federal policy through audit resolution “two steps forward, one step back” by michael brustein,...

FEDERAL POLICY THROUGH AUDIT RESOLUTION

“TWO STEPS FORWARD, ONE STEP BACK”

ByMichael Brustein, Esq.

[email protected] & Manasevit, PLLC

Fall Forum 2015

mailto:[email protected]

Brustein & Manasevit, PLLC © 2015. All rights reserved. 2

BASIC HIERARCHY OF SAFE HARBORS

1. Program Statute2. GEPA3. Program Regulations (34 CFR 81.5(b))4. EDGAR5. Final Agency Audit Decisions6. 90 Day Letter (34 CFR 81.33)7. Non-Regulatory Guidance and Dear Colleague Letters

(?)8. Memoranda, Emails, Telephone Calls


GOOD GUIDANCE VS. BAD GUIDANCE1.OMB Directs Agencies to Promote

Rulemaking Through Public Comment Attachment A

2.Senator Alexander Chiding Duncan on Policy Issues In May 2015, op-ed in National Review: ED issuing “guidance” to skirt regulatory requirements of rulemaking. “Guidance” should be non binding.


THE REINS ACT H.R. 427

“Regulations from the Executive in Need of Scrutiny” (243-165)

Passed House 7/28/15


Congress has 70 session days to enact approval of “major” regs with $100 million+ impact, or they do not take effect


HOW DOES GEPA DEFINE “REGULATION”?Section 431(a)“Regulation means any rules, regulations, guidelines, interpretations, orders, or requirements of general applicability.”


Regulations must contain citations to the particular sections of statutory law or other legal authority upon which such provision is based.

- 431(a)(2)


SEVEN SIGNIFICANT ED POLICIES MADE THROUGH THE AUDIT RESOLUTION PROCESS1.Cooperative Audit Resolution2.Equitable Offset3.Linkage Under Tydings4.S/L Measured by Obligations5.S/L Is Doctrine of Repose6.De Minimis Rule of Time and Effort7.Unrestricted Indirect Cost Rate Under IDEA B

State Funds


Is the pendulum now swinging back?


(A) CAROI

Piloted in May 1996 (Attachment B)History of Florida Voc Ed / Adult Ed Time and Effort Audits

Aggressive State Auditor General


Florida CAROI precedent in 1996 served as model for other states


CAROI fully resolved disallowances and eliminated monetary claims


ED was sole agency to use CAROINPRM on Super Circular in February 2013 adopted Cooperative Audit Resolution as Government Standard


See 2 CFR 200.25(d)NPRM “amnesty”UGG “appropriate relief”


What does “Appropriate Relief” mean?

Consider information that was not available or presented to auditors during audit.

Consider, if appropriate, equitable offset, where allowable costs are allowed to substitute for unallowable costs.

Accept, if appropriate, alternative documentation that can substitute for missing records. As a general matter, such documentation must be prepared by individuals that have direct knowledge of the underlying facts and rely on credible contemporaneous records.


Is ED backtracking from 1996 precedent?


(B) EQUITABLE OFFSET

Allowable costs charged to nonfederal funds are allowed to substitute for unallowable costs


ORIGIN OF EQUITABLE OFFSET

Tangipahoa Parish School Board v.

U.S. Department of Education821 F.2d 1022 (1987)


“ The equitable factors involved are proper considerations in the determination of appropriate refunding.”


Fifth Circuit case led to ruling in Appeal of New York, Docket No. 26-226-86 (1989)


Salary expenditures funded by New York could have been charged to federal grants and that amount is an equitable offset


The New York precedent reaffirmed from 1989 to 2014

25 years of precedent turned upside down by Pennsylvania Case – Attachment C


Trier of Fact must analyze each request for equitable offset:1. Scope and pervasiveness of

underlying actions2. Whether grantee acted in good faith

in response3. Arguments ED offers in opposition


Was there underlying fraud or intentional wrong doing?


Equitable offset is now under scrutiny by OALJ!!!

Is it even allowed under GEPA?


(C) LINKAGE(A.K.A. “THE TYDINGS CASE”)VEA Amendments of 1976 required OIG (HEW) to audit every state CTE program

Between 1978-1984 OIG recommended > $250 million be returned due to Tydings violation

Unless accounting / charging of federal $ comes within 27 month Tydings period, $ must be returned


OGC, OVAE, OESE, OSERS, OPE, CFO bought into this specious logic


Brustein & Manasevit, PLLC called Senator Tydings (retired) and professors of accounting as witnesses to debunk ED’s position


In 1986, Secretary William Bennett repudiated OIG and adopted standard of linkage

- Appeal of the State of California, Docket No. 12 (122) 83 (1986) - Attachment D


Based on California Tydings Decision and 1970 FIFO Memo (Attachment E), States for past 30 years can avoid “lapsing” by treating newer grant expenditures as older grant expenditures, and undertake this accounting after the 27 month period


(D) S/L MEASURED BY “OBLIGATIONS”GEPA S/L uses term “expenditure” Section 452 (k)

What does “expenditure” mean?


ED consistently held that “expended” as used in the statute means “obligated”

- Appeal of the State of Michigan, Docket No. 8-272-88 (1989) - Attachment F


“Obligation” defined based on underlying transaction.

- See 34 CFR 76.707


In current Pennsylvania case, Secretary ruled that S/L was not date of underlying obligation, but date of violation (date of accounting entry to federal funds)


(E) S/L IS DOCTRINE OF REPOSE

If GEPA S/L is five years from date of obligation, what if grantee lacks source documentation or fails to expend funds in a timely manner?


GEPA S/L was intended as a “doctrine of repose” which after 5 years would remove threat that SEA / LEA would have to make repayments

- Appeal of Los Angeles Community College District, Docket No. 26- 91-81 (1984) – Attachment G


5 year S/L covers matters where there is no record of expenditures or funds not expended in a timely manner


(F) “DE MINIMIS RULE”

If time spent on matters outside the objectives of the grant were “de minimis,” effort certifications are unnecessary

- Appeal of State of Michigan, Docket No. 8- 72-88 (1989) – Attachment F


“Montana Compact” defined “de minimis” as less than 5%


(G) UNRESTRICTED INDIRECT COST RATE

ED argued that entire IDEA-B program is subject to a restricted cost rate under 34 CFR 76.563 of EDGAR


But OALJ ruled that IDEA-B state discretionary funds and state administrative funds are not subject to the non supplanting provisions, only flow-through funds

-Appeal of New York State, Docket No. 91-81- R (1995) – Attachment H


“If there is no non-supplanting provision, there is simply no basis for using a restricted indirect cost rate.”


Thus the additional amount that the state is entitled to is an equitable offset


~ LEGAL DISCLAIMER ~

This presentation is intended solely to provide general information and does not constitute legal advice or a legal service. This presentation does not create a lawyer-client relationship with Brustein & Manasevit, PLLC and, therefore, carries none of the protections under the D.C. Rules of Professional Conduct. Attendance at this presentation, a later review of any printed or electronic materials, or any follow-up questions or communications arising out of this presentation with any attorney at Brustein & Manasevit, PLLC does not create an attorney-client relationship with Brustein & Manasevit, PLLC. You should not take any action based upon any information in this presentation without first consulting legal counsel familiar with your particular circumstances.

federal policy through audit resolution “two steps forward, one step back” by michael brustein,...

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