oversight

The Virgin Islands Is at Risk of Not Meeting the Goals of the September 2002 Compliance Agreement

Published by the Department of Education, Office of Inspector General on 2005-02-15.

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

  The Virgin Islands Is at Risk of Not Meeting the Goals
     of the September 2002 Compliance Agreement




                             FINAL AUDIT REPORT 





                         Control Number ED-OIG/A02-D0028 

                                   February 2005 





                                                     U.S. Department of Education
Our mission is to promote the efficiency,            Office of Inspector General
effectiveness, and integrity of the                  New York Audit Region
Department’s programs and operations.                Boston Area Office
                                                     Puerto Rico Area Office
                                                     Virgin Islands Area Office
                              NOTICE 


Statements that management practices need improvement, as well as
other conclusions and recommendations in this report, represent the
opinions of the Office of Inspector General. Determination of corrective
action to be taken will be made by the appropriate Department of
Education officials.

In accordance with the Freedom of 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.
                         U.S. DEPARTMENT OF EDUCATION
                                     OFFICE OF INSPECTOR GENERAL




                                                February 15, 2005

Juel Molloy, Chief of Staff
Office of the Governor
No. 21 Kongens Gade
Charlotte Amalie
St. Thomas, Virgin Islands 00802

Dear Ms. Molloy:

Enclosed is our final audit report, Control Number ED-OIG/A02-D0028, entitled The
Virgin Islands Is at Risk of Not Meeting the Goals of the September 2002 Compliance
Agreement. This report incorporates the comments you provided in response to the draft
report. If you have any additional comments or information that you believe may have a
bearing on the resolution of this audit, you should send them directly to the following
Education Department official, who will consider them before taking final Departmental
action on this audit:

                                      Jack Martin
                                      Chief Financial Officer
                                      Office of the Chief Financial Officer
                                      U.S. Department of Education
                                      400 Maryland Avenue, S.W.
                                      Washington, D.C. 20202

It is the policy of the U. S. Department of Education to expedite the resolution of audits
by initiating timely action on the findings and recommendations contained therein.
Therefore, receipt of your comments within 30 days would be appreciated.

In accordance with the Freedom of Information Act (5 U.S.C. §552), reports issued by
the Office of Inspector General are available to members of the press and general public
to the extent information contained therein is not subject to exemptions in the Act.

                                                Sincerely,

                                                     s/s

                                                Helen Lew
                                                Assistant Inspector General for Audit Services
Enclosure



 Our mission is to promote the efficiency, effectiveness, and integrity of the Department’s programs and operations.
                                    TABLE OF CONTENTS 



                                                                                                      Page 

EXECUTIVE SUMMARY ............................................................................…………..……….1


BACKGROUND ….…………………………………………………………………………. ....2


AUDIT RESULTS 


Finding 1               Program Planning, Design, and Evaluation - VIDE and VI did not fully 

                        complete three of the four major action steps …………..……...….……...6 


                        Recommendations …………………………………………….…………..8                                              

                        VI Comments ……………………………………..………….…….……..8                                              


Finding 2               Financial Management - VIDE and VI did not complete 

                        six of the ten major action steps ………………………..………….……...9 


                        Recommendations …………………….………………………………....12                                            

                        VI Comment ……….……………………………..…….……..…………12                                              

                        OIG Response ………………………………………………….…….…..13                                               


Finding 3               Human Capital - VIDE has made significant strides by 

                        completing four of the nine major action steps ……………..……….…..15 


                        Recommendations .…………………………………………….………...16                                            

                        VI Comments ..…………………………………..………….………..….17                                            


Finding 4               Property Management and Procurement - VIDE and VI 

                        did not complete the five major action steps ……………………………18 


                        Recommendations ………….…………………………………………... 20                                            

                        VI Comments ...….…………………………………..………….……… 21                                            

                        OIG Response ………………………………………………………….. 21                                               


OBJECTIVE, SCOPE, AND METHODOLOGY ...…….…………………….….………… 22 


ATTACHMENT A: Detail for Finding 1 


ATTACHMENT B: Detail for Finding 2 


ATTACHMENT C: Detail for Finding 3 





                                                     i
ATTACHMENT D: Detail for Finding 4

EXHIBIT A: Proposed Summary Reconciliation Spreadsheet

ATTACHMENT E: VI’s Partial Response to the Draft Report




                                        ii
                              ACRONYMS 


CIMS    Comprehensive Information            VIDE    Virgin Islands Department of
        Management for Schools                       Education


ED      U.S. Department of                   VIDF    Virgin Islands Department of
        Education                                    Finance


FMS     Virgin Islands Financial             VIDH    Virgin Islands Department of
        Management System                            Health


FY      Fiscal Year                          VIDP    Virgin Islands Department of
                                                     Personnel

GAPS    Grant Administration and
        Payment System                       VIDPP   Virgin Islands Department of
                                                     Property and Procurement

LPA     Learning Point Associates
                                             VIOMB   Virgin Islands Office of
                                                     Management and Budget
MOA     Memorandum of Agreement


NCLB    No Child Left Behind Act of
        2001


NOPA    Notice of Personnel Actions


OIG     Office of Inspector General


OSERS   Office of Special Education
        and Rehabilitative Services


UVI     University of Virgin Islands


VI      U.S. Virgin Islands




                                       iii
Audit of VI’s Progress in Meeting the
Compliance Agreement – Final Report                                      ED-OIG/A02-D0028


                              EXECUTIVE SUMMARY 

As a result of serious and recurring deficiencies in the administration of various Federally
funded programs by the government of the U.S. Virgin Islands (VI), the U.S. Department
of Education (ED) entered into a comprehensive, three-year Compliance Agreement
(Agreement) with the VI. Through the Agreement, signed on September 23, 2002, the
VI, with assistance from ED, agreed to develop integrated and systemic solutions to
problems in managing Federal education funds and programs. The Agreement addressed
four crosscutting issues: (1) Program Planning, Design, and Evaluation; (2) Financial
Management; (3) Human Capital; and (4) Property Management and Procurement.

The objective of this audit was to evaluate the VI’s progress in meeting the Agreement’s
Year One goals and assess the likelihood of the VI being on target to meet the goals for
Years Two and Three. Although the Virgin Islands Department of Education (VIDE) and
the VI government made some progress, only 9 of 28 Year One major action steps have
been completed. As a result, they are not on target to meet the goals for Years Two and
Three for three of the four issue areas: Program Planning, Design, and Evaluation;
Financial Management; and Property Management and Procurement. The VI is making
progress toward meeting the goals for Years Two and Three for the Human Capital issue
area, but to meet these goals, it still has to complete five Year One major action steps.

We summarized the results of our audit into four findings in the Audit Results section of
this report. We included detailed information accompanying each of the findings in
Attachments A through D.

In its response to the draft report, VI and VIDE concurred with Findings 1 and 3, partially
concurred with Finding 2, and did not concur with Finding 4. VI and VIDE also
disagreed with recommendations 2.1, 4.5, 4.6, and 4.7. VI and VIDE have agreed to
implement, have implemented, or are in the process of implementing the remaining
recommendations. A portion of VI’s written response to the draft report has been
included as Attachment E to this report. Because of the voluminous number of VI’s
exhibits included in its response, we have not included them in Attachment E. Copies of
VI’s exhibits are available on request. We summarized VI’s responses at the end of the
respective findings. We also made changes to reflect comments to the draft report
provided by officials of the U. S. Department of Education.
Audit of VI’s Progress in Meeting the
Compliance Agreement – Final Report                                                 ED-OIG/A02-D0028


                                         BACKGROUND 

VIDE has had serious and recurring deficiencies in its administration of Federally funded
programs. As a result, ED’s Office of Special Education and Rehabilitative Services
(OSERS) designated VIDE a “high-risk grantee” and imposed special conditions on its
Fiscal Year (FY) 1998 Special Education grant award. When VIDE did not demonstrate
significant progress, OSERS proposed to VIDE a voluntary compliance agreement.
Signed on December 12, 1999, the compliance agreement was a means of ensuring a
continued flow of Special Education funds while VIDE implemented a structured plan to
come into full compliance with the statute.

Subsequent audit work by the U.S. Department of Education Office of Inspector General
(ED-OIG) and on-site visits by ED program staff (from the Office of Elementary and
Secondary Education, Office of Vocational and Adult Education, and OSERS) made
clear that large-scale fiscal accountability and programmatic problems that have existed
for a number of years continue to exist. Serious deficiencies were found in many key
aspects of procurement, program planning and implementation, financial and property
management, including the lack of appropriate record keeping, and proper fiscal
reconciliations.

ED-OIG has issued several audit reports relating to VIDE's use of Federal funds. The
first report noted weaknesses in management controls over payroll processing and check
distribution in the Special Education program.1 The second cited inadequate
management controls in administering salary costs for the Special Education program.2
Next were two reports issued during 2003 that cited VIDE's lack of controls over
equipment inventories on St. Thomas/St. John and St. Croix.3 A cash management
report was issued in September 2003 that detailed problems with lapsed funds and
improper expenditures.4 Audits performed by the U.S. Department of Interior Inspector
General and KPMG LLP5 have also revealed a serious lack of management controls and
fiscal accountability.

ED has worked closely with VIDE and with other VI agencies to address these major
issues. When it became clear that the VI could not correct the problems immediately, ED
entered into a comprehensive, three-year Compliance Agreement with the VI. Through

1
    ED-OIG A04-B0013, Audit of the Virgin Islands Department of Education, Special Education Payroll.
2
 ED-OIG A04-A0015, The Virgin Islands Government Lacks Adequate Management Controls Over the
Administration of Its IDEA, Part B Grant Program Salary Cost.
3
 ED-OIG A02-C0011, The Virgin Islands Department of Education - St. Thomas/St. John School District's
Control of Equipment Inventory, and ED-OIG A02-C0019, The Virgin Islands Department of Education -
St. Croix School District's Control of Equipment Inventory.
4
 ED-OIG A02-C0012, The Virgin Islands Department of Education Did Not Effectively Manage its
Federal Funds.
5
    KPMG LLP is the independent auditor who performed the Single Audits for the Virgin Islands.


                                                     2

Audit of VI’s Progress in Meeting the
Compliance Agreement – Final Report                                     ED-OIG/A02-D0028

the Agreement, signed on September 23, 2002, the VI, with assistance from ED, agreed
to develop integrated and systemic solutions to problems in managing Federal education
funds and programs. The Agreement also is intended to ensure an effective planning and
evaluation process throughout VI programs and initiatives. The Agreement addresses
four crosscutting issues as cited earlier. The four crosscutting issues contain sub-issues
that include action steps. (See Table A below.) VI has set up an Agreement Internet
website, www.vica.gov.vi, for posting deliverables and updates of the Agreement.


                               Table A. Major Action Steps

                                             Major
 Step                                        Action
 Count Sub-Issues                            Steps Action Step Description
       ISSUE 1 – Program Planning, Design, and Evaluation
 1      1.1 – Separation of State and Local    1
        Educational Agencies                        Develop a Comprehensive, School-
 2                                             2    Based, Statewide Plan
 3                                             3
 4                                             4    Prepare Certifications of Allowable
                                                    Expenses
                            Issue 1 Subtotal   4
       ISSUE 2 – Financial Management
 5      2.1 – Credible Financial               1    Provide GAPS Access
        Management System
 6                                             2    Develop a Vision Document and an
 7                                             3    Implementation Plan for a Credible
                                                    Central Financial Management
                                                    System (FMS)
 8                                             4    Prepare Semi-Annual
                                                    Reconciliations
 9      2.2 – Indirect Costs                   1    Develop Unused Leave Policy
 10                                            2    Determine and Correct Indirect
                                                    Cost Rate
 11                                            3    Implement Indirect Cost Rate
                                                    Automatic Application
 12     2.3 – Obligation of                    1    Minimize Lapsed Funds and Re-
        Funds/Disbursement of Obligation            Engineer Grant Process (refer to
                                                    step 3)
 13                                            2    List Past Problems
 14                                            3    Minimize Lapsed Funds and Re-
                                                    Engineer Grant Process (refer to
                                                    step 1)
                            Issue 2 Subtotal  10




                                            3

Audit of VI’s Progress in Meeting the
Compliance Agreement – Final Report                                      ED-OIG/A02-D0028

                                                  Major
 Step                                             Action
 Count    Sub-Issues                              Steps Action Step Description
         ISSUE 3 – Human Capital
 15       3.1 – Recruiting and Hiring               1     Develop Policies and Procedures
                                                          for Class Coverage
 16                                                 2     Determine Percentage of Classes
                                                          Conducted by Highly Qualified
                                                          Teachers
 17                                                 3     Increase Recruitment of Specialized
                                                          Personnel
 18                                                 4     Determine Number of Qualified
                                                          Teachers Needed
 19                                                 5     Set Goals for Employing Qualified
                                                          Teachers
 20                                                 6     Improve Hiring Process
 21                                                 7     Expedite the Teacher Certification
                                                          Process
 22       3.2 – Inadequate Time Accounting          1     Develop a Plan for Time and
                   and Supplanting                        Attendance Accounting and
                                                          Supplanting
 23                                                 2     Develop an Accurate List of
                                                          Employees
                            Issue 3 Subtotal   9
         ISSUE 4 – Property Management and Procurement
 24       4.1 – Property Management            1 Implement an Inventory System
 25                                            2 Develop an Inventory Policy and an
                                                 Implementation Plan of the
                                                 Inventory Management System
 26                                            3 Develop a Property Security Plan
 27       4.2 – Competitive Procurement        1 Develop a Procurement Policy
 28                                            2 Establish Competitive Procurement
                                                 Process
                            Issue 4 Subtotal   5
                         Total for All Issues 28


We used the Agreement as the criteria for our observations, which are summarized under
each heading. Of the 60 action steps in the Agreement, we reported on a total of 28 as
major action steps, based on each step’s impact on the goals of the Agreement. The
Agreement also includes three provisions in addition to meeting the action steps laid out
in the plan: (1) consequences of not meeting the terms and conditions of the Agreement,
(2) reporting requirements, and (3) updated plans, action steps, and timelines.




                                             4

Audit of VI’s Progress in Meeting the
Compliance Agreement – Final Report                                    ED-OIG/A02-D0028

The Agreement further requires regular progress reporting on all issues by the VI. The
VI and ED agreed to three performance measures that will be applied to each issue and
sub-issue in addition to other performance measures specifically applied throughout the
Agreement, as follows:

    1. 	 All plans, other documents, and reports are timely, complete, accurate, and
         address the requirements set forth in the Agreement.
    2. 	 All action steps are implemented within the timeframes set forth in the 

         Agreement. 

    3. 	 Implementation of actions steps demonstrates progress towards achieving the
         outcomes or performance measures set forth in this Agreement.




                                            5

Audit of VI’s Progress in Meeting the
Compliance Agreement – Final Report                                      ED-OIG/A02-D0028


                                   AUDIT RESULTS 



                                        FINDING 1
              PROGRAM PLANNING, DESIGN, AND EVALUATION

     VIDE and VI did not fully complete three of the four major action steps of the 

     Compliance Agreement’s Issue 1 - Program Planning, Design, and Evaluation.



VI and VIDE did not fully complete three of the four Year One major action steps for
Program Planning, Design, and Evaluation. Issue 1 contains one sub-issue: separation of
state and local educational agencies (Sub-Issue 1.1).

VI and VIDE did not complete the requirements for developing the comprehensive,
school-based, statewide action plan as required in the first three major action steps. For
the fourth major action step, VIDE completed and submitted the required certified
expenditure reports, but the amount certified on the reports did not coincide with the
corresponding amounts on the semi-annual reconciliations.

The stated purpose of the Agreement is to improve education for the students of the VI.
This means that the VI has to be prepared to meet the requirements of the No Child Left
Behind Act of 2001 (NCLB) by the end of the third year of the Agreement. Essential to
meeting this goal is the development and implementation of a comprehensive, school-
based, statewide plan and fiscal year 2003 consolidated grant application as outlined in
the Agreement. The school-based, statewide action plan must include action steps that
will show steady progress in meeting the requirements of ED grants with respect to
separate State/Local Educational Agency issues.

Sub-Issue 1.1 – Separation Of State And Local Educational Agencies

VI and VIDE did not complete the comprehensive, school-based, statewide action plan as
required by the first three steps of the Agreement, because of delays in ED approving the
drawdown of the FY 2001 Consolidated Grant, and delays in VIDE entering into
professional service agreements with both Learning Point Associates (LPA) and the
University of the Virgin Islands (UVI). Further, VIDE did not have a monitoring system
in place to ensure that the contractors made sufficient progress to meet the requirements
of the Agreement.

Delay in ED Approval for 2001 Consolidated Grant

The FY 2001 Consolidated Grant was not approved timely. According to VIDE officials,
ED did not provide VIDE with sufficient technical support and timely responses to VIDE
inquiries. ED officials stated that its approval was delayed by receiving unacceptable
applications that were not suitable for approval. Further, ED officials noted large-scale
fiscal accountability and programmatic problems during a site visit in February 2001. ED


                                             6

Audit of VI’s Progress in Meeting the
Compliance Agreement – Final Report                                                    ED-OIG/A02-D0028

officials also stated that while corrective actions were recommended and technical
assistance was provided, the problems continued to exist. ED did not release most of the
$15.6 million grant to VIDE until August and September 2003 because of these issues.
Therefore, VIDE did not have sufficient time to obligate6 the funds as this grant’s
obligation period ended on September 30, 2003, resulting in $95,883 in lapsed funds.

VIDE, as of November 9, 2004, had drawn only $4.7 of the $15.6 million grant. Prior to
April 20, 2004, the last date to draw funds was December 31, 2003.7 VIDE officials
indicated that they had received written approval to extend the draw period, but had been
unable to draw funds through GAPS. On April 20, 2004, ED extended the liquidation
period to June 30, 2005. VIDE then made over $1 million in draws, in May 2004. VIDE
must work with ED to ensure that the 2001 Consolidated Grant obligations are liquidated
within the extended liquidation period.

Due to the late approval of the 2001 grant, VIDE delayed entering into a contract with
LPA and two Memoranda of Agreement (MOA) with UVI to develop a comprehensive,
territory-wide plan based on the information derived from individual school and district
plans. Because any work to be performed by contractors or consultants was a year late in
starting, the related Year One goals were not met. The goals for Years Two and Three
call for the VI to implement the comprehensive, statewide plan and demonstrate that it is
achieving the required program goals. The delays in starting the projects unavoidably
will result in the Year Two goals not being met, and may impact the timeliness of Year
Three goals. In addition, VIDE and ED should monitor the progress of the contractors in
developing the comprehensive, statewide plan.

Lack of Progress in Professional Service Agreements

The Executive Summary of ED’s Site Visit Report noted that one of UVI’s MOAs
included a plan to subcontract with Brown University for professional support and
assistance and another included a provision to procure security services to safeguard the
VI public schools. However, we found no evidence that UVI subcontracted with Brown
University or how UVI was going to procure security services. Furthermore, per an
August 2004 discussion, UVI officials were unsure of the actions they were to take on the
MOAs and wanted assurance from ED that the MOAs were valid documents. ED
officials stated it had no responsibility or legal authority regarding the MOAs. Such
delays could further hamper VIDE’s efforts to meet the Agreement’s milestones.

Semi-Annual Expenditure Certifications


6
 We use the term “obligate” throughout the report for consistency. Please note that VIDE often encumbers
obligations as a means of ensuring that funds will be reserved for future expenses.
7
  Per 34 C.F.R. § 80.23(b), a grantee must liquidate all obligations incurred under the award not later than
90 days after the end of the funding period. The Federal agency may extend this deadline at the request of
the grantee.



                                                      7
Audit of VI’s Progress in Meeting the
Compliance Agreement – Final Report                                                  ED-OIG/A02-D0028

For the fourth major action step, VI is required to prepare and submit semi-annual
expenditure reports, which include certifications that all expenditures are for allowable
purposes in each of the three Agreement years. VIDE completed the required semi-
annual expenditure certifications, but the expenditure amounts certified did not always
coincide with the amounts reported on the semi-annual reconciliations due to the
ineffective use of GAPS.8 For the certifications to be a meaningful tool, the certification
periods and the reconciliation periods, along with the related amounts, should be the
same. It would allow management to compare the expenses being certified with the
reconciliations and have a clearer picture of the amount of funds that may be lapsing on a
given award.

For detailed information on this finding see Attachment A.

Recommendations

We recommend that ED require

1.1 	   VIDE to work more closely with ED to ensure that grant applications are
        approved in a timely manner.

1.2 	   VIDE to work with ED to assure that the 2001 grant obligations are liquidated
        within the extended liquidation period.

1.3 	   VIDE to monitor the progress of the contractors in developing the comprehensive,
        statewide plan, clarify how Brown University is going to provide support or
        assistance to UVI, and determine how security services are going to be procured.

1.4 	   VIDE to involve managers in the semi-annual certifications and reconciliations
        and to take steps to assure that the reported amounts correspond to each other.

VI and VIDE Comments

VI and VIDE concurred with the recommendations. Since the recommendations parallel
the requirements set out in the September 23, 2002 Compliance Agreement, VI and
VIDE indicated that they had taken or would take action to fulfill their obligations.




8
 See in Attachment B, the section entitled “Fourth Major Action Step in Sub-Issue 2.1” for additional
semi-annual reconciliation data.


                                                    8
Audit of VI’s Progress in Meeting the
Compliance Agreement – Final Report                                    ED-OIG/A02-D0028




                                        FINDING 2
                              FINANCIAL MANAGEMENT

    VIDE and VI did not complete six of the ten major action steps of the Compliance 

                    Agreement’s Issue 2 - Financial Management.



VI and VIDE did not complete six of the ten Year One major action steps for Financial
Management. Issue 2 contains three sub-issues: credible financial management (Sub-
Issue 2.1), indirect costs (Sub-Issue 2.2), and obligation of funds/disbursement of
obligation (Sub-Issue 2.3).

The Agreement stipulates that the VI develop a credible central FMS by September 23,
2005. In the Agreement, such a system is described as being capable of providing the
correct amount of funds, in the correct accounts, in a timely manner, all the time.
Further, through the terms of the Agreement, financial management systems will be
integrated with one another (i.e., across departments) and with other management
systems (including planning and evaluation, budget, human resource management, and
property and procurement). It is especially important for the purpose of the Agreement
that the VI’s FMS is effectively integrated with all management systems and procedures
in VIDE. As a critical factor for success, the VI must improve its cash management
function immediately. Since the lapsed funds issue persists as a major problem, VIDE
has failed to meet this goal.

Sub-Issue 2.1 – Credible Financial Management System

Sub-Issue 2.1 has four major action steps:
   ƒ provide the appropriate employees with access to ED’s GAPS system to monitor
       drawdowns,
   ƒ create a vision document of a credible central FMS based on an independent party
       performing a needs assessment for the financial management system,
   ƒ create a plan for the development and implementation of a credible FMS based on
       an independent party performing a needs assessment for the financial
       management system, and
   ƒ provide complete semi-annual reconciliations.

The VI completed the first action step by providing certain employees training and
appropriate access to ED’s GAPS system to monitor drawdowns. However, new users
have been given access without receiving the GAPS training. Until the new users receive
proper training, they cannot effectively use GAPS.

VI did not complete the second and third action steps of Sub-Issue 2.1. VI created a
vision document of a credible central FMS, but there is no evidence that an independent
party performed a needs assessment of the system. As a result, implementation of the



                                            9

Audit of VI’s Progress in Meeting the
Compliance Agreement – Final Report                                                    ED-OIG/A02-D0028

FMS is on hold and is not likely to be operational within the three-year Agreement
period.

VIDE completed the fourth action step of Sub-Issue 2.1 by performing semi-annual
reconciliations for the six month periods ending March 31, 2003 and September 30, 2003.
However, the reconciliations could be made more effective by using a modified set of
comparisons. Further, the dates of the GAPS balances did not always coincide with the
reconciliation dates, the explanations for the differences between GAPS, FMS, and
VIDE’s internal system were inadequate, and the status of expired grants with
outstanding differences was omitted in the reconciliations in the subsequent periods.
VIDE and VIDF would benefit from using a modified reconciliation summary schedule.

Important aspects of a modified reconciliation summary schedule include: 1) the
reconciliation summary should be provided to the program managers since these
managers are required by the Agreement to certify semi-annual expenditure reports for
their grants;9 and 2) the status of expired grants should be included for one reconciliation
period after the grant has expired. VIDE initially thought that such a reconciliation
would be confusing to the managers, but finally agreed that the managers need to have
the data to better manage their program funds. We also suggested that a note could be
inserted to explain that the expired grant would be removed from the next reconciliation.
VIDE and VIDF adopted the modifications for the March 31, 2004 reconciliation. (See
Exhibit A for the proposed reconciliation summary schedule.)

Sub-Issue 2.2 – Indirect Costs

Sub-Issue 2.2 has three major action steps:
   ƒ establish a cost policy for unused leave for separating employees,
   ƒ determine and correct the indirect cost rate, and
   ƒ implement the indirect cost rate automatic application.

The VI did not complete the first action step requirement to establish a cost policy for
unused leave for separating employees. As of October 2004, a proposed policy for
unused leave for separating employees, dated July 28, 2004, was posted on the VI’s
Agreement Internet website.

VIDE and VI did complete the second action step requirement for an indirect cost
application determination and correction. VIDE retroactively applied the pro rata indirect
cost rate to expenditures incurred from April 1, through September 30, 2003. The
manual calculation of $482,054 was submitted to VIDF for entry into the FMS. VIDE
has not submitted a budget to VIDF for these funds. The funds could not be spent before
VIDE submits a budget to VIDF for entry into the general ledger.

VI did not complete the third action step of Sub-Issue 2.2, requiring the implementation
of the indirect cost rate automatic application. There was no evidence of the automatic

9
    See in Attachment A, the section entitled “Fourth Major Action Step in Sub-Issue 1.1.”


                                                      10
Audit of VI’s Progress in Meeting the
Compliance Agreement – Final Report                                               ED-OIG/A02-D0028

application of the indirect cost rate to the appropriate base and the resulting entries into
the appropriate FMS account. ED may have complicated the indirect cost issue by
recommending, in its Site Visit Report, that the VI replace the current three-year, pre-
determined rate cycle with a fixed-with-carry-forward hybrid rate type. ED should allow
time for VI to become efficient with the simple three-year, pre-determined rate before
requiring the change to a more complex type of indirect cost rate.

Sub-Issue 2.3 – Obligation of Funds/Disbursement of Obligation

Sub-Issue 2.3 has three major action steps:
   ƒ minimize lapsed funds,
   ƒ create a list of where and why problems occurred in the program planning,
       obligation, and disbursement of VI’s education grants, and
   ƒ reengineer the grant application, planning, obligation, and disbursement process.

The VI did not complete the first and third action step requirements to minimize lapsed
funds and re-engineer the grant application process. The VI did not complete a system of
safeguards to minimize the lapsing of funds. Although the VI developed a plan to re-
engineer its grant application, planning, obligation, and disbursement functions, it has not
implemented those policies. As a result, the VI continued to experience lapsed funds
problems after the March 31, 2003, deadline stipulated in the Agreement. More than $5.1
million ($1.3 million plus $3.8 million as noted below) is likely to lapse since we last
reported on this issue.

In November 2003, we alerted ED to potential lapsed funds of $1.8 million in FY 2001
and 2002 Special Education funds. Despite the request for intervention, GAPS showed,
as of November 9, 2004, that over $1.3 million would lapse. Therefore, VIDE and the
Special Education10 program would benefit from entering into a contract with a third-
party fiduciary agent – similar to what is required of the Infants and Toddlers grant
program. Using a fiduciary agent will provide the VIDE and program officials with an
expedited payment process and more current financial data. This should start with the
next grant approved and funded by ED.

In addition to the $1.3 million in 2001 and 2002 Special Education lapsed fund balances,
an additional $3.8 million has potentially lapsed for the 2000 Special Education grant, the
2000 Consolidated grant, and other grants. This is caused by a lack of monitoring by ED
officials and by VIDE’s failure to ensure that funds are obligated and spent timely. ED
and VIDE must jointly monitor potential lapsed funds and take actions to assure that
funds do not revert to the U.S. Treasury.

For the second major action step, the Agreement requires the VI to provide ED an
analysis of VI’s education grants for the past fiscal year specifying where the problems
occurred in meeting the requirements in program planning, obligation, and disbursement,
and the reasons for the problems. The VI completed a listing of the problems it identified
10
 Special Education grants are usually single source grants administered by one VIDE program staff
member who could easily monitor the grant funds and third-party fiduciary.


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in the areas of planning, obligation, and disbursement, but it did not provide adequate
reasons for the problems.

For detailed information on this finding see Attachment B.

Recommendations

We recommend that ED require

2.1 	   VIDE and the Special Education program to use a third-party fiduciary, effective
        with the next grant approved and funded by ED, to ensure that funds are obligated
        and spent in a timely fashion.

2.2 	   VI to provide, in coordination with ED, GAPS training to new users before giving
        them access to the system.

2.3 	   VI to move forward in implementing a fully functional central FMS based on an
        independent party performing a needs assessment of the system.

2.4 	   VIDE to improve its cash management capabilities by:

        ƒ   Implementing the newly proposed reconciliation summary schedule when
            preparing the required reports, and reporting on all grants for one
            reconciliation period past the funds availability or expiration period.
        ƒ   Using the reconciliation schedule to manage the Federally funded programs
            and simultaneously reduce lapsed funds.
        ƒ   Assuring that the GAPS balances used on the reconciliation schedule coincide
            with the period of the reconciliation.
        ƒ   Assuring that program managers receive the reconciliations so they can be
            involved in fiscal monitoring.

2.5 	   VIDE to submit a budget(s) to VIDF so the indirect cost funds can be used.

2.6 	   VIDF to ensure that indirect cost computations are automatically computed within
        the FMS and posted to the appropriate accounts.

2.7 	   VI and VIDE to use a three-year, pre-determined indirect cost rate cycle rather
        than the fixed-with-carry-forward hybrid rate type until the system for capturing,
        budgeting, and spending indirect costs is fully functional.

VI and VIDE Comments

VI did not fully concur with Finding 2. VI and VIDE concurred with five out of seven
recommendations of this finding.




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VI did not fully concur with our Finding 2, Sub-Issue 2.1. VI stated it submitted a vision
document on March 2003, however, due to ED not approving the document until August
2003, it caused the vision document to be revised three times. VI further stated that
despite these delays it has made substantial progress in the execution of the credible
central FMS. The VI stated that one of the significant measures, to have a needs
assessment performed by an independent contractor, has begun.

VI did not fully concur with our Finding 2, Sub-Issue 2.2. The VI stated that it had
established a written policy regarding unused leave for separating employees from
federally funded positions dated August 24, 2004. The VI also stated, while there is no
requirement that the VI automatically compute indirect cost, VIOMB/VIDOF made a
decision to compute indirect cost manually to ensure accuracy before turning back on this
feature in FMS and to “[G]et it right first, or it will simply mean Garbage In Garbage
Out.”

VIDE did not concur with the recommendation 2.1, which requires it to use a third party
fiduciary effective with the next grant approved and funded by ED. VIDE stated that
based on the grant funds spent on the fiscal year 2003 (“Q”) grant and the fiscal year
2004 (“R”) grant it has been obligating and spending grant funds timely.

VIDF did not concur with the recommendation 2.6, which requires it to automatically
capture indirect cost within the FMS and post to appropriate accounts.

OIG Response

We considered VI’s response to Finding 2, Sub-Issue 2.1, but our position remains the
same. VI failed to provide documentary evidence supporting its contentions. While the
VI provided a vision document that was revised three times, during our audit, we found
no assurances that the vision document and the implementation plan were adequate to
accomplish the second and third major action steps outlined in the Agreement.

We considered VI’s response to Finding 2, Sub-Issue 2.2, and its related recommendation
2.6, but our position remains the same. Although the VI stated that it had established a
written policy regarding unused leave for separating employees from federally funded
positions dated August 24, 2004, it was not to be effective until October 1, 2004, well
after the conclusion of our field work. In addition, according to the Agreement this
policy should have been developed by September 30, 2002.

While there is no requirement for automatic computation of the indirect cost, VI should
compute and apply indirect cost in a timely manner. In addition, automatic computation
would eliminate the need for manual computation and expedite the posting to FMS.
Further, the VI failed to provide documentary evidence that it was continuing to manually
compute indirect costs for the current period or that the appropriate FMS account
contained the resulting entries.




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We considered VI’s response to recommendation 2.1 requiring a third party fiduciary
effective with the next grant approved and funded by ED, but our position remains the
same. VIDE requested and received an extension of the liquidation period for some of its
grants so that funds would not lapse. A third party fiduciary would better manage these
funds. Our audit indicated that when a third party fiduciary was utilized, grant funds
were spent timely and, therefore, there would not be a need for an extension of
liquidation periods.




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                                        FINDING 3
                                    HUMAN CAPITAL

 VIDE has made significant strides by completing four of the nine major action steps in
              the Compliance Agreement’s Issue 3 - Human Capital.


VIDE made significant strides in four of the nine Year One major action steps for Human
Capital. Issue 3 contains two Sub-Issues: recruiting and hiring (Sub-Issue 3.1) and
inadequate time accounting and supplanting (Sub-Issue 3.2). VIDE completed three of
the seven major action steps in Sub-Issue 3.1, and completed one of the two major action
steps in Sub-Issue 3.2.

The Agreement’s goals are to ensure (1) there is a highly qualified teacher in every
classroom to improve education in VI, and (2) teachers and related personnel can be
moved into the schools quickly and receive their first paycheck on a reasonable time
schedule. The main objectives of Sub-Issue 3.2 were to ensure that (1) the salaries of
employees who work under more than one Federal program are properly allocated among
those programs, in accordance with accurate time distribution records, and (2) Federal
funds are not paying for personnel that should be paid for by the State.

Sub-Issue 3.1 – Recruiting and Hiring

Sub-Issue 3.1 contains seven major action steps:
   ƒ develop policies and procedures for class coverage,
   ƒ determine the percentage of classes conducted by highly qualified teachers,
   ƒ increase recruitment of specialized personnel,
   ƒ determine the number of highly qualified teachers needed,
   ƒ set goals for employing qualified teachers,
   ƒ improve the hiring process, and
   ƒ expedite the teacher certification process.

VIDE completed three of the seven major action steps in Sub-Issue 3.1. Specifically,
VIDE completed action steps one, three, and six, and made significant strides in
categorizing teachers’ academic backgrounds and in trying to match schools’ needs with
teacher subject matter areas.

VI was to have determined the percentage of classes conducted by highly qualified
teachers as defined in the NCLB of 2001. VIDE did not complete this requirement.
While VIDE provided the number of highly qualified teachers, it did not address the
percentage of classes conducted by highly qualified teachers nor the determination of the
number of highly qualified teachers needed. In addition, the teacher qualification
documentation was inconsistent. The inconsistencies appeared to result from VIDE
trying to systematically categorize and classify its teachers and their qualifications, when
no database existed. Because VIDE had to expend a tremendous initial effort to create a


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teacher database and because the work was time consuming and tedious, this may have
resulted in some of the compiled data being inconsistent or conflicting.

VIDE did not complete the process to expedite the teacher certification process.
Although VIDE prepared a draft proposal of alternatives to certification under NCLB, as
of November 2003, it had not yet been approved by the VI Board of Education or the VI
Board of Vocational Education.11 Therefore, we could not determine whether VIDE will
be prepared to be in compliance with NCLB within the five years stipulated in the
Agreement.

Sub-Issue 3.2 – Inadequate Time Accounting and Supplanting

Sub-Issue 3.2 contains two major action steps:
   ƒ develop a plan for time and attendance accounting and supplanting, and
   ƒ develop an accurate list of employees.

VIDE completed the second major action step and made significant progress in meeting
the other for Sub-Issue 3.2. VIDE completed a list of all employees who would be
charging time to different cost centers. Although VIDE did not complete the first action
step, it made significant progress by creating a database system for the Notice of
Personnel Actions (NOPAs). Copies of NOPAs indicated the term of employment,
salary, start date, and funding source. However, the NOPAs were for a one-year
temporary term and would not allow personnel expenses to overlap grant years.

VIDE provided a list of all employees who would be charging time to different cost
centers (funding sources), which we subjectively tested. We found that the split charges
appeared to be in line with the Agreement’s requirements.

We did not assess whether supplanting occurred.

For detailed information on this finding see Attachment C.

Recommendations

We recommend that ED require

3.1 	      VIDE to ensure an accurate and complete teacher qualification and personnel
           database is developed and maintained, including expediting the teacher
           certification process.

3.2 	      VIDE, VIOMB, and VIDP to work to extend the period covered by NOPAs to
           two or more years.




11
     As of October 2004, there was no update available on the Agreement Internet website.


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VIDE Comments

VIDE concurred with the findings and recommendations and indicated implementation is
ongoing.




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                                        FINDING 4
                PROPERTY MANAGEMENT AND PROCUREMENT

       VIDE and VI did not complete the five major action steps of the Compliance 

            Agreement’s Issue 4 - Property Management and Procurement. 




The VI did not complete any of the five Year One major action steps for Property
Management and Procurement. Issue 4 contains two Sub-Issues: property management
(Sub-Issue 4.1) and competitive procurement (Sub-Issue 4.2).

The Agreement requires that, by December 30, 2004, an inventory policy and system will
be fully implemented (the WIN ASSETS software was suggested). The inventory policy
and system will include procedures to ensure all property purchased with Federal
program funds will be tagged, entered into a tracking system, and delivered to the
appropriate location within three calendar days of receipt. The inventory policy will
include an established procedure for replacement or payback of any items in the
inventory that cannot be located, consistent with Federal regulations.

VI was to complete all reasonable steps to secure equipment by June 30, 2003. In
addition, VI’s inventory policy and system will ensure that the VIDPP, VIDF, and VIDE
act as an integrated team on procurement issues. They will delineate between
responsibilities of individual departments (including at the local and State levels), ensure
efficiency and eliminate duplication of effort, and make provisions for emergency needs
to ensure students’ health and safety.

Sub-Issue 4.1 – Property Management

Sub-Issue 4.1 has three major action steps:
   ƒ implement a government-wide inventory system,
   ƒ develop an inventory policy and implementation plan of the inventory
       management system, and
   ƒ secure all property in warehouses, schools, and other locations from larcenous
       behavior or inappropriate or unauthorized use.

VI did not implement a government-wide inventory system. VIDPP stated that WIN
ASSETS II would be used instead of WIN ASSETS as the VI government-wide
inventory system. This was the first indication that a change in inventory software would
occur. Since the Agreement identifies the VIDPP with responsibility for many of the
inventory action steps, ED must ensure that the VI Government takes immediate action to
implement the WIN ASSETS II system so that all VI government agencies can use it by
the Agreement’s target date of December 30, 2004. Without the VI Government’s
constant monitoring of the implementation status, it is unlikely that WIN ASSETS II will
be put into practice within the time prescribed.


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While VI is trying to implement WIN ASSET II, VIDE St. Thomas is planning on using
the Comprehensive Information Management for Schools (CIMS) software to manage its
internal inventory and VIDE St. Croix Curriculum Center is still using its internally
created database system to manage the St. Croix inventory. By using CIMS, VIDE is at
odds with the concept of a government-wide inventory system envisioned in the
Agreement.

VI did not provide evidence that it had developed a final inventory policy and
implementation plan of the inventory management system by June 30, 2003. While
VIOMB had posted VIDE’s internal Procurement and Inventory Policy Manual on its
Internet website, VIDE indicated that it was only a draft.12 However, the manual needs
some clarification to ensure that necessary controls are understood and implemented.
Specifically, it does not include:
    • 	 a provision indicating at what stage of the purchasing cycle the items will be
        tagged,
    • 	 control numbering and numerical sequencing on the forms for transferring items
        between centers/schools, and
    • 	 a provision for notifying the Curriculum Center.13

VI did not complete all reasonable steps to secure equipment by June 30, 2003. The VI
planned to contract for a security risk analysis in order to complete all reasonable steps to
secure all property in warehouses, schools, and other locations. As noted in Finding 1,
VIDE signed two MOAs with UVI. Included as part of one MOA was $1.7 million for
security services to safeguard VI public schools. However, the MOA does not delineate
how UVI is going to procure the $1.7 million in security services. Further, per an August
2004 discussion, UVI officials were unsure of the actions they were to take on these
MOAs and wanted assurance from ED that the MOAs were valid documents. Since VI
has taken little action to initiate the security risk analysis, the physical security of the
schools has not been improved to the extent required by the Agreement. ED must ensure
that VI obtains a security risk analysis to accelerate the completion of all reasonable steps
to secure VI schools.

Sub-Issue 4.2 – Competitive Procurement

Sub-Issue 4.2 contains two major action steps:
   ƒ provide ED with a procurement policy and implementation plan of procurement
       management, and
   ƒ develop baseline measures of the procurement process.


12
  The manual provides guidance for VIDE’s internal property management and refers to the CIMS
software as the system to be used for its internal asset inventory.
13
  Both St. Thomas and St. Croix Curriculum Centers control the inventory receipt and distribution to
schools in the Virgin Islands.



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VI’s procurement policy is inadequate. VIDE still has problems in assuring that, once
requisitions are made, the goods are delivered and payments made within a reasonable
time. The VI was to have provided ED with a procurement policy and implementation
plan of the procurement management process by June 30, 2003. Based upon a limited
evaluation of 14 transactions, we found that it took VIDE from 81 to 173 days to obligate
purchases in FMS and make payment for the purchases. This did not include the time
that it took VIDE to internally generate and process a requisition and send it to VIDF,
which was still a paper process, adding to the time it takes to process equipment orders.
We did not test to determine whether vendors were paid within 30 days of invoice
receipt.

VI did not provide evidence that the revised steps to require three bids for each requested
item had been implemented. This was to be implemented by September 30, 2003. We
reviewed documentation requiring three bids for each item, including setting up a central
store for common supplies and procedures for emergency procurement under $10,000.
Our review showed that VI did not provide evidence that these procedures had been
implemented.

For detailed information on this finding see Attachment D.

Recommendations

We recommend that ED require

The VI Government to take immediate action to:

4.1 	   Implement the WIN ASSETS II system to account for government-wide
        inventory for use by all government departments.

4.2 	   Contract for a security analysis to complete all reasonable steps to secure all
        property in warehouses, schools, and other locations.

4.3 	   Work with VIDE to consolidate and/or eliminate multiple approval steps in the
        requisition and payment process.

4.4 	   Ensure that the process of obtaining three bids for each requested item is
        implemented.

VIDE to:

4.5 	   Determine whether to implement its CIMS or VI’s WIN ASSETS II inventory
        system.

4.6 	   Determine how to integrate the CIMS with the FMS, if CIMS is to be used.

4.7 	   Clarify and implement its Procurement and Inventory Policy Manual.


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VI and VIDE Comments

VI did not concur with Finding 4 and VIDE partially concurred with the related
recommendations 4.5, 4.6, and 4.7.

VI stated late revisions of the inventory policy was due to a misinterpretation of exactly
what was expected under the Agreement in this area, thereby missing the June 2003
deadline. In VI’s reply, it stated that all departments were required to submit purchasing
records to VIDPP for conversion to the WIN ASSETS system, inventory verification, and
reconciliation. VI also noted that WIN ASSETS II is an upgraded version of WIN
ASSETS. VI further stated the inventory has/has not been merged into the FMS Fixed
Asset Module, a subsystem of the current DILOG (FMS) suite. The information for the
fixed asset module test system was implemented October 2003, but the information was
not transferred to the live system until September 2004.

VIDPP stated it has a functional procurement process outlined in the procurement
manual. VIDPP provided documentation that it had requested feedback on its property
and procurement manual from ED twice and did not receive a response. Therefore, the
VI is proceeding under the assumption that its official policy and procedures manual
satisfies ED’s mandate and the Agreements requirements. VI stated that WIN ASSETS
II is the official VI inventory system and that the implementation of CIMS is not relevant.

OIG Response

We considered VI’s response to Finding 4, but our position remains the same. VI failed
to provide documentary evidence supporting the implementation of WIN ASSETS II, and
the revised inventory policy.

We considered VI’s response to recommendations 4.5, 4.6, and 4.7, but our position
remains the same. VI was contradictory in its response as to whether the fixed asset data
had been merged into the FMS system. While VI provided snapshots of fixed assets,
there is no assurance that the American Appraisal Associates Summary Appraisal Report
data has been incorporated into the VI’s FMS Fixed Asset Module.

VIDE did not provide documentary evidence that it had reverted to using the revised VI
government-wide inventory manual and, therefore, was not implementing CIMS as its
inventory management system.




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                         OBJECTIVE, SCOPE, AND METHODOLOGY 


The primary objective of our audit was to determine whether VIDE had met the Year
One milestones outlined in the September 23, 2002, Agreement, and the likelihood of
VIDE being on target for Years Two and Three. Our audit period covered September 23,
2002, through September 30, 2003, but we considered actions taken by the VI
Government through October 2004. Also, because ED made a team visit in November
2003, we referenced ED’s Site Visit Report14 as appropriate.

To achieve the audit objective, we reviewed the Agreement. We also reviewed
memoranda, manuals, policies and procedures, and other documents obtained from
VIDE, Virgin Islands Department of Finance (VIDF), Virgin Islands Office of
Management and Budget (VIOMB), Virgin Islands Department of Health (VIDH), Virgin
Islands Department of Property and Procurement (VIDPP), and the VI Compliance
Agreement Internet website. We interviewed officials from the above VI departments
and Virgin Islands Department of Personnel (VIDP). We reviewed ED’s Grant
Administration and Payment System (GAPS) data to determine the status of the grants
and available balances. We also extracted and analyzed encumbrance data from the
FMS.

Of the 60 action steps in the Agreement, we classified a total of 28 as major action steps
based on each action step’s impact on the goals of the Agreement.

We relied on the FMS data reliability assessments of computer-processed data made in
the audits of The Virgin Islands Department of Education - St. Thomas/St. John School
District’s Control of Equipment Inventory, ED-OIG A02-C0011, The Virgin Islands
Department of Education - St. Croix School District’s Control of Equipment Inventory,
ED-OIG A02-C0019, and The Virgin Islands Department of Education Did Not
Effectively Manage Its Federal Education Funds, ED-OIG A02-C0012, which indicated
that the data was consistent and reliable.

We conducted fieldwork at VIDE’s, VIDF’s, VIOMB’s, VIDP’s, and VIDPP’s offices in
St. Thomas, VI, from September 22 through September 30, 2003, and from November 11
through November 21, 2003. Follow up work was performed on October 12, 2004.

We conducted the audit in accordance with generally accepted government auditing
standards appropriate to the limited scope of the audit described above.




14
     This Site Visit Report was issued on January 5, 2004.




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                                      ATTACHMENT A 



                                  Detail For Finding 1


SUB-ISSUE 1.1 - SEPARATION OF STATE AND LOCAL EDUCATIONAL
AGENCIES

First Three Major Action Steps in Sub-Issue 1.1
Develop a Comprehensive, School-based, Statewide Plan

In an effort to fulfill this requirement, VIDE entered into arrangements with third parties
for the development of the plan. However, there is no evidence of further progress to
complete the plan.

VIDE did not fully complete the requirements of the first three major action steps
because of delays in 1) approval for the drawdown of the FY 2001 Consolidated Grant,15
and 2) VIDE entering into professional service contracts with LPA and UVI to help it
develop a comprehensive, school-based, statewide plan. Further, VIDE did not have a
monitoring system in place to ensure that the contractors make the progress required by
the Agreement.

Delay in ED Drawdown Approval

FY 2001 CONSOLIDATED GRANT

The VI used the FY 2001 Consolidated Grant funds, $15.6 million, to aid in satisfying the
Agreement’s requirements. On October 18, 2002,16 ED awarded VIDE $15,614,698 for
the FY 2001 Consolidated Grant. The grant period ended on September 30, 2002, but
with the Tydings Amendment extension, VIDE had until September 30, 2003, to obligate
the grant funds.17

It took an extended period before the 2001 Grant was totally approved for drawdown.
Consequently, ED did not release most of the $15.6 million grant to VIDE until August
and September 2003. The late approval of the FY 2001 Consolidated Grant drawdowns
not only prevented the action steps of the Agreement from being met, it also compounded
the lapsed funds issue discussed in Finding 2. ED officials stated that in accordance with

15
  Under the Special Conditions ED placed on this grant, VIDE could not draw down funds until it first
received approval from ED.
16
  ED approved this award on October 18, 2002, after the grant period ended. This issue will be addressed
in a separate report to ED.
17
  Under the “Tydings Amendment” Section 421(b) of the General Education Provisions Act, 20 U.S.C.
§ 1225(b), any funds not obligated and expended during the period for which they were awarded become
carryover funds and may be obligated and expended during the succeeding fiscal year.



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                                   ATTACHMENT A 


the Special Conditions, VIDE could only draw down funds after documentation was
provided to show that funds would be spent for allowable purposes. Under the
Agreement, VIDE was to resolve the lapsed funds problem by complying with Issue 2, in
that no lapses of funds will occur after March 31, 2003. Funds lapse when the legislative
deadline to obligate Federal grant awards has passed and funds remain that have not been
properly obligated.

ED made the 2001 Consolidated Grant funds available as follows:

    ƒ   May 9, 2003                       $453,499
    ƒ   August 7, 2003                    7,414,650
    ƒ   September 26, 2003                7,746,549
                                        $15,614,698

The late release of the final $7,746,549 in grant funds, in combination with time
constraints to obligate the grant funds by September 30, 2003, caused $95,883 to lapse.
Had the $95,883 from the 2001 Consolidated Grant funds been obligated during the grant
period, it could have been better used to serve the VI students.

FY 2002 AND FY 2003 CONSOLIDATED GRANTS

For the FY 2002 Consolidated Grant, as of November 9, 2004, VIDE has drawn down
$17.4 million of the $21.2 million awarded. As stated in ED’s Site Visit Report, before
VIDE can draw down the 2002 Consolidated Grant funds related to the Reading First
program, it has to submit a revised plan incorporating the Reading First program into the
2002 Grant. VIDE needed to obligate the remaining $6.5 million prior to September 30,
2004, to avoid additional lapsed funds.

VIDE provided ED with the FY 2003 Consolidated Grant application. VIDE had to
revise the 2003 Grant application to reflect the assessment conducted by LPA before ED
would approve it. ED approved the $16.8 million FY 2003 Consolidated Grant
application in July 2004. According to GAPS, the last day to draw the FY 2003 Grant
funds is January 3, 2006. If VIDE’s experience with the 2001 Consolidated Grant is an
indicator, VIDE again could have problems obligating the funds prior to the expiration of
the 2003 Grant obligation period. As of November 9, 2004, VIDE had drawn only
$398,083.

Lack of Progress In Professional Service Agreements

VIDE obligated the majority of the FY 2001 Consolidated Grant for professional service
agreements with LPA and UVI. On September 15, 2003, VIDE signed a $7,414,650
contract with LPA to develop a comprehensive, territory-wide plan based on information
derived from individual school and district plans. From the funds approved on
September 26, 2003, VIDE obligated $7,518,789 for two MOAs with the UVI. The
MOAs were signed on September 30, 2003.


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                                   ATTACHMENT A 



ED’s Site Visit Report pointed out that in the two UVI MOAs, $1.7 million of the total
$7,518,789 million was for security services to safeguard VI public schools. However,
the MOAs did not delineate how UVI is going to procure the $1.7 million in security
services. Per an August 2004 discussion, UVI officials were unsure of the actions they
were to take on these MOAs and wanted assurance from ED that the MOAs were valid
documents.

According to the MOA, UVI has the right to assign all or part of its responsibilities to a
subcontractor with approval from VIDE. The Executive Summary of ED’s Site Visit
Report noted that UVI planned to subcontract with Brown University for professional
support and assistance. However, we found no evidence that UVI planned to subcontract
with Brown University. A UVI official indicated to OIG that he was waiting for ED to
provide evidence of approval of the MOAs.

The lack of progress suggests that VIDE and ED need to establish a formal system to
monitor the LPA contract and the MOAs with UVI. The monitoring system would need
to include assurances that the contracted work is progressing and that funds are being
drawn to pay for the services so that VIDE will be able to meet the requirements of the
Agreement.




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                                   ATTACHMENT B 



                               Detail For Finding 2


SUB-ISSUE 2.1 - CREDIBLE FINANCIAL MANAGEMENT SYSTEM

The main goal of this Sub-Issue was to ensure, by the conclusion of the Agreement, VI
departments will no longer need separate accounting systems and that outside auditors
will be able to rely on the central FMS as an accurate system of record. From the
inception of this Agreement, all transactions for draws and disbursements, as well as any
required adjustments for Federal education program funds, will be timely and accurately
recorded in VIDF’s accounting system as they occur according to generally accepted
accounting standards. The inability to track drawn funds will be considered a failure to
meet the terms and conditions of this Agreement.

First Major Action Step in Sub-Issue 2.1
Provide GAPS Access to Appropriate Staff

The Agreement requires that within one month of the inception of the Agreement,
appropriate staff members will be provided access to ED’s GAPS system to monitor
drawdowns. We found that not all of the appropriate staff members were provided GAPS
access. ED provided the VI a certain number of GAPS user accounts and GAPS training
on December 3, 2002. The list of employees with GAPS access has changed many times
since the training was provided, therefore, the VI did not effectively determine who
should have access to GAPS. In addition, the VI did not provide any evidence that GAPS
training was provided to new GAPS users. Consequently, the new users are not using the
GAPS information effectively.

Without proper training, new users cannot effectively use GAPS. The discussion in the
Fourth Major Action Step in Sub-Issue 2.1, below, on the proposed reconciliation
summary illustrates how the GAPS users could be employing the information to limit
funds from lapsing and being returned to the U.S. Treasury.

Second and Third Major Action Steps in Sub-Issue 2.1
Develop a Vision Document of a Credible Central FMS and a Plan for the Development
and Implementation of a Credible Central FMS

VIDF was to have created a vision document of a credible central FMS and timelines for
implementing the FMS based on a needs assessment performed by an independent party
by December 31, 2002. The vision document would include a description of how a
creditable central FMS would serve as an accurate system of record for all VI
departments, a detailed diagram of each function of the system, and how it would
integrate with other related systems (such as VIDE’s CIMS). The needs assessment of
VIDF’s FMS has not been completed. Without the needs assessment there is no
assurance the vision document and the implementation plan are adequate to accomplish
the second and third major action steps outlined in the Agreement.


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In addition, the VI has made little progress in implementing its vision statement for a
sound FMS. ED’s Site Visit Report also noted functional requirements have not been
identified for the new credible central FMS and that some VI officials indicated that
additional funding is needed to undertake several of the initial tasks, including the FMS
needs assessment.

Further, ED’s Site Visit Report stated

         [T]hat no project management organization, nor leadership, is in place to guide
         and control IT [Information Technology] efforts across the VI, much less a new
         CFMS [credible central Financial Management System] project . . . “Stove-pipe”
         systems and organizations abound; each VI department has its own IT
         organization and leadership as well as financial management operations and, in
         some cases, systems. There appears to be more focus on parochial interests rather
         than on working collaboratively to identify the best solution(s) to address the
         overall problem(s) affecting VI information systems.

The timeline of the credible central FMS implementation plan has been revised three
times, with the completion dates in the plan delayed from 92 to 487 days. Since the FMS
development appears to be on hold, we do not believe that the VI will be able to meet its
three-year commitment to implement a fully functional central FMS.

VIDE is in the process of replacing its current internal departmental financial system with
CIMS. Currently, CIMS is not operational and VIDE provided no specific date as to
when it would be implemented. Since the implementation date for CIMS is not known,
there is little assurance that VIDF’s FMS and VIDE’s CIMS would be integrated as
described in the vision document. Since VIDF’s FMS contains the VI’s official financial
records, VIDF has been reluctant to support a new and independent internal system that
would be implemented by one of VI’s departments.18

Because the needs assessment of VIDF’s FMS is not completed and considerable delays
occurred in taking action to implement a fully functional central FMS, there is no
assurance that a fully functional FMS is likely to occur within the three-year Compliance
Agreement period.

Fourth Major Action Step in Sub-Issue 2.1
Prepare Semi-Annual Reconciliations

During the first year of the Agreement, the VI was required to conduct semi-annual
reconciliations between GAPS, VIDE, and VIDF of draws and expenditures, resolve any
differences, and record appropriate adjustments within 30 days. These reconciliations


18
  See in Attachment D, the section entitled “First Major Action Step in Sub-Issue 4.1” for additional
information on CIMS implementation by VIDE.



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must be provided on a semi-annual basis to ED for review with evidence that all
adjustments have been made.

As required, VIDE completed semi-annual reconciliations for the 6-month periods ending
March 31, 2003 and September 30, 2003. However, the reconciliations were inadequate.
The reconciliations only showed the differences in dollar amounts between GAPS,
VIDE’s internal records,19 and FMS. The reconciliations did not clearly show the
amounts of available funds for draw from GAPS, which are subject to lapse if not drawn.
Both VIDE and VIDH expired grants were removed from the reconciliation without
explanation. Further, the dates of GAPS balances did not always coincide with the
reconciliation dates, explanations of the differences were inadequate, and the status of
expired grants with outstanding differences was omitted on reconciliations for the
following periods.

During the week of January 20, 2004, we proposed to VIDE and VIDF a modified
reconciliation summary schedule that would offer more useful comparisons of grant data.
VIDE and VIDF agreed with the intent and adopted it for the reconciliation for the period
ending March 31, 2004. (See Exhibit A for the proposed schedule.)

SUB-ISSUE 2.2 - INDIRECT COSTS

VIDE and VI were to have all of the underlying problems with indirect costs eliminated
by FY 2004, so that audits and other monitoring procedures would have minimal findings
related to indirect rates in FY 2003 and no findings related to indirect rates in FYs 2004
and 2005. Also, by the conclusion of the Agreement, there should be 100 percent
application of the correct and current indirect cost rate in education programs.

First Major Action Step in Sub-Issue 2.2
Develop Unused Leave Policy for Separating Employees

VI was required to develop a cost policy for unused leave for separating employees by
September 30, 2002. VI did not complete a cost policy for unused leave for separating
employees as of April 2004. VI was in the process of developing the policy, but was
waiting for guidance from ED. ED officials indicated that they provided timely and
responsive technical assistance in this matter.

Second Major Action Step in Sub-Issue 2.2
Determine and Correct Indirect Cost Rate

According to the Agreement, VIDE and VI will determine and correct the rates as
necessary; and review the prior year indirect costs applied to grants and prepare


19
  Although FMS is VI’s main accounting system, individual VI departments usually maintain their own
internal accounting records.



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necessary adjustments. VIDE and VI completed the indirect cost application
determination and correction.
VI satisfied this requirement by reimbursing VIDE $482,054 of indirect costs and when
VIDF established an indirect cost account that VIDE could use to pay for future
expenses. As ED indicated in its Site Visit Report, VIDF fulfilled the promise to
reimburse VIDE the pro-rata share of indirect costs of $482,054, retroactively applied to
expenditures incurred from April 1 through September 30, 2003. We traced the $482,054
to VIDE’s indirect cost account in FMS. The cost ledger inquiry sheet revealed that a
budget in the amount of $482,054 in the expense account had been set up for
Departmental Indirect Costs. A separate account and budget was set up for central
services for the VI government. Prior to VIDE spending these funds, it must send a
budget to VIDF, where the budget will be entered into the general ledger.

Third Major Action Step in Sub-Issue 2.2
Implement Indirect Cost Rate Automatic Application

According to the Agreement, VI was required to implement the 2003-2005 indirect cost
rates that the U.S. Department of Interior and VI departments approved. VI did not
complete the implementation of the indirect cost rate automatic application. There was
no evidence of the automatic application of the indirect cost rate to the appropriate base
and the resulting entries into the appropriate FMS account.

In a September 26, 2003 letter to VIOMB, VIDF stated that it had established expense
accounts in FMS for Departmental Indirect Costs and Central Service Indirect Costs. The
initial indirect cost entry was done manually after VIDE calculated the indirect cost by
applying the indirect cost rate to the base of salaries and wages. Since the indirect costs
are not applied to FMS automatically, problems could arise with the computation and
allocation of the indirect cost within FMS.

SUB-ISSUE 2.3 - OBLIGATION OF FUNDS/DISBURSEMENT OF
OBLIGATION

VIDE and VI did not complete two of the three major action steps in Sub-Issue 2.3. By
the conclusion of the Agreement, VIDE and VI were to have the grant application,
planning, obligation, and disbursement functions fully integrated with the FMS; and
obligations liquidated on a timely basis without the need for an extension of the
liquidation period. Further, the VI would develop a grant application process and
subsequent spending process that ensured that grant awards were based on specified
program plans and spent on the programs in a timely manner.

First and Third Major Action Steps in Sub-Issue 2.3
Minimize Lapsed Funds and Re-engineer Grant Process

The Agreement requires that within 45 days of the Agreement, the VI will put in place a
system of safeguards to assure that lapses of funds will be minimized and that no lapses


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of funds will occur after March 31, 2003. By March 31, 2003, VI also was required to
develop a plan to re-engineer its grant application, planning, obligation, and disbursement
functions. The plan should include policies, procedures, and systems to ensure that (1)
program plans are the basis for application and disbursement; (2) disbursements are tied
to actions specified in program plans; and (3) no funds are lost due to lapsing obligation
periods.

VI did not complete a system of safeguards to minimize the lapsing of funds. As a result,
VI continued to experience lapsed funds problems. While VI developed a policy entitled
“Policy To Re-Engineer The Grant Application, Planning And Disbursement Procedures
And Prevent Lapses Of Funds” and VIDE developed Policy Memorandum 01-03
“Departmental Policy Regarding Lapses of Federal Funds,” these policies were not
successfully implemented. In an ED-OIG audit report,20 issued in September 2003,
VIDE had $6.8 million in ED funds awarded in the period October 1, 1994, through
February 24, 2000, that had lapsed by March 12, 2003, and were likely to revert to the
U.S. Treasury.

At the start of this audit, we noted that $1.8 million of FYs 2001 and 2002 Special
Education Grants were subject to lapse by December 31, 2003, if actions were not taken.
On November 14, 2003, we notified ED of this situation. As of November 9, 2004, the
2001 and 2002 Special Education Grant lapsed fund balances still amounted to more than
$1.3 million.

On January 21, 2004, VIDE officials indicated that they had requested, in November
2003, extensions of the liquidation periods. On May 5, 2004, ED reopened certain
grants, but not the Special Education grants. According to GAPS data, VIDE had until
June 7, 2004 to draw down funds. An ED official stated that an ED team examined
documentation provided by VIDE and concluded that certain expenses were obligated
properly within the grants’ timeframes. Based upon those evaluations, ED allowed the
grants to be reopened. See the Table of Potential Lapsed Funds below. 21

In addition to the $1.3 million in 2001 and 2002 Special Education lapsed fund balances,
another $3.8 million has potentially lapsed for the 2000 Special Education grant, the 2000
Consolidated grant, and other grants. In total, over $5.1 million ($1.3 million plus $3.8
million) has potentially lapsed since we last reported on this issue. Had a system of
safeguards been put in place to prevent the lapsing of funds, pending evidence of any
outstanding obligations, over $5.1 million could have been better used to provide services
to VI’s students. The grants have to be managed and the reconciliations completed to
yield useful information to prevent funds lapsing. (See proposed summary reconciliation
in Exhibit A.)


20
  The Virgin Islands Department of Education Did Not Effectively Manage Its Federal Education Funds
(ED-OIG A02-C0012).
21
     In our table, we listed only those grants that had not been previously identified in prior ED-OIG reports.


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                                 Table of Potential Lapsed Funds

                                                                                                 GAPS Last
                                            Total                       GAPS Available Balance     Date to
  Award #            Program            Authorization     Net Draws       November 9, 2004       Draw Funds

H027A000001      Special Education        $ 8,852,007     $ 8,148,588               $ 703,419     7/1/2002

               Emergency Immigrant
T162A010023     Education Program             206,564          73,812                 132,752    10/31/2003

S276A000026         Goals 2000                496,836          57,932                 438,904    12/31/2002

S922A000004     Consolidated Grant         13,564,852      11,992,240                1,572,612    6/7/2004

                Bilingual Education
T194Q010019      Support Services             100,000          72,656                  27,344    6/30/2003

                Technology Literacy
S318X000056         Challenge                 860,101         281,009                 579,092    12/31/2002

                Technology Literacy
S318X010056         Challenge                 926,224         683,289                 242,935     6/7/2004

S340A000056    Class Size Reduction           835,936         718,192                 117,744     6/7/2004


                      Total             $ 25,842,520    $ 22,027,718            $ 3,814,802



To counter the ongoing and serious problem of lapsed funds, ED should require VIDE
and the Special Education program to enter into a contract with a third-party fiduciary
agent. This should start with the next grant approved and funded by ED.

ED used a third-party arrangement for the Infants and Toddlers grant, which was
administered by VIDH. According to GAPS, over $102,000 of the $759,000 of the year
1999 Infants and Toddlers grant lapsed. In addition, $111,000 of the $769,000 of the
2000 grant lapsed. ED then required VIDH to use a third-party fiduciary agent to
expedite payment of all expenses except for personnel and related fringe benefits and
indirect costs. VIDH paid an annual fee of $25,000 for the services provided by this
third-party fiduciary agent. The first grant administered by the fiduciary agent expired,
and grant officials indicated that payments were made on a timely basis, with few
complaints. The fact that GAPS showed no remaining balance indicates that the
arrangement may be working well.




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                               Detail For Finding 3

SUB-ISSUE 3.1 - RECRUITING AND HIRING

First Major Action Step in Sub-Issue 3.1
Develop Policies and Procedures for Class Coverage

VI was to have developed policies and procedures for class coverage in the event that a
teacher is unable to be in the classroom. To complete this requirement, VIDE developed
two documents entitled “Policy and Procedure For Assigning Substitutes” and “Substitute
Teacher Pool.”

Second Major Action Step in Sub-Issue 3.1
Determine Percentage of Classes Conducted By Highly Qualified Teachers

While VIDE provided the number of highly qualified teachers, it did not address the
percentage of classes conducted by highly qualified teachers. In addition, the teacher
qualification documentation was inconsistent. VIDE provided funding for 109 teachers
to take the Praxis Exam for certification as highly qualified. Of the 48 teachers we could
account for who sat for the Praxis Exam on August 09, 2003, only 7 passed. Our
calculations conflict with the documents provided by VIDE which state that 82 teachers
sat for the Exam and 15 passed. A VIDE document entitled “Human Capital
Subcommittee Report” provides a three-year moratorium, commencing with the school
year 2001, for compliance with the NCLB highly qualified teacher certification. Because
of this compliance delay, VIDE had difficulty getting teachers to take and pass the Praxis
Exam for certification.

Third Major Action Step in Sub-Issue 3.1
Increase Recruitment of Specialized Personnel

By December 31, 2002, VIDE was to have worked with VIDH to establish a MOA
between VIDH and VIDE to jointly recruit and share needed specialized personnel, such
as speech pathologists, physical therapists, etc. VIDE completed this step by entering
into a MOA with VIDH on December 20, 2002, to collaborate in the development and
implementation of strategies for the recruitment and retention of highly qualified allied
health professionals in the VI.

Fourth Major Action Step in Sub-Issue 3.1
Determine the Number of Qualified Teachers Needed

By December 31, 2002, VI was to have determined how many highly qualified teachers it
needed per program to achieve the goal of having a qualified teacher in every classroom
within five school years. In determining the number of teachers it needed, VI would
ensure ratios comparable to similar sized school districts for the (1) average number of


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students per teacher, (2) average number of administrators per student, and (3) percentage
of Federal dollars spent directly for classroom instruction and related expenses. VIDE
did not complete its determination of the number of highly qualified teachers needed.

The Human Capital Subcommittee Report documents did not include the student/teacher
and administrator/student ratios or the percent of Federal dollars spent directly for
classroom instruction. Further, the documents did not draw a comparison to similar sized
districts in determining the number of highly qualified teachers needed within the next
five years. This may not have been completed due to time constraints or lack of data.

Fifth Major Action Step in Sub-Issue 3.1
Set Goals for Employing Qualified Teachers

By March 31, 2003, VI was to set specific goals for employing qualified teachers in
specific classrooms each year based on the total number of qualified teachers needed over
five years and the priorities for types of vacancies to fill first. VIDE did not complete the
determination of the number of qualified teachers needed.

VIDE completed the Five-Year Strategic Plan for Teacher Quality and Certification and
VIDE met one of the first year’s requirements, which was to have 20 percent of the
qualified teachers it needed to meet the five-year goal. However, VIDE’s data was
inconsistent. For example, the Human Capital Subcommittee Report stated that 98
teachers benefited from a subsidy for a special administration of the Praxis Exam. Yet,
VIDE’s Human Capital-Teacher Quality Report had 82 as the number of examinees. In
its data collection report entitled “Invoices and Other Financial Documents for Teacher
Quality,” VIDE also stated that 98 teachers took the Exam. However, an invoice listed
fees paid for 109 participants. Similarly, the total number of teachers, territory-wide, was
inconsistent and fluctuated from 1,447 to 1,594. Due to the inconsistency in reporting the
VI’s population of teachers, we could not verify the total number of teachers and whether
VIDE will meet the yearly goal of 20 percent of the total number of qualified teachers
needed per year over the next five years.

The inconsistencies appeared to result from VIDE’s attempt to systematically categorize
and classify its teachers and their qualifications, when no database existed. To meet the
Agreement’s requirements, VIDE must assure that its data are consistent and not
contradictory.

Sixth Major Action Step in Sub-Issue 3.1
Improve Hiring Process

Another significant step by VIDE addressed the requirement to improve the hiring
process, including the use of current legislative authority for VIDE to bypass VIDP and
expedite the hiring process by April 30, 2003. On August 12, 2002, the Governor of VI
granted VIDE hiring authority, in order to expedite the hiring process.



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Seventh Major Action Step in Sub-Issue 3.1
Expedite the Teacher Certification Process

The VI was to have worked with (1) the VI Board of Education to expedite the teacher
certification process, including alternative certification approaches, and (2) the VI Board
of Vocational Education to expedite setting standards for teacher certifications, including
alternative certification approaches. VIDE did not complete the process to expedite the
teacher certification process. Although VIDE prepared a draft proposal of alternatives to
certification under NCLB, as of November 2003, it had not yet been approved by the VI
Board of Education. Therefore, we could not determine whether VIDE will be in
compliance with NCLB within the five years stipulated in the Agreement.

SUB-ISSUE 3.2 - INADEQUATE TIME ACCOUNTING AND SUPPLANTING

The main objectives of this Sub-Issue were to ensure that (1) the salaries of employees
who work under more than one Federal program are properly allocated among those
programs, in accordance with accurate time distribution records, and (2) Federal funds
are not paying for personnel that the State should pay.

First Major Action Step in Sub-Issue 3.2
Develop a Plan for Time and Attendance Accounting and Supplanting

VI was required to develop a plan that shows how the time and attendance accounting
procedures will be integrated with program related budgeting, financial management,
planning, and personnel processes. This system is to be computer-based and territory-
wide; allocate time and attendance to specific programs; and ensure personnel records are
properly archived and readily accessible.

VIDE made significant progress by creating a database system for the Notices of
Personnel Actions (NOPAs). Copies of NOPAs indicated the term of employment,
annual salary, start date, funding source (including the percentage of salary paid by
Federal programs), and type of certification along with other data for both temporary and
permanent hires.22

According to the Director of VIDE’s Human Resources Office, it would be a while
before all NOPAs became available electronically because of the large volume of data on
the NOPAs. VIDP was also working to establish an electronic personnel database.

Second Major Action Step in Sub-Issue 3.2
Develop an Accurate List of Employees

By September 30, 2002, the VI was to have developed an accurate list of employees
whose time is paid in any part with Federal education funds. VIDE completed this step

22
     See Finding 3, Sub-Issue 3.2, regarding the transfer of personnel costs between grant years.


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by providing a list of all employees who would be charging time to different cost centers
(funding sources). As a test, we subjectively selected 34 personnel and calculated the
portion of funds charged to local (VI) accounts as a percentage of total salary charges.
The salary allocations were not uniform, thus indicating that the employees may be
charging time based upon actual effort on a project. Without determining the accuracy of
the salary allocations, it appeared to be in line with the Agreement’s requirements.




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                                      Detail For Finding 4

SUB-ISSUE 4.1 - PROPERTY MANAGEMENT

First Major Action Step in Sub-Issue 4.1
Implement an Inventory System

VI was to have implemented WIN ASSETS Personal Property Inventory System, a
government-wide inventory system, by completing a 13-step plan by December 30, 2004.
The plan required:
       (1) all VI departments to comply with the WIN ASSETS system;
       (2) individual department inventories be converted to WIN ASSETS format and
           uploaded department data to VIDPP system; and
       (3) VIDPP to reconcile FMS expenditures to WIN ASSETS inventory
           acquisitions quarterly.

VI did not complete this step. The VI had made little progress in implementing a
government-wide inventory system, as required. Meanwhile, VIDE St. Thomas is
planning on using CIMS to manage its internal inventory.23 On November 7, 2003,
VIDE’s Director of Computer Operations wrote to the Commissioner of Education about
the need for training for all VIDE program staff and purchase order initiators prior to
using CIMS. At that time, the Director indicated that he had just learned how to use
CIMS. During the exit conference, the Director stated that he had provided the necessary
training. All staff, including the St. Croix warehouse personnel, would be using CIMS.
By using CIMS, VIDE is at odds with the concept of a government-wide inventory
system envisioned in the Agreement.

While VIDE St. Thomas moves to implement CIMS, the VIDE St. Croix Curriculum
Center is still using its internally created database system to manage the St. Croix
inventory. St. Croix personnel had only minimal involvement with the property
management task force. If different inventory systems remain in use, the VI may not be
able to meet the Agreement’s Year Two requirements, which include the full
implementation of the inventory management system.

Contract to Inventory VI Assets

VIDPP contracted with American Appraisal Associates to account for the VI’s inventory
as of September 30, 2002, as a baseline for the government-wide inventory. Using a
$5,000 threshold as the minimum value of equipment to be included in the inventory,
American Appraisal Associates produced a Summary Appraisal Report. The report cited
location, equipment cost, purchase date, depreciation, and net book value. This
information has not been entered into an asset database so that depreciation and asset
values could be calculated annually. No further inventories had been performed nor was
23
     Several states and school districts are using CIMS for their education financial system of record.


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any reconciliation done with the VIDE inventory. In addition, because VIDPP’s
inventory accountability remains at the $5,000 threshold, most of VIDE’s purchases
would not be captured and accounted for in VI’s inventory. As mentioned in the
Background section of this report, when OIG performed its inventories during years 2001
and 2002, we looked for equipment such as computers, printers, and other inventory
items valued at more than $250. In total, the reports cited almost $2.5 million in
unaccounted for equipment.

Second Major Action Step in Sub-Issue 4.1
Develop an Inventory Policy and an Implementation Plan of the Inventory Management
System

The VI was to have provided ED with a final inventory policy and implementation plan
of the inventory management system that would comply with Federal regulations by June
30, 2003. The inventory policy is to establish procedures for replacement or payback of
any items in the inventory that cannot be located, consistent with Federal regulations.

We did not find any evidence that VI developed an inventory policy and implementation
plan of the inventory management system. However, a copy of VIDE’s Procurement and
Inventory Policy Manual, dated June 30, 2003, was posted on the Internet website. It
provides guidance for VIDE’s property management and refers to CIMS as the system to
be used for asset inventory. In November 2003, the Director of VIDE’s Property,
Procurement, and Auxiliary Services informed ED officials and OIG that the manual was
a draft, but did not give a date as to when the manual would be finalized.

The manual illustrates the purchase order flow from initiator to payment by VIDE to
VIDF’s FMS. To coincide with the VI government’s inventory policy, the inventory
dollar threshold is set at $5,000. However, the manual also states that physical
inventories will be taken for items of $500 or more. This would enable VIDE to account
for inventory items such as computers, monitors, cameras, camcorders, televisions, fax
machines, scanners, and other audiovisual equipment.

We noted some shortcomings in the manual that need to be addressed. For example, it
describes the tagging of inventory, blue for Federal and red for state, but does not
indicate at what stage of the purchasing cycle the items will be tagged; forms for
transferring items between centers/schools are included, but appear to lack control
numbering and numerical sequencing; and no provision exists for notifying the
Curriculum Centers. These control functions should be part of CIMS, if it is to be used,
when the schools are linked electronically to the Curriculum Centers. VIDE can then
ensure that all property purchased with Federal program funds will be tagged, entered
into a tracking system, and delivered to the appropriate location timely. Another
shortcoming of the manual is that it did not address the need for reconciliation between
the schools’ biennial physical inventories and VIDE’s property records and original
requisitions. It also did not consider the need for providing the results to VIDPP to



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ensure VIDPP, VIDF, and VIDE act as an integrated team on procurement issues as
required by the Agreement.

The manual also contains a flowchart documenting the requisition process that needs
clarification. Specifically, the manual omitted how:

       ƒ   Vendors are approved prior to obligating purchases in the CIMS system,
       ƒ   CIMS would prohibit obligations if the vendor is not approved,
       ƒ   Transactions will flow between CIMS and FMS, and
       ƒ   Vendors are notified when orders are approved.

Also, VIDPP and VIDE need to consider how to consolidate and/or eliminate multiple
approval stages for a purchase order to ensure efficiency and eliminate duplication of
effort, as well as make provisions for emergency needs to ensure students’ health and
safety as required by the Agreement.

Third Major Action Step in Sub-Issue 4.1
Develop a Property Security Plan

By June 30, 2003, the VI was to have completed all reasonable steps to secure all
property in warehouses, schools, and other locations from larcenous behavior or
inappropriate or unauthorized use by performing a security risk analysis.

ED’s Site Visit Report pointed out that $1.7 million of the 2001 Consolidated Planning
Grant of $7,518,789 allotted to UVI will be for security services to safeguard VI public
schools.24 However, the timelines to implement security measures fall between
November 2003 and December 2004, well past the June 30, 2003 deadline. In October
2003, the Governor asked the U.S. Marshals to provide risk analysis training. However,
the U.S. Marshals declined the request.

Prior to the Governor’s request, VIDE requested security analysis proposals from five
different vendors. However, we saw no evidence to support the proposals or the intended
risk analysis training. As of October 2004, a document dated June 2004, posted on the
Agreement Internet website, indicated that a final risk assessment is expected to be
completed in August 2004. The VI should not consider the security analysis proposals
prior to assessing the level of risk associated with the inventory and the related structures.

SUB-ISSUE 4.2 - COMPETITIVE PROCUREMENT

VIDE and VI did not complete the two major action steps in Sub-Issue 4.2. The goals
were to ensure that school services, supplies, equipment, and other necessary resources
are provided in classrooms when they are needed and vendors are paid within 30 days of
invoice receipt.
24
     Additional discussion of the 2001 Consolidated Planning Grant is contained in Attachment A.



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First Major Action Step in Sub-Issue 4.2
Develop a Procurement Policy

Per the Agreement, the procurement management process will include procedures for
flexible, timely contractual arrangements, sole source contracts, contract closeout
activity, including receipt of goods certification, contracts release, and review of final
payment.

VIDE included the procurement policy in its Procurement and Inventory Policy Manual.
See Second Major Action Step in Sub-Issue 4.1, above, for findings regarding the
manual. We found its procurement policy and implementation plan to be inadequate. As
indicated in Finding 4, Sub-Issue 4.2, VIDE still has problems in assuring that, once
requisitions are made, the goods are delivered and payments are made within a
reasonable time.

Second Major Action Step in Sub-Issue 4.2
Establish Competitive Procurement Process

By September 30, 2003, the VI was to have revised the system of requiring three bids for
each item submitted on a requisition, to reduce the time needed to obtain required items
to meet the procurement time lines. VI also is to develop and maintain a short-term
emergency by-pass authority/option for items that cost less than $10,000.

VI did not complete this step. We reviewed documentation for revised steps requiring
three bids for each item, including setting up a central store for common supplies and
procedures for emergency procurement under $10,000. However, VI did not provide
evidence that these procedures had been implemented.




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                                                                                                                                                                                                                                  Audit of VI’s Progress in Meeting the
Proposed Summary Reconciliation Spreadsheet

        A          B           C              D                                                           H                                             K                  l              M



                 ).lli !~I~'~1
                                                                                         Nolell                        NoteN2                         Nolen                             NoteU
                                                                                        Column E·F                      F·H                            J·F                               J-L




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                                                                                                                                                                                                                      EXHIBIT A
(Special                   07127101 •
I
                           09130102     I   54.027A   I   $9.078.705.001 $7,670,617.631 U4llAM7~"        t74"'!L~?fi    t'4II:lR'~"   ~A02ll:l.4.1M     !:t~7.726.2~   !8.555.728.471   (!527.384.61~   $527,384.61




lndlVldual
wlDlsabillt
                           1011101 •
(special
I                          09I30I03     I 54.027A I       $9,391,764.001 !Q nnUOl; mI     $387.959.001   tA Q~ 4~ no     tA.1 a~ nnI !10870.?70.Ql     $1,666,465.911 $10,998,043.211   ($327,772.30~   $327,m.30




Note # 1: This figure is the amount available to VIDE for future draws.

Note # 2: This figure should be the draws which have yet to be recorded on FMS.




                                                                                                                                                                                                                                  ED-OIG/A02-D0028
Note # 3: This figure should represent the amount that needs to be drawn or the amount that is overdrawn.

Note # 4: This figure should equate to FMS' outstanding encumbrances that need to be liquidated.
Audit of VI’s Progress in Meeting the
Compliance Agreement – Final Report            ATTACHMENT E                    ED-OIG/A02-D0028




                                  THE UNITED STATES VIRGIN ISLANDS
                                              OFFICE OF THE GOVERNOR
                                                GOVERNMENT HOUSE

                                            Charlotte Amalie, V.I. 00802
                                                  340·774·0001


   December 31, 2004

   Mr. Daniel P. Schultz
   Regional Inspector General for Audit
   U.S. Department of Education
   Office ofInspector General
   75 Park Place
   New York, New York 10007

   Dear Mr. Schultz:

   The Government of the Virgin Islands has reviewed Audit Report Number ED-OIG/A02-
   D0028, The Virgin Islands Is at Risk of Not Meeting the Goals of the September 2002
   Compliance Agreement, dated December 2004. Transmitted for your review and inclusion in the
   final report are our responses to the draft report.

   The Government welcomes audits since they are useful management tools. However, we are
   concerned with the excessive time that it took for the issuance of the draft audit report. The
   primary objective of the audit, as stated by the U.S. Department of Education, Office of
   Inspector General (OIG), was "to determine whether VIDE had met the Year One milestones
   outlined in the September 23, 2002. Agreement, and the likelihood of VIDE being on target for
   Years Two and Three". Though this audit started in September 2003, which was the last month
   of year one, the draft report was not issued until December of 2004, fifteen months after the start
   of the year one review and three months into year three of the Agreement. This was despite the
   V.I. Government making numerous verbal and written requests (see attached Exhibit 1) for the
   results of the audit and a determination of the adequacy of the procurement policies. This late
   issuance affects the ability of the government to get timely written feedback from OIG on their
   year one review, the use of the results of the audit as a tool for making management decisions, as
   well as the implementation of the necessary recommendations in year two of the Agreement.

   We are cognizant that the underlining purpose of the Agreement is to insure that the V.I. is able
   to meet the requirements of the No Child Left Behind Act of 2001. The Government of the
   Virgin Islands will make its best efforts in this regard.




   Juel T.R. Molloy
   Chief of Staff, Office of the Governor

   Enclosure
Audit of VI’s Progress in Meeting the
Compliance Agreement – Final Report         ATTACHMENT E                          ED-OIG/A02-D0028




       Government of the Virgin Islands Response to the Draft Audit Report,
        Dated December 2004, Control Number ED-OIG/A02-D0028, The
        Virgin Islands Is at Risk of Not Meeting the Goals ofthe September
                            2002 Compliance Agreement


      Executive Summary

      The Government of the Virgin Islands (Government) acknowledges it is behind on some
      of the major action steps required by the Compliance Agreement. The response as
      prepared by the Government is attached for your review and inclusion in the final report.
      The responses were developed to conform to the thirty-day submission time frame
      established by the Assistant Inspector General for Audit Services, for inclusion in the
      report.

      This Government is concerned with the excessive period of time it took for the issuance
      of the draft audit report. The primary objective of the audit as stated by the U.S.
      Department of Education, Office of Inspector General (OIG), was "to determine whether
      VIDE had met the Year One milestones outlined in the September 23, 2002. Agreement,
      and the likelihood of VIDE being on target for Years Two and Three". Though this audit
      started in September 2003, which was the last month of year one, the draft report was not
      issued until December of 2004, which is fifteen months after t,he start of the year one
      review and three months into year three of the Agreement. This was despite the
      government making numerous requests (see attached Exhibit 1) for the results of the
      audit. This late issuance affects the ability of the government to get timely written
      feedback from OIG on their year one review, the use of the results of the audit as a tool
      for making management decisions as well as implement the necessary recommendations
      in year two of the Agreement.

      Additionally, There are concerns with the name of the audit being formulated as a
       conclusion; The Virgin Islands Is at Risk of Not Meeting the Goals of the September 2002
       Compliance Agreement. The objective of the audit as indicated in the Executive
       Summary more accurately reflects what the audit was about. Accordingly, a more
      'accurate depiction of the audit in terms of its title would be: audit of The Virgin Islands'
       Progress in Meeting the Compliance Agreement's Year 1 Goals.

      It is the our hope that through the process of the Compliance Agreement that the
      Government will be able to make the necessary improvements that will not only meet the
      expectations of the U.S. Department of Education but also improve the educational
      product that we are delivering to the children of the Virgin Islands.




                                            1

Audit of VI’s Progress in Meeting the
Compliance Agreement – Final Report     ATTACHMENT E                       ED-OIG/A02-D0028




       AUDIT RESPONSES

       Issue I-Program Planning and Design

       Finding I

       VIDE and VI did not fully complete three of the four major action steps of the
       Compliance Agreement

       Recommendation Number 1.1.            Require VIDE to work more closely with ED to
       ensure that grant applications are approved in a timely manner.

       Response        VIDE concurs with this recommendation. The FFY 2003
       Consolidated Grant Application was submitted late. However, after submitting the
       FFY 2003 application, almost three (3) months elapsed prior to our receipt of any
       written feedback relative to concerns from ED. Beyond that, there were several
       exchanges of information before a notice of grant award (NOGA) was made on July
       14, 2004. This represented a six and a half month lag between the submi ssion of the
       grant application and the receipt of the NOGA.

       Though the department made great strides in improving the quality of our
       application, the FFY 2004 Consolidated Grant Application was submitted later than
       anticipated because of the implementation of the new requirement for developing the
       application. This required the development of school-wide, district-wide and
       territory-wide improvement plans, which served as the basi s for the application. In
       addition to all schools developing school improvement plans, both districts
       developed similar plans; and all activity centers at the territorial level developed
       operational plans that were combined to form the territory's improvement plan.

       VIDE is committed to more effectively and efficiently completing applications and
       responding to concerns raised by ED. Now that we have implemented the use of
       school-wide, district-wide and territory-wide improvement plans as a paradigm for
       our application, we are confident that our timeliness will improve. We are hopeful
       that we would receive timely feedback from ED relative to our FFY 2004 application
       so that we do not have as lengthy a time lag with the receipt of the NOGA for this
       application as we had for the FFY 2003 application.

       Implementation Date: Spring 2005

       Recommendation 1.2. Require VIDE to work together with ED to ensure that the
       2001 grant obligations are liquidated within the extended liquidation period.

       Response       VIDE concurs. We have been working with ED to ensure timely
       liquidation of the FFY 2001 Consolidated Grant. However, VIDE recogni zes that
       additional time is needed beyond the current June 30, 2005 liquidation period - an


                                                  2
Audit of VI’s Progress in Meeting the
Compliance Agreement – Final Report       ATTACHMENT E                          ED-OIG/A02-D0028




           initial extension that was requested and granted. Currently, VIDE has contractual
           obligations under aforementioned grant as follows:

                                o   Learning Point Associates for the development of school­
                                    wide, district-wide and territory-wide improvement plans -­
                                    expires 8/31 /06
                                o   Two MOAs with UVI- a) Payment to teachers,
                                    administrators, and other school improvement staff for
                                    assisting in the development of the school-wide plans and the
                                    procurement of materials, which includes contracting for
                                    surveillance for an enhanced security system in schoo ls; and,
                                    b) The development of an accountability system for VIDE
                                    (subcontract: Education Alliance at Brown University). Both
                                    MOAs expire 9/15/06.

           Based on the above, it will be necessary for VIDE to request additional time to
           liquidate the 2001 Planning Grant funds. VIDE pledges its full cooperation in
           ensuring complete liquidation of all outstanding obligations. To date, thirty four
           percent (34%) of the 2001 funds for these contracts and MOAs have been liquidated.
           VIDE will submit a letter to ED by 12/31104 requesting an extension of the
           liquidation period, based on the current contract and MOAs.

           Implementation Date: 12/30/06

           Recommendation 1.3 Require VIDE to monitor the progress of the contractors in
           developing the comprehensive, statewide plan; clarify how Brown University is
           going to provide support or assistance to UVI, and determine how security services
           are going to be procured.


            Response        We concur. Currently, the Superintendents monitor the day-to-day
            activities of the comprehensive plans. The Office of Federal Grants and Audit has
            specifically assigned an employee to examine the billing of the contracts and the
            processing of requisitions for allowability. Brown University will be providing
            assistance to VIDE. Security services will be provided consistent with the response
            to recommendation 4.2.

            Implementation Date: On-going


            Recommendation 104. Require VIDE to involve managers in the semi-annual
            certification and reconciliation and to take steps to assure that the reported amounts
            correspond to each other.

            Response       VIDE concurs. As of October 2004, VIDE began sharing the
            reconciliation report on a monthly basis with Program Managers so that projects'


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Audit of VI’s Progress in Meeting the
Compliance Agreement – Final Report       ATTACHMENT E                           ED-OIG/A02-D0028




            narratives are tied to spending patterns of the programs. It is anticipated as we refine
            the process that managers will be more involved with the reconciliation. Managers
            will be given their own copy of each reconciliation report for use and reference.

            Implementation Date: January 30, 2005

            Issue 2-Financial Management

            Finding Number 2

            VIDE and VI did not complete six of the ten Year One major action steps for Financial
            Management

            Response to Finding 2.1 on Credible Financial Management System

            We do not concur. The vision document of a Credible Central FMS (CFMS) was
            completed by March 2003, as required in the Compliance Agreement with the submission
            of the CFMS implementation plan to the U.S. DOE. However, the U.S. DOE did not
            submit a formal response regarding concurrence with or approval of the subm itted plan to
            the V.I. until August 2003. This delay caused the document to be revised three times.
            Despite this delay, the V. I. has made substantial progress in the execution of the CFMS.
            One of the significant measures, to have a needs assessment performed by an independent
            contractor, has begun.

            As of September 2004, the Virgin Islands began to conduct a comprehensive needs
            assessment on the existing FMS by an independent party. Workshops were held with
            stakeholders, particularly the core FMS users within the various departments and
            agencies. The needs assessment contractor, Government Finance Officers Association
            (GFOA) has made two site visits to gather relevant information regarding FMS issues,
            including detailed information on stand alone systems currently in use by other
            departments. A survey is also being conducted for the purpose of gathering additional
            information. The schedu led completion of the needs assessment is February 2005.

            Response to Finding 2.1 on GAPS

            We concur. "The VI completed the first action step by providing certain employees
            training and appropriate access to ED ' s GAPS system to monitor drawdowns. " However,
            we do not concur with the statement that new users were given access without receiving
            GAPS training. The initial GAPS training took place in December of 2002 and VI staff
            (who received access for the first time) at the Office of Management and Budget, and the
            Department of Finance, received written notification of their access and/or access
            limitations due to maximum user caps, by correspondence dated February 21, 2003.

            Subsequently the follow-up GAPS training occurred in December of 2004. However
            because of a departmental reassignment in OMB, only one (I) employee, who is ass igned
            to VIDOH (not VIDOE) received GAPS training subsequent to receiving GAPS access.



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Audit of VI’s Progress in Meeting the
Compliance Agreement – Final Report       ATTACHMENT E                           ED-OIG/A02-D0028




          Nonetheless, this employee was provided with copies of the prior training manual and he
          had access to other VIOMB (GVI) employees in the unit (Federal Grants Management
          Unit - FGMU) who received the prior GAPS training from USDOEd (ED).

          Response to Finding 2.2 on Indirect Cost

                     •   We do not concur. The VI did establish a written policy regarding unused
                         leave for separating employees from federally funded positions. This
                         policy document dated August 24, 2004 is attached as Exhibit 2.
                     •   We concur. VIDE has not submitted a budget to VIOMB to address
                         expenditure of its departmental indirect cost of $482,054. This budget
                         should be submitted by January 30, 2005.
                     •   We concur. However, while use of a hybrid Fixed with Carry forward
                         method for Indirect Cost would be more complex, it would more
                         accurately derive the proper amount of indirect cost. Accordingly, GVI
                         would be short-changing itself by simply using the Predetermined Cost
                         method indefinitely.
                     •   We do not concur at this time. While it might be inferred, there is no
                         specific requirement in the Compliance Agreement that indirect cost be
                         computed automatically (e.g. systematically), only applied correctly.
                         Beginning with FY 2004, VIOMBNIDOF made a decision (after
                         meetings and training sessions) to compute indirect cost manually (outside
                         of the system - FMS) first, to ensure the accuracy before subsequently
                         turning back on this feature on the FMS (subsequent to any needed
                         enhancement). In short, we are trying to get it right first , or it will simply
                         mean, "Garbage In Garbage Out".
                     •   While the requirement to have all underlying problems dealing with
                         Indirect Cost eliminated was unrealistic, GVI in fact, had minimum
                         finding pertaining to indirect cost during recent Single Audits.
                         Additionally the RFP for the new rates for FY 2006-2008 was issued and
                         we anticipate addressing some concerns during the negotiation process.

          Recommendation 2.1. Require VIDE and Special Education program to use a third­
          party fiduciary, effective with the next grant approved and funded by ED, to ensure
          that funds are obligated and spent in a timely manner.

          Response        VIDE does not concur that a third-party fiduciary relationship is
          necessary based on our spending Special Education Funds. Extensive work has been
          done with the Special Education Program and as a result, the Fiscal Year 2004 ("R"
          grant that will expire 9/05) grant has less than I 0% of funds to draw and Fiscal Year
          2003("Q" grant that will expire 1/05) has a zero balance remaining as per the GAPS
          report (see Exhibit 3). This demonstrates that VIDE has been obligating and
          spending grant funds timely.

          Implementation Date: not applicable



                                                       5
Audit of VI’s Progress in Meeting the
Compliance Agreement – Final Report       ATTACHMENT E                        ED-OIG/A02-D0028




             Recommendation 2.2 VI to provide , in coordination with ED , GAPS training to new
             users before giving them access to the system.

             Response        We concur. At the time that this audit was performed new users to the
             ED's GAPS system had been using the system to monitor drawdowns. Subsequent to
             the audit, all new users have received proper GAPS training; and reconciliations are
             being performed using the information from GAPS, the FMS and the department's
             internal records.


             Recommendation 2.3 VI to move forward in implementing a fully functional central
             FMS based on an independent party performing a needs assessment of the system.

             Response        We concur. As of September 2004, the Virgin Islands began to conduct a
             comprehensive needs assessment on the existing FMS by an independent party.
             Workshops were held with stakeholders, particularly the core FMS users within the
             various departments and agencies. The needs assessment contractor, Government
             Finance Officers Association (GFOA) has made two site visits to gather relevant
             information regarding FMS issues, including detailed information on stand alone systems
             currently in use by other departments. A survey is also being conducted for the purpose
             of gathering additional information. The scheduled completion of the needs assessment
             is February 2005.

             Recommendation 2.4. Require VIDE to improve its cash management capabilities
             by:

                     a. Implementing the newly proposed reconciliation summary schedule when
                     preparing the required reports, and reporting on all grants for one
                     reconciliation period past the funds availability or expiration period.

             Response      We concur. VIDE has already adopted this format for its reporting
             period beginning for March 2004, and on-going (see Exhibit 4).

             Implementation Date: March 2004

                     b. Using the reconciliation schedule to manage the federally funded programs and
              simultaneously reduce lapsed funds.

             Response        VIDE concurs. VIDE has created an internal review panel and procedures
             to assure complete and accurate reconciliation (see Exhibit 5). Currently, VIDE does
             utilize the information gathered for assisting in managing its federal funds. The
             reconciliation reports alert VIDE of grants approaching the end of grant periods and
             pending close out dates after the liquidation period is scheduled to end. These reports
             also validate information previously collected on monthly reports of expenditures vs.
             draws with additional information as to what is posted in the FMS vs. what is posted in
             the internal records. The reports are also used by VIDE to monitor adjustments to ensure



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Audit of VI’s Progress in Meeting the
Compliance Agreement – Final Report        ATTACHMENT E                          ED-OIG/A02-D0028




            that they are made timely. The reports also assist reviewers to gauge the information to
            determine whether adjustments from one grant to another are being conducted correctly
            and timely. Additionally, the reconciliation reports help ensure that deposits into VIDE's
            checking account appear in the official accounting records of the V.r. Government and
            enable VIDE to know how timely these postings are occurring. Finally, the reports allow
            VIDE to provide program managers with more accurate and timely information
            concerning their programs.

            Implementation Date: March 30, 2004

                           c. Assuring that the GAPS balances used on the reconciliation
                           schedule coincide with the period of the reconciliation.

            Response       VIDE concurs .. VIDE has insured that the Business Office Directors
            are utilizing the appropriate GAPS report that coincides with the period being
            reconciled.

            Implementation Date: March 30, 2004

                           d. Assuring that program managers receive the reconciliation so they
                           can be involved in fiscal monitoring.

            Response      VIDE concurs. As we refine the reconciliation proce ss, managers
            will be brought in and be provided with feedback and guidance on expenditures or
            pending obligations to assist in timely obligating and liquidating their federal funds.

            Implementation Date: January 30, 2005

            Recommendation 2.5. Require VIDE to submit a budget(s) to VIDF so the indirect
            cost funds can be used.

            Response       VIDE concurs. For Fiscal Year 2004, VIDE has been granted an
            allocation. Upon receipt of the cost of single audits from OMB, a budget will be
            submitted utilizing the remaining funds.

            Implementation Date: December 30, 2004

            Recommendation 2.6 VIDF to ensure that indirect cost computations are automatically
            computed within the FMS and posted to the appropriate accounts.

            Response        We do not concur. While it might be inferred, there is no specific
            requirement in the Compliance Agreement that indirect cost be computed automatically
            (e.g. systematically). Beginning with FY 2004, VlOMBIVIDOF made a deci sion (after
            meetings & training sessions) to compute indirect cost manually (outside of the system ­
            FMS) first, to ensure the accuracy before subsequently turning back on this feature on the




                                                         7
Audit of VI’s Progress in Meeting the
Compliance Agreement – Final Report         ATTACHMENT E                           ED-OIG/A02-D0028




              FMS (subsequent to any needed enhancement). In short, we are trying to get it right first,
              before considering the automation aspect.

              Recommendation 2.7 VI and VIDE to use a three-year, pre-determined indirect cost rate
              cycle rather than the fixed-with-carry-forward hybrid rate type until the system for
              capturing, budgeting, and spending indirect costs is fully functional.

              Response       We concur at this time. While use of a hybrid Fixed with Carry forward
              method for Indirect Cost would be more complex, it would more accurately derive the
              proper amount of indirect cost. Accordingly, GVI would be short-changing itself by
              simply using the Predetermined Cost method indefinitely.

              Issue 3-Human Capital

              Finding 3

              VIDE and VI have made significant strides by completing four of the nine major action
              steps

              Response to Finding on Sub-Issue 3.1 Hiring and Recruitment

              We concur. However, the United States Department of Education should consider that
              the Board has already outlined in its certification policy an alternate route to certification
              to accommodate some of the teachers to whom a HOUSSE proposal would be
              addressed-teachers already in our system who do not meet the traditional certification
              guidelines. The present policy requires that teachers being considered under this
              alternate route complete a subject area examination in the area in which they wish to
              teach. The examination provided for in thi s policy is the PRAXIS II. At present, the
              Board is actively moving to fully implement this policy. We have been working with the
              Educational Testing Service to arrange for the validation of the PRAXIS II, which is
              available for subject area as well as pedagogical assessment. That process should be
              completed in the Spring of2005.

              In addition, the University of the Virgin Islands has formulated a new student teaching
              course at the Board's request that will allow veteran teachers who have not met the
              student teaching requirement set out in the certification criteria to do so without having to
              leave their classrooms. The course will be offered on both campuses of the University
              beginning in January 2005. Many of our teachers, particularly on the secondary level , are
              lacking this requirement. The availability of this course will mean that teachers being
              considered under the traditional certification route will stand a greater chance of being
              certified within the five-year period of the strategic plan.

              It also bears mention that the University now requires that students who are seeking to
              enter its education division pass the PRAXIS I examination first. The PRAXIS I
              examination is the proficiency instrument that must be administered to all Virgin Islands
              teachers hired after September 30 1996. We have had a low pass rate with thi s



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Compliance Agreement – Final Report        ATTACHMENT E                           ED-OIG/A02-D0028




             examination thus far, which has also adversely impacted the pool of candidates eligible
             for certification. It is our expectation that as more teaching candidates come from the
             University having already passed the PRAXIS I, the Board will be presented with fewer
             candidates who are deficient in the certification requirements.

             While the certification of our teachers presents a major challenge for the Virgin Islands,
             the landscape appears brighter when all these factors are taken into consideration.

             Recommendation 3.1. VIDE to ensure an accurate and complete teacher qualification
             and personnel database is developed and maintained, including expediting the
             teacher certification process.

              Response         VIDE concurs. VIDE updates database on a daily basis to ensure
              accuracy and completeness of data.           To further support this teacher qualification
              initiative, the staff audits the data by counseling, interviewing and writing to teachers as
              well as other school-based personnel included in our databases. This provides us with up
              to date information as well as an opportunity to make projections regarding highly
              qualified status. We also communicate requirements and available assistance pertaining
              to teacher quality. Other project initiatives include: monitoring online Praxis preparation
              tutorials, providing opportunities for classes that will lead to highly qualified status and
              developing and populating a professional development database. In addition, we have
              become the repository for teacher quality data. For security and accountability purposes
              file audits are completed on a hard copy fi Ie before being inputted into the system. New
              funding will support our efforts to image each personnel file and link it directly to each
              data base screen. By having data read ily available, we can provide the VlBE with
              appropriate updates of individual teachers' credentials.

              Implementation Date: On-going

              Recommendation 3.2 VIDE, VIOMB and VIPD to work to extend the period
              covered by NOP As to two or more years.

              Response      VIDE concurs. This is already happening for new hires on local
              funds. This is also done for new hires on federal funds when funding is available
              beyond a one-year period.

              Implementation:        Ongoing

              Issue 4-Property Management and Procurement

              Finding 4

              VIDE and VI did not complete the five major action steps

              Response to Findings




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Audit of VI’s Progress in Meeting the
Compliance Agreement – Final Report      ATTACHMENT E                         ED-OIG/A02-D0028




             Sub-Issue 4.1 Property Management

             The audit report concludes that VIDE and VI did not complete the five major action steps
             of the Compliance Agreement's Issue 4 - Property Management and Procurement. We
             do not concur with the finding.

             The Performance Measures for Issue 4.0 and 4.1 of the Compliance Agreement require
             that the VIDE and VI do the following:

                 1. The VI will provide the Department with an inventory policy and
                    implementation plan of the inventory management system by June 30,
                    2003.

                 2. The VI will take immediate action to the extent possible to secure all
                    property, in warehouses, schools, and other locations from larcenous
                    behavior or inappropriate or unauthorized use. By June 30, 2003, the VI
                    will complete all reasonable steps to secure all property, in warehouses,
                    schools, and other locations from larcenous behavior or inappropriate or
                    unauthorized use.

                 3. An inventory policy and system will be fully implemented by December
                    30, 2004. The policy and system will include that all property purchased
                    with Federal program funds will be tagged, entered into a tracking
                    system, and delivered to the appropriate location within 3 calendar days
                    of receipt.

                 4. By March 31, 2005, all unaccounted-for items will either be returned to
                    their intended locations, or their full value will be reimbursed to the U.s.
                    Department of Education.

                 5. By the end of the second year of the Compliance Agreement, the
                    inventory management system will reflect minimal losses due to theft.

                 6. By the end of the Compliance Agreement, audits will show minimal
                    unaccounted-for property.

             The audit finds that the "VI did not implement a government-wide inventory
             system." This finding is inaccurate because the VI has always had an inventory
             policy and an inventory control system.

             The VI was late in revising and providing the Department with an updated
             inventory policy addressing all relevant elements agreed to in the Compliance
             Agreement. Initially, there was a misinterpretation of exactly what was expected
             under the compliance agreement; therefore the VI missed the June 30, 2003 target


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Compliance Agreement – Final Report       ATTACHMENT E                           ED-OIG/A02-D0028




                 date for implementing the revised inventory management system. Nonetheless,
                 this performance measure was subsequently completed. Currently, a revised,
                 written, inventory policy addressing all relevant elements of the Compliance
                 Agreement is in effect. The same is true for an inventory management system.
                 A training seminar and workshop was held with members of all government
                 departments and agencies. A Property Management Handbook was made
                 available to all in attendance for use and reference. The handbook was also
                 posted on the Internet, and forwarded to ED for review (refer to Exhibit 1).
                 Additionally, all departments and agencies were directed to submit purchasing
                 records to VIDPP for conversion to the WIN ASSETS system, inventory
                 verification, and reconciliation.

                 In the audit, reference was made to the VIDPP using WIN ASSETS II, as opposed
                 to WIN ASSETS, for the VI government-wide inventory system. It seemed to
                 suggest that this represented a change in the inventory software. Such a
                 characterization is misleading, and it does not reflect the real nature, purpose, or
                 reason for the software upgrade.

                 WIN ASSETS and WIN ASSETS II are essentially the same software. It is
                 customary and expected that enhancements, maintenance releases, new feature
                 sets, functions, capabilities, and user interfaces are periodically made available
                 for all software. The use of WIN ASSETS II represents an evolution of the
                 system, not a change of the software as suggested. WIN ASSETS II is an
                 upgraded version of WIN ASSETS, which provides all of the features of WIN
                 ASSETS and more. Its use only increases the effectiveness of the overall
                 inventory management system, and should not be a point of concern.

                 The audit finds that the inventory conducted by American Appraisal Associates
                 as of September 30, 2002 to establish a baseline for the government-wide
                 inventory was not transferred into an assets database, and therefore depreciated
                 asset values cannot be calculated annually. The statement is false. The inventory
                 has been uploaded into the FMS Fixed Asset Module where it merged with the
                 rest of the VI's fixed assets to be depreciated and valued accordingly.

                 The VI fixed assets threshold for inventory items is set at $5,000.00. However, for
                 tracking purposes, property items must meet the following three criteria:

                    1. Any single unit item or piece of equipment that has a cost or value of $5,000.00 or
                       more.

                    2. All computer systems, laptops, notebooks, and monitors regardless of price.




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Audit of VI’s Progress in Meeting the
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                3. Certain electronic equipment such as fax machines, televisions, printers, scanners,
                   multifunction systems, digital cameras, DVD players/recorders, VCR
                   players/recorders, and other audio/visual equipment having a value of $500.00 or
                   more.

            For this reason, the concerns expressed in the audit report that "most of VIDE's
            purchases would not be captured and accounted for in VI's inventory" is overly
            pessimistic.

            Additionally, VIDPP contracted with American Appraisal Associates to account for the
            VI's inventory as of September 30, 2002, as a baseline for the government-wide
            inventory. Using a $5,000 threshold as the minimum value of equipment to be included
            in the inventory, American Appraisal Associates produced a Summary Appraisal Report.
            The report cited location, equipment cost, purchase date, depreciation and net book value.
            This information has not been entered into an asset database so that depreciation and
            asset values could be calculated almually.

            The Department of Finance has taken steps to ensure all central government capital
            property is duly recorded within the FMS, through the implementation of the Fixed
            Assets Module. Capital items include land, buildings, infrastructure and personal
            property that equal to or exceed a $5,000 threshold (established for GASB reporting).

            The module is a subsystem of the current DILOG (FMS) suite. This Fixed Assets system
            is designed to track capital assets that are placed in service, include the voucher number
            to track the expenditure (account, cost center and fund), as well as the responsible low­
            level organization, and the useful life of the assets (see attached data capture frames).
            Asset condition is also maintained in the module. The system can also accommodate
            custom reporting to facilitate the need for detailed reports on capital items.

            The Fixed Assets Module test system was implemented October 2003; however the
            information was not transferred to the live system until September 2004. To date all
            capital items (within the established threshold) purchased up to fiscal year 2003 have
            been added to the database (see Exhibit 6).


            Sub-Issue 4.2 - Competitive Procurement

            VIDPP disagrees with the audit report's statement that the "VI's procurement
            policy is inadequate." It is our position that the VI has a functional procurement
            process that is outlined in the Procurement Manual. A copy of this manual has
            been provided to all agencies with the expectation that the procedures will be
            followed. Any deviation noted at VIDE requires a direct response from them.

            Additionally, in letter dated September 2, 2004, Mr. Marc A. Biggs, Director of
            Property and Procurement, of the Government of the Virgin Islands requested a


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             determination from Mr. Glen Perry, Director, Contracts & Purchasing
             Operations, U.s. Department of Education, for his determination of whether or
             not the Virgin Islands Government's Department of Property and Procurement's
             Official Policy and Procedures Manual satisfies the United States Department of
             Education's mandate in the Compliance Agreement to implement a complete
             procurement management process by September 2004. No response was
             received from Mr. Perry or other official within the U.s. Department of
             Education. A second letter of request dated September 29, 2004, was sent to Mr.
             Perry (see Exhibit 1), again, no response was receive.

             In letter dated September 30,2004 (see Exhibit 1), Mrs. Juel T.R. Molloy, Chief of
             Staff of the Office of the Governor and Co-Chair of the Compliance Agreement
             Task Force, wrote to Mr. Phil Maestri, CFO, Fiscal Improvement & Post Audit
             Operations, U.s. Department of Education, requesting a response to the request
             made by the Director of Property and Procurement of the Government of the
             Virgin Islands. No response was received from Mr. Maestri or Mr. Perry to this
             request.

             Having no determinations to the contrary, the Government of the Virgin Islands
             must proceed under the assumption that its Official Policy and Procedures
             Manual satisfies the United States Department of Education's mandate in the
             Compliance Agreement.

             Recommendation 4.1      Implement the WIN ASSETS II system to account for
             government-wide inventory for use by all government departments.

             Response      This has already been done.

             Recommendation 4.2       Contract for a security analysis to complete all
             reasonable steps to secure all property in warehouses, schools, and other
             locations.

             Response       We concur. The Virgin Islands Department of Education in conjunction
             with University of the Virgin Islands has made great strides in providing electronic
             security to all public schools in the territory. A list of steps taken to address this
             recommendation follows.

                    I. A Request For Proposal was advertised on May 17, 2004 to have a complete
                       school security assessment done for all public schools and warehouses in the
                       territory. Alert # 1 International Inc. was selected to conduct the risk
                       assessment.
                    2. The risk assessment was submitted to the Department of Education and the
                       University of the Virgin Islands on August 23, 2004 (see Exhibit 7).



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                        3. Based on the assessment, a Request for Quotations was advertised on
                           November 1, 2004 (sec Exhibit S). The final proposals were submitted on
                           December 20. 2004. We are in the proccss of evaluating those bids and
                           should select a vendor by January 14,2005.

                        4. We expect service to begin on January 21, 2005. The estimated timeframe for
                           completion of the projcct is 5 to 6 months.

                 Implementation Date: January 21, 2005



                Recommendation 4.3         Work with VIDE to consolidate and/or eliminate
                multiple approval steps in the requisition and payment process.

                Response    We concur. This item has been completed. VIDE has been
                prOVided with copies of the VI property and procurement policies and
                manuals. VIDE has developed two procedures to assist in the exped iting of the
                requisitioning and paymcnt processes:        I) Procedures for emergency by·pass
                authority/option and 2) Procedures for the utilization of Supply Contracts and
                Central Stores. In addition, by Legislative Act 6533 sec 9(b), VIDE has the authority
                to purchase up to $50,000 in materials and supplies without going to the Department
                of Property and Procuremcnt. This procedure eliminates a step, thus shortening the
                time needed to process a document.

                Implementation D<lIe: September 30, 2003

                Recommendation 4.4        Ensure the process of obtaining three bids for each
                requested item is implemented.

                Response       VIDE concurs and will do everything possible to abide by this
                requirement.

                Implementation Date: Ongoing

                Recommendation 4.5        Determine whether to implement CIMS or VI's WIN
                ASSETS 11 inventory system.

                Response       WIN ASSETS II is the official VI inventory system.

                Recommendation 4.6           Determine whether to implement ClMS with FMS, if
                elMS is to be used.




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              Response      Not relevant since W IN ASSETS II is the official VI inventory
              system.

              Recommendation 4.7          Clarify and implement its Procurement and Inventory
              Policy Manual.

              Response      The Department or Property and Procurement has made
              enhancements to the government-wide inventory system (WIN ASSETS TJ) and
              establishment of policies and procedures to govern that system for the entire
              government. VIDE has reverted to using the government-wide manLlal since WIN
              ASSETS I[ is the official Vi inventory system _

              impiemcnt<ltion Date: June 30, 2004




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