant cost. The Government audit also
disclosed certain disallowed costs in the way of unauthorized
expenditures on equipment, transportation, T-shirts and similar
items. The amount of these costs was stipulated to by the
parties (Stipulation, Para. 15, 16, 17). The total amount of
costs questioned by the Government's audit was $993,853.00.
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
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follows:
ineligible participants
399 terminated early
540 completed program
939 total
undetermined participants
80 terminated early
290 completed program
370 total
This audit recommended a recovery amount of $462,515.00 (ETA
Exhibit No. 2, p. 55).
The City submitted another response to the Government's
audit on November 10, 1975 as an addendum to their May 8, 1975
audit. The November response had a smaller number of ineligible
and undetermined participants than the May survey. The City also
submitted a 10 percent sample survey in November of 1979 in
rebuttal of the Government's audit. This survey was not
conducted in accordance with generally accepted statistical
sampling methods.
Upon review of the USDOL audit, taking into consideration
the Gary audit of May 8, 1975 and November 10, 1975, the Grant
Officer issued his Findings and Determinations on May 14, 1976
disallowing $641,824.33 of the questioned costs (ETA Exhibit No.
1).
The City of Gary requested a hearing before the Department
of Labor, Office of Administrative Law Judges pursuant to 29
C.F.R. 98.41(b)(4) of the regulations.
At the hearing, the parties presented a "Stipulation of
Uncontested Facts" which contained in pertinent part the
categories by which the USDOL audit divided the group of
applications found ineligible and the cost figures of bus tokens,
T-shirts, and equipment which were disallowed expenditures
(Stipulation, Para. 13, 15, 16 and 17).
Position of the Parties
The USDOL contends that the Grant Officer's Findings and
Determinations regarding disallowed costs for the 1974 SPEDY
Program based on the USDOL audit should be upheld. The audit was
conducted in accordance with the CETA Financial and Compliance
Audit Guide and the provisions promulgated by the Comptroller
General of the United States. Regarding the City of Gary's
responses of May 8, 1975 and November 19, 1975 to the
Government's audit, the Government argues that such responses
were not sufficient to rebut the USDOL audit for the following
reasons: 1) the two surveys were not consistent with each other;
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2) the City's response did not include any detailed summary of
the procedure or methodology used in conducting the surveys; 3)
the City's responses gave no indication of any safeguards or
guidelines implemented to assure the uniformity of the standards
of review amongst the various individuals conducting the survey;
and 4) the City's responses did not specify the skills, or
qualifications of the individuals conducting the survey.
Finally, the Government contends that the City of Gary as
Prime Sponsor, and not the School City of Gary, is liable for all
disallowed costs.
The City of Gary contends that the USDOL audit is not
accurate and that the City's 100 percent survey rebuts the
Government's findings. The City argues that although many of the
applications were suspect on their face, their survey proved that
many of these suspect applications were in fact eligible. The
City submits that it should not be required to reimburse the
Government for any funds spent in light of the City's concerted
attempt to rid the roles of ineligibles since these problems were
caused by the late receipt of funds which in turn caused a crunch
on intake and planning time.
In the event that the City is ordered to reimburse the
Government, it argues that a maximum of $462,515.00 be
recommended for recovery and, as a minimum, the USDOL should
exclude from reimbursement the cost for those enrollees whom the
Gary Manpower Administration, as the result of its internal
investigation, found ineligible and terminated before the
program's end (ETA Exhibit No. 2, p. 62).
The City also argues that the School City of Gary should be
responsible for any liability imposed on the city. Since the
City entered into an agreement with the School City of Gary, as a
subgrantee, for the administration and implementation of the
program, the City's only remaining duty under the grant agreement
was that of monitoring the program, which, it is argued, it did.
Finally, the City argues that the only remedy provided by
the Act and applicable regulations in effect at the time the
grant agreement was entered into for the unauthorized expenditure
of grant monies was to withhold funds due the prime sponsor and
require it to return all or part of the unexpended funds in its
possession. There was no provision for the reimbursement of
disallowed costs out of the City's own coffers. Therefore, the
City can only be ordered to return unexpended funds under the
grant in question, of which there are none, and the Secretary can
revoke the City's plan and not make any further payments under
the plan.
Discussion and Conclusion
Disallowed Costs
The City as prime sponsor was responsible to the USDOL for
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compliance with all applicable provisions of the Act, its
regulations and all guidelines, policies and directives issued by
the Grant Officer. 29 C.F.R. §97.11 (June 4, 1974, Federal
Register).
The Government contends that the City of Gary is liable for
disallowed costs arising from the operation of the 1974 SPEDY
Program in the amount of $641,824.33. Further, the Government
argues that the City's 100 percent survey is insufficient to
rebut the USDOL audit or the Grant Officer's Findings and
Determinations because, inter alia; 1) The City's response
did not include any information regarding the procedures or
methodology used in conducting the survey; and 2) there was no
indication of any safeguards or guidelines implemented to insure
uniformity of standards of review amongst the various individuals
conducting the survey.
I disagree with the Government's contentions for several
reasons. Firstly, it is reasonable to assume that an audit
reviewing 100 percent of the applications, using a reasonably
credible methodology, is inherently more precise than an audit
performed according to statistical sampling methods from which
results are projected. Many of the applications which were
originally suspect, or ineligible on their face were in fact
valid, eligible applications. Secondly, I am satisfied from the
record with the procedures followed in conducting the City's
survey and with the qualifications of the individuals involved.
The City's response to the USDOL audit sets out the investigation
procedure and findings (ETA Exhibit No. 2, p. 55). It is granted
that the City's audit procedure may have lacked the
professionalism of the Government's operation. Nevertheless, I
find it sufficient to rebut, in substantial part, the Grant
Officer's Findings and Determination. Ronald Sullivan, Manpower
Administrator for the City of Gary Manpower Administration,
testified that during the operation of the 1974 SPEDY Program he
was the Manpower advisor to the Mayor of the City of Gary (Tr.
204). He testified that he holds a bachelor's degree in
education and a master's degree in educational administration.
The record indicates he had a wealth of experience with CETA and
Manpower administration (Tr. 405-6). Sullivan testified that he
headed a team of five individuals who reviewed every application,
interviewed participant intake workers, reviewed school and
welfare records, and in some cases even talked to the enrollees
themselves (Tr. 215-216). In light of the above and in
consideration of the entire record, I find that the City's 100
percent survey of May 8, 1975 is of sufficient credibility to
refute substantially the USDOL audit findings.
Regarding the City's Audit responses dated November 10,
1975, the record is lacking sufficient documentation of the
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procedure or methodology used in arriving at its results.
Therefore, it is not sufficiently persuasive to be given
substantial weight nor to be considered as an addendum to the
City's May, 1975 survey.
Likewise, I do not give any great weight to the City's 10
percent survey completed in November of 1979 as it was not
conducted in accordance with generally accepted statistical
sampling methods and thus, again, not sufficiently persuasive.
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 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.
In light of the above, the costs I find to be disallowed are
as follows:
540 ineligibles completing program
290 undetermined completing program
830 total
x 367.63 cost per enrollee as per stipulation
$305,132.90 total costs associated with wages and benefits.
Additionally, the parties have stipulated to further
disallowed costs as follows:
1. $ 392.00 bus tokens
2. 7,174.00 T-shirts
3. 893.46 equipment purchases
$8,459.46 total stipulated disallowed costs
8,459.46
+305,132.90
$313,592.36 total costs disallowed.
Therefore, the total costs disallowed for which the City of
Gary is liable to the USDOL is in the amount of $313,592.36.
The City argues in its brief at page 18 that any liability
lies with the School City of Gary as a subgrantee. I do not find
the City's argument persuasive. The City as prime sponsor is
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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.
Finally, the City argues that the only remedy provided by
the Act and applicable regulations in effect at the time the
grant agreement was entered into was for the revocation of the
prime sponsor's plan and the return of any unexpended funds paid
under the plan. Thus, the City contends that it cannot be
ordered to reimburse the USDOL for disallowed costs out of its
own coffers because the Act and regulations at the time did not
provide for this remedy. I disagree. In order to effectuate the
purposes of the Act (29 CFR §98.48), a grantee may be
required to return money improperly spent.
Accordingly, it is ordered:
ORDER
I hereby find the City of Gary, Indiana liable for costs in
the amount of $313,592.36 incurred in violation of the Act, its
regulations, and Grant Agreement and order that payment be made
forthwith to the USDOL.
GLENN ROBERT LAWRENCE
Administrative Law Judge
