1 29 U.S.C. §§ 1501 - 1781. REVISED, April 3, 1998

UNITED STATES COURT OF APPEALS

For the Fifth Circuit

No. 97-60018

TEXAS DEPARTMENT OF COMMERCE; TEXAS WORKFORCE COMMISSION,

Petitioners,

VERSUS

UNITED STATES DEPARTMENT OF LABOR,

Respondent.

Petition for Review of an Order

of the United States Department of Labor

March 31, 1998

Before WISDOM, HIGGINBOTHAM, AND STEWART, Circuit Judges.

WISDOM, Senior Circuit Judge:

The Texas Department of Commerce (Texas Commerce) petitions this Court to review the

final decision of the United States Department of Labor (DOL) disallowing $617,171 in expenditures

claimed under the Job Training Partnership Act (JTPA) 1 for the grant years of 1989, 1990, and 1991.

We find that the DOL failed to establish a prima facie case that Texas Commerce spent JTPA funds

unlawfully. We reverse the DOL’s decision.

I.

Congress provides federal funding to state governments under the JTPA to finance job2 Effective March 1, 1996, the Texas Workforce Commission replaced the Texas Department

of Commerce as the recipient of JTPA funds. Tex. Lab. Code Ann. § 302.021(8) (West 1996).

3 29 U.S.C. 1518; 20 C.F.R. § 629.38(a) (1989-1991).

4 29 U.S.C. § 1518 (a). This limitation cannot be waived. 20 C.F.R. § 629.39(a)(2) (1989-

1991)..

5 29 U.S.C. § 1518 (b)(1) & (c)(2)(B).

6 29 U.S.C. § 1574 (a)(1).

7 See 20 C.F.R. § 627.1 (1989-1991).

8 29 U.S.C. § 1604(19) repealed Pub. L. 102-367 (Sept. 7, 1992). Now, service delivery areas

are not authorized to spend funds o n employment generating activities. 20 C.F.R. §§ 627.225 &

627.435(e)(8) (1997).

2 training and placement programs for economically disadvantaged individuals. From 1989 through

1992, the years in question in this suit, Texas Commerce was the designated recipient of these funds

for the state of Texas. 2 Texas Commerce allocated its funds amo ng several service delivery areas

i ncluding the one administered by the Middle Rio Grande Development Council. The DOL

challenged the Middle Rio Grande Development Council’s expenditures in this case.

The a dminist rat o r of the JTPA funds for a given service delivery area must allocate its

expenditures a mo ng t hree categories: training, administration, and participant support. 3 The

administrator may not spend more t han 15% o f it s allocated funds in any given fiscal year for

administrative costs. 4 It may not spend more than 30% of its funds on the combined total of

administrative expenses and participant support without receiving a waiver from t he state. 5 Each

state is primarily responsible for establishing guidelines to ensure that expenditures are charged to the

proper cost category. 6 The state’s authority to establish guidelines is prescribed to the extent that the

DOL has issued its own regulations. 7

During the years in question, administrators of service delivery areas were authorized to spend

JTPA funds on “employment generating activities to increase job opportunities for eligible individuals

in the area”. 8 The DOL regulations prohibited charging expenditures for employment generating9 20 C.F.R. § 629.38( e)(5) (1989-1991).

10 The combined limitation for administrati ve and participant support expenditures was no

obstacle to the Middle Rio Grande Development Council because that limit was waived.

3 activities to the training cost category, 9 but those regulations did not explicitly state whether these

costs were classified as either administrative or participant support expenditures. The Middle Rio

Grande Developmen t Co uncil charged its expenditures for employment generating activities to

participant support. By doing this, the Middle Rio Grande Development Council was able to spend

JTPA funds on em

plo yment generating activities without encountering the 15% limit on

administrative expenditures. 10

The DOL’s Office of the Regional Ins pect or General audited the Middle Rio Grande

Development Council’s JTPA programs. The inspector general’s office sent a copy of the audit report

to the DOL’s grant officer who disallowed $822,257 in expenditures charged to the participant

support cost category for employment generating activities. The grant officer maintained that these

expenditures could be charged only to administration and were, therefore, subject to the 15% limit

.

Texas Commerce appealed the grant officer’s decision to an Administrative Law Judge (ALJ).

The Middle Rio Grande Development Council intervened in the appeal. The ALJ reversed the grant

officer’s decision in its entirety. The ALJ found that the DOL failed to establish a p rima facie case

that the Middle Rio Grande Development Council violated the JTPA and that the Middle Rio Grande

Development Council classified its expenditures properly.

The DOL appealed to an Administrative Review Board which reversed the ALJ’s decision

and disallowed $628,115 in expend itures.. The Board found that the DOL m et i ts burden of

producing evidence of a prima facie violation of the JTPA and that Texas Commerce failed to meet

its burden of persuasion to show that it classified the expenditures properly. The Board found that

the bu rden o f persuasion on Texas Commerce required it to trace expenditures for employment

generating activities to specific, identifiable individuals before those expenditures could be charged1 1 Texas has not petitioned for review of the DOL’s second finding that disallowed $10,944 in

expenditures.

12 Louisiana v. Dept. of Labor , 108 F.3d 614, 617 (5th Cir. 1997).

13 Id

.

14 29 U.S.C. § 1578 (a)(3).

15 20 C.F.R. § 636.10 (g) (1997); 20 C.F.R. § 629.58 (I) (1989-1991).

16 20 C.F.R. § 636.10 (g) (1997); 20 C.F.R. § 629.58 (I) (1989-1991).

1 7 See Louisiana v. Dept. of Labor

, 108 F.3d 614, 617 (5th Cir. 1997); 29 U.S.C. § 1575 (a)(1).

18 See 29 U.S.C. § 1574.

4 to participant support. Texas Commerce petitions this Court to review the Board’s decision under

29 U.S.C. § 1578(a). Only $617,171 remains in issue. 11

II.

Our review of the final decision of the DOL disallowing expenditures under t he JTPA is

limit ed. 12 “If the language of the JTPA is plain, we must enforce the unambiguously expressed intent

of Congress. If the statute is ambiguous, however, we must defer to r easonable interpretations of

the statute by the [DOL].” 13 The DOL’s fact ual findings shall be conclusive if supported by

substantial evidence. 14

At the ALJ’s hearing, the DOL bore the burden of producti on to prepare and file a report in

support of the grant officer’s decision to disallow expenditures. 15 As the party seeking to overturn

the grant officer’s decision, Texas Commerce bore the burden of persuasion. 16 The key issue before

us is to determine the nature and extent of these respective burdens.

Texas Commerce was required to maintain records adequate to show that JTPA funds were

spent lawfully. 17 These records enable the DOL to audit these JTPA programs to determine which

expenditures should be allowed. 18 Texas Commerce does not bear the initial burden of justifying its

expenditures before the ALJ, however. That burden rests upon the DOL which must produce1 9 See OWCP Director v. Greenwich Collieries

, 129 L.Ed 2d 221, 228-9 (1994); Maine v. Dept.

of Labor , 669 F.2d 827, 830 (1st Cir. 1982).

20 McCormick, 2 Evidence 433 (4th ed. 1992).

2 1 See Louisiana v. Dept. of Labor

, 108 F.3d 614, 617-18 (5th Cir. 1997); Montgomery County

v. Dept. of Labor

, 757 F.2d 1510, 1513 (4th Cir. 1985). The DOL argues that, as a matter of policy,

th e burden of showing the adequacy of the records should fall upon the state as the party in

possession of the records. We disagree. The DOL is already under an obligation to audit the state’s

JTPA records. If the records prove to be inadequate to show that JTPA funds are spent lawfully, the

DOL can obtain copies of the inadequate records or could offer testimony before the ALJ that, after

a reasonable investigation, no adequate records could be found. The DOL did neither in this case.

22 29 U.S.C. §§ 1503 (24), 1518(b)(2)(A). In thi s case, we address a parti cul ar subset of

participant support characterized as “supportive services”. In addition to this category, participant

support includes work experience expenditures and need-based payments to pay for food and housing

while a participant undergoes training. 29 U.S.C. § 1519(b)(2)(A); 20 C.F.R. § 629.21(a) (1989-

1991).

23 29 U.S.C. § 1503(24) (emphasis added).

24 See Louisiana v. Dept. of Labor , 108 F.3d 614, 617 (5th Cir. 1997).

5 evidence sufficient to establish a prima facie case. 19 This requires evidence sufficient for a reasonable

person to conclude that JTPA funds were spent unlawfully. 20 If the records of Texas Comerce were

inadequate to show that JTPA funds were spen t lawfully, the DOL could meet its burden by

establishing the inadequacy of the records. 21 The DOL maintains that these records were inadequate

because they did not trace expenditures for employment generating activities to specific, ident ifiable

individuals. We find that the DOL and the Board which accepted the DOL’s argument are in error.

Participant support costs are those cost s that directly benefit JTPA-eligible individuals by

assisting them in their participation in JTPA training program s. 22 These costs may include

“transportation, health care, specia l services and materials for the handicapped, child care, meals,

temporary shelter, financial counseling, and other reasonable expenses required for participation in

the training program ”. 23 Although these expenses are all ones that benefit individuals, there is no

support in the statute or the regulations that each expenditure must be traced to a specific, identified

individual. The DOL’s interpretation is not a reasonable one to which we must defer. 24

The ALJ found that the DOL failed to establi sh a prima facie c ase that JTPA funds were25 At first, th e DOL denied reimbursement for t he expenditures, arguing that employ ment generating activities could never be charged to participant support. Later, the DOL admitted that

employment generating act ivit ies could be charged to participant support. The DOL denied

reimbursement, however, arguing that Texas failed to trace the expenditures to specific individuals.

6 spent unlawfully. We agree. The DOL auditors conceded that the challenged employment generating

activities expenditures directly benefited JTPA-eligible individuals. The DOL did not review the

Texas Co mmerce records to determine whether these legitimate employment generating activity

expenditures were ones that could be charged to participant support. Instead, the DOL relied upon

faulty legal interpretations to just i fy the denials. 25 This is not evidence from which a reasonable

person could conclude that JTPA funds were spent unlawfully. The DOL did not meet its burden.

We REVERSE the decision of the Administrative Review Board and RENDER judgment in

accord with the ALJ’s decision.