Court Rules in Lawsuit on SCO’s Mandate Audit Practices
On August 14, 2008, in a significant but limited victory for the petitioners, a Superior Court in Sacramento ruled that the State Controller’s Office’s (SCO’s) requirement for contemporaneous documentation to support mandate claims for Collective Bargaining and the Interdistrict Attendance Program constituted an underground regulation for purposes of auditing local education agencies. The court, however, stopped short of invalidating the audits for which this requirement was applied.
In the Clovis v. Westly lawsuit, the petitioners argued that, in auditing school agency mandate claims, the State Controller used arbitrary and capricious auditing standards that resulted in unjustified reductions or full disallowance of mandate claims. The petitioners, which included 11 school districts and community college districts, contended that the Controller’s audit standards constituted underground regulations and should therefore be disallowed. The petitioners also challenged the Controller’s requirement for prior federal approval of indirect cost rates for the Health Fee Elimination Program, a program implemented by the community colleges. Also at issue was the Controller’s dual role as the chief governmental auditor and as a member of the Commission on State Mandates (COSM), the state agency that adjudicates disputes between local educational agency auditees and the SCO with regard to incorrect reduction claims (IRCs) on mandate reimbursements.
The court rejected the petitioners’ arguments against the SCO’s audit processes in all instances, save the contemporaneous documentation requirement as narrowly applied to the Collective Bargaining and the Interdistrict Attendance Programs. For petitioners’ claims related to the Notification of Truancy Program, the court concluded that they were moot because of subsequently passed legislation. The court also found that the source document rule “is a reasonable means of carrying out his responsibility . . . to audit school district records to verify the actual amount of their claimed mandated costs.” The court also sided with the SCO, concluding that required federal approval of indirect cost rates is reasonable “when the federal approval requirement is read in the context of the Controller’s claiming instructions.” Finally, the court did not find an enforceable conflict between the Controller’s dual role as a governmental auditor who must abide by professional standards of independence and his role on the COSM to decide appeals of SCO audit findings.
Following the Clovis v. Westly ruling, petitioners’ attorneys filed a motion for clarification/reconsideration. This action asks the court, based on its finding that the SCO’s requirement for contemporaneous documentation is an underground regulation, to invalidate the SCO’s audit findings which relied on this requirement. If these audit findings are deemed invalid, then presumably the SCO would be required to promulgate another standard by which to audit the Collective Bargaining and the Interdistrict Attendance Programs.
On the other hand, if the court rejects the petitioners’ motion for clarification/reconsideration, local education agencies whose claims have been disallowed by the SCO for this reason would likely have to appeal their case to the Commission on State Mandates as an IRC. The court’s conclusion that the SCO’s contemporaneous documentation requirement is an underground regulation would presumably influence the COSM to find in favor of local educational agencies that file IRCs for the Collective Bargaining and the Interdistrict Attendance Programs on the basis of this audit issue.
The court’s response to the petitioners’ request for clarification/reconsideration is not expected for several weeks or possibly months.
—Robert Miyashiro