USDOL/OALJ Reporter
State of New Mexico v. USDOL Grant Officer, 87-JTP-27 (Sec'y July 9, 1990)
DATE: July 9, 1990
CASE NO. 87-JTP-27
IN THE MATTER OF:
STATE OF NEW MEXICO,
COMPLAINANT,
v.
UNITED STATES DEPARTMENT OF LABOR GRANT OFFICER,
RESPONDENT.
BEFORE: THE SECRETARY OF LABOR
FINAL DECISION AND ORDER
Before me for review is the Decision and Order (D. and O.)
of Administrative Law Judge R.S. Heyer, issued on November 14,
1989, in this case which arises under the Job Training
Partnership Act (JTPA), 29 U.S.C. §§ 1501-1781 (1982),
and regulations promulgated thereunder. See 20 C.F.R.
Parts 626-684 (1989).
After a de novo hearing, the ALJ concluded that Complainant
(also referred to herein as the State), through a subgrant to the
University of New Mexico (UNM), misspent $600,000 of Title II-A
JTPA funds, and that the entire expenditure must be disallowed.
On review, the State urges remand of the case for an additional
hearing to permit an apportionment of the $600,000 in issue.[1]
The State also contends that the ALJ's findings that expenditures
were not properly allocated to training, and that the procurement
of the computer systems in issue was improper, should be
reversed. Upon thorough review of the record, I conclude that
$600,000 of Title II-A JTPA funds were misspent by the State and
that the entire expenditure must be disallowed.
INTRODUCTION
The purpose of the Job Training Partnership Act is to
establish programs to prepare youth and unskilled adults for
entry into the labor force and to afford job training to
economically disadvantaged individuals facing serious barriers to
employment, who are in special need of such training to obtain
productive employment. 29 U.S.C. § 1501. JTPA is funded by
federal appropriations to the Department of Labor (DOL) which
makes grants to the states which create and implement JTPA
programs in conformity with applicable standards.
[PAGE 2]
Title II of JTPA authorizes the expenditure of JTPA funds by
the states for training services for "economically disadvantaged"
individuals, and Title II-A specifically provides for the use of
funds for training services for economically disadvantaged
"adults" and "youth." The subgrant of funds from the State to UNM
in the present case used JTPA II-A funds; accordingly, the
individuals required to be targeted and served under the subgrant
are JTPA II-A eligible participants. The precise "adults" and
"youth" who are JTPA II-A eligible individuals are defined by the
eligibility criteria set out at 29 U.S.C. § 1603. JTPA
regulations require the states to keep adequate records of each
participant's enrollment in a JTPA program in order to
demonstrate compliance with the relevant eligibility criteria.
See 29 C.F.R. § 629.35(c).
Although it is the states which establish, implement and
monitor their own JTPA programs free of direct federal control,
JTPA nevertheless provides for accountability by the states to
the federal government for the misexpenditure of JTPA funds.
JTPA program costs resulting from violations of, or noncompliance
with, federal, state or local laws are not allowable and
constitute misexpended funds. See 20 C.F.R. §
629.37(c)(1). Thus, for example, the violation of JTPA
regulations governing the expenditure of funds for training or
for procurement would constitute a basis for disallowance of JTPA
funds so expended.
FACTUAL BACKGROUND
I. The Degem Proposal
In the latter part of 1983, Degem Systems, Ltd. (Degem), an
Israeli firm specializing in computer learning technology,
contacted the Governor of New Mexico concerning a proposal by
Degem to create a pilot demonstration project in the State.
Grant Officer's Exhibits (G.O. Ex.), pp. 190-191. The initial
proposal (inter alia) contemplated a demonstration project
involving computer-aided instruction for schools which would
become a showcase for the development, manufacturing and
promotion of new computer technologies for all of the United
States. Id. Degem projected that up to 4,300 direct new
jobs would be provided in the State as well as 6,800 additional
indirect jobs with subcontractors. Id. As of the date of
this contact with the Governor, individuals on the State's
Private industry Council (PIC)[2] already had been approached
and had purportedly expressed great interest in the project.
Id. Degem accordingly stated its hope that 10-15% of the
State's total JTPA budget of $12 million could be dedicated to
the project. Id. In January 1984 state officials visited
Degem in Israel and observed the computer-aided instruction
systems in operation. See OIG Investigative Memorandum
(OIG Memo), p. 2, G.O. Ex., pp. 90, 91.
Degem later contacted the Dean of the College of Education
[PAGE 3]
of the University of New Mexico to propose a cooperative venture
between Degem and UNM, whereby UNM (inter alia) would
evaluate and research the Computer-Aided Instruction (CAI)
systems Degem had developed, would develop new software and
courseware for such systems, would train teachers on use of the
systems and would provide other forms of promotion and support to
make the New Mexican model a national showcase. G.O. Ex., pp.
193-195. UNM promptly replied that it was highly capable of
being a productive partner with Degem and UNM made specific
proposals for setting up a demonstration project. G.O. Ex., pp.
197-202.
Degem then confirmed with the Governor its proposal for a
pilot demonstration project in cooperation with UNM, G.O. Ex.,
pp- 107-108, and repeated its firm intention to establish a
manufacturing plant and a research and development facility in
the state of New Mexico. Id. On June 24, 1984, the
Governor visited Israel on a trade mission to see the Degem CAI
system. OIG Memo, p. 2.
The precise manner in which JTPA Title II-A regular funds
were authorized to fund the project is not clear on the record.
However, as early as May 1984, the Director of the Training
Division of the Employment Security Department (ESD) (now, the
New Mexico Department of Labor) raised potential problems with
JTPA funding of the Degem project with the Secretary of ESD.
See G.O. Ex., pp. 210-211. Furthermore, early in 1984 the
Secretary of ESD unofficially requested the opinion of ESD Legal
Counsel concerning the legality of using JTPA funds to acquire
CAI systems. Statement of Richard Baumgartner (Baumgartner
Stmt.), G.O. Ex., pp. 216-220. Counsel advised the Secretary of
ESD that such an acquisition would be illegal under JTPA and
relevant state procurement laws. Id. The Secretary of ESD
purportedly agreed. Id. Sometime later, counsel inquired
about the Degem project's status, and was informed that agreement
between Degem and UNM had been reached for a joint demonstration
development program in the State. Id. Counsel approved
the final Subgrant dated September 13, 1984, between ESD and UNM
("Agreement for Purchase of Equipment for CAI Programs"). He
stated that he did not realize that the agreement involved Degem
or the acquisition of CAI systems. Id. Counsel believed
that he signed off on the document without actually inspecting it
and stated that if he had analyzed and understood it, he would
not have approved it. Id.
As to formulation of the terms of the subgrant, by June
1984, Degem and UNM had prepared a cooperative, preliminary
agreement and signed a letter of intent with the Governor. ESD
Ex., Tab. 4. The letter of intent restated Degem's intent to base
its CAI efforts in the State, initially in marketing, and later
in a manufacturing plant to serve as the sole production facility
in the United States for all lines of Degem activity, including
[PAGE 4]
expansion to Asia and Latin America as well. Id. Degem
anticipated sales of $500 million within 5-6 years. Id.
In the final Degem-UNM agreement, dated September 7, 1984,
ESD Ex., Tab 12, UNM agreed to establish a Center for Applied
Technologies in Learning (CATL) to accomplish evaluation of the
project, demonstration and research and development. CATL was to
be funded on a 50-50 basis between UNM and Degem, in the amount
of $125,000 each per year. UNM agreed to lease from Degem 5
stationary systems and 1 mobile unit, for $420,000 per year. UNM
would acquire title to the systems if it made all lease payments
over three years.[3] Id. at Exhibit F; Letter of
September 7, 1984, from Degem to UNM, re Irrevocable
Option and Undertakings Regarding Degem-UNM's Agreement, ESD Ex.,
Tab. 12.
2. The UNM Subgrant
The Degem-UNM agreement was incorporated into the initial
Subgrant from the State Employment Security Department to UNM.
ESD Ex., Tab 1, Paragraph 18. The Subgrant, dated September 13,
1984, granted to UNM regular Title II-A JTPA funds of $300,000
for the first year of an intended three-year program in order to
purchase equipment. The Subgrant agreement, entitled "Agreement
for Purchase of Equipment for CAI Programs," provided that UNM,
through CAM, would locate 3 stationary CAI systems and 1 mobile
unit at various sites in the State and facilitate the
demonstration of these systems, provide for teacher training and
evaluate the program. The Subgrant did not identify the content
of training to be provided, did not mention training of JTPA II-A
eligibles and did not provide goals or evaluation criteria for
training of any kind. The Subgrant charged the entire $300,000
to the training category, specifying in the Budget Information
Summary Backup that this amount represented the cost of
nonexpendable equipment, specifically, the lease/purchase of 3
stationary CAI systems and 1 mobile unit. The CAI equipment was
purchased sole-source through Degem and no competitive bidding or
cost comparisons were performed.[4] See ESD Ex., Tabs 5,
6; Testimony of Dr. Blackwell, H.T. at 96, 107; Monitor's Report
of March 6, 1985, ESD Ex., Tab 29; State Auditor's Workpapers
(SAW), p. 245.
Problems with the initial Subgrant quickly surfaced. In
September 1984, an ESD Bureau Chief notified the ESD Training
Division Director of the subgrant's non-compliance with United
States Office of Management and Budget (OMB) Circular A-102 in
sole-sourcing the purchase of computer equipment. SAW, p. 146.
In December 1984, the Financial Auditor reported to the
supervisor of the ESD Financial Management Bureau that the
$300,000 lease charge was unreasonable, and challenged the
subgrant for its failure to identify the number of JTPA
participants to be served and to target groups in the JTPA state
[PAGE 5]
plan as slated for training. SAW, p. 151.
The Employment Services Division, a component of the
Employment Security Department, is the largest and usual
service provider for JTPA subgrants, H.T. 156, 165, 175, and its
employees regularly monitor the subgrants, see Mondragon
Dep. at 27, and provide training services through the Training
Division for its own employees implementing JTPA programs. The
Director of the Training Division testified that the problems
that arose were based in the "lack of understanding of a very
complex act (JTPA] by people (UNM) who do not traditionally
involve themselves in running that kind of a project." H.T. at
166.
Throughout the two-year life of the subgrant UNM failed to
keep adequate records of JTPA participants served. Dr.
Blackwell, the UNM official responsible for the subgrant as its
principal investigator, H.T. at 37, did not understand until long
after the program was underway what was meant by a JTPA eligible
participant. H.T. at 47. Not until September 1985, a full year
into the subgrant, were UNM staff responsible for recordkeeping
given any formal training about the JTPA-2 forms that were
required to be kept.[5] JTPA Workshop, September 12, 1985, ESD
Ex., Tab 43; H.T. at 158-161. Prior to that time virtually no
records were kept. See ESD Ex., Tabs 27, 30.
A significant factor in the problem was UNM's
misunderstanding of its own role in keeping required records.
See ESD Ex., Tabs 45, 46. Procedures finalizing the
recordkeeping requirements were not put in place until well into
the second year of the program. See Memorandum of
December 19, 1985, ESD Ex., Tab 57. As of February 1986, when
the state auditors examined the project, information as to
enrollees still was not being properly recorded, G.O. Ex., pp.
294-295; Testimony of Dr. Blackwell, H.T. at 55-56, and only 39
JTPA applications had been received. State Auditor's Report of
arch 27, 1986, p. 4, ESD Ex., Tab 60.
The Secretary of ESD conceded on several occasions that the
count of JTPA eligibles served was not properly maintained and
would have to be reconstructed, ESD Ex., Tabs 64, 77, 81, because
the required JTPA forms on participants served were never
completed. The number of JTPA II-A eligibles served in the two
years of the subgrant was reconstructed after the subgrant was
terminated by identifying JTPA II-A eligibles from records of
their eligibility in other subgrants. H.T. at 180-181. By this
method it was determined after-the-fact that a total of 382 JTPA
II-A eligibles were served on at least one occasion over a two-
year period -- 144 in the first year and 238 in the second year.
State of New Mexico's Response to JTPA Grant Officer's Initial
Determination (State's Response), June 3, 1987. G.O. Ex., pp.
37-51.[6] By contrast, in the beginning of the second year of
the
[PAGE 6]
subgrant, on October 4, 1985, the total of all students then
being served was 1,775. SAW, p. 176.
Once the CAI systems were installed at various educational
sites, training in arithmetic, English and typing was made
available to UNM students at the respective sites and often to
the general public. Each system consisted of a central computer
unit for the instructor's use and 30 satellite computer terminals
for direct use of the participants. H.T. at 38-40; 113. The
courseware was able to assess initial skill or achievement level
of participants, provide drill and practice programs tailored to
the participant's level, and provide continuous feedback to the
participants on their achievement. H.T. at 110-152. Although
the computers were capable of printing records of participant
achievement on an ongoing basis, the records were not regularly
printed or preserved. H.T. at 136-137. Later studies were
presented to show that the progress of the students was enhanced
significantly by the use of the systems. Affidavit of Jack
Gittinger with Exhibits.
The Monitor's Report of March 6, 1985, raised serious
concerns about the subgrant. ESD Ex., Tab 29. The monitor found
that the sole-sourcing of the Digital-manufactured computer
systems from Degem conflicted with UNM's internal Purchasing
Policies which required competitive bidding and special approval.
Id. at pp. 2-3. Further, the monitor found that
competitive bidding was required under the state Public Purchases
Act at 131-1 through 13-1-27, and under federal law. See
OMB Circulars A87 and A-102 as incorporated into the State JTPA
Financial Management Information System Guide. Id. at
p.5. The monitor also found that the lease/purchase charges were
unreasonable, and that training monies earmarked for JTPA II-A
eligible participants were being impermissibly used for research
and development purposes and to purchase computer equipment.
Id. He concluded that the Subgrant could be an abuse of
JTPA and its regulations and recommended that his findings be
referred to the ESD Legal Department for appropriate compliance
action. Id. at p.6.
3. The Modification
After issuance of the March 1985 Monitor's Report, ESD Legal
Counsel reviewed the initial Subgrant, G.O. Ex., pp. 216, 218,
and determined it to be a "legal nullity." State's Response,
G.O. Ex., pp. 35, 41. Because he found the Subgrant void whether
considered as a purchase of equipment or as a program for
delivery of training services, he prepared a modification
document which allegedly more correctly contained the original
intent of the parties. G.O. Ex., pp. 216, 218. The resulting
Subgrant Modification was signed August 9, 1985. ESD Ex., Tab 2.
The Modification extended the second year of the contract,
[PAGE 7]
providing additional funding of $300,000, and purported to
redefine the initial Subgrant's provisions. The agreement's
title was changed to "Computer Assisted Instruction Service
Agreement" and provided that UNM would provide CAI services to
200 JTPA eligible participants in the first year (retroactively)
and 300-500 such participants in the second year. The Addendum
to 1985-86 Scope of Work provided for CAI training courses in
math, English, typing and other courseware for students, and
provided that JTPA eligible persons were guaranteed access to the
system. Id. The Budget Information Summary Backup was
changed to provide $300,000 for training costs for the "Purchase
of Computer Assisted Instruction Services." Id.
Incorporation of the Degem-UNM agreement was deleted. Id.
The Modification thereafter allegedly was submitted to the
Employment Services Division and UNM to establish an appended
training plan to be implemented and monitored in accordance with
JTPA and applicable recordkeeping requirements. This "critical
part of the contract performance" was never done. Baumgartner
Stmt., G.O. Ex., p. 216, 218.
Although under the Modification JTPA eligible participants
were to be given priority on the systems, the actual events show
otherwise. No differentiation was made among student users of
the CAI systems. H.T. at 71-72 and 96-97; at 149; and at 182-
183. The courseware and software were the same for all student
users without differentiation as to JTPA eligibility. H.T. at
149, 182. There was no system to inform teachers which students
were JTPA eligibles, H.T. at 181, and the identity of the JTPA
II-A eligibles who actually used the systems was not even known
until after the subgrant was terminated when their names were
reconstructed from records kept on other grants. H.T. at 180.
4. The Audits and Investigations
In September 1985, the State auditors questioned all monies
paid to UNM under the subgrant. G.O. Ex., pp. 297-301. A formal
state audit was conducted resulting in an Auditor's Report of
arch 27, 1986, ESD Ex., Tab 60, which concluded that the
Subgrant's purpose was not to provide training for JTPA
participants, but to fund a for-profit research and development
venture between Degem and UNM. To the extent that training was
provided, the report found that the subgrantee (UNM) provided
insufficient documentation of services to JTPA participants.
Id. The report recommended that ESD recover all monies
paid UNM under the Subgrant. Id. ESD issued an Interim
onitor's Report on June 24, 1986, concluding that under the
Subgrant, JTPA eligibles were not being targeted to be served and
that UNM's organizational structure was not adequate for
administering a JTPA program. ESD Ex., Tab 80. The report
recommended that the third year not be refunded. Id.
At the request of the state auditors, the DOL Office of
[PAGE 8]
Inspector General (OIG), investigated the Subgrant and issued an
Investigative Memorandum dated December 15, 1986. See
G.O. Ex., pp. 89-301, 90-94. Largely because of the
investigation, the Dean of UNM's College of Education did not
seek funding of the project for the third year. Id. at
94.
On March 20, 1987, the DOL Grant Officer, citing the OIG
investigation, issued an Initial Determination disallowing all
$600,000 in JTPA funds subgranted to UNM. G.O. Ex., pp. 26-34.
The Grant Officer found the costs allocated to the program
unreasonable, 20 C.F.R. § 629.37; OMB Circular A-87, and
that the purpose of the subgrant award was not job training, but
economic development. Id. at 30-31. Additionally, the
Grant Officer found that the sole-source procurement of the CAI
systems violated both OMB Circular A-102, and UNM's internal
policies, and he found that the Modification was an attempt to
avoid proper procurement procedure by transforming a
lease/purchase agreement into a JTPA Title II training subgrant.
Id. at 32-33.
On March 31, 1987, the Governor, under the signature of
counsel for the State in the present case, issued an Audit
Resolution Report. G.O. Ex., p. 69-88. Finding, on the basis of
reconstructed records, that 383 JTPA II-A eligibles were served
at some time over the life of the subgrant, and that UNM
performed substantial training of these JTPA participants in an
amount constituting reasonable performance of the Subgrant, the
report concluded that the funding was lawful and that all sums
expended should be allowed. Id.
On July 14, 1987, after receiving the State's Response, G.O.
Ex., pp. 35-68, the Grant Officer issued the Final Determination,
G.O. Ex., pp. 8-25, disallowing the entire $600,000 expenditure.
The Grant Officer concluded that the training costs were
unreasonable since it could not be concluded either that JTPA
eligibles were adequately served or that the number trained
reasonably approached the goals set in the Modification to
receive training. Id. at 17. The Grant Officer also
concluded that the procurement was improper because competitive
bidding was required, OMB Circular A-102, and because the sole-
sourcing provisions of 29 C.F.R. § 629. 38(e)(2) and 29
U.S.C. § 1551(d)(3) were not complied with. Id. at
20-21.
5. The ALJ Decision
Following a State-requested hearing under JTPA Section
166(a), concerning the sanctions (disallowance) imposed by the
Grant Officer, the ALJ disallowed the entire $600,000
expenditure. The ALJ found that costs were misapplied under 20
C.F.R. § 629.37(a) because they were not properly allocable
to the training program, but constituted instead a general
expense required to carry out the overall responsibilities of the
Governor or the subrecipient (UNM). The ALJ found that 20 C.F.R.
[PAGE 9]
§ 629.38(e)(2)[7] was violated in that the Subgrant made no
provision tying payment of costs to whether participants
completed or were placed into jobs. The ALJ found that no
competitive bidding occurred, citing the provisions of OMB
Circular A-102, a sound practice calculated to assure proper
value received for funds expended. Finally, the ALJ concluded
that because the State did not substantially comply with 29
U.S.C. § 1574(e)(2), it could not thereby escape liability
for noncompliance by its subgrantee. The State excepted to the
ALJ's decision and I granted review. 29 U.S.C. § 1576(b).
DISCUSSION
Training
A valid JTPA training program, funded with JTPA II-A funds,
must necessarily be established for the purpose of training JTPA
II-A eligible participants. See 29 U.S.C. § 1603.
In the present case the entire cost of the JTPA subgrant was
charged to and, following the Modification, purportedly expended
for training. The applicable regulations provide that, "[t]o be
allowable, a cost must be necessary and reasonable for proper and
efficient administration of the program...and not be a general
expense required to carry out the overall responsibilities of the
Governor or subrecipient." 20 C.F.R. § 629.37(a)
(emphasis supplied). Further, "[c]osts resulting from
violations of, or failure to comply with, Federal, State or
local laws and regulations are not allowable." 20 C.F.R.
§ 629.37(c)(1) (emphasis supplied). Moreover, language
virtually identical to regulatory section 629.37(a) is contained
in OMB Circular A-87, Attachment A, Paragraph C.1.a., G.O. Ex.,
p. 319, which, in turn, was adopted by the State of New Mexico on
November 28, 1983. JTPA Financial Management Information System
Guide, G.O. Ex., pp. 98, 103.
I conclude, based on my evaluation of facts in this case,
that JTPA II-A funds should not have been charged for this
subgrant because the costs were not "necessary and reasonable"
for the administration of a JTPA training program, but instead,
constituted a general expense required to carry out the overall
responsibilities of the State and the subrecipient, the
University of New Mexico. 20 C.F.R. § 629.37(a). From the
beginning, the manifest purpose of the initial Subgrant was the
lease/purchase of 4 CAI systems for UNM, which was an integral
part of a demonstration project for the research and development
of advanced learning technologies in the State of New Mexico.
The State's interest was motivated significantly by the
anticipated manufacturing plant which Degem proposed to establish
and which would greatly enhance the economic development of the
State. UNM, on the other hand, sought to acquire the systems,
and, equally important, to establish the ongoing facility (CATL)
[PAGE 10]
for the research and development of advanced learning
technologies. While these may be laudable purposes, they are not
purposes for which JTPA funds may be expended.
The training services contemplated in the initial Subgrant
were only an indirect consequence of the economic development
objective. JTPA eligible individuals were never mentioned as
targets of any training, much less were JTPA II-A eligibles
considered. The complete absence of any training plan in the
Subgrant further underscores the fundamental purpose of the
Subgrant to set up a CAI demonstration project as the first step
of a wider economic development plan in the State, in which UNM
would acquire CAI systems and control the research and
development function.
As to actual performance of the Subgrant, UNM did not know
what a JTPA II-A eligible participant was until the second year
of the subgrant and the teachers who ran the CAI program likewise
were uninformed. JTPA II-A participants were only ultimately
identified by their enrollment in other grants after the two-year
Subgrant terminated.[8] Because JTPA eligibles were never
contemporaneously identified, there is no proof that they were
given any priority on the systems. Rather, all students, and
even the general public, were given access without
differentiation. Students who paid their own tuition received
the same access as students whose UNM tuition was otherwise JTPA-
funded, but the training program charged JTPA II-A funds
additionally for these same services.
The second-year post hoc Modification did little, if
anything, to alter the purpose of the subgrant or the actual
performance of UNM under it. Recordkeeping remained wholly
inadequate to the end, thereby preventing the subrecipient from
targeting the very persons it was required to train. The fact
that some JTPA II-A eligibles were found to have had access to
some of the purchased equipment, cannot legitimize a program for
purposes of JTPA funding that failed to target JTPA eligible
participants for training and that was designed fundamentally for
economic development purposes unrelated to the Job Training
Partnership Act.
Procurement
The JTPA regulations governing procurement require that
"recipients and subrecipients shall administer procurement
systems that reflect applicable State and local law, rules and
regulations as determined by the Governor." 20 C.F.R. §
629.34. Further, "[c]osts resulting from violation of, or failure
to comply with Federal, State, or local laws and regulations
are not allowable." 20 C.F.R. § 629.37(c)(1)
(emphasis added). The (New Mexico] Public Purchases Act (PPA) ,
Chapter 13, NMSA 1978 (1983
[PAGE 11]
Repl. Pamph.),[9] in general, requires that procurements in
excess of $5,000 and not otherwise exempted from the PPA be
achieved by competitive bidding. See PPA, Section 13-1-
11.
OMB Circular A-102, governing procurement standards, and
made applicable to New Mexico JTPA procurement procedures in the
JTPA Financial Management Information System Guide, G.O. Ex., P.
98, 102, permits noncompetitive negotiation in only a limited
number of circumstances, one of which is the availability of the
item only from a single source (the other circumstances being
irrelevant to this case). Because OMB Circular A-102 was
officially adopted by the State, it reflects applicable State and
local law, rules and regulations as determined by the Governor,
for purposes of 20 C.F.R. § 629.34.
If the above-cited procurement laws apply -- a conclusion
which the State resists -- they were clearly not complied with.
Competitive bidding did not take place nor did the State or UNM
demonstrate that the CAI systems manufactured by Digital were
available from only a single source, Degem. Whatever
modification Degem made to these computers was not made clear,
but no investigation of whether other competitors could provide
the same equipment was performed.[10]
The record evidence shows that the Subgrant, even as
modified, contemplated in significant part the lease/purchase of
the CAI systems from Degem. The deletion in the Modification of
paragraph 18 of the initial Subgrant (which had adopted the
Degem-UNM agreement) did not alter or repudiate the terms of the
Degem-UNM agreement that if all lease payments were made over
three years, UNM would acquire title to the systems. While the
odification specifically referred to training services, the
objective of procuring the CAI systems by UNM remained.
The State argues that the purchase of materials, services or
real property is exempt under the New Mexico Public Purchases Act
where the procurement is "by a state agency or a local public
body from a state agency or local public body" (UNM). New Mexico
Brief-in-Chief at 25, citing PPA Section 13-1-24A. I disagree
that this exemption is applicable here. In the first place, the
purchase is, in significant part, one for "materials" (CAI
systems) between UNM and Degem, and not for the purchase of such
property by the State from UNM. UNM, as a local public body, is
nowhere excluded from the requirements of the PPA. Further, the
Public Purchases Act should not be interpreted to permit the
interposition of UNM as a "local public body" to defeat the
applicability of State procurement procedures where "materials"
are being procured from a third party vendor. I conclude that
the procurement of the CAI systems by UNM from Degem was subject
to the provisions of the Public Purchases Act.
Further, the State has offered no reason for noncompliance
[PAGE 12]
with OMB Circular A-102, which also mandates competitive bidding.
As stated in the JTPA Financial Management Information System
Guide, G.O. Ex., pp. 98, 102, OMB Circular A-102 applies in the
case of all JTPA programs in New Mexico, except where
specifically excepted by the Governor. No such exception was
made on the record of this case. Additionally, it is clear from
Attachment 0, paragraph 1 (Applicability) of the Circular that it
applies to the procurement of equipment. G.O. Ex., p. 320.
I find unpersuasive the State's arguments that payments to
UNM under the subgrant were for training services UNM rendered to
the State and that UNM's procurement methods are irrelevant. As
stated above, the Public Purchases Act and OMB Circular A-102
applied to the procurement by UNM of CAI systems from Degem as
contemplated by the Subgrant and its Modification. To the extent
that training services also were purchased by the state from UNM
under the subgrant, JTPA was violated. 29 U.S.C. §
1551(d)(3). The statute provides that "commercially available
training packages, including advanced learning technology, may be
purchased for off-the-shelf prices and without requiring a
breakdown of the cost components of the package if such
packages are purchased competitively and include performance
criteria." (Emphasis supplied). See also 20 C.F.R.
§ 629.38(e). Neither of these required conditions was met.
Sanctions
JTPA provides that "[e]very recipient shall repay to the
United States amounts found not to have been expended in
accordance with this chapter." 29 U.S.C. § 1574(d). See
also 20 C.F.R. § 629.44(a). I am required "to hold the
Governor responsible for all funds under the grant," 20 C.F.R.
§ 629.44(d)(1), and to "determine the liability of the
Governor for misexpenditures of grant funds in accordance with
section 164(e) of the Act, including the requirement that the
Governor shall have taken prompt and appropriate corrective
actions for misexpenditures by a subrecipient." 20 C.F.R. §
629.44(d)(2).
Section 164(e)(2) provides:
In determining whether to impose any sanction authorized by
this section against a recipient for violations by a
subgrantee of such recipient under this chapter or the
regulations under this chapter, the Secretary shall first
determine whether such recipient has adequately
demonstrated that it has-
(A) established and adhered to an appropriate system
for the award and monitoring of contracts with subgrantees
which contains acceptable standards for ensuring
accountability;
[PAGE 13]
(B) entered into a written contract with such
subgrantee which established clear goals and obligations in
unambiguous terms;
(C) acted with due diligence to monitor the
implementation of the subgrantee contract, including the
carrying out of the appropriate monitoring activities
(including audits) at reasonable intervals; and
(D) taken prompt and appropriate corrective action upon
becoming aware of any evidence of a violation of this
chapter or the regulations under this chapter by such
subgrantee.
29 U.S.C. § 1574(e)(2). I find that the State has not
demonstrated adherence to subsections (A), (B) and (D). The award
of the subgrant to UNM which derivatively approved the Degem-UNM
agreement, inappropriately disregarded required procurement
procedures. The State entered into a Subgrant with UNM which had
virtually no training goals or obligations and authorized a
odification which, in practice, effected little change in UNM's
administration under the subgrant in providing training to JTPA
II-A eligible participants. Although the State's monitoring
uncovered critical flaws in sole-sourcing, purchase costs and the
absence of training for JTPA II-A eligibles, the corrective
action the State took was neither prompt nor effective. Despite
the State's having uncovered UNM's failures in recordkeeping and
in targeting JTPA participants for training, the State did not
effectively coordinate a solution between ESD and UNM to correct
either failure. For these reasons, I conclude that the State has
not demonstrated substantial compliance with the requirements of
Section 164(e)(2)(A), (B) and (D) and that the $600,000
expenditure shall be disallowed. 29 U.S.C. § 1574(e)(1) and
(3).
Apportionment
The State urges remand of this case for an additional
hearing for apportionment of the $600,000 in issue, rather than
total disallowance. As ground for remand, the State argues that
approximately .1 million in cash and "in-kind" contributions of
non-JTPA funding were used to carry out the total endeavor
involving UNM and Degem, and that, even though non-JTPA eligible
participants used the CAI systems, the sharing of use should not
be objectionable.[11] On remand the State would seek to show
the ratio of non-JTPA users to JTPA II-A users, and, using the
ratio of non-JTPA funds to JTPA II-A funds, thereby present a
basis for apportionment.
I do not find this case appropriate for apportionment. The
failure of the State and UNM to follow JTPA training standards
both in the terms of the subgrant and in the performance
[PAGE 14]
thereunder, and their joint failure to follow acceptable
procurement practices are themselves sufficient and necessary
grounds for disallowance without apportionment.
Further, the State has not been denied the opportunity to
present evidence on the issue of apportionment. At all times
below the State elected to limit its argument to contending that
it complied with applicable law and that all of the $600,000
should be allowed. Memorandum Brief of the State of New Mexico,
filed September 15, 1989. Had the State desired apportionment,
it could have argued the issue in the alternative, and presented
appropriate evidence, both before the Grant Officer and before
the ALJ. The record reflects that all information the State
offered was received. H.T. at 4-6, 191. The ALJ's gratuitous
mention of apportionment for the first time in his Decision and
order should not and cannot serve as a basis to retry a case
which, I find, presents substantial, independent grounds for
total disallowance.
ORDER
Accordingly, I affirm the ALJ's decision that the State
misexpended $600,000 of JTPA II-A funds under the subgrant to the
University of New Mexico, and that this expenditure must be
disallowed in its entirety. The State of New Mexico is hereby
ordered to reimburse the Employment and Training Administration
$600,000 from non-Federal funds.
SO ORDERED.
ELIZABETH DOLE
Secretary of Labor
[ENDNOTES]
[1]
The State's request for apportionment is argued for the first
time on review before me. Below, the State contended that it and
UNM had complied with applicable law and that all of the
questioned costs should be allowed. Memorandum Brief of the
State of New Mexico, filed September 15, 1989, at 19-20.
[2]
The Private Industry Council is established for each state under
Section 102 of JTPA, 29 U.S.C. § 1512. Its membership is
composed of representatives from the private sector, who
constitute a majority, as well as representatives from organized
labor, educational agencies and public employment. The function
of the PIC is to provide policy guidance and oversight with
respect to job training plans, in partnership with government
representatives. See 29 U.S.C. § 1513; see
also 20 C.F.R. § 628.2. In particular, the PIC is
authorized to select grant recipients and entities to administer
a job training plan. 29 U.S.C. § 1513(b)(1)(B).
[3]
It appears that a total of 3 stationary systems at an annual
lease cost of $60,000 apiece (total $180,000), and 1 mobile unit
at $120,000, were ultimately installed. Hearing Transcript
(H.T.) at 49-50. Thus, the total lease cost was $300,000 per
year for a 3-year period. Degem-UNM Agreement, Exhibit F, ESD
Ex., Tab. 12. This is the amount that was funded per year with
JTPA II-A funds.
[4]
After the Subgrant was signed, a cost comparison of Digital
computer equipment, the same computers that Degem provided (with
some unspecified modifications), showed that unmodified equipment
from Digital would have cost $475,000, compared to $900,000 from
Degem. Mondragon Deposition at 28.
[5]
The JTPA-1 Form is an eligibility participation form which, on
the basis of the individual's financial status and other
criteria, certifies eligibility under a particular title of JTPA,
such as II-A. The JTPA-2 Form enrolls the JTPA eligible
participant in a particular training program, such as a Title II-
A program under a Title II-A funded subgrant. See
generally Mondragon Deposition at 8-15.
[6]
Virtually the same numbers appear in the earlier Governor's
Audit Resolution Report of March 31, 1987. G.O. Ex., pp. 69-88.
[7]
Although the ALJ states that 629.38(b) clause (iii) was violated,
D. and 0. at 10, Paragraph 2, it is clear that he is referring to
section 629.38(e)(2).
[8]
The subrecipient's failure to keep adequate records directly
violates 20 C.F.R. § 629.35(c), which requires that
the Governor shall ensure that records shall be
maintained of each participant's enrollment in a JTPA
program in sufficient detail to demonstrate
compliance with the relevant eligibility criteria
attending a particular activity and with the restrictions
on the provision and duration of services and specific
activities authorized by the Act.
[Emphasis added.)
The State acknowledged this failure, see pp. 9-10,
supra; Reply Brief of the State of New Mexico at 9, which
I conclude was not cured after-the-fact by the reconstructed
records of JTPA II-A eligible participants allegedly served. The
recordkeeping requirements are designed to demonstrate JTPA
compliance on an ongoing basis and to assure that the programs
are administered to achieve the JTPA objectives, especially
targeting and effective training of individuals who need the
program. The attempt to legitimize substantive program defects
after-the-fact by belatedly creating required records defeats
these purposes.
[9]
The Public Purchases Act was significantly amended and recodified
by the State Procurement Code, effective for contracts entered
into on or after November 1, 1984. As the initial Subgrant and
the Degem-UNM agreement were signed prior to that date, the PPA
is applicable and all PPA references are to the 1983 Replacement
Pamphlet.
[10]
The State's argument that the CAI systems were "unique," without
more, falls far short of the showing needed to establish that
they were available only from a single source. No attempt was
made to show that other sources could not provide exactly the
same equipment.
[11]
I find the State's contention that ,109,000 of non-JTPA funds
and contributions were used "to carry out the total endeavor"
unavailing. State of New Mexico Brief-in-Chief at 20. In the
first place, UNM's contribution of $360,000 for two CAI systems
it purchased from Degem after termination of the subgrant cannot
be attributed to costs of this subgrant. Further, the
contributions of Degem and UNM in the amount of $425,000 to CATL
are questionable since CATL's function was primarily research and
development, and the amount of the CATL funding actually
earmarked and paid for the JTPA subgrant is not specified. The
"in-kind" contributions in the amount of $364,000 of Degem are
overstated and inherently questionable. In this regard, the
State argues that Degem contributed $44,000 apiece for 6
stationary sites, but the Subgrant and record evidence show that
only 3 stationary systems were used. Initial Subgrant of
September 13, 1984, ESD Ex., Tab 1; Testimony of Dr. Blackwell,
H.T. at 49-50. Further, the fact that Degem's contribution was
"in-kind," for purposes of transporting and helping set up the
systems, rather than in cash, gives rise to the inference that
the contributions are merely illusory, and that Degem's services
are actually derived from the price of the subgrant.
