Auditors want state of Iowa to refund $2.7 million in child care assistance

UPDATE: A federal agency is asking the state of Iowa to refund $2.7 million in child care assistance for low-income families despite assertions from state officials that most of the spending had been approved years ago.

The Iowa Department of Human Services should have returned $2.5 million in leftover federal money in 2006 when a contractor managing the money abruptly dissolved, according to an audit report released Thursday by the Office of Inspector General of the U.S. Department of Health and Human Services. Instead, the state agency gave the money to other contractors, a shuffling of funds that is not allowed under federal rules, the audit found.

State officials are not contesting a recommendation that they refund another $200,000 that was not spent by contractors within the required timeframe. But they are fighting a request to give back the rest, saying they consulted with the federal agency's regional office in Kansas City on their plans for the leftover funds in 2006 and thought they had put the matter to rest.

Iowa DHS Director Charles Palmer sent a letter to auditors in January seeking to keep the refund recommendation out of the final report, but was unsuccessful.

"To ask now for DHS to return $2.5M in funding to the federal government, more than 5 years after DHS acted in good faith based on the consultation with (federal officials), is unduly punitive," he wrote. "No refund to the federal government is warranted."

Federal officials said they never formally approved the state's plan to spend the funds and promised only that they would review its compliance with the law in a future audit, which they have now completed.

State officials are expected to reply within 30 days to an HHS official who will make a final determination on the refund. A DHS spokesman had no immediate comment.

The audit is the latest headache for state officials caused by the 2006 closure of the Iowa Child Care and Early Education Network, a nonprofit that was hired to manage federal funds for child care assistance and give state grants to service agencies. The money at issue comes from the Child Care and Development Block Grant Act, which is meant to pay for child care to help low-income families go to work.

An earlier audit by the same federal agency in 2008 ordered Iowa to refund more than $3.1 million in funds given to the state between 1998 and 2003 that was not spent by the nonprofit before it went out of business. State officials protested that recommendation, arguing federal rules were unclear and that the money was properly spent. They eventually paid the money back after the federal agency stood by the audit finding.

Federal auditors appear to be digging in for a similar fight. They note they were proven correct the last time and say their latest refund request is valid.

State officials say they should not be punished because they were blindsided when the contractor's board opted to dissolve as a corporation - "an act DHS could have neither foreseen nor was forewarned." The closure came after the federal deadline for the state to show how it planned to use the funds, but before the deadline for them to be spent.

Given that situation, Iowa officials say they consulted with the federal Administration of Children and Families to come up with a plan so the state would not lose the funding and could use it for similar services. A 2006 memo included in Iowa's recent response to the audit confirms that approach. State officials said they asked the federal Child Care Bureau to determine whether the strategy was allowed and did not receive any guidance otherwise until now - six years later.