Bennett v. New Jersey

470 U.S. 632, 105 S. Ct. 1555, 84 L. Ed. 2d 572, 1985 U.S. LEXIS 72, 53 U.S.L.W. 4337

• Court: Supreme Court of the United States
• Decided: March 19, 1985
• Docket: 83-2064
• Status: Published

Opinions

Justice O’Connor

delivered the opinion of the Court.

The issue presented is whether substantive provisions of the 1978 Amendments to Title I of the Elementary and Secondary Education Act apply retroactively for determining if Title I funds were misused during the years 1970-1972. This case was previously before the Court, and we then held that the Federal Government may recover misused funds from States that provided assurances that federal grants would be spent only on eligible programs. Bell v. New Jersey, 461 U. S. 773 (1983). We expressly declined, however, to address the retroactive effect of substantive provisions of the 1978 Amendments. Id., at 781, n. 6, 782, and n. 7. On remand from our decision, the Court of Appeals for the Third Circuit held that the standards of the 1978 Amendments should apply to determine if funds were improperly expended in previous years. State of New Jersey, Dept. of Ed. v. Hufstedler, 724 F. 2d 34 (1983). We granted certiorari, 469 U. S. 815 (1984), and we now reverse.

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Title I of the Elementary and Secondary Education Act of 1965, Pub. L. 89-10, 79 Stat. 27, as amended, 20 U. S. C. §241a et seq. (1976 ed.), provided federal grants-in-aid to support compensatory education for disadvantaged children in low-income areas.¹ Based on the theory that poverty and low scholastic achievement are closely related, Title I allocated funds to local school districts based on their numbers of impoverished children and the State’s average per-pupil expenditures. H. R. Rep. No. 95-1137, pp. 4, 8 (1978); S. Rep. No. 95-856, p. 5 (1978); see 20 U. S. C. §§241a, 241c(a)(2) (1976 ed.); S. Rep. No. 146, 89th Cong., 1st Sess., 5-6 (1965). Within particular school districts, Title I funds were in turn directed to schools that had high concentrations of children from low-income families. § 241e(a)(l)(A). Once Title I funds reached the level of targeted schools, however, all children in those schools who needed compensatory education services were eligible for the program regardless of family income. H. R. Rep. No. 95-1137, at 4; 45 CFR § 116a.21(e) (1977); 45 CFR § 116.17(f) (1972). Respecting the deeply rooted tradition of state and local control over education, Congress left to local officials the development of particular programs to meet the needs of educationally disadvantaged children. Federal restrictions on the use of funds at the local level sought only to assure that Title I moneys were properly used “to provide specific types of children in specific areas with special services above and beyond those normally provided as part of the district’s regular educational program.” H. R. Rep. No. 95-1137, at 4.

The goal of providing assistance for compensatory programs for certain disadvantaged children while respecting the tradition of state and local control over education was implemented by statutory provisions that governed the distribution of Title I funds. Local school districts determined the content of particular programs, and the appropriate state education agency approved the applications for Title I assistance submitted by local education agencies. 20 U. S. C. § 241e(a) (1976 ed.). After determining that the applications complied with the requirements of federal law, the state education agencies distributed Title I funds to the school districts. §§241e(a), 241g. The state education agencies in turn received grants from the Department of Education upon providing assurances to the Secretary that the local educational agencies would spend the funds only on programs which satisfied the requirements of Title I.² Bell v. New Jersey, supra, at 776; 20 U. S. C. §241f(a)(1) (1976 ed.). As noted swpra, we previously held that if Title I funds were expended in violation of the provided assurances, the Federal Government may recover the misused funds from the States.

This case arises from a determination by the Department of Education that respondent New Jersey must repay $1,031,304 in Title I funds that were improperly spent during the years 1970-1972 in Newark, N. J. 461 U. S., at 777. There is no contention that the Newark School District received an incorrect allocation of Title I funds or that funds were not used for compensatory education programs. Instead, the Secretary’s demand for repayment rests on the finding that Title I funds were not directed to the proper schools within the Newark School District. Regulations in effect when the moneys were expended provided that school attendance areas within a school district could receive Title I funds if either the percentage or number of children from low-income families residing in the area was at least as high as the districtwide average. 45 CFR § 116.17(d) (1972). Alternatively, the entire school district could be designated as eligible for Title I services, but only if there were no wide variances in the concentrations of children from low-income families among school attendance areas in the district. Ibid. A federal audit completed in 1975 determined that the New Jersey Department of Education had incorrectly approved grant applications allowing 13 Newark schools to receive Title I funds in violation of these requirements. App. 9-51.

The auditors found that during the 1971-1972 school year, the percentage of children from low-income families for the 13 schools ranged from 13% to 33.5%, while the districtwide average for Newark was 33.9%. Id., at 23-24. Consequently, for that school year the auditors disallowed Title I expenditures totaling $1,029,630. The auditors also found that funds were misused during the 1970-1971 school year, but because of the statute of limitations, only $1,674 remains at issue for that year. App. to Pet. for Cert. 36a-37a. In June 1976, the Department issued a final determination letter to New Jersey demanding repayment of the misused funds. App. 52-58. New Jersey sought further administrative review, and hearings were held before the Education Appeal Board (Board). In those proceedings, New Jersey argued that the Department was not authorized to compel repayment, that the auditors had miscalculated the percentages of children from low-income families, and that the entire Newark School District qualified as a Title I project area under the regulations. App. to Pet. for Cert. 35a-58a. The Board rejected each of these arguments, id., at 37a-58a, and ordered repayment. The Secretary declined to review the Board’s order, which thereby became final. Id., at 59a.

New Jersey then sought judicial review, and the Court of Appeals for the Third Circuit held that the Department did not have authority to issue the order demanding repayment. State of New Jersey, Dept. of Ed. v. Hufstedler, 662 F. 2d 208 (1981). Accordingly, the Court of Appeals did not address arguments made by New Jersey challenging the Department’s determination that funds were misused. Id., at 209. After remand from our decision in Bell v. New Jersey, the State argued for the first time that the 1978 Amendments to Title I, Pub. L. 95-561, 92 Stat. 2143, 20 U. S. C. §2701 et seq., should determine whether the funds were misused during the years 1970-1972. 724 F. 2d, at 36, n. 1. The

Court of Appeals agreed and remanded the case to the Secretary to determine whether the disputed expenditures conformed to the 1978 standards. Id., at 37. We hold that the substantive standards of the 1978 Amendments do not affect obligations under previously made grants, and we reverse. Our holding does not address whether the Secretary correctly determined that Title I funds were misused under the law in effect during the years 1970-1972, and New Jersey may renew its contentions in this regard on remand.

The Court of Appeals based its holding on a presumption that statutory amendments apply retroactively to pending cases. Relying on language from Bradley v. Richmond School Board, 416 U. S. 696 (1974), the Court of Appeals observed that “[a] federal court or administrative agency must ‘apply the law in effect at the time it renders its decision, unless doing so would result in manifest injustice or there is statutory direction or legislative history to the contrary.’” 724 F. 2d, at 36, quoting416 U. S., at 711. We conclude, however, that reliance on such a presumption in this context is inappropriate. Both the nature of the obligations that arose under the Title I program and Bradley itself suggest that changes in substantive requirements for federal grants should not be presumed to operate retroactively. Moreover, practical considerations related to the administration of federal grant programs imply that obligations generally should be determined by reference to the law in effect when the grants were made.³

As we explained in our first decision in this case, “the pre-1978 version [of Title I] contemplated that States misusing federal funds would incur a debt to the Federal Government for the amount misused.” 461 U. S., at 782. Although our conclusion was based on the statutory provisions, id., at 782-790, we also acknowledged that Title I, like many other federal grant programs, was “much in the nature of a contract.” Pennhurst State School and Hospital v. Halderman, 451 U. S. 1, 17 (1981). “The State chose to participate in the Title I program and, as a condition of receiving the grant, freely gave its assurances that it would abide by the conditions of Title I.” 461 U. S., at 790. A State that failed to fulfill its assurances has no right to retain the federal funds, and the Federal Government is entitled to recover amounts spent contrary to terms of the grant agreement. Id., at 791; see id., at 794 (White, J., concurring). In order to obtain the Title I funds involved here, New Jersey gave assurances that the money would be distributed to local education agencies for programs that qualified under the existing statute and regulations. See 20 U. S. C. §241f(a) (1976 ed.); 45 CFR § 116.31(c) (1972). Assuming that these assurances were not met for the years 1970-1972, see 461 U. S., at 791, the State became hable for the improper expenditures; as a correlative, the Federal Government had, before the 1978 Amendments, a pre-existing right of recovery. Id., at 782, and n. 7.

The fact that the Government’s right to recover any misused funds preceded the 1978 Amendments indicates that the presumption announced in Bradley does not apply here. Bradley held that a statutory provision for attorney’s fees applied retroactively to a fee request that was pending when the statute was enacted. This holding rested on the general principle that a court must apply the law in effect at the time of its decision, see United States v. Schooner Peggy, 1 Cranch 103 (1801), which Bradley concluded holds true even if the intervening law does not expressly state that it applies to pending cases. 416 U. S., at 715. Bradley, however, expressly acknowledged limits to this principle. “The Court has refused to apply an intervening change to a pending action where it has concluded that to do so would infringe upon or deprive a person of a right that had matured or become unconditional.” Id., at 720. This limitation comports with another venerable rule of statutory interpretation, i. e., that statutes affecting substantive rights and liabilities are presumed to have only prospective effect. See, e. g., United States v. Security Industrial Bank, 459 U. S. 70, 79 (1982); Greene v. United States, 376 U. S. 149, 160 (1964). Cf. Bradley, supra, at 721 (noting that statutory change did not affect substantive obligations).

Practical considerations related to the enforcement of the requirements of grant-in-aid programs also suggest that expenditures must presumptively be evaluated by the law in effect when the grants were made. The federal auditors who completed their review of the disputed expenditures in 1975 could scarcely base their findings on the substantive standards adopted in the 1978 Amendments.⁴ Similarly, New Jersey when it applied for and received Title I funds for the years 1970-1972 had no basis to believe that the propriety of the expenditures would be judged by any standards other than the ones in effect at the time. Cf. Pennhurst State School and Hospital, supra, at 17, 24-25. Retroactive application of changes in the substantive requirements of a federal grant program would deny both federal auditors and grant recipients fixed, predictable standards for determining if expenditures are proper.

Requiring audits to be redetermined in response to every statutory change that occurs while review is pending would be unworkable and would unfairly make obligations depend on the fortuitous timing of completion of the review process. Moreover, the practical difficulties associated with retroactive application of substantive provisions in the 1978 Amendments would be particularly objectionable, because Congress

expressly intended those Amendments to strengthen the auditing process by clarifying the Department’s responsibilities and specifying the procedures to be followed. See Bell v. New Jersey, 461 U. S., at 789; S. Rep. No. 95-856, at 37,131; H. R. Rep. No. 95-1137, at 53, 161. We conclude that absent a clear indication to the contrary in the relevant statutes or legislative history, changes in the substantive standards governing federal grant programs do not alter obligations and liabilities arising under earlier grants.

I — I I — I h*H

Neither the statutory language nor the legislative history indicates that Congress intended the substantive standards of the 1978 Amendments to apply retroactively. Congress adopted the amendments as part of a general reauthorization of Title I that did not depart from the program’s basic philosophy, but instead sought to clarify and simplify provisions concerning implementation. H. R. Rep. No. 95-1137, at 2, 8; S. Rep. No. 95-586, at 2, 8, 130. The substantive provisions of the .1978 Amendments to Title I were expressly made applicable for grants between October 1, 1978, and September 30, 1983. 20 U. S. C. §2702. See also Pub. L. 95-561, § 1530, 92 Stat. 2380 (provisions shall take effect on October 1, 1978, “[ejxcept as otherwise specifically provided in this Act”). The House Report similarly stated that the changed requirements were intended to clarify “the manner in which school districts are to distribute Title I funds among eligible schools and children.” H. R. Rep. No. 95-1137, at 21 (emphasis added). Thus, both the general purpose of the 1978 Amendments and the more specific references in the statute and legislative history suggest that the new requirements were intended to apply prospectively.

The Court of Appeals did not rely on evidence from the legislative history to conclude that the 1978 Amendments in general have retroactive effect. Instead, the court below observed that the amendments to the school attendance area

eligibility requirements “were designed to correct regulations that frustrated the basic objectives of the Title I program.” 724 F. 2d, at 36-37. This observation mischarac-terizes both the regulations in effect prior to 1976 and the provisions adopted by Congress in 1978. Regulations adopted in 1967, see 32 Fed. Reg. 2742, and in effect for nearly 10 years, generally restricted Title I assistance to school attendance areas having a percentage of low-income children at least as high as the districtwide average. Supra, at 636; see also Office of Education, Title I Program Guide No. 44, ¶ 1.1 (1968) (explaining eligibility requirements). This requirement deliberately channeled funds to the poorest areas within any particular school district. One consequence of this comparative approach, however, was that a school located in a disadvantaged district might be ineligible for assistance even though it would have qualified if it were located in a wealthier district.⁵ Although later changes in the eligibility standards attempted to mitigate this incidental effect, they do not indicate that the earlier regulations conflicted with the policies of Title I.

During consideration of 1974 Amendments to Title I, a House Committee observed that inflexible application of the existing regulations might make schools with high proportions of low-income children ineligible. H. R. Rep. No. 93-805, p. 17 (1974) (“[I]t was never intended by the Act to render any school with a 30% concentration ineligible”). Although the 1974 Amendments made changes in the school eligibility requirements, they did not specifically address this situation.⁶ Apparently prompted by the concerns of Congress, the Department modified its regulations in 1976 to permit a school attendance area to qualify for funds if more than 30% of its children were from low-income families, even though the districtwide average might exceed 30%. See 42 Fed. Reg. 42914, 42917 (1976), codified in 45 CFR § 116a.20 (b)(2) (1977); National Institute of Education, Title I Funds Allocation: The Current Formula 57, 109 (1977). The 1978 Amendments refined this alternative by lowering the percentage to 25% and requiring the school district to guarantee that state and federal funding for compensatory education would not be reduced for any other school attendance area that received Title I funds in the preceding year. 20 U. S. C. § 2732(a)(1).

The evolution of the school eligibility requirements no doubt reflects a reassessment of the proper means to implement the goals of Title I. Nonetheless, the changes made since 1976 simply do not support the conclusion of the Court of Appeals and the contention of New Jersey that the earlier regulations were inconsistent with Title I’s policies. The regulations in place from 1967 to 1976 targeted assistance to the neediest areas within each school district in conformance with the statutory directive that funds should go to school attendance areas having high concentrations of children from low-income families. See 20 U. S. C. §241e(a) (1976 ed.). Moreover, available funds never were sufficient to provide services to all eligible students, H. R. Rep. No. 95-1137, at 7, and Title I required funds to be concentrated on particular projects rather than diffused among all eligible school attendance areas. See 20 U. S. C. § 241e(a)(l)(B) (1976 ed.); 45 CFR § 116.17(c) (1972). Thus, the school eligibility requirements helped to assure that funds would not be spread so thinly as to impair the effectiveness of particular Title I projects. Cf. H. R. Rep. No. 1814, 89th Cong., 2d Sess., 3 (1966) (suggesting that limited funds should be directed to schools with highest concentrations of children from low-income families); S. Rep. No. 95-856, at 7 (“[TJitle I is successful in directing substantial federal aid to those areas which have the highest proportions of children from low-income families”).

Congress did not abandon the concerns underlying the earlier regulations when it enacted the 1978 Amendments. Legislative Reports spoke approvingly of the longstanding policy to direct funds to school attendance areas “having the highest concentrations of low-income families.” Id., at 11; H. R. Rep. No. 95-1137, at 21. Although the 1978 Amendments relaxed the eligibility requirements for school attendance areas, the intent was “to give districts more flexibility without watering down the targeting features intended to give the programs a focus when funds are limited.” Ibid. The 25% eligibility standard was itself the product of a compromise at Conference. The House bill, see id., at 22, 211, but not the Senate amendment, provided that any school attendance area having a 20% concentration of poor children must be designated as eligible for Title I. H. R. Conf. Rep. No. 95-1753, p. 255 (1978). The Conference agreed to an amendment that made the designation of these areas optional, increased the required percentage to 25%, and provided that other areas must retain the same amount of funds they received the preceding year. Ibid. Although it is fair to infer that Congress determined that the targeting features of Title I would not be unduly compromised by adoption of the 25% standard, the background to the 1978 Amendments does not suggest the earlier regulations frustrated the program or that Congress intended the Amendments to apply to prior grants.

IV

New Jersey urges that we affirm the holding below on the ground that the Court of Appeals reached an equitable result. The determination by the Secretary does not question the good faith of New Jersey or the Newark School District with respect to the disputed expenditures, which we acknowledge might be permissible under standards enacted in 1978 or currently in effect.⁷ Nonetheless, we find no inequity in requiring repayment of funds that were spent contrary to the assurances provided by the State in obtaining the grants. Particular cases might appear to present exceptions to this rule, but given the statutory and administrative framework for assuring compliance with the requirements of Title I, we do not think recognizing such exceptions is within the province of the courts. Congress has already accommodated equitable concerns in the statutory provisions governing recovery of misused funds. Those provisions limit liability for repayment to funds received during the five years preceding the final written notice of liability, 20 U. S. C. §884 (1976 ed.), repealed and replaced by 20 U. S. C. § 1234a(g), and authorize the Secretary, under certain conditions, to return to the State up to 75% of any amount recovered. § 1234e(a). Of course, if Congress believes that the equities so warrant, it may relax the requirements applicable to prior grants or forgive liability entirely. The role of a court in reviewing a determination by the Secretary that funds have been misused is to judge whether the findings are supported by substantial evidence and reflect application of the proper legal standards. Bell v. New Jersey, 461 U. S., at 792. Where the Secretary has properly concluded that funds were misused under the legal standards in effect when the grants were made, a reviewing court has no independent authority to excuse repayment based on its view of what would be the most equitable outcome. Cf. Bennett v. Kentucky Dept. of Education, post, at 662-663.

Because the Court of Appeals has not yet addressed New Jersey’s arguments that the demanded repayment does not reflect proper application of the standards in effect during 1970-1972, the State may renew these contentions on remand. Accordingly, the decision of the Court of Appeals is reversed, and the case is remanded for further proceedings consistent with this opinion.

It is so ordered.

Justice Powell took no part in the consideration or decision of this case.

1 The Education Amendments of 1978, Pub. L. 95-561, 92 Stat. 2143, 20 U. S. C. §2701 et seq., reauthorized the Title I program and generally amended the Elementary and Secondary Education Act. The Title I program was subsequently succeeded by Chapter 1 of the Education Consolidation and Improvement Act of 1981, Pub. L. 97-35, 95 Stat. 464, 20 U. S. C. §3801 et seq. Chapter 1 retains Title I’s focus upon assisting educationally deprived children who live in low-income areas.

2 In 1980, the Department of Education replaced the former Office of Education as the federal agency responsible for administering Title I. See Bell v. New Jersey, 461 U. S. 773, 776, n. 1 (1983). For simplicity, unless the distinction is significant, we will refer to both the Office of Education and the Department of Education as the Department and to both the former Commissioner of Education and the Secretary of Education as the Secretary. See ibid.

3 In determining compliance with federal grant programs, other Courts of Appeals have consistently applied the legal requirements in effect when the grants were made. See, e. g., Indiana v. Bell, 728 F. 2d 938, 941, n. 6 (CA7 1984); North Carolina Comm’n of Indian Affairs v. Department of Labor, 725 F. 2d 238, 239 (CA4 1984); Woods v. United States, 724 F. 2d 1444, 1446 (CA9 1984); West Virginia v. Secretary of Education, 667 F. 2d 417, 420 (CA4 1981).

4 The eligibility requirements for school attendance areas have been altered many times since the years 1970-1972. Changes were made by 1974 Amendments to Title I, and the requirements were modified by regulation in 1976 and again amended in 1978. Infra, at 643, and n. 6. The Department issued regulations in 1981 clarifying the requirements of the 1978 Amendments. 34 CFR § 201.51(d)(ii) (1981). Later in 1981, the enactment of Chapter 1, see n. 1, supra, superseded the provisions of Title I. Chapter 1 has its own provisions governing eligibility for attendance areas within school districts, see 20 U. S. C. § 3805(b), and these provisions were amended in 1983. See Pub. L. 98-211, § 3, 97 Stat. 1413, 20 U. S. C. § 3805(d) (1982 ed., Supp. I).

5 Of course, relatively poor school districts would receive a greater districtwide allocation of Title I funds because this amount was determined by the number of poor children within the district. This fact is illustrated by the present case: for the period from September 1, 1970, to August 31, 1973, Newark was allocated more than $28 million in Title I funds, or 18.4% of New Jersey’s total allocation. App. 14.

Moreover, from the outset of the Title I program, the regulations provided that in certain circumstances an entire school district could qualify as a Title I project. 45 CFR § 116.17(b) (1966). This alternative responded to indications by Congress that districtwide eligibility might be appropriate for particularly impoverished areas. See S. Rep. No. 146, 89th Cong., 1st Sess., 9 (1965) (“There may be circumstances where a whole school system is basically a low-income area and the best approach in meeting the needs of educationally deprived children would be to upgrade the regular program”); H. R. Rep. No. 1814, 89th Cong., 2d Sess., 3 (1966) (“[W]hen 30 or 40 percent of the children in the school district are from low-income families, all of the children in the district could be considered disadvantaged and the whole school system could be upgraded”).

We do not address whether the Secretary correctly determined that Newark did not qualify for districtwide eligibility under the legal provisions in effect during the years 1970-1972. See supra, at 637.

6 The 1974 Amendments liberalized the eligibility standards by providing that an otherwise ineligible school attendance area would be deemed eligible if it had qualified and received Title I funds in either of the two preceding fiscal years. Pub. L. 93-380, § 101(a)(5)(D), 88 Stat. 500, 20 U. S. C. §241e(a)(13) (1976 ed.). Furthermore, the 1974 Amendments allowed a local education agency to deem a school attendance area eligible for Title I assistance based on the actual attendance, rather than the residency, of children from low-income families. § 101(a)(5)(B), 88 Stat. 500, 20 U. S. C. § 241e(a)(l)(A) (1976 ed.). See S. Rep. No. 93-763, p. 30 (1974); H. R. Rep. No. 93-805, pp. 16-17 (1974); S. Conf. Rep. No. 93-1026, p. 144 (1974).

7 New Jersey contends that 10 of the disputed attendance areas had concentrations of low-income children exceeding 25%, and under the 1978 standards, the State is liable for a minimum of $249,607. As the Court of Appeals noted, 724 F. 2d, at 37, the 1978 standards would not be satisfied if compensatory funding was not maintained at prior-year levels in other schools receiving Title I aid. Ibid. The present record leaves unclear whether this requirement was satisfied, ibid., and the possibility that the necessary information is no longer available merely underscores the practical problems resulting from retroactive application of changes in the eligibility requirements. Brief for Petitioner 46, and n. 37.