FEDERAL POLICY THROUGH AUDIT RESOLUTION “TWO STEPS FORWARD, ONE STEP BACK” By Michael Brustein, Esq. Brustein & Manasevit, PLLC Fall Forum 2015

BASIC HIERARCHY OF SAFE HARBORS 1.Program Statute 2.GEPA 3.Program Regulations (34 CFR 81.5(b)) 4.EDGAR 5.Final Agency Audit Decisions 6.90 Day Letter (34 CFR 81.33) 7.Non-Regulatory Guidance and Dear Colleague Letters (?) 8.Memoranda, s, Telephone Calls Brustein & Manasevit, PLLC © All rights reserved.2

GOOD GUIDANCE VS. BAD GUIDANCE 1.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. Brustein & Manasevit, PLLC © All rights reserved.3

THE REINS ACT H.R. 427  “Regulations from the Executive in Need of Scrutiny” ( )  Passed House 7/28/15 Brustein & Manasevit, PLLC © All rights reserved.4

 Congress has 70 session days to enact approval of “major” regs with $100 million+ impact, or they do not take effect Brustein & Manasevit, PLLC © All rights reserved.5

HOW DOES GEPA DEFINE “REGULATION”?  Section 431(a)  “Regulation means any rules, regulations, guidelines, interpretations, orders, or requirements of general applicability.” Brustein & Manasevit, PLLC © All rights reserved.6

 Regulations must contain citations to the particular sections of statutory law or other legal authority upon which such provision is based (a)(2) Brustein & Manasevit, PLLC © All rights reserved.7

SEVEN SIGNIFICANT ED POLICIES MADE THROUGH THE AUDIT RESOLUTION PROCESS 1.Cooperative Audit Resolution 2.Equitable Offset 3.Linkage Under Tydings 4.S/L Measured by Obligations 5.S/L Is Doctrine of Repose 6.De Minimis Rule of Time and Effort 7.Unrestricted Indirect Cost Rate Under IDEA B State Funds Brustein & Manasevit, PLLC © All rights reserved.8

 Is the pendulum now swinging back? Brustein & Manasevit, PLLC © All rights reserved.9

(A) CAROI  Piloted in May 1996 (Attachment B)  History of Florida Voc Ed / Adult Ed Time and Effort Audits  Aggressive State Auditor General Brustein & Manasevit, PLLC © All rights reserved.10

 Florida CAROI precedent in 1996 served as model for other states Brustein & Manasevit, PLLC © All rights reserved.11

 CAROI fully resolved disallowances and eliminated monetary claims Brustein & Manasevit, PLLC © All rights reserved.12

 ED was sole agency to use CAROI  NPRM on Super Circular in February 2013 adopted Cooperative Audit Resolution as Government Standard Brustein & Manasevit, PLLC © All rights reserved.13

 See 2 CFR (d)  NPRM“amnesty”  UGG“appropriate relief” Brustein & Manasevit, PLLC © All rights reserved.14

 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. Brustein & Manasevit, PLLC © All rights reserved.15

 Is ED backtracking from 1996 precedent? Brustein & Manasevit, PLLC © All rights reserved.16

(B) EQUITABLE OFFSET  Allowable costs charged to nonfederal funds are allowed to substitute for unallowable costs Brustein & Manasevit, PLLC © All rights reserved.17

ORIGIN OF EQUITABLE OFFSET Tangipahoa Parish School Board v. U.S. Department of Education 821 F.2d 1022 (1987) Brustein & Manasevit, PLLC © All rights reserved.18

 “ The equitable factors involved are proper considerations in the determination of appropriate refunding.” Brustein & Manasevit, PLLC © All rights reserved.19

 Fifth Circuit case led to ruling in Appeal of New York, Docket No (1989) Brustein & Manasevit, PLLC © All rights reserved.20

 Salary expenditures funded by New York could have been charged to federal grants and that amount is an equitable offset Brustein & Manasevit, PLLC © All rights reserved.21

 The New York precedent reaffirmed from 1989 to 2014  25 years of precedent turned upside down by Pennsylvania Case – Attachment C Brustein & Manasevit, PLLC © All rights reserved.22

 Trier of Fact must analyze each request for equitable offset: 1.Scope and pervasiveness of underlying actions 2.Whether grantee acted in good faith in response 3.Arguments ED offers in opposition Brustein & Manasevit, PLLC © All rights reserved.23

 Was there underlying fraud or intentional wrong doing? Brustein & Manasevit, PLLC © All rights reserved.24

 Equitable offset is now under scrutiny by OALJ!!!  Is it even allowed under GEPA? Brustein & Manasevit, PLLC © All rights reserved.25

(C) LINKAGE (A.K.A. “THE TYDINGS CASE”)  VEA Amendments of 1976 required OIG (HEW) to audit every state CTE program  Between OIG recommended > $250 million be returned due to Tydings violation  Unless accounting / charging of federal $ comes within 27 month Tydings period, $ must be returned Brustein & Manasevit, PLLC © All rights reserved.26

 OGC, OVAE, OESE, OSERS, OPE, CFO bought into this specious logic Brustein & Manasevit, PLLC © All rights reserved.27

 Brustein & Manasevit, PLLC called Senator Tydings (retired) and professors of accounting as witnesses to debunk ED’s position Brustein & Manasevit, PLLC © All rights reserved.28

 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 Brustein & Manasevit, PLLC © All rights reserved.29

 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 Brustein & Manasevit, PLLC © All rights reserved.30

(D) S/L MEASURED BY “OBLIGATIONS”  GEPA S/L uses term “expenditure” Section 452 (k)  What does “expenditure” mean? Brustein & Manasevit, PLLC © All rights reserved.31

 ED consistently held that “expended” as used in the statute means “obligated” - Appeal of the State of Michigan, Docket No (1989) - Attachment F Brustein & Manasevit, PLLC © All rights reserved.32

 “Obligation” defined based on underlying transaction. - See 34 CFR Brustein & Manasevit, PLLC © All rights reserved.33

 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) Brustein & Manasevit, PLLC © All rights reserved.34

(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? Brustein & Manasevit, PLLC © All rights reserved.35

 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 (1984) – Attachment G Brustein & Manasevit, PLLC © All rights reserved.36

 5 year S/L covers matters where there is no record of expenditures or funds not expended in a timely manner Brustein & Manasevit, PLLC © All rights reserved.37

(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 (1989) – Attachment F Brustein & Manasevit, PLLC © All rights reserved.38

 “Montana Compact” defined “de minimis” as less than 5% Brustein & Manasevit, PLLC © All rights reserved.39

(G) UNRESTRICTED INDIRECT COST RATE  ED argued that entire IDEA-B program is subject to a restricted cost rate under 34 CFR of EDGAR Brustein & Manasevit, PLLC © All rights reserved.40

 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 R (1995) – Attachment H Brustein & Manasevit, PLLC © All rights reserved.41

 “If there is no non-supplanting provision, there is simply no basis for using a restricted indirect cost rate.” Brustein & Manasevit, PLLC © All rights reserved.42

 Thus the additional amount that the state is entitled to is an equitable offset Brustein & Manasevit, PLLC © All rights reserved.43

~ 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. Brustein & Manasevit, PLLC © All rights reserved.44