[Federal Register Volume 60, Number 3 (Thursday, January 5, 1995)]
[Notices]
[Pages 1771-1772]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-217]



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DEPARTMENT OF EDUCATION

Office of Special Education and Rehabilitative Services


Office of Administrative Law Judges; Intent To Compromise Claims, 
Ohio Rehabilitation Services Commission

AGENCY: Department of Education.

ACTION: Notice of intent to compromise claims.

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SUMMARY: The Department intends to compromise claims against the Ohio 
Rehabilitation Services Commission now pending before the Office of 
Administrative Law Judges (OALJ), Docket Nos. 93-76-R and 93-120-R (20 
U.S.C. 1234a(j)).

DATES: Interested persons may comment on the proposed action by 
submitting written data, views, or arguments on or before February 21, 
1995.

ADDRESSES: All comments concerning this notice should be addressed to 
Jeffrey B. Rosen, Office of the General Counsel, U.S. Department of 
Education, 600 Independence Avenue, S.W., Room 5411, FB-10B, 
Washington, D.C. 20202-2242.

FOR FURTHER INFORMATION CONTACT: Jeffrey B. Rosen. Telephone: (202) 
401-6009. 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: Pursuant to the Single Audit Act of 1984 
(Pub. L. 98-502) and the provisions of Office of Management and Budget 
(OMB) Circular A-128, the Ohio Auditor of State conducted an audit of 
the State of Ohio for the period July 1, 1989 through June 30, 1990. A 
final audit report was issued on January 18, 1993 (ACN: 05-23444G) 
(hereinafter ``Ohio I'').
    Based upon this audit report, the Regional Commissioner, Region IV, 
Rehabilitation Services Commission, U.S. Department of Education (ED), 
issued a Preliminary Department Decision (PDD) on June 24, 1993 in 
which he requested that Ohio repay $883,517 of funds misspent under 
Title I of the Rehabilitation Act of 1973, as amended (the Act), 29 
U.S.C. 701 et seq. There were six different findings as follows:

1. Finding 16--$10,395--late payment penalties.
2. Finding 18--$77,962--State match charged to the Federal program.
3. Finding 19--$227,400--payment of back pay award. [[Page 1772]] 
4. Finding 20--$157,417--exceeded statutory limitation for indirect 
costs.
5. Finding 21--$410,343--indirect costs not appropriately allocated.

On October 29, 1993 Ohio filed an application for review of the PDD 
with the Office of Administrative Law Judges (OALJ).
    The Ohio Auditor of State conducted another audit covering the 
period July 1, 1988 through June 30, 1989. A final audit report was 
issued on October 1, 1992 (ACN: 05-23033G) (hereinafter ``Ohio II''). 
In Ohio II, the Regional Commissioner issued a PDD on August 31, 1993 
in which he requested that Ohio repay $10,798 of funds under the Act. 
The demand for a refund was based upon Ohio using funds under the Act 
to pay late charges on overdue invoices. Ohio filed an appeal of the 
PDD with the OALJ on September 30, 1993.
    On November 15, 1993 the Administrative Law Judge (ALJ) granted a 
motion to consolidate the two cases. On May 27, 1994 the Regional 
Commissioner filed a Notice of Reduction of Claim notifying the ALJ 
that, based upon new information submitted by Ohio, the claim in Ohio I 
was reduced by $106,840.86. The entire outstanding amount in Finding 
#18 of $77,962 was eliminated and the outstanding amount in Finding #20 
was reduced by $28,878.86 to $128,538.14. Thus, the total amount 
outstanding in the two appeals was reduced to $787,474.14.
    Ohio and ED have agreed to settle all of the issues in these cases 
with the exception of Finding #19 in Ohio I in the amount of $227,400. 
The parties will litigate this issue. The remaining amount of 
$560,074.14 is covered by the Settlement Agreement.
    Under the terms of the proposed agreement, Ohio owes ED a total of 
$211,745.64. Of this amount, a total of $68,446.00 is credited to Ohio 
for overmatch reported on its SF-269 for fiscal year 1990. Under the 
Act, grant funds are awarded to States on a matching basis. Depending 
upon the fiscal year, the Federal Government contributes approximately 
80 percent of the funding for the State's vocational rehabilitation 
(VR) program. (34 CFR 361.86.) The State is required to provide the 
remainder of the funding to earn the Federal contribution. State and 
Federal VR funds are commingled so that it is not possible to identify 
which funds are used for particular program expenditures. In this case, 
Ohio provided more State funds for VR services than was mandated by the 
matching requirement in Sec. 361.86 of the regulations. These overmatch 
funds can be substituted for disallowed Federal expenditures on a 
dollar-for-dollar basis.
    As a result, the repayment amount is $143,299.64, to be paid within 
30 days of execution of the agreement by ED. Ohio would be assessed 
interest at a rate of 4 percent per year if full payment is not made 
within 30 days. Failure to make timely repayment within 40 days would 
result in a late payment fee of 10 percent of the $143,299.64 
principal. Finally, under the agreement, the parties would jointly move 
for dismissal of the appeal. For the following reasons, ED recommends 
approval of the proposed Settlement Agreement.

A. Late Payment Penalties--100% Recovery

    In both Ohio I and Ohio II, the State incurred late charges on 
invoices that were not properly paid. Ohio charged $10,395 and $10,798, 
respectively, to the VR Basic Support Program under the Act. 
Maintaining throughout the negotiations that there was no basis to use 
Federal funds for late charges, ED refused to compromise this portion 
of the findings. Ohio has agreed to repay the $21,193, in full, as part 
of the proposed agreement.

B. Unallowable Indirect Costs--100% Recovery

    In Ohio I, the State exceeded the statutory limitation for indirect 
costs and charged the excess funds to the ED VR grants. ED maintained 
that the practice of charging unallowable costs to the VR program 
represented a substantial harm to the Federal interest of ensuring that 
Federal programs are not charged more than their fair and appropriate 
share of the costs. Ohio has agreed to pay the $128,538.14 outstanding 
on this violation, in full, as part of the proposed agreement.

C. Allocable Indirect Costs--15% Recovery

    In Ohio I, the auditors found that all indirect costs were charged 
to ED grants, rather than to a centralized indirect cost pool. As a 
result, the auditors concluded that the State received duplicative 
reimbursement from ED and the U.S. Department of Health and Human 
Services (HHS). In particular, 33 employees of the State's Bureau of 
Disability Determination (BDD) Fiscal Accounting Section worked 
entirely on the HHS grant activities. The auditors found that the 
related indirect costs for these employees were charged inappropriately 
to the ED grants. A total of $410,343 was disallowed.
    Ohio provided credible evidence that shows that this finding was 
based on some erroneous assumptions by the State auditors. Of the 
$410,343, a total of $26,018 was for telephone charges and a total of 
$115,116 was for rent charges. These expenses are clearly the type of 
expenses that are charged directly to grants, and the evidence 
submitted by the State demonstrates that these expenses were charged to 
the HHS grant. Thus, it appears that these charges should no longer be 
disallowed.
    The remaining charges of $269,209 consisted of equipment, building 
maintenance, and consultants for the BDD. Documentation submitted by 
Ohio showed that the HHS grant was charged for substantially all of 
these costs.
    There is no direct evidence that the ED grant was also charged. 
Even one of the auditors, who made the initial audit finding, expressed 
some doubt as to the validity of the initial findings.
    There is clearly a high litigation risk in attempting to uphold the 
original finding. At this time, ED has no information to establish that 
any of the disallowed costs were charged inappropriately to the ED 
grant. Although there is clearly a problem with the State's 
recordkeeping with respect to this issue, Ohio has presented other less 
reliable and circumstantial evidence that could persuade a judge or a 
Federal court to rule in substantial part or in full for its position. 
Furthermore, it is highly unlikely that ED would have made the cost 
disallowance if this information had been available earlier.
    Ohio has agreed to repay $62,014.50. Based upon the foregoing, ED 
believes that it is prudent to accept the settlement offer of 15 
percent of the original costs disallowed in the PDD for this finding.

D. Other Considerations

    If these issues are not settled, ED will incur further litigation 
costs. With respect to the back pay award that will be litigated 
further, there are no factual issues in dispute. The only area of 
contention is a legal issue--whether Federal funds can pay for costs if 
no services were provided and there was no benefit to the Federal 
interest. However, the allocable indirect costs issue is predicated 
upon factual disputes and the lack of corroborating documentation. 
Extensive discovery efforts would be necessary before this issue could 
be litigated. In addition, ED could hope to recover, at best, only the 
$269,209 that appears to be in dispute at this time. The recovery in 
the proposed agreement is almost 23 percent of this amount.
    While the other two issues appear to be very strongly in favor of 
ED, there would be some litigation risk during the administrative 
process. Moreover, Ohio also would have the right to appeal any 
decision to the U.S. Court of Appeals. See 20 U.S.C. 1234g. There is no 
certainty that ED would recover 100 percent on these two issues as is 
contemplated in the settlement.
    After weighing the risks in litigating the issues that are the 
subject of the settlement, it is ED's assessment that the proposed 
Settlement Agreement is the most advantageous resolution of these 
outstanding issues.
    The public is invited to comment on the Department's intent to 
compromise these claims. Additional information may be obtained by 
writing to Jeffrey B. Rosen at the address given at the beginning of 
this notice.

    Program Authority: 20 U.S.C. 1234a(j) (1990)

    Dated: December 29, 1994.
Donald R. Wurtz,
Chief Financial Officer.
[FR Doc. 95-217 Filed 1-4-95; 8:45 am]
BILLING CODE 4000-01-P