PennDOE's request to review U.S. Department of Education financial recovery order denied

By Nicholas Malfitano | Mar 16, 2016

U.S. Department of Education  

PHILADELPHIA – The U.S. Court of Appeals for the Third Circuit recently denied a petition from the Pennsylvania Department of Education to review an amount owed to the U.S. Department of Education for misuse of federal funds.

A 2010 audit of the School District of Philadelphia revealed “numerous” examples of misusing federal grant funds spanning the time period of July 2005 through June 2006. The report inquired as to $138.4 million in District spending, including $121.1 million in inadequately-documented personnel costs.

“In March 2011, the U.S. Department of Education (USDOE) issued the Pennsylvania Department of Education (PennDOE) a program determination letter that sustained certain audit findings,” Third Circuit Judge Julio M. Fuentes said.

The USDOE first sought recovery of about $10 million, but the parties agreed to reduce the amount to $7.2 million based on the statute of limitations for recovery of misspent grant funds. PennDOE appealed the determination to the USDOE’s Office of Administrative Law Judges and requested an equitable offset, or “a reduction in the recovery amount by the amount of non-federal funds spent for purposes within the scope of the federal grant.”

Chief Administrative Law Judge Allan C. Lewis rejected the appeal, and the USDOE’s now-former Secretary, Arne Duncan, affirmed that ruling.

PennDOE appealed to the Third Circuit, believing the USDOE “(1) arbitrarily and capriciously departed from its own precedent in denying petitioner’s request for an equitable offset, and (2) incorrectly applied the five-year statute of limitations in demanding recovery of contract and personnel expenditures made prior to March 2006.”

The Third Circuit rejected both arguments, and first explained equitable offset is only applied on a case-by-case basis at the discretion of the trier of fact.

“Here, the Secretary concluded that an equitable offset was not warranted under the circumstances, where the audit report contained ‘evidence of a complete breakdown in the basic budgetary practices required by Federal grant regulations,” Fuentes said.

“In particular, the audit found that the School District of Philadelphia improperly used federal grant funds to supplant state and local funding, inadequately enforced policies and procedures for processing financial transactions, and failed to have in place written policies and procedures for various fiscal processes,” Fuentes added.

Fuentes explained the Secretary determined these widespread failures were too “egregious” to warrant an equitable offset.

“That the School District immediately began making corrective actions after receiving the final audit report did not counteract the mismanagement and improper expenditures before the report came out. Absent the audit, the Secretary noted, it is unclear when or whether these practices would have been addressed,” Fuentes said.

Though PennDOE argued this decision was a departure from agency precedent, the Third Circuit commented it could not say whether or not this was the case.

“We cannot say that the Secretary’s decision was an arbitrary departure from established precedent. We must give deference to an agency’s interpretation of its own decisions unless the proffered interpretation is capricious,” Fuentes said.

Fuentes stated the Third Circuit could not say the Secretary’s decision was an abuse of discretion, since a total analysis had been conducted and the Secretary “provided a thorough evaluation of why the egregiousness of the underlying violations in this case did not merit such a remedy.”

Fuentes further disagreed on PennDOE’s argument as to the case’s statute of limitations.

“Under the relevant statute of limitations, the Department may not recover any misspent grant funds that were ‘expended in a manner not authorized by law more than five years before the recipient received written notice of a preliminary departmental decision,” the Third Circuit said. “The Secretary interpreted ‘in a manner not authorized by law’ as referencing unauthorized expenditure of federal funds.”

PennDOE argued because it received the program determination letter in March 2011, it should not be liable for misused funds before March 2006. However, the School District of Philadelphia had charged disallowed contract costs to its local account prior to March 2006, and later changed these costs to be charged to its federal account in September 2006.

“Thus, the earliest point at which the Secretary could know those funds were being used ‘in a manner not authorized by law’ was when the School District charged the expenditures to the federal account,” the Third Circuit said, emphasizing the School District did not show any evidence that when it charged the costs to its local account, that it had done so as an advance of federal funds.

“Thus, we find it reasonable for the Secretary to conclude that the logical point from which the limitations period must run is the date of the impermissible expenditure, not simply the date of obligation,” Fuentes said.

Fuentes then denied PennDOE’s petition to review the judgment of the USDOE.

U.S. Court of Appeals for the Third Circuit case 15-1420

From the Pennsylvania Record: Reach Courts Reporter Nicholas Malfitano at

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