Community Action Agency of Franklin County, Inc. (CAAFC) appealed a June 29, 1995 determination by the Administration for Children and Families (ACF) denying refunding for CAAFC's Head Start Program. This action was taken pursuant to 45 C.F.R. § 1303.15(c), which provides that refunding may be denied for "any or all of the reasons . . . set forth in [45 C.F.R.] § 1303.14(b)." ACF indicated that its denial of refunding was "based on the fact that CAAFC . . . violated program regulations and the terms of . . . [a previously negotiated] settlement agreement with . . . ACF by terminating . . . [three employees] without Policy Council approval. In doing so, CAAFC . . . violated both the terms and conditions of its 1993-94 refunding as well as federal regulations and policies." ACF Denial of Refunding Letter (ACF Denial) at 1.

The record in this case consists of the parties' briefs and evidentiary submissions, the transcript of a hearing held in March and May 1996 and the transcript of the parties' final arguments, taken on October 26, 1996.¹ Based on our review of that record, we find that a denial of refunding is warranted pursuant to 45 C.F.R. §§ 1303.14(b)(4) and (9).

Our decision that denial of refunding is warranted in this case is based on our conclusion that the Policy Council's decision to disapprove CAAFC's terminations of three employees was reasonable. Under the applicable standard of review, we are not to substitute our judgment for that of the Policy Council. CAAFC is bound by the applicable regulations and the terms and conditions of its grant to abide by a reasonable decision of the Policy Council, even if CAAFC's Board of Directors honestly believed that it was the wrong decision to make. We make no findings about the truth of CAAFC's allegations that there were program deficiencies for which the terminated employees were responsible, but hold only that the Policy Council could have reasonably decided that the appropriate action to take was to reinstate the employees for a probationary period. We therefore reject CAAFC's argument that by upholding the Policy Council's decision we are condoning any behavior of the terminated employees which might have resulted in regulatory violations.

Background

A. Overview of the applicable law and regulations

The Head Start program is designed to deliver comprehensive health, educational, nutritional, social and other services to economically disadvantaged children and their families. See 42 U.S.C. § 9831 and 45 C.F.R. § 1304.1-3. ACF provides funds to grantees to serve as Head Start agencies within designated communities. See generally 42 U.S.C. § 9836. The Head Start Act requires that a Head Start agency utilize --

organization, management, and administration which will assure, so far as reasonably possible, that all program activities are conducted in a manner consistent with the purposes of this subchapter. . . . Each such agency shall establish or adopt rules to carry out this section, which shall include rules to assure full staff accountability in matters governed by law, regulations, or agency policy . . . .

42 U.S.C. § 9839(a); see also 45 C.F.R. § 1301.30.

Head Start regulations list nine grounds for which a grantee agency may be terminated or have its refunding denied. As applicable here, refunding may be denied when a grantee has failed to meet the performance standards for operation of its Head Start program; or failed to abide by any other terms and conditions of its grant or applicable laws or regulations. 445 C.F.R. §§ 1303.14(b)(4) and (9), made applicable by 45 C.F.R. § 1303.15(c).

Under Department-wide grants administration regulations in Part 74, only a "material failure" to comply with grant terms justifies termination of a grant award. Part 74 regulations apply to Head Start grantees the extent that they are consistent.² Given the general statutory preference for continuing funding to existing Head Start grantees (42 U.S.C. § 9836(c)(1)) and, where appropriate, permitting a grantee the opportunity to correct deficiencies (42 U.S.C. § 9836a(d)(1)(B)), it is consistent to read 445 C.F.R. §§ 1303.14(b)(4) and (9)45 C.F.R. § 1303.14(b), which lists the bases for termination or denial of refunding actions, as referring to material failures to comply. Certainly, ACF should not seek to end a grantee's Head Start participation on a mere technicality.³

The Head Start Act and corresponding regulations provide that a grantee denied refunding shall have an "opportunity for a full and fair hearing" on whether refunding should be denied. See 42 U.S.C. § 9841(a)(3) and 45 C.F.R. § 1303.15. Procedures for the conduct of a hearing are set forth at 45 C.F.R. § 1303.16. The Board is authorized to act on behalf of the Secretary to provide this opportunity for hearing. 57 Fed. Reg. 59,260 (December 14, 1992). The Board's procedural regulations at 45 C.F.R. Part 16 apply to these proceedings insofar as they are not inconsistent with Part 1303. 45 C.F.R. § 1303.15(b)(1).

Parent participation is a key element of Head Start. The basic parent participation policy, with which each Head Start agency must comply as a term of its grant of financial assistance, is contained in the Head Start Policy Manual, Instruction I-31-Section B2, The Parents (OCD Transmittal Notice 70.2, dated August 10, 1970). See 45 C.F.R. § 1304.5-2(a). This Policy Manual appears as Appendix (App.) B to /hslc/Program%20Design%20and%20Management/Head%20Start%20Requirements/Head%20Start%20Requirements/130445 C.F.R. Part 1304, and is commonly referred to by ACF and Head Start grantees simply as "70.2." It explains the rationale for parent involvement in the Head Start program as follows:

Head Start believes that the gains made by the child in Head Start must be understood and built upon by the family and the community. To achieve this goal, Head Start provides for the involvement of the child's parents and other members of the family in the experiences he receives in the child development center. . . .

• It is clear that the success of Head Start . . . demands the fullest involvement of the parents, parental-substitutes, and families of children enrolled in its program. . . .
• Project Head Start must continue to discover new ways for parents to become deeply involved in decision-making about the program and in the development of activities that they deem helpful and important in meeting their particular needs and conditions. . . .

This sharing in decisions for the future is one of the primary aims of parent participation and involvement in Project Head Start.

Appendix B also identifies "four major kinds of parent participation in local Head Start programs," including "participation in the process of making decisions about the nature and operation of the program." The Appendix requires that "[e]very corporate board operating a Head Start program must have a Policy Committee or Council as defined by HHS." The Policy Council must consist of "[a]t least 50% parents of Head Start children presently enrolled in that grantee's program plus representatives of the community." 45 C.F.R. Part 1304, App. B, Chart A. Appendix B assigns specific roles to the Board of Directors, Executive Director, Head Start Policy Council and Head Start Director in the management and operation of the grantee agency's Head Start program. Chart C of Appendix B describes the responsibility of the Policy Council with respect to 17 "major management functions." The Policy Council must approve or disapprove actions taken to carry out 12 of the 17 functions listed. This entails approval "before the decision is finalized or action taken." Included in this list of actions requiring Policy Council approval are the hiring and termination of all Head Start employees. In addition, the Policy Council must "have been consulted in the decision making process prior to the point of seeking approval." Its role with respect to the remaining functions ranges from "general responsibility" to "may be consulted." These represent "the minimum functions and degrees of responsibility . . . ," although the Policy Council "may negotiate for . . . a greater share of responsibility if all parties agree."

B. Factual Background

Due to a disagreement between CAAFC's Board of Directors and its 1992-1993 Policy Council, CAAFC submitted its refunding application for the 1993-1994 program year to ACF without having received Policy Council approval for that application. In September 1993, based on the absence of an approved application, ACF appointed an interim grantee to operate CAAFC's Head Start program. ACF formally denied CAAFC's 1993-1994 refunding application on October 13, 1993. CAAFC appealed that action to this Board, and ACF awarded CAAFC supplemental funding to operate its program during the course of the appeal. Following the transfer of operations from the interim grantee back to CAAFC, several Head Start employees wrote to ACF complaining that they had not been rehired and that CAAFC's decision not to rehire them had not been approved by the Policy Council. CAAFC informed ACF that it was recalling only those employees it considered essential and would defer action on other personnel until it had a functioning policy council. ACF asserted that this action constituted a violation of 70.2.

On June 10, 1994, ACF and CAAFC reached a settlement agreement resolving the refunding dispute. See Attachment (Att.) 3 to CAAFC's Notice of Appeal. Under the terms of that agreement, CAAFC agreed to reinstate the three employees at issue (CAAFC's Head Start Director, Nutrition Coordinator and Social Services Coordinator) and provide them with back pay, which was supplied to CAAFC through a supplemental funding award from ACF. CAAFC also agreed that it would comply with 70.2 regarding the potential termination of any of the reinstated employees. Specifically noted were the provisions of 70.2 that, if CAAFC subsequently decided to take any personnel actions against the employees, the Policy Council must have been consulted in the decision making process prior to the point of seeking approval and, if the Policy Council did not approve, the proposed personnel action could not be taken until agreement was reached between the disagreeing groups or individuals. CAAFC also agreed to provide 70.2 training to its Executive Director, Board of Directors, Policy Council and Head Start Director, and to have the Head Start Director report directly to CAAFC's Child and Family Services Director instead of CAAFC's Executive Director.

6 of Settlement Agreement. In the settlement agreement, ACF recognized that the employees' reinstatement represented a continuation of their employment with CAAFC so that reinstatement could take place without Policy Council approval; CAAFC had the authority to supervise its employees; and any action taken by the employees, before or after their reinstatement, could be used to establish cause for their termination. 2 of Settlement Agreement. ACF withdrew its denial of refunding for 1993-1994 (and approved CAAFC's refunding application for that period), and CAAFC withdrew its appeal of that denial. On June 13, 1994, CAAFC reinstated the three employees (effective June 27th) and paid them back wages. However, CAAFC did not place these individuals in their former jobs. Rather, it informed them, in the letter offering reinstatement, that it intended to institute termination proceedings. See ACF Exs. 13-15. These employees were suspended on September 30, 1994 and terminated on October 14, 1994. CAAFC did present the question of these terminations to its Policy Council for approval on August 30, 1994. On September 1, 1994, the Policy Council voted 9-4 against termination.

On June 29, 1995, after attempting to get the Policy Council and CAAFC to settle their differences, and after reviewing the Policy Council's reasons for refusing to approve the terminations, ACF again denied refunding to CAAFC, leading to this appeal. ACF gave two bases for its decision. First, ACF asserted that CAAFC's termination of the employees without Policy Council approval violated the program performance standards for parent involvement embodied in 70.2. Second, ACF alleged that CAAFC failed to abide by the terms of the settlement agreement, which, according to ACF, constituted a failure to abide by the terms and conditions of the subsequent grant award. Specifically, ACF asserted that CAAFC breached the agreement because: CAAFC did not comply with Head Start personnel policies in implementing the employees' suspension and termination in fall 1994; did not obtain Policy Council approval of the terminations; did not reinstate the employees; and did not provide the required training in 70.2.

Analysis

A. The Standard of Review

It is undisputed that the Head Start performance standards require Policy Council approval of a decision to hire and fire a Head Start Director and staff of the grantee agency. 45 C.F.R. Part 1304, App. B, Chart C, III.(b) and (c). It is also undisputed that CAAFC did not obtain Policy Council approval of its termination actions. However, ACF is not necessarily required to deny refunding based on the absence of Policy Council approval. In North Shore Community Action Programs, Inc. v. Shalala, Civil Action No. 93-1834 (D.D.C. October 10, 1993), a U.S. district court held that HHS must examine whether a Policy Council's decision was arbitrary, capricious, or illegal, before denying refunding based on the lack of Policy Council approval.

North Shore involved the question whether the statutory right to a hearing on the denial of a refunding application applied where the Policy Council did not approve the grantee's application. ACF had determined that, without Policy Council approval, there was no valid refunding application to deny, and, thus, no right to a hearing. The court held that there was a refunding application pending before HHS, even though the application was missing a required element, so that the statutory right to a hearing applied. As one basis for its decision, the court noted that to accept HHS's position that the grantee was not entitled to a hearing on the denial of refunding "would essentially provide a Policy Council with absolute and unreviewable discretion on refunding." North Shore at 4. The court further stated:

• The HHS interpretation provides no review mechanism for Policy Council actions -- even if those actions were plainly illegal or suffered from constitutional infirmities. For example, without the prescribed hearing, a Policy Council could refuse to approve an application because the grantee employed minorities or because it refused to provide the Policy Council with kickbacks. [Footnote omitted.] The Court believes that the hearing requirement contained at section 9841(a)(3) was provided in the statute precisely to address these sorts of issues.

Id. at 5. The court also noted that an administrative law judge had held in another case that if the Policy Council's actions "were unreasonable, arbitrary, or improperly motivated, HHS could continue assistance to a grantee despite the lack of approval by the Council." Id. at n.7. ACF asserted that North Shore required the Board to examine the Policy Council's actions in light of the standard established by the Supreme Court in Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402 (1971). There the Court stated that in order to determine whether a decision was arbitrary, capricious, or illegal, one must examine whether the decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment. Id. at 416. ACF noted that this standard of review was "quite narrow." ACF Post-Hearing Brief (PHBr.) at 5. Thus, according to ACF, this Board should limit its review to a determination of whether the Policy Council's decision rested upon a consideration of the relevant factors and did not represent a clear error of judgment. Id. The Board used the Overton Park standard to review the Policy Council decision in Lonoke Economic Development Agency, DAB No. 1568 (1996).

CAAFC countered that application of the Overton Park standard of review was dependent upon the expertise of the "agency" whose decision was under review. Hearing Transcript⁴ (Tr.) at 1228-29. CAAFC maintained that it terminated the three individuals because they were "unsupervisable" and "out of control," and had committed violations of federal and state laws and regulations which endangered the children in the program.⁵ Tr. 1225. CAAFC argued that assessment of these shortcomings required expertise in the areas of health, child abuse and labor law, which the Policy Council did not have; thus, CAAFC contended that Overton Park is inapplicable. Tr. 1230-31.

CAAFC also argued that the fact that, under New York Law, boards of directors of non-profit corporations can be personally liable for corporate acts also rendered the Overton Park analysis inappropriate. In conjunction with this position, CAAFC cited Weiss v. Opportunities for Cortland County, Inc., 337 N.Y.S. 2d 409 (1972), for the proposition that, due to its responsibility to the corporation, the Board of Directors of a Head Start corporation could terminate a Head Start Director without Policy Council approval. Tr. 1237. CAAFC argued that this higher duty of its Board of Directors should be taken into account in determining the standard of review to be applied to the Policy Council's decision. CAAFC also argued that the members of its Board of Directors were more qualified than those of the Policy Council to make judgments about the issues of employment, health, and child abuse law involved in this particular case. CAAFC therefore contended that, rather than looking to Overton Park for guidance, the Board should apply a common law definition of the term "arbitrary" in reviewing the Policy Council's actions. Thus, CAAFC urged that the Policy Council's actions be measured against those which would be taken by a reasonable person with the appropriate expertise in the same situation. Tr. 1231-32.

At the oral argument, ACF insisted that the Overton Park standard applied, but also contended that even if the Board were to apply the common law standard advanced by CAAFC, CAAFC would still not prevail under the circumstances present in this case.

In considering what standard the Board should use in reviewing the Policy Council's decision, we note that the North Shore court was concerned with the possibility that a Policy Council might decide to disapprove a grantee's proposed action for reasons which are unconstitutional or otherwise illegal. This is apparent from the court's reference to the "unreasonable, arbitrary, or improperly motivated" standard employed by courts in reviewing administrative agency decisions. We agree with ACF that this language echoes that of the Supreme Court in Overton Park, in which the Court stated that the question was whether the challenged decision was arbitrary, capricious, or illegal, a comparable standard. Moreover, we find that the Overton Park analysis, in which one must examine whether the decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment, is appropriate here because of the Head Start Act's strong emphasis on parent involvement.

The Head Start Act and implementing regulations are rife with support for the proposition that the decision to approve the hiring or firing of staff is properly the domain of the Policy Council. As previously discussed, parents are expected to participate in the management of the Head Start program. The Head Start Act provides, in pertinent part, that in order to be designated a Head Start agency, an agency must --

1. establish effective procedures by which parents and area residents concerned will be enabled to directly participate in decisions that influence the character of programs affecting their interest;
2. provide for their regular participation in the implementation of such programs . . . .

42 U.S.C. § 9837. The objectives of the performance standards regulations implementing the Head Start Act's parent involvement policy found in 45 C.F.R. Part 1304, Subpart E, include:

(c) Provide the following kinds of opportunities for parent participation:

1. Direct involvement in decision making in program planning and operation.

45 C.F.R. § 1304.5-1(c)(1). In order to promote these parent involvement objectives, Head Start grantees are required to have a parent involvement plan that provides --

a system for the regular provision of information to members of Policy Groups. The purpose of such communication is to enable the Policy Group to make informed decisions in a timely and effective manner . . . .

45 C.F.R. § 1304.5-4(b). The guidelines in 70.2 explicitly recognize that Head Start Directors and staff, who have received training in early childhood development and in program management, may have difficulty sharing power with Head Start parent groups:

It may not be easy for Head Start directors and professional staff to share responsibility when decisions must be made. Even when they are committed to involving parents, the Head Start staff must take care to avoid dominating meetings by force of their greater training and experience in the process of decisionmaking.

45 C.F.R. Part 1304, App. B, B.1. Among the program management decisions requiring Policy Council approval are all staff hiring and firing decisions. Id. at Chart C.

Thus, we find that the Head Start Act, regulations, and guidelines contemplate that Head Start parents, acting through the Policy Council, will share with the grantee the responsibility for making decisions about the nature and operation of the program. Shared decision making is a cornerstone of the Head Start program. CAAFC's argument that members of its Board of Directors are more qualified than the Policy Council about the issues would have us dismiss the Policy Council as a competent decision maker simply because its members are less likely to be professionals. This would be inconsistent with the guidelines, which warn against overriding opinions of the Policy Council on that basis. The Head Start Act places a high value on the involvement of parents in decision making because they have a stake in the success of the program and are in a position to evaluate its daily operation. The Head Start Act also gave CAAFC the responsibility to provide information on a regular basis to the Policy Council so as to enable it to make decisions in an informed fashion, despite any lack of independent expertise in making termination decisions. We therefore reject CAAFC's contention that the Policy Council's alleged lack of expertise makes application of the Overton Park standard inappropriate.

In addition, we disagree that the New York appellate court's analysis in the Weiss decision indicates that the Overton Park standard is inappropriately applied to the Policy Council decision at issue. In that case, the court held that since New York corporate law provided for individual liability of the non-profit Head Start grantee's Board of Directors in fulfilling their duties, those Directors were authorized to terminate a Head Start Director despite the Head Start regulation requiring Policy Council approval of the termination.

CAAFC implied that the Board should give the Policy Council's decision less weight than the Board of Directors' because Policy Council members were not individually liable for judgments against CAAFC that might have resulted from the terminated employees' actions. However, this line of reasoning is based on several assumptions which we reject. First, CAAFC assumes that Policy Council members, over half of whom must by regulation be parents of Head Start enrollees, would be less concerned than Board Members about placing Head Start participants at risk simply because they could not be sued. Second, accepting this rationale would also require assuming that CAAFC continuously accepted, in bad faith, a grant with the provision requiring Policy Council approval of terminations. This provision has been a term and condition of CAAFC's grants all the years it has been a Head Start grantee. Moreover, since it appears that the Weiss case did not involve a functioning Policy Council and that the court was unaware that the grantee voluntarily entered into a grant accepting Policy Council participation, the court's analysis in that case does not persuade us that New York State law requires that the Board of Directors' decision be given greater weight than the Policy Council's. Consequently, we conclude that the Head Start Act's requirement for parent participation is best implemented by applying the Overton Park standard to the Policy Council's actions.

Accordingly, we next examine the record in this case to determine whether the Policy Council's decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment. Overton Park at 416.

B. Whether the Policy Council Considered the Relevant Factors

In order to determine whether the Policy Council considered the relevant factors in reaching its decision, we first outline the information available to the Policy Council when it made its decision. Then we discuss the reasons given by the Policy Council for its decision, as evidenced by documents and testimony in the record before us. In reviewing these reasons, we examine CAAFC's arguments that the Policy Council's decision should be rejected because some of the reasons are not relevant to a proper decision. Finally, we explain why our findings and conclusions about the information available, the reasons given, and the effect of any allegedly irrelevant reasons support a conclusion that the Policy Council's decision was based on a consideration of relevant factors.

1. The Information Available to the Policy Council

The employees in question--CAAFC's Head Start Director, Nutrition Coordinator and Social Services Coordinator--were effectively first terminated in October 1993, when they were not recalled after CAAFC regained the Head Start grant from the interim grantee. The minutes of the Policy Council show that, during the time between CAAFC's resumption of the grant in October 1993 and its settlement agreement with ACF in June 1994, the Policy Council repeatedly sought information on why the employees had not been returned to the job. CAAFC Miscellaneous Exhibit (Misc. Ex.) 2 at 85 (January 20, 1994 Policy Council Minutes); and 97 (March 17, 1994 Policy Council Minutes) and 118 (June 7, 1994 Policy Council Minutes). However, CAAFC did not respond substantively to those inquiries until it brought the proposed terminations before the Policy Council for approval on August 30, 1994.

In early 1994, CAAFC hired Jack Eisenberg, a Rochester, New York labor law attorney with a Head Start background, to investigate the three employees' performance. Tr. 568-70. He presented his findings to the Personnel Committee of the CAAFC Board of Directors on June 30, 1994. Id. at 502. As a result of his findings, the Board voted to seek approval of the Policy Council to terminate the employees. From around May 31 until August 30, 1994, CAAFC attempted several times to set up a joint meeting with the Board and the Policy Council to allow Mr. Eisenberg to present his findings to the Policy Council.

On August 30, 1994, Mr. Eisenberg appeared before the Policy Council. Several members of CAAFC's Board of Directors, its Executive Director, and the Head Start Director also attended the Policy Council meeting and answered questions.

CAAFC complained that the Policy Council showed a predisposition to ignore or an unwillingness to listen to Mr. Eisenberg because the Policy Council limited his presentation to two hours. However, testimony from Policy Council members (Tr. 233 [Mary Duryea]; Tr. 27-28 [Barbara Silman]) confirmed that this time limit was a usual practice of the Policy Council, not an exceptional limit adopted to shortchange Mr. Eisenberg. Furthermore, Mr. Eisenberg testified that he was able to complete his presentation. Tr. 554. Mr. Eisenberg testified that he had with him at the Policy Council meeting copies of documents supporting his Report, but that he distributed only a copy of an outline of his presentation. He also testified that no Policy Council member asked to see any of the supporting documents during or after his presentation.

Transcripts of the tapes of the August 30 meeting were made by both the Policy Council and CAAFC and submitted into the record. See ACF Ex. 24 and CAAFC Notice of Appeal, Att. 11. At that meeting Mr. Eisenberg chronicled a long list of problems in the program which, in his view, justified termination of the three employees. Mr. Eisenberg's Report divided his findings into two categories, program deficiencies and 70.2 violations. The program deficiencies involved Health, Social Services and Nutrition.

The Report noted that the centrifuge used for the program's blood testing was antiquated to the point of being ineffective and was unsanitary (i.e., caked with dried blood). Moreover, during the preparation for transition to the interim grantee, Head Start employees found a plastic bleach bottle in an unlocked cabinet in the office of the Head Start Health and Disabilities Coordinator containing used blood-testing equipment such as syringes (including at least one needle), glass capillary tubes, lancets, rubber gloves and general blood waste. While this was a second floor office, he found that it was otherwise accessible to the children. The Head Start Social Services Coordinator was responsible for drawing blood samples from children at the start of the school year and, apparently, had stored this waste there. Further, the equipment used for children's hearing tests was antiquated and inadequate.

The Report noted that, in the Social Services component, Family Needs Assessments were incomplete or poorly completed. Employees charged with collecting and compiling the information contained in those assessments did not receive adequate instruction or training. The CAAFC Head Start policy on child abuse directly contravened applicable New York State procedures. Finally, eligibility standards for applicants from one community in CAAFC's service area as well as the Head Start program's overall record keeping in terms of contacts with participating families were called into question.

The Report cited the Head Start food service operation due to unsanitary working conditions, both in employees' personal hygiene and the condition of equipment and food preparation surfaces. Records pertaining to food storage were not properly maintained, nor were the dietary needs of the general student population, or those children with special needs, adequately addressed.

The Report also found deficiencies pertaining to 70.2 that included the Head Start Director's failure to obtain approval of the CAAFC Executive Director in establishing and implementing personnel policies; her failure to meet with the CAAFC Board of Directors to plan the Head Start budget; her failure to get the Executive Director's approval on the budget and her submission of budgets to the CAAFC Board almost simultaneous with their due date for submission to ACF in spite, in at least one instance, of a request to submit it to the Board six weeks prior to its due date; her decision to change the composition of the Policy Council without Board of Director or Executive Director involvement or approval; her rejection of a Board of Directors' nominee for community representative to the Policy Council; her assertion to a prospective Policy Council member that cross-representation between Policy Council and Board of Directors was not permitted while apparently knowing otherwise; and her hiring of a Nutrition Coordinator without the Executive Director's prior knowledge, input or approval.

Following Mr. Eisenberg's presentation, the Policy Council went into executive session and decided that, prior to voting on the proposed terminations, the Policy Council should hear a response to Mr. Eisenberg's findings from the three employees. It scheduled a meeting on September 1 for that purpose.

Although some Board members were present at the August 30 meeting, none were specifically invited to the September 1 meeting, and none attended, except for Ms. Duryea (the Policy Council representative on the Board) and Mr. McDonald (the Board representative on the Policy Council). The CAAFC Executive Director testified that she knew of the meeting because it was held in CAAFC's home office, but that she neither attended nor informed the Board Members because it was her policy to attend Policy Council meetings only when invited. Tr. 1078-80.

At the September 1, 1994 Policy Council meeting, the terminated employees submitted a jointly signed written rebuttal (with Attachments) to Mr. Eisenberg's Report.⁶ See ACF Ex. 26.

In an Attachment to the Joint Rebuttal, the Nutrition Coordinator asserted that gloves for kitchen employees were not required by law in certain instances (although she did not say that this covered all of Mr. Eisenberg's concerns). She conceded that hairnets were not always worn, but noted that efforts were made to wear hairnets a majority of the time and that ("[a]ccording to . . . Code") hands were always washed. She admitted that food inventories were kept but not dated. She asserted that the children's special dietary needs were met by making any problems known to Teachers Assistants and, ultimately, parents. She contended that the program's kitchens had passed a Health Inspector's Report in 1992-93 with only cosmetic corrections recommended. Consequently, she asserted that none of the deficiencies raised by Mr. Eisenberg were imminent health hazards. ACF Ex. 26 at 8.

The Joint Rebuttal asserted that Hematocrit testing was not done by Head Start personnel in 1993, but rather by the doctor conducting physicals. The Joint Rebuttal contested the allegation that the centrifuge was encrusted with blood and argued that at worst, "it was most likely just not cleaned" following its most recent use. Alternatively, it suggested that CAAFC personnel who had moved the equipment might have suffered an injury causing them to bleed and contaminate it. The Joint Rebuttal denied that the equipment was antiquated, noting that only in recent years had newer equipment become available and affordable. The Joint Rebuttal characterized CAAFC's allegations about blood waste as sensationalized and asserted that the waste was inaccessible to the children. Further, the Joint rebuttal noted that "had the Health Coordinator been allowed to work as requested," the container would have been disposed of properly. In terms of the hearing testing equipment, the Joint Rebuttal stated that a tympanometer was purchased in 1993 and the audiometer was calibrated annually. ACF Ex 26. at 2-3.

The Joint Rebuttal also touched on the following areas:

• 70.2 Violations -- The Joint Rebuttal indicated that the Head Start Director had merely made a "minor addition" to the personnel policies in 1992. Id. at 1.
• Budget/Grant Application -- The Joint Rebuttal pointed out that CAAFC's Comptroller had participated in the budget process, intimating therefore that the Executive Director should have been aware of the various stages of the budget process. Moreover, the Joint Rebuttal asserted that grant applications were always on the Executive Director's desk at least ten days prior to Board meetings and implied that blame for any delay in presenting documents to the Board of Directors rested with the Executive Director. Id.
• Policy Council -- The Joint Rebuttal asserted that the Head Start Director followed 70.2 for selection of community representatives until 1993 when the Board of Directors advised her otherwise in order "to have more control over the Policy Council." Id. at 1.
• Hiring -- The Joint Rebuttal contended that personnel decisions were made according to 70.2 and that the Executive Director was invited to participate and kept informed as necessary. However, the Joint Report noted that, according to 70.2, the Executive Director did "not have to approve" hiring or firing of staff, except for the Head Start Director. Id. at 2.

Following the presentation of the Joint Report, the Policy Council went into executive session to vote on whether to approve CAAFC's proposed terminations of the employees. The record shows that the Policy Council voted 9-4 against termination. On September 12, 1994, the Policy Council informed CAAFC of its decision.

On October 14, 1994, Mr. Eisenberg submitted another report to the CAAFC Board of Directors which analyzed the employees' responses and concluded that they were insufficient to overcome the findings of deficient performance. See CAAFC Att. 4 to Notice of Appeal. Thereafter, the Board voted to go forward with the terminations despite the Policy Council's disapproval.

CAAFC contended that the Policy Council's deliberations were tainted by lobbying from the affected employees, especially the former Head Start Director, in the form of contacts with Policy Council members outside of the Policy Council meetings. However, in denying CAAFC's request to issue a subpoena to the Policy Council Chairperson to seek evidence on this subject, we concluded that contacts between the employees and Policy Council members outside of Policy Council meetings were to be expected in a community of the size served by CAAFC and were not inappropriate. Ruling on Motion for Subpoena at 3 (June 18, 1996). Consequently, we find that any information obtained as a result of "lobbying" outside of formal meetings could reasonably be considered by the Policy Council members in reaching their decision. Moreover, since many of the 1993-94 Policy Council members either had been Policy Council Members previously or had had children in the Head Start program during the time that the terminated employees served, those Policy Council members would have had independent knowledge and opinions of the performance of those employees which could reasonably be brought to bear in reaching their decisions on how to vote. Finally, the Policy Council members had and could properly draw upon their own experiences as professionals (where applicable), parents, Head Start participants, employers, and employees in analyzing all the arguments for and against termination of the three employees.

2. The Reasons Given by the Policy Council Members

In its post-hearing brief, ACF listed the reasons given by Policy Council members for the Policy Council's refusal to approve the employees' termination as follows:

1. There were no written personnel evaluations notifying the employees of their deficient performances.
2. The termination actions were not in compliance with CAAFC's personnel policies.
3. The deficiencies were not reported in previous audits.
4. The employees offered reasonable explanations for the deficiencies.
5. The deficiencies were discovered after the employees had been laid off.
6. CAAFC was acting in violation of the settlement agreement.
7. The deficiencies did not warrant termination.

a. There were no written personnel evaluations notifying the employees of their deficient performances.

The principal reason cited by Policy Council witnesses for the results of the vote was that none of the three employees had been given written personnel evaluations notifying them that their performances were so deficient as to warrant termination, nor had they been given an opportunity to correct the alleged deficiencies and improve their performance. According to one witness, the Head Start Director had never received an evaluation, while the other two employees had received only positive evaluations. Tr. 249, 279-280.

Policy Council Members Silman, Duryea, Pamela Latreille, and Preston Miller all cited this factor as key to the Policy Council's decision.⁷ The transcript of the September 1, 1994 Policy Council meeting also reveals the Council's concern that there was no prior paper trail of problems with these employees. See generally ACF Ex. R7. In addition, although Mr. Eisenberg reported that there was a history of problems between the Head Start Director and CAAFC's Executive Director and Board, he did not provide copies of correspondence from the Head Start Director's personnel files or any other supporting documentation to the Policy Council.

The Policy Council members viewed the lack of written negative evaluations as significant for several reasons. Some concluded that it was unfair to terminate an employee without having previously notified the employee that his or her performance was deficient. Without written negative evaluations, there was no evidence contradicting the employees' statements before the Policy Council that they had had no such notice. In fact, these employees had been congratulated, with the rest of the Head Start staff, by the Executive Director for their good work during the previous year. ACF Ex. 6. In addition, the Policy Council had had the opportunity to observe at least the Head Start Director and the Social Services Coordinator in their interactions with the Policy Council and therefore had an independent basis on which to judge those employees' performance. Finally, the lack of prior notice of deficiencies certainly led some Policy Council members to give less credence to allegations of deficiencies that were not described until after CAAFC had already announced its intent to terminate these employees.

CAAFC attempted to denigrate this factor as a reasonable basis for deciding to retain the employees by suggesting that the deficiencies placed Head Start children's and staff's safety at risk. According to CAAFC, these deficiencies were so serious that the employees did not deserve a second chance. Tr. 1241-42. In addition, CAAFC alleged that it deemed these employees unsupervisable, so that it was unreasonable to think that they would respond favorably to attempts to correct their performance. However, this assumes that the Policy Council believed that all the alleged deficiencies were factual, were the fault of the employees, and could not be corrected or ameliorated. As we discuss below, none of these assumptions are correct. Thus, we reject CAAFC's allegation that the Policy Council preferred fairness to employees over safety considerations. Given that there are no such statements in the record by any Policy Council member and that many of the Policy Council members had children in the program whose safety could have been jeopardized, we find that allegation to be unfounded.

CAAFC also noted that one Policy Council member (Ms. Duryea) stated a belief that employees could not be fired without a written evaluation. Tr. 251. CAAFC contended that neither state law nor CAAFC's personnel policies required this, so that a decision based on this reason was arbitrary. Id. at 1242. We lack sufficient information to resolve the question of New York state law, but, as we discuss below, we find that it was not unreasonable to read CAAFC's personnel policies as Ms. Duryea did. Moreover, her statement was not representative of the Policy Council's reasoning, which was based more broadly on a sense that terminating these employees without notice of and an opportunity to correct their deficiencies would be unfair. We therefore conclude that this statement does not invalidate the overall Policy Council rationale for disapproval of the terminations.

Consequently, we find the Policy Council's reliance on this factor to be reasonable and consistent with the Head Start regulations' preference for continuing employment of qualified personnel. See 45 C.F.R. § 1302.11(c) ("The bases for making a selection among applicants which submit approvable applications to replace a grantee, in addition to the basis in § 1302.10 of this part, shall be . . . [t]he extent to which provision is made for continued employment by the applicant of the qualified personnel of the existing program.").

Requiring grantee management to deal fairly with employees is also properly within the Policy Council's bailiwick as a decision about the "nature and operation of the program." Certainly, permitting the termination of employees without prior notice of deficient job performance could adversely affect the morale of the remaining employees and thus the program.

b. The termination action was not in compliance with CAAFC's personnel policies.

This factor includes both CAAFC's failure to do written performance evaluations and its failure to respond to the employees' grievances. According to 70.2, personnel policies are to be developed by the grantee, the Head Start Director, and the Policy Council, and approved by the Policy Council. 45 C.F.R. Part 1304, App. B, Chart C. CAAFC's management was obliged to proceed according to the written personnel policies adopted by the Policy Council. 45 C.F.R. §1303.31(a) and (b).

The specific parts of CAAFC's personnel policy allegedly violated were those dealing with evaluations and grievances. With respect to evaluations, the policy provides:

• a. Staff performance is formally reviewed by the Head Start Director. Evaluations are accomplished by first-line supervisory personnel with written reports filed in the employee's records. . . .
• c. Employees have the opportunity to accept or reject findings -- an unfavorable report entails the possibility of being denied increment, and/or possible discharge. Employees may appeal unfavorable evaluations by following the grievance procedures outlined in Item 15 of this section.

18, Affirmative Action/Personnel Policies (CAAFC Miscellaneous Ex. 17, at 424). The relevant paragraph entitled Employee Grievances provided -

Employee grievances will be given prompt and fair consideration. An employee should take his or her grievance to one or more of the following in order:

1. Immediate Supervisor
2. Head Start Director
3. Policy Council Personnel Committee
4. CAA Executive Director
5. CAA Board Personnel Committee

The resolution and final decision of the grievance must be approved or disapproved by the Head Start Policy Council and the CAA Board of Directors.

There is no dispute that the employees in question did not receive written negative evaluations and that they filed formal grievances with CAAFC when they were not brought back to work in October 1993, but did not receive any response to those grievances before their termination. During the April 20, 1994 Policy Council meeting, Policy Council members expressed concern about the failure of CAAFC to respond to the grievances. CAAFC Misc. Ex. 2 at 110.

CAAFC asserted that the Policy Council was mistaken in its evaluation of the personnel policies. CAAFC contended that neither New York state law nor CAAFC's personnel policies required written employee evaluations prior to termination. Tr. 1242-43. Moreover, since the "employees" in question had been laid off, CAAFC argued that it did not have to address their grievances. It is not necessary for us to resolve definitively whether state law or CAAFC's personnel policies required CAAFC to provide written employee evaluations prior to termination or whether CAAFC was bound to respond to the employees' grievances. The Policy Council's interpretation of the language of the personnel policies is reasonable, especially when viewed in context. Both provisions demonstrate an overall personnel policy that requires informing employees about management's opinion of their job performance and about proposed personnel actions, and giving employees an opportunity to respond to management's assertions. Moreover, CAAFC was repeatedly made aware of the Policy Council's concern about CAAFC's failure to give substantive reasons for not returning these employees and its failure to respond to their grievances. See, e.g., CAAFC Misc. Ex. 2 at 85-86 (January 20, 1994 Policy Council Minutes); and 110 (April 20, 1994 Policy Council Minutes). Management is supposed to follow policies set by the Policy Council.

We therefore conclude that this is a reasonable factor for the Policy Council to take into account.

c. The deficiencies were not reported in previous audits.

Some Policy Council members testified that they reviewed Head Start program reviews and audits for the relevant period to determine if the employee deficiencies reported by Mr. Eisenberg had previously been discovered and reported by others. Tr. 244 (Ms. Duryea); Tr. 32-34 (Ms. Silman). ACF performed an On-Site Program Review at CAAFC in 1991 (ACF Ex. 2), reporting its findings on an On Site Program Review Instrument (OSPRI). CAAFC had performed a required self assessment in 1993 as reflected in Self-Assessment Valuation Instrument or SAVI (ACF Ex. 4), and was subject to periodic surveys by the New York State Departments of Health and Social Services. None of these reviews or audits found any major program deficiencies.

CAAFC contended that a defect in the child abuse policy (one of the deficiencies in Mr. Eisenberg's Report) had been noted in a prior OSPRI and that such reviews were too infrequent to be relied on as evidence of what current employee practices were. CAAFC did not address the other, more recent, reviews cited by the Policy Council witnesses. There is no evidence that the Policy Council members who sought out this information were not aware of the respective dates of the reviews and Mr. Eisenberg's Report, and did not give them the proper weight.

This apparently clean record from official reviewing authorities, even if some of the reports were from an earlier period, could reasonably affect the weight which some Policy Council members gave to Mr. Eisenberg's Report. Given Mr. Eisenberg's stated purpose -- to explain why CAAFC was proposing termination -- it was reasonable for Policy Council members to seek out and consider independent evaluations of the program in coming to a conclusion about the employees' abilities. Thus, this factor was relevant and was appropriately considered by the Policy Council in reaching its decision.

d. The employees offered reasonable explanations for the deficiencies.

It is noteworthy that Mr. Eisenberg admitted that he did not share his Report with the affected employees prior to his August 30, 1994 presentation to the Policy Council. Tr. 509, 574-75.⁸ Consequently, the employees' first opportunity to respond to the allegations of deficient job performance was at the September 1, 1994 Policy Council meeting. The employees' responses are outlined above; in general, the employees stated that they were not responsible for some of the deficiencies or had followed established, presumably acceptable, procedures. Some Policy Council members testified that they found some of the employees' explanations for the alleged deficiencies credible. For example, Ms. Duryea testified that she verified through conversation with other Head Start staff that the hematocrit machine had not been operated by one of the terminated employees. Tr. 244-46. On the other hand, some Policy Council members testified that they considered the deficiencies quite serious. See, e.g., Tr. 919, 924; 964. CAAFC contended that most of the deficiencies were not satisfactorily or truthfully explained by the employees, and that it was illogical for the Policy Council to reject Mr. Eisenberg's Report. CAAFC also noted that the Policy Council did not review supporting documentation that Mr. Eisenberg brought to the August 30 meeting.

It was reasonable for Policy Council members to consider the employees' explanations for the alleged deficiencies, and to determine whether those explanations mitigated some of the deficiencies. The explanations could also have persuaded Policy Council members that some of the alleged deficiencies did not exist. It was also reasonable for Policy Council members to use those explanations, and the fact that Mr. Eisenberg had not interviewed the employees prior to making his Report, in deciding how much weight to give the Report. As for the documentation that Mr. Eisenberg had with him at the August 30 meeting, he distributed only an outline of his findings and did not state to the Policy Council that he had the documentation with him; we therefore do not fault the Policy Council for failing to examine it. Thus, we find that this factor was relevant and that the Policy Council reasonably considered it in reaching its decision.

e. The deficiencies were discovered after the employees had been laid off.

Several Policy Council members testified that they discounted the report of the employees' deficiencies somewhat because the deficiencies were not discovered until after the employees had been laid off. Policy Council members were aware that ACF had consistently taken the position that all employees should have been called back to work when CAAFC had resumed the grant in October 1993. Consequently, some Policy Council members testified that they believed that the report of deficiencies might be motivated by a desire to justify the employees' termination after the fact. ACF alleged that Mr. Eisenberg essentially admitted that his job was to justify the terminations. ACF PHBr. at 12, citing CAAFC Att. 11 at 1-2. In addition, Policy Council member Silman wondered why, if the deficiencies were so serious, they had not been discovered earlier. Tr. 144. Ms. Silman also testified that she believed that the charges against the employees were developed to justify their terminations since they did not fit into the Executive Director's vision for CAAFC. Id. at 169-170. Furthermore, the Policy Council minutes for January 20, 1994 indicate that when asked why these employees had not been returned to their jobs, the Executive Director stated that there was no money in the budget to bring them back to work, not that she or CAAFC had determined that the employees' performances were deficient. CAAFC Misc Ex. 2, at 85.

CAAFC contended that this factor was irrelevant, and that it was not surprising that the deficiencies were not discovered until after the employees had been laid off because they were the persons responsible for overseeing those parts of the program.

While it is true that some of the alleged deficiencies, such as the unsanitary centrifuge, might have been more readily discovered after the employees left, others, such as the nutrition and social services deficiencies, should have been evident to program participants, or to CAAFC if it were properly monitoring the program, during the employees' tenure. Moreover, this was not the principal factor cited for any Policy Council member's vote, but was apparently taken into consideration in determining what weight to give to Mr. Eisenberg's Report. Thus, we conclude the Policy Council reasonably considered this factor in reaching its decision.

f. CAAFC was acting in violation of the settlement agreement.

Several Policy Council members cited as an additional factor in their decision-making that they believed that the process CAAFC followed in terminating the employees violated CAAFC's settlement agreement with ACF. Some Policy Council members stated that they understood the settlement agreement as requiring CAAFC to reinstate the employees and give them an opportunity to correct their deficiencies, rather than reinstating them and immediately initiating termination actions. See, e.g., Tr. 89.

CAAFC's Board President briefed the Policy Council on the terms of the proposed settlement agreement at a May 25, 1994 meeting. Tr. 292-93. On July 26, 1994 the Policy Council adopted a resolution directing CAAFC to comply with the terms of the settlement agreement requiring reinstatement of the three employees. The Policy Council was given copies of the settlement agreement at a July 27, 1994 meeting with an ACF regional official, and that official explained ACF's view of the settlement agreement at that time. One witness (Ms. Silman) specifically remembered that the ACF official stated that termination of the employees was still possible, but that CAAFC would have to get Policy Council approval. Tr. 81.

CAAFC contended that it was improper for the Policy Council to take the settlement agreement into account because it was not a party to that agreement and because the Policy Council was mistaken in believing that CAAFC had violated the settlement agreement.

We are not persuaded that it was improper for Policy Council members to consider the requirements of the settlement agreement in reaching their decision. It appears that some Policy Council members' reading of the settlement agreement as requiring a probationary period reflected both the sense of what the Policy Council had suggested to CAAFC prior to the Settlement Agreement and what ACF may have implied to the Policy Council. Even though we have since upheld CAAFC's interpretation of the settlement agreement as permitting the simultaneous reinstatement and institution of termination proceedings (Ruling on Motion for Summary Disposition at 2-3 (December 14, 1995)), it was reasonable for Policy Council members to take into account that CAAFC's action was contrary to the Policy Council's earlier expressed wishes and to ACF's view of the settlement agreement. Given that CAAFC had a recent history of strained relations with both the Policy Council and ACF, and given that ACF was the funding source for the Head Start program, a reasonable person could have considered it poor judgment on CAAFC's part to proceed in this manner even if it was technically permitted by the settlement agreement. In any event, we note that none of the Policy Council members testified that this was an important factor in reaching the decision to deny approval of the terminations. We therefore conclude that the Policy Council reasonably considered this factor.

g. The deficiencies did not warrant termination.

Several Policy Council members testified that they found the alleged deficiencies easily correctable and not significant enough to warrant termination of the employees without giving them an opportunity to correct the deficiencies. See, e.g., Tr. 46, 112 (Ms. Silman); Tr. 244 (Ms. Duryea). For example, Ms. Silman and Ms. Duryea each stated that the blood waste container was not a danger to the children because it was located in a place where there would not be unsupervised children. Tr. 50, 127-28; 341. In addition, Ms. Silman, who had considerable experience in child abuse issues, testified that she considered the problem with CAAFC's child abuse policy "an easily changeable situation." Tr. 121. (On the other hand, as we noted above, some Policy Council members testified that they considered the deficiencies serious.)

We simply do not agree with CAAFC that the Policy Council's failure to reach the same conclusion about the alleged deficiencies as CAAFC's Board of Directors renders the Policy Council's decision per se arbitrary and capricious. The CAAFC Board of Directors was persuaded by the information contained in Mr. Eisenberg's Report. As noted above, there were a number of factors which caused the Policy Council to give less weight to that Report. The Policy Council provided the employees with an opportunity to respond in person to Mr. Eisenberg's Report and was able to question the employees about the causes and possible effects of those alleged deficiencies. For reasons not entirely clear, CAAFC's Board of Directors did not address these employees directly. The Policy Council also sought information about the terminated employees' performance from other staff members and parents and from past program audits and reviews; there is no indication in the record that the Board of Directors made similar inquiries.⁹ Although there was some testimony from a Board Member that the Head Start Director's performance had been a problem for some time and that the Board was aware of the problem, the record does not indicate that the Policy Council was provided copies of contemporaneous documentation of the problems. We also question (as we mentioned before) CAAFC's apparent assumption that the Policy Council would be less concerned about the children's safety than would the Board of Directors. AAFC also did not explain why the deficiencies were not easily correctable or why close supervision of the employees could not prevent any harm to the children should the employees' performance fail to improve during a probationary period.

Consequently, we find that CAAFC has not established that the deficiencies reported by Mr. Eisenberg were so significant, serious, and incapable of correction that they warranted automatic dismissal of the employees involved. We therefore find that it was reasonable for the Policy Council to conclude, after deliberation, that the employees could safely be given a second chance.

3. Conclusion -- the Policy Council's decision was based on a consideration of relevant factors.

We have discussed above the factors cited by the Policy Council as the reasons that a majority of voting members rejected CAAFC's proposed terminations of the three employees. The principal reason was that the Policy Council believed that it would be unfair to terminate the employees on the basis of the deficiencies alleged when the employees had not had prior notice that their job performance was unsatisfactory. In other words, the majority of the Policy Council thought that the employees should have a probationary period in which to attempt to improve their job performance. We have examined the other reasons cited by Policy Council witnesses and have determined that, notwithstanding CAAFC's contentions that some of these reasons should not have been part of the Policy Council's analysis, all of these other reasons were proper considerations for the Policy Council to use as factors in making its decision. CAAFC did not establish that the Policy Council failed to consider a relevant factor that would have led to a different result. Consequently, we conclude that the record before us shows that the Policy Council's decision was based on a consideration of relevant factors. Therefore, unless there exists evidence that some additional, illegal reason was the motivating factor for the Policy Council's decision, the applicable regulations require that CAAFC abide by that decision.

C. Whether the Policy Council's Decision Represents a Clear Error of Judgment Or Was Improperly Motivated

In its response to ACF's Motion for Summary Disposition of this appeal, CAAFC stated that it would provide testimony in support of its contention that Policy Council members who refused to approve CAAFC's termination of certain employees were biased. Specifically, CAAFC alleged that some Policy Council members had an active interest in having the employees retained and were biased against CAAFC for a variety of other reasons. In our Ruling on that Motion, we concluded that CAAFC's proffered testimony concerning ulterior motivating factors was relevant to a disputed fact and the proper subject of an evidentiary hearing. Ruling on Motion for Summary Disposition at 6-8. For that and other reasons stated in the Ruling, we denied ACF's Motion for Summary Disposition and this appeal went on to evidentiary hearing.

In its post-hearing presentation, CAAFC did not point to any testimony supporting its theory that the Policy Council was biased or otherwise improperly motivated. Instead, CAAFC only implied that the several times that the Policy Council scheduled and then canceled a meeting to hear CAAFC's charges against the employees showed that it was reluctant to hear those charges. CAAFC also argued that no "objective" person could have decided to continue the employment of these employees given the severity of their deficiencies. CAAFC pointed to the follow-up report written by Mr. Eisenberg in which he found the explanations given to the Policy Council by the employees to be faulty. In addition, as we discussed above, CAAFC alleged that the Policy Council was mistaken about some factors, such as whether written evaluations were required prior to termination of an employee for cause. Thus, CAAFC alleged that the Policy Council members simply liked the employees and wanted to keep them. Tr. 1243.

We find that CAAFC has not shown that the Policy Council was biased or otherwise improperly motivated. The meeting delays do not show a reluctance by the Policy Council to hear the charges against the employees. The record shows that throughout the 1993-94 program year, the Policy Council repeatedly asked for an explanation of why the three employees were not returned to work. Once the settlement agreement calling for the reinstatement of the employees was signed in June, some Policy Council members apparently believed that the matter was resolved because CAAFC was no longer going to pursue termination. A meeting to present CAAFC's reasons for the proposed terminations was eventually held on August 30 and, as we noted above, CAAFC's representatives were given a full opportunity to make their presentation. Since CAAFC's reasons were based on deficiencies that had allegedly taken place the previous year, it suffered no significant prejudice from delaying the presentation by a few months. Thus, these facts do not support a finding that the Policy Council's timing in scheduling a meeting to hear CAAFC's reasons for termination shows bias.

We also reject CAAFC's argument that no "objective" person could have decided to continue the employment of these employees given the severity of their deficiencies.¹⁰ As we discussed above, some Policy Council members gave less weight to Mr. Eisenberg's Report on deficiencies because the deficiencies had not been reported in contemporaneous written evaluations by supervisors, OSPRI reviewers or New York State survey personnel. Thus, these Policy Council members considered the Report an effort to justify the terminations after the fact. As for the follow-up report written by Mr. Eisenberg in which he found the explanations given to the Policy Council by the employees to be faulty, that subsequent analysis was not available to the Policy Council to consider in making its decision. Moreover, neither report satisfactorily addressed the principal concern of the Policy Council with treating the employees fairly by giving them fair notice of their deficiencies and a chance to correct them. Further, notwithstanding its allegations to the contrary, CAAFC did not show that this goal could not be met without endangering program participants.

We also reject CAAFC's contention that the Policy Council showed bias by relying on CAAFC's failure to provide written evaluations of the employees, since, according to CAAFC, no such evaluations were required by CAAFC's personnel policies or by state law. We find that the Policy Council's interpretations of the personnel policy provisions regarding written evaluations and grievance procedures were reasonable readings of those provisions. Moreover, the Policy Council's reliance on this factor was based as much on its sense of fair play as it was on any legal interpretation of CAAFC's obligations to these employees.

Finally, while past dealings with the people involved may have caused the members of the Policy Council to have friendly feelings towards the terminated employees and possibly unfriendly feelings towards CAAFC's Board of Directors, this record is devoid of any evidence showing improper motivation or the type of bias cited by the North Shore court as potentially impeaching a Policy Council decision. As the Court stated in Overton Park, we are not to substitute our judgment for that of the decisionmaker whose decision we are reviewing. We have found that the Policy Council based its decision on a consideration of relevant factors and that there is no evidence here of improper motivation. Consequently, there is no basis for overturning that decision.

D. CAAFC Also Violated the Settlement Agreement, Which Was a Condition of Its Head Start Grant.

The other principal reason stated by ACF for its termination decision was that CAAFC had violated the June 1994 settlement agreement, which was a condition of CAAFC's 1994-95 Head Start grant. In our Ruling on ACF's Motion for Summary Disposition, we found that the settlement agreement was indeed a condition of the grant, since ACF's withdrawal of its denial of CAAFC's application for refunding was a part of that agreement. We also held that CAAFC did not violate the terms or spirit of the settlement agreement by including in its letters to the employees offering reinstatement a statement that CAAFC would seek their termination. Id. at 3. Thus, we denied ACF's Motion insofar as it was premised on this view of the settlement agreement.

The chief purpose of the settlement agreement from ACF's point of view was to bring CAAFC into compliance with 70.2, since it was CAAFC's alleged violation of that program requirement that had caused ACF to deny refunding in 1993. Indeed, in its closing argument CAAFC stated that the real heart of this case was whether or not there was Policy Council approval of the terminations. Tr. 1226. The settlement agreement called for CAAFC to reinstate the three employees at issue (as had been requested by the Policy Council during the dispute that was settled by the agreement); to comply with 70.2 regarding the potential termination of any of the reinstated employees, including consulting the Policy Council in the decision making process prior to the point of seeking approval of any proposed personnel actions; to obtain Policy Council approval of any proposed personnel actions prior to implementing them; and to provide Policy Council training to its Executive Director, Board of Directors, Policy Council and Head Start Director.

The parties disputed whether CAAFC satisfied the particulars of the agreement in all respects, but there was no dispute on the central issue: CAAFC admitted that it had terminated three employees without Policy Council approval. Given that we have determined above that this was a violation of 70.2, we see no need to analyze whether CAAFC's actions with respect to particular provisions of the settlement agreement designed to enforce CAAFC's compliance with that key regulatory requirement satisfied the letter or spirit of those provisions. Thus, we conclude that CAAFC's termination of the three employees without Policy Council approval was a violation of the settlement agreement. Consequently, we find that CAAFC violated a material term and condition of its grant so that termination of the grant is warranted under 45 C.F.R. § 1303.14(b)(9).

Conclusion

Based on the preceding analysis, we find that a denial of refunding is warranted pursuant to 45 C.F.R. §§ 1303.15(c) and 1303.14(b)(4) and (9).

______________________
Judith A. Ballard

______________________
Norval D. (John) Settle

______________________
M. Terry Johnson
Presiding Board Member

[2] The concept of materiality is found in 45 C.F.R. § 74.113. That regulation has been amended and redesignated as 45 C.F.R. § 74.62, but continues to require materiality. See 59 Fed. Reg. 43,760 (August 25, 1994).

[3] In its closing argument, CAAFC contended that some of the settlement agreement provisions that it allegedly violated were immaterial, and stated that the real issue was Policy Council approval. Moreover, CAAFC did not argue that its termination of the employees without Policy Council approval was immaterial, but instead challenged the reasonableness of the Policy Council's decision to disapprove the terminations. Thus, we conclude that CAAFC in essence conceded that, if the Policy Council's decision was reasonable, failure to abide by that decision was a material failure to comply with the applicable regulations and with the terms and conditions of its grant.

[4] CAAFC presented an oral post-hearing brief which was transcribed into the record. In that same presentation, ACF responded to CAAFC's arguments. For ease of reference, the Board directed that the pagination of the hearing transcript be continued to include CAAFC's "brief" and ACF's response. The post-hearing pagination runs from pages 1222 through 1267.

[5] For example, as discussed more fully below, CAAFC pointed to alleged mishandling of blood testing equipment and blood waste at the Head Start Center and misapplication of New York State laws regarding child abuse notification.

[6] A fourth employee, whose termination is not in issue, appears as a signatory on that document. The grammatical style of the Joint Rebuttal made it difficult to ascertain if it was a document authored by one individual with four signatures attached or a joint effort by the signatories.

[7] Ms. Silman: "[T]he center of the discussion was, given the violations and deficiencies, were these sufficient grounds to terminate people without some kind of what we consider due process, either any supervisory -- without any supervisory process which made them aware of and allowed them the ability to change their performance, if there had been problems with their performance." Tr. 41-42; Ms. Duryea: "One of the biggest problems I had . . . was no documentation;" Tr. 243; "To my knowledge, there wasn't any [information regarding their deficiencies] presented to . . . [the employees] during their employment." Tr. 249; Ms. Latreille: "I feel at the time if the deficiencies occurred, they should have been addressed with the employee in an office. . . . [T]hey should have been presented something in writing so that the employee could sign it and there would be documentation in their personnel file . . . ." Tr. 409-10; Mr. Miller, a CAAFC witness who was on the Policy Council and who voted for termination: "[those opposed to termination] felt that they [the employees] hadn't been justly treated" Tr. 967.

[8] At the oral argument, CAAFC stated that the employees had been asked to address the Board of Directors a number of times but had refused. CAAFC did not point to any evidence of these requests in the record, however.

[9] In fact, Mr, Eisenberg testified that he did not speak to the terminated individuals or the employees they supervised. Tr. 574-75.

[10] CAAFC also argued that it was placed in an untenable position by ACF's reliance on the Policy Council's decision because it was possible that, if ACF had discovered the deficiencies, ACF could have based a decision to terminate CAAFC's grant on those deficiencies even if the Policy Council refused to terminate the employees responsible. This argument ignores ACF's responsibility to review the Policy Council's action; if ACF found that the Policy Council's refusal to approve was arbitrary or improperly motivated, HHS could continue assistance to a grantee despite the lack of approval by the Council. See North Shore, at 5 n.7.