NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

______________________ No. 15

- 1420

______________________ PENNSYLVANIA DEPARTMENT OF EDUCATION, Petitioner

v. SECRETARY UNITED STATES D EPARTMENT OF EDUCATION

______________________ On Petition for Review of a Final Order of the United States Department of Education

(EDUC

- 1: 11

- 33

- R)

______________________ Submitted Under Third Circuit LAR 34.1(a)

December 8, 2015
Before : FUENTES, SHWARTZ , and VAN ANTWERPEN , Circu it Judges

( Opinion Filed : March 10, 2016 )

_________________ OPINION *

_________________

* This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7 does not constitute binding precedent.2

FUENTES, Circuit Judge : The Pennsylvania Depa rtment of Education appeals the recovery amount owed to the U.S. Department of Education after an audit of the Philadelp hia School District revealed widespread misuse of federal fund s. For the reasons that follow, we wil l deny the petition for review.
I. A 2010 audit of the Philadelphia School District revealed numerous instances of misusing federal grant funds from July 2 005 through June 2006

. The report questioned $138.4 million in District spending, including $121.1 million in inadequately documented personnel costs. In March 2011, the U.S. Department of Education (“the Department”) issued the Pennsylvania Department o f Education (“P etitioner ”) a program determination
letter that su s tained certain audit findings. The Department initially sought recover y o f approximately $10 million, but t he parties agreed to reduce the amount to $7.2 million
based on the statute of lim itations for recovery of misspent grant funds. Petitioner appealed the determination to the Department’s Office of Administrative Law Judges and requested an equitable offset, which is a reduction in the recovery amount by the amount of nonfederal funds s pent for purposes within t he scope of the federal grant. Chief Administrative Law Judge Allan C. Lewis rejected the a ppeal, and the Secretary of the Department affirmed. Petitioner now asks this Court to review the Secretary’s decision , arguing that the Secretary (1) arbitrarily and capriciously departed from its own precedent in denying3

Petitioner’s request for an equitable offset, and (2 ) incorrectly applied the five

- year statute of limitations in demanding recovery of contract and personnel expenditur es made prior to March 2006. For the reasons that follow, we reject both arguments

. 1
II.
A. E quitable Offset
T he doctrine of equitable offset “ operates to reduce a grantee’s liability by allowing a grantee to substitute disallowed costs with expend itur es that were not made with F ederal funds but were made in furtherance of the purposes of the grant. ” App. 9. A grantee is not entitled to an equitabl e offset as a matter of right. 2 As its name suggests, equitable offset is an equitable remedy , 3 to be “ a pplied on a case

- by

- case basis at the di scretion of the trier of fact. ” App. 13. Here, t he Secretary concluded that an equitable offset was not warrant ed under the circumstances

— where the audit report contained “ ev idence of a complete breakdown in the bas ic budgetary practices required by Federal grant regulations

. ” App. 12. In

1 We have jurisdiction over this petition for review pursuant to 20 U.S.C. § 1234g. We will set aside an agency decision that is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A). “The scope of review u nder the ‘ arbitrary and capricious ’ standard is ‘ narrow, and a court is not to substitute its judgment for that of the agency. ’ ” CBS Corp. v. F.C.C. , 663 F.3d 122, 137 (3d Cir. 2011) ( quoting Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto . Ins. Co. , 463 U.S. 29, 43 (1983) ). “[W]here an agency departs from established precedent without announcing a principled reason for such a reversal, its action is arbitrary and an abuse of discretion and should be reversed.” Chao v. Roy’s Constr., Inc. , 517 F.3d 180, 190 (3d Cir. 2008) (citations and alterations omitted). 2 Consol. Appeals of Fla. Dep’t of Educ. , 69 Educ. Law Rep. 1373, 1394 , 1990 WL 357910, at *24 (ED

. O.H.A. June 26, 1990). 3 Tangipahoa Parish Sch. Bd. v. U.S. Dep't of Educ

. , 821 F.2d 1022, 1030 (5th Cir. 1987); Consol. Appeals of Fla. , 69 Educ. Law Rep. at 1393.4

particular, the audit found that the Philadelphia School District improperly used federal grant funds to supplant state and loca l funding, inadequately enforced policies and
proce dures for process ing financial transactions, and failed to have in place written polic i es and procedure s for various fiscal processes. The Secretary emphasized that
failures of t his magnitude were too egregious and too widespread to merit an offset. T hat the School District immediately began making corrective actions after receiving the final audit report did not counteract the mismanagement and improper expenditur es before the report ca me out. Absent the audit, the Secretary noted, it is unclear when or whether these practi ces would have been addressed. Petitioner argues that the Secretary’s decision represents a significant departure from Department precedent , without notice or a reasoned explanation. It underscores that this case is the first in which the Secretary denied equitable offset based on the nature of the grantee’s misconduct. It contends that never before has the Secretary focused on the

extent of the underlying violations or on the response of the school district. Rather, equitable offset decisions have focused solely on the proposed offset and whether it met the intent and purpose of the federal grant. The Department counters that its decisions have demonstrate d that granting an equitable offset is a matter of “reasonableness and equity , ” and is based on review of the underlying facts and circumstances, including the nature and extent of the grantee’s departure from the terms of the grant. Dep’t Br. 37. The Department also notes that this5

case was the first in which it actually objecte d to the grantee’s request for an equitable
offset based on the nature of the grantee’s misconduct. We cannot say that the Secretary ’s decision was an arbitrary d eparture from established precedent . We must give deference to an agency’s interpret ation of its own decisions unless the proffered interpretation is capricious. 4 Here, t he Secretary discussed four equitable offset decisions, the sum of which suggest s that a variety of factors may impact the ultimate determination. 5 T hese factors include, but a re not limited to: (1) the severity of the violation (honest or clerica l error v s . purposeful error); (2) whether supporting documentati on may be missing; (3) whether the grantee immediately acknowledged the mistake and took action to remedy the violation; (4) the scope and pervasiveness of the underlying actions; (5) whether the grantee acted in “good faith” in response to the issue; (6) whether the grantee has proven that the expenditure claimed as an offset were used for federal programmatic pu rposes; (7 ) whether the offset achieves the aims of the governing statutes and regulations and would not violate any statutory requirements; and (8 ) the arguments, if any, that the Department offers in oppos ition to the request for offset

. Applying this precedent, the Secretary concluded that the Petitioner is not entitled to an equitable offset.

4 CBS Corp. , 663 F.3d at 143. 5 See, e.g. , Application of Pittsburg Pre

- School and Cmty. Council, Inc. , Dkt. No. 09

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- R (E.D. O.H.A. May 16, 2012); Application of Ari z. Dep’t of Educ. , 2010 WL 3378298 (E.D. O.H.A. Aug. 12, 2010); N.C. Dep’t of Pub. Instruction , 1993 WL 940005 (E.D. O.H.A. Oct. 13 1993); Consol. Appeals of Fla. , 69 Educ. Law Rep. 1373; s ee also Application of N.Y. State Dep’t of Educ. , 108 Educ. Law. Re p. 1369 , 1414

- 38, 1994 WL 907419, at *56

- 87 (E.D. O.H.A. Apr. 21, 1994).6

We also cannot say that the Secretary’s decision was an abuse of discretion. He
underscored that a case - by

- case, totality of the circumstances analysis is appropriate, a nd th at is exactly what he did here. The very name “equitable offset” suggests that the remedy is grounded in fairness, and the Secretary provided a thorough evaluation of why the egregiousness of the underlying violations in this case did not merit such a reme dy. The Secretary also confined the decision to the parties in this case, and thus no argument can be made that the decision created a new rule without going through n otice and comment rulemaking.
B. Statute of Limitations Under the relevant s tatute of limitations, t he Department may not recover any misspent grant funds that were “expended in a manner not authorized by law more than five years before the recipient received written notice of a preliminary departmental d ecision.” 6 The Secretary interpreted “in a manner not authorized by law” as referencing unauthorized expe nditure of federal funds. App. 8. Petitioner argues that, because it received a program determination letter in March 2011, it should not be liable for misused funds prior to March 2006. But here, the Philadelphia School District initially charged disallowed contract costs to its local account prior to March 2006, and then in September 2006 changed the funding code to
link the e xpenses to its federal account. Thus, the earlie st point at which the Secretary

6 20 U.S.C. § 1234a(k); see also 34 C. F.R. § 81.31 (c).7

could know those funds were being used “in a manner not authorized by law” was when the School District charged the expenditures to the federal account. The Department points out that, typically, a grantee has some evidenc e to show whether an expenditure is to be treated as a federal program cost. Here, however, the School District could not produce any evidence that when it charged those expenditures to its own account it did so as an advance of federal funds. Thus, we f ind it reasonable for the Secretary to conclude that the logical point from which the limitations period must run is the date of the impermissible expenditure, no t simply the date of obligation, especially where there is no evidence that those expenditures were initially conside red for federal grant purposes.
III. For the foregoing reasons, we will deny the petition for review.