APPLICATION OF THE COLORADO DEPARTMENT OF SOCIAL SERVICES,
Docket No. 92-117-R
Recovery of Funds Proceeding
Appearances: Joyce K. Herr, Esq., Senior Asst. Atty. General, Gale A. Norton, Esq., Attorney General,
Timothy M. Tymokovich, Esq., Solicitor General, Paul Farley, Esq., Deputy Attorney General, and Wade Livingston, Esq., First Asst. Atty. General, for the Colorado Department of Social Services.
Kapfer, Esq., Office of the General
Counsel, U.S. Department of Education, for the
Regional Commissioner, Denver Regional Office of
the Rehabilitation Services Administration.
Before: Thomas W. Reilly,
Administrative Law Judge
The Colorado Department of Social Services (Applicant or CDSS) has appealed a Notice of Disallowance Decision (NDD) issued on September 30, 1992, by the Regional Commissioner (RC) of the Denver Regional Office (Region VIII) of the Rehabilitation Services Administration (RSA) of the U.S. Department of Education (ED). The NDD ordered the return of $767,787.87 of Federal funds which had been received by CDSS See footnote 1 1/ in Federal fiscal years (FFY) 1988, 1989, 1990, and 1991 under Part A of Title VII See footnote 2 2/ of the
Rehabilitation Act of 1973 (Act), as amended, 29 U.S.C. §§ 701-
796i, and as in effect before the Rehabilitation Act Amendments
of 1992 ('92 Amendments), Pub. L. 102-569, enacted on October 29,
1992. The basis for the Regional Commissioner ordering the
refund was CDSS' alleged failure to comply with the matching
funds requirements of 29 U.S.C. § 769c(b) and 34 CFR 365.45 of
the applicable regulations, as well as alleged record-keeping
Whether CDSS failed to meet the matching requirement of the
Act and regulations to qualify for the 90% "Federal share" under
the State's Independent Living Rehabilitation Services program
authorized by Part A of Title VII of the Act, and therefore
should be required to refund $767,787.87 in Federal funds as
demanded by the RSA Regional Commissioner.
Whether cash contributions may be or were required from
individuals receiving services under the Part A program; whether
cash contributions from individuals receiving services from sub-
grantees of CDSS may be used to meet the Part A matching
requirement; and whether the total of such alleged "consumer"
contributions made any significant impact upon the alleged
shortfall in required State matching funds.
Whether CDSS complied with the general record-keeping
requirements applicable to both cash and in-kind contributions
set forth in the pertinent regulations (34 CFR 74.61, 76.730,
76.731 and 80.20). (In-kind contributions, 34 CFR 80.24(b)(6).)
Whether CDSS may use expenditures made under the State's
Rehabilitation Home Teachers program (RHT) as an alternative to
meet the Part A matching requirement, or as an "offset" against
any alleged shortfall in the matching figures originally claimed
by CDSS at the time of the subject State Plan Assurance Review
(SPAR) and NDD.
For the reasons set forth below, I conclude that the Applicant
should not be required to return any of the disputed funds, and that the Disallowance Decision
and the Regional Commissioner's
demand for refund are unwarranted and unjustified. Among other
things discussed below, I find that the Regional Commissioner has
misapplied or misapprehended the concept of "donor" as used in
the pertinent regulation (34 CFR 361.76(b)) and, thereby,
improperly eliminated appropriate "matching funds" that were
sufficient to cover the required "State or local share."
I also conclude that cash contributions from disabled recipients (beneficiaries) receiving services under the Part A program may
not be used as part of the Part A matching requirement, but in this particular case, even though
there was some initial
confusion by the subgrantees on this point, it was subsequently
cleared up and no claim was made by CDSS for credit for such
funds under the "matching" requirements. (The evidence indicates
that there were only insignificant amounts involved in such
collected "client" funds.)
I find that even if all the contested "client/recipient
contributions" were to be disallowed in accordance with the
Regional Commissioner's theory, the balance remaining was
sufficient to make the required "match".
I further find that CDSS' adequately complied with the general
record-keeping requirements of the Part A Title VII program.
I also find there were other State funds that had been expended
in the same rehabilitation services program area in the subject
years that could have been (but were not) claimed as State
matching funds to support and justify the Federal funds for the
Federal fiscal years in question, i.e., funds expended by the
State in its Rehabilitation Home Teachers program (RHT). Those
RHT funds were more than adequate to supply the entire 10% State
or local match for the subject years. Whether treated as the
"match" itself, or simply as an offset, such State expenditures
render the R.C.'s calculations of shortfall invalid and
During the weeks of September 24-28, 1990, and May 28-30, 1991,
RSA conducted a review of CDSS Part A program case files, as part
of a SPAR review that had started October 11, 1989. A letter
from James Dixon, RC of RSA, informed Anthony Francavilla,
manager of CRS in CDSS, that RSA's September 24-28 Part A program
case file review had disclosed that CDSS might not be in
compliance with the matching requirements of 29 U.S.C. § 796c(b)
and 34 CFR 365.45, and requested more information on the "exact
amount of funds used for matching purposes for each year the
program had been in operation in (Colorado)" and "total
information (on) the source(s) of these matching funds."
(Letter, January 25, 1991, ED Ex.G.) See footnote 3
Mr. Francavilla's response (May 23, 1991, ED Ex.H) stated, inter alia:
1. Prior to Federal Fiscal Year 1990, all matching funds
were provided to CRS by the independent living centers and
other sub-grantees. With few exceptions (noted below), each
sub-grantee was reimbursed in the amount of 90% of the
approved, eligible expenditures under the grant, with the
sub-grantee being responsible to secure and expend eligible
2. Part A sub-grants took two forms - grants for direct
purchase of case services to individual consumers (shown as
"ILAC" funds)[Independent Living Local Allocations
Committees], and cost-reimbursement grants for administration and delivery of services by the sub-grant agency. The latter category of sub-grants represent approximately half of the total Part A funds expended, and do not have the potential for the misinterpretation of consumer participation which has been identified in some "ILAC" cases. . . .
* * * *
3. As we previously agreed, matching funds for all FFY
1990 "ILAC" activities were provided through cash funds available to CRS, and the questioned funds raised by the
ILC's (Independent Living Centers) were waived in their entirety. For non-ILAC "administrative" sub-grants, the sub-grantees have continued to provide the matching funds. Again, no direct client services are funded through these grants and, therefore, no issue of misinterpretation or misapplication of "client participation" funds arises.
* * * *
While examination of State Agency records allows for certain general conclusions as to whether a sub-grantee may have claimed funds expended by consumers as participation in the cost of services as a portion of the ILC's "applicant (matching) share" of the cost of case services, our own records only document with certainty the total amount contributed by the sub-grantees. We cannot, therefore, provide from our records a detailed breakdown of the multiple sources from which the sub-grantees themselves received the funds used for their share of eligible expenditures.
The majority of Part A funds expended during the period...
were in fact awarded to IL Centers for administrative expenditures (..."project grants", and were not subject to
the possibility of erroneous application of consumer funds). * * * *
(W)hile erroneous reporting of consumer participation
as local "matching" funds may have occurred,See footnote 4 4/ there is no evidence that any consumer was ever denied services for failure to participate in the cost of services, or that
there was ever intent by the State or the sub-grantees to
We regret that neither State agency (n)or Federal
review disclosed this problem prior to 1990. We have,
subsequent to your identification of this problem,
acted aggressively to assure that current-year matching
funds (FFY 1990) were provided from sources other than
the IL Centers, so that there was no possibility of any
funds from consumer participation being included in the state share of ILAC service costs....
We have sought and...received legislative approval for continued use of cash funds available directly to CRS
to match all IL Part A case service (ILAC) funds in the future. This will totally eliminate the potential for
future problems resulting from sub-grantee confusion
about eligibility of various funds for Part A "match"....
(Francavilla letter, May 23, 1991, ED Ex.H, emphasis added.)
A series of letters between RSA Regional Commissioner James Dixon and Anthony Francavilla, Manager of CRS, led to the eventual issuance of the Notice of Disallowance Decision (NDD) on September 30, 1992. Mr. Francavilla appeared to be genuinely attempting to comply with the requests for further information and further documentation, but Mr. Dixon apparently was dissatisfied with the forthcoming results, notwithstanding CRS's changes in its "matching funds" arrangements, the funds to be used therefor, and the newer methods of reporting and accounting to more exactly fit what RSA wanted.
RC Dixon sent another letter to Mr. Francavilla on July 2, 1991,
transmitting a draft report of the Part A program SPAR of CDSS
conducted September 24-28, 1990. (ED Exhs.I & F.) This included
a tentative finding that CDSS had allowed its subgrantees to
require clients to make contributions toward the cost of their
services. On July 22, 1991, Mr. Francavilla replied (ED Ex.J),
stating that on November 13, 1990, CDSS already had notified all
of its subgrantees that consumer participation in the costs of
services under the Part A program could not be required under any
circumstances, either as a condition of eligibility or for
approval of purchasing services, and that consumer participation
must be strictly voluntary. Mr. Francavilla also pointed out
that CDSS "has identified other sources of cash matching funds for all Title VII Part A
case service ('ILAC') sub-grants made from FFY 1990 and subsequent Federal grants."
The final SPAR report on the Part A program was sent by the RC on
July 26, 1991, advising CDSS that its methods for ensuring that
appropriate sources of State funds are used to match Federal
funds were being investigated, together with the fiscal
administration of the State match. (ED Ex.K.) On April 28,
1992, the RC sent another letter to Mr. Francavilla again
requesting information about the source of the State's share of
expenditures under the Part A program, and requesting supporting
documentation. (ED Ex.N.) The letter, inter alia, stated that the cost sharing or matching
requirement "must be verifiable from
your records and your subgrantees' records" and that "(t)hese
records must show how the value placed on third party in-kind
contributions was derived."
Mr. Francavilla replied by letter of June 3, 1992 (ED Ex.P),
stating in part:
Most of the local share of project costs reported by
the subgrantees came from "Other Contributions". In
many cases, subgrantees did not list specific donors
for these funds, because funds contributed to a non-
profit agency that are not "earmarked" for specific
purposes are ordinarily placed in an account for
general or "unrestricted" contributions. Funds from
such an account cannot subsequently be identified by
... CRS has obtained legislative authority
to begin using its own cash funds in lieu of funds
provided by subgrantees as the State share of Title
VII A expenditures. We have subsequently utilized
these cash funds, along with eligible funds contributed
by the Centers, to meet State participation requirement
for FFY 1990 and 1991.
* * * *
Funds have not been received for deposit from any party
other than the subgrantees, and then only under limited
and infrequent circumstances where the Center was unable
to carry the cash-flow for a purchase. In those instances, the Center sent CRS a check for the subgrantee share of a
purchase along with an invoice, and the State issued a warrant for the full amount. We have been able to identify
a total of $997 in funds deposited for this purpose.
There is no indication that any Center utilized fees charged
to consumers of Title VII services for matching purposes.
It should be noted at this point that in all the above correspon-
dence, the Judge does NOT consider the term "subgrantee" to be
synonymous with either "consumer" or the ultimate disabled recip-
ient/client of rehabilitation services. Rather, a subgrantee is
understood to refer to the local individual nonprofit, community-
based Center for Independent Living ("ILC" or "Center"). Under
the system used by CDSS and its organizational unit, CRS, the
local Centers were responsible for obtaining and supplying the 10% "State match"
that was necessary to utilize the Part A, Title
VII Federal funds here at issue. (The State or local "match"
could consist of either cash or in-kind contributions, or a
combination of both, and may include funds from private non-
profit agencies, such as United Way, or individual contributing
The forms submitted by CDSS to RSA (ED Exh.Q, R, S & T)
summarized the sources of funds used to satisfy the State's 10%
match requirement for FFY's 1988, 1989, 1990 and 1991, showing
the amounts received by CDSS from its subgrantees:
1988 -- $35,096.77
FFY 1989 -- $36,248.43
FFY 1990 -- $59,174.30
FFY 1991 -- $84,699.50
RSA's brief (at 8) states that the forms showed no "in-kind"
contributions received by CDSS from any of its subgrantees, and
that Mr. Francavilla provided no supporting documentation with
this information. "Therefore, RSA could not verify the figures
provided" on those forms (RSA Brief, at 8). But CDSS points out
(Brief, 14-15) that the primary source supporting information was "voluminous" and,
therefore, could not simply be handed over by
Mr. Francavilla; it was, however, maintained by CDSS personnel
and the Centers, and was always available for review or audit by
RSA. Consequently, the accuracy of RSA's claim that it "could
not verify the figures provided" is seriously questioned.
Furthermore, CDSS asserts that "the documentation of in-kind
contributions had not been maintained by CDSS fiscal personnel
because they believed that the 10 percent match provided by the
Centers was sufficient and therefore the reporting of in-kind
contributions as match was not necessary." CDSS also points out
that at no time has RSA attempted to perform any audit of these
records. (CDSS Brief, at 15.)
On July 27, 1992, the RC sent the draft monitoring report to
CDSS. CDSS replied through Mr. Francavilla's September 10, 1992
letter (ED Ex.W) which pointed out, among other things, that
CDSS' earlier June 3, 1992 letter was intended to address what
CDSS believed were RSA's "concerns about the sources of funds or
in-kind contributions to the subgrantees." (Emphasis added.) CDSS also said that costs
incurred by its subgrantees that were
funded by cash contributions to its subgrantees "constitute in-
kind contributions as defined in 34 C.F.R. 80.24(a)...(and) are
not subject to the deposit requirements of 34 C.F.R. 361.76." Id. CDSS also informed the
RC that "the balance of required State or
local participation in Title VII Part A expenditures for Federal
fiscal years 1988, 1989, 1990 and 1991 appears to be fully met
through the in-kind contributions of the subgrantees supported by
cash contributions to the subgrantees...." Id. CDSS also identified other amounts of
in-kind contributions to its
subgrantees from local volunteers for FFY 1990 totalling $1,187.
On September 30, 1992, the RC sent the final monitoring report to
CDSS (ED Ex.X) and it questioned $767,787.87 of the allotments
received by CDSS for the four FFY's in issue under Part A of
Title VII. The report alleged a failure of the State to meet the
Part A matching requirement. On the same date the RC sent the
NDD to CDSS disallowing the above amount for, inter alia, an alleged failure of the State to
meet its matching requirement for
the State's independent living program that had been authorized
under Part A of the Act.
CDSS filed its Application for Review on October 30, 1992, and
jurisdiction of the case was accepted by the Office of
Administrative Law Judges, U.S. Department of Education, on
November 11, 1992.
ANALYSIS OF ARGUMENTS
Regulations relating to the Independent Living program appear in
34 C.F.R. Part 365 (1990). A section entitled "State and local
funds", 34 C.F.R. 361.76 (relating to Title I) is referenced by
34 C.F.R. 365.15 (1990). In 34 C.F.R. 365.1, the provisions of
the Education Department General Administrative Regulations
(EDGAR) are made applicable. In March 1988 EDGAR regulations in
34 C.F.R. Part 80 were adopted establishing uniform rules for
grants to States. (Appl.Ex.17) There is nothing in Part 365
which defines, clarifies, interprets or prescribes standards for
the "non-Federal share" required by statute. In its brief, RSA
characterizes the non-Federal match as "State funds", but that terminology is
inaccurate and misleading. RSA appears to rely on
29 U.S.C. §796c(3)(1990) to support its contention that "non-
Federal share" is whatever the Commissioner says it is in the
regulations. The statute, however, does not quite say that. It
merely allows expenditures of counties and other political
subdivisions to (also) count toward the State share. It does not
otherwise limit or define the nature of expenditures includable
under "State share". This is consistent with 29 U.S.C.
§706(7)(C)(1990), which provides a similar definition for the
Vocational Rehabilitation program generally, i.e., that
expenditures of political subdivisions and local agencies also shall be regarded as expenditures
by the State. But neither
provision defines "expenditure."
Section 361.76 simply defines "State or local funds" for the purposes of Part 361 (see introductory statement in the regulation). No other provision in Part 361 or Part 365 refers to the term. Ergo, the regulation itself does not define or clarify or set forth requirements or limitations for the statutory term "non-Federal share". It cannot be maintained that "State or local funds" is equivalent to "non-Federal share" because 34 C.F.R. 361.76 makes no provision at all for the "in- kind" contributions clearly allowed by the statute. The basic rule for "cost sharing or matching" in 34 C.F.R. 80.24 (1990) is that matching requirements are satisfied either by allowable costs incurred by a grantee or subgrantee including "allowable costs borne by cash donations from non-Federal third parties" or by "the value of third-party in-kind contributions...." For example, under §80.24 there are two ways to satisfy a cost- sharing requirement -- allowable costs paid with funds from non- Federal sources and "in-kind" contributions. Section 361.76 establishes a third acceptable form of non-Federal match, cash deposited in State or local government bank accounts. However, neither statute nor regulation requires that only "State funds" can be considered the only permissible manner by which the State can fulfill the cost-sharing required by the Federal program, or that the cost-sharing "allowable costs" must be State funds. RSA's insistence that "allowable costs" also must be "State
funds" appears to be beyond the statutory authority of the
The Rehabilitation Services Manual, Chapter 3010, states in
3010.25 (Appl.Ex.18), that "the State share of the costs in the
establishment of a rehabilitation facility may be cash or in-kind
in accordance with 34 C.F.R. 80.24." Then, RSA appears to make
an unjustified leap over its authority by asserting that 3010.09
of its Manual applies to cash contributions by private agencies.
Paragraph 3010.09 refers back to 34 C.F.R. 361.76 which defines
"State and local funds," but there is no reference to "State and local
funds" in Part 80. Most of the costs claimed by CDSS as
its share in this case ("cost sharing") were allowable costs
borne by third parties. Some were identified as "in-kind"
contributions (Appl.Ex.19), including the value of such items as
general office work and donated goods. In Colorado, the system
used by CDSS to establish and comply with cost-sharing
requirements (ED Ex.H) was, in most cases, by reimbursement to
each subgrantee from the State for 90% of approved, eligible
expenditures, and the subgrantee was responsible for obtaining
and spending 10% of the costs as matching funds.
RSA is mistaken in asserting that CDSS did not have "sole
discretion" to direct how the cash contributions could be spent
by the individual Centers. The amounts became contributions for matching purposes only when
expended by the Centers for allowable costs of the program, as approved by CDSS. CDSS
maintained control over how, when and on what such money was to
be spent. RSA also argues that the State's match was faulty
because the funds contributed by the Centers were not
appropriated by the State. Those amounts were identified,
considered and appropriated by the Colorado legislature. (See Appl.Ex.10.) RSA admits that
expenditures made with appropriated
State funds "would clearly qualify" as State match. (ED Brief, at
One of the arguments of RSA is that none of the contributions to CDSS from its subgrantees could properly be used to meet the Part A matching requirement because this would allegedly violate 34 CFR 361.76(b), which expressly prohibits "expenditures that revert to the donor's use or facility," as CDSS, in essence, was sending 100% of the cost of the eligible expenditure back to the subgrantees (ILC's) in exchange for the 10% initially transmitted to CDSS by the subgrantees. But this appears to be clearly misinterpreting the meaning of "donor" in that regulation. The real "donor" was the original individual charitable contributor to the independent living center (ILC) or to CDSS - not CDSS itself or the ILC. In other words, if an initial individual donor were to be reimbursed the amount of his initial contribution (to ILC or CDSS) after going through the charade of initially paying the alleged "10% match" (or any part thereof), then, of course, that would violate the 361.76(b) prohibition
against reversion "to the donor's use or facility." Such funds could not then be used
as any part of the required "match". But
CRS or an ILC in using its own collected funds to transmit up the
line to CDSS or the State does not transform the ILC, CRS, or CDSS into a "donor"
within the meaning of that regulation. Also,
there is no requirement that only State funds be used for the 10% match share. County, local,
and private nonprofit agencies or
individual local contributors can certainly supply funds toward
the "State share" or match. Here it was clearly the State's plan
and system that the local agency come up with the 10% share, and
so long as the source of those funds was not the disabled
consumers themselves, the State was entitled to count those funds
as part or all of its 10% "match". The very section itself
envisions funds coming from "contributions by private organizations or individuals"
to be deposited in the account of
the State or local agency. (See first sentence of 361.76(b).)
To repeat the obvious, the "private organization or individual"
making the initial contribution is the "donor" for purposes of
that section -- not the local ILC, CRS, or CDSS which transmits some or all of those funds up to
the State as part or all of the
"State's" match. Thus, in the absence of any evidence that
individual contributing "donors" received their donation money
back again, the "reversion" prohibition of 361.76(b) has no applicability here. See footnote 5
The money "coming back" from a higher state agency never came back to the
original "donors", but rather
went to purchase goods or services for the disabled clients and
intended beneficiaries, i.e., "consumers" of rehabilitative
services in the ILC's.
There is an apparent additional argument that "none of the cash contributions received by CDSS from any of its subgrantees were received with the understanding that CDSS had 'sole discretion' for how those cash contributions could be spent," since those funds were transmitted with the expectation that a 100% payment would be sent back by CDSS for the rehabilitation item requested at the same time the 10% matching "donation" from the local ILC was sent. But this argument is inextricably tied in with improperly treating an ILC (or CDSS) as a mere charitable "donor" or "contributor" for purposes of the earlier "prohibited reversion" argument, instead of as the quasi sub-agency of the State that it is (albeit by contract). The fact that there is transmission of funds representing the "State's" 10% share from one local sub-agency (ILC) of the State to a larger State agency (CDSS) does not thereby taint those funds and make them unavailable for matching purposes, nor does it inhibit the discretionary re-use of those funds in the rehabilitation services area by the receiving state agency (CDSS or CRS). They were initially collected as private charitable contributions by the local agency (Independent Living Center) without restrictions on how to be used, they thereby became "State or local funds," and thereafter were utilized by the State agencies as part of their required 10% "match." I see nothing reprehensible or devious about this, nor does it in any way defeat the purposes of the Federal requirement that States come up with their 10% match in State or local funds before being eligible to spend the Federal share.
RSA also has argued that CDSS failed to meet the record-keeping
requirements of the pertinent regulations (34 CFR 74.61, 76.730,
76.731, 80.20 and 80.24(b)(6)). The Single Audit Act of 1984, 31
U.S.C. §§7501-7507, Appendix to Part 80 of EDGAR, mandates audit
requirements for State and local governments that receive Federal
funds. Each governmental unit receiving over $100,000 annually
in Federal funds must have an audit performed annually by an
independent auditor using generally accepted government auditing
standards covering financial and compliance audits, 34 C.F.R.
Part 80, Appx.4 (1990), with the oversight of a "cognizant
agency", 34 C.F.R. Part 80, Appx.3(a)(1990). The Single Audit
Act also requires State or local governments receiving Federal
funds to enforce similar audit requirements on their sub-
recipients. Colorado's Department of Health and Human Services
is the "cognizant agency." This cognizant agency has given no
notice to the State of any irregularity in the accounting system
being used by state agencies and sub-agencies in the
rehabilitation services programs. The Office of the State
Auditor has performed regular state audits of the program and
agencies involved and found no significant irregularities in the
accounting systems used (Appl.Ex.22).
The regulation found at 34 C.F.R. 76.730 requires records kept by
the State and subgrantees to show the amount of funds and how
used. Section 76.731 requires records kept by the State and
subgrantee "to show its compliance with program requirements."
Section 80.20(a) requires the State to account for funds "in
accordance with State laws and procedures" sufficient to prepare
required Federal reports and allow tracing of funds. A review of
the two volumes of CDSS exhibits indicate that the State's fiscal
controls and accounting procedures comply with those mandates.
Section 80.20(b) prescribes subgrantees' reporting standards,
including accurate reports required by the grant or subgrant, and
records which identify "the source and application of funds".
The evidence indicates that CDSS' subgrantees keep such records.
34 C.F.R. Part 74 Subpart G (74.53(d)) of EDGAR (re: FFY'88) and
34 C.F.R. Part 80 Subpart C (80.24(b)(6) (re: FFYs'89,'90,'91) See footnote 6
specified that cost-sharing or matching costs and third party in-
kind contributions "must be verifiable from the records of
recipients or cost-type contractors"(FFY'88) or "from the records
of grantees and subgrantees or cost-type contractors" (FFYs
Independent audits of the Independent Living Centers have been
performed. CDSS maintains in its own records the cancelled
checks and other back-up material relating to all costs incurred
as "match". One RSA official (from Washington,D.C.) "questioned
the detail and magnitude of client files" See
in a Colorado Center, believing such detail to be "excessive and contrary to
Independent Living philosophy."
In its brief (at 21), RSA complained that "CDSS has failed to supply adequate accounting records and supporting documentation." But the statute and regulations only require the maintenance of
records and designated reports. They do not require that a State
comply with an unreasonable, unlimited or unfeasible request for
voluminous documentation by a Federal agency, when such
voluminous records and documentation are freely available to
Federal audit or inspection. Nor does Federal law require
additional audits in violation of the Single Audit Act, which
provides that the single audit "shall be in lieu of any financial
or financial and compliance audit of an individual Federal
assistance program which a State or local government is required
to conduct under any other Federal law or regulation." 31 U.S.C.
What Regional Commissioner Dixon appeared to be driving at here
(judging by his extensive and lengthy correspondence with Mr.
Francavilla) was a rather extensive re-audit of the voluminous documentation available at CDSS
and the individual Centers. For
example, see Mr. Dixon's January 25, 1991, letter wherein he
asked for "total information about the source(s)" of funds used for matching
purposes. CDSS, attempting to cooperate and
believing that RSA's primary concern was consumer or individual
contributions, replied by letter of May 23, 1991, supplying
additional information as to how the match was determined along
with several pages of detail. (ED Ex.G, reply ED Ex.H.) Mr.
Dixon's second letter (ED Ex.N) demanded even more information,
even transmitting an ad hoc form for the State's "convenience" in providing large
amounts of additional information, which was to
be returned to RSA with "supporting information." The letter
provided only the most general description of the additional
documentation desired by the Regional Commissioner: "T)he
information and supporting documentation ... must be sufficient
to permit the tracing of the Title VII, Part A funds to a level
of expenditures adequate to establish that such funds have not been used in violation of the
restrictions and prohibitions of
applicable statutes." (Not a helpfully narrowing description.)
On June 3,1992, CDSS provided the completed forms requested by
RSA (ED.Exs.P-T). The information supplied still did not satisfy
RSA. The Regional Commissioner asserts in his brief (p.8) that
the ad hoc forms completed and returned by CDSS "showed no in- kind contributions
received by CDSS from any of its subgrantees."
But the documentation from each Center clearly identifies such
contributions which were included in RSA's spreadsheet attached
to its Final Monitoring Report (ED Ex.27).
After the lengthy series of letters and repeated attempts to supply additional information and additional documentation, RSA's allegation of "insufficient record-keeping" seems disingenuous at best, particularly when further voluminous records and documentation still existed at CDSS and the IL Centers, scrupulously maintained for RSA's inspection, should it care to go to the trouble. Thus, the issue of records "maintenance" appears to be not a valid allegation, one created by RSA from a
position wherein it was adamantly committed to remain unsatisfied
with whatever was produced by CDSS (and Mr. Francavilla).
It is true that the individual Centers did not always identify
the specific donor of some of the funds because it was unable to
do so. Funds included in the category of "Other Contributions"
were "unrestricted" from sources that did not "earmark" the funds
for any particular purpose. It was the usual practice in such
organizations that all such funds were combined and thus lose
their individual character. If all such funds were eligible for
use, the identity of the donor was irrelevant. However,
the Centers were generally able to identify the sources of funds in unrestricted accounts as shown by examples in Applicant's Exhibit 25.
The "Other Cash Funds" to which Mr. Francavilla referred in his
June 3, 1992 letter (ED Ex.P), were cash funds unrelated to the
contributions from the Centers. CRS had intended to use these
funds in lieu of claiming funds from the subgrantees for the ILAC
grants. However, when CRS determined that the language of the
State legislative appropriation precluded use of such funds at
that time, it did not include them in the category of funds
described in Mr. Francavilla's letter (ED Ex.P) thus: "funds have
not been received for deposit from any source other than the
subgrantees." At that time the statement that CDSS was not aware
of any Centers charging fees to clients was correct.
In the preliminary departmental decision to disallow funds, "the Secretary shall have the burden of stating a prima facie case for the recovery of funds."See footnote 8 8/ 20 U.S.C. §1234a(a)(2). A State does not have the burden or proving the allowability of expenditures disallowed in a final audit if the notice "lacked sufficient detail." State of California Dept. of Education v. Bennett, 849 F.2d 1227 (9th Cir. 1988). The court determined in that case that summary conclusions do not supply "sufficient detail" required in the statute if the conclusions are based upon a tiny sample too small to be relied upon to give a fair picture of operations across-the-board. In this case RSA's NDD referred to the final monitoring report issued September 30, 1992. That report repeated the State's claim for the non-Federal share as reported on the Federal forms and RSA asserted that Colorado deposited only "miniscule" amounts in its bank accounts. The report concluded that "(b)ased on responses from CRS, CRS used cash funds contributed by the Centers ... not deposited in a State account...." The report further concluded that CDSS "did not provide documentation to support" in-kind contributions, and
then argued that because CDSS failed to provide the documentation
RSA wanted "RSA must conclude that CRS and its subgrantees did
not maintain adequate records...." There is no assertion that
RSA ever looked at the records the Centers did have, nor evidence as to what those records
actually showed. There is not even an
assertion that any attempt was ever made to look at such records.
RSA merely asked questions in its ad hoc forms, received answers, additional information and
additional documentation, and then RSA
made a sweeping conclusion ("inadequate records") without
checking the readily available records for the further
information it apparently desired.
It is apparent now that RSA was looking for something very
specific in its continuous rejections of whatever was supplied,
but RSA never did specify exactly what it was looking for. The
generality about supplying "information and supporting
documentation...sufficient to permit the tracing of...funds to a
level of expenditures adequate to establish that such funds have
not been used in violation of (law)" is so vague as to be
useless, instead of being helpful and specific. It is
insufficient for RSA to simply say that some instances have been
found in which clients "illegally" contributed to costs of
services, and then use that as a basis to disallow CDSS' entire
non-Federal share. The burden is on RSA to show illegality, that
the State's and Centers' audits, reports and records were
inaccurate or insufficient (in some specific way) to comply with
applicable law and regulations. From the exhibits in this
record, the State's records appear to be adequate to comply with
the requirements of the law and regulations. Without ever
auditing or at least reviewing the records described by Mr.
Francavilla in his letters, particularly at the Centers, RSA
failed to meet its burden of establishing a prima facie case with
regard to alleged "inadequacy" of record-keeping. RSA's
suspicions do not substitute for proof.
Not only is RSA's disallowance of the State's entire Federal
share of Part A Title VII disproportional to any harm to the
Federal interest, but I see no harm to the Federal interest in the facts and circumstances existing
here. The State did a
commendable job in executing the Part A program,See
and exceeded the required 10% match from several standpoints.
COLORADO'S REHABILITATION HOME TEACHERS
During the same four-year period for which the disallowance was
issued, CDSS also operated a Rehabilitation Home Teachers Program
for persons who are visually impaired. Funded entirely by
appropriation of State general funds, the RHT Program serves clients, 53% of whom have been
recipients of services through
Title I (§110), 29 U.S.C. §720, the basic support grant, and 47%
of whom may not be eligible for Title I assistance because of
their severe disability. The program provides training in
Braille and mobility, use of low-vision aids, cooking,
housekeeping, and shopping. (Appl.Ex.12) The teachers' job
descriptions specifically describe their functions. Examples of
case records (Appl.Ex.11) show that these clients were eligible
for Title VII, and that services rendered were eligible services
under Part A Title VII and the RSA-approved State plan.
For documents relating to the Rehabilitation Home Teachers
Program (RHT), a review of Applicant's Exhibits 11 thru 14 and 37
thru 42 is essential. Not only is the applicability of that
program's State expenditures for use as "matching funds" quite
evident, but the amount of expenditures not otherwise used as
Federal match is calculated in those exhibits. (Appl.Ex.14.)
In its brief, RSA bases its contention that CDSS may not claim
previously unreported expenditures as an offset against a
disallowance of Part A funds on two old RSA program instructions
(RSA-PI-77-7, December 8, 1976, ED Ex.A; RSA-PI-77-33, September
26, 1977, ED Ex.B). They were issued long before Title VII was
enacted, and apparently those old program instructions related
only to Title I of the Act, not Title VII. (See Appl.Ex.26 and
Policy Directive RSA-PD-91-04.) Thus it appears that the first
of the six conditions described in RSA's brief as prerequisites
to accepting the RHT Program expenses for "match" is
inapplicable. The remaining five conditions (ED Brief, at 24-25)
clearly have been met.
During each of the four years in question, the State expended only State general funds for the RHT Program and to the extent of over $400,000 per year, of which $200,000 or more (each year) was NOT used to match Title I or any other Federal funds. Thus, over $200,000 per year was available to meet the State's share of Title VII Part A costs (Appl.Ex.14, see also Appl.Exs.11,12,13 and 37-42). (Compare the amount available per year with the much less than $100,000 per year needed for the "match".) All expenditures in the RHT program offered as non-Federal match were for personal services, staff travel and operating expenses for CDSS personnel engaged in delivery of services to persons who were eligible for services under Title VII Part A, and were within the scope of the State plan for Independent Living. Accordingly, these funds more than meet the requirements for
match even utilizing RSA's own criteria for "State and local
funds." See footnote 10
Applicant's Exhibit 36 summarizes appropriated expenditures for
the RHT Program for each year covered by the disallowance (NDD),
indicating amounts reimbursed under Title I and amounts remaining
available for match of Title VII funds. (Each of the years in
issue have an amount of RHT expenditures available for match in
the Part A Title VII program far greater than needed.)
Applicant's Exhibit 34 itemizes all Title I expenditures, by
grant extract report, including the RHT Program, in FFY 1991.
That supports the amount of $287,790.39 claimed on the RSA-269
form (Appl.Ex.35) submitted to RSA for Title I for that year, and
the amounts summarized in Applicant's Exhibit 36.
The combined effect of the Supplemental Documentation See footnote 11 11/ submitted by Colorado on March 6, 1995 (in response to my February 13th Order requesting such additional information) is to clearly establish in sufficient detail that CDSS did, in fact, have more than adequate RHT expenditures to qualify for the "non- Federal share" in each of the years in issue standing alone without credit for any of the already-claimed Independent Living Center expenses. Within these documents there are calculations and deductions of those RHT expenditures already claimed as match under Title I programs. I decline to accord to Standard Form 269 the exalted shibboleth status that ED counsel apparently would, when similar information is contained in the copious additional
documentation submitted by Colorado. See footnote
FINDINGS AND CONCLUSIONS
After due consideration of the entire record in this proceeding
including all documentary evidence and the briefs of the parties,
the tribunal has arrived at the following findings of fact and conclusions of law:
1. The Applicant has carried its burden of proving that the
funds covered by the RSA's Disallowance Decision should not be
returned, and that the expenditures disallowed by that DD were
allowable under the Rehabilitation Act of 1973, Part A Title VII program for required
"State and local funds" matching purposes.
2. The Applicant carried its burden of proof in establishing
that the State of Colorado (through CDSS) has supplied more than
the required matching funds in the four Federal Fiscal Years in
issue, consistent with the requirements of §704(b)(1) of the Act
with regard to the State's Independent Living Rehabilitation
3. The Applicant met its burden of proving that it maintained
adequate records and met the general record-keeping requirements
for the Part A Title VII program and, specifically with regard to
the documentation of "matching funds" expended, as required by
the Act and its implementing regulations.
4. CDSS met the Part A Title VII matching funds requirements of
the statute and regulations for the four FFY's in issue.
5. Cost participation by individual clients/recipients of
services, who were able to pay for part of their services, does
not violate the law or regulations relating to the Part A Title
VII program, so long as such funds are not claimed as part of the
State's required "match".
6. Such "client" cost participation was miniscule in amount,
did not affect the claimed "non-Federal share", was not claimed
by CDSS to be part of its "matching funds" expenditures, and was
not mandatory or a prerequisite to receiving rehabilitative
services or equipment.
7. CDSS substantially met the record-keeping requirements of
RSA in accordance with the mandates of the Part A Title VII
program, and during and since the subject audit has upgraded the
quality of its record-keeping system in its continuing quest to
conform to whatever detail RSA requires.
8. RSA gave insufficient guidance before, during, and after the
subject records review (SPAR) to enable CDSS to supply the more
specific documentation RSA apparently desired for "matching
funds" records. Furthermore, RSA never went to the sites of the
Individual Living Centers to view the voluminous additional
documentation that was always freely available and accessible to
RSA for whatever further detailed records it sought to support
the "matching funds" calculations submitted by CDSS.
9. For years prior to the subject audit and review RSA never
indicated that CDSS' records system was inadequate for RSA's
purposes, nor gave any suggestions on how to improve it to
10. The Applicant met its burden of proving that the State fully
discharged its obligations to account properly for both the
Federal funds expended in this program and for the "matching
funds" ("non-Federal share") required by the Act and the
11. The funds used as "non-Federal share" need not be solely governmental in nature (i.e., State, county or local government units), but they may originate with private individual contributors (organizations or private individuals), so long as contributed for State or local use in the rehabilitation services area. Nothing in the statute or regulations expressly prohibits this nor explicitly defines or limits what may constitute the funds or expenditures used for the "non-Federal share."
12. There was NO harm to the "Federal interest" by the manner in
which Colorado and CDSS calculated and recorded funds and
expenditures made on the local level for the State's Independent
Living Rehabilitation Program.
13. The State's expenditures in the Rehabilitation Home Teachers
Program, standing alone, and emanating from the State's
legislatively appropriated general funds, alternatively, more
than satisfies the matching funds requirements of the Part A
Title VII program. Such funds (solely those NOT used for any
other Federal "match") amounted to over $200,000 per year for
each of the four years in issue, and the amount of "match"
required for each of those four years was far less than $100,000
per year. There is no Federal regulation now in effect that would prohibit use of those RHT
funds as "match" simply because
other State or local expenditures had been submitted earlier for that same purpose.
On the basis of the foregoing findings of fact and conclusions of
law, the demand by the Regional Commissioner of the Denver
Regional Office (Region VIII), of the Rehabilitation Services
Administration, to recover funds from the Colorado Department of
Social Services is HEREBY ORDERED DENIED AND REVERSED, and the
subject Disallowance Decision covering Federal Fiscal Years 1988
through 1991 is hereby VACATED.
Thomas W. Reilly
Administrative Law Judge
Issued: March 31, 1995.
S E R V I C E L I S T
A copy of the attached INITIAL DECISION was sent to the following
by Certified Mail, Return Receipt Requested, on the 31st day of
Sergio Kapfer, Esq.
Office of the General Counsel
U.S. Department of Education -- FOB-10B
600 Independence Avenue, S.W. -- Rm. 5403
Washington, D.C. 20202-2242.
Joyce K. Herr, Esq.
Senior Asst. Attorney General
Human Resources Section
Office of the State Attorney General
1525 Sherman Street -- 5th Floor
Denver, Colorado 80203.