T. H. BELL, SECRETARY OF EDUCATION, PETITIONER V. KENTUCKY DEPARTMENT OF EDUCATION No. 83-1798 In the Supreme Court of the United States October Term, 1984 On Writ of Certiorari to the United States Court of Appeals For the Sixth Circuit Brief for the Petitioner TABLE OF CONTENTS Question Presented Opinions below Jurisdiction Statute and regulation involved Statement Summary of argument Argument: Grantees of federal funds are obligated to repay amounts spent in violation of applicable statutes and regulations, as reasonably construed by the agency charged with administration of the grant program I. The court of appeals applied an erroneous standard of review by deferring to the State's interpretation of the Title I anti-supplanting provisions A. The Secretary's decision should have been upheld because it is based on a reasonable interpretation of the Title I statute and regulations B. The Title I statute and legislative history do not support the court of appeals' limitations on the Secretary's recoupment authority C. This Court's decision in Pennhurst State School & Hospital v. Halderman does not support the court of appeals standard of judicial review D. The court of appeals' standard of review effectively eviscerates the Secretary's ability to recover misspent Title I funds II. The court of appeals erred in finding ambiguity in the Title I statute and regulations and in concluding that the State's interpretation of the anti-supplanting requirements was reasonable Conclusion OPINIONS BELOW The opinion of the court of appeals (Pet. App. 1a-16a) is reported at 717 F.2d 943. The decisions of the Education Appeal Board and the Secretary of Education (Pet. App. 17a-42a) are unreported. JURISDICTION The judgment of the court of appeals (Pet. App. 43a) was entered on September 14, 1983, and a petition for rehearing was denied on December 5, 1983 (Pet. App. 44a). On February 28, 1984, Justice O'Connor extended the time for filing a petition for a writ of certiorari to and including May 3, 1984. The petition was filed on that date and was granted on October 1, 1984 (J.A. 34). The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1). STATUTE AND REGULATION INVOLVED Title I of the Elementary and Secondary Education Act of 1965, 20 U.S.C. (1976 ed.) 241e(a)(3)(B), provided in relevant part: /1/ Federal funds made available under this subchapter will be so used (i) as to supplement and, to the extent practical, increase the level of funds that would, in the absence of such Federal funds, be made available from non-Federal sources for education of pupils participating in programs and projects assisted under this subchapter, and (ii) in no case, as to supplant such funds from non-Federal sources. 45 C.F.R. 116.17(h) (1974) provided in relevant part: Each application for a grant * * * shall contain an assurance that the use of the grant funds will not result in a decrease in the use for educationally deprived children residing in that project area of State or local funds which, in the absence of funds under Title I of the Act, would be made available for that project area and that neither the project area nor the educationally deprived children residing therein will otherwise be penalized in the application of State and local funds because of such a use of funds under title I of the Act. * * * Federal funds made available for that (Title I) project (1) will be used to supplement, and to the extent practical increase, the level of State and local funds that would, in the absence of such Federal funds, be made available for the education of pupils participating in that project; (2) will not be used to supplant State and local funds available for the education of such pupils. QUESTION PRESENTED Under a decision of the Secretary of Education interpreting Title I of the Elementary and Secondary Education Act of 1965 (20 U.S.C. (1976 ed.) 241a et seq.) and regulations issued thereunder, the Commonwealth of Kentucky misspent a portion of its Title I grant. The court of appeals concluded that the Secretary's interpretation of the statutory and regulatory requirements was reasonable and could be applied prospectively. However, the court held that the Secretary's interpretation could not be applied retroactively to require repayment of the misspent federal funds since the statute and regulations were not unambiguous and the State's position was also reasonable. The question presented is whether the right of federal agencies to recoup misspent grant funds is limited to cases in which no reasonable argument can be adduced to justify the expenditure. STATEMENT 1. Title I of the Elementary and Secondary Education Act of 1965, 20 U.S.C. (1976 ed.) 241a et seq., was enacted to provide federal financial assistance for programs "which contribute particularly to meeting the special educational needs of educationally deprived children" in areas where there are high concentrations of children from low-income families (20 U.S.C. (1976 ed.) 241a). Title I funds are thus intended to benefit a specific group of children -- educationally deprived children in low-income areas -- and are to be used to address their special needs by supplementing their regular school programs. /2/ In 1970, in response to concerns that Title I funds were being used to replace state and local funds that otherwise would have been spent for participating children (S. Rep. 91-634, 91st Cong., 2d Sess. 9, 14-15 (1970) ), Congress added a provision requiring that Title I funds be used only to supplement the level of funds that would, in the absence of Title I funding, "be made available from non-Federal sources for the education of pupils participating in programs and projects assisted under (Title I)" (20 U.S.C. (1976 ed.) 241e(a)(3)(B)(i) ). The provision emphasized that in no case could Title I funds be used "to supplant such funds from non-Federal sources" (20 U.S.C. (1976 ed.) 241e(a)(3)(B)(ii) ). /3/ The Secretary of Education /4/ acts through state educational agencies (SEAs) to distribute Title I funds to local education agencies (LEAs), which provide the supplemental programs. In order to participate in the Title I program, and SEA must assure the Secretary that Title I funds will be expended only for programs that meet all applicable statutory and regulatory requirements and have been approved by the SEA. 20 U.S.C. (1976 ed.) 241f(a)(1). An LEA may receive Title I funds from the SEA only on the basis of a project application in which the LEA describes how the funds will be expended and provides satisfactory assurances that it will comply with the statutory and regulatory requirements. See 20 U.S.C. (1976 ed.) 241e(a). The total maount of funds that an LEA receives under the Title I program is determined by a formula based on the number of children from low-income families in the area served by the LEA and the state per pupil expenditure. 20 U.S.C. (1976 ed.) 241c. Under a specific delegation of rulemaking authority (see 20 U.S.C. (1976 ed.) 241(a), 242(b) ), the Secretary has promulgated regulations to ensure that Title I funds will be used only to provide supplemental assistance to the target population of educationally deprived children in low-income areas. In FY 1974 (the year involved in this case), the regulations specified that children could qualify for Title I services only if they needed "special educational assistance in order that their level of educational assistance in order that their level of education attainment (would) be riased to that appropriate for children of their age" (45 C.F.R. 116.1(i), 116.17(a) (1974) ), and if they resided in a school attendance area with a high percentage of low-income children (45 C.F.R. 116.17(a), 116.17(d) (1974) ). The regulations also required grant applications submitted by LEAs to contain an assurance that the Title I funds would not cause "a decrease in the use for educationally deprived children residing in (the) project area of State or local funds which, in the absence of (Title I) funds * * *, would be made available for that project area and that neither the project area nor the educationally deprived children residing therein will otherwise be penalized in the application of State and local funds because of such a use of (Title I) funds" (45 C.F.R. 116.17(h) (1974) ). The regulations further required that Title I funds in fact be used to supplement the state and local funds that would otherwise be "made available for the education of pupils participating in (the Title I) project" (45 C.F.R. 116.17(h)(1) (1974)), and not "to supplant State and local funds available for the education of such pupils" (45 C.F.R. 116.17(h)(2) (1974)). 2. In order to ensure that Title I funds are being expended properly in accordance with applicable statutory and regulatory requirements, Congress has required the Secretary to conduct post-expenditure audits. 20 U.S.C. (1976 ed.) 1232c; see also 5 U.S.C. App. 1-12, at 987-993; 20 U.S.C. 2835. If an audit discloses that funds have been misspent, the Department of Education demands restoration of the misspent funds. See Bell v. New Jersey, No. 81-2125 (May 31, 1983). Audits of Title I programs have been conducted continuously since the late 1960's, and Congress recognized as early as 1970 that misspent Title I funds discovered during these audits must be refunded to the Department. S. Rep. 91-634, supra, at 83-84. Congress thus expected the Secretary to "exercise fully his authority and responsibility under the law to see that State agencies abide by the assurances they have given" (id. at 10) and to recover any "improperly used funds" (id. at 84). If an administrative determination is made that Title I funds have been misspent, the state may file an application for review with the Education Appeal Board (EAB). The EAB was established to provide states and other grantees of federal education funds with an opportunity to appeal audit findings and other adverse determinations to an impartial administrative tribunal. 20 U.S.C. 1234-1234d. /5/ Under the statute governing the EAB, the "burden shall be upon the State * * * to demonstrate the allowability of (questioned) expenditures" (20 U.S.C. 1234a(b) ). A decision of the EAB becomes final unless it is modified or set aside by the Secretary. 20 U.S.C. 1234a(d). The state may seek judicial revew of the Secretary's final decision in the appropriate federal court of appeals (20 U.S.C. 1234d, 2851), but the Secretary's findings of fact are conclusive if supported by substantial evidence. 20 U.S.C. 1234d(c), 2851(b). 3. a. The present dispute arose when auditors from the Department of Health, Education, and Welfare (see note 4, supra) determined that, during FY 1974, 50 LEAs in the Commonwealth of Kentucky had spent $704,237 in violation of the prohibition against using Title I funds to supplant state and local funds. J.A. 11-21. At issue were federally funded "readiness" classes run by these LEAs for children who were not prepared to enter first or second grade. In contrast to Title I programs in other states, which typically provided services a few hours a week in a specific area of educational need, the readiness classes were full day programs. J.A. 16. The classes were similar to preschool programs, except that the children were formally enrolled in first or second grade and a substantial portion of the children were expected to move on to the next grade level following their year of readiness instruction. J.A. 16-17. All of the readiness classroon instructional salaries, and some administrative support costs, were funded with Title I, not state or local, monies. Pet. App. 22a. The children in these classes received the same locally-funded "enrichment" services (e.g., physical education, library, art and music) as children enrolled in regular first and second grade classes. Approximately $1.65 million of Title I funds was expended for these programs during FY 1974. J.A. 14. In a final audit report sent to respondent on October 29, 1976, the auditors concluded that federal funding had replaced the state and local funds that would otherwise have been spent on first or second grade for the children in the readiness classes who were promoted to the next grade level in the following year. J.A. 17. The auditors calculated that $704,237 of the $1.65 million had been used improperly in place of state and local funds. Ibid. The State disagreed with the auditors' findings, essentially on the ground that there had been no decrease in state and local funding of the schools or grade levels involved. The State took the position that this was sufficient compliance with the supplanting prohibition, and that the federal statute and regulations should not be interpreted to require maintenance of state and local funding for the particular children enrolled in the Title I program. J.A. 18-19. After administrative review, the Deputy Commissioner for Elementary and Secondary Education issued a final determination letter sustaining the auditors' findings and demanding repayment of the $704,237 that was determined to have been misspent. J.A. 22-23. The State filed an application for review with the Title I Audit Hearing Board and, after extensive administrative proceedings, the successor EAB (see not 5, supra) issued an initial decision sustaining the auditors' findings (Pet. App. 17a-32a). Because it was "undisputed factually that State and local funds were not expended for the basic instructional costs of Title I readiness pupils" (Pet. App. 24a), the EAB concluded that Title I funds had been used to supplant state and local funds that otherwise would have been spent on the participating pupils who were promoted to the next grade level in the following year. The EAB specifically rejected the State's argument that the supplanting prohibiition was satisfied as long as there was no decrease in state and local funding of the schools or grade levels involved, because "the statutory and regulatory provisions are sufficiently clear in their emphasis on the expenditure of funds for pupils -- not LEA's, schools, or grade levels" (ibid.). The EAB found that "(t)he regulatory provision is * * * clear (on this issue), even to the point of repetition" (id. at 25a (footnote omitted)). Indeed, the EAB pointed out that "by maintaining State and local funds at the grade level while Title I paid for instructional costs of the readiness program, the SEA and the LEA's assured that additional State and local funds were devoted to non-Title I pupils -- funds which in the absence of Title I would have paid for the instruction of the educationally deprived children" (id. at 24a (emphasis added)). Consequently, the EAB decided that the readiness programs "were not properly designed to supplement state and local expenditures for Title I children, that a supplanting violation did occur, and that the full $704,237 must be refunded by the SEA" (Pet. App. 19a). The State then sought review by the Secretary, who remanded to the EAB for further consideration (id. at 33a-35a). Folowing the EAB's reaffirmance of its initial decision (id. at 36a-37a), the Secretary again considered the case. The Secretary upheld the determination that a violation of the supplanting prohibition had occurred, but he reduced to $338,034 the amount the State was required to repay. Pet. App. 38a-42a. /6/ b. The State appealed to the court of appeals pursuant to 20 U.S.C. 1234d and 2851. The court of appeals sustained the Secretary's interpretation of the supplanting prohibition (Pet. App. 8a-9a (footnote omitted)): It cannot be said that the interpretation posited by the Secretary is "unreasonable." The statutory and regulatory prohibitions against supplanting State and local funds with Title I funds can reasonably be applied with reference to expenditures at the level of the individual educationally deprived pupil, rather than at the level of either the LEA, the school, the grade, or the classroom. Nevertheless, relying on Pennhurst State School & Hospital v. Halderman, 451 U.S. 1 (1981), the court of appeals concluded that the Secretary's interpretation could not be applied to require the repayment of funds spent by respondent in violation of Title I, because "the statutory and regulatory provisions at issue were (not) sufficiently clear to apprise the Commonwealth of its responsibilities (Pet. App. 9a-10a). In particular, the court held that "(w)here, as here, a determination of whether Title I funds supplant or supplement State and local funds depends upon whether the focus is on the district or the pupil, the statute and regulations cannot be said to be unambiguous" (Pet. App. 15a). The court accordingly concluded (id. at 12a (footnote omitted)): This is not to say that the interpretation * * * posited by the Commonwealth is controlling. On the contrary, the interpretation of the Secretary governs all future dealings. We hold only that in the absence of unambiguous statutory and regulatory requirements, and in the presence of a specific grant of discretion to the Commonwealth to develop and administer programs it believes to be consistent with the intentions of Title I, it is unfair for the Secretary to assess a penalty against the Commonwealth for its purported failure to comply substantially with the requirements of law, where there is no evidence of bad faith and the Commonwealth's program complies with a reasonable interpretation of the law. SUMMARY OF ARGUMENT I. This Court has consistently applied the "venerable principle that the construction of a statute by those charged with its execution should be followed unless there are compelling indications that it is wrong." Red Lion Broadcasting Co. v. FCC, 395 U.S. 367, 381 (1969). This principle has special force where, as here, "Congress entrusts to the Secretary * * * the primary responsibility for interpreting the statutory term." Batterton v. Francis, 432 U.S. 416, 425 (1977). In that circumstance, "(a) reviewing court is not free to set aside those regulations simply because it would have interpreted the statute in a different manner." Ibid. The court of appeals ignored these fundamental precepts of administrative law. Without identifying any legal basis for its ruling, the court excused respondent's failure to comply with the Secretary's reasonable interpretation of the anti-supplanting provisions of the Title I statute and regulations, stating only that respondent did not act in bad faith in adopting its own reasonable interpretation of an allegedly ambiguous requirement. This limitation on the principle requiring judicial deference to an agency's reasonable construction of its governing statute is without support in policy or precedent and is inconsistent with the language and legislative history of Title I. This Court has repeatedly recognized the unconditional right of the federal government to recover monies erroneously paid or used for an improper purpose. Title I and its legislative history specifically support the strict enforcement of basic Title I requirements, such as the supplanting prohibition at issue here, and the recovery of any funds that are spent in contravention of those requirements. Bell v. New Jersey, No. 81-2125 (May 31, 1983). The standard adopted by the court of appeals, however, substantially eviscerates the established right of the federal government to recover misspent grant funds and undermines the ability of federal agencies to ensure scrupulous compliance with grant programs. In effect, the court's decision, instead of requiring grantees to seek clarification of ambiguous regulations before expending federal funds, invites them to adopt their own relaxed interpretations of federal expenditure restrictions and to resist audit exceptions whenever some interpretation can be devised to justify an erroneous expenditure. Nothing in Pennhurst State School & Hospital v. Halderman, 451 U.S. 1 (1981), supports this unfortunate result. Pennhurst involved the potential imposition of large, indeterminate financial burdens on states as a condition for the receipt of modest amounts of federal grant funds. By contrast, the present case involves only the proper use of federal grant funds, and the State's potential liability is limited to repaying the amount of federal funds that have been misspent. Moreover, unlike the situation in Pennhurst, compliance with the legal requirement at issue here was an unmistakable statutory condition on the receipt of Title I funds. II. The adverse effect of the court of appeals' limitation on the government's right to recover misspent grant funds is exacerbated by the exceedingly low standard of reasonableness it applied in concluding that respondent's interpretation of the Title I statute and regulations was reasonable. The express terms of the supplanting prohibition provide that Title I funds may not be used to replace state and local funds that, in the absence of the Title I program, would have been expended on participating children. The operation of a Title I program in contravention of this basic requirement serves to defeat the statutory purpose of providing supplemental services to educationally deprived children residing in low-income areas, for whose benefit Title I was enacted, and cannot be considered "substantial compliance" with the conditions imposed upon receipt of the federal funds. ARGUMENT GRANTEES OF FEDERAL FUNDS ARE OBLIGATED TO REPAY AMOUNTS SPENT IN VIOLATION OF APPLICABLE STATUTES AND REGULATIONS, AS REASONABLY CONSTRUED BY THE AGENCY CHARGED WITH ADMINISTRATION OF THE GRANT PROGRAM I. THE COURT OF APPEALS APPLIED AN ERRONEOUS STANDARD OF REVIEW BY DEFERRING TO THE STATE'S INTERPRETATION OF THE TITLE I ANTI-SUPPLANTING PROVISIONS In reversing the decision of the Secretary, the court of appeals adopted an incorrect standard of review that severely restricts the ability of federal agencies to recoup misspent federal grant funds. Rather than limited its inquiry to determining the reasonableness of the Secretary's interpretation of Title I, the court below chose to defer to the grantee's view of allegedly ambiguous statutory and regulatory requirements. In other words, unless there is evidence of bad faith, or the provisions at issue are "unambiguous," a grantee need only "substantially" comply with "a reasonable interpretation of the law" (Pet. App. 12a). Accordingly, the well established right of federal agencies to recoup misspent grant funds would be limited to those rare instances in which the grantee cannot present any reasonable argument to justify an expenditure. This approach cannot be reconciled with the proper standard of judicial review of administrative action and would greatly undermine the administration of federal grant programs. A. The Secretary's Decision Should Have Been Upheld Because It Was Based On A Reasonable Interpretation Of The Title I Statute And Regulations The validity of the contested Title I expenditures in this case depended entirely upon whether the anti-supplanting provisions in the Title I statute and regulations "applied with reference to expenditures at the level of the individual educationally deprived pupil" or "at the level of either the LEA, the school, the grade, or the classroom" (Pet. App. 9a). On that question, the court of appeals found that both the Secretary's (id. at 8a-9a) and respondent's (id. at 12a) interpretations of the anti-supplanting provisions were reasonable. It concluded that while the Secretary's interpretation would "govern() all future dealings" (ibid), respondent could not be required to repay the disputed FY 1974 sums, evidently on the ground that respondent's interpretation controlled past expenditures. Thus, in the guise of developing "substantive standards" for reviewing the Secretary's determination (id. at 5a), the court departed from the clearly established standards that control judicial review of administrative action. /7/ As the Court noted in Bell v. New Jersey, No. 81-2125 (May 31, 1983), slip op. 3, Congress has authorized "judicial review in the courts of appeal of the Secretary's final action with respect to audits" under the Title I program. The standards that govern judicial review of such final administrative determinations are well settled. "The findings of fact by the Secretary, if supported by substantial evidence, shall be conclusive" (20 U.S.C. 2851(b); see also 20 U.S.C. 1234d(c)). As to questions of law, this Court has consistently held that "the construction of a statute by those charged with its execution should be followed unless there are compelling indications that it is wrong." Red Lion Broadcasting Co. v. FCC, 395 U.S. 367, 381 (1967). See Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., No. 82-1005 (June 25, 1984), slip op. 6-7 & n.14. The Court has explained that a reviewing court "need not find that (the agency's) construction is the only reasonable one, or even that it is the result (the court) would have reached had the question arisen in the first instance in judicial proceedings. * * * All that is needed to support the (agency's) interpretation is that it has 'warrant in the record' and a 'reasonable basis in law'." Unemployment Compensation Comm'n v. Aragon, 329 U.S. 143, 153-154 (1946), quoting NLRB v. Hearst Publications, Inc., 322 U.S. 111, 131 (1942). /8/ See FEC v. Demoncratic Senatorial Campaign Committee, 454 U.S. 27, 39 (1981); Zenith Radio Corp. v. United States, 437 U.S. 443, 450 (1978). /9/ If the court of appeals had applied this principle it would have upheld the Secretary's right to recover the misspent funds at issue here. There was substantial evidence in the record to support recoupment: it was "basically uncontested" (Pet. App. 21a) that $338,034 of Title I funds had been used in lieu of state and local funds that otherwise would have been spent on the participating children. Moreover, the court of appeals explicitly stated that the Secretary reasonably interpreted the statutory and regulatory provisions in effect in FY 1974 as prohibiting supplanting "at the level of the individual educationally deprived pupil," even if the non-Title I funding for "the LEA, the school, the grade, or the classroom" remained the same (Pet. App. 8a-9a). Accordingly, "(t)he judicial function (was) exhausted when there (was) found to be a rational basis for the conclusions approved by the administrative body." Mississippi Valley Barge Line Co. v. United States, 292 U.S. 282, 286-287 (1934). Although the court of appeals gave lip service to the principle of deference (Pet. App. 8a-9a n.6), the court found the principle inapplicable, apparently on the theory that it applied only to "future dealings," not to the determination of the propriety of the 1974 expenditures. The court cited no authority for this limitation on the scope of the principle, and we are aware of none. This Court has never suggested that less deference is due to an agency interpretation of the statute it administers when the interpretation governs conduct occurring before the judicial ruling. /10/ Litigation frequently involves such interpretations, as did the two cases most often cited for the principle, Red Lion Broadcasting Co. v. FCC, supra, and Udall v. Tallman, 380 U.S. 1, 16 (1965). /11/ Despite this clear authority requiring deference to the Secretary's reasonable interpretation of the anti-supplanting provisions, the court of appeals focused on whether respondent's interpretation was also reasonable, and, on finding that it was, gave it controlling effect for the period in dispute. This approach turned the proper standard for judicial review on its head. Cf. Consolo v. Federal Maritime Commission, 383 U.S. 607, 618-619 (1966) (court of appeals improperly reversed agency determination after concluding that substantial evidence supported conclusion contrary to that reached by the agency). B. The Title I Statute And Legislative History Do Not Support The Court Of Appeals' Limitations On The Secretary's Recoupment Authority This Court has long recognized that the federal government possesses the unconditional right to recover monies erroneously paid or used for an improper purpose. See United States v. Wurts, 303 U.S. 414, 415 (1938); Grand Trunk W. Ry. v. United States, 252 U.S. 112 (1920); Wisconsin Cent. R.R. v. United States, 164 U.S. 190 (1896); United States v. Carr, 132 U.S. 644 (1890); United States v. Barlow, 132 U.S. 271, 281-282 (1889); United States v. Burchard, 125 U.S. 176, 180-181 (1888). This right is abrogated or limited only when Congress has clearly manifested its intention to do so. United States v. Wurts, 303 U.S. at 416. None of these cases suggests that recoupment is contingent on proof other than the erroneous nature of the payment or the impropriety of an expenditure. In particular, there is no suggestion in any decision of this Court that the government must demonstrate "bad faith" or "unambiguous" requirements, or that "substantial" compliance with "a reasonable interpretation of the law" is sufficient to defeat the government's claim to recover misspent federal funds. Consequently, the court of appeals erred in imposing these conditions unless they can be justified on the basis of the Title I statutory scheme. They cannot. In fact, the statute and its legislative history demonstrate that Title I requirements are to be strictly enforced, and that the Secretary must recover any misspent funds. The specific statutory provisions authorizing the recovery of misspent Title I funds do not place any conditions on the right of recovery. See 20 U.S.C. 1226a-1, 1234a(e), 2835. These provisions do not provide that, to recoup misspent funds, the Secretary must demonstrate "bad faith" or a violation of "unambiguous" requirements. And, contrary to the court of appeals' suggestion (Pet. App. 9a n.8, 16a), there is no "substantial compliance" test in the Title I audit provisions. /12/ The provisions noted by the court of appeals, 20 U.S.C. 1234b(a) and 1234c(a), authorize the Secretary to withhold grant funds and to issue cease-and-desist orders when a recipient of federal funds has failed to "comply substantially" with federal requirements. By contrast, the provisions authorizing the Secretary to make audit determinations do not contain a "substantial compliance" standard. /13/ The statutory distinction between the standards applicable to withholding or cease-and-desist proceedings on the one hand, and audit proceedings on the other, is based on their different practical effects. While withholding and cease-and-desist proceedings may result in serious disruption of ongoing programs, to the immediate detriment of program participants, settlements of audit claims involve only after-the-fact adjustments of accounts. It is both programmatically and fiscally sound to apply a more lenient standard of review in the former context, to avoid sudden disruptions in the Title I program, yet at the same time to hold the grantee ultimately responsible for the expenditure of all Title I funds in strict compliance with the statutory and regulatory requirements to which it agreed when it accepted the funds. The legislative history confirms the congressional intent to require strict compliance with the statutory grant conditions. The Senate Report stated that the Secretary must "exercise fully his authority and responsibility under the law to see that State agencies abid by the assurances they have given." S. Rep. 91-634, supra, at 10. /14/ The Report added that, "(e)ven though there may be difficulties arising from recovery of improperly used (Title I) funds, those exceptions must be enforced" (id. at 84). See also 20 U.S.C. 1234a-1234c. As this Court recognized in Bell v. New Jersey, supra, the recapturing of excess or misused Title I funds by the Department was viewed as "'an essential condition for enacting the * * * legislation'" (slip op. 9, quoting 111 Cong. Rec. 7690 (1965) ), and the debates in the House when Title I was enancted "suggested * * * a concern and a desire to hold the States accountable in every way possible" (Bell v. New Jersey, slip op. 9 n.9). Subsequent events reinforce this evidence of legislative intent. Congress in 1978 ameliorated some of the "difficulties arising from recovery" of misspent funds by imposing a five-year statute of limitations on audit claims and by authorizing the compromise of claims of $50,000 or less, where collection is not practical or in the public interest and the practice that resulted in the claim has been corrected. 20 U.S.C. 1234a(g) and (f). /15/ Significantly, Congress did not choose to include in this ameliorative legislation a "good faith" exception, or to place any other conditions on the recovery of misspent Title I funds. In fact, as part of this legislation, Congress specifically imposed on grantees the burdent of "demonstrat(ing) the allowability of (questioned) expenditures" in administrative proceedings before the EAB. 20 U.S.C. 1234a(b). Thus, contrary to the court of appeals' approach of deferring to a grantee's reasonable interpretation of statutory and regulatory requirements, Congress sought to make grantees strictly account for and justify Title I expenditures subject to an audit claim. /16/ Thereafter, in 1981, the Senate considered an amendment to an appropriations bill that would have relieved the states of any obligation to repay Title I funds that were misspent before 1978. Although the amendment was ultimately defeated on a point of order (127 Cong. Rec. S5430 (daily ed. May 21, 1981)), the debate further confirms congressional recognition of the Secretary's unconditional authority to recover misspent Title I funds. In particular, it was expressly noted in these debates that the agency was seeking to recoup funds in instances where "(t)here has been no showing of bad faith or intentional misspending" (id. at S5428) or "fraud" (id. at S5430). There was no suggestion that the Secretary lacked legal authority to recover the funds in these circumstances. Nor can the decision of the court of appeals be justified on the basis that "(t)he legislative history to Title I is replete with evidence that Congress left to the discretion of the participating States the responsibility to establish programs with Title I funds" (Pet. App. 10a-11a). Although Title I does leave to the states and LEAs the responsibility for determining the types of services to be offered (e.g., whether funds should be used for reading, mathematics, or language arts instruction), it goes without saying that states and LEAs doe not have the discretion to implement programs that violate basic statutory and regulatory requirements of the Title I program. Thus, while "the legislation left to local schools the decision as to what education methods are to be used in improving educational opportunities for educationally deprived children," it also contained "requirements * * * designed to insure that, whatever education methods are used, Federal funds are to be focused on the special education needs of educationally deprived children" (S. Rep. 91-634, supra, at 8). See also H.R. Rep. 95-1137, 95th Cong., 2d Sess. 4 (1978); Alexander v. Califano, 432 F. Supp. 1182, 1189-1190 (N.D. Cal. 1977). /17/ The legislative history cited by the court of appeals does not remotely suggest that a grantee may establish educational programs that use Title I funds to supplant state and local funds that otherwise would have been spent on eligible children. C. This Court's Decision In Pennhurst State School & Hospital v. Halderman Does Not Support The Court Of Appeals' Standard Of Judicial Review Although the legal basis for the limitations that the court of appeals placed on the Secretary's recoupment authority is unclear, the court claimed to find support for its position in Pennhurst State School & Hospital v. Halderman, 451 U.S. 1 (1981). Nothing in that decision, however, supports the court of appeals' unprecedented standard of review. Pennhurst involved the potential imposition of a "massive obligation" on states as a condition of their participation in a federal grant program under the Developmentally Disabled Assistance and Bill of Rights Act of 1975, 42 U.S.C. 6000 et seq. 451 U.S. at 24. The plaintiffs contended that the Act required that grant recipients provide mentally retarded persons with appropriate treatment in the least restrictive environment. While the grant program provided relatively modest federal funding to the participating state, /18/ the state grantees' potential obligations under the plaintiff's view of the program were "largely indeterminate." Ibid. In this content, the Court held that "if Congress intends to impose a condition on the grant of federal moneys, it must do so unambiguously * * *. (This enables) the States to exercise their choice (of whether to participate in the grant program) knowingly, cognizant of the consequences of their participation." 451 U.S. at 17 (citations omitted). The present case is quite different from Pennhurst. First, the supplanting prohibition is now, and was in 1974, an explicit statutory condition on the receipt of Title I funds. See 20 U.S.C. (1976 ed.) 241f(a)(1). /19/ An LEA could receive a Title I grant only if the SEA determined that the LEA's application demonstrated compliance with this basic requirement. 20 U.S.C. (1976 ed.) 241e(a)(3)(B); see also 45 C.F.R. 116.17(h) (1974). Thus, in contrast to the situation in Pennhurst, where Congress "fell well short of providing clear notice to the States that they, by accepting funds under the Act, would indeed be obligated to comply with (the alleged condition)" (451 U.S. at 25), Congress here made compliance with the supplanting prohibition a specific condition on the receipt of Title I funds. See also S. Rep. 91-634, supra, at 14-15; Bell v. New Jersey, slip op. 16 n.17). No grantee could ever have reasonably thought otherwise. Second, because Title I is totally funded by the federal government, this case involves only the use of federal funds, not an affirmative obligation imposed on a grantee to fund additional programs or services out of state or local funds. /20/ While the states' potential obligations were "largely indeterminate" in Pennhurst (451 U.A. at 24), a grantee's liability under Title I is limited to repaying the Title I funds that were misspent. See Heckler v. Community Health Services of Crawford County, Inc., No. 83-56 (May 21, 1984), slip op. 9-11. Moreover, whereas in Pennhurst, in light of the enormity of the potential state liability in comparison to the modest amount of grant funds provided, it "defie(d) common sense * * * to suppose that Congress * * * imposed (a) massive obligation on participating States" (451 U.S. at 24), the amount of the refund sought here by the Secretary is little more than 1% of the Title I funds granted to Kentucky for the year in question (Pet. App. 19a, 42a). Third, Pennhurst involved an action brought by private plaintiffs, not an audit dispute between the federal government and a federal grantee. As Justice White explained in Guardians Ass'n v. Civil Service Comm'n, No. 81-431 (July 1, 1983), the federal government may always recover grant funds misspent by a recipient, but "it is an entirely different matter to subject the recipient to open-ended liability to private plaintiffs" (slip op. 20 n.24). In sum, the State was able to make an informed decision to participate in the Title I program. The conditions for participation (including the supplanting prohibition) were set forth clearly in the statute and regulations, and the State only exposed itself to the potential liability of repaying any Title I funds that were misspent. As the Sixth Circuit correctly recognized in another case involving the Commonwealth of Kentucky, Pennhurst "involved the issue as to whether a particular grant of funds was conditional at all," not the precise meaning of clearly applicable conditions. Kentucky v. Donovan, 704 F.2d 288, 299-300 n.17 (1983). Accordingly, the circumstances that gave rise to the Court's decision in Pennhurst are not present here, and that decision cannot justify the inappropriate standard of review adopted by the court of appeals. D. The Court Of Appeals' Standard Of Review Effectively Eviscerates The Secretary's Ability To Recover Misspent Title I Funds In Bell v. New Jersey, supra, this Court unanimously held that the federal government may recover misspent funds "advanced as part of a federal grant-in-aid program under Title I of the Elementary and Secondary Education Act" (slip op. 1). The Court emphasized that states are required "to honor the obligations voluntarily assumed as a condition of federal funding" (slip op. 16) and that when a State fail(s) to fulfill those assurances * * * it (becomes) liable for the funds misused, as the grant specified" (slip op. 17). In view of this Court's ruling, the court of appeals acknowledged the right of the federal government "to recover misspent funds from states which had received grants under Title I" (Pet. App. 4a) and stated that, "if supplanting occurred" here, "the Secretary has the authority to order a refund" (ibid.). Despite this recognition in principle of the Secretary's right to recover misspent Title I funds, the court of appeals' standard of review effectvely eviscerates that right by placing unworkable conditions on recovery. Unless the Secretary's decision is based on a violation of "unambiguous" requirements or a showing of "bad faith," the court below would disallow recover of misspent Title I funds whenever the grantee can demonstrate that it complied "substantially" with "a reasonable interpretation of the law" (Pet. App. 12a). /21/ These restrictions on the right of recoupment not only would severely limit the ability of the Secretary to enforce grant requirements, but also would send a clear signal to grantees that strict adherence to federal grant requirements is no longer necessary. At present, if a grant recipient is uncertain about the meaning of statutory or regulatory limitations on the expenditure of federal funds, it has every incentive to seek an authoritative administrative interpretation of those limitations. Indeed, states regularly consult with the Secretary to determine the correct interpretation of Title I regulations. Cf. Heckler v. Community Health Services of Crawford County, Inc., No. 83-56 (May 21, 1984), slip op. 12-13. In contrast, the court's decision invites grantees to adopt their own relaxed interpretations of federal expenditure restrictions and to resist audit exceptions whenever the grant requirement alleged to have been violated is ambiguous in the slightest way. /22/ Such a result is flatly inconsistent with this Court's recent admonition that "(p)rotection of the public fisc requires that those who seek public funds act with scrupulous regard for the requirements of law; (a recipient of such funds can) expect no less than to be held to the most demanding standards in its quest for public funds." Heckler v. Community Health Services of Crawford County, Inc., slip op. 11. This case presents a stark illustration of these adverse effects. The court of appeals acknowledged the clear intent of Congress that Title I funds be used only to provide supplemental services to a specific target group (educationally deprived children in low-income areas), and it agreed that the State had in fact violated that intent during FY 1974. Nonetheless, because the court concluded that the anti-supplanting requirement was not "unambiguous," it upheld the expenditure of $338,034 of Title I funds that supplanted state and local funds that otherwise would have been used for eligible children. Congressional intent to provide supplemental services for the educationally deprived children in low-income areas in these LEAs therefore was defeated, and the real beneficiaries of the program were instead the non-Title I children who took advantage of the state and local funds that would otherwise have been spent on the Title I children. II. THE COURT OF APPEALS ERRED IN FINDING AMBIGUITY IN THE TITLE I STATUTE AND REGULATIONS AND IN CONCLUDING THAT THE STATE'S INTERPRETATION OF THE ANTI-SUPPLANTING REQUIREMENTS WAS REASONABLE The error inhering in the court of appeals' standard of review was compounded by its unwarranted conclusion that "(w)here * * * a determination of whether Title I funds supplant or supplement State and local funds depends upon whether the focus is on the district or the pupil, the statute and regulations cannot be said to be unambiguous" (Pet. App. 15a). This conclusion contemplates an exceedingly low standard of reasonableness. It ignores explicit language in the Title I statute, regulations, and legislative history. It also seriously undermines a statutory and regulatory requirement critical to the proper operation of the Title I program. The Secretary's focus on the level of state and local funds spent for the particular children participating in the Title I program is expressly required by statute. Under 20 U.S.C. (1976 ed.) 241e(a)(3)(B) (emphasis added), an LEA could receive a Title I grant only if the funds were to be used: to supplement and, to the extent practical, increase the level of funds that would, in the absence of such Federal funds, be made available from non-Federal sources for the education of pupils participating in programs and projects assisted under this subchapter, and * * * in no case, * * * to supply such funds from non-Federal sources. This statutory provision could hardly be more explicit in stating that Title I funds must be used to supplement, and not supplant, the state and local funds that would otherwise be expended for the specific "pupils participating in" Title I programs. Plainly, Title I children "are not * * * to receive less than they would otherwise be entitled to receive under any State or local program." Alexander v. Califano, 432 F. Supp. at 1189 (emphasis in original); /23/ see also Indiana v. Bell, 728 F.2d 938, 941 (7th Cir. 1984) (emphasis added) ("Title I funds could not be used to replace state and local funds that would have been spent on Title I children had there been no Title I money."). The Title I regulations in effect in 1974 further emphasized what was already plain on the face of the statute: that the children participating in the Title I programs must receive services from state and local funds as if there were no Title I program. The regulations required that "(e)ach application for a grant under Title I * * * shall contain an assurance * * * that neither the project area nor the educationally deprived children residing therein will * * * be penalized in the application of State and local funds because of such a use of funds under Title I. * * * Federal funds * * * will be used to supplement * * * the level of State and local funds that would, in the absence of such Federal funds, be made available for the education of pupils participating in that (Title I) project (and) * * * will not be used to supplant State and local funds available for the education of such pupils. 45 C.F.R. 116.17(h), (1) and (2) (1974) (emphasis added). /24/ The legislative history of the supplanting prohibition is equally explicit. When Congress added that provision in 1970, it explained (S. Rep. 91-634, supra, at 14) (emphasis added)): Under present law there is no specific prohibition against supplanting State and local funds even though supplanting would be inconsistent with the theory of Title I. Title I funds are intended to be supplementary to the education program generally offered by the States and local educational agencies. The amendment made by section 109 would make clear that supplanting is prohibited and that State and local funds will be used to provide services for Title I children which are at least comparable to the services provided to children who are not participating in title I programs. As a subsequent House Report noted, "(t)he cornerstone of (Title I) and similar Federal aid-to-education programs is the premise that Federal aid must supplement -- not supplant -- State and local expenditures. The historic intent is that Federal dollars must represent an additional effort for the target children" (H.R. Rep. 95-1137, supra, at 139 (emphasis added)). Despite these clear pronouncements in the Title I statute, regulations, and legislative history, the court of appeals concluded that there was an ambiguity with respect to whether the anti-supplanting provision applied to the services provided to the children participating in the Title I program, rather than requiring simply that the level of state and local funding of the LEA, schools, or grade levels remain constant. This conclusion is simply unsupportable. /25/ The court reached its conclusion without stating what particular language in the statute or regulations it considered to be ambiguous. Indeed, the court's opinion contains no analysis at all of the statutory or regulatory language, or of the relevant legislative history. See Pet. App. 15a. The record here also shows that, even if there was some possible ambiguity in the statute and regulations, respondent was well aware of the Secretary's interpretation that controlled its expenditure of the grant funds. In the standard grant application completed for FY 1974 by each of the LEAs that operated the challenged readiness programs, there was a question asking the LEA how it would "organize the program to assure that children participating in the component activity will receive this Title I service in addition to services to which they are ordinarily entitled from state and local school funds" (Pet. App. 27a (emphasis added)). As the EAB stated, "(h)ad the LEA's given the assurance requested and adhered to it, the SEA would have been protected." Ibid. In reversing the Secretary's decision, and in finding reasonable respondent's use of Title I funds to replace state and local funds that otherwise would have been expended on Title I children, the court of appeals has allowed respondent to defeat the basic purpose of the Title I program. To the extent of the misused funds (see note #6, supra), the target population of educationally deprived children in low-income areas did not receive supplemental assistance; rather, they received the same level of services they would have received without Title I funds, although these services were financed from federal rather than state and local funds. The real beneficiaries in these LEAs were the non-Title I students. As the EAB found, "by maintaining State and local funds at the grade level while Title I paid for instructional costs of the readiness program, the SEA and the LEA's assured that additional State and local funds were devoted to non-Title I pupils -- funds which in the absence of Title I would have paid for the instruction of the educationally deprived children." Pet. App. 24a. Such a use of Title I funds directly violates the mandate of Congress that the funds be used to provide supplemental educational services to educationally deprived children, and not be diverted "to meeting other needs of school systems, however pressing these other needs may be." S. Rep. 92-634, supra, at 10. This case thus does not involve a mere "technical violation of the (grant) agreement" (Bell v. New Jersey, slip op. 2 (White, J., concurring)), and respondent is incorrect in suggesting (Br. in Opp. 7-9) that it was in "substantial compliance" with the governing statutory and regulatory requirements. The principle that Title I funds are to be spent solely for the benefit of the targeted children lies at the very heart of the Title I program. Accordingly, the supplanting prohibition is an essential part of the statutory scheme, and its violation negates substantial compliance. Cf. Bonwit Teller & Co. v. United States, 283 U.S. 258, 264-265 (1931); Grannis v. Ordean, 234 U.S. 385 (1914); Mutual Life Ins. Co. v. Phinney, 178 U.S. 327, 337 (1900). /26/ Consequently, the State's readiness programs cannot be considered to have been in compliance with any reasonable interpretation of the Title I statute or regulations, and the court of appeals erred in denying recoupment of the misspent funds. CONCLUSION The judgment of the court of appeals should be reversed. Respectfully submitted. REX E. LEE Solicitor General KENNETH S. GELLER Deputy Solicitor General HARRIET S. SHAPIRO Assistant to the Solicitor General STEPHEN H. FREID Attorney Department of Education NOVEMBER 1984 /1/ Title I has been revised on several occasions since its original enactment. The statute and regulations in effect during Fiscal Year (FY) 1974, the year involved in this case, is set forth in the text. Title I was amended and reorganized in the Education Amendments of 1978 (20 U.S.C. 2701 et seq.) and superseded by Chapter 1 of the Education Consolidation and Improvement Act of 1981 (20 U.S.C. 3801 et seq.). This subsequent legislation does not affect the issues in this case. /2/ The Title I program has proven to be a highly successful federal education effort. Not only have the resources of the program been effectively brought to bear on "areas with the highest proportions of low-income children" (H.R. Rep. 95-1137, 95th Cong., 2d Sess. 5 (1978) ), but the program has been "extremely effective in enhancing the achievement of participating students" (id. at 6). "Title I funds are indeed being used to provide special additional services to eligible children and * * * the program is making an important contribution to the education experiences of disadvantaged children" (ibid.). /3/ The supplanting prohibition for the current Chapter 1 program (see note 1, supra) is in 20 U.S.C. 3807(b). See also 34 C.F.R. 200.62. /4/ On May 4, 1980, the Department of Education replaced the Office of Education of the Department of Health, Education, and Welfare as the federal agency responsible for the Title I program, and the Secretary of Education assumed the responsibilities and authorities over this program that were previously exercised by the Commissioner of Education. See 20 U.S.C. 3411, 3441. For purposes of this brief, we will refer to the Department of Education and the Secretary of Education, even though most of the events surrounding this case occurred prior to 1980. /5/ The creation of the EAB was mandated by Congress in the Education Amendments of 1978 (Pub. L. No. 95-561, 92 Stat. 2153). See 20 U.S.C. 1234(a). Prior to the establishment of the EAB, states could appeal adverse Title I audit determinations to the Title I Audit Hearing Board. Effective June 29, 1979, the Title I Audit Hearing Board was replaced by the EAB, which assumed jurisdiction over 31 pending Title I audit appeals, including the appeal by Kentucky that is the subject of the instant action. 44 Fed. Reg. 30528-30537 (1979); 44 Fed. Reg. 43807 (1979). /6/ This reduction reflected the Secretary's determination that the pupil-teacher ratio in the readiness classes (13:1) was substantially smaller than the ratio prevailing elsewhere in the State (27:1). The Secretary concluded that the children in readiness classes had therefore received some benefit beyond what they would have received from the regular program, and that a pro rata state-federal allocation of the readiness class costs, reflecting the improved pupil-teacher ratio, was an appropriate way to calculate this benefit. Pet. App. 3a, 38a-42a. /7/ The court of appeals incorrectly believed that this case involved the "significant issue" identified in Justice White's concurrence in Bell v. New Jersey, slip op. 2: "whether a State can be required to repay if it has committed no more than a technical violation of the agreement or if the claim of violation rests on a new regulation or construction of the statute issued after the state entered the program and had its plan approved." As explained below (pages 37-38, infra), the violation here was hardly "technical," and the Department's regulation construing the statute antedated the SEA's approval of the contested plans (see Pet. App. 6a, 10a n.9). /8/ Not surprisingly, other courts of appeals have followed this principle in accepting the Secretary's interpretation of statutory and regulatory requirements in Title I audit cases. See Indiana v. Bell, 728 F.2d 938, 941 (7th Cir. 1984); West Virginia v. Secretary of Education, 667 F.2d 417, 420 (4th Cir. 1981). /9/ Judicial deference to the agency interpretation is particularly appropriate here. The Secretary was expressly authorized to establish "basic criteria" to govern the SEA's determination that an LEA grant application provided satisfactory anti-supplanting assurances (20 U.S.C. (1976 ed.) 241e(a) and (3); see also 20 U.S.C. (1976 ed.) 242(b)). When there is such a specific delegation of rulemaking authority, "Congress entrusts to the Secretary, rather than to the courts, the primary responsibility for interpreting the statutory term. In exercising that responsibility, the Secretary adopts regulations with legislative effect. A reviewing court is not free to set aside those regulations simply because it would have interpreted the statute in a different manner" Batterton v. Francis, 432 U.S. 416, 425 (1977). See also United States v. Morton, No. 83-916 (June 19, 1984), slip op. 11-12; Schweiker v. Gray Pantheres, 453 U.S. 34, 44 (1981). Congress's confidence in administrative expertise in this area is further evidenced both by its reliance on information developed by the agency to establish the need for a specific statutory anti-supplanting provision (S. Rep. 91@634, supra, at 9) and by its direction to the Secretary to "exercise fully his authority and responsibility under the law" to police that provision and others designed to control improper use of grant funds (id. at 10). /10/ See Lange v. United States, 443 F.2d 720, 725 (D.C. Cir. 1971) ("The gears of government must mesh without awaiting final judicial precedent, and the officials concerned must construe the statutes they administer. When the practice they launch and continue is not unreasonable or contrary to ascertainable legislative intent the courts will give it weight in deciding statutory intent."). /11/ The court of appeals' refusal to apply the Secretary's interpretation to the 1974 expenditures cannot be justified on the theory that those expenditures were made before the agency had clarified its position. See page 34, infra; Pet. App. 10a n.9. But even if the scope of the anti-supplanting requirement had not been clear when the expenditures were made, that would not have prevented the Secretary from establishing the standards for expenditures through adjudicatory rulings in audit cases rather than through rulemaking. This Court has repeatedly rejected the argument that an agency must employ rulemaking rather than adjudication to articulate new legal standards. NLRB v. Bell Aerospace Co., 416 U.S. 267, 290-295 (1974); NLRB v. Wyman-Gordon Co., 394 U.S. 759, 765-766 772 (1969); SEC v. Chenery Corp., 332 U.S. 194, 200-203 (1947). No regulatory scheme can address specifically every factual situation that may arise. Accordingly, so long as the adjudication does not produce "substantial inequitable results" (Chevron Oil Co. v. Huson, 404 U.S. 97, 107 (1971), quoting Cipriano v. City of Houma, 395 U.S. 701, 706 (1969)), the agency may properly decide to proceed by adjudication. The Secretary's application of the anti-supplanting provision produced no such results, and there is no retroactivity problem here. The agency certainly did not "overul(e) clear past precedent on which (the states) may have relied or * * * decid(e) an issue of first impression whose resolution was not clearly foreshadowed" (Chevron Oil Co. v. Huson, 404 U.S. at 106 (citations omitted) ). Instead, it merely applied the fundamental principles behind the anti-supplanting provision (see pages 32-38, infra) to the specific factual situation presented by the Kentucky readiness program. /12/ Even if the substantial compliance test applied to audit claims, it would not justify the decision of the court of appeals. See pages 37-39, infra. /13/ Indeed, Congress recently rejected a proposal to amend the audit provisions to add such a standard. The proposed amendment was contained in Section 808(a) of H.R. 11, 98th Cong., 2d Sess. (1984) (see 130 Cong. Rec. H7902-H7903 (daily ed. July 26, 1984), but was deleted in conference (see 130 Cong. Rec. H10756 (daily ed. Oct. 2, 1984)). /14/ The Senate Report identified "(t)he supplanting of state and local funds with title I funds" as an area in whch state supervision was lax, and thus where federal enforcement was particularly necessary. S. Rep. 91-634, supra, at 9-10. /15/ Congress also authorized the Secretary to return to the states up to 75% of the repaid funds where the practices that led to the misuse have been corrected and where the returned funds will, to the extent possible, be used to benefit the population affected by the misuse and will serve to achieve the purposes of the approved state program (20 U.S.C. 1234e(a)). This grantback authority has been exercised by the Secretary on numerous occasions. See, e.g., 49 Fed. Reg. 34886-34887 (1984) (Rhode Island); 49 Fed. Reg. 13899-13900 (1984) (West Virginia); 49 Fed. Reg. 8474-8476 (1984) (South Carolina); 47 Fed. Reg. 20343-20345 (1982) (Wisconsin); 47 Fed. Reg. 23002-23003 (1982) (District of Columbia). /16/ The statue governing the EAB provides that "the burden shall be upon the State or local educational agency to demonstrate the allowability of expenditures disallowed in the final audit determination" (20 U.S.C. 1234a(b)). It would be anomalous to place the burden of demonstrating the allowability of a questioned expenditure on the grantee in the administrative proceedings, but require deference to the grantee's interpretation of the law during subsequent judicial review. Under such a scheme, a grantee who fails to meet its burden at the administrative level may well prevail on judicial review under a more relaxed standard. That anomaly is avoided by requiring the courts to accord "deference to (the) congressionally prescribed standard() of proof * * * in administrative proceedings" before the EAB (Steadman v. SEC, 450 U.S. 91, 95 n.9 (1981)). /17/ For example, the decision to use a "self-contained classroom procedure" rather than exposing the children involved to regular grades as well as the readiness program. (Br. in Opp. 3-4) was clearly one reserved to the local authorities. But that decision did not justify the supplanting violation that occurred here, which relates only to the method by which the program was funded. Thus, the LEAs could have implemented precisely the same kind of unified program without any supplanting violation, if they had arranged the funding so that the participating children received their fair share of state and local educational funds. Title I funds could then properly have been used for any extra costs, over and above the state and local funds that should have been expended for these children, resulting from the impelementation of the readiness program. It was the funding, not the education structure of the program, that created the supplanting violation. /18/ For example, Pennsylvania received $1.6 million under this program in 1976. 451 U.S. at 24. /19/ Unlike the situation in Pennhurst, where the federal agency's regulations did not support imposition of the condition in question (451 U.S. at 23), the Title I regulations have always required an assurance by the SEA that each application it approved would comply "with the requirements of Title I of the Act and the regulations in subpart C of this part." 45 C.F.R. 116.31(c) (1974). The Subpart C regulations included the supplanting prohibition in 45 C.F.R. 116.17(h) (1974). There accordingly was no ambiguity about the applicability of the anti-supplanting provision at the time respondent received its FY 1974 funds. If the SEA was uncertain about the precise meaning of that provision, of course, it could always have sought clarification from the Secretary. See Pet. App. 27a. /20/ Title I does impose certain budgetary restrictions on state and local participatns, such as the anti-supplanting provision involved in this case and the maintenance of effort and comparability requirements (see note 25, infra). However, these requirements only commit an LEA to maintain preexisting levels of expenditures for education from state and local sources, and not to use Title I funds to replace state and local funds that would otherwise have been spent on participating children. They do not require a state or LEA to expend any additional state resources as a condition for participation in the Title I program. /21/ The court of appeals' error is attributable in part to its false characterization of the recovery of grant funds as a "penalty" on the grantee and on its concern with "the fairness of imposing sanctions" on respondent. Pet. App. 16a, 9a. Grant-in-aid agreements, however, are "much in the nature of a contract." Pennhurst State School, 451 U.S. at 17. Accordingly, in a recoupment action, the Secretary merely attempts to recover federal monies that were not spent in accordance with the federal statute and regulations with which the state undertook to comply; the remedy is compensatory, not punitive. Congress has provided other remedies for those who knowingly obtain money from the government for unauthorized purposes. See, e.g., 31 U.S.C. 3729; 18 U.S.C. 286, 287. /22/ We do not, of course, suggest that grantees are "crooks waiting for their chance to be dishonest" (Br. in Opp. 11). But grantees may be subject to community pressure to use federal funds to serve a broader or different population than that for which the federal program was designed. The court of appeals' standard would directly affect the degree of diligence with which grantees would ensure adherence to the terms and conditions attached to the receipt of federal funds. We not in this regard that, although Title I involves only state grantees and local school district sub-grantees, the principles of this case apply equally to any federal grantee, public or private. /23/ The court of appeals' opinion suggests that the supplanting prohibition was applied properly in Alexander (Pet. App. 12a n.11). However, the present case is quite similar to the situation in Alexander; in both cases the total amount of state or local funds available to each LEA remained the same as it would have been had Title I funds not been available. See 432 F. Supp. at 1187. However, a supplanting violation occurred in the Alexander case, precisely as in this case, because Title I funds were used to supplant state or local funds that would have been expended on eligible Title I children in the absence of the Title I program. See 432 F. Supp. at 1187-1190. /24/ The EAB correctly concluded that "the statutory and regulatory provisions are sufficiently clear in their emphasis on the expenditure of funds for pupils -- not LEA's, schools or grade levels -- to sustain the * * * Secretary's position." Pet. App. 24a. In fact, the EAB found the regulation on this point to be "clear, even to the point of repetition." Pet. App. 25a. /25/ If the supplanting prohibition applied only at the LEA level, as alleged by respondent, there would have been no need to have both the supplanting prohibition and a separate maintenance of effort requirement. See 20 U.S.C. (1976 ed.) 241g(c)(2); 45 C.F.R. 116.45 (1974). Under the maintenance of effort requirement, each LEA participating in the Title I program had to expend, from year to year, essentially the same total or per-pupil amount of state and local funds for free public education as it had the year before. In light of this requirement, which was included as part of the original Title I legislation enacted in 1965 (Pub. L. No. 89-10, Section 207(c)(2), 79 Stat. 32-33), the enactment in 1970 of a supplanting prohibition that applied only at the LEA level would have been redundant. The supplanting prohibition was necessary, however, to ensure that an LEA would not, as the result of the availability of Title I funds, shift state and local funds origina-ly expended for the benefit of Title I children to programs for non-Title I children, while maintaining the same total level of expenditures of state and local funds. Similarly, if the supplanting prohibition applied only at the school level, as also alleged by respondent, there would have been no need to have both the supplanting prohibition and a separate comparability requirement. See 20 U.S.C. (1976 ed.) 241e(a)(3)(C); 45 C.F.R. 116.26 (1974). The comparability requirement was designed specifically to ensure that state and local funds were not diverted from Title I schools to non-Title I schools once Title I funds become available. Therefore, under the Title I regulations, an LEA has to demonstrate that each Title I school receives its fair share of services from state and local funds. See 45 C.F.R. 116.26 (1974). Again, however, the supplanting prohibition is necessary to ensure that state and local funds are not shifted from Title I children to non-Title I children within the Title I schools. /26/ The accepted meaning of the term "substantial compliance" refers to whether compliance has been achieved with "the essential requirements" of the statute (Wentworth v. Medellin, 529 S.W.2d 125, 128 (Tex. Civ. App. 1975)), not to the clarity (or lack of clarity) of the statutory provision in question. See, e.g., City of Lenexa v. City of Olathe, 233 Kan. 159, 164, 660 P.2d 1368, 1373 (1983) (citation omitted) ("'Substantial compliance' * * * refers to 'compliance in respect to the essential matters necessary to assure every reasonable objective of the statute.'"); In re Santore, 28 Wash. App. 319, 327, 623 P.2d 702, 707-708 (1981) ("Substantial compliance has been defined as actual compliance in respect to the substance essential to every reasonable objective of the statute."); Houman v. Mayor & Council, 155 N.J. Super. 129, 169, 382 A.2d 413, 434 (1977) (citation omitted) ("'Substantial compliance' * * * occurs whenever * * * partial compliance has fully attained the objective of the statute."); Smith v. State, 364 So. 2d 1, 9 (Ala. Crim. App. 1978) (citations omitted) (Substantial compliance means "compliance in respect to the substance essential to every reasonable objective of the statute (where) * * * the purpose of the statute is shown to have been served."); Dorignac v. Louisiana State Racing Commission, 436 So. 2d 667, 669 (La. Ct. App. 1983) (Substantial compliance occurs where "the statute has been followed sufficiently so as to carry out the intent for which it was adopted.").