oversight

Puerto Rico Department of Education Needs Major Improvements in Its Administration of the Even Start Program.

Published by the Department of Education, Office of Inspector General on 2000-09-27.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                      Puerto Rico Department of Education
                Needs Major Improvements in Its Administration of
                            the Even Start Program




                                  FINAL AUDIT REPORT




                           Audit Control Number ED-OIG/A01-90006
                                       September 2000



Our mission is to promote the efficient                       U.S. Department of Education
and effective use of taxpayer dollars                           Office of Inspector General
in support of American education.                                             Boston, MA
                                            Notice

Statements that financial and/or managerial practices need improvement or recommendations
 that costs questioned be refunded or unsupported costs be adequately supported, as well as
other conclusions and recommendations in this report, represent the opinions of the Office of
    Inspector General. Determinations on these matters will be made by appropriate U.S.
  Department of Education officials. In accordance with the Freedom on Information Act (5
U.S.C. §552), reports issued by the Office of Inspector General are available, if requested, to
  members of the press and general public to the extent information contained therein is not
                               subject to exemptions in the Act.
                                            Table of Contents

Executive Summary ................................................................................................1

Finding 1            PRDE severely delayed the flow of Federal funds .......................2
                          Recommendations..................................................................5
                          PRDE’s response...................................................................5
                          OIG’s reply ...........................................................................6

Finding 2            PRDE lacked efficient cash management controls resulting
                     in excess cash held .........................................................................7
                            Recommendations..................................................................9
                            PRDE’s response...................................................................9
                            OIG’s reply .........................................................................10

Finding 3            PRDE lacked supporting documentation for cash draws
                     and failed to reconcile advance payments made to
                     subrecipients..................................................................................11
                            Recommendations................................................................12
                            PRDE’s response.................................................................13
                            OIG’s reply .........................................................................13

Finding 4            PRDE overpaid Even Start funds and failed to identify
                     unused carryover balances due to inadequate reconciliation
                     and validation by departments......................................................14
                        Recommendations......................................................................15
                           PRDE’s response...................................................................16
                           OIG’s reply ...........................................................................16

Other Matters .......................................................................................................17
Background ...........................................................................................................18
Audit objectives .....................................................................................................18
Methodology & scope 18
Management controls............................................................................................20

Exhibit A:           Summary Report Even Start Funding - Private Institutions -
                     From January 28, 1999 to September 2, 1999 - Updated Through
                     January 15, 2000

Exhibit B:           Even Start Funds Not Supported
Exhibit C:      PRDE’s response to the Draft Audit Report (without attachments)


                                 Executive Summary
Puerto Rico Department of Education’s (PRDE) administration of the Even Start program severely
delayed the flow of Federal funds to subrecipients. In addition, PRDE lacked adequate cash
management practices and effective internal controls to properly administer the program. PRDE’s
Single Audit reports for the years ended June 30, 1998 and June 30, 1999 have not been submitted.
Furthermore, similar cash management issues have been repeatedly reported in PRDE’s Single Audit
reports since 1991.

PRDE severely delayed the flow of Federal funds to Even Start subrecipients because it did not ensure
contracts and budget assignments were signed prior to the beginning of the award period. Specifically,
private institutions signed contracts four to ten months after the beginning of the contract period; and
public institutions received budget assignments approved by PRDE’s Budget Office Director four to
seven months after the beginning of the award period. As a result, PRDE prevented institutions from
rendering services and/or hindered their ability to offer optimum services to program participants.

PRDE also lacked efficient cash management controls resulting in excess cash held totaling $1,074,608.
 PRDE held funds for 15 to 316 days before making initial disbursements to subrecipients. As of
January 15, 2000, PRDE still held funds totaling $119,180. In addition, PRDE did not properly
forecast payroll expenses totaling $69,387 and failed to return excess funds from another ED program
totaling $55,799. Lastly, PRDE lacked supporting documentation for $152,065 in cash draws and
failed to reconcile “advance” payments made to subrecipients.

We recommend that the Assistant Secretary for Elementary and Secondary Education require PRDE to
institute adequate controls to assure contracts are signed by both parties and budget assignments are
approved prior to the beginning of the award period. PRDE must also establish adequate controls to
ensure that only the amount of funds necessary to meet immediate cash needs are requested from ED
and that requests made are supported with reliable supporting documentation. In addition, PRDE must
establish more thorough cash forecasting procedures to encourage prompt and effective utilization of
Even Start funds and must reconcile advance payments made to subrecipients.

PRDE agreed with most of the findings reported and has taken action in response to our
recommendations. PRDE disagreed it overpaid $29,240 to one institution. However, we reviewed
PRDE’s documentation and our position remains unchanged (see Finding 4 for specifics). We have
recommended PRDE obtain an independent assessment to determine if the new control procedures
detailed in its response are sufficient. PRDE’s detailed response is attached as Exhibit C, except for the
attachments that will be provided upon request.
PRDE needs major improvements in its
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Finding 1                              PRDE severely delayed the flow of Federal funds



                                       PRDE severely delayed the flow of Federal funds to Even Start
                                       subrecipients because it did not ensure contracts and budget
                                       assignments were signed prior to the beginning of the award period.
                                       Specifically, private institutions signed contracts four to ten months
                                       after the beginning of the contract period; and public institutions
                                       received budget assignments approved by PRDE’s Budget Office
                                       Director or an authorized representative four to seven months after
                                       the beginning of the award period. These delays hindered the
                                       institutions’ ability to offer optimum services to program participants
                                       and resulted in the suspension of the program at one institution. Also,
                                       it prevented teachers from receiving their salaries in a timely manner.

                                       Federal regulation 34 CFR 80.21 (g) (1) states that, “Unless
                                       otherwise required by Federal statute, awarding agencies shall
                                       not withhold payments for proper charges incurred by grantees
                                       or subgrantees…”

                                       PRDE published newspaper advertisements during the months of
                                       December 1997 and January 1998 to advise institutions of the
                                       availability of funds for the Even Start program for the next award
                                       year. PRDE also provided orientation to all parties interested in
                                       applying for funds under the program. Interested parties, both private
                                       and public, submitted proposals to PRDE.

                                       PRDE evaluated all proposals and, between August and October
                                       1998, sent acceptance and/or rejection letters to the applicants.
                                       Acceptance letters included the amount of funds approved for the
                                       institution for the award year. However, PRDE did not award funds
                                       to the institutions timely because contracts for private institutions were
                                       not signed and budget assignments for public institutions were not
                                       approved until four to ten months after the start of the program.

                                       Private institutions entered into a contractual agreement with PRDE in
                                       order to receive Even Start funds. They were required to submit with
                                       the proposals, a series of documents necessary for the processing of
                                       the contracts such as a: (1) certification acknowledging that the
                                       institution filed income taxes for the last five years, (2) certification of
PRDE needs major improvements in its
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                                       tax liability issued by the Puerto Rico Treasury Department, and (3)
                                       certification from the Department of State acknowledging that the
                                       institution was registered and in “good standing”. PRDE officials
                                       explained that private institutions failed to provide the necessary
                                       documentation, resulting in the slow processing of the contracts.
                                       PRDE officials also stated contracts were backdated because Puerto
                                       Rico law does not permit retroactive payment for contract services.
                                       Contrary to PRDE statements, private institution officials interviewed
                                       stated they did not provide additional documentation to PRDE prior
                                       to signing the contracts.

                                       Public institutions were not required to sign a contract with PRDE;
                                       they also did not provide the various certifications. Instead, they
                                       received a budget assignment approved by PRDE’s Budget Office
                                       Director or an authorized representative, which allowed them to start
                                       receiving the funds. However, both private and public institutions
                                       were restricted from receiving funds until the contracts and budget
                                       assignments were finalized months after the beginning of the award
                                       period.

4 - 10 month delay in signing          We reviewed 13 contracts for private institutions for award year
contracts for private                  1998/1999. The dates on the contracts indicated they were signed
institutions resulted in               one or two days prior to the beginning of the contract period.
subrecipients’ inability to            However, we identified five contracts that were actually signed 4 to
provide optimum services to
                                       10 months after the beginning of the contract period. Officials at three
participants
                                       of the institutions stated they signed contracts five months after the
                                       beginning of the contract period. PRDE subsequently issued checks
                                       for Even Start funds two months later. Officials at another institution
                                       stated the contract was signed seven months after the beginning of the
                                       contract period. PRDE subsequently issued a check to the institution
                                       two months later. Documentation for the other institution showed the
                                       contract was signed 10 months after the beginning of the contract
                                       period. The institution ceased operations the same week the contract
                                       was finalized. As of January 15, 2000, no funds had been requested
                                       from ED on behalf of the institution and no disbursements had been
                                       made to the institution.


                                       Two private institutions were able to begin services utilizing their own
                                       lines of credit. However, not all institutions had sufficient funds or
                                       lines of credit to operate the program. Officials at one institution
                                       indicated that the Even Start program was discontinued for the
                                       1999/2000 award year because of late receipt of funds for the
PRDE needs major improvements in its
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                                       1998/1999 award year. The institution did not have sufficient
                                       institutional funding to continue supporting the program. In addition,
                                       some private institution officials stated programs were hindered
                                       because salaries could not be paid until contracts were signed.

                                       The following table illustrates PRDE’s restriction of Even Start
                                       Program funds for the 13 private institutions tested.


                                                                                                  NUMBER OF
                                                                                    DATE           MONTHS
                                                             PROGRAM                 OF             UNTIL
                                          PRIVATE             START                 FIRST            FIRST
                                          INSTITUTION          DATE               PAYMENT          PAYMENT

                                              1             October 1, 1998     April 21, 1999             7
                                              2             October 1, 1998     April 23, 1999             7
                                              3             October 1, 1998     June 18, 1999              9
                                              4             October 1, 1998     June 29, 1999              9
                                              5             October 1, 1998     April 21, 1999             7
                                              6              July 1, 1998             *                   *
                                              7             October 1, 1998      June 9, 1999              8
                                              8             October 1, 1998           *                   *
                                              9             October 1, 1998     May 11, 1999               7
                                              10            October 1, 1998           *                   *
                                              11            October 1, 1998    October 15, 1999           12
                                              12            October 1, 1998    August 2, 1999             10
                                              13            October 1, 1998           *                   *

                                               *        No payments had been made as of January 15, 2000 because
                                                        the institution had not submitted invoices.

4 – 7 month delay for approval         We traced the budget assignments for 11 public institutions that
of budget assignments for              participated in the Even Start program during award year 1998/1999
public institutions resulted in        (see table on following page). PRDE signed the budget assignments of
late salary payments to                nine public institutions in January 1999 – four months after the beginning
teachers
                                       of the award period, October 1, 1998. For the remaining two
                                       institutions, PRDE signed the budget assignments in May 1999 – seven
                                       months after the beginning of the award period. PRDE could not
                                       provide an explanation for the slow processing of budget assignments
                                       for the public institutions.




                                                                                         NUMBER OF
                                                                              DATE         MONTHS
PRDE needs major improvements in its
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                                                              PROGRAM           BUDGET             BUDGET
                                          PUBLIC               START           ASSIGNMENT          ASSIGNMENT
                                       INSTITUTION              DATE            APPROVED           SIGNED LATE

                                              1              October 1, 1998    January 21, 1999        4
                                              2              October 1, 1998    January 21, 1999        4
                                              3              October 1, 1998    January 21, 1999        4
                                              4              October 1, 1998    January 21, 1999        4
                                              5              October 1, 1998    January 21, 1999        4
                                              6              October 1, 1998      May 5, 1999          7
                                              7              October 1, 1998    January 21, 1999        4
                                              8              October 1, 1998    January 21, 1999        4
                                              9              October 1, 1998    January 21, 1999        4
                                              10             October 1, 1998    January 21, 1999        4
                                              11             October 1, 1998      May 5, 1999          7


                                       Officials at one public institution stated that for award year 1999/2000,
                                       teachers had been working since October 1999 without receiving
                                       salaries. As of January 18, 2000, the institution had not received the
                                       approved budget assignment for the 1999/2000 award year. Once
                                       they received the approved budget assignment, teachers would be able
                                       to receive retroactive payment for the time worked.


Recommendations                        We recommend that the Assistant Secretary for Elementary and
                                       Secondary Education require:

                                       1.1     PRDE to institute controls to assure contracts and budget
                                               assignments are signed prior to the beginning of the   award
                                       period; and

                                       1.2         An independent assessment of PRDE’s new control
                                                   procedures to determine that controls are sufficient.

PRDE’s response                        PRDE agreed with the audit finding and stated it has taken significant
                                       corrective actions to improve the deficiencies in the process of assigning
                                       budgets and executing contracts to assure contracts are signed before
                                       the beginning of the award period. These include:

                                        §    Moving to earlier dates the orientations to applicants, the
                                             submission of proposals, and the evaluation process;
                                        §    Encouraging applicants to submit all necessary documentation with
                                             their proposal in order to avoid delays in the contracting process;
                                        §    Revising the Notice of Award letter to prospective contractors to
                                             include that within 10 days of receipt of the letter, they must submit
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                                            all certifications to PRDE; and
                                        §   Sending follow-up letters for any contractor who does not comply
                                            with the 10-day deadline identifying the specific missing documents
                                            and stating that if certifications are not submitted within 10 days,
                                            the award will be in jeopardy.

OIG’s reply                            PRDE’s corrective actions should improve the flow of Federal funds to
                                       subrecipients. We added recommendation 1.2 to address the
                                       corrective actions PRDE stated would be taken.
PRDE needs major improvements in its
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Finding 2                              PRDE lacked efficient cash management controls resulting in
                                       excess cash held



                                       Beginning in January 1999, PRDE drew $1,074,608 and held the
                                       funds for 15 to 316 days before making initial disbursements to
                                       subrecipients. As of January 15, 2000, PRDE still held funds totaling
                                       $119,180, 348 days after the draws. In addition, PRDE did not
                                       properly forecast payroll expenses totaling $69,387 and failed to
                                       return excess funds from an Adult Education program totaling
                                       $55,799.

                                       According to Federal regulation 31 CFR 205.7 (c) (4), “A State
                                       shall request funds not more than 3 business days prior to the
                                       day on which it makes a disbursement. . .” and (d), “a State and
                                       a Federal agency shall limit the amount of funds transferred to a
                                       state to the minimum required to meet a State’s actual,
                                       immediate cash needs.”

                                       Furthermore, Federal regulation 34 CFR 80.20 (b) (7) states that,
                                       “Procedures for minimizing the time elapsing between the
                                       transfer of funds from the U.S. Treasury and disbursement by
                                       grantees and subgrantees must be followed whenever advance
                                       payment procedures are used. . .When advances are made by
                                       letter-of-credit or electronic transfer of funds methods, the
                                       grantee must make drawdowns as close as possible to the time of
                                       making disbursements.”

                                       In addition, Federal regulation 31 CFR 205.12 (a) states that, “A
                                       State will incur an interest liability to the Federal Government
                                       from the day Federal funds are credited to a State account to the
                                       day the State pays out the funds for program purposes.”

Not minimizing the time                We traced the flow of funds of 13 private institutions that participated
elapsing between receipt and           in the Even Start program during award year 1998/1999. Between
disbursement of program                April 15, 1999 and July 13, 1999, PRDE requested from ED funds
funds resulted in PRDE                 totaling $325,398 on behalf of three private institutions. PRDE
holding funds for up to 348
                                       requested the funds as the subrecipients submitted invoices.
days
                                       However, PRDE held the funds between 15 and 21 days before
                                       disbursing to the subrecipients, exceeding the 3 business days limit.
PRDE needs major improvements in its
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                                       Between January 28, 1999 and May 10, 1999, PRDE requested the
                                       total amount of the contracts for six private institutions totaling
                                       $749,210. PRDE held these funds between 37 and 316 days in
                                       excess of 3 days need before PRDE began making disbursements.
                                       Through January 15, 2000, unpaid balances totaling $119,180
                                       remained in the Puerto Rico Treasury Department’s account at the
                                       Puerto Rico Governmental Development Bank, 348 days after the
                                       draws.1

                                       See Exhibit A for a complete analysis of Even Start funds for the 13
                                       private institutions through September 2, 1999, including updated
                                       data through January 15, 2000 for the six institutions whose total
                                       amount of contracts were requested in advance.

Excess cash totaling $55,799           On September 2, 1999, PRDE transferred $55,799 excess funds
not returned from Adult                available from the Adult Education program to the Even Start
Education program funds                program. PRDE officials stated that it occasionally transfers available
                                       funds between different programs in order to speed up the payment
                                       process. However, under the Grant Administration Payment System
                                       (GAPS), funds requested from ED are available within one day.
                                       Therefore, PRDE should not need to access available cash from other
                                       programs and should return the excess funds to ED.

PRDE exceeded payroll                  PRDE’s cash forecasting process was not based on accurate future
forecasts by $69,387                   expenditure forecasts. As a result, PRDE often requested more cash
                                       than needed. Payroll funds were usually estimated and requested two
                                       or three pay periods in advance. We tested payroll requests made for
                                       the period January 1999 through May 1999 and found that PRDE
                                       drew a total of $446,784 in Even Start funds for payroll. Actual
                                       payroll paid for the period totaled $377,397. As a result, PRDE
                                       exceeded its cash forecast by $69,387.

                                       In addition, payroll expenses were generally paid out of funds
                                       available from the prior award year until new accounts were opened
                                       and submitted to the Puerto Rico Treasury Department. Once
                                       accounts were opened, PRDE prepared adjusting entries charging the
                                       correct expense accounts, and requested the funds from the current
                                       year award. These transactions left cash on hand from the prior year
                                       award that, instead of being returned to ED, was held until it was
                                       disbursed for prior year invoices.


1
    The Puerto Rico Treasury Department is the custodian and disbursement agent of Federal funds.
PRDE needs major improvements in its
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                                       Failure to limit the amount of funds transferred to the minimum
                                       required to meet immediate cash needs and not disbursing the funds
                                       drawn down within three days needs resulted in lost interest to the
                                       Federal government.


Recommendations                        We recommend that the Assistant Secretary for Elementary and
                                       Secondary Education require PRDE to:

                                       2.1         Return to ED any funds that have been drawn in advance,
                                                   which are not in compliance with excess cash requirements,
                                                   as of the date of this report;

                                       2.2         Compute the interest liability of Even Start funds transferred
                                                   which were not immediately released for payment and remit
                                                   those amounts to ED;

                                       2.3         Request from ED only the amount of funds necessary to meet
                                                   the immediate cash needs in order to prevent excess cash
                                                   balances in Federal programs;

                                       2.4         Establish more thorough cash forecasting procedures to
                                                   encourage prompt and effective utilization of Federal funds;

                                       2.5         Set up new payroll accounts and submit them to the Puerto
                                                   Rico Treasury Department before the beginning of each
                                                   award period; and

                                      2.6          Conduct an independent assessment of the new control
                                                         procedures to determine if corrective actions have
                                      been               taken.

PRDE’s response                        PRDE concurred with the finding and agreed that any funds drawn in
                                       advance that were not in compliance with excess cash requirements
                                       should be returned to the Federal government, including the interest
                                       earned during the audit report period. The draft report identified
                                       $125,652 excess cash held by PRDE as of January 15, 2000.
                                       PRDE identified additional payments made to two institutions prior to
                                       January 15, 2000 and updated payments made to subrecipients
                                       through August 31, 2000, leaving a remaining balance of $43,868 in
                                       excess cash. In addition, PRDE stated it has implemented
                                       procedures to assure requests from ED are made for the specific
PRDE needs major improvements in its
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                                       amount of funds needed, drawing down funds when the invoices and
                                       payment vouchers are received, and discontinuing the policy of
                                       rounding off drawdown requests to the nearest round number.
                                       Furthermore, PRDE stated it has implemented a new payroll system
                                       that should eliminate previous problems in cash forecasting. Finally,
                                       PRDE will strive to set up new payroll accounts and submit them to
                                       the Puerto Rico Treasury Department prior to the beginning of each
                                       award period.

OIG’s reply                            We have adjusted the report to reflect a reduction in the excess cash
                                       balance reported as of January 15, 2000 because PRDE identified
                                       payments made to two institutions prior to January 15, 2000.
                                       However, we did not reduce the amount of excess cash reported to
                                       reflect PRDE’s updated balance through August 31, 2000. PRDE
                                       should work with program officials on the balance to return to ED as
                                       excess cash. Further, PRDE must determine the interest liability of the
                                       funds transferred which were not immediately released for payment.
                                       Similar cash management issues have been repeatedly reported in
                                       PRDE’s Single Audit reports since 1991. We added
                                       recommendation 2.6 to address the corrective actions PRDE stated
                                       would be taken.
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Finding 3                              PRDE lacked supporting documentation for cash draws and
                                       failed to reconcile advance payments made to subrecipients



                                       PRDE lacked adequate controls to support funds drawn with reliable
                                       documentation and to properly review subrecipient expenses in order
                                       to reconcile quarterly advance payments. As a result, PRDE drew
                                       $152,065 Even Start Program funds without proper documentation
                                       and failed to adjust “advance” 2 payments made to subrecipients.

                                       Federal regulation 34 CFR 80.20 (a) (2) requires that fiscal controls
                                       and accountability procedures of entities that receive Education grants
                                       be sufficient to “permit the tracing of funds to a level of
                                       expenditures adequate to establish that such funds have not been
                                       used in violation of the restrictions and prohibitions of applicable
                                       statutes.”

                                       In addition, Federal regulation 34 CFR 80.20 (b) (1) states that the
                                       financial management systems of grantees and subgrantees must meet
                                       the financial accounting standard, which indicates that “accurate,
                                       current, and complete disclosure of the financial results of
                                       financially assisted activities must be made in accordance with
                                       the financial reporting requirements of the grant or subgrant.”

Unsupported draws total                We traced 14 of PRDE’s Even Start draws made between January
$152,065                               28, 1999 and September 2, 1999 totaling $1,862,014 for award
                                       year 1998/1999. PRDE was unable to provide supporting
                                       documentation for $152,065. As of January 15, 2000, PRDE had
                                       maintained these funds between 184 and 348 days; consequently,
                                       PRDE must return the unsupported funds to ED.

                                       Exhibit B identifies the dates PRDE drew the Even Start funds, the
                                       amount of funds requested, amounts without supporting
                                       documentation, and the number of days in excess of 3 days needs
                                       that the funds were held by PRDE through January 15, 2000.

2
 ED required PRDE to “advance” payments to subrecipients. As per PRDE’s contract with the subrecipients, once
both parties signed the contract, subrecipients could submit invoices for three months of estimated expenditures. In
order to receive the next advance payment, institutions submited evidence of expenditures incurred during the
previous three months. However, as explained in Finding 1, subrecipients did not receive the first payment until
months after the start of the contract.
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“Advance” payments not                 PRDE began making “advance” payments of Even Start program
reconciled                             funds to private institutions on a quarterly basis during the 1998/1999
                                       award year. According to established procedures, subrecipients must
                                       submit invoices to PRDE based on expenses they expect to incur
                                       during the first quarter of the award year. For each of the remaining
                                       three quarters, subrecipients must provide evidence of actual
                                       expenses incurred during the previous quarter in order to be able to
                                       receive the next advance payment.

                                       We found that PRDE did not perform quarterly reconciliations for
                                       the estimated and actual expenses reported by private institutions
                                       during the 1998/1999-award year. For example, for the period
                                       October 1998 to July 1999, PRDE disbursed a total of $94,784 to
                                       one institution. Actual expenses reported by the institution for the
                                       period totaled $91,913, resulting in an overpayment for the period
                                       of $2,871. For the remaining two months of the award year, August
                                       1999 and September 1999, PRDE made an advance payment of
                                       $42,546 based on estimates. As of January 15, 2000, PRDE had
                                       made no effort to request from the institution the actual expenses
                                       incurred during the last two months of the award period in order to
                                       reconcile the account.


Recommendations                       We recommend that the Assistant Secretary for Elementary and
                                      Secondary Education require PRDE to:

                                      3.1          Return to ED the $152,065 resulting from funds drawn
                                                   without supporting documentation, as well as the amount of
                                                   lost interest to ED resulting from the excess days funds
                                                   remained in PRDE’s account;

                                      3.2          Establish adequate procedures to ensure that requests made
                                                   to ED are supported with reliable documentation;

                                      3.3          Reconcile the account of the private institutions that
                                                   participated in the Even Start program during award year
                                                   1998/1999, request any excess funds disbursed, and return
                                                   the funds to ED, including any lost interest;
                                      3.4          Perform the quarterly reconciliations needed to ensure
                                                   compliance with the established procedures;
PRDE needs major improvements in its
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                                      3.5          Apply a reimbursement method on the last payments made to
                                                   subrecipients;

                                      3.6          Provide personnel the proper training necessary to ensure that
                                                   they verify supporting evidence and reconcile subrecipients’
                                                   accounts; and

                                      3.7          Conduct an independent assessment of the new control
                                                   procedures to determine that controls are sufficient.

PRDE’s response                       PRDE agreed that any funds that could not be supported must be
                                      returned to ED, including any lost interest, except funds that were
                                      already included in the excess cash calculations in Finding 2.
                                      However, PRDE claimed the unsupported draws totaled just
                                      $12,914. PRDE also agreed to reconcile all accounts for the private
                                      institutions that participated in the Even Start Program during award
                                      year 1998-99 and return to ED excess funds disbursed, if any,
                                      including any lost interest. In addition, PRDE agreed to provide
                                      training to its personnel on acceptable supporting documentation,
                                      draw down, and quarterly reconciliation procedures. Finally, PRDE’s
                                      pre-payment policy currently contemplates using a reimbursement
                                      method to pay the last contract installment to subrecipients.

OIG’s reply                            We have adjusted the audit report to reflect a correction of $562 in
                                       total questioned costs for unsupported draws to $152,065.
                                       However, our position remains the same because the supporting
                                       documentation submitted remains unreliable. In addition, the excess
                                       cash held resulting from the funds drawn down without reliable
                                       supporting documentation reported in this Finding was not included in
                                       the excess cash calculations in Finding 2. Therefore, PRDE must
                                       return to ED the questioned costs for unsupported draws reported in
                                       this finding, including any lost interest. In addition, PRDE should
                                       implement controls to ensure future reconciliation of advanced
                                       payments made to subgrantees are completed timely and that
                                       unreconciled items are properly acted on. We added
                                       recommendation 3.7 to address the corrective actions PRDE stated
                                       would be taken.
PRDE needs major improvements in its
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Finding 4                              PRDE overpaid Even Start funds and failed to identify unused
                                       carryover balances due to inadequate reconciliation and
                                       validation by departments



                                       In addition to the inadequate cash management controls reported in
                                       Findings 2 and 3, PRDE also lacked proper controls due to
                                       inadequate reconciliation and validation by departments responsible
                                       for approving and disbursing Even Start funds. As a result, PRDE
                                       overpaid Even Start subrecipients funds totaling $29,240. In
                                       addition, PRDE failed to identify unused carryover balances that
                                       could have been utilized in the subsequent funding period.

                                       Education Department General Administrative Regulations
                                       (EDGAR) 76.702 states that, “A State and a subgrantee shall
                                       use fiscal control and fund accounting procedures that insure
                                       proper disbursement of and accounting for Federal funds.”

                                       In addition, EDGAR 76.709 (a) states that, “If a State or a
                                       subgrantee does not obligate all of its grant or subgrant funds
                                       by the end of the fiscal year for which Congress appropriated
                                       the funds, it may obligate the remaining funds during a
                                       carryover period of one additional fiscal year.”

Overpayments                           PRDE’s Office of External Resources was responsible for
                                       operational, fiscal, and other matters related to Federal programs.
                                       All private institutions that participated in the Even Start program
                                       submitted requests for payment to External Resources. External
                                       Resources then verified and certified the invoices and sent them to
                                       the Finance Division which in turn, made a final revision to the
                                       invoices and disbursed the funds. But External Resources did not
                                       verify the final disbursements made, believing that the Finance
                                       Division made the disbursements as approved.

                                       We traced the funds of 13 private institutions and found PRDE’s
                                       Finance Division overpaid two institutions during award year
                                       1998/1999. One institution submitted three invoices to PRDE’s
                                       External Resources Division requesting payment of the first three
                                       quarters of award year 1998/1999, totaling $89,372. External
                                       Resources verified the three invoices and incorrectly calculated the
PRDE needs major improvements in its
administration of the Even Start Program - Final           Page 15                     ACN: ED-OIG/A01-90006


                                       total amount of one invoice. The Finance Division further incorrectly
                                       re-calculated the total amount of the invoice, making a final
                                       disbursement for the three invoices of $109,092. This resulted in an
                                       overpayment of $24,170. External Resources did not verify the final
                                       disbursement made and did not become aware of the overpayment.
                                        The institution submitted to External Resources another invoice
                                       requesting payment for the third quarter of the award year. External
                                       Resources approved the invoice and the Finance Division paid
                                       $5,070, resulting in an additional payment for a quarter that had
                                       been previously overpaid. As a result, PRDE overpaid the
                                       institution funds totaling $29,240.

Unused carryover balance               PRDE’s Finance Division prepared and submitted to ED a Financial
                                       Status Report for the Even Start program for award year
                                       1997/1998. The report reflected an unobligated funds balance of
                                       $535,373 that was not carried over and re-assigned to the
                                       subsequent award year. PRDE’s Office of External Resources was
                                       not aware of the balance at the time of distributing the funds for the
                                       1998/1999 award year because of poor communication with
                                       PRDE’s Finance Division. These funds represented appropriated
                                       funds that PRDE did not utilize.

Recommendations                       We recommend that the Assistant Secretary for Elementary and
                                      Secondary Education require PRDE to:

                                      4.1 Strengthen its internal control structure by establishing a
                                          reconciliation and validation process;

                                      4.2 Refund $29,240 to ED for overpayment to the subrecipient;
                                          and

                                      4.3 Conduct an independent assessment of the new control
                                          procedures to determine that controls are sufficient.
PRDE needs major improvements in its
administration of the Even Start Program - Final          Page 16                     ACN: ED-OIG/A01-90006


PRDE’s response                       PRDE agreed that for fiscal year 1997-98 it failed to obligate the
                                      Even Start carryover balance. This oversight was immediately
                                      corrected under the External Resources Office’s new leadership. In
                                      addition, PRDE stated it would strengthen its existing reconciliation
                                      and validation policies through additional training of PRDE staff, as
                                      well as orientation to the proponents. However, PRDE strongly
                                      disagrees with the determination that it overpaid $29,240 to one
                                      institution.

OIG’s reply                           Contrary to PRDE’s disagreement that it overpaid $29,240 to one
                                      institution, we adhere to our position that PRDE overpaid the
                                      institution. On May 12, 1999, the institution submitted a request for
                                      payment for the period April to June 1999. The original request
                                      totaled $30,672. PRDE adjusted the total amount requested and
                                      paid $50,392, resulting in a supposed overpayment of $19,720
                                      ($50,392 - $30,672). However, the correct total of the request
                                      should have been $26,222. As a result, PRDE overpaid the
                                      institution $24,170 ($50,392 - $26,222). On July 1, 1999, the
                                      institution submitted another request for payment for the same period
                                      mentioned above (April to June 1999). Although PRDE claimed
                                      that it adjusted the previous overpayment and paid only $5,070, we
                                      determined that the payment was not properly issued because
                                      PRDE had already paid the institution for the same period. As a
                                      result, PRDE overpaid the institution $29,240 ($24,170 + $5,070),
                                      the amount that should be refunded to ED. We added
                                      recommendation 4.3 to address the corrective actions PRDE stated
                                      would be taken.
PRDE needs major improvements in its
administration of the Even Start Program - Final          Page 17                     ACN: ED-OIG/A01-90006



Other Matters                          Because PRDE’s Single Audit reports have been historically late,
                                       ED lacks the appropriate information to adequately monitor PRDE’s
                                       administration of ED funds. The reports submitted have contained
                                       repeated findings, including similar cash management problems
                                       disclosed in this report, which have yet to be corrected. During our
                                       review, we examined PRDE’s Single Audit reports for the years
                                       ended June 30, 1996, and June 30, 1997. The 1997 report, which
                                       should have been submitted by the end of July 1998, was submitted
                                       in February 2000. The 1998 Single Audit report should have been
                                       submitted in September of 1999 and the June 30, 1999 Single Audit
                                       report should have been submitted in March 2000. As of June 13,
                                       2000, neither the 1998 nor the 1999 reports have been submitted.
PRDE needs major improvements in its
administration of the Even Start Program - Final           Page 18                    ACN: ED-OIG/A01-90006



Background                             The Even Start Program, which started in 1989, supports family-
                                       centered educational programs for parents and children from birth
                                       through age seven; helps parents become full partners in the education
                                       of their children; and helps children reach their full potential as
                                       learners. Its goal is to demonstrate that comprehensive programs of
                                       two-generation literacy, parenting, and early childhood education can
                                       improve educational opportunities and life chances of disadvantaged
                                       families in local communities throughout the United States.

                                       The U.S. Department of Education awards formula grants to state
                                       education agencies (SEAs) that, in turn, make competitive
                                       discretionary grants to partnerships of local education agencies
                                       (LEAs) and community-based organizations for Even Start projects.
                                       PRDE, which acts as both the SEA and the LEA for the island,
                                       administers the Even Start projects. Because it is both SEA and
                                       LEA, PRDE distributes Even Start program funds directly to its
                                       subrecipient partners that are private and public institutions.

                                       During award year 1998/1999, a total of 24 institutions, (13 private
                                       and 11 public) participated in the Even Start program. PRDE
                                       assigned $3,716,110 to the private and public institutions for the
                                       1998/1999-award year.

Audit objectives                       The purpose of our audit was to determine whether PRDE properly
                                       administered Even Start funds. Specific objectives included the
                                       following:

                                       §   Determine if PRDE has adequate controls to request Even Start
                                           funds from ED and distribute the funds to subrecipients;

                                       §   Determine if PRDE has a system to monitor subrecipients;

                                       §   Determine if PRDE has adequate controls for administering
                                           contracts for Even Start funds; and

                                       §   Determine the flow of the federal funds from ED to PRDE
                                           through to the subrecipients.

Methodology & scope                    To achieve the audit objectives, we reviewed PRDE’s most recent
                                       Single Audit Reports (Fiscal Year 1996 and 1997), the Fiscal Year
                                       1997 independent evaluation of PRDE’s monitoring of subrecipients,
PRDE needs major improvements in its
administration of the Even Start Program - Final            Page 19                      ACN: ED-OIG/A01-90006


                                       policies and procedures for awarding Even Start funds to
                                       subrecipients, and the funds assigned by PRDE to the subrecipients.

                                       We interviewed officials from PRDE’s External Resources office,
                                       Finance Division, and officials from the Puerto Rico Comptroller’s
                                       Office, Puerto Rico Government Development Bank, and Puerto
                                       Rico Treasury Department regarding PRDE’s administration of
                                       Federal funds.

                                       In addition, we made site visits to six institutions, four private and two
                                       public. We made site visits to private institutions on September 14,
                                       1999, September 16, 1999 and November 12, 1999. We made site
                                       visits to two public institutions on January 18, 2000.

                                       Lastly, we traced all 14 PRDE draws of Even Start funds during the
                                       period January 28, 1999 through September 2, 1999 to follow the
                                       funds from ED to PRDE through to the subrecipients; and traced the
                                       flow of funds to 13 private institutions during the period October 1,
                                       1998 through September 2, 1999. To fully develop issues discussed
                                       in this report, we followed Even Start funds through January 15,
                                       2000.

         Data reliability              We did not use electronic data provided by PRDE for this audit.
         assessment                    With the exception of GAPS information, we did not rely on
                                       electronic data provided by the U.S. Department of Education. To
                                       verify the accuracy of the GAPS data, we traced the funds drawn, as
                                       reported in GAPS, from ED to PRDE’s source documentation.
                                       Based on our tests, we conclude the data was sufficiently reliable to
                                       meet the audit objectives.

         Audit period                  The period of our audit was from May 1, 1998 to September 2,
                                       1999. Updated data as of January 15, 2000 was incorporated into
                                       the findings presented. We performed our fieldwork at PRDE’s
                                       offices in Hato Rey, Puerto Rico from June 28, 1999 through
                                       February 29, 2000. We determined the status of the 1998 and 1999
                                       Single Audit reports on June 13, 2000. In addition, we made site
                                       visits to six institutions that participate in the Even Start program, as
                                       detailed above.

                                       Our audit was conducted in accordance with government auditing
                                       standards appropriate to the limited scope of the audit described
                                       above.
PRDE needs major improvements in its
administration of the Even Start Program - Final             Page 20                        ACN: ED-OIG/A01-90006



Management controls                    As part of our audit, we made an assessment of PRDE’s management
                                       control structure, policies, procedures, and practices applicable to the
                                       audit scope. The purpose of our assessment was to determine the
                                       level of control risk; that is, the risk that material errors, irregularities,
                                       or illegal acts may occur.

                                       We identified and classified the significant management controls into
                                       the following categories:

                                       §   Contracts
                                       §   Cash management

         Material weaknesses           Because of inherent limitations, a study and evaluation made for the
                                       limited purpose described above would not necessarily disclose all
                                       material weaknesses in the control structure. However, our
                                       assessment disclosed weaknesses specifically related to the contracts
                                       and cash management. These weaknesses are discussed in the body
                                       of this report.
                                       REPORT DISTRIBUTION LIST

                                                                                                                  No. of copies

Auditee........................................................................................................................1

Action Official..............................................................................................................1
Michael P. Cohen
Assistant Secretary for Elementary and Secondary Education

Other ED Offices
Assistant Secretary for Intergovernmental and Interagency Affairs .................................1

Compensatory Education Programs, Office of Elementary and
  Secondary Education ...............................................................................................1

Supervisor Post Audit Group, Office of the Chief Financial Officer................................1

Office of Public Affairs.................................................................................................1

ED-OIG
Inspector General.........................................................................................................1

Deputy Inspector General.............................................................................................1

Assistant Inspector General for Investigations ...............................................................1

Assistant Inspector General for Audit (A) .....................................................................1

Deputy Assistance Inspector General for Audit (A).......................................................1

Planning, Analysis, and Management Services ..............................................................1

Audit Services..............................................................................................................1

Director, State and Local Assistance Advisory & Assistance Team...............................1

Area Managers ...........................................................................................................6
                                                                                       EXHIBIT A
                                                                 SUMMARY REPORT EVEN START FUNDING - PRIVATE INSTITUTIONS
                                                                        FROM JANUARY 28, 1999 TO SEPTEMBER 2, 1999
                                                                            UPDATED THROUGH JANUARY 15, 2000


INSTITUTION             AMOUNT        DATE       PAYMENT     INVOICE       PERIOD            CHECK          BALANCE      DATE       EXCESS DAYS    EXCESS DAYS
                    REQUESTED         FUNDS      VOUCHER     AMOUNT        COVERED       AMOUNT                          CHECK      FUNDS HELD     FUNDS HELD
                                      WERE        DATE                                                                    WAS       BEFORE BEING   BEFORE BEING
                                    REQUESTED                                                                            CASHED      DISBURSED      DISBURSED
                                                                                                                                     THROUGH        THROUGH
                                                                                                                                       9/2/99        1/15/00
FUNDS
REQUESTED
AS NEEDED:
        1           $     127,058     6/10/99                                                           $      127,058                   15
                                                   6/4/99    $    39,411   10/98-12/98
                                                             $    41,670    1/99-3/99
                                                             $    45,977    4/99-6/99    $    127,058   $          -     6/29/99         0


        2           $         -          -           -       $       -          -        $        -     $          -        -            0


        3           $         -          -           -       $       -          -        $        -     $          -        -            0


        4           $      89,247      4/15/99                                                          $       89,247                   21
                                                  4/15/99    $    25,513   10/98-12/98
                                                             $     8,485     Jan-99
                                                             $     8,543     Feb-99
                                                             $    46,706    3/99-5/99    $     89,247   $          -     5/11/99         0


        5           $         -          -           -       $       -          -        $        -     $          -        -            0


        6           $         -          -           -       $       -          -        $        -     $          -        -            0


        7           $     109,093     7/13/99     6/24/99                                               $      109,093                   18
                                                             $    34,101   10/98-12/98
                                                             $    24,600    1/99-3/99
                                                             $    50,392    4/99-6/99    $    109,093   $          -      8/2/99         0


SUB TOTAL
(FUNDS
REQUESTED
AS NEEDED)          $     325,398                                                        $    325,398   $          -




CONTRACTS
REQUESTED
IN ADVANCE:
        8           $     190,000     2/23/99                                                           $      190,000                   55
                                                  3/17/99    $    44,105   10/98-12/98
                                                             $    44,444    1/99-3/99    $     88,549   $      101,451   4/21/99         75
                                                  4/26/99    $    52,269    4/99-6/99    $     52,269   $       49,182   5/11/99        183
              (1)                                 8/11/99    $    49,101    7/99-9/99    $     48,989   $          193   8/27/99        204
                                                   9/3/99    $      193      9/1/99      $       193    $          -     9/17/99         0


        9           $     135,000     3/4/99      3/17/99                                               $      135,000                   48
                                                             $     5,583     Oct-98
                                                             $     4,858     Nov-98
                                                             $     5,621     Dec-98
              (2)                                            $     7,123     Jan-99      $     25,185   $      109,815   4/23/99        101
                                                             $     7,434     Feb-99      $      7,434   $      102,381   6/17/99        178
                                                   9/7/99    $    10,655     Mar-99
                                                             $    14,729     Apr-99
                                                             $    12,308     May-99
                                                             $    15,259     Jun-99      $     52,951   $       49,430    9/22/99                      277
                                                  11/30/99   $    11,100     Jul-99      $     11,100   $       38,330   12/10/99                      313


     10             $     100,000     5/10/99                                                           $      100,000                   37
                                                   6/3/99    $    45,430   10/98-12/98
                                                             $    42,415    1/99-3/99
                                                             $    12,155    4/99-6/99    $    100,000   $          -     6/18/99         0


     11             $     100,000     2/23/99                                                           $      100,000                   55
                                                  3/10/99    $    16,701   10/98-12/98
                                                             $    34,048    2/99-4/99    $     50,749   $       49,251   4/21/99        189
                                                   8/3/99    $    22,872    5/99-7/99    $     22,872   $       26,379    9/8/99                       278
                                                  11/3/99    $    26,130    8/99-9/99    $     26,130   $          249   11/30/99                      324
                                                                                 EXHIBIT A
                                                           SUMMARY REPORT EVEN START FUNDING - PRIVATE INSTITUTIONS
                                                                  FROM JANUARY 28, 1999 TO SEPTEMBER 2, 1999
                                                                      UPDATED THROUGH JANUARY 15, 2000


INSTITUTION       AMOUNT         DATE      PAYMENT     INVOICE       PERIOD           CHECK          BALANCE      DATE       EXCESS DAYS    EXCESS DAYS
              REQUESTED          FUNDS     VOUCHER     AMOUNT        COVERED      AMOUNT                          CHECK      FUNDS HELD     FUNDS HELD
                                 WERE       DATE                                                                   WAS       BEFORE BEING   BEFORE BEING
                               REQUESTED                                                                          CASHED      DISBURSED      DISBURSED
                                                                                                                              THROUGH        THROUGH
                                                                                                                                9/2/99        1/15/00


     12       $     149,210      2/23/99                                                         $      149,210                  104
                                            2/19/99    $     7,624    Oct-98
                                                       $     8,018    Nov-98
                                                       $     6,852    Dec-98
                                                       $     6,607    Jan-99      $     29,101   $      120,109    6/9/99        153
                                            6/21/99    $     8,084    Feb-99
                                                       $     8,459    Mar-99
                                                       $     9,781    Apr-99
                                                       $    36,116   5/99-7/99    $     62,440   $       57,669   7/28/99        189
                                            10/5/99    $     3,243     Jul-99
                                                       $    42,546   8/99-9/99    $     45,789   $       11,880   11/29/99                      324


     13       $      75,000      1/28/99                                                         $       75,000       -                         316
                                            11/30/99   $     6,279   10/98-3/99   $      6,279   $       68,721   12/13/99                      348


SUB TOTAL
(CONTRACTS
REQUESTED
IN ADVANCE)   $     749,210                                                       $    630,030   $      119,180


TOTAL         $    1,074,608                                                      $    955,428   $      119,180
                                 EXHIBIT B
                      EVEN START FUNDS NOT SUPPORTED

                                                                  EXCESS
                                                                    DAYS
                                                     DATE          FUNDS
        DATE        TOTAL                           AFTER 3         HELD
         OF        AMOUNT            AMOUNT         WORKING      THROUGH
        DRAW      REQUESTED       NOT EVIDENCED      DAYS      January 15, 2000


 1      1/28/99   $     80,000    $         5,000    2/2/99          348
 2      2/23/99   $    500,000    $        60,790    2/26/99         324
 3       3/4/99   $    200,000    $        65,000    3/9/99          313
 4       4/9/99   $    110,000    $             -                     0
 5      4/22/99   $     81,500    $        12,506    4/27/99         264
 6      4/28/99   $     95,514    $           408    5/3/99          258
 7      5/25/99   $    110,000    $           237    5/28/99         233
 8      6/10/99   $    165,000    $         3,837    6/15/99         215
 9      6/28/00   $     80,000    $             -                     0
10      6/30/99   $    175,000    $         2,436    7/6/99          194
11      7/13/99   $     65,000    $         1,851    7/16/99         184
12       8/2/99   $     38,000    $             -                     0
13      8/24/00   $     30,000    $             -                     0
14       9/2/99   $    132,000    $             -                     0

     TOTAL        $   1,862,014   $       152,065