Trustees of California State University v. Riley, 94-55455
| Decision Date | 20 February 1996 |
| Docket Number | No. 94-55455,94-55455 |
| Citation | 74 F.3d 960 |
| Parties | 106 Ed. Law Rep. 478, 96 Cal. Daily Op. Serv. 549, 96 Daily Journal D.A.R. 1826, 96 Daily Journal D.A.R. 879 TRUSTEES OF the CALIFORNIA STATE UNIVERSITY, Plaintiff-Appellee, v. Richard W. RILEY, Secretary of the Department of Education, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Constance A. Wynn, United States Department of Justice, Washington, D.C., for defendant-appellant.
Lee R. Rydalch, Office of General Counsel, California State University, Long Beach, California, for plaintiff-appellee.
Appeal from the United States District Court for the Central District of California.
Before: G. NELSON and KLEINFELD, Circuit Judges, and LEGGE, * District Judge.
The Secretary of Education appeals the district court's grant of summary judgment to the Trustees of the California State University System ("CSU"). The district court determined that CSU was not accountable for any interest earned on undisbursed Pell Grant funds during the audit period, and enjoined the Secretary from attempting to collect such money.
We AFFIRM in part, REVERSE in part, and REMAND.
The Pell Grant Program, 20 U.S.C. Sec. 1070a (Supp.1983), provides financial assistance to eligible, financially needy students attending eligible institutions of higher education to help them pay for their post-secondary education costs. The amount of financial assistance given to eligible students is determined by statute and regulations. Eligible students receive their Pell Grant awards either through the educational institution under the Regular Disbursement System, or directly from the Secretary under the Alternate Disbursement System. 34 C.F.R. Part 690, Subpart H (1985).
An eligible institution participating in the Pell Grant Program receives Pell Grant funds from the Department of Education ("Department") under a letter of credit payment system. Each institution is allowed to draw down funds from a Federal Reserve Bank servicing the area.
In this case, Pell Grant funds transferred from the Federal Reserve Bank were deposited into the State Treasurer's Federal Trust Account, as required by California state law. CSU recovered these funds by presenting a claim to the State Treasurer. Pell Grant funds thus recovered were then deposited into CSU's Agency Bank Account at the State Treasury. Funds deposited in the State's Federal Trust and Agency Bank Accounts were pooled and invested daily in a Money Investment Fund under the control of the Pooled Money Investment Board. Interest earned on the Fund was credited to the State's General Fund. See Cal.Gen.Code Secs. 16305.5, 16305.7.
The Department, through the Office of Inspection General ("OIG"), performed an audit of the Pell Grant program of fourteen CSU institutions for the period of July 1, 1983, through May 31, 1986. In February 1987, the Department's auditors issued a final audit report. The auditors concluded
that by drawing down Pell Grant funds earlier than needed for disbursement and retaining the funds in state accounts for periods of up to seventy-two days, CSU had earned $534,329 in interest on the deposited funds. Based on its final audit, the Department directed CSU to repay the interest. CSU challenged the final audit determination and requested a hearing.
Appearing before the Administrative Law Judge ("ALJ"), CSU argued that Sec. 6503(a) of the Intergovernmental Cooperation Act ("ICA"), 31 U.S.C. Secs. 6501-6508 (1983), which provides that a state "is not accountable for interest earned on grant money pending its disbursement for program purposes," applies to Pell Grant funds, and therefore it is not required to repay interest. 1 In opposition, the Department contended that Pell Grant funds do not constitute "grants" as defined by the ICA. The ALJ rejected the Department's argument and ruled in favor of CSU.
The ALJ alternatively held that the Department's auditors improperly calculated the interest by utilizing the month-end method of interest calculation. In arriving at his decision, the ALJ considered an accounting abstract, which CSU submitted with its administrative appeal brief, showing that interest calculated on a daily cash flow basis, rather than the month-end method used by the agency, was more accurate and reflected no net interest earnings. The ALJ rejected the Department's argument that the accounting abstract should not be considered because it was not timely filed under the agency regulation, 34 C.F.R. Sec. 668.116.
The Secretary, finding that Pell Grant funds are not "grant" monies within the meaning of the ICA, reversed the ALJ. Additionally, the Secretary found that there was no error in the Department's calculation of the interest due, that the accounting abstract was not timely submitted, and that the ALJ erred in considering the accounting abstract.
The district court, adopting CSU's "Statement of Uncontroverted Facts and Conclusions of Law," vacated the Secretary's decision and granted CSU's motion for summary judgment. The district court held: (1) the Secretary's decision was contrary to the ICA; (2) the Secretary misapplied 34 C.F.R. 668.116(e)(1)(ii); and (3) the Secretary's reversal of the ALJ's decision was arbitrary because the Department's selection of the accounting method used to calculate interest was arbitrary and capricious.
An order granting summary judgment is reviewed de novo. The agency decision may be set aside only if "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. Sec. 706(2)(A). Review under the arbitrary and capricious standard is narrow, and the reviewing court may not substitute its judgment for that of the agency. Marsh v. Oregon Natural Resources Council, 490 U.S. 360, 378, 109 S.Ct. 1851, 1861, 104 L.Ed.2d 377 (1989). In reviewing an agency's construction of a statute, the court must reject those constructions that are contrary to clear congressional intent or frustrate the policy that Congress sought to implement. Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 843 n. 9, 104 S.Ct. 2778, 2781 n. 9, 81 L.Ed.2d 694 (1984).
. . . . .
(ii) specifies directly, or establishes by means of a formula, the amount that may be provided to the State or local government, or the amount to be allotted for use in each State by the State, local government, and beneficiaries.
The language of 31 U.S.C. Sec. 6501(4)(A) may be distilled into a three-pronged test to determine if certain federal funds are considered to be "grants" under the ICA: (1) the money is provided by the federal government under a fixed annual or total authorization; (2) the federal aid program is administered by a State or a local government under a program that was approved by an executive agency; and (3) the authorization statute for the federal aid program specifies directly, or establishes by means of a formula, the amount to be provided or allotted for use in each state.
According to the Department, Pell Grant funds are not "grants" under the ICA because the second and third criteria are not met. The Department contends that Pell Grant funds do not satisfy the second prong of the ICA because universities do not "administer" the Pell Grant program in the manner contemplated by the ICA.
A review of the ICA and the Pell Grant authorizing statute in force during the audit period indicates that the nature of Pell Grant funds differ from federal "grants" contemplated under the ICA. The "grants" that are the subject of the ICA are grants to states, local governments, or beneficiaries under a state plan or program administered by the state. A state plan or program must comply with the conditions set forth by the executive agency carrying out the federal program.
An example of such a program is the Low-Income Home Energy Assistance Program, 42 U.S.C. Secs. 8621-8629 (1989). The Low-Income Home Energy Assistance Program is a program which provides grants to beneficiaries under a state plan or program administered by the state. In order to participate in the Low-Income Home Energy Assistance Program, a state must submit an application to the Secretary of Health and Human Services. As part of the application process, a state must submit a plan, for the Secretary's approval, which describes eligibility requirements to be used by the state and the methods the state will employ to administer the plan.
The Pell Grant Program, however, is a program which provides grants directly from the federal government to individual students who meet the eligibility requirements outlined in the Pell Grant statute. The students submit applications for Pell Grants which are evaluated under the strict guidelines set by the Secretary in 20 U.S.C. Sec. 1070a(f). Although universities where the eligible students attend may process student applications, the eligibility determinations are made in accordance with the guidelines set by the Secretary. Unlike the Low-Income Home Energy...
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