[Federal Register Volume 60, Number 118 (Tuesday, June 20, 1995)]
[Proposed Rules]
[Pages 32252-32255]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-14981]
[[Page 32251]]
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Part III
Department of Education
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34 CFR Parts 75, 76, and 81
General Education Provisions Act; Equitable Offsets: Proposed Rule
Federal Register / Vol. 60, No. 118 / Tuesday, June 20, 1995 /
Proposed Rules
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[[Page 32252]]
DEPARTMENT OF EDUCATION
34 CFR Parts 75, 76, and 81
RIN 1880-AA56
General Education Provisions Act--Enforcement: Equitable Offsets
AGENCY: Department of Education.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Secretary proposes to amend Part 81 of Title 34 of the
Code of Federal Regulations, containing regulations regarding
enforcement under the General Education Provisions Act (GEPA). The
amendment would include regulations clarifying the circumstances under
which equitable offset is taken into account in determining harm to an
identifiable Federal interest under section 453(a)(1) of the GEPA. The
proposed regulations would enhance grantee flexibility and reduce
burden by contributing to the early resolution of audit disputes and
the avoidance of protracted litigation.
The proposed regulations in this notice do not apply to programs
under the Higher Education Act of 1965 or the Impact Aid statutes (Pub.
L. 81-874, Pub. L. 81-815, and Title VIII of the Elementary and
Secondary Education Act of 1965 (ESEA) as amended by Pub. L. 103-382).
DATES: Comments must be received on or before August 4, 1995.
ADDRESSEES: All comments concerning these proposed regulations should
be addressed to Ted Sky, Senior Counsel, U.S. Department of Education,
600 Independence Avenue SW., Washington, DC 20202-2121.
FOR FURTHER INFORMATION CONTACT: Ted Sky. Telephone: (202) 401-6000.
Individuals who use a telecommunications device for the deaf (TDD) may
call the Federal Information Relay Service (FIRS) at 1-800-877-8339
between 8 a.m. and 8 p.m., Eastern time, Monday through Friday.
SUPPLEMENTARY INFORMATION:
I. Recognition of Offset Costs
Section 453(a)(1) of the GEPA, 20 U.S.C. 1234b(a)(1), provides that
a recipient determined to have made an unallowable expenditure, or to
have otherwise failed to discharge its responsibility to account
properly for funds, shall be required to return funds in an amount that
is proportionate to the extent of the harm its violation caused to an
identifiable Federal interest associated with the program under which
the recipient received the award.
The proposed regulations (in Sec. 81.32 (c) and (d)) would state
the circumstances under which the Secretary or an authorized Department
official, in determining the extent of harm to an identifiable Federal
interest caused by a violation, may take into account costs that the
recipient could have charged to the Federal grant or cooperative
agreement in question but in fact did not. These costs are ``offset
costs.'' Issues pertaining to those so-called offset costs have arisen
in connection with administrative litigation before the Office of
Administrative Law Judges (OALJ).
The Secretary believes that regulatory guidance regarding these
issues would be helpful to the field, would enhance grantee
flexibility, would increase the possibilities for early resolution of
disputes, and would reduce the need for protracted litigation arising
from expenditure disallowance and other audit claims under Department
programs, while maintaining proper accountability. The Secretary
solicits additional public comments and suggestions as to how this
balance may best be achieved.
Equitable offset is not a new concept initially proposed in these
regulations. The concept has evolved over time, through case-by-case
adjudication, both in decisions of the Secretary and the courts,
arising from disputes under programs administered by the Secretary. The
proposed regulations are consistent with this precedent.
If finally adopted, it is anticipated that the provisions of
proposed Sec. 81.32 (c) and (d) would apply to existing cases before
the OALJ, but without regard to Sec. 81.32(c)(5) (relating to early
identification of offset costs).
The proposed regulations are based upon the conclusion that the
recognition of offset costs, under appropriate circumstances and
subject to appropriate limitations, is consistent with section
453(a)(1) of the GEPA. The proposed regulations would provide for the
recognition of offset costs under the following circumstances:
--The offset costs must meet all the requirements of the grant or
cooperative agreement, including any applicable recordkeeping
requirements;
--The recipient must demonstrate that the offset costs could have been
charged to the grant or cooperative agreement during the same Federal
fiscal year as the original violation;
--The charging of offset costs to the grant or cooperative agreement
must not result in other violations of applicable requirements, such as
maintenance of effort, matching or non-supplanting requirements;
--The practices and policies that resulted in the original violation
must have been corrected and must not be likely to recur;
--The original violation must not have been intentional or willful.
Under the proposed rule, the Secretary would have the burden of
initially establishing a prima facie case that a violation was willful
or intentional so as to preclude an offset. It is not anticipated that
these cases will be frequent. However, on occasion, circumstances may
suggest the existence of this situation. For example, where a recipient
continues to incur costs or carry out program activities that the
Department has advised the recipient are beyond the purview of the
grant, the issue of whether a violation was willful or intentional
might be presented.
Federal financial assistance under a program subject to a statutory
non-supplanting requirement must supplement and be additional to any
State assistance for the project in question. A recipient of assistance
under this type of program generally must use all Federal funds awarded
for project purposes, irrespective of the use of State or local
funds.1 To permit a recipient to offset disallowed costs under the
federally funded project with State or local-funded costs would
normally be contrary to the non-supplanting requirement and would
result in the diminution of the project to the detriment of the
beneficiaries to be served and contrary to the purposes of the program.
\1\ One exception to this principle is the non-supplanting
requirement in section 614 of the Individuals with Disabilities
Education Act which requires a local educational agency to
supplement what it has expended on special education in the past.
This approach is more similar to a maintenance of effort requirement
than it is to the non-supplanting requirements in other statutes.
(See 34 CFR 300.230.)
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In the case of a program with a non-supplanting requirement,
therefore, a recipient has a particularly heavy burden in showing that
use of State or local funds as offset costs is consistent with the
requirement. The Department has identified a limited number of
situations in which this burden could be met.
(1) State administrative expenses. Where a disallowance involves
State administrative expenditures, and the recipient proposes to offset
other State administrative expenditures that could have been charged to
the grant but were not, the non-supplanting requirement should not
present a bar to the offset. Presumably the State administrative
expenditures would not have been made in the absence of the program.
[[Page 32253]]
(2) Other cases where the offset expenditures would not have been
incurred in the absence of the Federal program. In exceptional
circumstances a recipient may be able to establish that the State or
local expenditures sought to be used as an offset would not have been
incurred in the absence of the program and thus do not give rise to a
question under the non-supplanting requirement. For example, the
recipient might be able to show that a particular cost was so related
to the Federal grant that it would not have been incurred in the
absence of that grant.
(3) Statutorily excluded funds. Under the statute governing the
program in question, there may be categories of expenditures that may
be specifically excluded from the reach of the non-supplanting
requirement. For example, under section 1120A(b)(1)(B) of the Title I
(ESEA) statute, 20 U.S.C. 6322(b)(1)(B), certain State and local funds
may be excluded for purposes of determining compliance with the Title I
non-supplanting requirement. These funds would be available for offset
purposes, despite the non-supplanting requirement, assuming that other
requirements of the proposed rule would be met.
In proposing these rules, the Secretary does not intend to
encourage recipients to incur unallowable costs or engage in activities
that will give rise to accountability issues. On the contrary, the
Secretary believes that the proposed regulations will enable the
Department to more readily focus time on those areas where the most
serious accountability problems occur.
II. Early Identification of Issue
The proposed regulations provide that, if the recipient is apprised
of the violation in a draft audit report or other written communication
issued prior to the final audit report, the offset costs must be
presented to the auditor within a 60-day period. This provision is
designed to ensure that offset claims are raised sufficiently early in
the audit process to permit the auditor to verify the claimed offset
costs and make recommendations regarding those costs, within the
overall context of the auditor's responsibility, prior to the issuance
of the final audit report. Even if an oral rather than a written
communication regarding the violation is made during the audit process,
recipients are encouraged to present offset cost claims to the auditor
so that these matters may be taken into account in the audit report in
an orderly fashion.
If the recipient is first apprised of the violation in the final
audit report, the offset costs must, under the proposed regulations, be
presented to the authorized Department official within a 60-day period
after the issuance of the final audit report. If the recipient is first
apprised of the violation after the issuance of the final audit report,
then the 60-day period runs from this first written notice. In either
event, offset cost ``claims'' must be presented in the form of facts
verified by an independent auditor.
Early notice of these issues is intended to encourage and
contribute to early resolution of disallowance cases (through
alternative means of dispute resolution or otherwise) and reduction of
litigation expense for recipients as well as for the Department.
The early notice provision in Sec. 81.32(c)(5) is also designed to
avoid introduction of offset cost issues late in the audit appeal
process. The introduction of offset cost issues at the litigation stage
in prior and currently pending cases before the OALJ has caused
administrative problems, requiring more audit work long after the
original audit is over, thus delaying resolution of these cases.
However, as indicated above, these advance notice requirements would
not apply to pending cases.
In addition to adding the proposed provisions to 34 CFR Part 81, a
cross-reference is proposed to be added to Subpart G of 34 CFR Part 75
and Subpart H of 34 CFR Part 76.
Executive Order 12866
These proposed regulations have been reviewed in accordance with
Executive Order 12866. Under the terms of the order the Secretary has
assessed the potential costs and benefits of this regulatory action.
The potential costs associated with the proposed regulations are
those resulting from statutory requirements and those determined by the
Secretary to be necessary for administering this program effectively
and efficiently as discussed in those sections of the preamble that
relate to specific sections of the regulations. Burdens specifically
associated with information collection requirements, if any, are
identified and explained elsewhere in this preamble.
Regulatory Flexibility Act Certification
The Secretary certifies that these proposed regulations would not
have a significant economic impact on a substantial number of small
entities. States and State agencies are not considered to be small
entities under the Regulatory Flexibility Act. Small local educational
agencies could be affected by these regulations. However, these
proposed regulations are intended to implement statutory provisions and
are designed to provide greater flexibility and reduce litigation in
the administration of the programs in question. They should not have a
significant economic impact on any small entities affected.
Paperwork Reduction Act of 1980
These proposed regulations have been examined under the Paperwork
Reduction Act of 1980 and have been found to contain no information
collection requirements.
Invitation to Comment
Interested persons are invited to submit comments and
recommendations regarding these proposed regulations.
All comments submitted in response to these proposed regulations
will be available for public inspection, during and after the comment
period, in Room 5400, 600 Independence Avenue SW., Washington, DC,
between the hours of 8:30 a.m. and 4:00 p.m., Monday through Friday of
each week except Federal holidays.
To assist the Department in complying with the specific
requirements of the Executive Order and the Paperwork Reduction Act of
1980 and their overall requirement of reducing regulatory burden, the
Secretary invites comment on whether there may be further opportunities
to reduce any regulatory burdens found in these proposed regulations.
List of Subjects
34 CFR Part 75
Education Department, Grant programs--education, Grant
administration, Incorporation by reference.
34 CFR Part 76
Education Department, Grant programs--education, Grant
administration, Intergovernmental relations, State-administered
programs.
34 CFR Part 81
Enforcement, General Education Provisions Act, Offset costs.
Dated: March 16, 1995.
Richard W. Riley,
Secretary of Education.
(Catalog of Federal Domestic Assistance Number does not apply)
The Secretary proposes to amend Parts 75, 76, and 81 of Title 34
of the Code of Federal Regulations as follows:
PART 81--GENERAL EDUCATION PROVISIONS ACT--ENFORCEMENT
1. The authority citation for Part 81 continues to read as follows:
[[Page 32254]] Authority: 20 U.S.C. 1221e-3, 1234-1234i, 3474,
unless otherwise noted.
2. Section 81.32 is amended by revising the heading and by adding
new paragraphs (c), (d) and (e) to read as follows:
Sec. 81.32 Proportionality; equitable offset.
* * * * *
(c) In determining the extent to which a violation that is not
intentional or willful caused harm to an identifiable Federal interest,
the Secretary or an authorized Department official, as appropriate, may
take into account costs that could have been charged to the Federal
grant or cooperative agreement but in fact were not (offset costs),
only if the recipient has demonstrated that--
(1) The offset costs would have met all the requirements of the
grant or cooperative agreement, including any applicable recordkeeping
requirements;
(2) The offset costs could have been charged to the grant or
cooperative agreement during the same Federal fiscal year as the
original violation;
(3) The charging of offset costs to the grant or cooperative
agreement would not result in other violations of applicable
requirements, such as maintenance of effort, matching, or non-
supplanting;
(4) The practices and policies that resulted in the original
violation have been corrected and are not likely to recur; and
(5) (i) If the recipient was apprised of the violation in a draft
audit report or other written communication from the cognizant auditor
that was issued prior to the final audit report--
(A) The offset costs were presented to the auditor within 60 days
after the issuance of the draft audit report or other written
communication; and
(B) The auditor verified that the costs met the conditions in
paragraph (c) of this section;
(ii) If the recipient was first apprised in writing of the
violation in the final audit report or the costs were timely presented
to but not verified by the auditor, the offset costs were presented to
the authorized Department official, in the form of facts demonstrating
compliance with this paragraph and verified by an independent auditor,
within 60 days of the issuance of the final audit report; or
(iii) If the recipient was first apprised of the violation in
writing after the issuance of the final audit report, the offset costs
were presented to the authorized Department official, in the form of
facts demonstrating compliance with this paragraph and verified by an
independent auditor, within 60 days of the first written notice of the
violation;
(d) In making a verification under paragraph (c)(5) of this
section, the independent auditor may be the auditor that initially
conducted the audit and may base the verification on the original audit
as long as the offset costs were examined as part of that audit and
were not disallowed.
(e) For the purposes of Sec. 81.32(c)(1), in the case of a
discretionary program under which awards are made by the Secretary,
``grant'' or ``cooperative agreement'' means the grant or cooperative
agreement awarded to the recipient.
3. Section 81.40 is amended by redesignating paragraphs (d) and (e)
as (e) and (f), respectively, and by adding a new paragraph (d) to read
as follows:
Sec. 81.40 Burden of proof.
* * * * *
(d) An offset cost should be taken into account in accordance with
Sec. 81.32 (c) and (d), except that the Secretary has the burden of
initially establishing a prima facie case that a violation was willful
or intentional so as to preclude an offset.
* * * * *
4. The Appendix to Part 81 is amended by adding new Examples 14,
15, 16, 17, and 18 to read as follows:
Appendix to Part 81--Illustrations of Proportionality
* * * * *
Equitable Offset Allowed
(14) Administrative costs of a State educational agency (SEA) are
disallowed by the auditor under a program subject to a non-supplanting
requirement because the SEA did not maintain adequate time distribution
records for employees charged to the grant. The SEA demonstrates that
other employees, whose salaries are paid for out of State funds,
performed administrative functions allowable under the Federal grant
during the relevant fiscal period. Adequate records, including any
necessary time distribution records, were maintained for these
employees. Charging these costs to the grant would not violate other
requirements. The non-supplanting requirement does not bar the offset
because it is presumed that the State funds would not have been spent
in the absence of the program. The SEA presents a corrective action
plan to ensure that future recordkeeping violations will not arise.
There is no evidence that the SEA intentionally failed to keep the
required records. The Secretary recognizes the offset costs under the
principles stated in Sec. 81.32 (c) and (d) and reduces the required
recovery by the amount of the offset costs.
Equitable Offset Not Allowed--Violation of Program Requirement
(15) Under the Title I program, a LEA provides remedial reading
services to children residing in ineligible attendance areas. The LEA
proposes to offset the disallowed costs with funds expended for
eligible Title I children under a State compensatory education program
similar to Title I but not excluded from the operation of the non-
supplanting requirement in Title I under section 1120A(b) of the Title
I statute. Even though the costs of the State program would otherwise
have been allowable under Title I, an offset is not allowed because the
use of the State funds would violate the non-supplanting requirement.
Equitable Offset Not Allowed
(16) Under a Federal vocational education program with a
maintenance of effort requirement, the SEA fails to maintain required
time distribution records for employees working on more than one
program. The State proposes to use as offset costs the salaries of
other employees, charged to State funds, who worked exclusively on the
Federal program. If all those costs are not included as State
expenditures, however, the SEA would not have sufficient State
expenditures to satisfy the maintenance of effort requirement under the
Federal program. An offset is not allowed, because the charging of the
offset costs to the Federal grant would have resulted in another
violation of an applicable program requirement (maintenance of effort).
Equitable Offset Partially Allowed
(17) In this example the State needs some but not all of its
proposed offset costs to satisfy the matching requirement applicable to
the program. The State may use the remaining offset costs (i.e., those
not needed to meet the matching requirement) to reduce its liability.
For example, under a program with a 1:1 matching requirement ($1 of
State funds must be spent for every $1 of Federal funds), the State has
spent $100,000 of Federal funds and $100,000 of State funds. However,
the auditors have determined that $20,000 of the Federal funds were not
supported by required time distribution records. The State could not
fully extinguish its liability through an offset, because the State
would not meet the matching requirement. (If $20,000 of State funds
were used as an offset, the State would have left only $80,000 of
allowable matching costs which would not [[Page 32255]] support Federal
expenditures of $100,000 under the 1:1 match requirement.)
Nevertheless, the State liability could be partially reduced by an
offset. The amount of the partial offset is computed by combining the
allowable Federal and State expenditures ($80,000 Federal plus $100,000
State = $180,000), and computing the allowable Federal expenditure that
would be supported by the required State match. The allowable Federal
expenditure would be $90,000 ($180,000 x 50%) which would be supported
under the 1:1 match by $90,000 of State expenditures. Rather than
repaying the full amount of the Federal disallowance ($20,000), the
State would be required to repay $10,000 (the difference between the
amount actually charged to the Federal grant ($100,000) and the
allowable Federal expenditure considering the allowable State matching
costs ($90,000)). The State therefore is credited with a partial offset
of $10,000.
Equitable Offset Not Allowed--Intentional or Willful Violation
(18) Under the Title I program, the State seeks written advice from
the Secretary regarding the allowability of certain expenditures. The
Secretary informs the State that the expenditures are unallowable under
the Title I statute. Nevertheless, the State proceeds to spend its
Title I funds in this manner. An offset is not allowed, even though
other expenditures could have been properly charged to the Title I
program, because the Secretary determines that the State's violation is
intentional and willful.
PART 75--DIRECT GRANT PROGRAMS
5. The authority citation for Part 75 continues to read as follows:
Authority: 20 U.S.C. 1221e-3 and 3474, unless otherwise noted.
6. Part 75 is amended by adding the following cross-reference to
the existing cross-reference in Subpart G immediately following the
heading:
``See 34 CFR 81.32, Proportionality; equitable offset.''
PART 76--STATE-ADMINISTERED PROGRAMS
7. The authority citation for Part 76 continues to read as follows:
Authority: 20 U.S.C. 1221e-3, 3474, and 6511(a), unless
otherwise noted.
8. Part 76 is amended by adding the following cross-reference
immediately following the heading for Subpart H:
``Cross-Reference. See 34 CFR 81.32, Proportionality; equitable
offset.''
[FR Doc. 95-14981 Filed 6-19-95; 8:45 am]
BILLING CODE 4000-01-P
