Michigan Dept. of Educ. v. U.S. Dept. of Educ.

• Citation: 875 F.2d 1196
• Decision Date: 25 May 1989
• Docket Number: No. 88-3560,88-3560
• Parties: 54 Ed. Law Rep. 101 MICHIGAN DEPARTMENT OF EDUCATION, Petitioner, v. UNITED STATES DEPARTMENT OF EDUCATION, Lauro Cavazos, Secretary, Respondent.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

Page 1196

875 F.2d 1196

54 Ed. Law Rep. 101

MICHIGAN DEPARTMENT OF EDUCATION, Petitioner, v. UNITED STATES DEPARTMENT OF EDUCATION, Lauro Cavazos Secretary, Respondent.

No. 88-3560.

United States Court of Appeals Sixth Circuit.

Argued March 30, 1989.

Decided May 25, 1989.

Leigh M. Manasevit, Asst. Atty. Gen. (argued), Brustein & Manasevit, Washington, D.C., for petitioner.

Terrell H. Bell, Secretary of Educ., Dept. of Educ., Ronald B. Petracca (argued), U.S. Dept. of Educ., Office of General Counsel, Washington, D.C., for respondent.

Before BOGGS and NORRIS, Circuit Judges, and BALLANTINE, District Judge. ^*

BOGGS, Circuit Judge.

The Michigan Department of Education (MDOE) appeals a final decision of the United States Department of Education (USDOE) finding, as the result of an audit, that MDOE misexpended federal funds in the conduct of its vocational rehabilitation program. This case arises under the Rehabilitation Act of 1973, 29 U.S.C. Sec. 701 et seq., the purpose of which is "to develop and implement, through the research, training, services, and the guarantee of equal opportunity, comprehensive and coordinated programs of vocational rehabilitation and independent living." 29 U.S.C. Sec. 701 (1982). We affirm.

I

The MDOE was awarded a grant of federal funds by the USDOE. The grant was awarded under a grant program administered by the USDOE's Rehabilitative Services Administration (RSA). The actions giving rise to the audit disallowance were taken by the Acting Regional Commissioner (ARC) of the RSA.

In dispute are fiscal year 1982 federal funds which the USDOE, after having conducted an audit, alleges Michigan misexpended in conducting its vocational rehabilitation program. Michigan challenged the finding in an administrative hearing before the Education Appeals Board (EAB), a body within the USDOE which has the power to adjudicate appeals of adverse audit decisions. 20 U.S.C. Sec. 1234(a). The EAB upheld the adverse audit finding and, since the Secretary of Education did not disturb that determination, the initial decision of the EAB has become the USDOE's final decision. 20 U.S.C. Sec. 1234a(d). This is the decision on appeal.

The grant in this case was made under Title I of the Rehabilitation Act, as it stood prior to the 1986 amendments. Under the statutory scheme, funds are awarded to states with a state plan approved by the USDOE, based on an allotment formula derived from state population figures. An individual with a physical or mental disability that constitutes a substantial handicap to employment is eligible for vocational rehabilitation programs if the individual can reasonably be expected to benefit from vocational rehabilitative services. Each handicapped individual is required to be served in accordance with an individualized written rehabilitation program developed jointly by a vocational rehabilitation counselor and the individual. The plans must be reviewed annually. Title I sets out a comprehensive description of services which may be provided with grant funds. In general, such services are "any goods or services necessary to render a handicapped individual employable."

Section 3 of the Act authorizes the Secretary to take whatever actions are necessary to ensure that funds are expended only for the purposes contemplated by the Act. Each grantee must keep records to account for its use of grant funds and to facilitate an effective audit. Further, the Secretary has statutory authority to conduct an audit. The Act also allows the Secretary to promulgate any regulations necessary to exercise his authority under the Act. The USDOE also has the power to audit state programs to ensure the proper use of federal funds. However, any final decisions regarding action pursuant to an audit must be made by the Secretary.

The Secretary delegated his authority under the Act, with some reservations, to the Assistant Secretary for Special Education and Rehabilitative Services. The Assistant Secretary, in turn, delegated the authority to the Commissioner of Rehabilitative Services, who in turn delegated it to the Regional Commissioners of the Rehabilitative Services Administration. Each delegation was recorded in a memorandum contained in the record. This last delegation is the delegation that is disputed by the parties.

Michigan's Department of Education (MDOE) implements and administers the vocational rehabilitative program in the state. During the audit period, fiscal year 1982, Michigan employed 250 vocational rehabilitation counselors located in 36 field offices across the state who provided services to some 43,000 individuals. Counselors have primary responsibility for determining a client's eligibility. This is done through the use of medical exams and reports, diagnostic tests, ability evaluations and the issuance of a certificate of eligibility. Counselors also develop a comprehensive vocational diagnosis which is then used in developing an individualized written rehabilitation program tailored to the specific needs of the client. The written program outlines the expectations and responsibilities of the client and counselor.

Between April 1983 and January 1984, the USDOE's Office of Inspector General Office of Audit, conducted an audit of the Michigan program. The audit covered fiscal year 1982 expenditures and evaluated the allowability of expenditures made for the vocational rehabilitation of Michigan's clients. During the audit period, there were 66,368 authorizations for client service expenditures totalling $11,244,739, of which $8,995,791 was the federal share. The auditors reviewed a random, stratified sample of 259 of these authorizations, and tested the sample in the areas of: client eligibility; individualized written rehabilitation programs; vocational goal selection; similar benefits; proper authorization of case service expenditures; proper payment and billing of case service expenditures; and appropriate case closure. The auditors made findings regarding compliance with applicable statutes and regulations.

The auditors determined that unallowable expenditures were made in thirteen of the 259 samples. Employing their sampling technique, the auditors projected the amounts disallowed in the thirteen cases out of 259 against the total universe of 66,368 client case service expenditure authorizations. This produced a disallowance of $898,248. This amount was reduced to $718,598 in that federal funds accounted for only eighty percent of the total expenditures.

Michigan disputed nine of the sample cases disallowed by the auditors. Three of the cases are discussed in the state's brief. Sample case 51 concerned whether proper authorization was given for payment of repairs made to a client's knee, ankle and foot orthosis. The client needed the braces to compensate for her limited mobility which was the result of a birth defect. Her doctor recommended that the repairs be performed immediately. The repairs were made and paid for; although authorization was not given until later. At the time the repairs were needed, the client's case worker was on maternity leave and the case worker's supervisor was out of the office. The ARC disallowed this expenditure alleging a violation of 34 C.F.R. Sec. 361.44, which requires prior written authorization for the purchase of services except in emergency situations, in which case there must be prompt confirmation of authorization.

In sample case 162, the auditors alleged that Michigan had failed to give appropriate consideration to similar benefits that were available to the client other than those provided by the vocational rehabilitation program. Michigan demonstrated that an investigation had determined that no similar benefits were available. In the final letter of determination, explained below, the ARC dismissed the auditors' allegation. However, the ARC then took exception to $104 that Michigan had received as a tuition refund from a technical school the client had attended. The final decision found that Michigan did not meet its burden of proof to demonstrate that the money was returned to the Department. The amount of the unreturned refund in this case was also projected against the universe of expenditures.

Sample case 84 was disallowed by the auditors who alleged that "the vocational goal selected [for this client] was inappropriate considering the client's disability." The client was disabled by cerebral palsy and was attending a business school on a trial basis until she withdrew and stopped receiving vocational rehabilitation. The final decision indicated that the client's own assessment that the pressure from her family to pursue a particular goal was a "hassle" should have alerted the counselor to the need for a diagnostic study. The final decision agreed and upheld the disallowance.

Other cases are discussed in the USDOE's brief. For example, sample case 144 involved a client who was found eligible for services and was given $488 to pay for the cost of attending college because he was suffering from asthma. However, the examination reports for this client found no limitation on the physical activities that he could engage in, and the only environmental condition which he had to avoid was dust. The reports concluded that he could work full time.

The USDOE also sheds some light on the three cases discussed in the state's brief. In sample case 84, referred to above, although a diagnostic study is required before services are rendered to a client, no such study was performed in this case. In sample case 51, services were purchased without authorization as required under the regulations. Finally, in sample case 162, the tuition refund was received by the state, and the state did not show that it either used those funds to provide services to another client or returned them to the federal government.

The results of the audit of these 259 cases were used to project total unallowable expenditures for the year. This...