08-005951 Workforce Escarosa, Inc. vs. Agency For Workforce Innovation Status: Closed Recommended Order on Friday, October 30, 2009.

Summary: Neither Petitioner nor Respondent proved a precise amount of grant expenses (mis-used gas cards) which should be disallowed. Petitioner should provide an accurate or forensic audit so that figure can be determined.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

WORKFORCE ESCAROSA, INC., )

)

Petitioner, )

)

vs. ) Case No. 08-5951

)

AGENCY FOR WORKFORCE )

INNOVATION, )

)

Respondent. )

)

RECOMMENDED ORDER

Upon proper notice, this matter came on for formal

proceeding and hearing before P. Michael Ruff, a duly-designated

Administrative Law Judge of the Division of Administrative

Hearings in Pensacola, Florida, on June 17 and 18, 2009. The

appearances were as follows:

APPEARANCES

For Petitioner: Susan Nelms, Executive Director,

Workforce Escarosa, Inc.

(Qualified Representative)

9111 A Sturdevant Street

Pensacola, Florida 32514

Joseph Passeretti, Esquire

30 South Spring Street

Pensacola, Florida 32502

For Respondent: James E. Landsberg, Esquire

Peter James Caldwell, Esquire

Agency for Workforce Innovation

107 East Madison Street, MSC 110

Tallahassee, Florida 32399-4158

STATEMENT OF THE ISSUES

The issues to be resolved in this proceeding concern

whether the Agency for Workforce Innovation (the Agency),

(Respondent), has properly disallowed some $348,355 in federal

grant funding to the Petitioner, Workforce Escarosa, Inc.

(Escarosa) or Petitioner, for purportedly having insufficient

documentation to justify that such funds were used for allowable

U.S. Department of Health and Human Services (HHS) grant

purposes. Included within that issue is the question of whether

the funds, related to "gas card" purchases, were properly

documented and whether Escarosa must re-pay the disallowed

amount.

PRELIMINARY STATEMENT

This cause arose on September 19, 2008, when the Respondent

Agency issued a "Management Decision" (Initial Agency Action),

in which it disallowed $348,355 in expenditures for gas cards

charged by Escarosa to an HHS Temporary Assistance to Needy

Families (TANF) Welfare Transition Program (WTP) grant. It

advised Escarosa that the disallowed charges must be re-paid by

December 31, 2008. The Management Decision followed an audit of

federal funds which had been awarded to Escarosa for the year

ending June 30, 2007. Thereafter, pursuant to an Amended

Hearing Request, the cause was referred to the Division of

Administrative Hearings on December 1, 2008.

The cause was assigned to the undersigned Administrative

Law Judge for formal proceeding. By agreement of the parties,

the matter was initially set for hearing on March 24 and 25,

2009. Thereafter, by an agreed-upon Motion for Continuance, the

matter was continued and was re-scheduled for agreed upon dates

of June 17 and 18, 2009. The cause came on for hearing on those

dates. The Petitioner, Escarosa, presented the testimony of two

witnesses, Susan Nelms, the Escarosa Executive Director, and

Margeret Thomas, the former Escarosa Assistant Executive

Director. Escarosa offered Petitioner's Exhibits 1 through 8

into evidence and those eight exhibits were admitted.

Additionally, upon examination and discussion between

Susan Nelms and the undersigned, Susan Nelms, without objection,

was granted leave to represent Escarosa as a Qualified

Representative at the hearing.

The Agency presented the testimony of nine witnesses; Susan

Nelms, Diane Bagwell, Director of Social Service Grants and

Projects for Pensacola Junior College (PJC); James Mathews,

Agency Inspector General; Janet Summers, Escarosa Finance

Director; Carol Bono, Escarosa Accounting Specialist; Laura

McKinley, the Agency's Financial Management Systems Assurance

Section Manager; Fay Malone, Agency Compensation and Benefits

Manager; Phillip Wilcox, Agency Investigations Manager; and Ed

LeBrun, former Escarosa Executive Director. The Respondent

Agency also offered Respondent's Exhibits A through TT. All

exhibits were admitted into evidence upon motion and stipulation

of the parties.

On June 16, 2009, the Agency served on Escarosa a request

that the undersigned take official recognition of several

federal regulations and administrative decisions. That request

was filed with the Division of Administrative Hearings, no

objection was made to the request and official recognition has

been so taken.

Upon conclusion of the hearing, the parties requested that

the testimony be transcribed and availed themselves of the right

to submit proposed recommended orders. The three-volume

transcript was filed with the Division on July 13, 2009. After

the hearing, upon a showing of good cause by the Agency, the

Agency's Motion for Extension was granted, for submission of

proposed recommended orders, until August 21, 2009. The

Proposed Recommended Orders were thereafter timely submitted and

have been considered in the rendition of this Recommended Order.

FINDINGS OF FACT

1. The Petitioner, Escarosa, is a state Regional Workforce

Board (RWB) constituted according to Section 445.007, Florida

Statutes (2008). 1/ Escarosa is in the business of promoting

workforce development in the Northwest Florida region and as

part of this effort provides support services to assist WTP

participants. It does so, as pertinent to this case, through

the use of TANF funds to provide transportation assistance, in

the form of gas cards, which assist participants in engaging in

work activities.

2. In the Workforce Development System, federal government

funds are transmitted to the Agency. The Agency then passes the

funds through to regional workforce boards such as Escarosa, and

the regional workforce boards then pass those funds, by related

agreements, to local providers such as PJC, to provide workforce

development programs or support services.

3. The Agency and Escarosa operated pursuant to a "Master

Cooperative Agreement," at times pertinent to this case. The

agreement required Escarosa to comply with applicable cost

principles and administrative requirements for grants included

in various "Circulars" of the Federal Office of Management and

Budget" (OMB).

4. The TANF program is a state-administered program that

assists unemployed persons returning to the workforce. It

provides support services, such as transportation assistance

(here in the form of gas cards) which assist participants in

traveling to engage in work activities.

5. In accepting TANF funds, Escarosa has agreed to the

terms and conditions of the Grant Award. The Grant Award

states, in pertinent part,

expenditures utilizing these funds must be

consistent with all federal and state rules,

regulations and policies established for

TANF funds. Funds must be used to

facilitate meeting the goals and outcome

measures of the welfare transition program.

6. By being a recipient of federal grant funds, Escarosa

is required to properly account for expenditures of those funds

and to document grant expenditures. The documentation must

establish that an expenditure is one which is allowable under

the laws or regulations pertaining to the grant program and that

the expenditure is actually used for the intended purpose of the

grant. Therefore, for the gas card situation, the documentation

must show a link between a card issued by Escarosa and a

participant in the WTP program and show that the card went to an

eligible participant.

7. Escarosa, as a recipient of federal funds, is required

to maintain a financial management system that includes

effective internal controls and provides for safeguarding of

federal funds. The system should include controls to prevent

errors or problems in transactions and to detect when there are

breakdowns in the system. A monitoring plan should be part of

the testing or detection process.

8. The state agency is also required to monitor sub-

recipients such as Escarosa. They must be monitored on a

regular basis to ensure that there is compliance with grant

rules, regulations, the provisions of specific agreements, and

with the performance of goals and objectives, pursuant to OMB

Circular A-133.

9. The Agency monitored Escarosa during the period of time

relevant to this case but did not discover the problems with

documentation in the gas card program. The monitoring by the

Agency is a sampling process, not an entire audit of every

aspect of Escarosa's operations and programs.

10. The Agency does not have authority to monitor or

investigate below the level of its sub-recipient such as

Escarosa. It does not audit sub-recipients' service providers,

such as PJC. It did check Escarosa's records to see that it had

been monitoring, and had audit reports, as to its service

provider PJC (the College). The Agency checked for the Audit

reports regarding the College and, for the 2004 period,

determined that the College had not submitted an external audit

report or Federal Single Audit Report, as required. It

recommended to Escarosa's regional workforce board that it

require such sub-recipients to comply with contractual terms,

including submission of a Federal Single Audit Report. Escarosa

took that suggested corrective action by the time of the 2005

audit and had a current External Audit Report for the College in

its file for 2005.

11. Escarosa is required to have annual financial audits

performed in compliance with OMB Circular A-133. The audit

reports are required to be filed with the Agency and Escarosa

complied with that requirement and filed its reports.

12. The Agency has a policy concerning audit resolution

which provides that regional workforce boards, such as Escarosa,

must re-pay debts, established as a result of inappropriate use

of federal funds, from non-federal funds. In its Administrative

Plan, Escarosa acknowledged the requirement to re-pay such

obligations, which are accrued as a result of mis-expenditure of

funds due to willful disregard of federal law, gross negligence

or failure to observe accepted standards of administration. The

Escarosa Administrative Plan includes debt collection from

contracted providers such as PJC, in appropriate circumstances.

THE GAS CARD PROGRAM

13. Escarosa provided transportation assistance to WTP

participants in the form of issuance of gas cards to such

participants. The gas cards were purchased with HHS/TANF grant

funds received from the Petitioner Agency and were charged to

Escarosa's grant award. The value of gas card purchases between

June 2004 and December 2006 as reflected on invoices for gas

cards, totaled $991,000. Escarosa purchased approximately

58,800 gas cards during this period in increments of $5.00,

$10.00, $15.00 and $20.00. As reflected on the Respondent's

Exhibit A, in evidence, at page 4, witness Diane Bagwell

reported that some 57,652 cards (including 1,544 purportedly un-

used cards) were issued to the College between July 1, 2004, and

December 15, 2006.

14. The un-refuted evidence reflects that Escarosa had

written procedures which specified the process for ordering gas

cards, transferring custody of them to the service provider,

(the College); determining participant eligibility and the

process for issuing cards to participants. This included

documentation requirements and monitoring requirements.

Escarosa's written procedures required that it monitor, with

periodic reviews, the gas card disbursement system to determine

compliance with all written procedures. The procedure requires

the documentation of participant eligibility and issuance of

cards. This documentation was required to be filed in the

participant's "support services file" maintained by the College.

Additionally, a gas card log was maintained by the College and

was required to reflect the participant's signature, upon

receipt of a gas card. The log and the gas cards were required

to be monitored to ensure strict, procedural accountability.

15. The College was a service provider for Escarosa during

the period in question, June 2004 to December 2006, and until

June 30, 2008. This was pursuant to a contract between the

College and Escarosa by which the College operated the gas card

program. The contract between Escarosa and the College required

the College to defend, indemnify, and hold Escarosa harmless

from all claims, including attorneys' fees and costs, caused by

the College's acts or omissions in the course of operation of

the contract. Escarosa's contract with the College also

required the College to maintain general liability insurance to

cover the College, and any services or activities provided by

the College, under its contract with Escarosa.

16. The College did not petition to intervene in these

proceedings. The Respondent Agency is not a party to Escarosa's

contract with the College to operate the gas card program.

17. On December 14, 2006, Escarosa notified the College of

certain problems in the audit and reconciliation of gas card

disbursements. Some of the issues included gas card signature

logs not being available to be audited by Escarosa;

inconsistencies in the dates on signature logs, such that

distribution dates to participants were entered as prior to the

date that their relevant cards had actually been purchased.

There were distribution dates on Saturdays when the program was

closed for the weekend. There were logs showing the

distribution date to the participant in October 2006, which were

submitted after the referenced gas cards had been physically

counted (before distribution) on November 3, 2006. There were

cards not issued in consecutive order and cards issued without

being receipted to the staff member responsible for distributing

the cards, so that there was no record of who had custody of the

cards. Some clients received excessive amounts of cards and, on

one signature log, the client signed a line with no gas card

number indicated.

18. Escarosa notified the Respondent Agency in December

2006, that there were cards which could not be accounted for and

that theft by an employee of the College was suspected. All

cards that could not be accounted for were issued from Escarosa

to the College between the dates of June 1, 2004 and

December 31, 2006.

19. The Respondent's staff went to Escarosa in

January 2007 to provide technical assistance in resolving the

discovered problems with the gas card program. The Respondent

found that Escarosa had not been following its own procedures as

to monitoring and managing the program. Escarosa was not

monitoring the gas card distribution process or the process for

determining whether participants were eligible for receiving

cards. It was not monitoring the dollar amount of cards being

distributed to participants on a monthly basis. It was not

correctly following its Administrative Plan concerning

monitoring or the Master Cooperative Agreement with the Agency,

because it was not properly monitoring its service provider, the

College.

20. Escarosa has agreed, through its representative,

Ms. Nelms, that with proper monitoring of the program the theft

of gas cards could have been detected within a few months. The

Agency's Office of Inspector General conducted an inquiry into

Escarosa's report concerning problems with the program and

issued a report on March 16, 2007. At that time, there had not

been a determination of the final amount of undocumented cards,

so it was recommended that Escarosa determine the amount of loss

and develop a plan for recovery of the loss from the College.

21. The Florida Department of Law Enforcement (FDLE)

investigated the gas card theft. It interviewed program

participants and asked them to authenticate signatures on the

client signature logs, in order to identify forged signatures.

It did this for about 50 participants and then suspended its

investigation because the total charges then established through

its investigation exceeded the amount necessary to charge the

College employee involved with grand theft. Therefore, because

FDLE ceased its investigation, it never established the total

extent of any theft or other undocumented status of additional

gas cards. The College employee involved was prosecuted in a

criminal proceeding and was ordered to pay $2,360 restitution.

VALUE OF UNDOCUMENTED CARDS

22. The Escarosa staff worked with the Agency's personnel

in attempting to determine the number of undocumented cards. It

later hired temporary staff to assist in that effort.

23. In September 2007, Ms. Nelms, of Escarosa, advised the

Agency's Inspector General of her belief that the amount of

undocumented cards at that time was $284,685. The process of

reconciliation was continuing and incomplete at that point,

however. The College had not agreed to that amount and was

trying to match disbursement logs for issuing the cards, the

documentation in its "one-stop service tracking system" (OSST)

and its "hard copy files," to locate additional documentation

which could reduce the amount of undocumented gas cards below

the above figure. The OSST is a data system used to store

information on program participants, such as their eligibility

for transportation services.

24. Escarosa had the College calculate the number of

cards, and their value, for which there was insufficient

documentation, using gas card numbers provided it by Escarosa.

The list of card numbers provided to the College was prepared by

Escarosa using its financial and purchasing records. The list

provided contained only the cards issued to the College.

25. The College then matched the card numbers with

information in its "support services files" as to eligibility

and card disbursement to participants. It then determined, in

late 2007, that it believed the final amount of undocumented gas

cards to be $348,355.

26. In late 2007, the Agency Investigations Manager and an

auditor returned to Escarosa and accepted the College's

calculation that 20,899 gas cards valued at $348,355 were

unaccounted for and not traceable to corresponding disbursement

logs. A report of that confirmation was issued on January 10,

2008 ( See Respondent's Exhibit 8 in evidence).

27. However, disbursement logs have been shown by the

evidence and testimony in this proceeding, in some instances, to

have been inaccurately executed or forged. Even if some issued

cards were not reflected in disbursement logs, that still does

not mean that those which were reflected in disbursement logs

were accurately entered and documented, given the fact that

there was some forgery and inaccurate recording in disbursement

logs, concerning card disbursement. This fact calls into

question the valuation of $348,355. That number also is

rendered doubtful by the fact that, of the purported number of

undocumented gas cards, it has not been persuasively shown

whether all were actually issued and used, nor who may have used

all of them. Thus, while the evidence may show that 20,899 gas

cards were undocumented, it does not correspondingly

persuasively show that $348,355 is the proven amount which

should be disallowed and ultimately re-paid.

28. Thus, the report issued January 10, 2008, found that

documentation had not been produced to support proper use of

grant funds concerning the undocumented cards. The Agency

Inspector General could not know with confidence that the gas

cards in question went to eligible participants in the program

or that the funds were actually used for the purpose for which

they were granted to Escarosa.

29. Escarosa chose not to have an audit performed, as

requested by the Agency, to determine the exact amount

attributable to undocumented cards or the amount used for non-

approved purposes. It did not have a forensic examination of

the gas card logs performed, as Ms. Nelms had once advocated,

because Ms. Nelms did not want to spend further money in

investigation. Escarosa does not have any non-federal money to

spend on such costs.

30. Further, in January 2008, the Agency requested that

Escarosa attempt to determine whether the oil companies from

whom the cards had been purchased could, from their records,

confirm and document the unused gas cards. The unused cards

would show that funds represented by them had not actually been

expended. That would reduce the number of undocumented cards

and result in obtaining refunds for the unused cards. This

would reduce the ultimate re-payment amount. The Agency

believed this would help Escarosa reduce the number of

undocumented cards that it might be responsible for. Escarosa,

however, did not accede to the request that it attempt to make

such an audit involving the oil companies.

31. Escarosa had obtained an audit from the firm of

O'Sullivan and Creel, LLP, which issued its "Independent

Auditor's Report on Compliance with Requirements Applicable to

Each Major Program and Internal Control Over Compliance in

Accord with OMB Circular A-133." This document is in evidence

as Respondents Exhibit 2. This was a report of an audit of

Escarosa's compliance with requirements applicable to federal

programs and was provided to Escarosa's Board of Directors. It

included a finding that Escarosa had not complied with

requirements concerning allowable costs and sub-recipient

monitoring applicable to its TANF-WTP program. It included, at

Finding 2006-1: "Un-allowed costs and sub-recipient monitoring,"

that there was a final amount of questioned cost of $348,355,

representing the period from July 2004 through December 2006.

It described that amount in its finding, however, as a "Final

Amount of Possible Theft " of $348,355 for undocumented gas

cards. It also acknowledged in its findings that it had not

audited any response to the audit report which was made or might

be made by Escarosa.

32. Escarosa later took the position, by letter of

January 30, 2009, that it believed all gas cards had been

properly documented, except for an amount valued at $5,580,

which Escarosa postulated had been stolen. The Agency did not

accept that new position, without an amended audit finding or

certification by an auditor, which would validate the

documentation as being appropriate as to the remaining $342,775

amount of disputed gas cards.

33. Ms. Nelms asserted that the only way to arrive at an

audited number of the cards that were stolen, improperly used or

unaccounted-for would be to have a forensic handwriting

specialist analyze the signatures in the card disbursement logs.

She admitted that it would be better to have had a forensic

audit performed so that an exact amount of loss would have been

known. She did not obtain, nor did Escarosa obtain, such a

forensic audit or handwriting analysis, however.

34. In taking a position that the undocumented amount or

value of the gas cards was much lower than the postulated

$348,355, Ms. Nelms testified that the client signature logs or

gas card logs should be used to reconcile gas card purchases

with what had been disbursed to participants. She maintained

that this would result in a much lower undocumented figure,

perhaps as low as $5,580. Escarosa presented no persuasive

evidence that the gas card logs were sufficiently reliable

however. In relying on the gas card logs to show gas card

disbursement to program participants, Escarosa concedes that the

logs contained forged and missing signatures and that portions

of the logs had been falsified. The logs have simply not been

demonstrated to be reliable as a basis of documentation for the

gas card expenditures at issue.

35. Diane Bagwell was the person responsible for the

College's calculation concerning arriving at the figure for

undocumented gas cards. Ms. Bagwell testified that the

College's support services files, which were maintained under

her supervision, were maintained and updated accurately and that

the $348,355 figure was arrived at from data in the support

services files. She testified that she believed that data was

reliable, but she also questioned the final amount of $348,355

because she had a doubt concerning the list of cards provided by

Escarosa to the College, as well as the time period (July 2004-

December 2006) for which she was directed to conduct the search

or calculation. In its calculation, the College compared the

total number of gas cards purchased with HHS funds by Escarosa

to the number of gas cards distributed by the College. It only

distributes gas cards pursuant to the WTP program. It is not

involved in card distribution for Escarosa's Non-Custodial

Parent Program (NCPP). The approach used by the College in its

calculation, which thus far has been accepted by the Agency, is

flawed in that the testimony of Diane Bagwell and Janet Summers

indicates that NCPP gas cards may have been included in the

purported undocumented amount referenced above. This is because

the evidence indicates that the calculation by the College may

have compared the total cards purchased for both the WTP and

NCPP programs against the cards distributed by the college.

36. It is also apparent the College did not include any

data from the time period prior to July 2004 nor after December

2006. The analysis in this manner would remove from

consideration cards purchased prior to the beginning of the test

period, July 2004, but actually activated or issued after July

2004, as well as cards purchased prior to December 2006, but

activated or issued after December 2006. Cards purchased prior

to July 2004 and distributed during January 2004 through

December 2006, would appear to be undocumented because the data

was not reviewed, even though the cards were distributed and

used between January 2004 and December 2006. Similarly, the

cards purchased prior to December 2006, but not issued and used

until 2007, would appear as being undocumented because the

attendant data was not reviewed for the period July 2004 through

December 2006, even though, in actuality, the cards may have

been properly accounted-for, but used after December 2006.

37. It thus appears that the College, in its calculation,

may have combined gas card purchases made for both the NCPP and

the WTP programs, comparing the combined total of gas card

purchases to its own WTP records in its support services files.

It apparently did not set off the total of the number of NCPP

gas cards from the WTP program cards and thus considered an

inflated number of purchased gas cards vis-a-vis its records

when it should have only considered the WTP-related cards. The

evidence shows that NCPP cards valued in excess of $200,000 were

purchased. This is a relatively small percentage of the total

HHS funds expended on gas card purchases for the relevant time

period (approximately $1,000,000). However, this does account

for a significant portion of the so-called undocumented gas

cards. The number of undocumented cards might be substantially

smaller if the College, in its calculation, had offset or

removed the NCPP gas cards from the total cards it was

considering.

38. Other flaws in the calculations by the College also

cast doubt on the correctness of the disallowment figure of

$348,355. Thus, for example, as to Exhibit "L", the Agency

contends that in the period July 2004 to December 2004, gas

cards issued by both CITGO and BP oil companies are

undocumented. Exhibit "S", however, and Exhibit "OO", which

document Escarosa's use of HHS funds during this period of time,

show Escarosa did not purchase any BP gas cards. Instead, only

CITGO gas cards were purchased prior to June 2005.

39. Exhibit "S" in evidence, specifically Invoices 2322,

2426, 2428, 2490, 2515, and 2516 show that Escarosa purchased a

total of 7,250 gas cards valued at $133,500. The Agency

contends that the value of $127,558, represented by 8,335 gas

cards during that time period are unallowable costs, as depicted

by Exhibit "L", in evidence. The Agency is thus contending that

nearly 100 percent of the gas cards for the year 2005 are

undocumented. Such a finding would not be credible nor

supported by preponderant, persuasive evidence.

40. Moreover, Exhibit "L" identifies undocumented cards by

serial number. When that exhibit is compared to Exhibit "OO"

and Exhibit "S", it would appear that the value of undocumented

cards alleged by the Agency ($348,355) includes cards that were

never purchased (at least for the WTP program). Exhibit "OO,"

for example, shows that Escarosa activated a total of 750 $5.00

gas cards for the WTP program in the calendar year January 2005

to December 2005. Exhibit "L" however suggests that 1,438 $5.00

gas cards are undocumented for that same calendar year. Thus it

would appear the undocumented cards total contended for by the

Agency either includes cards that were never purchased, which is

inappropriate, or includes NCPP program gas cards, which are not

part of this dispute and are not related to the program (WTP)

and purported undocumented gas cards at issue.

41. In summary, the analysis employed, based primarily on

the College's calculations, to justify a disallowance figure of

$348,355 is simply unreliable, as demonstrated by the facts

found above. Therefore, although persuasive evidence shows that

there is, no doubt, a substantial number of undocumented gas

cards, at the very least represented by the ones which were

stolen or embezzled by the College employee in question (or

others), the evidence does not prove with any precision what

that figure for such disallowable costs should be.

42. This situation and determination might have been

alleviated or avoided, in part, had the Petitioner, Escarosa,

taken the advice of the Agency and effected an audit of its gas

card operation, procedures and WTP program, related to gas card

use, which included a precise audit of the number of cards

obtained from oil companies and the oil company records which

could show which cards had actually been used. Unfortunately,

Escarosa declined to do that. Consequently, an accurate, and

perhaps a forensic audit, is clearly needed to establish with

precision the amount of costs which should be disallowed,

represented by the gas card portion of the Petitioner's WTP

program.

43. Based upon the legal authority cited herein, that

audit should be performed by the Petitioner Escarosa. It is

also observed that, given the facts established by the record in

this case, based upon its contract with the College, Escarosa

would appear to have a substantial likelihood of recourse

against the College and its insurance carrier or servicing

agent, for whatever cost disallowance, and related costs and

fees, are ultimately proven, if any.

CONCLUSIONS OF LAW

44. The Division of Administrative Hearings has

jurisdiction of the subject matter of and the parties to this

proceeding. §§ 120.569 and 120.57(1), Fla. Stat.

45. This is a proceeding where the Agency, the Respondent,

has made an initial decision to disallow and require repayment

of certain disallowed grant expenditures made by the Petitioner,

Escarosa. The Division of Administrative Hearings has

jurisdiction to hear such disallowance cases. See Department of

Labor and Employment Security v. Indian River Community College ,

Case No. 82-032 (DOAH: March 22, 1982; Final Order: November 7,

1982); Department of Labor and Employment Security v Putnam

County Board of County Commissioners , Case No. 82-167 (DOAH:

April 16, 1982; Final Order: July 2, 1982). The Respondent

Agency's predecessor Agency, The Florida Department of Labor and

Employment Security, has had its authority to disallow certain

grant-related expenditures, and to require repayment of

disallowed costs, upheld. See Department of Labor and

Employment Security v Nando-Sumter Community Action Agency , Case

No. 84-0719 (DOAH: June 13, 1984; Final Order: August 27, 1984);

Department of Labor and Employment Security v Jefferson County

Board of County Commissioners , Case No. 82-883 (DOAH: June 14,

1982; Final Order: August 2, 1982).

46. The Nando-Sumter and Jefferson County cases are

procedurally and factually similar to the instant case, with the

Department therein disbursing federal funds to sub-recipients,

pursuant to contracts requiring compliance with federal

regulations. In those cases, the Recommended Orders and Final

Orders recognize that, as the recipient of federal funds, the

Florida Department of Labor was responsible for insuring

compliance with federal regulations and that Florida law

obligated it to carry out the duties assigned to Florida under

federal law. Those duties included "entering into contracts on

behalf of the State with program operators to locally administer

the program." Nando-Sumter at 6. In Jefferson County , the

Recommended Order and the Final Order provided that the sub-

recipient involved should re-pay the Department of Labor the

costs expended "in violation of the contract and applicable

regulations."

47. HHS Department Appeals Board (DAB) decisions have been

held to be persuasive in a case such as this where the Agency

and Escarosa are required to comply with HHS law and regulations

governing HHS grants. AHCA v. Lake Mary Health Care Assocs.,

Inc. , Case No. 04-0335 (DOAH: June 8, 2004; Final Order: Feb. 9,

2005). HHS is the federal agency responsible for promulgating

the regulations that are standards by which Escarosa's

compliance must be determined. Because these decisions are

those of HHS addressing the interpretation and application of

its own regulations, the decisions are entitled to substantial

deference. S. Valley Health Care Ctr. v. Health Care Fin.

Admin. , 223 F.3d 1221, 1223 (10th Cir. 2000) (Courts give

substantial deference to agency's interpretation of its own

regulations.).

48. A question was raised in this proceeding concerning

whether the College was an indispensable party. An

indispensable party is one necessary for a complete

determination of all issues and one without which the case

cannot further proceed. See Office of the Attorney General,

Dept. of Legal Affairs v. Commerce Commercial Leasing , 946 So.

2d 1253, 1255 (Fla. 1st DCA 2007). Party status for the College

is not necessary for a determination of the ultimate issues

concerning whether Escarosa has violated the relevant federal

regulations and contract, has grant-related expenditures which

are not documented or otherwise justified, and whether it must

repay the disallowance thereof. An indispensible party is one

who is materially interested in the subject matter of the

litigation and would be directly affected by its outcome.

Everette v. Florida Dept. of Children and Families , 961 So. 2d

270, 273 (Fla. 2007). The College in this proceeding would not

be "directly affected" since the case will not result in an

order adjudicating any of the College's interests. The

disallowance issue affects Escarosa and not the College. The

fact that the College may become liable to Escarosa for recovery

of any disallowed amount, pursuant to the College's contract

with Escarosa, does not make the College an indispensible party

to this proceeding. See Phillips v. Choate , 456 So. 2d 556, 558

(Fla. 4th DCA 1984). Moreover, the College is not an

indispensible party where it has no privity of contract between

itself and the Agency for Workforce Innovation. See Dept. of

HRS v. Southpointe Pharmacy , 636 So. 2d 1377, 1381 (Fla. 1st DCA

1994). The record reflects that the College had notice of these

proceedings and elected not to file a motion to intervene.

THE AGENCY’S ROLE AND AUTHORITY TO DISALLOW

GRANT EXPENDITURES AND REQUIRE REPAYMENT

49. The Agency is the state administrative entity for

receipt of federal workforce development grants and other

federal funds, and is the designated agency for each federal

workforce development grant assigned to it for administration.

§§ 20.50(2)(a) and 20.50(3), Fla. Stat. The Agency is

responsible for administering the TANF funds at issue in this

proceeding and for ensuring that welfare transition services

funded by TANF are provided in compliance with approved

administrative plans. § 445.004(5)(b)6, Fla. Stat. The Agency

has the level of authority necessary to be the designated

recipient of each federal grant assigned to it. § 20.50(3), Fla.

Stat. In sum, the Agency is responsible for ensuring that the

state appropriately administers federal workforce funding.

§ 20.50(1), Fla. Stat.

50. All program and fiscal instruction to the regional

workforce boards is statutorily required to emanate from the

Agency. § 20.50(1)(a), Fla. Stat.

51. OMB Circular No. A-133 , Audits of States, Local

Governments, and Non-Profit Organizations , 62 Fed. Reg. 35,278

(June 30, 1997) provides the standards and requirements for

audits of states, local governments and non-profit organizations

expending federal awards or grant funds.

52. The Agency serves as a “pass-through entity” which is

defined as a “non-Federal entity that provides a Federal award

to a sub recipient to carry out a Federal program.” “Sub

recipient means a non-Federal entity that expends Federal awards

received from a pass-through entity to carry out a Federal

program . . . .” OMB Circular A-133, Audits of States, Local

Governments, and Non-Profit Organizations , 62 Fed. Reg. 35,278

§ 105 (June 30, 1997). As an entity that has received an award

of TANF funds from the Agency, Escarosa is the Agency’s sub

recipient.

53. As a pass-through entity, the Agency has the following

responsibilities:

Pass-through entity responsibilities . A

pass-through entity shall perform the

following for the Federal awards it makes:

(1) Identify Federal awards made by

informing each sub recipient of CFDA title

and number, award name and number, award

year, if the award is R&D, and name of

Federal agency. When some of this

information is not available, the pass-

through entity shall provide the best

information available to describe the

Federal award.

(2) Advise sub-recipients of requirements

imposed on them by Federal laws,

regulations, and the provisions of contracts

or grant agreements as well as any

supplemental requirements imposed by the

pass-through entity.

(3) Monitor the activities of sub-

recipients as necessary to ensure that

Federal awards are used for authorized

purposes in compliance with laws,

regulations, and the provisions of contracts

or grant agreements and that performance

goals are achieved.

(4) Ensure that sub-recipients expending

$300,000 ($500,000 for fiscal years ending

after December 31, 2003) or more in Federal

awards during the sub-recipient's fiscal

year have met the audit requirements of this

part for that fiscal year.

(5) Issue a management decision on audit

findings within six months after receipt of

the sub-recipient's audit report and ensure

that the sub-recipient takes appropriate and

timely corrective action.

(6) Consider whether sub-recipient audits

necessitate adjustment of the pass-through

entity's own records.

(7) Require each sub-recipient to permit

the pass-through entity and auditors to have

access to the records and financial

statements as necessary for the pass-through

entity to comply with this part.

OMB Circular No. A-133 , Audits of States, Local Governments, and

Non-Profit Organizations , 62 Fed. Reg. 35,278 § 400(d) (June 30,

1997).

54. A management decision must include the following:

The management decision shall clearly state

whether or not the audit finding is

sustained, the reasons for the decision, and

the expected auditee action to repay

disallowed costs, make financial

adjustments, or take other action. If the

auditee has not completed corrective action,

a timetable for follow-up should be given.

Prior to issuing the management decision,

the Federal agency or pass-through entity

may request additional information or

documentation from the auditee, including a

request for auditor assurance related to the

documentation, as a way of mitigating

disallowed costs. The management decision

should describe any appeal process available

to the auditee.

OMB Circular No. A-133 , Audits of States, Local Governments, and

Non-Profit Organizations , 62 Fed. Reg. 35,278 § 405(a) (June 30,

1997). The Agency in the grant award, master cooperative

agreement, monitoring activities, and management decision has

performed its pass-through entity responsibilities.

55. In the present case, the HHS definition of “sub-

recipient” shows federal acknowledgment of a recipient’s

authority to disallow and require repayment.

Sub-recipient means the legal entity to

which a sub-award is made and which is

accountable to the recipient for the use of

the funds provided.

45 C.F.R. 74.2 (emphasis added). The Master Cooperative

Agreement between the Agency and Escarosa further establishes

the Agency’s authority. It states:

Failure to comply with the terms and

conditions outlined herein may result in the

loss of federal and state funds and may be

considered grounds for the suspension or

termination of this Agreement and result in

a determination of disallowed costs.

The Board understands that the Agency may

take action to recover disallowed costs and

interest. Upon exhaustion of applicable

administrative and judicial remedies, the

Board agrees to refund the amount of finally

determined disallowed costs and interest

from non-federal and non-state grant funds.

COMPLIANCE REQUIREMENTS FOR EXPENDITURE OF GRANT FUNDS

56. Escarosa is a regional workforce board and, pursuant

to Section 445.007(9), Florida statutes, it must ". . . apply

the . . . expenditure procedures required by federal law for

the expenditure of federal funds." § 445.007(9), Fla. Stat.

This statutory requirement derives from federal requirements for

the use of federal funds and is incorporated in the parties'

master cooperative agreement and in the grant award of HHS funds

to Escarosa. Escarosa is bound by the spending principles of

federal law for its HHS/TANF grant.

57. Escarosa as a "sub-recipient" and auditee has the

following responsibilities pursuant to the OMB Circular A-133:

"(a) Identify, in its accounts, all Federal

awards received and expended and the Federal

programs under which they were received. . .

(b) Maintain internal control over Federal

programs that provides reasonable assurance

that the auditee is managing Federal awards

in compliance with laws, regulations, and

the provisions of contracts or grant

agreements that could have a material effect

on each of its Federal programs.

(c) Comply with laws, regulations, and the

provisions of contracts or grant agreements

related to each of its Federal programs.

(d) Prepare appropriate financial

statements, including the schedule of

expenditures of Federal awards. . . .

(e) Ensure that the audits required by this

part are properly performed and submitted

when due.

(f) Follow up and take corrective action on

audit findings, including preparation of a

summary schedule of prior audit findings and

a corrective action plan . . .".

OMB Circular No. A-133, Audits of States, Local Governments, and

Non-Profit Organizations , 62 Fed. Reg. 35,278 § 300 (June 30,

1997).

58. OMB Circular A-122, Cost Principles for Non-Profit

Organizations , 2 C.F.R. Part 230, App. A, § A.2.g. provides that

costs or expenditures must be adequately documented in order to

be allowable. Escarosa was required to meet the standards for

financial management systems in accordance with OMB Circular A-

110, Uniform Administrative Requirements for Grants and

Agreements with Institutions of Higher Education, Hospitals, and

Other Non-Profit Organizations , 2 C.F.R § 215.21(b)(2). Such

financial management systems must include records that

adequately identify the source and application of funds for

grant purposes; control over and accountability for all funds,

property, and other assets, as well as safeguards to ensure that

assets are only used for authorized purposes. Preponderant

evidence demonstrates that Escarosa, during the time period at

issue, failed to meet the standards for such financial

management systems in accordance with OMB Circular A-110, 2

C.F.R § 215.21(b)(2), primarily due to the lack of adequate

oversight of gas card program operations conducted at the

College locations.

DISALLOWANCE

59. The failure to have documentation to support grant-

charged expenses is grounds for the Respondent Agency's

disallowance of gas card purchases charged to the TANF grant.

See OMB Circular A-122, Cost Principles for Non-Profit

Organizations , 2 C.F.R Part 230, APP. A. § A.2.g. "Documented"

means that items purchased for grant program participants must

actually be received by those individuals. Delta Foundation

Inc. v. Dept. of Health and Human Services , 303 F.3d 551, 568-70

(5th Cir. 2002) ("It is not enough for a cost to be allowable,

records must establish that the cost is also allocable to the

grant project"). An agency's disallowance of a recipient's

expenses has been upheld due to inadequate documentation in a

case before the Division of Administrative Hearings as well.

See Abilities, Inc. v. Dept. of Education , Case No. 04-2053

(DOAH: May 9, 2005; Final Order: July 12, 2005), where the

Administrative Law Judge found as follows:

Abilities' invoices are not sufficient to

show that federal funding for VRS services

was spent on VRS services and neither are

the invoices and profit-loss statements,

etc. provided by ACS. Simply, the funds

allegedly used for these services could not

be verified or audited by VRS.

60. Escarosa's purchase orders and records of the

College's request for cards do not constitute adequate

documentation showing that gas card expenditures were properly

charged to the TANF grant because they do not show that eligible

participants received them. The gas card logs, with client

signatures, are not reliable documentation because they

admittedly contain some forged signatures and falsified

information. Therefore, they do not reliably show that only

eligible participants received gas cards.

61. Under its authority referenced above, the Agency

requested that Escarosa provide additional documentation or

auditor-assurance of documentation. The Agency suggested that

Escarosa contact the oil companies to obtain further

documentation on cards purchased and, more importantly, cards

actually used. Escarosa refused to do this and also refused to

obtain independent auditor verification as to adequacy of

documentation, when it revised its position to assert that it

had documentation for all but $5,080 worth of gas cards. As the

auditee, however, Escarosa had a responsibility to assist in

clearing the audit finding. Thus, it has not complied with

federal expenditure principles.

62. While Escarosa maintained that it had documentation

for all but $5,080 worth of gas cards, it did not show that it

had adequate supporting information because of the documentation

that it purportedly relied on (the logs) referenced above.

Thus, in addition to the amount of $5,080, Escarosa did not show

that all remaining TANF funds expended for gas cards during the

time period in question actually got to the ultimate recipients,

the participants in the program. Thus, it was not shown that

all such expenditures were used to accomplish grant purposes and

therefore, some disallowance would be in order.

63. The problem with disallowance, and requiring Escarosa

to repay the disallowed amounts, is that the postulated

disallowed amount of $348,355 has not been established by

reliable, substantial evidence. The Agency has accepted the

College's calculation that this amount represents the final sum

of undocumented cards. The greater weight of the persuasive

evidence, however, does not support reliance on that

calculation, for the reasons delineated in the above Findings of

Fact, including the likelihood that unrelated, irrelevant NCPP

funds and gas cards might have been included in the College's

calculation. The evidence in support of that amount as being an

accurate total, under the circumstances delineated in the above

Findings of Fact, is simply not substantial or credible.

64. In the face of that finding and conclusion, it has

neither been established that some other amount, or lesser

amount, of undocumented cards has been persuasively proven as

being appropriate for disallowance and repayment by the

Petitioner. An appropriate independent and/or forensic audit

should be conducted. Such an audit should include examination

of oil company records, both for determining the exact amount of

gas cards purchased during the relevant time period and the

precise amount of such gas cards actually used. Until this is

accomplished, an appropriate, precise amount of undocumented gas

card expenditures, and concomitantly, the magnitude of any

departure from the grant requirements cannot be determined.

REPAYMENT REQUIREMENT FOR THEFT

65. The Petitioner, Escarosa, asserts that a grantee is

not required to repay federal grant charges that are

undocumented by reason of another person's theft. It relies on

the absence of reference to a theft repayment requirement in OMB

Circular A-122. It is clear, however, that theft does not

excuse a requirement that disallowed amounts be repaid. See Sea

Mar Community Health Center, Inc. , DAB No. 1459 at 10 (1994)

(Grantee had an "obligation to repay or properly account for the

embezzled funds."). See also Oglala Sioux Tribe , DAB No. 498 at

2 (1984) where the DAB found that money which was stolen could

not have "been expended for grant purposes." In Oglala Sioux

Early Childhood Component , DAB No. 680 at 1 (1985), the party

who stole grant-purchased property was the grantee's third-party

business associate rather than its own employee. Even though

the theft was due to no fault of the grantee and beyond its

control, the DAB upheld the disallowance since stolen grant

property constitutes unallowable "bad debts" under OMB Circular

A-122. Theft of gas cards does not relieve Escarosa of the

requirement that it repay amounts thus not used for grant

purposes because of the theft.

66. The Petitioner also contends that, even if it is

required to repay some disallowed amount representing

undocumented gas card funds, the Respondent Agency does not have

authority to require such repayment from non-federal funds.

Moreover, it contends that, as a practical matter, it has no

funds which are non-federal with which it could repay any

disallowance.

67. However, expenditures disallowed, and therefore not

allowed to be paid from federal grant funds, cannot be repaid

using federal grant funds. The law governing HHS grants

requires the Agency, as a pass-through entity, to request

repayment of disallowed HHS funds from non-federal sources.

Anderson-Oconee Headstart Project, Inc. , DAB No. 090 (1980)

(Disallowed grant expenses must be repaid from non-federal funds

despite the recipient's insistence that it had no non-federal

funds.)

68. The Respondent Agency has the authority to require

repayment of any disallowance, ultimately established as to

amount, out of non-federal funds. Escarosa, in turn, would

seem, pursuant to its contract with the College, to have some

opportunity for recourse against the College in pursuing

recovery of any disallowed amount.

69. Escarosa also contends that the Agency's failure

through its monitoring program, to timely discover the problems

attendant to the gas card program should relieve it from having

to re-pay grant funds not spent for grant purposes. The case

law, however, supports the proposition that even if the

Respondent Agency failed to discover the problems with the gas

card program, through not adequately monitoring that program,

that Escarosa still is not relieved from repayment of any grant

funds expended for non-grant purposes, either intentionally or

inadvertently. Florida AFL-CIO, Inc. v. Florida Dept. of Labor

and Employment Security , Case No. 88-2755 (DOAH: Jan. 20, 1989;

Final Order: Mar. 17, 1989). In that case, the Department of

Labor disallowed federal grant funds based upon fraudulent

misappropriations by the recipient's employee. The grantee

argued that the Agency's disallowance should be overturned

because it had failed to discover the misappropriation through

monitoring of the grantee. In the Recommended Order, the

Division of Administrative Hearings determined that the failure

to monitor the recipient did not constitute a valid defense:

A further Petitioner argument is that it

should be excused from the repayment sought

by the Respondent because the Respondent

failed to properly monitor the Petitioner's

performance under the contract. In this

regard, it is argued that better monitoring

would likely have resulted in earlier

detection of the fraudulent activities of

the Petitioner's employee. The argument

misses the point. The Petitioner is not

being penalized because of the fraudulent

activities of its employee; it is being

asked to return the fruits of that

fraudulent activity. The timing of the

discovery of the fraud has no bearing on the

Petitioner's obligation to repay

fraudulently obtained funds.

Florida AFL-CIO, Inc. v. Florida Dept. of Labor and

Employment Security , supra . Even if the Agency herein should

have discovered the lack of documentation or theft earlier,

through better monitoring, a belated discovery still does not

exonerate Escarosa from its liability for any undocumented use

of grant funds.

70. In summary, the Agency has authority to proceed

against Escarosa and demand repayment of grant funds which were

not used for approved grant purposes, in this case by not being

adequately documented as to who the recipients were, when they

received the gas cards and that they were appropriately approved

clients of the program entitled to receive the gas cards. The

fact remains, however, that the evidence in this case is not

reliable in establishing with any precision what the disallowed

amount should be, for the reasons determined in the above

Findings of Fact. Therefore, it cannot be recommended that

Escarosa repay any amount at this time. The preliminary step of

conducting an adequate audit and/or forensic audit, which

accords with generally-accepted accounting principles, as well

as the above-referenced federal grant administration legal

authority, must be conducted before the magnitude of funds and

gas card expenditures which are genuinely undocumented and

therefore subject to repayment can be determined. Such an audit

should be required to be conducted by the Petitioner, Escarosa.

Parenthetically, it is noted that the Petitioner may have the

ability to obtain recompense for the attendant expenses from its

contracting partner, the College.

RECOMMENDATION

Having considered the foregoing findings of fact,

conclusions of law, the evidence of record, the candor and

demeanor of the witnesses and the pleadings and arguments of the

parties, it is, therefore,

RECOMMENDED that a final order be entered by the Agency for

Workforce Innovation requiring the Petitioner, Workforce

Escarosa, Inc., to conduct an appropriate independent audit

and/or forensic audit, which accords with generally accepted

accounting principles and the above-referenced federal grant

management and administration authority, which might show with

precision any extant undocumented amount of grant-related funds

from within the gas card program, for the relevant audit period

referenced in the above Findings of Fact. When that is

accomplished, the parties may take such substantive and

procedural steps as their interests may indicate.

DONE AND ENTERED this 30th day of October, 2009, in

Tallahassee, Leon County, Florida.

S

P. MICHAEL RUFF

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-3060

[phone]

Fax Filing [phone]

www.doah.state.fl.us

Filed with the Clerk of the

Division of Administrative Hearings

this 30th day of October, 2009.

ENDNOTE

1/ All statutory references shall be to 2008 Florida Statutes,

unless otherwise noted.

COPIES FURNISHED :

James E. Landsberg, Esquire

Peter James Caldwell, Esquire

Agency for Workforce Innovation

The Caldwell Building, MSC 110

107 East Madison Street

Tallahassee, Florida 32399-4128

Susan Nelms, Executive Director

Workforce Escarosa, Inc.

9111 A Sturdevant Street

Pensacola, Florida 32514

Joseph Passeretti, Esquire

30 South Spring Street

Pensacola, Florida 32502

Cynthia Lorenzo, Interim Executive Director

Agency for Workforce Innovation

Office of the General Counsel

Caldwell Building

107 East Madison Street, Ste.212

Tallahassee, Florida 32399-4120

Veronica Moss, Administrative Assistant II

Agency for Workforce Innovation

Office of the General Counsel

Caldwell Building

107 East Madison Street, Ste.212

Tallahassee, Florida 32399-4120

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within

15 days from the date of this Recommended Order. Any exceptions

to this Recommended Order should be filed with the agency that

will issue the Final Order in this case.