[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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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