oversight

Philadelphia School District's Controls Over Federal Expenditures.

Published by the Department of Education, Office of Inspector General on 2010-01-15.

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

       Philadelphia School District’s Controls Over Federal
                          Expenditures


                                 FINAL AUDIT REPORT




                                    ED-OIG/A03H0010
                                      January 2010


Our mission is to promote the                         U.S Department of Education
efficiency, effectiveness, and                        Office of Inspector General
integrity of the Department's                         Philadelphia, Pennsylvania
programs and operations.
                          NOTICE

Statements that managerial practices need improvements, as well as
other conclusions and recommendations in this report, represent the
   opinions of the Office of Inspector General. Determinations of
 corrective action to be taken, including recovery of funds, will be
   made by the appropriate Department of Education officials in
      accordance with the General Education Provisions Act.


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.
                                 UNITED STATES DEPARTMENT OF EDUCATION
                                        OFFICE OF INSPECTOR GENERAL


                                                                                                                   Audit Services
                                                                                                        Philadelphia Audit Region



                                                        January 15, 2010



Dr. Gerald L. Zahorchak
Secretary of Education
Pennsylvania Department of Education
333 Market Street
Harrisburg, PA 17126-0333

Dr. Arlene Ackerman
Superintendent of Schools
School District of Philadelphia
440 N. Broad Street
Philadelphia, PA 19130


Dear Dr. Zahorchak and Dr. Ackerman,

Enclosed is our final audit report, Control Number ED-OIG/A03-H0010, entitled Philadelphia School
District‟s Controls Over Federal Expenditures. 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 Department
of Education officials, who will consider them before taking final Departmental action on this audit:

                                        Thelma Meléndez de Santa Ana, Ph.D.
                                        Assistant Secretary for
                                        Office of Elementary and Secondary Education
                                        U.S. Department of Education
                                        400 Maryland Ave., S.W.
                                        Washington, DC 20202

                                        Alexa E. Posny
                                        Assistant Secretary for
                                        Special Education and Rehabilitative Services
                                        U.S. Department of Education
                                        400 Maryland Ave., S.W.
                                        Washington, DC 20202




           Our mission is to promote the efficiency, effectiveness, and integrity of the Department’s programs and operations.
                                          Kevin Jennings
                                          Assistant Deputy Secretary for
                                          Office of Safe and Drug Free Schools
                                          550 12th Street, S.W.
                                          10th Floor
                                          Washington, DC 20202

                                          Daniel T. Madzelan
                                          Delegated the Authority to Perform the Functions and Duties
                                          of the Assistant Secretary for
                                          Office of Post Secondary Education
                                          U.S. Department of Education
                                          1990 K Street, N.W.
                                          Washington, DC 20006


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/

                                                     Bernard Tadley
                                                     Regional Inspector General for Audit


Enclosures




             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…………………………………………………………………………………4

AUDIT RESULTS……………………………………………………………………………….8

        FINDING NO. 1 – PSD Needed Stronger Controls over Personnel
                        Expenditures Charged to Federal Grants……………...….…9

        FINDING NO. 2 – Supplanting of Federal Funds…………………………….…25

        FINDING NO. 3 – PSD Did Not Have Adequate Controls in Place to
                        Ensure Non-Payroll Expenditures Met Federal
                        Regulations and Grant Provisions……………………….…..29

        FINDING NO. 4 – Policies and Procedures Were Not Adequate and/or
                        Enforced……………………………………………………….33

        FINDING NO. 5 – PSD Did Not Have Written Policies And Procedures For
                        Various Fiscal Processes……………………………………...51

OTHER MATTERS………………………………………………………………………...….66

OBJECTIVE, SCOPE, AND METHODOLGY……………………………………………...69

Enclosure 1: Calculation of Total Unallowable Amounts….……………………...…………75

Enclosure 2: Finding No. 1 – Determination of Unduplicated Costs………………………..76

Enclosure 3: Finding No. 3 – Description of AP Transactions………………………………77

        Enclosure 3a: Detail of Title I AP Transactions……………………………….…78

        Enclosure 3b: Detail of CSR AP Transactions……………………………………81

        Enclosure 3c: Detail of GEAR UP AP Transactions…………………………….83

        Enclosure 3d: Detail of Safe and Drug Free Schools AP Transactions…....…....87

        Enclosure 3e: Detail of Title II, Part D AP Transactions………………………...88
Enclosure 4: Finding No. 4 – Description of JV Transactions (Subpart A)…......………….90

Enclosure 5: Finding No. 5 – Detail of Office Depot Web Site Transactions by
                            Grant (Subpart C)..……………………………………..……..92

Enclosure 6: Finding No. 5 – Federal Grants Allocated 2006 Single Audit
                            Costs (Subpart E)…………………………………...………….95

Enclosure 7: PSD September 23, 2009 Response to the Draft Audit Report……….…...….97
                      ACRONYMS\ABBREVIATIONS USED IN THIS REPORT

AP                      Accounts Payable
ATIPs                   Attendance and Truancy Intervention and Prevention Support
CEO                     Chief Executive Officer
CFO                     Chief Financial Officer
C.F.R.                  Code of Federal Regulations
Controller‟s Office     The City of Philadelphia, Office of the Controller
CSR                     Comprehensive School Reform Demonstration
EC                      Extracurricular
ESEA                    Elementary and Secondary Education Act of 1965
ESOL                    English for Speakers of Other Languages
FIE                     Fund for the Improvement of Education
GEAR UP                 Gaining Early Awareness and Readiness for Undergraduate Programs
GL                      General Ledger
HEA                     Higher Education Act of 1965
HR                      Human Resources
HSSA                    State Head Start Grants
IDEA                    Individuals with Disabilities Education Act
IU                      Intermediate Unit
JVs                     Journal Vouchers
LEA                     Local Educational Agency
NCLB                    No Child Left Behind
OMB                     Office of Management and Budget
PDE                     Pennsylvania Department of Education
POMB                    PSD Office of Management and Budget
PSD                     Philadelphia School District
PSSA                    Pennsylvania System of School Assessment
RCS                     Reduced Class Size
Reading First           Reading First State Grant
SEA                     State Educational Agency
SEFA                    Schedule of Expenditures of Federal Awards
               ACRONYMS\ABBREVIATIONS USED IN THIS REPORT (Continued)

SRC                   School Reform Commission
Special Ed            Special Education Grants to States
Title I               Improving Basic Programs Operated by Local Education Agencies
Title II, Part A      Improving Teacher Quality
Title II, Part D      Enhancing Education through Technology
TPER                  Time and Attendance Personnel Timesheets
Final Report
ED-OIG/A03H0010                                                                                  Page 1 of 131


                                     EXECUTIVE SUMMARY


The objective of our audit was to determine if the Philadelphia School District (PSD) had
adequate fiscal controls in place to account for Federal funds for the period July 1, 2005, through
June 30, 2006. PSD, the 8th largest local educational agency (LEA) in the country, had an
enrollment of 184,560 students in 291 public schools, with an additional 25,872 students in 55
charter schools.1 PSD was governed by a five-member School Reform Commission (SRC).

We reviewed PSD‟s fiscal controls relating to the processing of Federal grant expenditures. To
test the fiscal controls, we reviewed expenditures made from the following grants: Improving
Basic Programs Operated by Local Education Agencies-Basic Grants, Improving Teacher
Quality, Enhancing Education through Technology, Reading First State Grants, Safe and Drug
Free Schools, Fund for the Improvement of Education, Comprehensive School Reform
Demonstration, Special Education Grants to States, and Gaining Early Awareness and Readiness
for Undergraduate Programs.

We determined that PSD did not have adequate fiscal controls in place to account for the Federal
grant funds that were expended during the audit period. We also found that expenditures,
totaling $138,376,068,2 from grant funds were either unallowable or inadequately supported.
Specifically, we determined that:

       o PSD needed stronger controls over personnel expenditures charged to Federal grant
         funds ($2,912,440 in unallowable costs and $107,005,052 in inadequately supported
         costs, totaling $109,917,492);
       o PSD supplanted state and local funding with Federal funds ($6,979,063 in unallowable
         costs and $1,293,386 in inadequately supported costs);
       o PSD did not have adequate controls in place to ensure non-payroll expenditures met
         Federal regulations and grant provisions ($411,383 in unallowable costs and $764,241
         in inadequately supported costs, totaling $1,175,624);
       o PSD‟s policies and procedures were not adequate and/or enforced ($6,358,792 in
         unallowable costs and $11,976,434 in inadequately supported costs, totaling
         $18,335,226); and
       o PSD did not have written policies and procedures for various fiscal processes
         ($622,572 in unallowable costs and $52,705 in inadequately supported costs, totaling
         $675,277).

We recommend that the Assistant Secretary for Elementary and Secondary Education, in
collaboration with the Assistant Secretary for Special Education and Rehabilitative Services,
Assistant Secretary for the Office of Post Secondary Education and the Assistant Deputy
Secretary of Safe and Drug Free Schools instruct the PSD to:

1
  The enrollment and school data was as of October 2005, which equates to our audit period.
2
  This amount is the unduplicated costs among the findings of $17,284,250 in unallowable costs and $121,091,818
in inadequately supported costs. The unallowable amount does not include the indirect costs of $393,827.
Final Report
ED-OIG/A03H0010                                                                    Page 2 of 131


      Return $17,678,079 in unallowable costs to the U.S. Department of Education (the
       Department);
      Provide adequate documentation to support $121,091,818 in inadequately supported
       expenditures or return that amount to the Department;
      Develop and implement policies and procedures to ensure that personnel costs are
       adequately supported;
      Develop and implement policies and procedures to ensure that Federal funds are not
       supplanted; and
      Develop, implement and enforce policies and procedures to ensure that expenditures paid
       from grant funds are reasonable, allocable and allowable expenditures of the grant from
       which they are being paid.

In its response to the draft of this report, PSD did not concur with Findings No. 1, 2, 3, and 5.
However, for Finding No. 4, PSD stated that of the 30 Journal Voucher (JV) transactions the
response addresses, it concurred with 3 of our conclusions concerning unallowable costs: English
for Speakers of Other Languages (ESOL) tutor benefits erroneously transferred, duplication of
charges already moved, and late carryover of charges into the Title I grant. PSD asserted that we
should revise the draft report to eliminate the vast majority of the findings.

In its response, PSD also raised concerns about the lack of time it had to respond to the report
and the level of disclosure concerning the unallowable and inadequately supported expenditures.
During the audit, our auditors began providing PSD with potential finding issues on
March 16, 2008. This process continued until November 15, 2008. We provided PSD with over
30 updates and held on-site meetings to discuss findings as they developed.

In November 2008, we held an exit conference with PSD. At this time we provided PSD with
finding point sheets which detailed all the findings presented in the draft report. Two weeks
after the exit conference PSD sent us a formal letter requesting information on specific issues
discussed during the exit conference. We sent the requested information to PSD on
December 11, 2008, along with an offer to meet to discuss the issues further and provide PSD
officials full access to all the documentation we used to develop our findings. This meeting was
held, for 2 full days, with PSD in January 2009. Another meeting was held in April 2009 to
discuss the additional information provided to us by PSD.

The draft report was issued on May 6, 2009. PSD was provided the standard 30 days to provide
its response to the draft report. PSD formally requested and was granted two separate 30-day
extensions to provide its response to the draft report. PSD then requested an extra 2 weeks to
submit its response due to medical reasons.

PSD‟s initial response was submitted on August 17, 2009. This submission was incomplete.
Another response was provided on August 24, 2009. We met with PSD officials and PSD‟s
outside counsel on September 18, 2009, to discuss some of the statements in and exhibits
provided with its response. At that time we noted that PSD‟s response contained misstatements
and that it had submitted one exhibit that was erroneous and another that was incomplete. A
Final Report
ED-OIG/A03H0010                                                                   Page 3 of 131

corrected exhibit and a complete exhibit were provided at the meeting. PSD resubmitted its
response on September 23, 2009. The revisions provided by PSD are included in Enclosure 7.

We received comments from the Pennsylvania Department of Education and it concurred with
PSD‟s response.

We revised Finding No. 2 in our final report to reflect only district based expenditures. Also,
amounts in Findings No. 3 and 5 were adjusted to reflect the new documentation provided by
PSD with its response. A summary of PSD‟s response is included after each finding issue. The
full text of PSD‟s response to the draft report is included as Enclosure 7 to the report.
Final Report
ED-OIG/A03H0010                                                                                Page 4 of 131



                                           BACKGROUND


PSD, the 8th largest LEA in the country, had an enrollment of 184,560 students in 291 public
schools, with an additional 25,872 students in 55 charter schools.3 PSD was governed by a five-
member SRC. The SRC was responsible for the overall operation, management, educational
programs, and budgetary and financial matters of PSD. The SRC was also responsible for the
formulation of education policy, adoption of an annual budget, development of a comprehensive
capital improvement budget and program, and the incurrence of indebtedness.

Additionally, PSD had a Chief Executive Officer (CEO), who was responsible for the general
supervision of all business affairs of the LEA. PSD also had various levels of management that
made up the organizational structure. There was a central office and 10 regional offices, which
were led under the supervision of Regional Superintendents. The Regional Superintendents were
primarily responsible for providing instructional leadership to the region, creating and managing
the budget for the region, and monitoring the implementation of grants for systemic
recommendations for strategic long-term goals, related to the assigned area of responsibility.
PSD also had No Child Left Behind (NCLB) District Liaisons who were responsible for ensuring
that program sites received adequate support for the services provided and charged with
monitoring the Title I, and the Comprehensive School Reform Demonstration (CSR) programs.
The monitoring included conducting on-site visits to schools to verify the school‟s compliance
with the Title I records retention policy, program regulations, ensuring all activities are in
compliance with mandated regulations, and preparing the schools for Title I audits and reviews.

Some of the central office departments that managed Federal grant funds included the Office of
Grants Development and Support, the PSD Office of Management and Budget (POMB), General
Accounting Office, Accounts Payable (AP), Human Resources, and various program offices.
POMB worked with the program offices and the Office of Grants Development and Support
office to determine a grant‟s budget. Each grant was assigned a POMB Financial Analyst. The
Financial Analyst was charged with managing the daily financial aspects of the grant, along with
the grant program office. The General Accounting Office input all grant expenditures for food
service, facilities rentals, and central office copier charges, and also prepared the Schedule of
Expenditures of Federal Awards (SEFA). The AP department handled all vendor payments as
well as travel and imprest fund reimbursements.

PSD used the Advantage System to manage the fiscal process. This system used an account
code system, referred to as ABC Codes, to identify the funding source and other account
information relating to an expenditure.

PSD was also the servicing agent for Intermediate Unit 26, an entity established to provide
special education and Nonpublic school services, as well as related management services.

3
 The enrollment and school data were as of mid-October 2005. As of March 12, 2009, PSD reported a current
enrollment of 167,128 students in 281 schools, with an additional 30,516 students in 61 charter schools.
Final Report
ED-OIG/A03H0010                                                                                       Page 5 of 131

All PSD schools were Title I schools and had school-wide programs but did not consolidate their
funds. Forty-nine of the schools were Reading First schools, and 12 Nonpublic schools received
Reading First services.

For the year ended June 30, 2006, PSD was awarded4 $245,328,919 and expended $202,717,711
for the grants we reviewed. We reviewed the following programs authorized by the Elementary
and Secondary Education Act (ESEA), of 1965, as amended by the NCLB Act of 2001, the
Individuals with Disabilities Education Act (IDEA), as amended, and the Higher Education Act
(HEA) of 1965, as amended:

Table 1-Grant Programs and Expenditures
    Program                    Purpose              Types of Allowable            Funds              Funds
                                                    Expenditures                         5         Expended
                                                                                Awarded
Improving Basic      Provide financial              Student assessments,       $141,732,173       $117,388,617
Programs             assistance through state       parental
Operated by          educational agencies           involvement,                Grant period
Local Education      (SEAs) to LEAs and             professional                 07/01/05-
Agencies             public schools with high       development and               09/30/07
(Title I, Part A)    numbers or percentages of      supplemental
                     poor children to help          educational services
                     ensure that all children       or items that absent
                     meet challenging state         of Federal funding
                     academic content and           would not be funded.
                     student academic
                     achievement standards.
Improving            To increase academic           Recruiting and              $22,858,010       $22,086,264
Teacher Quality      achievement by improving       retaining highly
State Grants         teacher and principal          qualified teachers,         Grant period
(Title II, Part A)   quality.                       professional                 07/01/05-
                                                    development                   09/30/07
                                                    activities and
                                                    professional
                                                    development related
                                                    expenses.
Enhancing            Improve student                Initiatives to increase     $5,015,240         $3,679,113
Education            achievement through the        access to technology,
through              use of technology by           to integrate                Grant period
Technology           helping all students           technology into              07/01/05-
Program              become technologically         curricula,                    09/30/07
(Title II, Part D)   literate by the end of the     enhancement of
                     eighth grade and through       ongoing professional
                     the integration of             development in
                     technology with both           teaching through
                     teacher training and           electronic means,
                     curriculum development.        and support of the
                                                    development and use
                                                    of electronic
                                                    networks.

4
  As indicated in Table 1, the funds awarded crossed more than 1 fiscal year (FY); therefore, there is a difference
between the funds awarded and expended.
5
  The amounts were taken from PSD‟s SEFA for the period reviewed.
Final Report
ED-OIG/A03H0010                                                                            Page 6 of 131

   Program                  Purpose              Types of Allowable         Funds          Funds
                                                 Expenditures                      5     Expended
                                                                          Awarded
Reading First      Establish scientifically      Activities include       $8,904,676     $8,396,241
State Grants       based reading programs        selecting,
(Reading First)    for students enrolled in      administering            Grant period
                   kindergarten through          screening, diagnostic,    07/01/04-
                   grade three.                  and classroom-based        06/30/06
                                                 instructional reading
                                                 assessments, and
                                                 implementing a
                                                 learning system or
                                                 program of reading
                                                 instruction based on
                                                 scientifically based
                                                 reading research.
Safe and Drug-     The program provides          Educational              $2,819,258     $1,959,403
Free Schools       support to SEAs for a         programs for drug
and                variety of drug-abuse and     and violence-            Grant period
Communities:       violence-prevention           prevention, including     09/06/05-
State Grants       activities focused            professional               03/31/07
                   primarily on school-age       development.
                   youths.
Fund for the       To improve the quality of     Activities designed to   $11,989,924    $3,032,973
Improvement of     elementary and secondary      improve student
Education          education at the state and    academic                 Grant period
(FIE)              local levels and help all     achievement,              10/01/04-
                   students meet challenging     strategies for             12/31/06
                   state academic content        effective parent and
                   standards and student         community
                   achievement standards.        involvement, support
                                                 for Scholar-Athlete
                                                 Games, and voter
                                                 participation
                                                 programs.
Comprehensive      To raise student              Activities to enable      $599,005      $332,758
School Reform      achievement by employing      the schools to
Demonstration      proven methods and            implement a              Grant period
Program            strategies to produce         comprehensive             08/26/05-
                   comprehensive school          school reform              09/30/07
                   reform.                       program, teacher
                                                 and staff professional
                                                 development, and
                                                 parental involvement
                                                 activities.
Special            Assist in meeting the costs   Supplemental staff,      $44,066,633    43,972,562
Education          of providing special          professional
Grants to States   education and related         development and          Grant period
(Special Ed)       services to children with     supplemental              07/01/05-
                   disabilities.                 support.                   06/30/06
Final Report
ED-OIG/A03H0010                                                                          Page 7 of 131

   Program                Purpose             Types of Allowable        Funds           Funds
                                              Expenditures                     5      Expended
                                                                      Awarded
Gaining Early     Increase the number of      Comprehensive           $7,344,000      $1,869,780
Awareness and     low-income students who     mentoring,
Readiness for     are prepared to enter and   counseling, outreach   Grant period
Undergraduate     succeed in postsecondary    and supportive          09/01/04-
Programs          education.                  services. Including      08/31/06
(GEAR UP)                                     after school and
                                              summer tutoring,
                                              assistance in
                                              obtaining summer
                                              jobs, career
                                              mentoring and
                                              academic counseling.
    Totals                                                           $245,328,919    $202,717,711

The NCLB Act of 2001 is a Federal education act that increases accountability for states and
school districts, school choice for parents and students, flexibility for states‟ and school districts‟
use of Federal education funds, and also places an emphasis on reading.

All grant programs reviewed, except for Special Ed and GEAR UP, were administered by the
Department‟s Office of Elementary and Secondary Education. The GEAR UP program was
administered by the Office of Postsecondary Education and the Special Ed program was
administered by the Office of Special Education and Rehabilitative Services.
Final Report
ED-OIG/A03H0010                                                                     Page 8 of 131


                                              AUDIT RESULTS


We determined that PSD did not have adequate fiscal controls in place to account for the Federal
grant funds expended during the period July 1, 2005, through June 30, 2006. Specifically, we
found that:

             PSD needed stronger controls over personnel expenditures charged to Federal grants
              including:
               o Adequate controls to ensure salary costs charged to grant funds were adequately
                   supported ($123,772,665 in inadequately supported costs),
               o Monitoring of personnel costs paid by the Title I, Part A grant to ensure costs
                   charged were allocable ($2,910,940 in unallowable costs), and
               o Adequate payroll policies and procedures ($1,500 in unallowable and $2,669 in
                   inadequately supported costs).
             PSD supplanted state and local funding with Federal funds ($6,979,063 in unallowable
              and $1,293,386 in inadequately supported costs).
             PSD did not have adequate controls in place to ensure that non-payroll expenditures
              met Federal regulations and grant provisions ($411,383 in unallowable and $764,241
              in inadequately supported costs).
             PSD‟s policies and procedures were not adequate and/or enforced for:
               o JV processing ($6,349,260 in unallowable and $11,928,352 in inadequately
                   supported costs),
               o Travel ($9,532 in unallowable and $2,275 in inadequately supported costs),
               o Imprest fund reimbursements ($10,593 in unallowable and $20,084 in
                   inadequately supported costs),
               o Inventory tracking ($45,808 in unaccounted for equipment), and
               o Contracts (contract provisions were not followed and contract services were
                   rendered prior to approval).
             PSD did not have written policies and procedures for various fiscal processes
              including:
               o Monitoring of budgets ($2,443,885 in unallowable and $2,331,043 in
                   inadequately supported costs),
               o Using Nonpublic Title II, Part A grant funds ($422,956 in unallowable and
                   $10,050 inadequately supported costs),
               o Purchasing from the Office Depot vendor ($66,252 in unallowable costs),
               o Charging of transportation costs ($13,885 in unallowable and $42,655 in
                   inadequately supported costs),
               o Allocating single audit costs, and
               o Charging of indirect costs ($11,063 in unallowable costs).6



6
    Bulleted amounts include duplications across the findings.
Final Report
ED-OIG/A03H0010                                                                                  Page 9 of 131

The lack of adequate fiscal controls resulted in a total of $138,376,068 (unduplicated among the
findings) in unallowable ($17,284,250) and inadequately supported costs ($121,091,818).

In its response to the draft report, PSD did not concur with our findings as a whole. The
response is summarized after each finding issue. The full text of PSD‟s response to the draft
report is included as Enclosure 7 to the report. The Pennsylvania Department of Education
concurred with PSD‟s response.



FINDING NO. 1 – PSD Needed Stronger Controls Over Personnel Expenditures Charged
                to Federal Grants

PSD did not have written policies and procedures for certifying personnel costs charged to
Federal grants. PSD also did not have time and effort certifications for all personnel, and
personnel activity reports were not adequate. In addition, unallocable personnel costs were
charged to the Title I grant. Lastly, PSD‟s payroll policies and procedures were not adequate
because record retention and documentation requirements were not addressed. These
deficiencies resulted in inadequately supported and unallowable costs charged to the grants we
reviewed.

    A. PSD Lacked Adequate Controls to Ensure Salary Costs Charged to Grant Funds
       Were Adequately Supported

PSD charged personnel expenditures that were inadequately supported to Federal grant funds,
resulting in unsupported salary and fringe benefit costs of $123,772,665. Specifically, PSD
could not adequately support the compensation of employees: (1) for all types of remuneration
paid from grant funds ($53,021,174); (2) whose salaries were included in adjusting journal
entries ($33,474,626); and (3) who worked on multiple cost activities ($37,276,865).

Code of Federal Regulations (C.F.R.) Part 225 (Office of Management and Budget (OMB)
Circular A-87) Appendix B, 8., Compensation for Personal Services, a. provides that
compensation for personnel services includes all remuneration, paid currently or accrued, for
services rendered during the period of performance under Federal awards, including but not
limited to wages, salaries, and fringe benefits. The costs of such compensation are allowable to
the extent that the total compensation for individual employees is determined and supported as
provided in OMB Circular A-87, subsection h (see below).

I. Time and Effort Certifications Were Not Maintained for All Grants
Time and effort certifications were not prepared for employees who worked solely on or received
compensation for extra work activities for the following grants, resulting in inadequately
supported salary costs of: 7


7
 The amounts for the Title I and CSR grants were for employees who were paid per diem, overtime, extracurricular
pay, professional development, and summer pay. We could not determine if the employees worked solely on the
grant programs that the funds were charged against or if they were funded by multiple sources.
Final Report
ED-OIG/A03H0010                                                                                  Page 10 of 131

           Special Ed: $22,536,407
           Improving Teacher Quality (Title II, Part A): $11,793,430
           Reading First: $6,048,002
           Title I: $6,972,080
           ED Technology (Title II, Part D): $2,440,237
           Fund for Improvement of Education (FIE): $1,323,929
           Safe and Drug Free: $862,786
           GEAR UP: $531,995
           CSR: $404,022
           Title II, paid through Intermediate Unit 26: $108,287

Federal regulations require the certifications as support for the personnel costs charged to
Federal grant funds. The certifications are required to verify the time and effort spent by an
employee that worked on a grant program. OMB Circular A-87, Appendix B, 8. Compensation
for Personal Services, h. Support of Salaries and Wages, (3) states,

        Where employees are expected to work solely on a single Federal award
        or cost objective, charges for their salaries and wages will be supported by
        periodic certifications that the employees worked solely on that program
        for the period covered by the certification. These certifications will be
        prepared at least semi-annually and will be signed by the employee or
        supervisory official having firsthand knowledge of the work performed by
        the employee.

According to PSD‟s Comptroller, some program managers were not aware of the 100 percent
time and effort certification requirements. They thought the employee daily sign-in sheets were
sufficient documentation for the personnel costs charged to the grant funds.8

II. Time and Effort Certifications Were Not Prepared for Employees Whose Salaries Were
Transferred by Adjusting Journal Vouchers
PSD did not have a procedure in place to ensure that adequate supporting documentation was
maintained before salary costs were transferred and grant funds charged. Using adjusting journal
vouchers, PSD transferred salary costs between the grant funds. PSD could not provide time and
effort certifications for those individuals whose salaries were transferred, resulting in
inadequately supported salary costs of:

           Title I: $11,272,852
           Title II, Part A: $9,768,527

8
  In February 2008, the Department issued revised non-regulatory guidance for Title I, Fiscal Issues that includes
Consolidating Funds in Schoolwide Programs. The revised guidance states that “if a school operating a schoolwide
program consolidates Federal, State, and local funds under section 1114(a)(3) in a consolidated schoolwide pool …
an employee who is paid with funds from that pool is not required to file a semi-annual certification. Because
Federal funds are consolidated with State and local funds in a single consolidated schoolwide pool, there is no
distinction between staff paid with Federal funds and staff paid with State or local funds.” However, PSD did not
consolidate Federal, State and local funds in its schoolwide program. Furthermore, the Department‟s guidance
became effective after our audit period.
Final Report
ED-OIG/A03H0010                                                                    Page 11 of 131

         FIE: $5,027,598
         Special Ed: $3,771,258
         CSR: $1,910,009
         Reading First: $1,387,462
         Safe and Drug Free: $238,635
         Title II, Part D: $82,868
         GEAR UP: $15,132
         Title II, paid through Intermediate Unit 26: $286

According to OMB Circular A-87 Appendix A, C. Basic Guidelines, 1. Factors Affecting
Allowability of Costs, a., b., and j., to be allowable under Federal awards, costs must be
necessary and reasonable for proper and efficient performance and administration of Federal
awards, be allocable to Federal awards, and be adequately documented. We could not determine
whether the salary and fringe benefit costs transferred were allocable and allowable to the grants
charged because the costs were not adequately supported.

PSD policy did not require the POMB to notify the program offices that salaries would be
transferred to their grants by an adjusting JV entry and that certifications would be required for
the individuals whose salaries were transferred. Furthermore, there appeared to have been a lack
of communication between the POMB and the program offices. Although the Director of
Budget, who oversaw the POMB (the office performing the transfers), was aware of the
certification requirements, he did not inform the grant analysts (the individuals performing the
JV transfers) that certifications were required and should be obtained as support for the salary
transfers.

PSD Response to Time and Effort Certifications Not Being Maintained for All Grants (I)
and Prepared for Employees Whose Salaries Were Transferred by Adjusting JV (II):

PSD did not concur with the finding.

In its response, PSD stated that the inadequately supported amount for Finding No. 1 differs
from the amounts in spreadsheets provided by the OIG, and that its response relies on the
spreadsheet amounts.

Time and Effort Certifications
In its response to the draft audit report, PSD stated that it maintains “alternative forms of
corroborating evidence” of sufficient weight and credibility to satisfy the obligation to document
personnel costs. PSD‟s Time and Attendance Personnel Timesheets (TPERs) require employees
to document the time that they work each day and personally initial the record each day. PSD
further stated that when a TPER is combined with an employee‟s job description or an
employee‟s classroom assignment, this is credible alternative documentation that provides the
same corroboration as the twice-yearly certifications.

PSD selected a sample of 6 of its 267 schools and provided documentation for employees paid
from grant funds at the 6 schools as evidence of a representative sample of the records generally
maintained at all PSD schools. The documentation provided included TPERs, staff listings,
Final Report
ED-OIG/A03H0010                                                                    Page 12 of 131

classroom assignments, job titles, and other related documents. Specifically, PSD provided the
following with its response:

       IDEA Salaries
      A Human Resources (HR) document showing that all 25 employees were coded in the
       Advantage system as being funded by the IDEA grant, school staff listings for 9
       employees, and school schedules for 2 employees.

       Title II, Part A Salaries
      For 19 employee salaries, school enrollment data to show that the 11 Reduced Class Size
       (RCS) teachers taught at schools eligible to receive RCS teachers, school schedules, and
       training logs for 6 employees, and a school staff list for 1 employee to show the
       employee‟s job title.

      PSD also noted that all of the employees in its sample representing the Title II, Part A
       grant‟s salary charges had been reversed, as shown on OIG‟s supporting spreadsheets.

       Reading First Salaries
      A spreadsheet containing the Reading First grant charges for 37 employees, with the
       Reading First purpose associated with each charge, references to exhibits containing the
       relevant sign-in sheets and other corroborating evidence. For 36 of the employees, these
       charges related to either professional development activities or extracurricular (EC) work.
       The remaining employee‟s total compensation was funded by Reading First. To support
       this PSD provided a “Request for Extracurricular, Staff Development or Summer
       Activities” form and TPERs for the period November 2005 through June 2006.

PSD also stated that, in order to simplify its process and ease the administrative burden it
implemented procedures in January 2009 to assure that all Federal grant awards with salary costs
complete semiannual time and effort certifications.

Title I and CSR JVs
PSD asserted that because all PSD schools were operated under school-wide plans for the
purpose of school reforms, all of the salary charges and associated benefits for a teacher, part-
time teacher, librarian, counselor, or “other paraprofessional” are eligible Title I grant costs
simply by the fact that these staff members are working in a school-wide program. PSD believes
this fact, combined with the employee‟s TPERs are sufficient supporting documentation to show
that these employees worked on the grants. PSD used the following portion of 20 U.S.C. § 6314
(a)(2)(A) to support this statement: “No school participating in a school-wide program shall be
required…to identify particular children…as eligible to participate in a school-wide program; or
to provide services to such children that are supplementary, as otherwise required by
section 6321 (b) of this title.”
Final Report
ED-OIG/A03H0010                                                                                   Page 13 of 131

Title I and CSR Per Diem, Extracurricular and Professional Development Charges
PSD stated that for the expenditures that were for pay above regular salaries, such as per diem,
EC activities, professional/staff development, or object codes 1211, 1511 and 1611,9 it maintains
sign-in sheets as supporting documentation for the salary charges to the Title I and CSR grants.

OIG Response to PSD Response to Time and Effort Certifications Not Being Maintained
for All Grants (I) and Prepared for Employees Whose Salaries Were Transferred by
Adjusting JV (II):

We provided PSD‟s Comptroller and principal analyst for grants spreadsheets with the
preliminary questioned amounts a week prior to the issuance of the draft report. The day after
the issuance of the draft report we provided, via email, PSD‟s Comptroller with spreadsheets that
contained the final questioned amounts included in the draft report.

Time and Effort Certifications
We disagree that the TPERs combined with either a staff listing, classroom assignment, or job
description provides accurate and adequate supporting documentation of an employee‟s
activities. TPERs document the hours an employee works and show only the amount of time
worked, not the actual activity/activities performed. Furthermore, we could not rely on the
TPERs because during our audit we noted that PSD did not enforce its own TPER sign-out
policy. Therefore, it could not be determined how much time the employee actually worked.
Another issue we noted with the TPERs was that they are not regularly approved by managers.
As stated in the report (see Finding No. 1, C), we reviewed 26 TPERs and found that 23 did not
have an employee sign-out time for all employees listed on the TPER and 14 were not manually
approved by the appropriate supervisor. Also, PSD was not able to locate all the TPERs needed
for our salary sample. Therefore, TPERs may not be an accurate reflection of actual time
worked, verified by appropriate personnel or properly maintained.

Job descriptions would not be adequate supporting documentation for salary costs because they
include only the tasks that an employee is to perform and may not include the amount of time
that is to be devoted to particular grant related activities. During the year, the employee may not
have performed any or all of the tasks listed in the job description. OMB Circular A-87 requires
an after-the-fact certification for time and effort documentation, and job descriptions would not
fit this purpose. Furthermore, most job descriptions are not grant specific and would, therefore,
not show which grant an employee‟s salary is to be funded from. For example, a Title II, Part A
RCS teacher would have the same job description as a teacher paid from the general fund. Even
if the job description did include grant funding information, it may not be accurate, as we found
during our review. We reviewed 2 JVs transferring 25 percent of 5 PSD attorneys‟ salaries from
the general fund into the IDEA grant fund. The movement of the salaries was to represent the
amount of time the attorneys spent providing IDEA professional development to schools.
However, the attorneys‟ job descriptions showed that only 10 percent of their time was to be
devoted to this task.



9
 The object codes 1211, 1511 and 1611 respectively are per diem, extracurricular activities, and professional
development.
Final Report
ED-OIG/A03H0010                                                                     Page 14 of 131

Also, PSD has not been consistent in preparing job descriptions for employees (see Other
Matters, A Lack of Position Descriptions for Personnel in Senior Management). There is a
strong possibility that job descriptions may not exist for all positions paid by grant funds.

Staff listings and classroom assignments show only the rooms the employees are to work in.
They do not show what tasks were completed while working in these rooms.

The purpose of the TPER is to document the hours worked. The purpose of the other
documentation PSD discussed is to document activities planned to be worked on or assigned to
be worked on or a planned funding source, not what actually occurred. The purpose of the
personnel activity report is to certify and verify that the employee‟s salary paid from grant funds
is commensurate with his\her percent of effort worked on the grant. The TPER along with the
alternative documentation does not provide this certification or verification.

In addition, PSD did require time and effort certifications to be completed by employees who
worked on some grants (Title I and CSR); therefore, it is reasonable to expect that PSD would
require it for employees being funded by all applicable grants.

Review of PSD Sample
We have two major concerns with the sample provided by PSD. The first concern is that PSD
was not able to provide complete supporting documentation or rationale for the sampling
methods used to select the six schools.10 In a September 2009 meeting with PSD, it was
disclosed that PSD selected the 6 schools from the 40 schools in the district having both Title I
and IDEA funding streams. When we requested documentation showing how the six schools
were selected, the principal analyst for grants, who selected the sample, stated the rationale was
in his head.

This calls into question PSD‟s statement that the documentation gathered from the six schools is
representative of the records generally maintained at all PSD schools. This statement cannot be
supported if the sample was not randomly selected.

Our second concern is the lack of verification concerning the accuracy of the funding codes for
the employees and the supporting documentation provided for the sample. PSD did not verify
the accuracy of all the supporting documents provided to us for the transactions in the sample it
selected. We inquired whether the spreadsheet data and other employee funding codes had been
verified to the underlying supporting documentation. The principal analyst for position control
stated that she verified only the funding codes to the Advantage system for the first employee in
each exhibit. To support this we were given Advantage printouts dated the day prior to our
meeting.

We also found that PSD did not verify the funding codes to a source other than the Advantage
system, such as personnel files, that would show the position the employee held. In our review
we found numerous employees coded to certain positions in the Advantage system that PSD was
not able to show had actually worked in that position. For example, PSD transferred the salaries

10
     During the audit period PSD had 291 schools operating.
Final Report
ED-OIG/A03H0010                                                                                   Page 15 of 131

of 156 employees stating they were Transition Support Tutors; however, 32 of the 156 were not
on any Transition Support Tutor list supplied by PSD (see Finding No. 4, A). Without the
appropriate and complete verification of the PSD sample, it cannot be considered reliable.

IDEA Salaries
The document that PSD referred to as an “HR document” was an Excel spreadsheet that had
employee names, funding codes that the employees were to be paid from, and employee position
titles. The documentation did not show what work was actually performed. As stated above,
PSD did not provide supporting documentation showing that the funding codes or the position
titles for the employees listed on the spreadsheet had been properly verified.

The school staff lists showed only where the teachers were assigned within the school, not the
work the employee performed. The two school schedules provided showed the rooms where the
teachers were working but did not provide any information to show the tasks performed while in
these rooms that we could relate to grant functions. For example, the schedule for one teacher
showed that the employee was assigned to “Room 28,” under this is written “Learning Support.”

Title II, Part A Salaries
PSD actually identified 18 employees paid from the Title II, Part A grant in its 6-school sample.
For the 11 employees that PSD used to illustrate the schools‟ need for a RCS teacher, it failed to
show that the employees paid from Title II, Part A funds were actually the employees used as
RCS teachers. We reviewed a JV transfer from the general fund into Title II, Part A grant funds
for salary costs for 66 RCS teachers. We reviewed supporting documentation for 31 of the 66
teachers and found of the 31, 8 of which PSD agreed with, were not RCS teachers (see Finding
No. 4, A). Furthermore, PSD also provided the same type of school enrollment data during our
audit as it did with its response for the remaining 35 teachers, and those teacher‟s salaries were
also inadequately supported.11

PSD provided only schedules for three of the six employees included in its response. For two of
the three employees, PSD provided only schedules for one semester during the 2005-2006 school
year. According to OMB Circular A-87, Appendix B, 8, h, (3), PSD would be required to
provide a schedule for both semesters during the school year, so providing only one semester did
not fulfill the time and effort certification requirements. The schedules also did not show what
tasks the employee actually performed. In fact, the schedules further call into question whether
the employees actually worked on activities relating to the Title II, Part A grant. For example,
the schedules for all three employees showed that a period of their day was spent providing prep
time to teachers.12 Prep time is not a Title II, Part A activity. Also, one employee worked part of
her day performing entrance and exit duties at the school. These tasks, by title alone, do not
appear to be activities related to Title II, Part A grant activities.



11
   In a July 7, 2008, email PSD‟s Comptroller and principal analyst for grants were apprised that the documentation
provided to support the JV was insufficient and did not show that the teachers transferred as RCS teachers actually
were used by the school as RCS teachers.
12
   Prep time is a free period given to teachers through their union bargaining agreement. This time is to allow the
teacher time to prepare class lessons.
Final Report
ED-OIG/A03H0010                                                                     Page 16 of 131

Although PSD indicated in its response that it provided the training logs for six employees, it
actually provided training logs for only one employee. The training logs provided do not show
how the activity met the goals for the Title II, Part A grant. For example, an activity was listed
on a log titled “Title I Professional Development” as only, “Presented information about the End
of Grade Testing. Discuss school requirements for retention and promotion.” There was no
further explanation of these activities.

PSD has not been able to show that teachers coded as RCS teachers were teachers hired for the
purpose of reducing class size. The sample data submitted were not complete and the
information provided did not show whether work was performed for the grant.

In addition, PSD‟s response also illustrated that there may have been coding errors involving two
employees in its sample. Footnotes 4 and 5 in its response state that a teacher was coded in the
accounting system to the wrong school, and that in another situation, the Title II grant paid for a
second grade teacher when the grant should have funded a fifth grade teacher.

Furthermore, PSD‟s statement is incorrect that the salaries had been reversed for all of the
employees in its sample that were paid from Title II, Part A grant funds. During the September
2009 meeting we held with PSD, we were informed by PSD‟s counsel that a match was
performed using the salary amounts transferred and those paid in the sample to determine
whether the employees‟ salaries had been reversed. We were provided supporting
documentation for this statement the following week, which showed only that five employees‟
salaries had been reversed and not all of those in the sample. The reversals had already been
incorporated into our work and the spreadsheets we provided to PSD.

Reading First Salaries
The spreadsheets provided for the Reading First grant expenditures are nothing more than Salary
History Reports for the three schools. The reports show the Reading First expenditures for each
employee; however, PSD failed to provide all of the other information it stated in the text of the
response would be included on this exhibit, such as the Reading First purpose for each
expenditure and a reference to more detailed information. PSD did not provide the TPERs for
the one employee (the hiring information was provided twice, each time in separate exhibits);
however, if the TPERs were provided they would have showed only the hours worked. The
“Request for Extracurricular, Staff Development or Summer Activities” form provided for the
employee showed only why the employee was hired, not what the employee actually did while
working. This information is incomplete and does not provide adequate supporting
documentation for the personnel costs charged to the Reading First grant.

PSD‟s statement that it created policies and procedures to implement time and effort
certifications supports our position that its process was not adequate. This is further shown by the
inconsistent information provided by PSD as supporting personnel expenditure documentation
for the three grants in its sample. The inconsistent information provided makes it apparent that
PSD had no uniform process in place to support the personnel costs charged to Federal grants.

PSD did not provide its new policies and procedures nor did it provide supporting documentation
to show the procedures had been implemented.
Final Report
ED-OIG/A03H0010                                                                    Page 17 of 131


Title I and CSR JVs
PSD failed to show how the criteria cited applied to the appropriate certification of those salary
expenditures transferred into the Title I and CSR grants. We are not requesting that PSD identify
particular children or the supplemental services. The time and effort certifications are to certify
and verify personnel charges to the Title I and CSR grants. Furthermore, using the object code
and the employee‟s TPER is not reliable supporting documentation. During our audit, along
with the issues found concerning the TPERs, we found that PSD‟s use of the ABC codes needs
improvement (see Other Matters, ABC Code Usage Needs Improvement). For example, we
found invoices from bowling alleys and invoices for portable toilet rentals that were coded to a
salary object code.

Per Diem, Extracurricular Activities and Professional Development Charges
As stated in the report, OMB Circular A-87 Appendix B, 8, a. provides that compensation for
personnel services includes all remuneration, paid currently or accrued, for services rendered
during the period of performance under Federal awards including but not limited to wages,
salaries, and fringe benefits. Therefore, PSD must certify all types of personnel charges to
Federal grants, not just salaries.

We reviewed JVs for salary transfers coded to object codes, 1211, 1511, and 1611 (see
footnote 9 for code descriptions) that PSD stated in its response it was able to support with
documentation already maintained, such as sign-in sheets. However, PSD did not provide us
with adequate documentation. For example, the RCS teacher and principal training salary
transfers that were coded as object code 1211 and 1611, respectively, were not adequately
supported (see Finding No. 4, A). In addition, ESOL tutoring expenses were transferred and
coded to object code 1511, along with the corresponding fringe benefits for these salaries using
the same object code. Fringe benefit costs for ESOL tutors are not an allowable expense, as
stated in the finding (see Finding No. 4, A). Our review found that salary costs using these
object codes were inadequately supported and involved unallowable costs. Our work does not
support PSD‟s statement that salary costs associated with those object codes are adequately
supported by the documentation it currently keeps.



   A. PSD Lacked Adequate Controls to Ensure Salary Costs Charged to Grant Funds
      Were Adequately Supported (Continued)

III. Time and Effort Certification Process for Title I and CSR Positions Paid from Multiple
Funding Sources Was Not Adequate
The personnel activity reports that were prepared by PSD for positions funded by multiple
funding sources did not meet Federal regulations. The activity reports were completed
semiannually, not monthly, and did not coincide with a pay period, as required by
OMB Circular A-87, Appendix B, 8. Compensation for Personal Services, h. Support for Salaries
and Wages, (4), which states,
Final Report
ED-OIG/A03H0010                                                                      Page 18 of 131

       Where employees work on multiple activities or costs objectives, a
       distribution of their salaries or wages will be supported by personnel
       activity reports or equivalent documentation which meets the standards in
       subsection (5)…Such documentary support will be required where
       employees work on:
       (a) More than one Federal award,
       (b) A Federal award and a non-Federal award….

       Subsection (5) (c) states, Personnel activity reports or equivalent
       documentation must meet the following standards: …
       (c) They must be prepared at least monthly and must coincide with one or
           more pay periods.

We could not determine the exact amount of the inadequately supported costs because PSD
could not determine the number of positions that were multiple funded for the audit period. The
only information provided was the budgeted amounts for those positions that were to be split
between the Title I and CSR grants and/or another funding source. The total salary and fringe
benefits costs budgeted for these positions for the audit period for the Title I and CSR grants was
$36,785,218 and $491,647, respectively.

As a result of PSD not certifying all personnel costs charged by the payroll system or by
adjusting JV transfer to the Federal programs in our review, Federal grant funds might have been
used to pay PSD employees who did not perform any work for the programs. Also, PSD did not
have the information needed to correctly allocate personnel costs for employees working on
multiple programs.

PSD Response to Time and Effort Certification Process for Title I and CSR Positions Paid
from Multiple Funding Sources Was Not Adequate (III):

Lack of Personnel Activity Reports
PSD presented three factors that called the OIG‟s reasoning into question. First, PSD stated that
the OIG‟s methodology was fundamentally unsound. PSD stated that the OIG cannot reasonably
find that PSD had expended funds in an improper manner or without sufficient supporting
documentation strictly on the basis of budgeted figures. Also, to rely on budgeted numbers when
actual expenditures were provided is contrary to accepted audit practice. PSD then referred to
spreadsheets previously provided to the OIG.

The second factor PSD noted was that all of the budgeted positions listed on the spreadsheets
were not split funded. PSD stated that it appeared the OIG used any non-whole number position
shown on a school‟s Title I budget. When a school‟s budget contains a non-whole number of
Title I positions that is greater than one, only the amount to the right of the decimal represents a
split salary. The OIG used 408.36 positions for the basis of the finding when 206 of those
positions were funded 100 percent by Title I. PSD also provided an exhibit that showed the
breakdown of whole number and non-whole number positions.
Final Report
ED-OIG/A03H0010                                                                     Page 19 of 131

PSD‟s third factor that it stated called the OIG‟s reasoning into question related to the budgeting
of a salary as a “split salary,” even though the position was devoted exclusively to the Title I
grant. PSD stated that the documentation previously provided to the OIG showed that
employees split between the Title I or CSR grants and another Federal or non-Federal funding
source still worked 100 percent on activities properly allocable to the Title I or CSR grant.

OIG Response to PSD Response to Time and Effort Certification Process for Title I and
CSR Positions Paid from Multiple Funding Sources Was Not Adequate (III):

We used budgeted amounts because, as stated in the finding, PSD only provided us with the
budgeted amounts for the audit period (July 2005 through June 2006). Also, PSD charged
salaries and benefits based solely on budgeted amounts to the grant funds. For example, during
our audit period, PSD charged salaries and benefits ($6,943,833) for prep time and salaries
($94,432) for school police officers to Title I grant funds based on budgeted amounts.

In March 2009, PSD provided the spreadsheet that it refers to in the response. On April 3, 2009,
we met with PSD concerning the spreadsheet. At this meeting it was disclosed that the
spreadsheet contained only a portion of the year‟s split salaries and may have excluded some
salaries as well. The principal analyst for position control stated that all the salaries on the
spreadsheet were for employees who were entered into the Advantage system as split funded and
that it is a common practice for the principals, who have employees with split funded positions
that total a whole position, not to enter the split funded positions as such in the Advantage
system. Also, it was disclosed that the amounts were from mid-year JVs that were done to move
all the split funded salaries entered into the Advantage system. The principal analyst for position
control stated that this JV occurred in approximately February 2006. No other documentation
was provided to us. Also disclosed at this meeting, by the principal analyst for grants, was that
the information provided does not in any way support that the employees worked solely on a
single cost activity.

The auditor in charge informed PSD that this information was not complete or sufficient in an
April 17, 2009, email sent to PSD‟s Comptroller, principal analysts for grants and position
control, the Title I Director, the Budget Director, the Deputy Budget Director, and outside
counsel. During the September 18, 2009, meeting with PSD, it was disclosed that the
information provided with its response was the same information from the April 3, 2009,
meeting and it had not been updated since that meeting.

Furthermore, if the employees worked 100 percent on the Title I or CSR grant, as stated by PSD,
then they should have completed the appropriate time and effort certifications.

We reiterate that PSD should ensure that its personnel activity reports for employees that work
on multiple grant activities are completed at least monthly and coincide with at least one pay
period.
Final Report
ED-OIG/A03H0010                                                                    Page 20 of 131

   B. PSD Did Not Monitor Personnel Costs Paid by the Title I, Part A Grant to Ensure
      Costs Charged Were Allocable

PSD charged personnel costs for Head Start teachers and school police officers to Title I, Part A
grant funds that were not allocable to the grant.

I. Head Start Employees
PSD inappropriately charged $2,888,140 for the salaries and fringe benefits for 64 Head Start
teachers and classroom assistants to Title I, Part A grant funds. Although Title I grant funds may
be used to pay for such costs, PSD did not perform certain actions that must be taken or have
certain required factors in place for this to be an allowable grant expense.

First, Head Start is not a Title I, Part A program. Secondly, payment of Head Start personnel
costs should have been included in PSD‟s 2006 Title I, Part A consolidated application, approved
by the Pennsylvania Department of Education (PDE), as required by Title I, Part A- Section
1112 (b)(1)(E), which provides that each local education agency plan shall include a description
of how the local education agency will coordinate and integrate services under Title I with other
educational services at the local educational agency or individual school level. PSD did not
include such a description relating to the payment of personnel costs in its application. Third,
U.S. Department of Education Non-Regulatory Guidance (March 2004), Serving Preschool
Children Under Title I, Part A, Section G .3., stated that Title I funds may be used to provide
services to complement or extend Head Start programs for children who are also eligible for
Title I services; however, the teachers and classroom assistants did not provide additional
services to PSD‟s Head Start program. The personnel costs were for Head Start teachers and
assistants. Therefore, the services they provided did not complement or extend the Head Start
program. Lastly, these costs also should have been adequately supported, but were not. None of
the 64 teachers and assistants completed the required time and effort certifications.

PSD considered the Title I grant to be a “contingency source” of funds for Head Start salaries.
In an email dated September 17, 2008, that was from the current Program Director of
Pre-kindergarten Head Start, provided to us by the current principal analyst for grants, it was
stated that, “the 243 teachers would have been funded presumably through a combination of the
State Head Start (HSSA) grant and the Federal pair of Head Start (primary source) & Title I
(contingency source).” Title I funds should not be used as a contingency source to pay for Head
Start program personnel costs.

OMB Circular A-87, Appendix A, C., Basic Guidelines, 1., Factors Affecting Allowability of
Costs, a.-j., provides that for a cost to be allowable, it must be necessary and reasonable for
efficient performance of Federal awards, be allocable, authorized, or not be prohibited under
State or local laws, be accorded consistent treatment, be in accordance with generally accepted
accounting principles, be net of all applicable credits, and be adequately documented. The salary
and fringe benefit costs were not allocable to the grant or adequately supported, and therefore,
were unallowable grant expenses.
Final Report
ED-OIG/A03H0010                                                                                   Page 21 of 131

PSD Response to Head Start Salaries Paid from the Title I Grant (I):

PSD stated that it was incorrect to determine paying Head Start teachers from Title I funds was
unallowable. PSD also stated that although Head Start Performance Standards do not require
that grantees employ certified teachers, all of PSD‟s Head Start teachers have Commonwealth of
Pennsylvania teaching certificates. For this reason, PSD must compensate its Head Start
teachers at a higher level.

OIG Response to PSD Response to Head Start Salaries Paid from the Title I Grant (I):

PSD did not provide any argument, explanation, or supporting documentation to show why the
Head Start salaries are allowable Title I grant expenditures. Additionally, paying for the Head
Start teachers‟ salaries was not in-line with PDE requirements. PDE‟s 2005-2006 program
review instrument13 for the Title I, Part A program (Fiscal Requirements, 3) stated that one of the
items PDE required of an LEA was that the LEA expend Title I funds on activities that
correspond with what was outlined in the Title I application. As stated in the finding, PSD did
not include the payment of Head Start teacher salaries in its application.

II. School Police Paid from Title I Funds
In May 2006, PSD transferred $94,432,14 for the partial salaries of school police officers, from
the general fund into the Title I grant fund. In an email dated March 7, 2006, a PDE Division of
Federal Programs official stated that PDE would approve PSD paying for school police officers
from Title I funds if the affected schools revised their school-wide plans and PSD stated why
Safe and Drug Free funds were not being used. In an undated letter responding to the official,
PSD‟s Budget Director stated that the school-wide plans would be revised and that Safe and
Drug Free funds were being used in other areas.15 In March and April 2006, school-wide plans
were revised; however, PSD did not revise the school-wide plans of all 15 schools affected. The
school-wide plans of Gillespie Middle, Potter Thomas, Penn Treaty, and Pepper Middle schools
were not revised.

The POMB and the Title I program office did not adequately communicate concerning which
schools were affected by the transfer of funds since PSD did not revise all the appropriate
school-wide plans. Because the school-wide plans were not revised, as required by PDE, and the
costs were not necessary and reasonable for the efficient performance of the Title I program, as
required by OMB Circular A-87, Appendix A, C. Basic Guidelines 1. Factors Affecting
Allowability of Costs, unallowable costs of $22,800 were charged to the Title I grant for the four
schools.




13
   Program review instruments are the guides PDE uses to monitor the Department grants that it passes through to
the LEAs.
14
   The $94,432 is included in the salary transfer amount in subpart A, II of this finding.
15
   On June 5, 2006, PSD corresponded with a different official within the PDE, concerning another issue, and stated
that there were $558,437 in unexpended funds in the Safe and Drug Free Schools grant.
Final Report
ED-OIG/A03H0010                                                                       Page 22 of 131

PSD Response to Head Start Salaries Paid from the Title I Grant (I):

PSD stated that there is no legal authority that required schools to amend their school-wide plans
for the salaries to be allowable if paid from Title I grant funds. In addition, the four schools cited
did amend their budgets.

OIG Response to PSD Response to School Police Paid from Title I Grant Funds (II):

PSD was instructed by PDE to revise its school-wide plans. The schools that did not revise their
school-wide plans expended funds in violation of a State required procedure. Federal regulation
34 C.F.R. § 80.20 (a) requires that grant funds be expended according to state procedures. PSD
did not provide any supporting documentation showing that the schools in question had amended
budgets to account for the school police officer salary transfers.

   C. Payroll Policies and Procedures Were Not Adequate

PSD‟s payroll policies and procedures did not address TPER retention, documentation
requirements for overtime and bonus payments, or provide an adequate definition of the sign-in
and sign-out process. As a result, we found inadequately supported salary costs as a result of
missing TPERs, inadequately supported overtime costs, TPERs that did not support salary
amounts paid, and a bonus that was paid to an individual who did not meet the time requirements
for bonus payment.

We reviewed payroll transactions, totaling $57,921 (included salary, bonus, and overtime
transactions), and found $2,669 in unsupported costs and $1,500 in unallowable costs paid by
Title I grant funds during the audit period. PSD processed payroll through the Advantage
Payroll System. Employees were required to sign in and sign out daily on bi-weekly sign-in
sheets (hardcopy TPER). The principal, assistant principal, or manager was required to approve
the TPER.

Unsupported Costs
We reviewed $29,400 in salary costs and found that $1,795 could not be supported because of
two missing TPERs. We also reviewed $2,009 in overtime payments and found that $874 could
not be supported because of missing TPERs or the lack of time being recorded on the TPER for
two separate pay periods for one employee. In addition, the employee was paid the same amount
of overtime for both pay periods, even though one of the pay periods included the Thanksgiving
holiday break. Personnel costs must be supported by source documentation, as required by
34 C.F.R. § 80.20 (b)(6) Standards for Financial Management System, which provides that local
educational agencies must support accounting records by source documentation such as
cancelled checks, paid bills, time and attendance records, and other documents of the like kind.
In addition, OMB Circular A-87, Appendix A, C., Basic Guidelines, 1. Factors Affecting
Allowability of Costs, j., provides that for a cost to be allowable it must be adequately
documented.

Also, we found instances where employees did not enter a sign-out time onto the hardcopy TPER
as required by PSD‟s payroll policies and procedures. All employees listed on the TPER did not
Final Report
ED-OIG/A03H0010                                                                                   Page 23 of 131

sign out for the workday on 23 of the 26 TPERs we reviewed.16 For example, on one TPER
from William Penn High School, all 9 employees listed on the TPER did not sign out at all
during the 2-week pay period, resulting in 90 instances of missing sign-out times for the pay
period. In addition, we noted 14 instances, out of the 26 TPERs reviewed, where supervisors did
not manually approve the TPERs, as required by PSD policy. PSD‟s payroll policy “614. Payroll
Authorization” stated, “Daily sign-in and sign-out procedures adequate to meet wage and hour
requirements and Board policy are required of all employees” and that “The payroll shall be
certified by the building principals or appropriate directors”; however, this was not done. In
addition, although the policy required daily sign-in and sign-out procedures, it did not delineate
what the sign-in and sign-out procedures required. Additionally, the policy did not address
TPER retention requirements.

PSD Response to Payroll Policies and Procedures Were Not Adequate (Unsupported
Costs):

PSD stated that the OIG misunderstands PSD‟s policies and procedures concerning TPER sign-
outs. The policy states that sign-outs are only required as necessary “to meet wage and hour
requirements.” The OIG did not identify any case where wage and hour laws would call for
employees to sign out and an employee failed to do so.

OIG Response to PSD Response to Payroll Policies and Procedures Were Not Adequate
(Unsupported Costs):

PSD‟s payroll policy actually stated, “Daily sign-in and sign-out procedures adequate to meet
wage and hour requirements and Board policy are required of all employees.” If PSD‟s policy
requires employees to document the time worked each day, as stated by PSD in its response, then
a sign-out time should be included on the TPER. Also, PSD did not address the missing TPER
issue.

Unallowable Costs
We reviewed $26,125 in bonus payments and found that a $1,500 bonus was paid in error. The
bonus was paid to a teacher who did not complete the amount of service time required to receive
the bonus. The teacher left before completion of the 150-day requirement that qualified her to
receive the initial $1,500 new hire bonus payment. PSD‟s Bonus Payment Guidelines for New
Hire, Critical Subjects and Critical Schools required that bonuses be paid to certified teachers
receiving a satisfactory rating who met the new hire bonus requirements. The requirements were
that the initial bonus payment was paid after the first 150 calendar days of service and the
balance was received at the end of the 37th month. PSD did not determine whether the teacher
met all the requirements for bonus payment, nor did its payroll policy or bonus payment
guidance include a process to be used to ensure that teachers met all the requirements before they
were paid a bonus.

PSD management did not maintain an adequate internal control environment by ensuring that
payroll policies and procedures included adequate controls and that processes were clearly

16
     We are not questioning any costs for these employees because they were salaried employees.
Final Report
ED-OIG/A03H0010                                                                                     Page 24 of 131

defined. For those policies and procedures that were in place, PSD did not enforce them.
Therefore, grant funds may have been used for salary, overtime, and bonus payments that should
not have been paid. PSD did not use fiscal controls and fund accounting procedures that insured
proper disbursement of and accounting for Federal funds, as required by 34 C.F.R. § 75.702.

PSD’s Response to Payroll Policies and Procedures Were Not Adequate (Unallowable
Costs):

PSD did not provide a response to this portion of the finding.

Recommendations:

We recommend that the Assistant Secretary for Elementary and Secondary Education, in
collaboration with the Assistant Secretary for Special Education and Rehabilitative Services,
Assistant Secretary for the Office of Post Secondary Education and the Assistant Deputy
Secretary of Safe and Drug Free Schools instruct the PDE to require PSD to:

         1.1      Return the $2,978,844 17 in unallowable salaries, benefits, and related indirect
                  costs to the Department.

         1.2      Provide adequate documentation to support $107,005,05218 in inadequately
                  documented personnel expenditures or return any portion of that amount the
                  Department determines is not adequately supported.

         1.3      Implement and enforce policies and procedures requiring all employees who work
                  on a single program to complete semiannual time and effort certifications and
                  monthly personnel activity reports for employees funded from multiple funding
                  sources, whose salaries are paid from grant funds, either directly or by JV
                  transfer, and revise the process for preparing personnel activity reports to meet
                  Federal regulations.

         1.4      Develop and implement policies and procedures that will ensure that expenditures
                  charged to grant funds are reasonable, allocable, and allowable expenditures of
                  the grant from which they are being paid.

         1.5      Revise policies to ensure TPERs are retained for a minimum of 3 years, overtime
                  is properly documented and is verified before payment is made, and bonus
                  payments are paid properly. Additionally, revise the payroll policy to delineate
                  the daily sign-in and sign-out requirement. Also develop a process to ensure that
                  the payroll authorization policy is followed.




17
   This amount includes all unduplicated unallowable expenditures and related indirect costs at a rate of 2.28 percent
of the unallowable costs. See Enclosure 1 for a calculation of this amount.
18
   See Enclosure 2 for a table detailing the unduplicated costs.
Final Report
ED-OIG/A03H0010                                                                                  Page 25 of 131

FINDING NO. 2 – Supplanting of Federal Funds

PSD used Federal grant funds to supplant state and local funding. The types of expenditures
made that supplanted the funds included expenditures for contracted services, teacher training,
computer equipment, and software. All of the expenditures were made at the district level. PSD
also may have supplanted local funding by charging a portion of the school choice transportation
costs to the Title I grant.

We reviewed 110 JV transactions, totaling $47,668,116, and found that $6,979,063 was charged
to grant funds that supplanted state and local funding. We also reviewed another JV, totaling
$1,293,386, relating to school choice transportation costs, that was not part of the sample above.
The following amounts, by grant, were supplanted:

        Title I: consulting contracts with university partnerships ($2,848,988), consulting
         contracts entered into by PSD‟s High School Reform office ($2,400,000), and school
         choice student transportation costs (undetermined amount-see below); totaling
         $5,248,988.
        Title II, Part A: salaries and benefits related to the new teacher training program, totaling
         $1,395,685.
        Title II, Part D: computer equipment ($267,979) and software ($66,411), totaling
         $334,390.

According to Department Non-Regulatory Guidance on Title I Fiscal Issues (2006) 19 and the
OMB Circular A-133 Compliance Supplement, Section III (G) (2.2) b, dated March 2006,
supplanting occurs when a state or local education agency uses Federal funds to provide services
they provided with state or local funds in the prior year. Although this criterion did not apply to
school level expenditures in a school-wide program, it did apply to district level expenditures.

Under the Federal “supplement not supplant” requirement,20 PSD may use Department funds
only to supplement and, to the extent practical, increase the level of funds that would, in the
absence of the Federal funds, be made available from non-Federal sources (State and local) for
the education of participating students. In no case should PSD have used Federal program funds
to supplant funds from non-Federal sources. PSD did not supplement the non-Federal funds but
replaced the state and local funds with Federal funds. The majority of the expenditures were
expensed from state or local funds and then were transferred at year-end from the general fund or
state funds into Department grant funds. 21

19
   In February 2008 the Department released updated guidance, Non-Regulatory Guidance on Title I Fiscal Issues;
Maintenance of Effort; Comparability; Supplement, not Supplant; Carryover; Consolidating Funds in Schoolwide
Programs; and Grantback Requirements, illustrating how LEAs should consolidate school funds. Had this guidance
been in effect during the audit period, PSD‟s school based Title I expenditures, totaling $6,327,025, found during
our review would have supplanted local funding. This includes salaries and contracts for Transition Support Tutors
($4,555,099), ESOL tutor salaries and benefits ($1,666,981), school police officer salaries ($94,432), and general
education expenses ($10,513).
20
   Provided by NCLB Title I, Part A, Section 1120A(b), Title II Part A, Sections 2113(f) and 2123(b), and Title II,
Part D, Section 2413(b)(6).
21
   The transfers for the Title I, Part A contracting expenses and the Title II, Part D computer expenses (totaling
$5,583,378) were year-end adjusting entries.
Final Report
ED-OIG/A03H0010                                                                                      Page 26 of 131


Contracts
Contracted services, totaling $2,400,000, included payments to a moving company and a
company that created custom banners. There were also contracting expenses, totaling
$2,848,988, for PSD‟s university partnerships that included payments for Federal Express
shipping charges, a payment to a local deli for catering and payment to a management consulting
firm. Supplanting occurred because these contracts were paid from non-Federal funding sources
in prior years. Also, they were budgeted to be funded from non-Federal sources during the audit
period.

Teacher Training Program
In three separate JV transfers PSD moved $1,803,713 in expenses, including salaries, benefits,
contract services and materials, associated with the new teacher training program from state
funding into Title II, Part A. Portions of two of the JVs, totaling $1,395,685, supplanted state
funding since in the prior year these items were funded by the Empowerment Grant (State
funding).22

Computer Equipment and Software
PSD transferred $320,452 and $66,411 in expenditures coded to computer equipment and
software. Of the $320,452 in computer equipment, $267,979 supplanted local funds spent in the
prior year while all of the $66,411 in computer software supplanted local funds.

School Choice Transportation
PSD transferred $1,293,386 paid from the general fund for school choice student transportation
costs into the Title I grant.23 According to the supplement not supplant requirement in Title I,
Part A, Section 1120A (b), if an LEA uses local funds to transport students to their school of
residence, the LEA may only use Title I, Part A funds to pay the incremental costs of
transporting students to their school of choice. PSD provided us with only the costs of
transporting the students to their school of choice; therefore, we could not determine whether the
amount transferred represented the incremental cost of transporting the students.24 We requested
supporting documentation showing how PSD determined the amount transferred was for
incremental costs or the costs above those it would have incurred transporting the students to
their home school; adequate support was not provided.25

NCLB Title I, Part A, Section 1114, School Wide Plans (a)-(b) provides that funds must be used
to address the educational needs of a school identified by the needs assessment and articulated in
the comprehensive plan and may not be used for non-educational activities.

22
   The total amounts of the two JV transfers were not supplanted. As stated the supplanted amounts only represents
the costs funded by State funding in the prior year.
23
   See Finding No. 5, subpart C for more information on the movement of costs for school choice student
transportation. We are questioning a portion of these costs in Finding No. 5.
24
   PSD provided us with supporting documentation and confirmation that costs for 546 of the 728 students were for
the full cost of the students being transported to school not the incremental costs. We were not provided with
adequate supporting documentation to determine the amount of the supplanted costs for those 546 students.
25
   In the prior year PSD only used $726,361 in Title I funds for school choice student transportation and had an
entirely different method for determining the costs to allocate to the Title I grant. Neither the difference nor change
in allocation method was explained to us.
Final Report
ED-OIG/A03H0010                                                                                    Page 27 of 131


PSD could not demonstrate that it would not have received or provided the services or equipment
in question with non-Federal funds had the Federal funds not been available. PSD would have
had to have a reduction in or lack of state or local funds available to pay for these expenditures
from Federal funds. However, PSD did not have a reduction in or lack of state and local
funding; it overspent its local funds, as shown by the deficit incurred in the general fund.

During the 2005-2006 school year PSD incurred a deficit in its general fund. The former Chief
Financial Officer (CFO) stated that PSD first identified that it was headed for a deficit in the fall
of 2005. The balance in the general fund on June 30, 2006, was negative $66.1 million. The
former CFO stated that the deficit was partially a result of PSD‟s inadequate controls and
controls that were not being followed. PSD transferred charges to grant funds to absorb costs
already incurred by the general fund, which caused the supplanting of Federal funds. The former
CFO and former principal analyst for grants both stated that transfers to move charges from the
general fund into state and Federal grants were done at the direction of the Budget Director. The
Budget Director stated he had meetings with the former Chief Executive Officer (CEO) to
discuss movement of charges. Spreadsheets prepared by the Budget Director, for his meetings
with the former CEO, show a projection of the “deficit relief” if the charges were transferred into
state and Federal grant funds. PSD did not determine whether the movement of these charges
would be supplanting of Federal funds.

PSD did modify its controls, to be effective in FY 2008, as a result of the deficit in the general
fund. These controls included the requirement that program offices submit an operating (general
fund expenditures) plan of contracted service expenditures prior to the start of the fiscal year to
better assess proposed resolutions and to provide a check against program managers over
committing their resources. PSD was not proactive in creating additional controls and only
enhanced its controls as a reaction to this major financial crisis. Had additional controls been
enacted prior to the audit period, the excessive spending in the general fund may have been
curtailed.

Recommendations:

We recommend that the Assistant Secretary for Elementary and Secondary Education require
PDE to instruct PSD to:

         2.1      Return the $7,138,18526 in unallowable supplanted charges and related indirect
                  costs to the Department.
         2.2      Provide adequate documentation to support that the $1,293,386 paid from the
                  Title I grant were the incremental costs for transporting the school choice students
                  or return any portion of that amount the Department determines is not adequately
                  supported.
         2.3      Enforce the modified controls and develop and implement any additional policies
                  and procedures necessary to ensure that Federal funds are not supplanted.

26
  This amount includes all unallowable expenditures and related indirect costs at a rate of 2.28 percent. See
Enclosure 1 for a calculation of this amount.
Final Report
ED-OIG/A03H0010                                                                      Page 28 of 131


PSD Response:

PSD did not concur with the finding.

PSD stated that the OIG used the wrong method of testing for supplanting. Whereas a
presumption of supplanting typically arises if Federal funds provide services that it provided
with non-Federal funds in the prior year, this is not the case in the context of a school-wide
program. The U.S. Department of Education has issued guidance indicating that, “[a] school
operating a school-wide program does not have to: (1) show that Federal funds used with the
school are paying for additional services that would not otherwise be provided; (2) demonstrate
that Federal funds are used only for specific target populations; or (3) separately track Federal
program funds once they reach the school.” See U.S. Dep‟t of Educ., “Non-Regulatory
Guidance, Title I Fiscal Issues: Maintenance of Effort; Comparability; Supplement, Not
Supplant; Carryover; Consolidating Funds in Schoolwide Programs; Grantback Requirements,”
at 37 (2008) [sic].

PSD stated schools not consolidating state, local, and Federal funding is irrelevant.
Consolidation relieves school-wide program schools from various programmatic, accounting,
and reporting requirements. A school that consolidates its Federal and non-Federal assistance
need not maintain separate books and records demonstrating that it has expended its Federal
funds exclusively for award purposes so long as it can show that its school-wide plan as a whole
serves the intents and purposes of the award. 20 U.S.C. § 6314(a)(3)(A)-(B).

PSD also stated that the presumption of the supplanting of Federal funds can be rebutted through
evidence that it was not able to provide the services in the absence of the Federal funds. PSD
points to the draft report statements concerning its deficit acquired during the audit period. PSD
believes that the existence of such a “shortfall of non-Federal dollars should eliminate any
presumption of supplanting.”

OIG Response:

We revised our finding to include only the district level expenditures that were supplanted. PSD
did not take into account that it supplanted funds on a district level. Administrative offices, such
as the Title I program office, the High School Reform office, and the Office of Secondary
Education made expenditures that were charged to Federal grants and that supplanted state and
local funds.

PSD‟s statement that it incurred such a large deficit alone is not enough to refute the finding of
supplanting of state and local funds. PSD would have to provide documentation, such as
budgets, minutes from director‟s meetings or supporting documentation of a reduction in state
and local funding, from the time period of the supplanting to show these services would not have
been provided without Federal funds. The supplanting occurred after PSD had already paid for
the services or equipment from the general fund and then at year-end, when it was discovered
that funds were overspent, transferred the expenses into Federal grant funds. Therefore, PSD did
Final Report
ED-OIG/A03H0010                                                                                   Page 29 of 131

provide or receive the services or equipment without the Federal funds and used the Federal
funds to help reduce its deficit.

PDE currently requires LEAs to keep the documentation needed to rebut supplanting.27 This
documentation includes local board of education actions, budget histories, and fiscal and
programmatic documentation that in the absence of Federal funding, staff and services in
question would have been eliminated.


FINDING NO. 3 – PSD Did Not Have Adequate Controls in Place to Ensure Non-Payroll
                Expenditures Met Federal Regulations and Grant Provisions

We determined that PSD‟s accounts payable process was not adequate. The process was not
adequate because it did not include a review of expenditures for allowability or require that
proper supporting documentation be obtained prior to payment from grant funds. Also, PSD did
not have written accounts payable policies and procedures. The written guidance that was
available, entitled “Managing Your Grant” and “Pre-Audit of Payment of Vouchers,” was not
adequate because it did not address expenditure allowability and reasonableness or
documentation requirements.

Consequently, PSD charged $1,175,623 in non-payroll expenditures to grant funds that did not
follow Federal cost regulations or grant provisions, resulting in expenditures that were not
reasonable, allocable, or adequately supported. We found unallowable expenditures, totaling
$411,383, that were processed through the AP Department that included finance charges and late
fees, indemnity insurance for a Nonpublic school, tips for alcoholic beverages, iPods, pool
tables, two 11-inch crystal vases, a crystal wine bucket,28 newspaper subscriptions for the Title I
program office, and the purchase of two copier/printers; one that was never used and one that
was not being used for its intended purpose (to assist in processing assessment instruments).29
These expenditures were not allowable based on Federal grant criteria (OMB Circular A-87)
and/or the grant provisions relating to the types of allowable grant expenditures.30 Inadequately
supported expenditures,31 totaling $764,241, included food, training materials, computers, Palm
Pilots, and class trips. Specifically,32
    
27
   PDE, Division of Federal Programs, 2009-2010 Administrative Manual for Consolidated Federal Programs.
Section 1: Program General Guidelines, Supplementing State and Local Funds.
28
   The vases and the wine bucket were purchased by the GEAR UP program office.
29
   The equipment was located at University City High School. PSD never purchased the service agreement from the
distributor that would have set up the items to work for the intended purpose. In the summer of 2008, the principal
of the school confirmed that one of the copiers was not being used for its intended purpose and the other copier was
still packaged in the box that it was received in and never used. This person was not the principal at the time the
questioned items were purchased.
30
   Refer to table in Background section for the types of allowable expenditures that can be made from grant funds.
31
   Expenditures were considered to be inadequately supported if adequate documentation was not provided that
showed that the expenditure as actually incurred or that fully supported the expenditure. For example, no
documentation at all was provided; there was no invoice, bill, or receipt to support an expense; expenditures for
computers were not located, and were not entered into to PSD‟s property management system; no contracts were
provided; or a list of students that attended the field trips could not be provided.
32
   See Enclosure 3 for expenditure details and a summary of unallowable and inadequately supported amounts.
Final Report
ED-OIG/A03H0010                                                                                  Page 30 of 131

        We reviewed 735 expenditures, totaling $3,206,023, charged to the Title I grant. We
         found 67 expenditures, totaling $62,761, were unallowable and 126 expenditures, totaling
         $281,010, were inadequately supported. Of those that were inadequately supported,
         62 expenditures, totaling $41,178, were also questionable.33 (See Enclosure 3a for
         detailed examples of the unallowable and inadequately supported expenditures.)
        We reviewed 99 expenditures, totaling $435,706, charged to the CSR grant. We found
         17 expenditures, totaling $4,554, were unallowable and 4 expenditures, totaling $47,662,
         were inadequately supported. (See Enclosure 3b for details of the unallowable and
         inadequately supported expenditures.)
        We reviewed 424 expenditures, totaling $2,527,483, charged to the GEAR UP grant. We
         found 59 expenditures, totaling $138,512, were unallowable and 81 expenditures, totaling
         $203,181, were inadequately supported. Of those that were inadequately supported,
         seven expenditures, totaling $14,200, were also questionable. (See Enclosure 3c for
         detailed examples of the unallowable and inadequately supported expenditures.)
        We reviewed 76 expenditures, totaling $46,716, charged to the Title II, Part A grant. We
         found 68 expenditures, totaling $45,000, were unallowable. All of the unallowable
         expenditures were for purchases of textbooks or instructional aids that were purchased
         without the related professional development for instructional staff that is required by
         Title II, Part A, Section 1123(a).
        We reviewed 665 expenditures, totaling $871,323, charged to the Reading First grant.
         We found 96 expenditures, totaling $160,016, were unallowable and 8 expenditures,
         totaling $44,080, were inadequately supported. Of those that were inadequately
         supported, four expenditures, totaling $12,764, were also questionable. The unallowable
         expenditures included those items purchased that were a violation of grant guidelines,
         such as the purchases of non-reading text books, study materials for the Pennsylvania
         System of School Assessment (PPSA) test, graphing calculators, and school safety
         support services. The unallowable expenditures also included the purchase of items that
         were in violation of OMB Circular A-87,34 such as incidental items for staff training.
        We reviewed 43 expenditures, totaling $530,159, charged to the Safe and Drug Free
         Schools grant. We found one unallowable $540 expenditure, and 10 expenditures,
         totaling $53,119, were inadequately supported. Of those that were inadequately
         supported, two expenditures, totaling $654, were also questionable. (See Enclosure 3d for
         details of the unallowable and inadequately supported expenditures.)
        We reviewed 55 expenditures, totaling $1,603,002, charged to the Title II, Part D grant.
         We found 10 expenditures, totaling $117,162, were inadequately supported. (See
         Enclosure 3e for details of the unallowable and inadequately supported expenditures.)
        We reviewed 37 expenditures, totaling $168,662, charged to the Title II, Part D grant for
         Nonpublic schools. We found that 4 expenditures, totaling $18,026, were inadequately
         supported. All of the inadequately supported expenditures were also questionable. All


33
   Because of the expenditures being inadequately supported, we could not determine the exact nature or purpose of
the expense, and based on the accounting codes and line descriptions for the expenditures contained in the general
ledger, the allowability of these expenditures appeared questionable.
34
   OMB Circular A-87, Appendix A, C. Basic Guidelines, 1., Factors Affecting Allowability of Costs , a-j., provides
that for a cost to be allowable it must be necessary and reasonable for efficient performance of Federal awards and
be allocable.
Final Report
ED-OIG/A03H0010                                                                                     Page 31 of 131

         four expenditures were for the purchase of computer equipment and software for
         archdiocesan schools.

     PSD did not meet the Federal financial management system standards contained in
     34 C.F.R. § 80.20 (b)(3) and (b)(6):

        (b)(3) provides that grantees and sub-grantees must maintain effective
         control and accountability for all grant and sub-grant assets (including
         cash) and assure that such assets are used solely for authorized purposes.

        (b)(6) provides that grantee and sub-grantee accounting records must be
         supported by such source documentation as cancelled checks, paid bills,
         time and attendance records, and subgrant award documents, etc.

Additionally, according to OMB Circular A-87, Appendix A, C., Basic Guidelines, 1., Factors
Affecting Allowability of Costs, a. and j., costs must be necessary and reasonable for proper and
efficient performance and administration of Federal awards, be allocable to Federal awards, and
be adequately documented. The unallowable costs were not necessary and reasonable to the
grants charged and the inadequately supported costs were not adequately documented.

We recognize that the SRC mandated new internal controls concerning expenditures paid
through the AP Department (effective in FY 2008). These controls provided that all payments
over $350 either go through PSD‟s procurement process or be encumbered. Also added were
controls requiring that all resolutions be fully encumbered and that no changes to encumbrances
or encumbrance overrides were to be authorized without proper reason and documentation.
Although PSD appeared to have taken steps to reduce overspending, it still has not addressed the
issue of unallowable and inadequately supported expenditures.

Recommendations:

We recommend that the Assistant Secretary for Elementary and Secondary Education in
collaboration with the Assistant Secretary for the Office of Post Secondary Education and the
Assistant Deputy Secretary of Safe and Drug Free Schools require PDE to instruct PSD to:

         3.1      Return the $420,76235 in unallowable and related indirect costs to the Department.
         3.2      Provide adequate documentation to support $764,241 in inadequately supported
                  non-personnel expenditures or return any portion of that amount the Department
                  determines is not adequately supported.
         3.3      Develop and implement written accounts payable policies and procedures that
                  provide reasonable assurance that Federal expenditures are necessary, reasonable,
                  allocable, and adequately documented. We suggest the policies and procedures
                  require that (1) adequate supporting documentation (invoices, receipts, etc.) is
                  obtained and maintained for all expenditures, (2) sign-in sheets for professional

35
  This amount includes all unallowable expenditures and related indirect costs at a rate of 2.28 percent of the
unallowable cost. See Enclosure 1 for a calculation of this amount.
Final Report
ED-OIG/A03H0010                                                                                   Page 32 of 131

                 development activities are prepared and maintained, (3) sign-in sheets along with
                 agendas for parental involvement activities are prepared and maintained, and
                 (4) expenditures are reviewed for allowability before payment is made from grant
                 funds.
        3.4      Develop and implement a process to ensure employees are made aware of the
                 types of items that are and are not allowed to be purchased with Federal grant
                 funds.

PSD Response:

PSD did not concur with the finding.

PSD acknowledged that the OIG staff reviewed more than 2,000 transactions processed through
its AP department. PSD stated that because of the number of line items at issue in the finding, it
limited its response to addressing those transactions valued at $1,000 or greater.

In addition, PSD noted that in many circumstances the OIG staff‟s description of the grounds for
recommending a transaction to be unallowable or questioned is at odds with the documentation
that it presented. For example, the OIG claims that PSD could not support Palm PDA devices
because PSD was unable to provide the names of those using them. PSD stated that they in fact
provided the documentation to the OIG.

PSD further stated, “As to the costs listed as „questionable‟ in the OIG‟s spreadsheets, it appears
that the OIG does not dispute that the particular costs were allowable or adequately documented.
Instead, the OIG poses general questions regarding the relationship between a specific
expenditure and a federal award purpose. Each „questionable‟ line item commentary from the
auditors agrees that the cost was necessary, allocable, and adequately supported, and in many
cases there is acknowledgement that the finding has no dollar value finding attached. Although
the SDP does not understand these „questionable‟ findings to require a response, we have
endeavored to provide responses where possible.”

PSD also provided the results of the review of its records relating to the AP transactions in a
spreadsheet included as an exhibit to its response to the draft report.

OIG Response:

We disagree with PSD‟s statement that the OIG‟s determination that items were unallowable is
“at odds with the documentation PSD presented” because PSD did not provide adequate
supporting documentation to us. Regarding the PDA devices PSD used as an example, PSD did
not provide the information stated until it provided its response to the draft report.36

Furthermore, PSD‟s documentation for this item was inconsistent, and it did not fully provide the
requested information. PSD provided two different serial numbers for one of the Palm Pilots and
for another one provided two user names and two different serial numbers. Also, PSD never
36
   This item was part of the Office Depot sample in Finding No.5 of the report. PSD chose to use it as an example in
its response to Finding No. 3. The Office Depot issue is discussed further in Finding No. 5.
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provided the form used by the Title I Program office, as stated by its Director, which was
supposed to be used to monitor who received such items as we requested.

In the draft report, we clearly stated that the questionable costs were not adequately documented,
as still stated in the finding. We stated the number of expenditures that were inadequately
supported and the amount of those that were questionable. We also included a footnote in the
draft report to explain why items were questionable. Footnote 33, (29 in the draft report) read,
“Because of the expenditures being inadequately supported, we could not determine the exact
nature or purpose of the expense, and based on the accounting codes and line descriptions for the
expenditures contained in the general ledger, the allowability of these expenditures appeared
questionable.” Also, the numerous spreadsheets provided to PSD showed that the questionable
items were not considered adequately supported and the allowability of the items was in
question. Furthermore, we held several meetings with PSD to discuss the finding issues and
explained the reasoning for the unallowable, inadequately supported, and questionable costs.
PSD had ample opportunity to seek clarification on any questioned expenditure.

Regarding PSD‟s spreadsheet exhibit, it addressed only the Title I, CSR and Reading First grant
expenditures; three of the seven grants for which we reviewed AP expenditures. Much of the
information provided by PSD did not reverse our position on the expenditures, because the
documentation provided was not reliable or adequate. For example, the information provided by
PSD concerning the purchase of 21 iPods (15 Shuffles and 6 Nanos), with CSR grant funds was
not reliable. In May 2008, we received a written statement from the Title I Director stating that
the 15 iPod Shuffles and 6 iPod Nanos did not support the CSR program; however, PSD‟s draft
response included an undated, handwritten statement signed by an individual (no position title
indicated) that the 15 iPod Shuffles ($1,035) were used to enhance the school‟s literacy program
since stories were added onto the Shuffles. No additional information was provided to show
which students received them or which teachers used them. Also, nothing was provided to
explain the purchase of the 6 iPod Nanos (totaling $1,074). For these and similar items,
inconsistent statements and the lack of adequate documentation made it impossible for us to form
a conclusion that the expenditures were allowable.

Adequate supporting documentation was provided for some of the expenditures and we revised
our finding accordingly.



FINDING NO. 4 – Policies and Procedures Were Not Adequate and/or Enforced

PSD did not enforce its policies and procedures for processing JV transactions, travel
reimbursement, imprest fund usage, and contracting. In addition, PSD‟s JV processing and
imprest fund policies and procedures were not adequate. As a result, unallowable and
inadequately supported costs were charged to grant funds.
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     A. Policies and Procedures for Processing JVs Were Not Adequate or Enforced

PSD‟s written policies and procedures relating to JV transfers were not adequate because they
did not include adequate controls and processes. As a result, we found JV transactions that were
not allowable or adequately supported. We reviewed 110 JV transactions, totaling $47,668,116
(excluding transportation and indirect costs transactions) and found that 18 transactions, totaling
$6,349,261, were unallowable and 42 transactions, totaling $11,928,352, were inadequately
supported. (See Enclosure 4 for a table detailing the unallowable and inadequately supported
costs.)

Unallowable Costs
Examples of the types of unallowable JV transactions included transfers of salaries and benefits,
totaling $576,596, for nine teachers37 purported to be RCS teachers that were not, transfers of
salaries and benefits ($55,837 and $51,344 respectively, totaling $107,181) for two individuals
into the Safe and Drug Free Schools grant who were not working on the grant,38 duplication of
charges in a JV,39 and the transfer of fringe benefits from the general fund for ESOL tutors, a
position that was not eligible to earn benefits. The expenditures were unallowable because they
were not reasonable or allocable to the grant they were charged to as stated in
OMB Circular A-87, Appendix A, C., Basic Guidelines, 1., Factors Affecting Allowability of
Costs, a.-j.

We also noted unallowable expenditures that were transferred into Title I grant funds by carrying
over Title I grant charges that were expended after the grant period had expired. We reviewed
three separate JV transactions, totaling $830,184, where PSD carried over grant funds. One
$691,586 transaction was a Title I grant expenditure and two transactions were Reading First
grant expenditures, totaling $138,598. In December 2005, PSD transferred Title I grant
expenditures, totaling $691,586, from the 2004 Title I grant fund into the 2003 Title I grant fund,
15 months after the grant period expired. Department grants have a 15-month grant funding
period, with an additional 12-month extension that can be granted if unobligated funds are still
available for grant use. Grant funds must be expended during this 27-month period if the
extension is granted. PSD generally was granted the extension for Department grants. It was
common practice for PSD to “carry over” grant funds to fully expend the grants (i.e., JV
transfers were performed to move charges from later grant periods into earlier grant periods.)
The grant period for the 2003 grant was from July 2002 to September 2003, with an extension
until September 2004. We found that $112,383 of the $691,586 JV transfer was for expenditures
incurred by the Title I program after September 2004.



37
   We sampled 31 RCS teacher‟s salaries, totaling $1,667,806, from a universe of 66, totaling $3,142,915.
38
   The transfer was from the Steps to a Healthier Philadelphia grant and a clearing fund for grants. One salary
transferred was for an administrative assistant from the Office of Health, Safety, Physical Education and Sports
Administration. This employee stated she was in that position during the audit period and did not work on the Safe
and Drug Free Schools grant.
39
   The duplications involved two JVs relating to charges for prep time for teachers. On one JV PSD moved
$1,403,071 in prep time charges from the general fund into the Title I fund. On another JV PSD transferred
$5,543,762, moving the same type of charges from the general fund into the Title I fund. This JV also included
duplication of the $1,403,071 in charges already transferred.
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PSD‟s policies and procedures did not require the analyst to determine that the grant funds were
from the appropriate grant period when performing a carryover to fully expend grant funds. In
fact, the policies and procedures were silent on guidance relating to JV transfers of carryover
grant funds. When preparing the JV to transfer the charges, the analyst reviewed only a screen
print from the Advantage system which showed the total amount of funds available for transfer
by funding code and not the detailed report of the general ledger that showed the actual dates the
charges were incurred. According to 34 C.F.R. § 80.23, Period of Availability of Funds, where a
funding period is specified, a grantee may charge to the award only costs resulting from
obligations of the funding period unless carryover of unobligated balances is permitted, in which
case the carryover balances may be charged for costs resulting from obligations of the
subsequent funding period. The $112,383 should not have been charged to the FY 2003 grant
because the expenditures were incurred after the end of the grant‟s period of eligibility and the
subsequent funding period.

Inadequately Supported Costs
Inadequately supported JV transactions included salary transfers40 (from state and local funding),
professional development expenses for principals and assistant principals,41 and salaries for
personnel purported to be in a position that they were not. For example, 37 ($12,690) of the 442
separate salary payments ($920,915) for training of principals that were transferred into
Department grants were for personnel other than principals. Also, there were 156 transfers for
employee salaries into Department grants under the ABC code for Transition Support Tutors.
However, 32 ($272,205) of the 156 ($2,179,581) employees whose salaries (excluding benefits)
were transferred did not appear on the list of Transition Support Tutors provided by PSD‟s HR
department. In addition, routine JVs used to record copier charges, facilities rentals, and food
service expenditures were not supported.

PSD did not meet the basic guidelines in OMB Circular A-87, Appendix A, C. Basic Guidelines
1. Factors Affecting Allowability of Costs, j. which states that to be allowable under Federal
awards cost must be adequately documented. PSD also did not meet the Federal financial
management system standards contained in 34 C.F.R. § 80.20 (b)(2) and (b)(6) that provides that
local educational agencies accounting records must be supported by such source documentation
as cancelled checks, paid bills, time and attendance records, and subgrant award documents, etc.

Policies and Procedures
PSD management did not ensure that the policies and procedures included adequate internal
controls and that processes were clearly defined. PSD‟s JV processing policies and procedures
were not adequate because they did not clearly define or provide detailed examples of what
documentation should be used to support JV transactions. Also, the policies and procedures did
not require analysts or others to determine that expenditures transferred to a grant were
allowable. Our review disclosed JV Approval Request forms submitted by analysts and

40
   These transfers included salaries for the new teacher training program, transition support tutors, RCS teachers, and
teachers transferred as literacy interns.
41
   These costs were for the summer 2005 professional development training for principals. For the transfer from the
Title II grant to the Title I grant, PSD changed the ABC code from 2272, “Professional Development” to 2274,
“Instructional Development.” PSD did have a specific ABC code for principal and assistant principal professional
development (2277). Using the wrong ABC code could create a misrepresentation of the costs.
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approved by principal analysts that did not clearly show the purpose of the transfer and did not
include sufficient supporting documentation to clearly identify the authority and purpose of the
JV transaction, as required by PSD policy.

For all JV transactions performed, PSD policy required that an analyst input the JV into the
Advantage system, and then complete and submit a JV Approval Request form to the principal
analyst for grants. Once submitted, the principal analyst for grants approved the JV on-line and
initialed the JV Approval Request form to show manual approval of the transaction and to
indicate review of the supporting documents.

Although PSD‟s POMB and Accounting Department policies on JV management stated the
following, PSD did not enforce its policies and procedures for processing JV transactions. The
policy stated that:

           …it is essential that the purpose of JVs are clearly documented and centrally maintained
           to serve as a reference....
          Sufficient backup is required behind each JV Approval Request Form to clearly identify
           the authority and purpose of the JV for auditing purposes. Such backup may be an
           e-mail, letter, memo, or the like, but in no case can it only be a screen print of the JV
           from Advantage.
          No single employee may both prepare and approve transactions.
         First level approval must be obtained prior to second level approval. Senior or Principal
           Financial Analysts may not initiate a JV and approve at the second level and then direct
           the Financial Analyst to approve at the first level.

PSD management bypassed the policies and procedures for the entry of JV transactions. On
numerous transfers grant analysts were allowed or directed by the principal analyst for grants42 to
transfer charges from the general fund or other grants into Department grants with insufficient
documentation to show that the charges supported the grant‟s purpose or were allowable grant
expenditures.

We also noted an instance where there was a lack of segregation of duties in the processing of
one JV (the preparer of the JV also approved it). Segregation of duties is a basic accounting
control procedure that strengthens internal control by not allowing an individual to initiate,
process, and record transactions without the review and approval of other individuals. The lack
of segregation of duties occurred because the principal analyst for grants prepared a JV and had a
subordinate enter it into the accounting system. The principal analyst for grants then approved
the JV in the system, which allowed him to circumvent the controls in the accounting system.
PSD‟s JV process did not prevent one person from preparing and approving a JV, as illustrated
above. Improper segregation of duties may allow internal controls to be circumvented for
operational convenience or conceal unintentional errors and irregularities, as shown. Proper
segregation of duties should reduce the potential risk resulting from the intentional or inadvertent
actions of any one individual.


42
     The Budget Director directed the principal analyst for grants to make the transfers.
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Although PSD‟s POMB and Accounting JV policies and procedures discussed a “second level”
of approval, the policies and procedures did not define or require a second level of approval.
The policies and procedures also did not require large dollar JVs to receive a second or higher
level of approval. Because of the instances noted above, and to strengthen its internal controls
relating to JV transactions, PSD should require a second level of review and approval (such as
the Deputy Budget Director or the Comptroller) for all JV transfers, especially large dollar
transfers. In addition, for large dollar transfers into Federal grants, the grant program manager
should be required to approve the transfer. This will assist PSD in maintaining effective control
and accountability as required by 34 C.F.R. § 80.20 (b)(3), Standards for Financial Management
System, Internal Controls.

Additionally, we found that PSD did not have a basic training program in place for grant analysts
concerning JV preparation, grant expenditure allowability, or basic grant accounting. Analysts
were not provided formal training and had to train themselves on basic grant accounting and
allowability of items expended by Federal grant funds. During an interview, a grant analyst
stated that most of what was received in the form of training “was on-the-job training that was
learned from the Advantage system on my own.”

The management control environment was weak because PSD did not maintain effective internal
control over the JV process, as required by 34 C.F.R. § 75.702, Fiscal Control and Fund
Accounting Procedures, and 34 C.F.R. § 80.20 (b)(3), Standards for Financial Management
System, Internal Controls. In fact, when questioned about the financial state of PSD, the former
CFO stated that there was a lack of appreciation of financial protocols.

PSD Response to Policies and Procedures for Processing JVs Were Not Adequate or
Enforced (A):

PSD did not concur with this finding as a whole. PSD did state that it concurred with three of
our conclusions, relating to Title I, Part A grant costs (ESOL tutor benefits erroneously
transferred, duplication of charges already moved, and late carryover of charges on the 30 JV
transactions that it chose to address in its response to the draft report).

PSD also stated that in the vast majority of the JVs determined to be unallowable, the draft report
does not provide reference to criteria underlying its finding; therefore, this caused difficulty in
discerning the basis for a particular unallowable or unsupported expenditure. Without reference
to specific criteria for disallowance of items, PSD stated it cannot understand the OIG‟s rationale
and formulate a response to the finding.

Additionally, PSD stated that because of the volume of the transactions involved it addressed
only the grants with the greatest dollar amounts in its response. PSD stated the following
regarding the unallowable and inadequately supported transactions.

Unallowable JV Transactions
  1. The transaction that transferred charges from the Empowerment Grant into the FIE grant
      that the OIG determined unallowable due to supplanting is allowable. To support this
      statement PSD referred to its response to Finding No. 2.
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   2. Regarding the JV transactions that transferred charges into Department grants that
      represented programs or expenditures that were not contained in the grant award
      agreement (FIE), budget, or a school‟s school-wide plan (Title I), PSD stated that not
      being contained in award agreements, budgets, or school-wide plans did not warrant the
      JVs to be determined to be unallowable. Also, PSD stated that the movement of teachers
      to reduce class size and prevent a split class for elementary grades actually is included in
      its FIE application since the application details the purposes and goals of its school
      reform efforts including reducing class sizes in grades 3-11.
   3. Food service expenditures for staff meetings are not prohibited under
      OMB Circular A-87 (JV transfers).
   4. Title I grant expenditures for food service items or facilities rental were eligible to be
      funded by the Title I grant because they attempted to upgrade a school‟s entire
      educational program by creating a safer learning environment (concert by Peter Yarrow
      of Peter, Paul and Mary) and\or the activity (health fair) included parent involvement.
   5. One of the eight RCS teacher‟s salaries being questioned as unallowable is allowable
      because the teacher is RCS eligible.

Unsupported JV Transactions
   1. For the JV transactions that were unsupported because of a lack of time and effort
      certifications, PSD referred to the portion of its response for Finding No. 1 that addressed
      this issue. (See page 11.)
   2. Regarding the JV transactions that concerned professional development, PSD stated it
      customarily keeps sign-in sheets for professional development. It would locate and
      provide them on request.
   3. Adequate supporting documentation had been provided for the JV transactions for district
      food services charging the items to the Title I grant. PSD‟s position is that sign-in sheets
      are not necessary and enough supporting documentation had been supplied that showed
      a) PSD incurred the obligation and b) the obligation related to a Title I grant activity.
   4. Enough supporting documentation was provided to show that teachers charged to the
      Title II, Part A grant were RCS teachers. The information provided showed a) teachers
      regularly signed in at their assigned schools, b) the schools were allotted at least one RCS
      position, and c) the positions were filled.
   5. The OIG used a list of Transition Support Tutors that did not coincide with the audit
      period to determine whether the employees whose salaries were transferred were
      Transition Support Tutors.
   6. Enough information (dates of training, agendas, list of participants and costs) was
      provided to support the transfer of principal training charges into Federal funds. Also,
      the second movement of the charges into a Federal grant should be removed.
   7. PSD stated that one JV, per the OIG‟s statement, was a duplicate and should be removed.
   8. PSD stated that because of a lack of clear indication by the OIG, it could not determine
      why certain JVs were considered to be unsupported. Also, it was not able to completely
      search for needed items because of time constraints.
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OIG Response to PSD Response to Policies and Procedures for Processing JVs Were Not
Adequate or Enforced (A):

PSD did not address the issue of the JV policies and procedures being inadequate and not
enforced.

The OIG consistently provided criteria for this portion of the finding in the draft report. OMB
Circular A-87, Appendix A, C, Basic Guidelines, 1., Factors Affecting Allowability of Costs, a-j
and 34 C.F.R. § 80.23, Period of Availability of Funds was provided as criteria for unallowable
costs. Criteria for the unsupported items was OMB Circular A-87, Appendix A, C, Basic
Guidelines, 1., Factors Affecting Allowability of Costs, j, 34 C.F.R. § 80.20 (b)(2), (b)(3) and
(b)(6) and 34 C.F.R. § 75.702. As stated in the Executive Summary, if PSD believed it needed
clarification on any expenditure and/or criterion, it was provided many opportunities to seek
clarification.

Unallowable JV Transactions
      1. The transaction at issue involved a district level expenditure made by the Office of
         High School Reform, and therefore, the school-wide plan criteria mentioned in
         Finding No. 2 did not apply. (See Finding No. 2 and our portion of the response.)

       2. PSD did not provide additional supporting documentation to show how the
          transactions in question met the objectives of the grant. Furthermore, FIE grant
          regulations, Title V, Part D, Subpart 3- Partnerships in Character Education, (e)
          Application, (2)(C) provides that the grant application must describe the activities
          carried out by the program. PSD‟s FIE application did not include school reform for
          grades 3-11; it included high school reform efforts.

           According to PDE‟s Title I, Part A; Title II, Part A; and Reading First grant review
           instruments for the audit period (third requirement under Fiscal Requirements) that
           PDE also expected the LEAs to expend grant funds on activities that correspond with
           what was outlined in the grant applications.

           If an expenditure for an item was not in a grant‟s budget, it was noted but not used to
           determine the item‟s allowability. Allowability was determined if the charges moved
           into a grant were for a program in the grant‟s application or if the movement of the
           charges caused Federal funds to be supplanted.

           PSD also did not provide additional supporting documentation to show how the
           expenditures in question support the related school-wide plan. For 1 of the 2 JVs in
           question, we requested that the Title I Director show us the portion of the school-wide
           plan that the expenditures involved in the transfer supported. On May 30, 2008 we
           were provided a written statement that the reading literacy portion of the school‟s
           plan does not directly address the reading/literacy materials purchased.

       3. Although OMB Circular A-87, Attachment B, 27. Meetings and Conferences, states
          that meals provided for meetings and conferences, where the primary purpose is
Final Report
ED-OIG/A03H0010                                                                   Page 40 of 131

          dissemination of technical information are allowable, PSD provided no additional
          supporting documentation to show that these were more than just staff meetings and
          that technical information was disseminated.

       4. PSD provided no additional supporting documentation with its response for its
          statement that the unallowable food items and facilities rental expenditures charged to
          the Title I grant served the purpose of the grant and upgraded the school‟s entire
          educational program.

       5. PSD provided no additional supporting documentation or further explanation with its
          response to show that the teacher in question was in fact an RCS teacher (during our
          audit fieldwork PSD stated that the teacher was charged in error as an RCS teacher).
          Furthermore, PSD only stated that the teacher was “RCS eligible” and not actually an
          RCS teacher.

Unsupported JV Transactions
     1. As stated in our response to Finding No. 1 concerning the alternative documentation
         kept by PSD, it is not adequate to certify and verify personnel charges.

       2. PSD did not provide the sign-in sheets to support the professional development JV
          transactions in question as stated in its response.

       3. The unsupported JV transactions for food service expenditures were for items that
          PSD provided no supporting documentation for or the documentation was inadequate
          (for example, the documentation did not show the activity conducted or the
          documentation that was provided did not match the dates of the expenditures). In one
          instance PSD provided a photocopy of a January 2006 desk calendar with a hand
          written note on the date in question that said, “9 AM Meeting Room 9” (this
          expenditure was for coffee and tea for 60 people charged to the Title I grant). In
          another instance where coffee and tea for 100 people was charged to the Title I grant,
          PSD only provided an email from a Title I Community Builder that stated the
          locations of where she would be the week of January 9, 2006, and January 13, 2006.

       4. PSD did not show that the RCS position filled at the school was actually filled by the
          teacher whose salary was transferred. PSD was made aware of this in a July 7, 2007,
          email to its Comptroller and principal analysts for grants. We requested additional
          information; however, PSD provided no additional supporting documentation after
          the email was sent.

       5. During the audit, the OIG was provided a list of Transition Support Tutors by PSD‟s
          HR Executive Director of Business Processes and Systems as supporting
          documentation for the transaction. The dates of the audit period (2005-2006 School
          Year) were on the header of the document. In the September 18, 2009, meeting, we
          presented the list used and requested a correct list. In a September 23, 2009, email,
          PSD responded with the following statement:
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ED-OIG/A03H0010                                                                     Page 41 of 131

               Numbered paragraph 17 on page 27 of the SDP's [PSD] response
               erroneously states that “the cited print-out on which the report
               apparently relies contains a list of transition support tutors for the
               2004-2005 school year, not the 2005-2006 school year in which the
               questioned charges were made.” The SDP instead intended to indicate
               that the questioned compensation charges in JV OMBG0002980 relate
               to pay during the summer months of 2005 for Transition Support
               Tutors during the 2004-2005 school year. That is, the individuals
               listed in the salary history reports but who are not on the Human
               Resources listing of 2005-2006 Transition Support Tutors were
               Transition Support Tutors in the prior year. Attached is a Human
               Resources report (TST 2005-06noSSN9-21-09.xls) showing the
               Transition Support Tutors employed as of May 2005. The names
               missing from the 2005-2006 listing appear on the May 2005 report.
               We apologize for any confusion that our earlier error may have caused.

           Using the second list provided by PSD there were still 32 employees
           (whose transferred salaries totaled $272,205) that could not be found on
           either list of Transition Support Tutors.

       6. PSD provided a copy of a report prepared for the former Chief Financial Officer.
          This report included principal names, class title, and hours. The report did not
          include class agendas, class dates, or training costs. During our audit we reviewed
          106 of the 442 employee salaries transferred. The total salaries for the 106
          employees was $388,776, and of that amount $88,114 was for training hours that
          could not be found on the report provided by PSD. This JV was not a duplicated cost
          but two separate JV transfers of the same charges. The salaries were transferred from
          state funds into the Title II grant and then transferred into the Title I grant (as stated
          in the finding).

       7. The JV PSD discussed was not a duplicate but was for two separate JV transfers
          including a portion of the same charges. The items were transferred from state funds
          into the Title II grant and then into the Title I grant. PSD asked for clarification on
          this issue in a letter to us in November 2008. Clarification was provided in
          December 2008.

       8. We provided PSD with numerous updates regarding the potential findings and issues.
          PSD had ample opportunities to ask questions and had an extended amount of time to
          provide its response to the draft report. (See the Executive Summary for meetings
          held with PSD and updates provided to it.)


   B. Travel Policies and Procedures Were Not Followed

PSD did not adhere to its travel policies and procedures, resulting in unallowable, unsupported,
and unreasonable travel costs charged to the grants we reviewed. PSD policy required
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ED-OIG/A03H0010                                                                                    Page 42 of 131

employees to submit a travel voucher (Form SEH-195) to claim reimbursement for their travel
expenses. After the employee prepared the travel voucher, it was reviewed and approved by the
employee‟s supervisor (administrators at the level of Director, Principal, or above), and then
submitted to the AP Department for review before payment. However, the AP Department did
not adequately review travel vouchers for unallowable, unsupported, or unreasonable travel
costs.

We reviewed 75 travel reimbursements, totaling $51,651. We determined that $9,532 of the
travel expenditures were unallowable. The majority of the unallowable expenditures ($8,433)
were caused by PSD employees not using government rate lodging. PSD charged lodging
expenditures to Department grants for amounts over the government rate, with some amounts
over $300 per night. PSD‟s travel policy, section 3.1 stated that “effective March 1, 2003,
employees traveling out-of-town on official school district business will be required to use the
School District of Philadelphia‟s official travel agency when booking transportation and
accommodations,” and section 3.10 stated that “Lodging will be booked by the travel agent at
government rates....” Although PSD‟s travel policy stated that its travel agency should reserve
rooms for PSD employees at the government rate, PSD did not include a clause in its travel
agency contracts that required the agency to book its lodging; therefore, the travel agency was
not required to reserve employee lodging, resulting in lodging costs incurred at a rate different
from what PSD‟s policy allowed. There was no control to ensure that lodging costs were
incurred at the government rate. According to OMB Circular A-87, Appendix B, 43., Travel
Costs, b. Lodging and Subsistence, lodging costs are not to exceed charges normally allowed by
the governmental unit in its regular operations as a result of the governmental unit‟s written
travel policy. Therefore, per PSD policy and OMB Circular A-87, the costs over the government
rate were not allowable. Other unallowable expenditures included $264 for business class rail
fare and $279 paid for tips for food, taxicab fare, and hotel maid service on 12 different
reimbursements.

In addition, PSD could not locate four travel reimbursement forms, totaling $2,275. We also
noted one instance where a lodging expenditure for $278 was reimbursed without a receipt.

Additionally, three travel reimbursement forms were not properly approved; there was no
approval signature on the forms. Furthermore, we noted an instance of a lack of segregation of
duties. The traveler signed and approved her own travel reimbursement form. These
expenditures43 were not properly approved according to PSD‟s travel policy and should not have
been paid until a proper approval was obtained.

We also noted an instance in which three employees traveling on the same trip all claimed and
were reimbursed for taxicabs to the same hotel from the same airport.44 There were also many
instances of taxicabs being used instead of public transportation, as required by PSD‟s travel
policy. These expenditures should not have been claimed, and furthermore, should have been


43
   These expenditures were not questioned in their entirety (the portion of the expenditures relating to lodging costs
over the GSA rate are questioned) because the purpose of the trips were allowable and the supporting documentation
was adequate.
44
   PSD did not provide documentation to show the individuals took separate flights or arrived separately.
Final Report
ED-OIG/A03H0010                                                                                   Page 43 of 131

disallowed according to PSD‟s policies and procedures on reimbursable travel expenditures
which stated:

                    2.2.2 - An Administrator at the Director/Principal level or above
                    may not authorize his/her own travel or approve expenditures
                    therefore, but must obtain approval of his/her supervisor.

                    2.6.1 - Employees will be reimbursed for approved expenditures
                    within the policies and limitations established herein.
                    Form SHE-195 properly executed and signed, will be used to
                    request reimbursement for routine or out-of-state travel. Receipts
                    for transportation, hotel accommodations, taxi fares, tolls, etc.,
                    must be obtained and attached to the form.

                    2.6.2 - All requests for reimbursement of travel expenses are
                    subject to review by the Office of Accounting Services to
                    determine the official nature of the expenditure and the propriety
                    and reasonableness of the charges. Expenditures not deemed
                    necessary or reasonable will not be reimbursed.

                    2.8.5 - Transportation to a terminal for the purpose of beginning a
                    trip, transportation to and from the destination terminal and
                    transportation home from the terminal must always be made at the
                    lowest possible cost. Public transportation, shuttle service or
                    private automobile, if less costly, must be used in preference to
                    taxi service.

                    2.10.3 - Reasonable tips for carrying luggage will be allowed.

We recognize that the SRC mandated new internal controls, effective in FY 2008, that included
the restriction of travel, as well as some other expenses;45 however, the policies and procedures
need to be followed.

PSD Response to Travel Polices and Procedures Were Not Followed (B):

PSD stated that the OIG cannot reasonably conclude that lodging costs are unallowable simply
because they were not at the government rate. At most the OIG should question lodging costs in
excess of the government lodging rate and not the entire amount.




45
     The other expenses included catered food, cell phones, credit cards, and laptop computers.
Final Report
ED-OIG/A03H0010                                                                                 Page 44 of 131

OIG Response to PSD’s Response to Travel Policies and Procedures Were
Not Followed (B):

The draft report stated that the unallowable lodging expenditures were for the amounts over the
government rate. This information was provided to PSD during a meeting we held with PSD‟s
Comptroller on April 16, 2008, in which we specifically discussed the travel issues.

     C. Imprest Fund Policies and Procedures Were Not Adequate or Enforced

PSD‟s imprest fund policies and procedures were not adequate or enforced. The policies and
procedures in effect during the audit period (issued in September 1978) did not provide examples
of prohibited expenditures, other than prohibiting temporary loans, personal advances, or cashing
of personal or other checks. The policy also did not require a review of expenditures to ensure
compliance with the funding source (grants).

We found that school imprest funds were reimbursed without receipts, the fund expenditure
spending limit was not adhered to, and there was a lack of adequate segregation of duties in the
handling of the fund (we found instances where the fund custodian signed and approved the
Imprest Fund Reimbursement Requests). As a result, grant funds were used for unallowable and
inadequately supported expenditures. For example, funds were used to pay a school‟s telephone
bill ($922), to purchase two computers ($998), for an unallowable school trip ($329), and to pay
for a back-to-school breakfast for school staff ($326).

We reviewed 287 imprest fund transactions totaling $135,162.46 The total unallowable amount
expended through school imprest funds was $10,593, and the inadequately supported amount
was $20,084. Of the inadequately supported amount, $7,124 was found to be questionable (see
Table 2 below).




46
  We did not select a separate sample of imprest fund expenditures; we reviewed all imprest fund expenditures
included in our AP sample (Finding No. 3).
        Final Report
        ED-OIG/A03H0010                                                                                   Page 45 of 131

        Table 2- Imprest Fund Expenditures47
                  Services        No. Entertainment         No. Electronics            No. Office         No.    Total     No.
                  (i.e., phone        and Awards                (i.e., printers,           Supplies
                  bills,              (i.e., food, field        cameras,                   (i.e.,
                  training            trips,                    Palm Pilots,               stationery
                  materials,          subscriptions,            etc.)                      supplies,
                  print               plaques, gift                                        printer ink,
                  services)           cards)                                               general
                                                                                           desk items)



Title I
Unallowable       $0                    $1,985              6      $448                1    $994          2     $3,427     9
Inadequately      $2,974          12    $13,460             31     $0                  0    $3,650        5     $20,084    48
Supported
CSR
Unallowable       $997            2     $326                1      $0                       $0                  $1,323     3
GEAR UP
Unallowable       $0                    $4,298              9      $500                1    $0                  $4,798     10
Reading
First
Unallowable       $1,000          2     $0                         $0                       $45           1     $1,045     3
All Grants
Unallowable       $1,997          4     $6,609              16     $948                2    $1,039        3     $10,593    25
Inadequately      $2,974          12    $13,460             31     $0                  0    $3,650        5     $20,084    48
Supported
Total             $4,971          16    $20,069             47     $948                2    $4,689        8     $38,075    73

        Imprest funds were to be used by schools and program offices to pay for low cost purchases.
        PSD‟s imprest fund policies and procedures limited purchases from any one vendor to $50,
        required fund custodians to bank at banks that did not charge service fees, and required the
        maintaining of receipts. Fund custodians were also to advise users as to what may or may not be
        purchased with the funds. The fund custodian completed the reimbursement request, which
        included the funding code (ABC code) for each expenditure. By signing the reimbursement
        request, the fund custodian was certifying that: “The enclosed imprest fund vouchers support the
        expenditures for low cost items, not available from the warehouse, summarized above. These
        expenditures have been made in accordance with the „imprest fund (petty cash) procedures.‟”
        By signing the reimbursement request, the principal or administrator was certifying that the
        request was true and correct and was properly chargeable to the stated accounts. PSD‟s imprest
        policy stated that the reimbursement requests were to be submitted to the AP Department and
        reviewed by Audit Services, and that all reimbursement requests would be reviewed and
        examined for propriety and compliance by the Accounting department. Although the imprest
        fund policy stated that reimbursement requests would be reviewed for propriety and compliance,
        it did not state compliance criteria.


        47
             Amounts are included in Finding No. 3 and Enclosures 3, 3a, 3b, and 3c.
Final Report
ED-OIG/A03H0010                                                                    Page 46 of 131

In addition, expenditures were not being reviewed for appropriate ABC coding, reasonableness,
allowability, or allocability with the funding source. The AP Department entered the
expenditures into the Advantage system but did not review them for allowability. Audit
Services, which received the reimbursement request after the AP Department had entered the
information into the Advantage system, only reviewed the reimbursement request to determine
whether the amounts paid were correct. They did not determine whether the correct ABC codes
were used, whether the amounts were under the required spending limits, or whether the
items\services purchased were allowable.

Furthermore, based on the types of unallowable expenditures found, it does not appear that the
fund custodians advised others on what could or could not be purchased with the fund. The
imprest fund policies and procedures need to be revised to include the information discussed
above. This will help to ensure that items purchased with grant funds through school imprest
funds will meet the OMB Circular A-87, Appendix A, C., Basic Guidelines, 1, Factors Affecting
Allowability of Costs, requirement that costs are necessary and reasonable for the proper and
efficient performance and administration of Federal awards, are allocable to Federal awards, and
are adequately documented. PSD also needs to ensure that its policies and procedures are
followed by all employees. Properly implemented internal controls provide reasonable assurance
that only appropriate transactions are authorized, executed, and recorded and that any errors in
execution and recording are detected in a timely manner.

In September 2007 PSD revised its imprest fund policies and procedures, although, as of
September 2008, these policies were not on PSD‟s Policy and Procedures Web site. The revised
policy increased the expenditure limit to $200 and prohibited its use for telephone bills, food,
transportation, travel, and other types of expenditures.

PSD Response to Imprest Fund Policies and Procedures Were Not Adequate or
Enforced (C):

PSD did not provide specific written comments in its response about the finding issue, instead it
provided its response on the expenditures through a spreadsheet exhibit and the supporting
documentation that was provided with Finding No 3.

OIG Response to PSD Response to Imprest Fund Policies and Procedures Were Not
Adequate or Enforced (C):

Contrary to statements made in its response, PSD did not provide any additional supporting
documentation for any imprest fund expenditures, nor did it discuss the internal control issues in
its response.
Final Report
ED-OIG/A03H0010                                                                              Page 47 of 131


     D. Inventory Controls Were Not Enforced

PSD did not comply with its property inventory procedures. As a result, we found that $45,80848
in equipment was unaccounted for in PSD‟s records. Although PSD‟s policies stated that a
complete inventory should be maintained, PSD was not strenuous in the enforcement of its
policy that required items over $500 receive property codes. Additionally, the transfer of
inventoried property from closed schools to new locations was not performed. PSD also did not
require items purchased for under $500 to be inventoried.

PSD Property Records, Policy 706 required that:

        1. Purpose,…adequate property records and inventory records be
        maintained on land, buildings, and physical property under the control of
        the district,
        2. Authority, provides that the Board directs that a complete inventory be
        maintained by physical count of all district-owned equipment. It further
        directs that property records be maintained of all buildings and grounds
        under the control of the district. Such records shall be updated annually,
        and
        3. Definition, provides that for the purposes of this policy, “equipment”
        shall mean a unit of furniture, an instrument, a machine, an apparatus, or a
        set of articles which retains its shape and appearance with use, is
        nonexpendable, and does not lose its identity when incorporated into a
        more complex unit.

Also, PSD‟s 2006 Personnel Property Inventory Procedures (3) Additions provided that items
with an acquisition cost of $500 or more should be recorded on the 2006 Personal Property
Inventory “Additions Form.”

We noted that computers from a closed school could not be located. In our CSR grant sample
we found that 21 computers, totaling $29,379, and three televisions, totaling $1,014, purchased
during the audit period by Pickett Middle School could not be immediately located. These
computers were left in the school when it closed in June 2007. In April 2008, the Title I Director
informed us that she was having trouble locating any of the computers and televisions. In
May 2008, the Title I Director informed us that PSD could not locate seven of these computers.
The Title I Director later informed us that 14 of the computers and televisions had been relocated
to Roosevelt Middle School. PSD did not provide adequate supporting documentation to show
that the items had been transferred to Roosevelt Middle School‟s inventory property list. PSD
provided us with an unsigned and undated copy of its T-31-“Personal Property Inventory System
Transaction Form” requesting a transfer of the computers. We were also provided with a letter
dated May 19, 2008, from the principal at Roosevelt Middle School stating that the televisions


48
  Includes $12,715 charged to Reading First grant funds and $30,393 charged to CSR grant funds that were
reviewed with our AP sample (see Finding No. 3), and $2,700 reviewed with our Office Depot expenditure sample
(see Finding No. 5, subpart B).
Final Report
ED-OIG/A03H0010                                                                                         Page 48 of 131

were also transferred to Roosevelt Middle School. No other documentation was provided by
PSD to actually show the items had been located or transferred.

PSD also did not adequately use equipment property codes. For example, we reviewed 61
computer purchases, totaling $78,635, charged to Reading First grant funds. PSD stated that 7
computers, totaling $8,593, did not have property codes and that it could not locate 3 of the 61
computers noted above, totaling $4,122.

Since the adoption of PSD‟s property policies in 1981, there has been significant advancement in
technology and many significant technological items are available for under $500. These are
pilferable items that may easily be lost or stolen. During our review we noted several instances
where items purchased for less than $500 could not be located. For example, in our Office
Depot sample (discussed in Finding No. 5, subpart B) we noted that for 7 of the 10 PDAs
purchased, PSD was unable to provide user information, and therefore, it could not determine the
status of the equipment. Three of the PDAs cost $250 each and four cost $300 each (total cost of
$1,950). In the same sample, five digital cameras a school purchased, costing $150 each (total
cost of $750), could not be located.

Not performing an inventory, not using property codes, and not accounting for equipment
purchased with grant funds could result in equipment being unaccounted for, as noted above, or
lost or stolen.

PSD Response to Inventory Controls Were Not Enforced (D):

PSD did not provide specific written comments in its response about the finding issue, instead it
provided its response on the expenditures through a spreadsheet exhibit and the supporting
documentation that was provided with Finding No 3.

OIG Response to PSD’s Response to Inventory Controls Were Not Enforced (D):

The spreadsheet exhibit and supporting documentation provided by PSD did not specifically
address inventory controls. PSD provided additional supporting documentation, such as property
reports, for selected expenditures. We revised the amounts questioned in the inventory control
portion of the finding to reflect the personal property reports provided.

In addition, PDE required LEAs to maintain an up-to-date inventory record. According to PDE‟s
monitoring instruments (Data Collection/Documentation and Federal Reports sections) PDE
expected LEAs to maintain an updated equipment list indicating model number, date of
purchase, funding source, serial number, and purchase price for the Title I, Part A,
Title II, Parts A and D and Reading First grants.49 Not only was PSD required by the
Department to maintain effective controls over inventory, PDE also had set forth requirements
that PSD had not met.



49
   For the Title I, Part A grant this is the seventh requirement in this section. For all other mentioned grants it is the
first requirement.
Final Report
ED-OIG/A03H0010                                                                             Page 49 of 131

       E. Contract Provisions Were Not Adhered to and Contract Services Were
          Rendered Prior to Approval

PSD did not always adhere to the requirements set forth in its contracts with vendors.
Specifically, contract provisions regarding invoice requirements were not followed. PSD also
did not follow the required protocol to obtain the SRC‟s approval of the contract through
resolution before entering into a contract with a vendor.

Contract Provisions
We found that invoices were paid that did not include an itemization of charges and a description
of the work performed. We reviewed nine invoices (relating to seven contracts totaling
$9,158,950), totaling $2,309,200, and found that six, totaling $1,683,161,50 were reimbursed
without an itemization of charges or a description of the work performed. The invoices only
included a statement certifying that work was performed. For example, the following statement
was found on a $24,000 invoice that was paid from Title I grant funds: “I certify that I served as
a consultant for the School District of Philadelphia in the Title I Improvement of Reading Project
during the following period: September 2005 to February 2006.”

PSD‟s Agreement for Services (standard clause included in all contracts), Section 5, Invoices,
Standard Terms and Conditions for contracts provides that “invoices shall include an itemization
of charges and, at a minimum, a description of work performed. No payment shall be due before
receipt of a properly prepared invoice.” PSD‟s account payable process did not include a review
of invoices to determine whether they adhered to all contract provisions, such as detailed
invoices.

Without an itemization of costs and a description of work performed, PSD had no documentation
to determine what work was performed and may have paid for services it did not request or
receive.

Contract Not Approved
During our review we also noted that PSD entered into a contract 2 months before receiving the
approval of the SRC. Work had begun on the contract prior to the approval as well. This
contract was to operate the National School and Community Corps in nine schools. The
contract, totaling $540,000, began on September 22, 2005. The resolution for the contract‟s
approval that was provided to the SRC was dated November 16, 2005. PSD incurred $108,000
of the $540,000 before the SRC approved the contract‟s resolution in November 2005. PSD
began to incur costs on the contract in September 2005. By the time PSD made the first
payment,51 it was invoiced $216,000 from September through December 2005.
Pennsylvania School Code PS 5-508 states in part that “The affirmative vote of a majority of all
members of the board of school directors in every school district duly recorded, showing how
each member voted, shall be required in order to take action on the following subjects: Entering
into contracts of any kind….” Furthermore, SRC policy required approval of resolutions in order
to enter into contracts of $25,000 or more.

50
     These costs are not being questioned because they were allowable grant expenditures.
51
     PSD made the first payments on this contract in January 2006.
Final Report
ED-OIG/A03H0010                                                                                    Page 50 of 131

 PSD had no process to determine whether all contract resolutions had been approved prior to the
contract being entered into and costs being incurred.

We recognize that the SRC mandated new internal controls, effective in FY 2008, which
included reducing the threshold requirement for SRC approval of contracts from $25,000 to
$15,000. Although this new control is helpful, it does not address the issue of not requiring
vendors to comply with contract provisions or contracts being entered into and costs incurred
before receiving SRC approval.

PSD Response to Contract Provisions Were Not Adhered to and Contract Services Were
Rendered Prior to Approval (E):

PSD stated that its contract approval and invoice review procedures ensure that all contracts are
properly authorized and vendor invoices contain adequate documentation for payment.

OIG Response to PSD Response to Contract Provisions Were Not Adhered to and Contract
Services Were Rendered Prior to Approval (E):

We disagree that PSD‟s policies and procedures ensure that all contracts are properly authorized
and vendor‟s invoices contain adequate documentation for payment based on the examples
discussed in the finding. PSD‟s contract provisions Section 5 state that invoices shall include an
itemization of charges and, at a minimum, a description of work performed and that no payment
shall be due before receipt of a properly prepared invoice. PSD paid invoices without this
provision requirement being fulfilled. PSD provided no supporting documentation for its
statements concerning contract approval nor did it provide the invoice review procedures to
which it refers.

Recommendations:

We recommend that the Assistant Secretary for Elementary and Secondary Education require
PDE to instruct PSD to:

         4.1      Return the $6,503,77352 in unallowable costs and related indirect costs to the
                  Department.
         4.2      Provide adequate documentation to support $11,976,43553 in inadequately
                  documented non-personnel expenditures or return any portion of that amount the
                  Department determines is not adequately supported.
         4.3      Revise its POMB and Accounting JV preparation policies and procedures to
                  include a process to determine that expenditures are allowable and supported, and
                  establish a second level of review and approval for all JV transfers. For large
                  dollar transfers, controls should be strengthened by requiring review and approval

52
   Amount includes unduplicated unallowable and related indirect costs at a rate of 2.28 percent of the unallowable
costs. See Enclosure 1 for a calculation of this amount.
53
   This amount includes the inadequately supported JV transactions, (see Enclosure 4) totaling $11,928,352;
inadequately supported travel reimbursements totaling $2,275; and unaccounted inventory in subpart D of this
Finding, totaling $45,808.
Final Report
ED-OIG/A03H0010                                                                                    Page 51 of 131

                  of the transfer by the grant program office. We also suggest training be provided
                  to the grant analysts and senior management.
         4.4      Enforce its travel policies and procedures.
         4.5      Revise its imprest fund policies and procedures to include an adequate review and
                  approval process that would prohibit the same person from preparing and
                  authorizing the reimbursement request, and place the revised policies and
                  procedures on PSD‟s Web site.
         4.6      Revise its inventory policies and procedures to include items, such as cell phones,
                  PDA‟s, and digital cameras, which are easily pilfered and sought after, and
                  develop a process to ensure that all items receive a property code and that
                  property transfers are properly recorded.
         4.7      Establish a process to ensure that it adheres to its own contract provisions and
                  does not reimburse vendors without properly documented invoices and develop a
                  process to ensure that it only enters into a contract and it incurs costs after the
                  SRC has approved the contract‟s resolution.



FINDING NO. 5 – PSD Did Not Have Written Policies and Procedures for Various Fiscal
                Processes

PSD did not have written policies and procedures relating to budget monitoring, ordering of
items from the Office Depot Web site, bus transportation costs, and the allocation of single audit
and indirect costs charged to Federal grants. The lack of the written policies and procedures may
have led to the unallowable (including supplanting) and unsupported expenditures charged to the
grant funds we reviewed.

Policies and procedures are a part of effective internal controls. Management sets the objectives,
puts the control mechanisms and activities in place, and monitors and evaluates the control. PSD
management had not created an adequate control environment.

     A. Monitoring of Budgets

PSD did not have written policies and procedures relating to the monitoring of grant budgets
during the audit period. As a result, budget to actual reconciliations were not required and
appeared to not have been performed on a periodic basis. One analyst we interviewed stated that
she performed any budget to actual expenditure reconciliations on her own without a request or
requirement. Federal regulation, 34 C.F.R. § 80.20 (b)(4), requires that actual expenditures or
outlays must be compared with budgeted amounts for each grant or subgrant. It is important for
analysts to monitor budget to actual expenditures because they move funds and expenditures
within the grant fund and need to determine the amounts that can be expended.

We reviewed 110 JV transactions, totaling $47,668,116, (excluding transportation and indirect
costs transactions) and found seven transactions, totaling 1,504,101,54 were unallowable and two
54
   Amount includes five transactions, totaling $108,416, two separate transactions, totaling $1,395,685, were
transfers of charges for the new teacher training program into the Title II grant.
Final Report
ED-OIG/A03H0010                                                                                Page 52 of 131

transactions,55 totaling $2,331,044, were inadequately supported.56 We found that expenditures
were transferred between grants that had over-expended budgets and grants that had budgets
with funds remaining to be spent. For example, the Nonpublic school portion of the Title V,
Innovative Education, went over budget by at least $108,416 and PSD transferred this
expenditure amount from the grant into the Nonpublic school portion of the Title II, Part A grant
(represents five transactions).

Two of the expenditure transfers included at least three instances where the object codes of the
expenditures were changed. For example in one transfer, expenditures originally coded as
textbooks and library books, in the Title V grant were transferred to the Title II grant and coded
as “general education” supplies. In another transfer, school computer equipment was charged to
the Title II grant as consulting contracts. The analyst that performed these transfers told us that
this was done to transfer the amount necessary to complete the objective of closing out the funds.
The analyst also stated that those grants overspent had “excessive expenditures.” In all
instances these transfers were approved by the principal grant analyst. OMB Circular A-87,
Appendix A, C., Basic Guidelines, 3., Allocable Costs, a. provides that any cost allocable to a
particular Federal award or cost objective under the principles provided for in this Circular may
not be charged to other Federal awards to overcome fund deficiencies. Accordingly, these
transferred expenditures were not allocable to the grants charged. If the budgets were being
monitored and reconciliations were performed periodically, the excessive spending and transfers
should have been curtailed.

Furthermore, some of the expenditures that were transferred between the funds were
unsupported. For example, expenditures, totaling $1,165,522, that were not in the grant budget
were transferred from PSD‟s Empowerment Grant to the Title II, Part A grant then later
transferred to the Title I grant (two transactions).57 Funds were budgeted in the FY 2006
Empowerment grant to pay for these costs, as they had been in the prior year. Additionally, PSD
could not provide adequate support for the expenditures that related to principal training. The
only data provided were generated from a payment spreadsheet that showed what training
sessions each principal participated in and the number of training hours taken. No
documentation from the training attended was provided.

In addition, grant analysts consistently overrode grant budgets to complete JV transactions. We
found 55 instances in our samples where the budgets were overridden to complete JV
transactions. For example, the Special Ed grant had budgeted salary costs of $99,183 for
professional development to be provided by PSD‟s legal counsel to instructors in the schools;
however, $175,104 in salary costs for the professional development expense was transferred into
the grant fund. Although these expenditures appeared allowable, the budget was overridden in
order to transfer these costs into the grant fund. If periodic reviews of the budget had been

55
   The two transactions were for $1,165,522 each. These were for the transfer of principal training expenditures
from state funding into the Title II grant and then from the Title II grant into the Title I grant.
56
   Of the 9 questioned transactions, $1,395,685 of the unallowable amount is included in Finding No. 2 and the
entire inadequately supported amount is included in Finding No. 4. The total unduplicated unallowable amount is
$108,416.
57
   These costs were for PSD‟s New Teacher Training program and principal training. They included salaries, fringe
benefits, materials, and contract services incurred by the grant programs.
Final Report
ED-OIG/A03H0010                                                                                   Page 53 of 131

performed, funds could have been moved between line items (budget transfers) so that the
unbudgeted expenditures could be properly accounted and paid for. Therefore, transfers of the
charges after expenditures had occurred could have been reduced.

Furthermore, PSD‟s JV policies and procedures required only senior or principal analysts to
approve JV transactions (see Finding No. 4, subpart A for additional details). No additional
approval was required to override grant budgets. To strengthen PSD‟s internal controls and to
assist in ensuring that only allowable and allocable expenditures are charged to grant funds, PSD
should require a second level of approval for budget overrides. PSD‟s applicable grant program
office should also be required to review and approve override transactions.

The POMB prepared a budget to actual report, about which the Deputy Budget Director stated,
“activity managers, agency managers, and program chiefs receive the reports monthly.” The
Deputy Budget Director, who oversaw the grants area of POMB, also stated that this report was
made available to the analysts. However, PSD did not provide any documentation to show that
the grant analysts had a written requirement to access or use this report in any way. 58
Furthermore, the report provided to us as an example59 appeared to include only three agency
groups at PSD60 and did not include a detailed comparison for any Federal grants. For example,
there was no budget to actual information for the Title I and Reading First grants.

Although the Deputy Budget Director stated that managers have always been responsible for the
fiscal management of their program, it did not appear that grant analysts who work with the grant
managers to establish budgets for the grants had a direct requirement to review the grant
expenditures and report on them even periodically. Analysts should assist the grant manager
with monitoring the grant budget and expenditures. It is also important that reconciliations be
performed since not all grants have a grant manager outside of POMB. For example, the Title II,
Part A, and FIE program were managed within POMB.

Because there was no policy to require monitoring to be performed and no monitoring occurred,
budgets were allowed to be over-expended and overridden and costs were moved across grants to
overcome deficiencies. Policies and procedures are a part of effective internal controls.
Management sets the objectives, puts the control mechanisms and activities in place, and
monitors and evaluates the control.

PSD management had not created an adequate control environment. PSD did not meet the
Federal financial management system standards contained in 34 C.F.R. § 80.20(b)(3), that
provides that local educational agencies must maintain effective internal controls and
accountability for all grant and sub-grant assets (including cash) and assure that such assets are
used solely for authorized purposes. PSD also did not meet 34 C.F.R. § 75.702, which provides

58
   When requested, management at PSD offered signed affidavits by the analysts that would state they perform the
actions. When we told PSD these signed affidavits may contradict information already provided by the analysts
themselves, PSD decided not to offer the affidavits as support.
59
   PSD provided us with a report for fiscal year 2009 showing year-to-date activity through July 2008. PSD‟s fiscal
year is from July to June.
60
   The three agency groups in the report were Accountability and Assessment, Executive Management, and Charter
Schools.
Final Report
ED-OIG/A03H0010                                                                                    Page 54 of 131

that grantees are required to have financial management systems that enable the grantee to
maintain effective internal control and fund accountability procedures.

PSD believed that the overriding of budgets was an issue because it enacted enhanced controls,
effective in FY 2008, concerning the overriding of budgets. Control was to be vested in the
POMB to prevent the automatic overriding of budgets and to ensure POMB review and
resolution, along with concurrence by the program office or school involved, so that the budget
deficiency would be addressed immediately. However, we noted that PSD‟s enhanced controls
did not require at least two individuals (a second level of approval) to approve budget overrides.
Furthermore, to aid in preventing circumvention of the control, these persons should not be in the
same chain of command. Although PSD was taking steps to eliminate the issue of overriding
budgets to perform JV transfers, there was still no written requirement that reconciliations of
actual expenditures to budgeted amounts be performed periodically.

PSD Response to Monitoring of Budgets (A):

PSD stated it addressed the issue of the policies and procedures in its response to Findings No. 3
and 4. PSD stated that it addressed the transfer of principal training and new teacher costs in its
response to Finding No. 4.

OIG Response PSD Response to Monitoring of Budgets (A):

PSD‟s statement that it addressed this issue in Finding Nos. 3 and 4 is not correct. PSD made no
specific mention of its budget review process or controls in any portion of its response.

PSD did not address the JV transfers performed to move excessive costs from the Title V grant
into the Title II grant or the movement of the transfer of attorney salaries into the IDEA grant.

Although PSD did state the transfers mentioned should be considered supported, it offered no
supporting documentation or explanation of how they relate to this portion of Finding No. 5.
PSD did not address why the transferring of these expenditures in and out of grants is an
acceptable business practice and does not show a lack of adequate controls.

     B. Use of Title II, Part A Grant Funds

PSD‟s Intermediate Unit 26 (IU 26) did not have policies and procedures in place to ensure
Title II, Part A grant funds61 were expended in accordance with Federal regulations and
guidance. PSD directly paid private schools62 and other vendors for professional development
services with Title II, Part A grant funds. Direct reimbursement to private schools is not
allowable under Federal regulations. Section 1120 (d) (1) of the ESEA, Public Control of
Funds, states in general, the control of funds provided under this part, and title to materials,

61
   Under Title II, Part A, LEAs are required to provide equitable services for private school teachers and other
educational personnel only to the extent that they use the funds for professional development.
62
   A private school is a nonprofit institutional day or residential school that is not under Federal or public
supervision or control and that provides elementary and/or secondary education as determined under State law,
except that the term does not include any education beyond grade 12.
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equipment, and property purchased with such funds, shall be in a public agency, and a public
agency shall administer such funds, materials, equipment, and property.

We reviewed 39 Title II Part A expenditures, totaling $436,756, for services to Nonpublic
schools paid for by IU 26 Office of Nonpublic Programs. We found that 23 of those
expenditures, totaling $422,956, were unallowable because they were direct reimbursements to
private school organizations (for example, the Archdiocese of Philadelphia, and the Philadelphia
Association of Christian Schools) and\or on behalf of their affiliated private schools and other
private schools (for example, the Politz Hebrew Academy, Muhammad‟s Islamic Academy,
Green Tree School, and Chestnut Hill Academy).

Federal regulations at 34 C.F.R. § 76.651 (a)(3) requires that the LEA maintain continuing
administrative direction and control over funds and property that benefit students enrolled in
private schools. Furthermore, guidance from the Department, Improving Teacher Quality State
Grants, ESEA Title II, Part A, Non-Regulatory Guidance, Section G, Private School
Participation, (Revised October 5, 2006), (Title II, Part A, Non-Regulatory Guidance) G-23,
states that “The LEAs must administer and retain control over the funds and, therefore, may not
provide program funds directly to private schools.” Therefore, PSD should have paid vendors or
third party contractors directly and not the Nonpublic schools or other organizations.

Guidance to Nonpublic Schools
PSD also did not provide guidance to Nonpublic schools on the use of Title II, Part A funds. The
Nonpublic schools were requesting reimbursement for expenditures that should not have been
paid with Title II, Part A funds, and the schools did not provide adequate supporting
documentation along with the reimbursement requests.

The majority of the expenditures ($248,572) paid to the Nonpublic schools would also be
unallowable because many of these expenditures were for the incidental costs (i.e., travel, food,
and lodging) of the professional development activity. 63 For the incidental costs to be allowable
Title II, Part A expenditures, the actual professional development itself must be funded by the
grant as well. OMB Circular A-87, Appendix A, C., Basic Guidelines, 1., Factors Affecting
Allowability of Costs, a.-j., provides that for a cost to be allowable it must be necessary and
reasonable for efficient performance of Federal awards and be allocable. To be allocable the
expenditure must be clearly related to the grant‟s goals and objectives. When the funding of the
actual training is not provided by Title II, Part A funds, the grant‟s goal and objectives which are
to provide training–not support it–have not been met. Also unallowable were payments made for
a non-pubic school‟s indemnity insurance ($1,173) and tips related to the purchase of alcoholic
beverages ($762).

Additionally, we noted expenditures, such as the training on the use of 50 Palm Pilots that were
purchased64 ($9,538), and a training class titled “Promoting Proper Health and Nutrition” ($880)


63
   Generally expenditures were requested for reimbursement in bunches. For example, the Archdiocese of
Philadelphia submitted a request for reimbursement on October 27, 2005, that was for five separate items totaling
$43,332.
64
   The $9,538 was for the purchase of the Palm Pilots and training on how to use them.
Final Report
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that did not fulfill the professional development requirements of Title II, Part A, and also were
unallowable.

Inadequately Supported Costs
Furthermore, PSD paid the Title II, Part A expenditures without obtaining adequate supporting
documentation from the private schools. We determined that nine expenditures, totaling
$10,050, were unsupported due to lack of adequate supporting documentation. These were for
payments to private school personnel who attended professional development activities as either
an instructor or participant. We requested class outlines to support the participant‟s attendance,
but none were provided. Without the outlines we could not determine if the professional
development activity was allowable and if the participant actually attended.

Furthermore, due to the lack of adequate documentation provided, we were not able to determine
if all of the professional development expenditures were for allowable activities under Title II,
Part A grant provisions. Examples of the activities include expenditures for attendance at the
National Catholic Education Association National Conference and the Archdiocesan Curriculum
Committee Weekend Conference. We could not determine if any part of these conferences were
religiously oriented, which would be unallowable. Title II, Part A, Non-Regulatory Guidance,
Section G, Private School Participation, G-13, states that Title II, Part A funds may be expended
to pay for the portion of the costs of the conference that represents the secular professional
development in which the teacher participated. Without adequate documentation, this
determination could not be made. We also found expenditures for attendance at conferences that
did not appear to be professional development based on subject content or the art, science, or
profession of teaching. Examples include, classes titled “A Framework for Understanding
Poverty,” and “Promoting Proper Health and Nutrition.” Another example was a workshop for
middle school girls that had teachers in attendance that was titled “A Young Woman‟s Journey.”
Title II, Part A, Section 2123, Local Use of Funds, (a)(3) Providing Professional Development
Activities, states that professional development provides training in one or more of the core
academic subjects taught by the teachers and improves teaching practices and student academic
achievement. Examples of expenditures for other conferences or classes that we could not
determine allowability included attendance at the National Association of the Education of
Young Children Conference, the Reading First and Jump Start Weekend Conference, and
Learning 24/7-The Community is a Classroom.

PSD Response to the Use of Title II, Part A Grant Funds (B):

PSD did not concur with this finding. PSD stated that it addressed the policies and procedures
issues in its response to Finding Nos. 3 and 4. Therefore, PSD chose to address portion B of the
finding, “Use of Title II, Part A Grant Funds.”

PSD stated that it only made a direct payment to a Nonpublic school after the school had already
made a payment to a vendor for eligible costs and then the school sought reimbursement from
PSD. This allowed PSD to retain greater “administrative direction and control” over Title II
funds than had it directly incurred an obligation to pay a vendor itself. This structure allowed
PSD to determine after the fact whether a particular expenditure was eligible under the Title II
grant, then exercise its discretion to pay for the activity with no obligation to the vendor.
Final Report
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PSD further stated that the draft report‟s contention that the majority of the Title II, Part A
expenditures would be unallowable because the expenditures were incidental professional
development costs has little substance and is contrary to Department guidance. The auditors
were not correct in adopting this position to disallow costs. (See U.S. Dep‟t of Educ.,
“Improving Teacher Quality State Grants – Non-regulatory Guidance,” at 32 (2006) [sic]
“Provided that an LEA maintains records of the amount of Title I and Title II, Part A funds used
for these professional development activities, and the Title I funds are used as permitted in the
Title I statute and regulations, Title I and Title II, Part A funds may be used jointly for this
purpose.”

PSD asserted that the draft report assumed that other dollars paid for the vendors conducting the
training simply because the Title II grant was not charged. The vendors/presenters provided
services free of charge. The auditor‟s conclusions are incorrect.

OIG Response to PSD Response to the Use of Title II, Part A Grant Funds (B):

PSD‟s statement that its current system of reimbursement allowed it to maintain greater
administrative control is contrary to the issues found during our review. Along with the
examples of indemnity insurance and tips for alcoholic beverages discussed in the text of the
finding, we found that PSD reimbursed Nonpublic schools for floral arrangements, rental of a
piano and piano player, valet parking, and entertainment expenses. Furthermore, 13 of the 39
expenditures we reviewed were reimbursed with only a request for reimbursement submitted by
the Nonpublic school that did not include receipts to show that the costs were actually incurred.
PSD has not shown that it had “administrative direction and control” over the Nonpublic Title II,
Part A funds. Approving potential expenditures before they are incurred provides greater
administrative direction and control because you can ensure that the expense is reasonable and
allowable. In addition, paying expenses without the proper receipts also does not provide for
adequate direction and control over the funds.

In January 2009, PDE‟s Division of Federal Programs released an Administrative Manual for
Consolidated Federal Programs. Section 1, General Guidelines, Participation of Nonpublic
School Children, clearly states that the public LEA controls funds, employment, and contracts
used to provide services to nonpublic students and teachers. The public LEA makes the final
decisions with respect to the services provided to Nonpublic children with Federal funds from
the consolidated Federal programs. The manual further states that, “No funds may go directly to
the nonpublic schools-only services.” The manual also states that these requirements must be
met or the “district‟s program would not be in compliance.” If PSD continues to carry out this
process of reimbursement for Title II, Part A nonpublic school expenditures, it will be in
violation of both state and Federal requirements.

Our position that Title II, Part A funds were not allowed to purchase incidental expenditures for
training if the training itself is not funded by Title II, Part A funds was based on our discussions
Final Report
ED-OIG/A03H0010                                                                                     Page 58 of 131

with the Department‟s Title II, Part A program office and was developed by its attorneys. The
actual guidance provided by the program office was provided to PSD on October 10, 2008.65

Although the Department‟s guidance does allow Title I and Title II, Part A grant funds to be used
jointly to fund training and professional development, PSD provided no supporting
documentation to show that the Title I grant funded the actual costs of the professional
development when the Title II, Part A grant funded the incidental costs.

Also, PSD did not provide sufficient documentation to support the statement, “…the draft report
assumed that other dollars paid for the vendors conducting the training simply because Title II
was not charged. The vendors/presenters provided their services free of charge.” No agreements
or contracts with any of the vendors or presenters showing that the services were provided “free
of charge” or as part of the purchase of materials were provided.

     C. Use of Office Depot Web site

PSD did not have documented policies and procedures defining the process to be used for
ordering items from the Office Depot vendor. Employees ordered items directly from Office
Depot‟s Web site on a daily basis. Daily order activity was collected weekly by Office Depot
and a bill was transmitted electronically to PSD for payment. This direct submission by Office
Depot started the invoice payment process in the Advantage system. The items ordered were
received directly by the department or school that ordered them. All expenditures were charged
to the ABC activity funding code 6121 “office supplies.” Therefore, if a mini refrigerator was
ordered, the same activity code would be used as if pens were ordered.

We reviewed 779 Office Depot expenditures, totaling $97,953. We found that 584 expenditures,
totaling $66,252, were unallowable.66 (See Table 3 and Enclosure 5 for more detail on the
unallowable expenditures.)

PSD did not have controls in place to ensure that items ordered from Office Depot were
appropriate grant expenditures, and there was a lack of oversight of items purchased.
Unallowable Office Depot expenditures that were charged to grant funds included the purchase
of a mini fridge, hand trucks, a microwave oven, greeting cards (all purchased by the Title I
program office), cordless phones, cherry wood office furniture, hand soap, facial tissue, cleaning
supplies, and many other basic office and education supplies.67 Based on the types of items
ordered, it appeared that PSD employees did not receive guidance on what could and could not
be ordered using grant funds.




65
   An email was sent to the Chief Financial Officer, Comptroller, and principal analysts for grants.
66
   See the Background section of the report for the types of expenditures that grant funds should be used for
according to the grant provisions.
67
   These expenditures were determined to be unallowable because they do not support the grant‟s purpose.
Final Report
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Table 3-Office Depot Expenditures
                          Miscellaneous          Electronics (i.e.,        Office Supplies
                         (i.e., break room       printers, cameras,         (i.e., stationery
                         supplies, coffee,          Palm Pilots,           supplies, printer
                            cups, plates,           calculators,          ink, general desk
                         napkins, Tylenol,         refrigerators,                 items)
                          Advil, cleaning           microwaves,
                           supplies, and         cordless phones,
                                candy)             and batteries)                                        Total
Title I
    Unallowable               $6,524                  $14,837                 $33,116                        $54,477
CSR
    Unallowable                 $289                   $1,505                  $2,091                         $3,885
GEAR UP
    Unallowable                 $198                    $584                   $6,388                         $7,169
Reading First
    Unallowable                $99                      $11                    $611                             $721
           Total              $7,109                  $16,937                 $42,206                        $66,252

In addition, PSD did not follow OMB Circular A-87 concerning the refund of items paid from
grant funds. OMB Circular A-87, Appendix A, C, Basic Guidelines, 4. Applicable Credits,
provides that rebates are considered to be an applicable credit, and they should be credited to the
Federal award either as a cost reduction or cash refund. A PSD official from the Procurement
Services department informed us that PSD received a $74,740 rebate check68 from Office Depot
in FY 2007 for items purchased in FY 2006. The entire rebate was deposited into the general
fund.69 Based on the OMB Circular A-87 criteria, PSD should have pro-rated the rebate and
credited the funds among the Federal grants that were used to purchase items from Office Depot
during the period the rebate applied to.

PSD Response to the Use of Office Depot Web site (C):

In its response to Finding No. 3, PSD provided additional supporting documentation for the
Office Depot expenditures.

PSD did not address having inadequate controls in place for using the Office Depot Web site for
ordering items.

OIG Response to PSD Response to the Use of Office Depot Web site (C):

Of the 584 expenditures that were unallowable, PSD provided additional documentation for only
10 expenditures with its response. Based on the information provided for two of the
expenditures, we removed the associated costs from our exceptions.


68
   The Procurement Services department official stated that currently the rebate was 1 percent of the total purchases,
but the rate would increase to 3 percent within the next year (2009).
69
   PSD also received a $42,390 rebate check that was deposited into the general fund on June 27, 2006.
Final Report
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The other information provided was not adequate. For example, for the purchase of a shredder
by an elementary school using Title I funds, PSD provided an email from the principal stating
that she was not the principal at the time of the purchase but did know there were two shredders
at the school. This information is not adequate to support the shedder being purchased from the
grant funds because PSD did not know why the shedder in question was purchased or where it
was located.

Also, PSD provided conflicting information. For example, PSD‟s first response included a
statement that 30 packages of toner were purchased for 2 printers to be used by the MERIT staff.
As part of its final response submission, PSD stated that the toner was used for 30 printers at
Archdiocesan schools. As stated in our response for Finding No. 3, the inconsistent statements
made it impossible for us to form a conclusion that the expenditures were allowable.

     D. Bus and School Choice Transportation Costs Charged to Grant Funds

PSD did not have written policies and procedures regarding the use of PSD‟s bus service, and no
review of the costs was being performed. PSD‟s Fiscal Coordinator for Transportation Services
informed us that schools were to submit Form S-175 “Request for School District-Operated Off-
Peak Bus Service” to Transportation Services to request the use of a bus. Bus drivers were
required to complete Form TO-68 “Trip Assignment Slip” for each bus driven on a trip.
However, Transportation Services did not keep track of the bus usage information but obtained it
from the schools. The fiscal coordinator stated that he emailed requests to schools for
information on their bus usage at the end of the month and compiled his billing information from
the replies, which would include trip date and ABC billing code. Once the information was
received, a spreadsheet was created and sent to the POMB as support for a JV transferring costs
from the general fund into the grant funds. No reconciliation or cross check of the billing
information received from the schools and the S-175 or the TO-68 forms was performed.
Additionally, no review of the ABC code used was performed either, which allowed trips to be
charged to the grants that were not grant eligible. As a result of no reconciliations being
performed and no review of the ABC code, bus transportation costs charged to the grants were
unallowable, inadequately supported, and overstated.

We reviewed nine JV transfers, which included 69 transportation expenditures, totaling
$1,380,266. We found three unallowable expenditures, totaling $13,885. This included $13,145
($12,064 for token usage and $1,081for busing) for transportation costs for public school choice
students.70 We also found 22 expenditures (that included costs for buses for afterschool tutoring
and field trips to PSD‟s educational center), totaling $42,655, were inadequately supported
($30,880 of this was also questionable).

School Choice
We found that costs for the transportation of public school choice71 students charged to the
Title I grant were overstated. Title I was charged for all the 2006 school choice students‟
transportation costs, totaling $1,293,386. PSD provided transportation to school choice students

70
  This item is also discussed in Finding No. 2.
71
  Title I, Section 1116 (b) (1) (e) allowed for students enrolled in a school identified for improvement to transfer to
another public school serviced by PSD.
Final Report
ED-OIG/A03H0010                                                                     Page 61 of 131

by bus, tokens, or taxicab. Transportation Services charged the Title I grant $86,768 for tokens
for 187 school choice students to take public transportation to school.72 The supporting
documentation provided by PSD showed that only 161 students ($74,704) using tokens were
actually public school choice students. Therefore, PSD overcharged the Title I grant for 26
students, totaling $12,064.

PSD also overcharged the grant $1,081 for the busing of other school choice students.
According to the JV used to record the bus route costs to the Title I grant, the total cost per bus
route was $45,044. The amount charged per bus route to the Title I grant was based on the
percentage of school choice students per bus route. PSD charged the Title I grant for the use of
this bus route under the assumption that 16.7 percent of the students were public school choice
students ($7,522). However, only 5 students on the bus were school choice students, and the
supporting documentation provided by PSD showed that the total number of students on the bus
was 35. Therefore, only 14.3 percent (5 divided by 35) of the students on the bus route were
choice students ($6,441).

Buses Charged for Pepper Middle School’s After School Program
The majority of the inadequately supported questionable costs related to busing costs charged to
the Title I grant for an after-school program. The charges for the use of the buses did not
correspond with the dates provided by PSD personnel and the supporting documentation did not
support the number of buses charged. A memo from the school‟s principal indicated that three
buses were needed each day to provide the students with transportation home; however, the
number of buses charged per month did not correspond with this. For example, in February
2006, costs for 76 buses were charged to the Title I grant for transporting students from the
extracurricular program at Pepper Middle School. The number of buses appeared to be
excessive since the program only ran 4 days a week. There would only have been a need for 48
buses if there were 3 buses for 4 days (Monday through Thursday) for 4 weeks.

In addition, PSD was unable to clearly provide the actual start and end dates for the after school
program. We initially were told that the program ran from January 2006 through March 2006.
In May 2008 PSD stated that the program started in November 2005. We then received a
memo, dated June 26, 2008, from the Title I Director to the Comptroller that stated the program
ran from November 2005 through May 2006. Although we were told that the program ran from
November 2005 until May 2006, the Title I grant was first charged for bus usage in October
2005 and the grant was not charged for bus usage for the months of April and May 2006 (see
Table 4 below).




72
     The Title I grant was charged $464 per student for the year.
Final Report
ED-OIG/A03H0010                                                                                  Page 62 of 131

Table 4-Bus Usage
                            Date Buses Were
Month Buses Were
                           Charged to Title I           Number of Buses           Amount Charged74
    Used 73
                           by JV Transaction
      October 2005         November 15, 2005                     22                       $3,520
     November 2005          February 2, 2006                     42                       $6,720
     December 2005          February 28, 2006                    22                       $3,520
      January 2006           March 24, 2006                      29                       $4,640
     February 2006           May, 16, 2006                       76                      $12,160
       March 2006             May 22, 2006                       71                      $11,360
       April 2006             June 19, 2006                       0                         $0
        May 2006              June 27, 2006                       0                         $0
        TOTAL                                                   262                      $41,920

Pepper Middle School provided supporting documentation for the program in the form of student
sign-in sheets from January through March 2006 only. However, in a July 7, 2008, letter, the
principal stated “Sign-in sheets were kept for the entire program.”

PSD‟s inability to show when the program actually started, to provide adequate supporting
documentation, and to show that the bus usage was not excessive resulted in the costs for 193
buses,75 totaling $30,880, paid from Title I grant funds being questionable. These costs were not
in line with OMB Circular A-87 because they were not necessary and reasonable or adequately
documented. OMB Circular A-87, Appendix A, C. Basic Guidelines 1. Factors Affecting
Allowability of Costs, requires that costs must be necessary and reasonable for proper and
efficient performance and administration of Federal awards, be allocable to Federal awards, and
be adequately documented.

      E. Allocation of Single Audit Costs

PSD did not have written policies and procedures regarding the allocation of single audit costs
and did not allocate these costs appropriately. Therefore, grantors may not have been allocated
their appropriate share of the audit costs. Additionally, PSD did not allocate the entire cost of
the single audit. Although` PSD received a bill from the City of Philadelphia, Office of the
Controller (Controller‟s Office), there was no actual monetary payment made by PSD to the City
for this service. This was a non-monetary expense for the district.

During the audit period, PSD allocated $183,220 in single audit costs to Federal grants.
Department grants absorbed more than 89 percent of the 2006 audit costs allocated. The Title I

73
   This information was obtained from JV documents provided by Transportation Services and the Trip Assignment
Slips prepared by the bus drivers.
74
   Bus usage was not charged under the same method as those used for field trips or other non-peak bus activities.
Buses were charged $160 each.
75
   This number was arrived at by taking the total number of buses (262) minus the number of buses that were
supported by student sign-in sheets (69). PSD provided supporting documentation for 4 days in January, 9 days in
February and 10 days in March 2006, for a total of 23 days. Three buses were required for the 23 days, which
equals 69 buses that were supported.
Final Report
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grant alone absorbed 27 percent of the costs for the audit period, while the Vocational Education
grant absorbed over 17 percent.

The Controller‟s Office performed the single audit and provided a bill to PSD detailing the audit
cost and the programs audited. For example, the Controller‟s Office billed PSD $283,533 for the
cost of the FY 2006 single audit. Eleven major grant programs were audited: six Department
grants, three U.S. Department of Agriculture grants, and two U.S. Department of Health and
Human Services grants. Department grants were allocated a total of $163,443 of the audit costs.

We were informed by the principal analyst for grants that PSD‟s rule was to allocate 0.25 percent
(.0025) of a grant‟s administrative costs to audit costs and cap Title I grant audit costs at
$50,000. When asked why PSD used the percentage amounts selected, he stated that the
percentage amounts were decided on years ago and have always been “a good amount to gauge
the expense.” However, PSD was not uniform in applying this method. We found that not all
the grants with administrative costs were allocated audit costs. Of the 25 grants76 allocated audit
costs, during the audit period, three were allocated .005 percent of the administrative costs and
three others (excluding Title I) were allocated a “flat” amount. In addition, 17 of the 25 grants
were allocated audit costs based on budgeted direct costs and another 7 of the 25 grants were
allocated audit costs based on the grant award amount.77

Furthermore, PSD did not provide supporting documentation to show the basis for the amounts
allocated or why a grant that was not audited was allocated audit costs. PSD also did not state
why the entire audit cost was not allocated. OMB Circular A-87, Appendix A, C. Basic
Guidelines 3. Allocable Costs, a. provides that a cost is allocable to a particular cost objective if
the goods or services involved are chargeable or assignable to such cost objective in accordance
with relative benefits received. As shown above, this did not appear to be the case with the
single audit costs.

We also found that there was no consistency in the manner in which PSD determined which
grant period would be allocated the audit costs. For example, the 2004 Title I grant was
allocated FY 2006 audit expenses while the FY 2005 Reading First grant was allocated audit
expenses incurred during FY 2006. In addition, we noted an instance where multiple grant
periods for one program were allocated audit costs. The Department‟s 21st Century Community
Learning Centers program grants for FY 2005 and 2006 were allocated FY 2006 single audit
costs even though this program was not audited.

PSD should either allocate all audit costs to the grants (by way of an indirect cost rate) or
maintain documentation to support another fair and equitable method of allocating the costs.

PSD management did not create an adequate control environment. Documented policies and
procedures are part of good internal controls. Documentation of policies and procedures
facilitates the training for new employees and ensures continuity of operations in the event of
prolonged employee absences or turnover. With established policies and procedures, audit costs
could be allocated consistently and correctly.
76
     Of the 25, 17 were Department grants.
77
     See Enclosure No. 5 for a table detailing the allocated audit costs.
Final Report
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   F. Charging of Indirect Costs

PSD did not have written policies and procedures relating to the calculation and recording of
indirect cost expenditures. We reviewed $2,659,237 in indirect costs charged to the grants and
found that the indirect costs were overstated by $11,063 (the Title I grant by $8,055, the Safe and
Drug Free Schools grant by $2,312 and the Title II grant by $696).

We found that indirect costs were also not calculated correctly. PSD calculated indirect costs by
multiplying total expenditures (minus equipment and state retirement revenue) by 2.28 percent,
the rate set forth by Commonwealth of Pennsylvania Comptroller‟s Office. Because there were
no policies and procedures, indirect costs were recorded at the analyst‟s discretion. Some
analysts recorded the costs only once during the grant period and others more than once. When
calculating the amount of indirect costs to record for any time period other than the first time,
PSD did not reduce the total expenditure amount by the amount of the previously recorded
indirect costs. For example, the FY 2006 Title I grant was charged $353,283 in indirect costs
via a JV performed in September 2005. In a September 2006 JV to record indirect costs, the
analyst calculated the indirect cost base of $92,627,219 (the amount by which the indirect rate
was multiplied) using the total FY 2006 grant expenditures ($96,090,954 less equipment costs of
$2,101,980 and state retirement revenue of $1,361,755). The prior booking of the indirect costs
($353,283) was not deducted from the total expenditures to determine the indirect cost base. The
indirect cost base should have been $92,273,936, resulting in indirect costs of $2,103,846. The
previously recorded indirect costs should have been deducted from the total expenditures
because total expenditures included that amount. As a result, the Title I grant was overcharged
$8,055 for indirect costs.

As previously stated, PSD management did not create an adequate control environment.
Documented policies and procedures are part of good internal controls. Documentation of
policies and procedures facilitates the training for new employees and ensures continuity of
operations in the event of prolonged employee absences or turnover. With established policies
and procedures, analysts would be consistent in the recording of the indirect costs and would be
aware of how to correctly calculate the costs.

PSD Response to Transportation Costs Charged to Grants, Allocation of Single Audit
Costs, and Charging of Indirect Costs (D., E., F.):

In its response PSD stated that the omission of a discussion of finding issues in the response,
such as the transportation charges, allocation of single audit costs, and the charging of indirect
costs, is not an agreement with the findings but are a result of resource and time limitations.

OIG Response to PSD Response to Transportation Costs Charged to Grants, Allocation of
Single Audit Costs, and Charging of Indirect Costs (D., E., F.):

Finding issues D, E, and F remain unchanged from the draft report.
Final Report
ED-OIG/A03H0010                                                                                      Page 65 of 131

Recommendations:

We recommend that the Assistant Secretary for Elementary and Secondary Education in
collaboration with the Assistant Secretary for the Office of Post Secondary Education require
PDE to instruct PSD to:

         5.1      Return the $636,51578 in unallowable costs and related indirect costs to the
                  Department.
         5.2      Provide adequate documentation to support $52,705 in inadequately documented
                  non-personnel expenditures or return any portion of that amount the Department
                  determines is not adequately supported.
         5.3      Develop and implement budgetary monitoring policies and procedures.
         5.4      Develop and implement policies and procedures to properly administer Title II,
                  Part A grant funds.
         5.5      Provide appropriate guidance to the Nonpublic schools that are eligible to receive
                  Title II, Part A services.
         5.6      Develop and implement policies and procedures to ensure that expenditures
                  purchased from the Office Depot Web site are reasonable and allowable and
                  grants are refunded any rebate or the rebate is returned to the Department.
         5.7      Develop and implement policies and procedures to ensure transportation costs
                  billed to the grants are allowable and adequately supported and school choice
                  costs charged to Title I are incremental.79
         5.8      Develop and implement policies and procedures for allocating single audit and
                  indirect costs to ensure that the charges are reasonable, allocable, and allowable,
                  and adequately supported.




78
   This amount includes all unallowable expenditures and related indirect costs for all the subparts of the finding
except for the charging of indirect costs. The indirect cost rate used was 2.28 percent. See Enclosure 1 for a
calculation of this amount.
79
   See Finding No. 2 for school choice transportation charges and supplanting.
Final Report
ED-OIG/A03H0010                                                                    Page 66 of 131



                                            OTHER MATTERS


A Lack of Position Descriptions for Personnel in Senior Management

PSD could not provide job descriptions that were in effect during the audit period for the
positions of Comptroller, Deputy Budget Director, and the Safe and Drug-Free Schools Director.

In creating an adequate control environment, management needs to identify appropriate
knowledge and skills needed for all positions. Appropriate human capital policies and
procedures, which include requiring resumes and providing professional development, are a
critical factor in creating an adequate control environment. We requested personnel documents
(resumes, applications, job descriptions, and training documentation) for the Interim CFO, the
Comptroller, Budget Director, Deputy Budget Director, Principal Financial Analyst, and
Directors of the grant programs in our review.80 This information was requested to determine
whether these positions had a clear definition of the required duties and responsibilities. Also
resumes or applications were requested to help determine whether those in the positions were
qualified.

Although PSD did provide us with all of the job descriptions, the Comptroller, Deputy Budget
Director, and the Safe and Drug-Free Schools Director grant job descriptions did not appear to
have been prepared prior to or during our audit period. For example, the job description for the
Comptroller was written in April 2008. We requested information concerning how the job
description was created and were provided with the job announcement for the position. The job
announcement did not include job responsibilities or duties. Therefore, we were unable to
determine that the Comptroller‟s position had defined responsibilities and duties during the audit
period. The job descriptions for the Deputy Budget Director and the Safe and Drug-Free Schools
Director program were created in April 2008. We suggest PSD ensure all positions, especially
those in senior management, have written job descriptions that define the position‟s
responsibilities and duties.

Ordering of Excessive Amounts of Food

During the audit period, PSD ordered excessive amounts of food for parental and other activities.
We noted many instances where PSD could not fully support the amount of food ordered; too
much food was ordered for the number of activity participants. We also noted that school
personnel were the main attendees at many functions where food was ordered. Examples of food
ordered by PSD included:

          Lunches at $14 per plate for an honor roll recognition luncheon. No documentation of
           attendees could be provided by PSD.

80
     PSD provided us with all requested items except for two resumes.
Final Report
ED-OIG/A03H0010                                                                   Page 67 of 131


      100 continental breakfasts were ordered for a “kick-off celebration” at Bayard Taylor
       Elementary. There was no agenda or any other type of information to determine what the
       activity actually was. It also appeared that only 22 parents attended the event.

      A breakfast at $8 per plate was held at Widener Memorial School for a Positive Post
       School Outcome event. The sign-in sheets provided indicated that 40 percent of the
       attendees were school personnel.

      Food totaling $4,000 was ordered for an event held in the West Region that was being
       promoted as “A Thousand Parent Breakfast with the (Regional) Superintendent.” PSD
       stated that there were 400 attendees, however, supporting documentation for only 162
       attendees was provided.

      An Even Start staff breakfast meeting, which cost $685, was held at PSD‟s central office.
       This was not for a professional development activity but for a staff meeting. The ordering
       of food is unallowable according to OMB Circular A-87, Attachment B, 27. Meetings
       and Conferences, because it was for a staff meeting concerning administrative issues and
       not a training session where technical or training information would have been
       disseminated.

      The Title I program office order of six cases of water, totaling $90, for staff meetings
       with PSD Title I employees. This item was not allowable because, as stated above, this
       was for staff meetings.

The excessive amount of food ordered was not a prudent use of grant funds. The funds could
have been put to use in other areas supporting the grants.

We recognize that the SRC mandated new internal controls, effective in FY 2008, that included
the restriction on the use of catered food; however, we suggest PSD develop a better way to
estimate the number of participants that will attend. Furthermore, limits should be set on the
amount that can be spent on food and what can be ordered. PSD should ensure that food is not
ordered when a large percentage of those fed will be PSD employees and for events such as staff
meetings.

ABC Code Usage Needs Improvement

During our review we found that ABC codes were not clearly defined and were used improperly
to code expenditures charged to grant funds. For example, in our review of the FIE grant we
noted that payments to the Philadelphia Public League, totaling $52,877; trips to bowling alleys,
totaling $7,570; and charges for portable toilets, totaling $2,805, were coded to an ABC code
that represented part-time extra-curricular salaries.

We also found purchases of what appeared to be 2-way radios and accessories, totaling $3,725,
and food service orders, totaling $2,763, that were coded to the ABC code for Title I, classroom
Final Report
ED-OIG/A03H0010                                                                     Page 68 of 131

instruction materials. In addition, we noted two instances, totaling $54,632, where the ABC code
for classroom instruction was used for contractual services involving school safety.

During the exit conference a PSD official stated that the ABC codes were based on codes
provided by the Commonwealth of Pennsylvania and may not correspond to how PSD uses
them. The state does not provide definitions for the usage of the codes. This is part of the reason
why PSD should develop a document that more clearly defines when each code should be used
and train employees on the appropriate use of the ABC codes. We also suggest that PSD monitor
expenditures more closely to ensure that the correct ABC codes are being used. The use of the
wrong ABC code leads to a misrepresentation of the expenditure, which can lead to unallowable
expenditures being charged to Federal funds and misrepresentation of PSD‟s expenditures in
reports to grantor agencies.

Lack of Supporting Documentation for Training and Professional Development
Expenditures

PSD did not require sign-in sheets, course agendas, or training certificates to be maintained as
supporting documentation for the reimbursement of professional development costs. Without
these items, PSD cannot be certain that those registered actually attended the professional
development activity. In the travel sample we reviewed in Finding No. 4, $46,574 was
reimbursement for travel associated with training. PSD did not require employees to submit
training certificates or even a course agenda from the training activity as support for
reimbursement. Without these items, the traveler can show only that they traveled but not that
they fulfilled the objective of the trip, which was to attend training.

In a few instances copies of the training registration forms were presented as support for
reimbursement; however, this showed only that the employee registered for the training, not that
they actually attended it. As evidenced in our CSR grant sample, PSD reimbursed a teacher,
through an imprest fund, with only a copy of the registration for the class. When we requested
the training certificate, we learned that the teacher did not attend the training.

Another example we found involved Title II, Part A grant funds expensed through the
Intermediate Unit 26 for Nonpublic schools included in our sample discussed in Finding No. 5.
Grant funds were used to reimburse $436,756 in professional development costs without any
supporting documentation, such as sign-in sheets, course agendas, or training certificates. The
Archdiocese of Philadelphia alone was reimbursed $354,501.

We suggest PSD require sign-in sheets, training certificates, and/or course agendas to be
submitted as supporting documentation for training attendance in order to be reimbursed for
training and associated travel costs.
Final Report
ED-OIG/A03H0010                                                                   Page 69 of 131



                  OBJECTIVE, SCOPE, AND METHODOLOGY


The objective of our audit was to determine if PSD had adequate fiscal controls in place to
account for Federal funds for the period July 1, 2005, through June 30, 2006.

To achieve the audit objective, we performed the following procedures:

1. Reviewed applicable laws, regulations and guidance, including Title I, Part A;
   Title II, Part A; and Title II, Part D of the NCLB Act of 2001; and the Department‟s Non-
   Regulatory Guidance, Serving Preschool Children Under Title I, Part A (dated March 2004).
   We also reviewed Education Department General Administrative Regulations (34 C.F.R.
   Parts 75, 76, and 80), OMB Circular A-87, Cost Principles for State, Local and Indian Tribal
   Governments, and OMB Circular A-21, Cost Principles for Educational Institutions.
2. Reviewed reports prepared by the Philadelphia City Controller‟s Office, including the: A-
   133 Single Audit report for the year ended June 30, 2005, the Report on Internal Control and
   on Compliance and Other Matters for the School District of Philadelphia (FY 2005), and the
   Update to Report Dated August 23, 2000 on Study and Review of the Application Controls of
   the School District of Philadelphia’s American Management Systems Advantage 2000
   Financial Management and Human Resources/Payroll System. In addition, we reviewed the
   School District of Philadelphia and Philadelphia Intermediate Unit #26 Performance Audit
   Report (for the years ended June 30, 2004, 2003, 2002, 2001, and 2000). This report was
   issued by the PDE and also included the status of prior years‟ findings and recommendations.
   We also reviewed PSD‟s Report on Controls Placed in Operation and Tests of Operating
   Effectiveness for the Application Hosting Services of Verizon Data Services Inc. (SAS 70
   report) completed by Ernst & Young, for the period of January 1, 2006, to
   September 30, 2006.
3. Interviewed officials from the Department‟s Title I, Title II, and GEAR UP program offices,
   and the Office of the CFO.
4. Interviewed PSD officials, including the former CFO, Interim CFO, Comptroller, General
   Counsel, Budget Director, the Principal Financial Analyst, former Principal Financial
   Analyst, Director of Audit Services, Director of Accounts Payable, Accounts Payable
   Supervisor, Accounts Payable Clerk, Procurement Services Manager, Payroll Director,
   Inspector General for PSD, Fiscal Coordinator for Transportation Services, Executive
   Director of Employee Support Operations, Director of Human Resources, Accounting
   Managers, Program Managers, (Program) Directors, (Program) Executive Directors and the
   Financial Analysts for Title I (former and current), CSR, Title II, Enhancing Education
   through Technology, Reading First, Safe and Drug-Free Schools, FIE, and Special Ed grants.
   We also interviewed the Chairwoman of the SRC.
5. Reviewed PSD accounting records, including the GL of accounts, ABC code descriptions,
   JV policies and procedures for the POMB, General Accounting Office, AP, travel, imprest
   funds, payroll, and enhanced controls. In addition, we reviewed JVs, invoices, timesheets,
   time and effort certifications, job descriptions, employee resumes, employment applications,
   contracts with vendors, and SRC resolutions. We also surveyed employees from the POMB
   to determine the types of fiscal and grant related training taken.
Final Report
ED-OIG/A03H0010                                                                      Page 70 of 131

Sampling
We used random and judgmental sampling techniques during the audit. We did not use a
statistical sample; therefore, the results of the audit can not be projected to the intended
population. Our samples were selected as follows:

During the survey phase of the audit, we judgmentally selected categories of expenditures for
review and within those categories we randomly selected samples for testing. The judgmental
selections were based on the GL account object code category descriptions. We selected object
categories that had a total of $50,000 or more or those that appeared unusual or of interest
because of the category description. We selected separate samples for those object codes that
seemed unusual or had a category description of interest. We broke the other object codes into
three groupings; salary, salary-related, and other. Samples from these final three groupings were
randomly selected.

While conducting our survey phase testing we concluded that the volume of documents that had
to be reviewed was extremely voluminous. Therefore, we decided to only review Title I grant
expenditures in the survey phase. During the audit phase, we expanded our work to include a
review of not only Title I grant expenditures but the other grants (Title II, Parts A and D, Special
Ed, FIE, CSR, GEAR UP, Safe and Drug-Free Schools and Reading First) as well.

Review of Title I Non-Payroll Expenditures
During the audit we randomly selected our sample from a universe of 37,550 expenditures,
totaling $32,929,358, from PSD‟s GL report for the audit period. We sorted the universe into JV
and AP expenditures and selected samples from both categories. We reviewed 913 randomly
selected expenditures, totaling $4,403,772. The AP expenditures were paid through PSD‟s AP
process.

Category of Expense            Number of Expenditures          Amount of Expenditures
                               Sampled                         Sampled
AP Expenditures                735                             $3,206,023
JV Expenditures                178                             $1,197,749
Total Sampled Items            913                             $4,403,772

Review of Title I Payroll Expenditures
We randomly and judgmentally selected our sample from a universe of 292,167 expenditures,
totaling $98,834,989, from PSD‟s GL report for the audit period. We judgmentally selected
payroll JV expenditures to review. The sample selection was based on the amount of the JV, the
ABC coding, and the JV date. These items were reviewed during the survey phase.
Final Report
ED-OIG/A03H0010                                                                                     Page 71 of 131

Category of Expense                    Number of Expenditures              Amount of Expenditures
                                       Sampled                             Sampled
Bonuses                                13                                  26,125
Overtime                               3                                   2,009
Leave                                  10                                  2,127
Base Pay                               21                                  27,273
Fringe Benefits                        3                                   387
Total Sampled Items                    50                                  $57,921

Review of Improving Teacher Quality Expenditures (Title II, Part A)
We obtained the universe of expenditures from PSD‟s GL report for the audit period. We sorted
the universe into JV and AP expenditures. We only reviewed the AP expenditures because the
majority of the expenditures were paid through the AP department and the JV expenditures were
included in our review of JV transfers. We judgmentally selected our sample from a universe of
310 AP expenditures,81 totaling $763,203. We selected 76 AP expenditures, totaling $46,716, for
review. The sample selections were based on dollar amount, line description, and ABC coding.

Review of Enhancing Education through Technology Expenditures (Title II, Part D)
We judgmentally selected our sample from a universe of 2,547 expenditures,82 totaling
$6,605,924, from PSD‟s GL report for the audit period. We sorted the universe into JV and AP
expenditures. We selected samples from both types of expenditures. The sample selections were
based on dollar amount, line description and ABC coding.

Category of Expense                    Number of Expenditures              Amount of Expenditures
                                       Sampled                             Sampled
AP Expenditures                        55                                  $1,603,002
JV Expenditures                        12                                  $495,006
Total Sampled Items                    67                                  $2,098,008


Review of Title II Nonpublic Expenditures
We judgmentally selected our sample from a universe of 779 expenditures, totaling $4,190,805,
from PSD‟s GL report for the audit period. We sorted the universe into JV and AP expenditures
and selected samples from both categories. The sample selections were based on dollar amount,
line description, and ABC coding.

Category of Expense                    Number of Expenditures              Amount of Expenditures
                                       Sampled                             Sampled
Nonpublic School AP                    76                                  $605,418
Expenditures
Nonpublic School JV                    9                                   $111,280
Expenditures
Total Sampled Items                    85                                  $716,698

81
     The total Title II, Part A universe was 62,775 expenditures, totaling $23,461,274.
82
     Some of the expenditures were charged to prior years grants, but were made during the audit period.
Final Report
ED-OIG/A03H0010                                                                                     Page 72 of 131

Review of Reading First State Grant Expenditures
We judgmentally selected our sample from a universe of 9,508 expenditures, totaling
$8,710,634, from PSD‟s GL report for the audit period. We sorted the universe into JV and AP
expenditures and selected samples from both categories. The sample selections were based on
dollar amount, line description, and ABC coding.

Category of Expense                    Number of Expenditures              Amount of Expenditures
                                       Sampled                             Sampled
AP Expenditures                        665                                 $871,323
JV Expenditures                        51                                  $743,096
Total Sampled Items                    716                                 $1,614,419

Review of Safe and Drug-Free Schools Expenditures
We judgmentally selected our sample from a universe of 1,733 expenditures83, totaling
$2,118,570, from PSD‟s GL report for the audit period. We sorted the universe into JV and AP
expenditures and selected samples from both categories. The sample selections were based on
dollar amount, line description, and ABC coding.

Category of Expense                    Number of Expenditures              Amount of Expenditures
                                       Sampled                             Sampled
AP Expenditures                        43                                  $530,159
JV Expenditures                        30                                  $142,743
Total Sampled Items                    73                                  $672,902

Review for the Fund for the Improvement of Education Expenditures
We judgmentally selected a sample of 122 JV expenditures, totaling $9,022,583, from a universe
of 206 expenditures, totaling $10,506,152, from PSD‟s GL report for the audit period. We chose
to only review JV expenditures because the grant funds were received late and the majority of
the expenditures were charged to the grant funds using JVs. The sample selections were based on
dollar amount, line description, and ABC coding.

Review for Comprehensive School Reform Demonstration Expenditures
We judgmentally selected our sample from a universe of 12,243 expenditures, totaling
$6,188,144, from PSD‟s GL report for the audit period. We sorted the universe into AP and JV
expenditures, and selected samples from both categories. The sample selections were based on
dollar amount, line description, and ABC coding.

Category of Expense                    Number of Expenditures              Amount of Expenditures
                                       Sampled                             Sampled
AP Expenditures                        99                                  $435,706
JV Expenditures                        44                                  $123,107
Total Sampled Items                    143                                 $558,813



83
     Some of the expenditures were charged to prior years grants, but were made during the audit period.
Final Report
ED-OIG/A03H0010                                                                                 Page 73 of 131

Review of GEAR UP Expenditures
We obtained the universe of expenditures from PSD‟s GL report for the audit period. We sorted
the universe into JV and AP expenditures. We only reviewed the AP expenditures because the
majority of the expenditures were paid through the AP department and the JV expenditures were
included in our review of JV transfers. We judgmentally selected our sample from a universe of
936 AP expenditures,84 totaling $3,380,097. We selected 424 AP expenditures, totaling
$2,527,483, for review. The sample selections were based on dollar amount, line description,
and ABC coding.

Review of Office Depot Expenditures
We judgmentally selected our sample from a universe of 6,163 expenditures, totaling $364,518.
To obtain the universe, we extracted all Office Depot expenditures from each grant‟s GL report
and combined them. We selected a sample of 779 expenditures, totaling $97,953, from the
combined universe for review. The sample selection was based on dollar amount, line
description, and ABC coding.

Review of A-133 Single Audit Costs
We reviewed all A-133 Single Audit expenses charged to the grants in our review during the
audit period, totaling $183,220.

Review of Indirect Cost
We reviewed all the indirect costs, totaling $2,659,237, charged to the grants on the JVs included
in our samples.

Review of Transfers between the Grants and the General Fund
We obtained a report containing all non-payroll related JV transfers between the general fund
and the grants in our review from PSD's Systems Administration Unit. We judgmentally
selected our sample from a universe of 207 JV Requests, totaling $95,816,881.85 We sampled 52
JV Requests, totaling $39,840,904. We selected those transfers with a high dollar amount that
seemed to be a movement of charges across several funding sources and transfers that appeared
to be duplicated. We reviewed all transfers on the JV request forms that related to the grants we
were reviewing.

To accomplish the audit's objective, we relied, in part, on computer-processed GL data contained
in PSD‟s Advantage system. These data contained the universe of personnel, non-personnel, JV,
and AP expenditures made from grant funds. The completeness and accuracy of the data were
validated by matching the grant expenditure totals in the GL to the SEFA report for the year
ended June 30, 2006. To further determine the reliability of the data, we compared the GL data to
supporting documentation, such as invoices, timesheets, contracts, and resolutions. Based on our
testing, we concluded that the computer-processed GL data were sufficiently reliable for the
purposes of our audit.


84
  The total GEAR UP universe was 1,920 expenditures, totaling $4,146,895.
85
  This amount included the IDEA grant. Although we did not review this grant individually, our sample of transfers
included the IDEA grant expenditures because a large amount of the grant funds were expended for salary costs by
way of JV.
Final Report
ED-OIG/A03H0010                                                                    Page 74 of 131

We reviewed and assessed PSD‟s fiscal controls significant to our audit objective. Our review
disclosed significant fiscal control weaknesses. PSD did not have policies and procedures for all
its fiscal processes, several of the policies were not adequate and several were not followed. It
also appeared that PSD did not have an adequate management control environment. These
weaknesses and their effects are fully discussed in the Audit Results section of this report.

We conducted on-site fieldwork at PSD‟s office in Philadelphia, Pennsylvania, during the period
May 22, 2007, through June 6, 2008. On November 14, 2008, we held an exit conference with
PSD. We conducted our work in accordance with generally accepted government auditing
standards appropriate to the scope of the audit described above.
Final Report
ED-OIG/A03H0010                                                                             Page 75 of 131

         Enclosure 1: Calculation of Total Unallowable Amounts
                           Unallowable        Indirect Cost Rate           Total Unallowable
                            Amount              (ICR) (.0228)*                  Amount
                              (UA)                                       (UA multiplied by ICR
                                                                             added to UA)
       Finding 1
      Subpart B (I)         $2,910,940               $66,369                    $2,977,309
       Subpart C              $1,500                   $34                        $1,534
        Total for
        Finding             $2,912,440               $66,404                    $2,978,844

        Finding 2
          Title I           $5,248,988              $119,677                    $5,368,665
      Title II (Parts       $1,730,075               $39,446                    $1,769,520
          A&D)
        Total for
         Finding            $6,979,063              $159,123                    $7,138,185

        Finding 3            $411,383                $9,380                      $420,762

       Finding 4
       Subpart A            $6,349,260              $144,763                    $6,494,023
       Subpart B              $9,531                  $217                        $9,749
        Total for           $6,358,791              $144,980                    $6,503,772
        Finding

       Finding 5
       Subpart A             $108,417                $2,472                      $110,889
       Subpart B             $422,956                $9,643                      $432,599
       Subpart C              $66,252                $1,511                       $67,763
       Subpart D              $13,885                 $317                        $14,202
      Subpart F**             $11,063                                             $11,063
        Total for
        Finding              $622,572                $13,942                     $636,515

      Total for All         $17,284,250             $393,827                    $17,678,078
       Findings

Note: Any differences in amounts are due to rounding.

*Unallowable costs multiplied by the indirect cost rate for the audit period.

**This portion is for the overcharge of indirect costs. Indirect costs were not calculated for these
amounts.
Final Report
ED-OIG/A03H0010                                                           Page 76 of 131


 Enclosure 2: Finding No. 1 – Determination of Unduplicated Costs

                 Unduplicated Unsupported Salary and Fringe Benefits Costs
   Total Inadequately Supported Personnel Expenditures
                                                                $123,775,334
   Charged to Federal Grants
   Costs Duplicated in Finding No. 1, B, II
         School Police Paid From Title I Grant Funds                   22,800
   Costs Duplicated in Finding No. 2                                  995,596
   Costs Duplicated in Finding No. 4                               15,751,886
   Total Unduplicated Inadequately Supported Costs              $107,005,052

Note: Any differences in amounts are due to rounding.
      Final Report
      ED-OIG/A03H0010                                                                  Page 77 of 131

           Enclosure 3: Finding No. 3 – Description of AP Transactions
                                                                     Office
                    Services     Entertainment       Electronics   Supplies      Textbooks /
                       (i.e.,     and Awards             ( i.e.,      ( i.e.,   Instructional
                   contracted      ( i.e., food,      computers,     school         Aids
                    services,       field trips,     iPods, Palm    supplies,
                    training,     subscriptions,        Pilots)       office
                     finance      board games,                     furniture,
                    charges)     pool tables, gift                  general)
                                       cards)
                                                                                                  Total
Title I
   Unallowable                        $34,579           $7,859     $20,323                       $62,761
   Unsupported     $222,142           $27,588           $6,262      $5,852        $19,166       $280,010
CSR
   Unallowable       $997             $1,448            $2,109                                    $4,554
   Unsupported      $42,000                             $5,662                                   $47,662
GEAR UP
   Unallowable     $115,686           $18,738            $500       $3,589                      $138,513
   Unsupported     $115,561           $13,030           $64,751      $748          $9,091       $203,181
Title II (A)
   Unallowable                                                                    $45,000        $45,000
Reading First
   Unallowable     $125,700           $2,459                         $443         $31,414       $160,016
   Unsupported      $10,476                             $14,759                   $18,844        $44,079
Safe and
Drug Free
   Unallowable       $540                                                                         $540
   Unsupported      $18,504           $2,839            $31,777                                  $53,119
Title II (D)
   Unsupported      $87,937                             $29,225                                 $117,162
Title II D
(Nonpublic
Schools)
   Unsupported                                          $18,026                                  $18,026

   All Grants
   Unallowable     $242,923           $57,224           $10,468    $24,355         $76,414       $411,384
   Unsupported     $496,620           $43,457          $170,462     $6,600         $47,101       $764,241
          Total    $739,543          $100,682          $180,930    $30,955        $123,515      $1,175,623

      Note: Any differences in amounts are due to rounding.
       Final Report
       ED-OIG/A03H0010                                                                             Page 78 of 131

             Enclosure 3a: Finding No. 3 – Detail of the Title I, Part A Grant
                                   AP Transactions
                                                                                                          Inadequately
                   Number of                                                                Unallowable
Subcategory                                           Explanation                                          Supported
                  Transactions                                                               Amount
                                                                                                            Amount
                                  The unallowable expenditures were for the purchase
                                  of various work benches, tables, and shelving. PSD
                                  stated that they were not sure why several of the
                                  items were ordered or who ordered them. The
                                  inadequately documented expenditures, per PSD,
                                  were to replace tables in the library, due to students
                       14         being injured on the old ones or none being present;        $22,169        $4,356
Furniture                         however, the description listed on the General Ledger
                                  stated that the tables were for the cafeteria. These
                                  types of expenditures are unallowable per OMB A-
                                  21, Appendix A, J.18.(4)b.1. Equipment and other
                                  Capital Expenditures.

                                  One of these expenditures was for an assessment
                                  printer (see the Finding for details). Report binding
                                  machine, iPods and megaphones; PSD did not show
Computers
                                  how the items supported the schoolwide plan.
and                     9                                                                     $8,329         $6,346
                                  Computers and visual equipment were unsupported if
Equipment *
                                  no property codes or adequate support were
                                  provided.

Table Games                       The expenditures for table games are unallowable per
with Supplies                     OMB A-122 Attachment B 14 Entertainment Cost.
(i.e. Pool                        The unsupported expenditures for sporting
Table and Air                     equipment was not supported with adequate
                       33                                                                     $4,364         $673
Hockey                            documentation, and is unallowable per OMB A-21,
Game), and                        Appendix A, J.48. Student Activity Costs.
Sporting
Equipment
                                  The description provided stated that these tee shirts
                                  were purchased for professional development;
                                  however, a more detailed explanation was provided
                                  by PSD that stated the t-shirts were for a parent
                                  group and students who volunteered for Unity Day.86
                                  By the description and explanation this item is
T-Shirts *              3         clearly not professional development. These                 $2,175         $900
                                  expenditures were considered unnecessary to
                                  perform the functions of the Title I program as
                                  require by OMB A-87, Appendix A.C. Basic
                                  Guidelines 1. & 2. Allowability and Reasonable
                                  Costs.


       86
            Unity Day is a summer event sponsored by Clear Channel Radio Station WDAS FM.
         Final Report
         ED-OIG/A03H0010                                                                      Page 79 of 131

          Enclosure 3a: Finding No. 3 – Detail of the Title I, Part A Grant AP
                              Transactions (Continued)
                                                                                                     Inadequately
                   Number of                                                           Unallowable
Subcategory                                        Explanation                                        Supported
                  Transactions                                                          Amount
                                                                                                       Amount
                                 Several of these expenditures included
                                 "textbooks" in the description line; however PSD
                                 was not able to provide us with an invoice so
                       39                                                                               $16,807
Textbooks                        that we could evaluate the allowability of the
                                 purchase.

                                 Subscriptions to the Philadelphia Inquirer and
                                 Daily News papers; delivered to PSD's Title I
Newspaper                        program office daily. Unallowable per
                       2                                                                  $731
Subscriptions *                  OMB A- 87 Appendix B., 28(b) Memberships,
                                 subscriptions, and professional activity costs.

                                 The unallowable expenditures are composed of
                                 the purchase of tissue and basic office supplies
                                 (i.e. whiteout, files, pens) which were purchased
                                 through school‟s imprest funds. For the
Stationary                       unsupported expenditures we were not provided
Items/ Basic                     with documentation or support to identify the
                       22        type of office supplies that were purchased. We         $1,309         $16,227
Office
Supplies *                       identified the expenditures as office supplies
                                 from the general ledger description. These types
                                 of expenditures are unallowable per
                                 OMB Circular A-21, J.18 (4)b.1. Equipment and
                                 other Capital Expenditures.

                                 The expenditures for field trips included trips to
                                 the Baltimore Aquarium and various plays and
                                 shows, including trips to New York. For one
                                 trip, the documentation provided showed that the
                                 students were to pay for the trip and a
                                 fundraising event (candy sale) would offset the
Field Trips *          11        cost of the trip; however, the full invoiced            $26,052
                                 amount of the trip was still charged to Title I and
                                 it was never adjusted to reflect any payments
                                 made by parents or any offset cost by a candy
                                 sale. These entertainment expenditures are
                                 unallowable per OMB A-87, Appendix B, 14.
         Final Report
         ED-OIG/A03H0010                                                                            Page 80 of 131

         Enclosure 3a: Finding No. 3 – Detail of the Title I, Part A Grant AP
                             Transactions (Continued)
                                                                                                             Inadequately
                   Number of                                                               Unallowable
Subcategory                                            Explanation                                            Supported
                  Transactions                                                              Amount
                                                                                                               Amount
                                      These expenditures were composed of various
                                      gift card purchases of American Express and
                                      various retail vendors‟ gift cards. Gift cards
Gift Cards *             5            were awarded to parent volunteers, students, and         $1,453
                                      staff. These expenditures are unallowable per
                                      OMB A-122

  TOTALS                138                                                                   $66,582              $45,309

         Note 1: All Title I items are not listed; this Enclosure provides examples of the types of expenditures
         made. Any differences in amounts are due to rounding.

         Note 2: According to PSD policy, equipment and related items purchased for $500 or more are required
         to be inventoried and should able to located on a district property report.

         * Includes items expended through an imprest fund. While listed as separate items in this enclosure, in
         Finding No. 3, items are listed by expenditure.
Final Report
ED-OIG/A03H0010                                                                        Page 81 of 131

         Enclosure 3b: Finding No. 3 – Detail of the CSR Grant AP
                              Transactions
                                                                                          Inadequately
               Number of                                                 Unallowable
Subcategory                               Explanation                                      Supported
              Transactions                                                Amount
                                                                                            Amount
                             Professional development at a school-
                             America's Choice School Design
                             Program; 2 payments; no contract or
Contracted                   SRC resolution-per PSD policy,
Service            2         contract is required; without contract                         $42,000
                             cannot determine what services were to
                             be provided and when or if the correct
                             amount is being billed.

                             Payment of school telephone bill;
Telephone
                   1         unallowable per PSD Imprest Fund               $922
Bill *
                             policy.
                             Staff breakfast on opening day of
Food *             1         school.                                        $326

                             Payment for 2 charter buses to
                             Neshaminy Shore Picnic Park; no
                             information in school's CSR files on the
                             trip; no student trips in CSR school
Field Trip         1                                                        $370
                             budget; PSD personnel could not
                             determine purpose of trip and why it
                             was charged to CSR grant funds.

                             Payment for registration for workshop
                             attendance by school assistant principal;
Training *         1         individual did not attend training; no         $75
                             refund was made.

                             Purchase of a power book computer
                             ($2,122), service plan and other items
Computers          1                                                                         $2,964
                             ($842); no district property report.

                             Purchase of 15 iPod Shuffles ($1,035)
                             and 6 iPod Nanos ($1,074); no
                             information on students who received
                             the iPods; not in CSR budget; school
                             principal stated items were given to
iPods              3         students; supposed to support summer          $2,109
                             work at home; however, school did not
                             monitor summer work; Title I Director
                             stated purchase does not support CSR
                             grant.
Final Report
ED-OIG/A03H0010                                                                            Page 82 of 131


       Enclosure 3b: Finding No. 3 – Detail of the CSR Grant AP
                       Transactions (Continued)
                                                                                              Inadequately
                 Number of                                                   Unallowable
Subcategory                                   Explanation                                      Supported
                Transactions                                                  Amount
                                                                                                Amount
                                Gym equipment purchases; 10 hot ball
                                shields ($43), 1 baseball portfolio ($17),
                                2 ball bags ($22), 52 softballs ($153),
Sports                          and 40 basketballs ($332); per school
Equipment             9         principal items ordered by PE teacher           $567
**                              and not part of CSR grant nor were
                                items supposed to be funded by CSR
                                grant.

                                Payment for a charter buses to the Spirit
                                of Philadelphia (cruise ship); no student
                                trips in CSR school budget; PSD
Field Trip            1         personnel could not determine purpose           $185
                                of trip and why it was charged to CSR
                                grant funds.

                                Purchase of 2 iMac computers; no
Computers             1         district property report.                                        $2,698

 TOTALS              21                                                        $4,554           $47,662




Note 1: According to PSD policy, equipment and related items purchased for $500 or more are required
to be inventoried and should able to located on a district property report.

Note 2: Any differences in amounts are due to rounding.

* Expended through a school imprest fund. While listed as separate items in this enclosure, in Finding
No. 3, items are listed by expenditure.

** Other sports equipment was purchased with CSR that were not included in our CSR sample.
        Final Report
        ED-OIG/A03H0010                                                                       Page 83 of 131

            Enclosure 3c: Finding No. 3 – Detail of the GEAR UP Grant AP
                                    Transactions
                                                                                                     Inadequately
                 Number of                                                             Unallowable
Subcategory                                        Explanation                                        Supported
                Transactions                                                            Amount
                                                                                                       Amount
                               These finance charges and fees were for invoiced
Finance                        field trips that were not paid by the due date listed
Charges &            7         on the invoice. These costs can not be charged to          $102
Fees                           grants per OMB A- 87, Appendix B. 16 Fines and
                               Penalties.

                               The balloon arches and decorations were
                               purchased for graduation and various award
                               luncheons. These expenditures are not consistent
Balloon                        with the grant purpose or the intended use of the
Arches and           4         GEAR UP grant funds. Unallowable per OMB A-                $514
Decorations                    21 Appendix A,J. 8. Commencement and
                               Convocation Cost and Appendix A,C.2. & 3.
                               Allowability and Reasonable Costs.

                               PSD was unable to provide us with an invoice or
                               an explanation for the expenditure. Based upon the
                               name of the payee the expenditure did not appear
                               to be a cost consistent with the program objective
Extermination        1         nor did it appear to be permissible as an                  $180
                               appropriate expenditure under the GEAR UP
                               program. This expenditure is unallowable per
                               OMB A-87 Appendix A, C. Basic Guidelines 1.&
                               2. Allowability and Reasonable Costs.
                               PSD was unable to provide the auditors with any
                               documentation regarding this expenditure. Due to
National                       the lack of documentation, the auditors were
Hispanic             1         unable to determine the allowability of the               $10,000
Institute                      expenditure under the program; Therefore, this
                               expenditure is considered unallowable per OMB
                               A-87 C.1.j. Adequate documentation.
                               In preparation for the state PSSA test, PSD
                               purchased several board games to entertain
Games               19         students upon completion of various segments of            $311
                               the State Standardized test. Unallowable per OMB
                               A-21, Appendix A, J. 17. Entertainment Costs.
                               1 $25 card to Dave and Busters, 5 cards, totaling
                               $130, to Best Buy, 1 $50 card to City Blue
                               (clothing store), 1 $40 card to Bennigans
Gift Cards *         2                                                                   $1,045
                               restaurant, 10 $15 cards to Staples, 10 $15 cards
                               to Olive Garden, and 20 $25 cards to Wal-Mart.
         Final Report
         ED-OIG/A03H0010                                                                       Page 84 of 131


              Enclosure 3c: Finding No. 3 – Detail of the GEAR UP Grant AP
                                Transactions (Continued)
                                                                                                      Inadequately
                  Number of                                                             Unallowable
Subcategory                                        Explanation                                         Supported
                 Transactions                                                            Amount
                                                                                                        Amount
                                The unallowable expenditures included expenditures
                                for PSD staff meetings at restaurants. These
                                expenditures also included tips and gratuities. The
                                unallowable food expenditures also included
                                incentive trips to restaurants for students and
                                various graduation luncheons and banquets. The
                                unsupported expenditures for food included lunch
                                provided to students during a trip to WHYY,
                                refreshments for parents and students at various
                                GEAR UP program ceremonies. The unsupported
                                cost also included the cost of a breakfast buffet for
Food *               14         parents, staff, and students to go to an off site         $5,023         $5,315
                                facility to meet the new Regional Superintendant.
                                PSD's Gear UP office could not provide us with
                                documentation showing that the event was an event
                                to support the initiatives of GEAR UP. We were
                                provided with an agenda that showed a small
                                portion of the meeting dealt with items closely
                                related to GEAR UP initiatives. These expenditures
                                were considered unallowable per OMB A-21
                                Appendix A, J. 17, Entertainment Costs, 32.
                                Meetings and Conferences, and 48. Student Activity
                                Costs.

                                The unallowable expenditures included a Ride the
                                Ducks Tour in Philadelphia as a student incentive
                                for PSSA's. The unsupported expenditures included
Field Trips           5         field trips that appeared to be to college tours.         $1,450         $5,837
                                Documentation to quantify and identify attendees
                                was not maintained.
                                The unallowable expenditure was for a track and
                                field summer camp. This expenditure appeared to be
Summer
                                extra-curricular in nature. The unsupported
Camps &
                      3         expenditures were for two summer programs that            $2,070       $106,743
Summer
                                appeared to be reasonable, however PSD could not
Programs
                                provide additional documentation to support who
                                was served by the programs.
Summer                          PSD was unable to provide sign in sheets or time
                     31                                                                                  $7,750
Interns                         sheets for the summer interns.
       Final Report
       ED-OIG/A03H0010                                                                         Page 85 of 131

            Enclosure 3c: Finding No. 3 – Detail of the GEAR UP Grant AP
                              Transactions (Continued)

                                                                                                     Inadequately
                  Number of                                                           Unallowable
Subcategory                                        Explanation                                        Supported
                 Transactions                                                          Amount
                                                                                                       Amount
                                The unallowable expenditures included the
                                purchase of an iPod, business card cases, and wine
Awards &                        buckets. Goods and Services of this nature are
                     10                                                                 $2,950          $1,009
Incentives *                    unallowable per OMB Circular A-21 Appendix A,
                                J. 22 Goods and Services for Personal Use.

                                Movie rental to entertain students following their
Movie Rental                    completion of the PSSA test. Unallowable per
                      1                                                                  $10
*                               OMB A-21, Appendix A, J. 17. Entertainment
                                Costs.
                                These expenditures were for various items
Student                         purchased to aid the students in putting together a
Government                      display for the Robotics Competition. These
                      2                                                                  $771
and Robotics                    expenditures were considered unallowable.
Program *                       Unallowable per OMB A-21 Appendix A, J.48.
                                Student Activity Costs
                                The purchase of 1 electric pencil sharpener. The
Pencil                          cost seems unreasonable. Unallowable per OMB
                      1                                                                  $130
Sharpener                       A-87 Appendix A, C. Basic Guidelines 2.
                                Reasonable Cost.
                                The expenditures were for PSD's Student Success
Furniture             3         Centers, however it was determined that the             $1,348
                                Centers never opened.
                                The purchase of school backpacks. The purchase
                                does not support the programs goals or initiatives.
Backpacks             1                                                                 $2,111
                                Unallowable per OMB A-87 Appendix A, C. Basic
                                Guidelines 2. Reasonable Cost.
                                No information was provided for these
General Office                  expenditures, however based upon the GL
                      2                                                                                 $1,057
Supplies                        description, it appeared that the expenditures were
                                for office supplies.
                                PSD expended $100,790 to purchase a
                                personalized publication that compiled various
                                college tools and tips. This document provided the
                                same college entrance tools and tips that were
                                available for no cost on www.ed.gov, therefore we
Publications          2         consider the purchase unreasonable and                 $101,890
                                unnecessary. Furthermore, PSD did not have
                                invoices to support the cost, only the publication.
                                OMB A-87, Appendix A, C. Basic Guidelines 2.
                                Reasonable Cost and C.1.j. Adequate
                                Documentation.
        Final Report
        ED-OIG/A03H0010                                                                           Page 86 of 131

             Enclosure 3c: Finding No. 3 – Detail of the GEAR UP Grant AP
                               Transactions (Continued)

                                                                                                         Inadequately
                   Number of                                                               Unallowable
Subcategory                                            Explanation                                        Supported
                  Transactions                                                              Amount
                                                                                                           Amount
                                   The rental of an offsite facility to host a event for
                                   staff, students, and parents to meet the Regional
Facility Rental         1          Superintendant. Unallowable per OMB A-21                  $2,550
                                   Appendix A, J.32. Meetings and Conferences

                                   These two expenditures were for the purchase of
                                   shirts for students and staff associated with the
Shirts for                         GEAR UP program. Unallowable per OMB A-87
                        2                                                                    $6,059
Students                           Appendix A, C. Basic Guidelines 2. Reasonable
                                   Cost.

                                   The auditors were not provided with adequate
Music and                          support to determine how this expenditure for
Performance             1          Music Appreciation supported the GEAR UP                                   $870
Class                              program initiatives.
Computers,                         These expenditures included the purchases of
Printers, &            22          computers and accessories. For these items PSD                           $62,255
Software                           was unable to provide invoices or property reports.
                                   PSD did not provide supporting documentation to
Graphing                           show how the purchase of graphing calculators
                        1                                                                                    $2,496
Calculators                        related to the GEAR UP program
                                   For 2 of the expenditures, PSD was unable to
                                   provide invoices. For the remaining 5 items PSD
Textbooks &
                                   was unable to provide documentation to
Instructional           7                                                                                    $7,644
                                   demonstrate how the expenditures were supporting
Aides
                                   the goals and initiatives of the GEAR UP program.

                                   PSD was unable to provide supporting
Student                            documentation to demonstrate how the purchase of
                        1          student agendas supported the GEAR UP program.                            $2,205
Agendas


  TOTALS               144                                                                  $138,512        $203,181


        Note: Any differences in amounts are due to rounding.

        * Includes items expended through an imprest fund. While listed as separate items in this enclosure, in
        Finding No. 3, items are listed by expenditure.
Final Report
ED-OIG/A03H0010                                                                      Page 87 of 131


Enclosure 3d: Finding No. 3 – Detail of Safe and Drug Free Schools
                    Grant AP Transactions

                                                                                     Inadequately
                  Number of                                            Unallowable
Subcategory                                  Explanation                              Supported
                 Transactions                                           Amount
                                                                                       Amount
                                  Lodging costs above government
Travel                 1          rate for two training presenters.       $540

Undetermined           2          No support provided.                                   $654
                                  Food (breakfast and lunch) for
                                  vendor fair and mini conference
                                  at school; vendor and school
Food                   1                                                                $2,839
                                  personnel in attendance; no sign-
                                  in sheets for participants.

                                  Computer equipment; no property
Computers              4          reports to show status/location of                   $26,977
                                  equipment.
                                  Printer; no property reports to
Printers               2                                                                $4800
                                  show status/location of equipment
                                  Invoice for PSD Safe and Drug
                                  Free personnel attendance at
                                  Business Continuity Certification
Training               1                                                               $17,850
                                  training; no proof of actual
                                  attendance.

  TOTALS               11                                                 $540         $53,120


Note: Any differences in amounts are due to rounding.
Final Report
ED-OIG/A03H0010                                                                 Page 88 of 131


  Enclosure 3e: Finding No. 3 – Detail of Title II, Part D Grant AP
                          Transactions

                 Number of                                                  Inadequately Supported
Subcategory                                  Explanation
                Transactions                                                       Amount
                               No support provided.
Undetermined         1                                                             $12,400
                               Payment to vendor for 2 training sessions
                               of “Project Management Boot Camp” to be
Training\Cont
                               held in 2/2006; no proof that training was
racted               1                                                             $10,880
                               provided; no attendance information;
Services
                               invoice date appears to be altered from
                               “1/25/2005” to “1/25/2006.”
                               Invoice for registration fees for 2005
                               National Education Computing
                               Conference; no support to show who
                               attended\cost per person; per PSD official
Training             1         PSD was a supporter of the event;                   $23,625
                               however, there is no agreement or other
                               document to show that PSD was a
                               supporter, only an invoice for the
                               registration fees was provided.
                               Invoice for partnership with West Chester
                               University for faculty stipends,
                               professional development, evaluation,
Contracted
                     1         eLearning and mentoring celebration; no             $12,900
Services
                               contract or resolution (required per PSD
                               OMB official), no detail of services; no
                               info on who services provided to.
                               100 Palm Pilots ($27,000) plus leather
                               cases ($2,225) for Palm Pilots; no
Palm Pilots          2         information who received\what school                $29,225
                               went to; purpose of purchase or status of
                               items.
                               Invoice for the development of a digital
                               technology studio (DTS) design and model
                               and model; includes payment of student
Contracted                     workers, food, travel, shipping, and other
                     1                                                             $10,757
Services                       items to make the model; no contract;
                               model could not be located; no receipts
                               attached to the invoice to show that costs
                               invoiced were actually incurred.
Final Report
ED-OIG/A03H0010                                                                       Page 89 of 131


  Enclosure 3e: Finding No. 3 – Detail of Title II, Part D Grant AP
                     Transactions (Continued)

                   Number of                                                      Inadequately Supported
Subcategory                                        Explanation
                  Transactions                                                           Amount
                                    Workshops for students; “Bring A
                                    Computer, Ask A Question;” 20-3 hour
                                    sessions for 5-15 students; no contract; no
Contracted                          details or dates of services provided, such
                        1                                                                $10,000
Services                            as list of students\schools serviced or
                                    number of people serviced; no
                                    documentation to show that 20 sessions
                                    were actually provided.
                                    Computer and related equipment repairs
                                    invoices for March 2006 ($125 per repair;
                                    28 instances) and February 2006 ($125 per
                                    repair for 31 repairs) per spreadsheet
Contracted                          attached to invoices; per invoice-all work
                        2                                                                 $7,375
Services                            performed under RFP-174; however no
                                    contract\RFP provided (required per PSD
                                    OMB official); original invoice lost for
                                    February; support shows only 20 repairs
                                    for difference of 11; $1375 not supported.
  TOTALS                10                                                               $117,162

Note: Any differences in amounts are due to rounding.
Final Report
ED-OIG/A03H0010                                                         Page 90 of 131


     Enclosure 4: Finding No. 4 – Description of JV Transactions
                            (Subpart A)
                                 Unallowable JV Transactions
                                                          Number of
Title I                                                  Transactions    Amount
Duplication of Charges for Teacher Prep Time                  1         $1,403,071
ESOL Tutor Benefits                                           1            265,026
Carryover of Expenditure Post Grant Period                    1            112,383
Transfer of Expenditures Not In School Wide Plan              2             44,432
Facilities Rental and Food Services Charges                   3              4,010
Total Title I                                                 8         $1,828,922
FIE
Teachers Salaries for Split Classes (not in grant
                                                              1         $2,021,661
application)
Office of High School Reform Charges                          1          1,200,012
Truancy Center Charges (not in grant application)             1            455,430
Movement of Charges from State Funding                        1             79,438
Attendance and Truancy Intervention and Prevention
Support (ATIPs) Charges (transferred charges for a            1              1,417
non-ATIPS provider)
Total FIE                                                     5         $3,757,958
Title II, Part A
Teachers Who Were Not Hired As Reduced Class Size
                                                              1         $576,596
Teachers
Safe and Drug Free Schools
Salaries of Those Who Did Not Work On Grant From
                                                              2         $107,181
General Fund
Reading First
Transfer of Summer Salaries Earned Under Another
                                                              2          $78,604
Funding Source
Total Unallowable Costs                                      18         $6,349,261
Final Report
ED-OIG/A03H0010                                                        Page 91 of 131

     Enclosure 4: Finding No. 4 – Description of JV Transactions
                      (Subpart A) (Continued)
                           Inadequately Supported JV Transactions
                                                         Number of
Title I                                                 Transactions    Amount
Principal Training Program                                    1        $1,165,522
Office of Staff Development Salaries                          1           677,024
Split Funded Salaries                                         1           414,109
Teacher Induction Charges                                     1            77,068
Facilities Rental, Food Service, and Copier Charges for
                                                              8            27,149
Program Office
New Teacher Training Program Salaries and
                                                              1            32,521
Expenditures
Transition Support Tutors Salaries                            1            17,810
Total Title I                                                14        $2,411,203
FIE
Twilight Charges                                              1        $1,277,330
Office of High School Reform Charges                          1         1,035,071
SMART Program Salaries                                        1           123,796
Total FIE                                                     3        $2,436,197
Title II, Part A
Teachers Transferred as Literacy Interns                      3        $2,849,379
Reduced Class Size Teachers                                   1         2,566,319
Principal Training Program                                    1         1,165,522
Teacher Recruitment and Retention Program Costs               1           296,782
New Teacher Training Program Salaries and Expenses            2            97,541
Total Title II, Part A                                        8        $6,975,543
CSR
Carryover to Prior Grant Period                               2         $72,208
Unsupported Salaries                                          9          22,480
Total CSR                                                    11         $94,688
Safe and Drug Free Schools
Facilities Rental                                             1          $3,640
Reading First
Salaries                                                      1          $3,434
Copier Charges for Program Office                             1             179
Total Reading First                                           2          $3,613
Title II Part D
Salaries                                                      2          $2,483
GEAR UP
Payment for Membership to Latino Festival                     1           $984
Total Inadequately Supported Costs                           42        $11,928,352

Note: Any differences in amounts are due to rounding.
         Final Report
         ED-OIG/A03H0010                                                                         Page 92 of 131

            Enclosure 5: Finding No. 5 – Detail of the Office Depot Web site
                          Transactions by Grant (Subpart C)
                                     Number of                                                             Unallowable
    Grant           Category                                           Explanation
                                    Transactions                                                            Amount
Title I, Part A
                                                   48 dozen black markers ($359), wastebasket ($16),
                                                   cases of paper ($257), 10 boxes of laminating film
                                                   ($251), 50 chairs ($1,496), dustpan ($56), file
                                                   cabinet ($70, $377), book shelves ($228), 4 tables
                                                   ($139), magazine rack ($98), 29 multi-bins ($119),
                  Office Supplies       27         brooms ($51, $42), hand trucks ($167, $198),              $7,384
                                                   storage locker ($208), label makers ($122), money
                                                   receipt book, 3 pack ($62), 3 pencil sharpeners
                                                   ($320), paper towels ($20, $40), desk ($216), 6
                                                   cabinets ($1,412), computer cases ($160), printers
                                                   ($600, $300)
                                                   Scanner ($200), calculators ($101, $262, $363,
                                                   $389), laptop computer battery; no laptop user
                                                   information provided ($171), wireless PDA
                                                   keyboards ($252), 5 mini heaters ($128), hard
                                                   drive; no serial number or user information ($229),
                                                   4.2 cubic feet mini refrigerator ($145), headset and
                                                   Bluetooth ($178, $270), PDAs; no user or serial
                                                   number provided ($1,200, $750, $250), 3 heaters
                    Electronics         24                                                                   $10,705
                                                   ($74), 3 desk alarm clocks ($41), microwave oven
                                                   ($69), anti-virus software packages 60 units for 47
                                                   Title I reading teachers ($2,399, $2,394), shredders;
                                                   used for documents with staff personal information
                                                   ($150), toner for Nonpublic schools ($178),
                                                   stopwatches; 77 ordered when only 47 needed
                                                   ($309), fax machine; no serial number information
                                                   provided ($200)
                                                   Vinyl gloves ($87), facial tissues ($31, $60, $124),
                                                   50 sponges ($132), computer cleaner ($40), dusters
                                                   ($152), lotion and band aids ($14, $23),
                                                   plates\cups\napkins\spoons ($34, $107, $82, $17,
                                                   $36, $48), floor sweeper ($51), Clorox Germicidal
                                                   Wipes ($101), deodorized urinal blocks ($45, $25),
                                                   coffee\tea\sugar\sweetener ($40, $7, $9, $7, $31),
                  Miscellaneous         49                                                                   $2,084
                                                   Tylenol and Advil ($18, $12, $30, $60), candy and
                                                   pretzels ($8, $4, $9, $6, $4, $3), birthday cards
                                                   (teacher) ($22), hand sanitizers ($10, $10, $27),
                                                   coffee maker ($66), Pine-Sol ($117, $28), Windex
                                                   ($132), holiday themed greeting cards ($16, $17,
                                                   $17), antacid ($19, $19), first aid kit ($81), Shout
                                                   stain remover wipes ($46)
                  Title I, Part A
                                        100                                                                  $20,173
                      Totals
    Final Report
    ED-OIG/A03H0010                                                                         Page 93 of 131

         Enclosure 5: Finding No. 5 – Detail of the Office Depot Web site
                 Transactions by Grant (Subpart C) (Continued)
                              Number of                                                              Unallowable
 Grant         Category                                         Explanation
                             Transactions                                                             Amount
                                            Wipes ($40)
 CSR
                                            Kim Wipes and Windex ($40), wrist gel ($8), door
                Office                      stops ($27), reusable ties ($6), 50 ink cartridges [3
                                  8                                                                     $2,090
               Supplies                     expenditures] ($1,935), a chair ($74)

                                            5 digital cameras [2 expenditures] ($750), VHS tape
                                            ($8), mini-solar calculator ($10), 60 computer mice
              Electronics         5                                                                     $1,505
                                            ($737)

                                            20 cases of facial tissue ($285), duster ($4)
             Miscellaneous        2                                                                      $289
             CSR Totals          15                                                                     $3,884
GEAR UP
                                            4 two door storage cabinets ($857), toner ($179),
                                            picture frame [8.5 X 11] ($61), ink cartridges [6
                                            expenditures] ($854), 8 cases of copy paper [2
                                            expenditures] ($215), soap dispenser ($11),
                Office                      business\index cards ($611), toner\laminating
                                 19                                                                     $6,314
               Supplies                     machine\planner ($1,364), desktop calculator\file
                                            cabinet\marker board ($871), paper and toner
                                            ($670), fuser kits [2 expenditures] ($589), cards
                                            ($32)

                                            Fax, ($200), photo printer ($130), thumbdrives [2
                                            expenditures] ($107), calculators [4 expenditures]
              Electronics        10                                                                      $659
                                            ($37), extension cords [2 expenditures] ($185)

                                            Sanitizing wipes ($9), gloves ($18), hand sanitizers
                                            [2 expenditures] ($28), 8 boxes of plastic spoons
                                            ($24), 8 boxes of plastic forks ($24), coffee ($19),
                                            50 count packs of creamer [2 expenditures] ($16),
             Miscellaneous       15                                                                      $198
                                            cleanser ($17), liquid soap ($7), 3-5lb bags of
                                            candy [2 expenditures] ($15), 3 packs of paper
                                            plates ($15); 1000 count pack of sugar ($5)

              GEAR UP
                                 44                                                                     $7,171
               Totals
       Final Report
       ED-OIG/A03H0010                                                                            Page 94 of 131


           Enclosure 5: Finding No. 5 – Detail of the Office Depot Web site
                   Transactions by Grant (Subpart C) (Continued)

                                   Number of                                                                 Unallowable
   Grant          Category                                             Explanation
                                  Transactions                                                                Amount
Reading First
                                                  Ink cartridges [5 expenditures] ($101), wastebaskets
                    Office                        [2 expenditures] ($45), shelf ($19), desk drawer
                                       12                                                                       $610
                   Supplies                       organizer ($43), electric stapler ($26), electric hole
                                                  punch ($75), toner ($301)
                  Electronics           2         Light bulbs ($3), lamp ($8)                                      $11
                                                  Coffee creamer ($5), coffee [3 expenditures] ($32),
                                                  coffee filters [2 expenditures] ($5), sugar packets              $99
                Miscellaneous          13
                                                  ($5), utility knife ($9), facial tissue [3 expenditures]
                                                  ($36), liquid soap ($4), plastic spoons ($3)
                Reading First
                                       27                                                                       $720
                   Totals

       Note 1: All items are not listed; this Enclosure provides examples of the types of expenditures made. See
       Table 3 for total amounts.

       Note 2: Any differences in amounts are due to rounding.
Final Report
ED-OIG/A03H0010                                                                  Page 95 of 131

 Enclosure 6: Finding No. 5 – Federal Grants Allocated 2006 Single
                     Audit Costs (Subpart E)

       Grant              Grant          Amount             PSD Methodology for Allocation
                          Year          Charged to
                                          Grant
Title I*                2004          $50,000           Flat Amount
Perkins Vocational      2005          $32,668           .0025 of direct costs
Education
Reading First           2005          $21,711           .0025 of (expenses less audit and
                                                        indirect costs)
Class Size Reduction    2005          $19,856           Plug amount used since insufficient
                                                        funds at time of grant closing
Title VI Public         2005          $13,000           Same amount budgeted for prior years
Schools
Temporary               2006          $10,146           .0025 of FY 06 Award
Assistance for Needy
Families
21st Century            2005          $6,321            .0025 of (expenses less audit and
Community Learning                                      indirect costs)
Center
Title IV Public         2005          $5,483            .0025 of FY05 Award
Schools
Elect Student Works     2006          $5,000            .0025 of FY06 Award
21st Century            2006          $3,942            Preliminary estimate of audit based on
Community Learning                                      expenses @ .0025
Center
Responsive              2006          $1,901            .0025 x FY06 total budgeted costs
Education for All
Children
Core Philly             2005          $1,812            .0025 x FY05 total budgeted costs
Scholarship Program
ABE Training            2006          $1,415            .0025 of FY05 Award
Program
Success For All         2006          $1,275            .0025 x FY06 total budgeted direct costs
Fatherhood Initiative   2006          $1,261            .0025 of FY 06 Award
Title II B (Math and    2004          $1,251            .0025 x FY04 total budgeted direct costs
Science)
Partnerships in         2004          $1,200            .0025 x FY04 total budgeted direct costs
Character Education

*Indicates grant was audited as part of the FY 2006 single audit.
Final Report
ED-OIG/A03H0010                                                          Page 96 of 131


Enclosure 6: Finding No. 5 – Federal Grants Allocated 2006 Single
              Audit Costs (Subpart E) (Continued)
       Grant            Grant       Amount        PSD Methodology for Allocation
                        Year      Charged to
                                     Grant
Language Instruction   2005     $1,000         Preliminary Estimate of Audit Based on
for Limited English                            Expenses
Proficient &
Immigrant Students
Refugee School         2005     $827           .0025 expenses less audit/indirect (FY
Impact Aid                                     05 award)

Homeless Children      2005     $746           .0025 x FY05 Award
ARREST                 2005     $750           Flat Amount for FY 05

Improvement of         2005     $600           Expenses of $236,039 less $5,713
Education                                      (indirect costs) and $600 (audit)=
                                               $229,726 (base amount) x .0025 (audit
                                               rate) =$575, rounded up to $600
Asthma Buster          2005     $500           Flat amount for FY 05
Bicycle Education      2004     $293           .0025 x FY 04 total budgeted direct
Enhancement                                    costs
Program
Chinese Language       2005     $262           “budgeted less indirect costs and audit
Grant                                          @ .0025”

                       TOTAL    $183,220
Final Report
ED-OIG/A03H0010                                       Page 97 of 131




   Enclosure 7: PSD’s September 23, 2009 Response to the Draft
                            Report
Final Report
ED-OIG/A03H0010   Page 98 of 131
Final Report
ED-OIG/A03H0010                                                                                   Page 99 of 131




                                                           Yours truly,




                                                          ChiefBusine&> Officer

        cc:   Dr. Arlene C. Ackerman, Superintendent, The School District of Philadelphia
              Robert L. Archie, Jr., Esq., Chair, School Refonn Commission
              Miles H. Shore, Esq., General Counsel, The School District of Philadelphia
              Thomas E.Darden, Chief of Staff, 'The School District o[Philadelphia
              Ellen Stciker, Deputy Chief Business Officer, The School District of Philadelphia
              Marcy F. Blender, Comptroller, The School District of Philadelphia
Final Report
ED-OIG/A03H0010                                          Page 100 of 131




                  The School District of Philadelphia


        Response to United States Department of Education,
                  Office of the Inspector General

              Draft Audit Report ED-OIG/A030H0010:
              “Philadelphia School District’s Controls
                    Over Federal Expenditures”

              Audit Period 7/1/2005 through 6/30/2006


                       Submitted August 17, 2009
Final Report
ED-OIG/A03H0010                                                                                                  Page 101 of 131

                                            TABLE OF CONTENTS

Introduction .................................................................................................................. 1

FINDING #1 – PSD NEEDS STRONGER CONTROLS OVER
             PERSONNEL EXPENDITURES CHARGED
             TO FEDERAL GRANTS ....................................................................... 4

         A.       Lack of Personnel Time Records .......................................................................... 5

         1.        Support of Compensation Costs for Employees Working
                   on a Single Cost Objective .......................................................................... 5

              1a. IDEA: Support of Compensation Costs for Employees
                  Working on a Single Cost Objective ............................................................ 7
              1b. Title II - Improving Teacher Quality: Support of
                  Compensation Costs for Employees Working on a
                  Single Cost Objective ................................................................................ 8
              1c. Reading First: Support of Compensation Costs for
                  Employees Working on a Single Cost Objective .......................................... 11
              1d. Title I: Support of Compensation Costs for Employees
                  Working on a Single Cost Objective ........................................................... 11
              1e. CSR: Support of Compensation Costs for Employees
                  Working on a Single Cost Objective ........................................................... 12

         2.        Lack of Personnel Activity Reports (Title I, CSR) ................................................. 12

         B.       Ineligible Charges ................................................................................................. 13

FINDING #2 – SUPPLANTING OF FEDERAL FUNDS ............................................... 15

FINDING #3 – PSD DID NOT HAVE ADEQUATE CONTROLS
             IN PLACE TO ENSURE NON-PAYROLL EXPENDITURES
             MET FEDERAL REGULATIONS AND GRANT
             PROVISIONS ..................................................................................... 19

FINDING #4 – POLICIES AND PROCEDURES WERE NOT ADEQUATE
             AND/OR ENFORCED ......................................................................... 20

FINDING #5 – PSD DID NOT HAVE WRITTEN POLICIES AND
             PROCEDURES FOR VARIOUS FISCAL PROCESSES ....................... 29

CONCLUSION .......................................................................................................... 31
Final Report
ED-OIG/A03H0010                                                                   Page 102 of 131


The School District of Philadelphia (the “SDP”) submits the following in response to the
findings and recommendations contained in the draft audit report prepared by the United States
Department of Education (“USDE”), Office of Inspector General (“OIG”) with respect to USDE
financial assistance to the SDP during the period from July 1, 2005 through June 30, 2006. The
SDP greatly appreciates the OIG‟s acceptance and consideration of this written response and
accompanying documentation.

As set forth in greater detail below and in the supporting exhibits, the SDP disputes most of the
OIG‟s proposed findings. Where we do not dispute the OIG‟s proposed findings, this is noted in
the narrative below. However, the School District of Philadelphia believes and will demonstrate
in this response that the overwhelming majority of costs questioned in the draft audit report are,
in fact, adequately documented and allowable under the awards received by the SDP, based on
an examination of the SDP‟s records and the relevant Federal policy guidance. The School
District further believes and will demonstrate in this response that the financial practices and
procedures under which the SDP operated during the audit period provided sufficient internal
controls to safeguard Federal funds against loss or misuse.

Due to the number and complexity of the findings in the draft report, it was not possible to
address each element of those findings in a comprehensive manner, even with the additional time
that the OIG afforded for submission of this response. Certain of the findings in the draft report
are based not on representative samples of a particular type of cost, but instead on a 100%
sample for 268 schools and 91 administrative organizations. The spreadsheets that were
provided to the SDP along with the draft report contain approximately 122,000 line-item findings
(many of which relate to multiple schools or locations). The explanations associated with those
findings were in many instances not self-explanatory, making the process of performing a
meaningful analysis of the findings all the more complicated.

The SDP could not during the audit period and cannot in the formal response fully research,
clarify, and address each item, as would be our normal practice when responding to an audit.. We
have therefore focused our efforts on responding to and commenting on those portions of the
supporting documentation to the audit findings that either provide the best illustration of our
reasoning in disputing a finding or comprise a significant part of the dollar value attached to a
finding. The omission of any particular finding line-item from this response is not to be taken as
agreement with that finding, but is instead the result of resource and time limitations.

We are compelled to note that despite the enormous amount of time and resources expended by
both the OIG and the SDP in the course of the eighteen month audit process, the findings and
recommendations contained in the draft report appear to reflect a fundamental misunderstanding
of the SDP‟s management of USDE funds. Moreover, the draft report does not constitute an
accurate and comprehensive assessment of the SDP‟s financial practices and compliance
systems.
Final Report
ED-OIG/A03H0010                                                                   Page 103 of 131

Of significant concern are these elements of the draft report:

   1. Incorrect Supplantation Analysis (Finding #2) – The draft report states that the SDP
      supplanted $21,413,178.99 in State and local funding with Federal dollars, in violation of
      the statutory “supplement, not supplant” requirement. In coming to this conclusion, the
      draft report relies on the supplanting test applicable to “targeted assistance” schools, not
      the test applicable to “schoolwide program” schools. This is an error since all SDP
      schools operate under schoolwide plans. Application of the correct supplantation
      analysis reveals that the SDP has met its obligations to use Federal funds to “supplement,
      not supplant” State and local funding.

   2. Failure to Consider Alternative Corroborating Evidence Per Generally Accepted
      Government Auditing Standards (Findings 1.A.I., 1.A.II) – The draft report questions
      more than $124,000,000 in personnel costs charged to Federal awards because it
      concludes that the SDP did not maintain time and effort records in the format described
      in Federal cost principles. The SDP, however, presented support for these costs in the
      form of contemporaneous time records, staff listings, classroom assignments, and job
      titles, all of which corroborate the fact that the subject employees did in fact perform the
      work for which the Federal awards were appropriately charged. Because this alternative
      documentation was reliable (perhaps even more reliable than the documentation that the
      OIG requested) and relevant to the costs at issue, the OIG draft report should have
      considered that evidence, in keeping with generally accepted government auditing
      standards.

   3. Requiring Incorrect Documentation of Personnel Costs (Finding 1.A.III.) – The draft
      report questions more than $38,000,000 in salary and fringe benefit charges for
      employees paid from two or more funding sources, based on the contention that the SDP
      did not keep detailed records showing the distribution of employee time among
      Federally-supported and non-Federally-supported activities. However, the SDP was not
      required to maintain such records, because the subject employees worked exclusively on
      activities eligible under a single Federal award. The SDP simply decided not to charge
      the employees‟ total compensation to the Federal award. Because each employee was
      devoted to a single cost objective, the SDP adequately documented the personnel costs by
      keeping the periodic time and effort certifications called for under Federal cost principles.

   4. Disallowances Without Sufficient Basis (Findings 3, 4) – The draft report recommends
      disallowance of several recommended award-eligible expenditures because the SDP did
      not explicitly identify those costs in a school‟s budget or schoolwide plan. These
      findings are improper because there is no apparent legal or other requirement that a
      school operating a schoolwide program must set forth every potential expenditure of
      Federal funds in its schoolwide plan. Rather, a cost is allowable under a Federal award if
      it is incurred in support of the schoolwide program goals in general and is otherwise an
      award-eligible expense. Moreover, the OIG‟s position in this regard would deprive the
      SDP of the budget flexibility afforded by USDE regulations. See 34 C.F.R. § 80.30(a)
      (“Grantees and subgrantees are permitted to rebudget within the approved direct cost
      budget to meet unanticipated requirements and may make limited program changes to the
      approved project.”).
Final Report
ED-OIG/A03H0010                                                                   Page 104 of 131

It is also important to note that the Government suffers no apparent harm as a result of many of
the alleged transgressions in the draft report.

The substantial majority of the total amount of costs questioned or disallowed in the draft report
relate exclusively to a purported failure to adequately document costs in compliance with OMB
standards. All SDP schools, however, operated under “schoolwide programs” during the audit
period and continue to do so today. Those schools were therefore entitled to consolidate all
Federal and non-Federal funding into a single pool that they could manage free of many Federal
administrative requirements. Although, as the OIG repeatedly observes in the draft report, the
SDP schools did not formally avail themselves of their legal authority to consolidate funding, it
is difficult to imagine what, if any, detriment the government may have suffered due to
departures from recordkeeping requirements that the SDP could have by all rights been exempt
from in the first place.

We cannot overemphasize the devastating impact that the OIG‟s draft findings would have on
the SDP‟s mission should the responsible USDE officials accept the recommendations in the
OIG draft report. The sheer magnitude of the findings – over $140,000,000 – would put an end
to the great strides that the SDP has made in meeting the objectives of the No Child Left Behind
Act. For example, the SDP steadily and significantly improved standardized test scores before,
during, and after the audit period. In FY 2002, only one in four SDP students were proficient or
better in reading, and only one in five students were proficient or better math. In FY 2009, about
one in two students is proficient or better The SDP intends to accelerate this progress as outlined
in its Imagine 2014 strategic plan – a plan whose objectives and strategies are highly consistent
with the goals and recommendations of the Obama Administration‟s K-12 educational policies.

To require the SDP to repay the amounts that the draft report has questioned would not only
preclude the SDP from implementing its plans further to enhance the educational services it
provides to children and families in the City of Philadelphia, but would also effectively undo
many important advances the SDP has already made in the past several years.

We note that the SDP has budgeted more than $300 million in Federal American Recovery and
Reinvestment Act funds in FY 2009-10, of which a substantial portion is targeted to the first year
implementation of Imagine 2014. Both in anticipation of these new Federal programs and as a
responsible on-going business practice, the SDP has undertaken a comprehensive review of its
grants administration policies, procedures, and operations under the direction of Superintendent
Ackerman to make sure that the SDP has the organizational structure, personnel, resources, data
systems, policies, and procedures necessary to ensure effective and strategic utilization of ARRA
funds and the successful implementation of the Imagine 2014 plan in a manner fully consistent
with Federal guidelines.

It is our fervent hope that, through this submission, we will successfully and thoroughly address
the concerns that were raised in the draft report regarding the SDP‟s management of grants and
its overall operations and that the OIG will conclude after reviewing this response that the SDP‟s
financial and management systems are sound and its use of Federal funds was and is compliant
with Federal requirements. Once again, the SDP appreciates the opportunity to submit these
comments.
Final Report
ED-OIG/A03H0010                                                                     Page 105 of 131

FINDING #1 – PSD NEEDS STRONGER CONTROLS OVER PERSONNEL
               EXPENDITURES CHARGED TO FEDERAL GRANTS
$2,955,524 Unallowable; $123,775,33487 ($95,899,570 unduplicated) Unsupported

The SDP disputes this finding. The discussion below and the accompanying documentation
demonstrate that the SDP maintains sufficient documentation to support the questioned
compensation costs and that the personnel charges to the SDP‟s Federal awards were otherwise
allowable.

The SDP keeps daily time and attendance records which, together with documents showing
classroom assignment and/or the duties associated with each employee‟s position, create a
reliable basis on which to conclude that the employee performed the work for which an award
was charged. These records are in many instances more comprehensive and detailed than the
form of documentation described in the relevant cost principles. The OIG should therefore
accept the SDP‟s alternative corroborating evidence as adequate support for the questioned salary
and fringe benefit costs.

The draft report identifies three general grounds for the questioning of costs and/or the
recommended disallowance associated with this finding.

The first is the absence of supporting documentation for salary and fringe benefit costs charged
to Federal awards. The OIG asserts that the SDP failed to maintain adequate (1) semi-annual
certifications showing that employees who were charged 100% to a Federal award worked
exclusively on a single cost objective and (2) “personnel activity reports” that record the
distribution of staff time for individuals charged in part to Federal awards. The questioned costs
associated with this rationale total $124,940,508.22.

The second basis cited for the finding in the draft report relates to personnel costs paid out of
Federal awards that allegedly were not properly allocable to those awards. The OIG
recommends disallowance of $2,982,572 in light of this determination.

The OIG‟s third basis for the finding arises out of the auditors‟ review of overtime costs and
bonus payments, resulting in questioned overtime payments of $2,669 and $1,500 in allegedly
unallowable bonuses.

The following narrative addresses each of these three issues:

A.     Lack of Personnel Time Records

The lion‟s share of the questioned costs in Finding #1 – and, for that matter, in the draft report as
a whole – fall under the rubric of inadequately supported salary and fringe benefit expenses paid

87
  The $123,775,334 figure appears in the text of the draft report. The numbers in the OIG‟s
spreadsheets, however, do not match with this amount. Instead, they show a total of
$124,943,177.22 in unsupported costs for Finding #1, with $124,940,508.22 questioned as part
of subfinding 1.A. and $2,669 questioned under subfinding 1.C. See OIG Spreadsheet entitled
“Finding_Recon.xls,” Finding 1 tab, lines 34, 46, 47. The discussion herein relies on the
spreadsheet numbers.
Final Report
ED-OIG/A03H0010                                                                   Page 106 of 131

out of ten USDE awards. Of those ten, the employee compensation charges related to the SDP‟s
Title I (Part A), Title II (Part A), IDEA, Reading First, and Comprehensive School Reform
(“CSR”) awards make up $114,308,755.49 – i.e., fully 91% of the $124,940,508.22 in costs that
the OIG has deemed unsupported as part of this subfinding.

The draft report indicates that the SDP‟s documentation of personnel expenses during FY 2006
was deficient in three ways. First, except with respect to its Title I (Part A) and CSR awards, the
SDP‟s records did not include semi-annual certifications for employees devoted solely to a single
USDE award as described in Attachment B, Paragraph 8.h.(3) of OMB Circular A-87. Second,
the OIG claims that the SDP did not require employees working on more than one cost objective
to keep “personnel activity reports.” Third, the OIG contends that the SDP failed to support
salary and fringe benefit charges transferred to Federal awards through “journal vouchers.”

Because the OIG‟s finding is based on a 100% sample of the subject costs, it would be all but
impossible for the SDP to assemble and transmit support for all of the personnel costs
questioned. The SDP has therefore selected a judgmental sample of six schools – Horatio B.
Hackett, Guion S. Bluford, James R. Lowell, Joseph W. Catharine, Gilbert Spruance, and John
B. Kelly – chosen because they received funds under three or more of the awards listed in the
finding during FY 2006. The documentation gathered from those six schools are representative
of the records maintained at all SDP schools generally, and serve to illustrate the SDP‟s
reasoning in response to this finding and the type of information available in each of the SDP‟s
267 schools.

       1.      Support of Compensation Costs for Employees Working on a Single Cost
               Objective

The draft report states that the SDP only provided time and effort certifications for single cost
objective employees working on Title I (Part A) and CSR activities during FY 2006, and,
moreover, that even those certifications did not cover personnel charges transferred to either
Title I (Part A) or CSR by journal voucher. Citing OMB Circular A-87, Att. B, § 8.h(3) to the
effect that an awardee must document such charges with semi-annual certifications stating that
the subject employee was devoted exclusively to funded activities during the months covered by
the certification, the OIG concludes that the SDP could not support $113,284,180.48 in salary
and fringe benefit expenses under its USDE awards. That amount includes $26,307,664.88
charged to IDEA, $21,561,956.87 to Title II (Part A), $11,272,851.88 to Title I (Part A),
$7,435,464.04 to Reading First, and $1,910,008.60 to CSR.

The OIG‟s conclusion, however, ignores evidence other than semi-annual certifications that the
SDP offered to support the questioned compensation costs. The United States Government
Accountability Office‟s “Government Auditing Standards” indicates that in order to enhance the
reliability of audit conclusions and to reduce “audit risk,” auditors should obtain “alternative
forms of corroborating evidence” where sufficient and appropriate evidence is otherwise lacking.
See U.S. Gov‟t Acct. Office, “Government Auditing Standards: July 2007 Revision,” GAO 07-
731G, at 123-124 (2007) (hereinafter, “GAO Yellow Book”).

In addition, USDE has itself long acknowledged that recipients may use alternative
documentation to support personnel compensation charged to Federal awards. See:
Final Report
ED-OIG/A03H0010                                                                    Page 107 of 131

        Application of the New York State Department of Education, Docket No. 90-70-R (1994)
         (“This tribunal will also accept the after-the-fact affidavits executed by supervisors and
         submitted by NYSED in the case at bar.”);
        Consolidated Appeals of the Florida Department of Education, Docket Nos. 29-293-88 &
         33-297-88 (1990) (“The use of later affidavits... is not categorically precluded... This
         Panel... finds the [affidavits submitted] to be credible and useful evidence.”);
        Application of Escambia County Board of Education, Docket No. 89-9-R (1989) (“The
         Education Appeal Board (EAB) and the Secretary of Education have indicated that after-
         the-fact evidence can be considered to substantiate costs disallowed in a Final Letter of
         Determination.”);
     -   Appeal of Fort Valley State College, Docket No. 21(196)85 (1987) (“The EAB has in the
         past permitted such expenditures if, after the fact, the grantee can support them with
         alternative, equivalent, or contemporaneous documentation.”);
        Appeal of Government of Guam, Docket No. 30(162)84 (1986) (“The Secretary agrees
         that where appropriate, a Panel can permit a recipient to meet its burden by constructing a
         time distribution formula based on credible evidence.”);
        Appeal of Albany State College, Docket No. 41(173)84 (1986) (“[T]he Department of
         Education... has indicated its satisfaction with certain after-the-fact affidavits and has
         revised its demand accordingly.”).
        Application of Escambia County Board of Education, Docket No. 89-9-R (1989). See
         also Appeal of Fort Valley State College, Docket No. 21(196)85 (1987). (“There is no
         limit on the types of documentation that can serve as support so long as the evidence is
         „credible‟.”)

The SDP maintains “alternative forms of corroborating evidence” of sufficient weight and
credibility to satisfy its obligation to document the subject personnel costs.88 The SDP maintains
daily attendance records (“Time and Attendance Personnel Timesheets,” or “TPERs”) that
require employees to document the time that they work each day and personally initial the record
each day. In combination with an employee‟s job description, the TPER is credible alternative
documentation that provides the same (if not better) corroboration as the twice-yearly
certifications cited by the OIG for positions such as grade teachers, special education classroom
assistants, literacy interns, and school-based teacher leaders,.

The summaries below describe the support the SDP has produced for the questioned charges at
the six schools in the SDP‟s sample:

     1a. IDEA: Support of Compensation Costs for Employees Working on a Single Cost
         Objective

The SDP has identified a total of 25 employees among the six sample schools whose salary and
benefit costs were included in the spreadsheets provided by the OIG. TPERS verify that each of
those employees regularly worked at their assigned school throughout the 2005-2006 school


88
  Although the SDP is able to provide sufficient alternative documentation to support salary
costs, in order to simplify the process and ease the administrative burden the SDP implemented
procedures in January 2009 to assure that all Federal grant awards with salary costs complete
semi-annual time and effort certifications.
Final Report
ED-OIG/A03H0010                                                                 Page 108 of 131

year. In addition, as set forth in the table below, school and/or human resources records more
than reasonably support the inference that each such employee worked on IDEA eligible
activities. These daily attendance documents, school-based records, and human resources files
are provided in the attached exhibits as indicated in the table below.

SUMMARY OF SCHOOL RECORDS SUPPORTING SALARIES CHARGED TO IDEA
        NAME          SCHOOL                   EVIDENCE                       EXH.
Gumby, Annette       Hackett   Staff list shows as special education         A, B
                               classroom assistant; HR records show same
Hill, Cynthia        Hackett   Staff list shows as special education         A, B
                               classroom assistant; HR records show same
King, Elizabeth      Hackett   Staff list shows as special education         A, B
                               classroom assistant; HR records show same
McGrath, Sandra      Hackett   Staff list shows as special education         A, B
                               classroom assistant; HR records show same
Meredith, Patricia   Hackett   Staff list shows as special education         A, B
                               classroom assistant; HR records show same
Scott, Alice         Hackett   Staff list shows as special education         A, B
                               classroom assistant; HR records show same
Vasquez, Juanita     Hackett   Staff list shows as special education         A, B
                               classroom assistant; HR records show same
Walker, Albert       Hackett   Staff list shows as special education         A, B
                               classroom assistant; HR records show same
Young, Carmelita     Bluford   Schedule shows assigned to special            P at 13,
                               education classroom; certification as special B
                               education teacher; HR records show as
                               special education classroom assistant
Foster-Hill, Valerie Bluford   Schedule shows assigned to special            P at 14,
                               education classroom; HR records show as       B
                               special education classroom assistant
McAliley, Angela     Lowell    Staff list shows as special education         C, B
                               classroom assistant; HR records show same
Williams, Eleanor    Lowell    HR records show as special education          B
                               classroom assistant
Stringfield, Juanita Kelly     HR records show as special education          B
                               classroom assistant
Ellis James, Darlene Kelly     HR records show as special education          B
                               classroom assistant
Blake, Eleanor       Catharine HR records show as special education          B
                               classroom assistant
Edmonds, Gail        Catharine HR records show as special education          B
                               classroom assistant
Smith, Esqueen       Catharine HR records show as special education          B
                               classroom assistant
Wilson, Jacqueline   Catharine HR records show as special education          B
                               classroom assistant
Lewis, Jennifer      Catharine HR records show as special education          B
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                                          classroom assistant
Camacho, Barbara         Spruance         HR records show as special education            B
                                          classroom assistant
Silvestri, Mary Ann      Spruance         HR records show as special education            B
                                          classroom assistant
Stales, Sheila           Spruance         HR records show as special education            B
                                          classroom assistant
Steigerwald, Phyllis     Spruance         HR records show as special education            B
                                          classroom assistant
Valerio, Suzanne         Spruance         HR records show as special education            B
                                          classroom assistant
Winter, Barbara          Spruance         HR records show as special education            B
                                          classroom assistant

     1b. Title II - Improving Teacher Quality: Support of Compensation Costs for Employees
         Working on a Single Cost Objective

The SDP has identified a total of 19 employees89 in the six sample schools whose full-time salary
and benefit costs during the 2005-2006 school year were included in the spreadsheets provided
by the OIG. Although the full compensation of a number of other employees was charged to
Title II at various points in the year, the OIG spreadsheet listing the Title II journal voucher
salary transfers reveals that the SDP reversed those charges.

The SDP primarily uses Title II funds to reduce class size and to improve teacher quality through
increasing the number of adults in a classroom through more homeroom teachers, the
deployment of literacy interns, and improving teacher morale through mentoring and training.
These personnel expenses were properly allocable to Title II either because the school paid for
one or more additional teachers to reduce class size or because the individual charged to the
award performed other Title II eligible activities, such as improving/maintaining teacher morale
or acting as a “school based teacher leader.”

As to the reduced class size (“RCS”) charges, the SDP distributes operating funds to schools
based on a formula that guarantees that class size will not exceed a set maximum as negotiated
with the Philadelphia Federation of Teachers (“PFT”). The maximum in grades K-3 is thirty
students per classroom, while the maximum for all other grades is thirty-three per classroom.
See Exh. D; see also Exh. E (snapshot report of enrollment data used to determine homeroom
teacher allotments for each of the sample schools).

To take an example, Hackett School had 303 students in grades K-3 and 69 students in grade 4.
To determine the funded positions for Hackett per the SDP formula, the total of funded positions
would be 12.2 (303 students divided by 30 students per classroom in grades K-3 plus 69 total
students divided by 33 for grade 4). The actual number of homeroom teachers at Hackett was
16, indicating that the school had 3 RCS teachers. Application of that formula to the six sample
schools yielded the following results in grades K-4 during the 2005-2006 school year:
89
  The other personnel charges to Title II in the sample schools relate either to (1) pay for July
and August of 2005 for “literacy interns” who worked at one of the sample schools during the
2004-2005 school year, or (2) extra-curricular/professional development (i.e., non-full-time) pay.
Final Report
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        FORMULA HOMEROOM DISTRIBUTION/RCS-ELIGIBLE POSITIONS
SCHOOL       STUDENTS IN K-3, 4 FUNDED POSITIONS           ACTUAL NO. OF
             (Exh. E, Cols. 0-4) PER FORMULA               HOMEROOMS/RCS
                                                           POSITIONS
Hackett      303, 69             12.2                      16/3
                                 (303/30=10.1, 69/33=2.1)
Lowell       794, 210            32.8                      34/1
                                 (792/30=26.4, 210/33=6.4)
Spruance     518, 121            21                        22/1
                                 (518/30=17.3, 121/33=3.7)
Catharine    478, 117            19.5                      21/1
                                 (478/30=15.9, 117/33=3.6)
Kelly        451, 98             18                        24/6
                                 (451/30=15, 98/33=3)
Bluford      380, 81             15.2                      18/2
                                 (380/30=12.7, 81/33=2.5)

Where the actual number of homerooms is greater than the number according to the formula, the
excess position(s) would be for the purpose of reducing class size. Therefore, Hackett had three
K-4 RCS eligible teachers, Lowell, Spruance, and Catharine each had one, Kelly had six, and
Bluford had two.

The SDP‟s records of Title II personnel charges show that the sample schools‟ RCS charges are
consistent with the foregoing. See Exh. F.

The table below summarizes those records.

                  RCS TEACHER CHARGES TO SAMPLE SCHOOLS
     SCHOOL        EMPLOYEES 100%        GRADE/ROOM  NO. OF STUDENTS
                   CHARGED AS TI. II         ASSM’T
                            RCS
Hackett90        Fox, Heather        1st/307         20
                 Johnson, Cynthia    1st/306         18
                                      nd
                 Davis, Jennifer     2 /211          23
Lowell           Chhann, Ying        Literacy Intern Literacy Interns are
                 Richelson, Shelly   Literacy Intern individuals placed in a
                                                     classroom with an
                                                     existing teacher in
                                                     order to assist that
                                                     teacher and to
                                                     increase the frequency
                                                     and quality of


90
  One other grade teacher, Wanda Pegrem, appears in the SDP‟s accounting records as a Hackett
RCS teacher. The SDP has determined that this is a result of miscoding, as Ms. Pegrem was a
teacher at Hartranft School (5320), not Hackett (5300).
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ED-OIG/A03H0010                                                                  Page 111 of 131

                                                                          interactions between
                                                                          instructors and
                                                                          students. Lowell
                                                                          relied on the Literacy
                                                                          Intern model to
                                                                          reduce class size
                                                                          rather than adding
                                                                          homerooms.
Spruance          N/A (no teachers were
                  charged to Title II RCS)
Catharine         Sharkey, Barbara              2nd/322                   30
                  Warren, Necole91              2nd/209                   29
Kelly             Schecter, Meredith            1st/217A                  21
                  Moylan, Jennifer              4th/105                   25
                  Gulsoy, Aylin                 K/K-2                     25
Bluford           Gaskins, Andrea               6th/26                    33

The documentation maintained at the sample schools supports the remaining single objective
employee compensation paid from Title II. The following is a list of those employees, their
positions, and the evidence corroborating the fact that they performed Title II activities.


     OTHER TITLE II FULL-TIME SALARY CHARGES TO SAMPLE SCHOOLS
      NAME        SCHOOL         POSITION                 EVIDENCE            EXH.
Schultz, Lorraine Lowell    School-based teacher Schedule; training logs      G
                            leader
Silverman, Marci  Lowell    School-based teacher Schedule; training logs      G
                            leader
Crawford, Carolyn Bluford   School-based teacher Schedule; training logs      P at 7-
                            leader                                            9
McCarthy, Mari    Bluford   School-based teacher Schedule; training logs      P at 1,
                            leader                                            52
Yvonne Drayton    Catharine School-based teacher Schedule; training logs      Q
                            leader
Jacobs, Rochelle  Spruance School-based teacher Schedule; training logs       H
                            leader
Koch, Janis       Spruance Climate (teacher      Staff list shows as “climate H
                            morale) specialist   specialist,” “Dean of
                                                 Students”

For both the RCS and non-RCS employees devoted exclusively to Title II purposes, the TPERs
show their regular attendance at their assigned schools. See Exhs. R through Z.




91
  The charges for Ms. Warren are likely in error. Title II RCS should instead have paid for the
addition of a fifth-grade teacher. See Exh. E at 2, Col. 5.
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ED-OIG/A03H0010                                                                      Page 112 of 131

   1c. Reading First: Support of Compensation Costs for Employees Working on a Single Cost
       Objective

Three of the six schools in the SDP sample used Reading First funds to pay for employee time.
Only one – J. W. Catharine – applied Reading First dollars to cover one employee‟s total
compensation during the 2005-2006 school year. In October 2005, Catharine requested funding
to hire Bonnie Bass, a retired teacher, on a part-time basis to assist the school‟s reading specialist
in testing and evaluation. See Exh. I. That request was approved and Ms. Bass started work in
November 2005. Id. The TPERs for November 2005 through June 2006 show that Ms. Bass
worked 3-4 days per week throughout that period. See Exh. AA at 1-5.

The remaining salary and fringe benefit charges at Catharine, Lowell, and Kelly relate either to
professional development activities or extracurricular work in connection with the SDP‟s after-
school “Power Hour” program. The spreadsheet attached hereto as Exh. F identifies each of
those charges, the Reading First purpose associated with each charge, and a reference to the
exhibits containing the relevant sign-in sheets and other corroborating evidence.

   1d. Title I: Support of Compensation Costs for Employees Working on a Single Cost
       Objective

The OIG also questions $11,272,851.88 in compensation expenses for single objective
employees charged to Title I by way of journal voucher transfers. Again, the basis for this
portion of the finding is the absence of semi-annual certifications.

Although the questioned costs comprise more than 60,000 separate transactions, a single
rationale serves as support for the vast majority of the charges. More than 90% of the
transactions relate to regular compensation for teachers, counselors, and librarians working in
SDP schools. The spreadsheets provided by the OIG show that 5,874 of the 7,136 salary entries
carry an object code of 1120, 1122, 1123, 1124, 1125, 1126, 1127, or 1128, which codes
represent payments to teachers, part-time teachers, librarians, classroom assistants, assistant
teachers, counselors, and “other paraprofessionals.” Likewise, the fringe benefit charges listed in
the spreadsheets consist largely of those associated with the regular salary charges.

Because the SDP schools have the TPERs for the relevant time period in their school-based
records, and because all SDP schools operate under schoolwide programs, there is adequate
support for the bulk of the questioned Title I personnel compensation expenditures. That is, the
TPERs document that employees regularly appeared for work at a particular school. Where an
employee appearing on a TPER is a teacher, part-time teacher, librarian, counselor, or “other
paraprofessional,” that employee‟s salary and fringe benefits are eligible Title I costs simply by
virtue of the fact that he or she works in a schoolwide program. See 20 U.S.C. § 6314(a)(2)(A)
(No school participating in a schoolwide program shall be required . . . to identify particular
children . . . as eligible to participate in a schoolwide program; or to provide services to such
children that are supplementary, as otherwise required by section 6321(b) of this title.).

The remaining questioned employee compensation costs are associated with object codes 1211,
1511, and 1611, all of which relate to pay above and beyond regular salaries, e.g., per diem,
extracurricular, and professional/staff development. As to those costs, the SDP maintains sign-in
sheets or similar documentation supporting the charges to Title I. This is true with respect to the
Final Report
ED-OIG/A03H0010                                                                     Page 113 of 131

questioned costs in both Finding 1.A.I. and Finding 1.A.II., many of which are duplicated in the
two findings. See Exh. J (spreadsheet showing approximately $2,000,000 in duplicate
questioned costs).

   1e. CSR: Support of Compensation Costs for Employees Working on a Single Cost Objective

The same explanation for Title I support of salary costs for employees working on a single cost
objective can be applied to the $145,010.32 of CSR salary costs, plus the costs of the associated
fringe benefits. (See discussion of Title I, above.) In this case, the OIG spreadsheets show 128
salary charges for object codes 1122, 1123, 1127, and 1128, relating to non-teaching
professionals, teachers, part-time classroom assistants, and “other paraprofessionals” working in
the schools. Because all SDP schools operate under schoolwide plans for the purpose of school
reforms, and because all of the 128 compensation charges are for individuals working in
furtherance of such reform efforts, the TPERs showing that each such individual regularly
appeared for work at their assigned school is sufficient to support the salary and benefit expenses
paid out of CSR.

       2.      Lack of Personnel Activity Reports (Title I, CSR)

The draft report questions $38,444,708.00 in personnel compensation charged to Title I and CSR
that covered “split salaries” listed in SDP school budgets. The draft audit appears to have taken
any non-whole number appearing in a school‟s budgeted positions that were to be funded out of
Title I, then multiplied that number by the salary associated with each such position, and thus
derived a total amount that the OIG assumes to have been charged as “split salaries.” As to these
assumed charges, the draft report contents that the SDP cannot rely on the semi-annual
certifications contained in SDP‟s records as sufficient support. Rather, the report contends that
the OMB cost principles require “personnel activity reports” (“PARs”) prepared at least monthly
showing an after-the-fact distribution of staff time between USDE-funded work and other work.

This finding is wrong both as a matter of fact and law. There are at least three factors that call
the OIG‟s reasoning into question.

First and foremost, the OIG‟s methodology is fundamentally unsound. An auditor cannot
reasonably find that an auditee has expended funds in an improper manner or without sufficient
support strictly on the basis of budgeted figures. Such a conclusion is inherently unreliable in
the absence of some evidence confirming that the auditee in fact incurred the questioned costs
according to budget. This practice also creates a substantial risk that the costs questioned in this
subfinding are duplicated elsewhere in the draft report given that the draft report questions
$7,376,101.22 in personnel compensation charged to Title I and CSR under Finding 1.A.I., and a
further $13,182,860.48 under Finding 1.A.II. In short, audit findings must be related to actual
expenditures. To rely on budget numbers when actual expenditure numbers were provided is
contrary to accepted audit practice. See spreadsheets previously provided by Office of
Management and Budget.

Second, the spreadsheets detailing the budgeted positions underlying the finding include several
positions that were not, in fact, split-funded. It appears that the finding sweeps in any non-whole
number positions shown on a school‟s Title I budget. The flaw in this approach lies in the fact
that where a school's budget contains a non-whole number of Title I positions that is greater than
Final Report
ED-OIG/A03H0010                                                                      Page 114 of 131

one, only the amount to the right of the decimal represents a split salary. The OIG incorrectly
added all such positions, both the whole and split funded, in arriving at the questioned amount.
Accordingly, of the 408.36 positions comprising the basis for Finding 1.A.III., 206 were funded
100% by Title I under a single object code. See Exh. DD (showing breakdown of whole number
and non-whole number positions).

Finally, even where a school budget shows a “salary split,” the position was devoted exclusively
to Title I purposes, i.e., a single cost objective. As the documentation and certifications
previously provided to the OIG shows, the employees budgeted between Title I/CSR and another
Federal or non-Federal funding source still worked 100% on activities properly allocable to Title
I/CSR. In such circumstances, PARs are not necessary to support salary and benefit charges
under an award. See Exh. K (Title I policy guidance from Michigan, New Hampshire).
Therefore, there is no instance where a salary split would require a PAR.

B.     Ineligible Charges

The draft audit report identifies as unallowable (1) $2,888,140.00 in charges to Title I for Head
Start salaries and (2) $22,800.00 in charges to Title I for school police salaries. The draft report
bases the first determination on a contention that the subject personnel expenditures were not for
the purpose of complementing or extending Head Start services, as required in order to be
allowable under Title I. The report bases the second determination on an assumption that the
schools where the particular officers were assigned failed to amend their schoolwide plans to
reflect that Title I would pay for police salaries.

As to the latter finding, the SDP has been unable to locate any guidance or legal authority that
would have required the subject schools to amend their schoolwide plans as the report appears to
believe is necessary. Moreover, although the four schools did not amend their schoolwide plans
to include police salaries, they did amend their budgets to reflect the additional police salary
costs.

The former finding is also incorrect. Although Head Start Performance Standards do not require
that grantees employ only certified teachers, all SDP Head Start teachers have Commonwealth of
Pennsylvania teaching certificates. The SDP follows this practice because of its determination to
enhance the quality of the Head Start services it provides directly to children. The SDP‟s Head
Start delegate, by contrast, does not require its teachers to be certified.

As a result of the higher standards that the SDP applies in its Head Start hiring, the SDP must
compensate its Head Start teachers at a higher level than it would require for Head Start teachers
with lesser qualifications. The FY 2006 Head Start budgets attached hereto as Exh. L reveal that
the delegate agency paid its teachers an average of $21,507.50 per annum, while the average
annual salary for SDP Head Start teachers was $50,908.35. Because the SDP employed 266
teachers in its 2006 Head Start program, the difference in Head Start compensation costs
between an assumed average of $21,507.50/teacher and the actual $50,908.35/teacher comes to
$4,860,695.00 – substantially more than the $2,888,140.00 that the SDP charged to Title I to pay
for higher quality Head Start services.

Finally, the draft report states that the SDP failed to enforce its own payroll policies because it
did not require employees to sign-out on TPERs. The OIG misunderstands the SDP‟s policies
Final Report
ED-OIG/A03H0010                                                                    Page 115 of 131

and procedures on this score. As the portion of those policies quoted in the draft report indicates,
sign-outs are required only as necessary “to meet wage and hour requirements.” The OIG has
not identified any case in which wage and hour laws would call for employees to sign-out where
an employee failed to do so. In the absence of such evidence, the OIG cannot claim that the SDP
violated any internal policy.
Final Report
ED-OIG/A03H0010                                                                    Page 116 of 131

FINDING #2 – SUPPLANTING OF FEDERAL FUNDS
$21,413,180.01 Unallowable; $1,293,385.68 Unsupported

The SDP disputes this finding in its entirety.

The draft report applies the wrong test to determine whether the SDP ran afoul of any
supplanting prohibition. Had the report applied the correct test, it could not have concluded that
the SDP engaged in supplantation.

As discussed in more detail below, because all SDP schools operate under schoolwide programs,
it is an “equitable funding” standard – not the comparison of line-item expenditures that the OIG
conducted – that needs to be applied in order to determine whether the SDP violated the statutory
“supplement, not supplant” requirements.

We will demonstrate that the SDP did, in fact, meet the standard by distributing its state and local
funds in a fair and equitable manner, based on established and published per student and per
school formulas that have remain consistent over time. Furthermore, the availability of Federal
funds has no bearing on the SDP‟s distribution of non-Federal dollars. The SDP‟s Title I
formula, unlike its Basic Education formula, allocates Federal funds exclusively as a function of
student family income levels

The conclusions contained in the draft report appear to rest largely on a comparison between
particular line item expenditures in FY 2005 and FY 2006 – i.e., the report claims the existence
of “supplantation” when a given cost was charged to non-Federal sources in FY 2005 and then
was charged to a Federal award in FY 2006. In addition, the draft report indicates that there is at
least one instance of alleged “supplanting” involving the use of Federal funds to pay for costs
that the SDP was allegedly required to incur under local regulation.

The largest portion of the finding relates to charges applied to Title I, Part A in the amount of
$17,539,693.00, the bulk of which consist of salaries for the Transition Support Tutors Program
($4,555,099.00), bilingual instruction ($1,666,981.00), teacher preparation time required under
SDP‟s collective bargaining agreement with the Pennsylvania Federation of Teachers
($5,543,762.00), consulting contracts ($5,248,988.00), and school choice transportation costs
($1,293,386). The remainder of the finding concerns $1,701,000.00 in IDEA consulting contract
expenditures, $1,395,685.00 in personnel compensation charges to Title II, Part A, and
$334,390.00 in costs for computer hardware and software paid out of Title II, Part D.

The chief flaw in the draft report‟s analysis is in its use of the wrong method of testing for
supplantation. Whereas a presumption of supplanting typically arises if an awardee uses Federal
funds to provide services that it provided with non-Federal funds in the prior year, this is not the
case in the context of a schoolwide program. The U.S. Department of Education has issued
guidance indicating that, “[a] school operating a schoolwide program does not have to: (1) show
that Federal funds used with the school are paying for additional services that would not
otherwise be provided; (2) demonstrate that Federal funds are used only for specific target
populations; or (3) separately track Federal program funds once they reach the school.” See
U.S. Dep‟t of Educ., ”Non-Regulatory Guidance, Title I Fiscal Issues: Maintenance of Effort;
Comparability; Supplement, Not Supplant; Carryover; Consolidating Funds in Schoolwide
Final Report
ED-OIG/A03H0010                                                                      Page 117 of 131

Programs; Grantback Requirements,” at 37 (2008) (citing 20 U.S.C. § 6314(a)(2)); see also
OMB Circ. A-133 Compliance Supp. at 4-84.000-15 (March 2006) (same).

That guidance further states that, in order to satisfy the “supplement, not supplant” requirement
for schoolwide program schools, “[a]n LEA should be able to demonstrate, through its regular
procedures for distributing funds and resources, that it distributes State and local funds fairly and
equitably to all its schools – including schoolwide program schools – without regard to whether
those schools are receiving Federal education funds.” See Title I Non-Regulatory Guidance at
64.

Because all SDP schools operate under schoolwide programs, it is this “equitable funding”
standard – not the comparison of line-item expenditures that the OIG staff conducted – that
would apply to determine whether the SDP violated the statutory “supplement, not supplant”
requirements.

The SDP did, in fact, meet the standard by distributing its State and local funds in a fair and
equitable manner. The SDP‟s FY 2006 allocation formula (attached hereto as Exh. M) reveals
that the level of “Basic Education” funding (i.e., State and local financial assistance) for each
school is determined on a per student basis and according to school size, both with adjustments
for grade level and type of school. As the funding stream analysis (attached hereto as Exh. N)
shows, the Basic Education formula yielded substantially constant levels of funding in each
school between FY 2005 and FY 2006. The few instances in which State/local assistance to a
particular school dropped by more than 10% from 2005 to 2006 are attributable to decreases in
enrollment, the elimination of one or more grades at the school, or school closing.92

Furthermore, the availability of Federal funds has no bearing on the SDP‟s distribution of non-
Federal dollars. The SDP‟s Title I formula, unlike its Basic Education formula, allocates Federal
funds exclusively as a function of student family income levels. The factors relevant in
calculating State/local funding to SDP schools are completely distinct from those applicable in
the SDP‟s Federal funding calculation. Accordingly, the SDP does not consider the amount of
Federal education assistance that a school will receive in apportioning non-Federal assistance to
that school.

In light of the foregoing, the supplantation finding is simply incorrect to the extent that it is based
on a comparison of FY 2005 and FY 2006 expenditures. All portions of that finding relying on
this manner of analysis should therefore be eliminated. These would include all but the
$5,543,762.00 in compensation for teacher preparation time and $419,918.00 in copier costs
charged to Title I, Part A.

The two remaining parts of the finding are equally invalid. The draft audit report indicates that
the teacher preparation time and copier costs violate the “supplement, not supplant” prohibition
because the obligations arise out of the SDP‟s collective bargaining agreement with the
Pennsylvania Federation of Teachers. According to the spreadsheets accompanying the draft

92
  For instance, the spreadsheet shows that Sayre Middle School‟s level of State and local funding
in 2006 was 88.95% of the level of State and local funding in 2005. See Exh. N, line 17. The
reduction in funding is attributable to the fact that Sayre lost a grade in 2006, i.e., Sayre served
four grades (7-10) in 2005, but only served three grades (9-11) in 2006. Id.
Final Report
ED-OIG/A03H0010                                                                     Page 118 of 131

report, the report treats these as services that the SDP “was required to make available under
other Federal, State or local laws,” and therefore concludes that the use of Federal funds to pay
for such services amounts to supplanting

Again, the OIG auditors misunderstand the law on this score. Union contract requirements are
not “services that are required by law.” These are no different from any other obligation an
awardee assumes by way of agreement with a vendor, employee, or service provider. Moreover,
the charges relating to teacher preparation time are simply a type of personnel cost comparable to
any of the other types of compensation provided under the collective bargaining agreement
which the OIG has previously deemed allowable. To adopt a contrary view would, in effect,
render any salary or fringe benefit payments on behalf of any bargaining unit employee (i.e.,
most employees of most, if not all, school districts) unallowable. Consequently, the
“supplement, not supplant” prohibition on using Federal dollars to cover expenses incurred in
compliance with State or local law or regulation is irrelevant in determining whether the teacher
preparation time and copier costs are allowable. Instead, it is the “equitable funding” standard
described above that applies here, which, as previously discussed, shows that the SDP has not
supplanted Federal assistance for non-Federal assistance.

It bears at least brief mention here that, notwithstanding the draft report‟s conclusion that none of
the costs included in this finding fall within the regulatory exemption from the supplanting
prohibition, the $4,555,099.00 in Transition Support Tutors costs relate to a program that “meets
the intents and purposes” of Title I, and should therefore be excluded from any “supplement, not
supplant” analysis. That is, the Transition Support Tutors program satisfies all four of the criteria
for the exclusion because the program (1) “[i]s implemented in a school in which the percentage
of children from low-income families is at least 40 percent” (all SDP schools are at least 40%
low-income), (2) “[i]s designed to promote school-wide reform and upgrade the entire
educational operation of the school” by increasing the number and quality of student/instructor
interactions in upper elementary and middle school grades, (3) “[i]s designed to meet the
educational needs of all students in . . . to meet the State's challenging student academic
achievement standards,” and (4) “[u]ses the State's assessment system under Sec. 200.2 [i.e., the
PSSA] to review the effectiveness of the program.” See 34 C.F.R. § 200.79 (b).

The further observation in the draft report that no SDP schools consolidated their State, local,
and Federal funding is likewise irrelevant. Consolidation relieves schoolwide program schools
from various programmatic, accounting, and reporting requirements. That is, a school that
consolidates its Federal and non-Federal assistance need not maintain separate books and records
demonstrating that it has expended its Federal funds exclusively for award purposes so long as it
can show that its schoolwide plan as a whole serves the intents and purposes of the award. 20
U.S.C. §§ 6314(a)(3)(A)-(B). The “equitable funding” test for supplantation, however, applies
regardless of whether a schoolwide program school consolidates its funding. See Title I Non-
Regulatory Guidance at 64.

Finally, the draft report itself casts doubt on the validity of the proposed “supplement, not
supplant” finding.

As noted above, the alleged substitution of Federal for non-Federal funds will create a rebuttable
presumption that an awardee has engaged in prohibited supplanting. That presumption can be
overcome through evidence that the awardee would not have been able to provide the subject
Final Report
ED-OIG/A03H0010                                                                   Page 119 of 131

services in the absence of Federal assistance – i.e., that non-Federal funds were otherwise
insufficient to support the activities.

According to the draft report, the SDP suffered a deficit in its general fund of approximately
$66.1 million during the 2005-2006 school year. See Draft Report at 18.

This general fund deficit was a component of an overall Operating Funds negative fund balance
of $23.8 million for the period ending June 30, 2006. Although the OIG indicates that the SDP
“did not determine” whether the movement of general fund charges into Federal accounts in
order to relieve the deficit “would be supplanting Federal funds,” the mere existence of such a
substantial shortfall in non-Federal dollars should eliminate any presumption of supplanting. It
therefore appears that, even under the OIG‟s incorrect “supplement, not supplant” test, there is
no basis for the proposed finding
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ED-OIG/A03H0010                                                                    Page 120 of 131

FINDING #3 – PSD DID NOT HAVE ADEQUATE CONTROLS IN PLACE TO ENSURE
             NON-PAYROLL EXPENDITURES MET FEDERAL REGULATIONS
             AND GRANT PROVISIONS

$572,437.14 Unallowable; $1,020,003.52 Unsupported

The SDP disputes this finding.

The OIG staff reviewed over 2,000 transactions processed through the SDP‟s Accounts Payable
(“AP”) department and concluded that some $572,437.14 in costs were unallowable, and another
$1,020,003.52 either lacked sufficient support or were “questionable.” The transactions that are
the subject of this finding range in value from hundreds of thousands of dollars down to less than
two dollars.

As to the costs listed as “questionable” in the OIG‟s spreadsheets, it appears that the OIG does
not dispute that the particular costs were allowable or adequately documented. Instead, the OIG
poses general questions regarding the relationship between a specific expenditure and a Federal
award purpose. Each “questionable” line item commentary from the auditors agrees that the cost
was necessary, allocable, and adequately supported, and in many cases there is acknowledgement
that the finding has no dollar value finding attached. Although the SDP does not understand
these “questionable” findings to require a response, we have endeavored to provide responses
where possible.

Due to the sheer number of line item costs at issue in this finding, the SDP has limited its
response to addressing those transactions valued at $1,000.00 or greater.

It is worth noting that in many circumstances the OIG staff‟s description of the grounds for
recommending disallowance or questioning a given cost are at odds with the documentation that
the SDP presented. For instance, at line 198 of the OIG‟s “Office Depot” spreadsheet, the OIG
claims that the SDP could not support a charge of $1,199.96 for Palm PDA devices because it
was “[u]nable to provide names of those using.” Upon review of the documentation presented to
support this transaction, it appears that the SDP did, in fact, produce a list of individuals using
the devices, their titles, and the serial number for each product. See Bates numbered exhibits at
file designated “4650 through 4761 Finding 3 Office Depot.pdf.”

Likewise, at lines 417 and 418 of the OIG‟s “Reading First” spreadsheet, the OIG staff concludes
that two transactions of $1,000.75 each for Leapfrog electronic learning systems are unallowable
because the SDP could not present scientifically-based reading research that supported the
Leapfrog system as a learning device. The SDP‟s contract files, however, include research
literature demonstrating the efficacy of the Leapfrog system. See Bates numbered exhibits at file
designated “4960 through 5224 Finding 3 AP Reading First.pdf.”

The results of the SDP‟s review of its records concerning the AP transactions appear in the
spreadsheet and supporting documentation attached hereto as Exh. BB.
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FINDING #4 – POLICIES AND PROCEDURES WERE NOT ADEQUATE AND/OR
               ENFORCED
$6,358,792.03 Unallowable; $12,009,159.07 Unsupported

The SDP disputes this finding.

The OIG‟s conclusions rest predominantly on its review of JV transactions recorded in the SDP‟s
books. According to the draft report, the SDP‟s policies and procedures for the approval and
entry of JVs did not ensure that amounts charged to Federal awards were reasonable, allocable,
and sufficiently documented, allegedly resulting in double charges, payment of costs unrelated to
award purposes, and otherwise unsupported expenditures.

In the vast majority of cases, the draft report does not provide any reference to a law, regulation,
or other authority underlying its finding, and it is therefore difficult to discern the bases for a
particular recommended disallowance or questioned cost. For example, the report‟s summary
spreadsheet identifies unallowable costs in two JVs transferring summer salary expenses to the
SDP‟s Reading First grant. (See “Findings Amount Reconciliation” Spreadsheet, Finding 4 Tab,
Lines 19-20.) The separate spreadsheet containing the explanation for this conclusion indicates
that the salaries were earned when the SDP staff members were being paid from non-Federal
funding sources and discusses the manner in which SDP employees accrue summer pay. (See
“Reading First” Spreadsheet, Lines 21-44.) The explanations do not, however, describe how
these observations have any bearing on whether the costs are allowable, nor do they cite any
requirement with which the SDP has failed to comply.

Without some reference to specific criteria for disallowance – i.e., “[t]he laws, regulations,
contracts, grant agreements, standards, measures, expected performance, defined business
practices, and benchmarks against which performance is compared or evaluated,” as called for in
the GAO Yellow Book – the SDP cannot understand the OIG‟s rationale and formulate a
response to the finding. See GAO Yellow Book at §§ 4.15, 5.21 (definition of “criteria” for
finding, and description of need to communicate “criteria” in audit report, respectively).

Further, to the extent that the draft audit report or the accompanying spreadsheets purport to cite
some “criteria,” it appears that many of the OIG staff‟s objections to the award charges relate to
matters that are not genuine requirements. For instance, the OIG staff recommends disallowance
of activities or items not specifically identified either in a schoolwide plan or in a grant
application/budget. See, e.g., “Title I” spreadsheet, lines 2-4; “FIE” spreadsheet, lines 71-94, 95,
96-123; “Transfers” spreadsheet, lines 653-660. This, however, is not sufficient grounds for a
disallowance.

We have found nothing in law, regulation, or USDE guidance to suggest that a schoolwide plan
must detail each planned expenditure in order properly to charge that expenditure to a Federal
award. Rather, a cost is allowable under Title I as long as it is incurred in furtherance of the
purposes of the schoolwide plan. See OMB Circ. A-133 Compliance Supp. at 4-84.000-6 (March
2006).

Costs charged to other awards are allowable if they relate to activities generally contemplated in
an award agreement and are otherwise eligible under the statute authorizing the grant program.
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See 34 C.F.R. § 80.30 (grantee flexibility to make budget and program changes, defining
circumstances requiring prior approvals).

Accordingly, the mere fact that Federal dollars may have paid for an item not explicitly listed in
a grant budget does not amount to a failure to comply with a “criterion” if it does not result in
either a significant rebudgeting or a change in the scope or objectives of the project. 34 C.F.R.
§§ 80.30(c), (d).

The SDP otherwise responds to the challenged JV transactions as follows. Due to the sheer
volume of transactions involved (both JV and individual transactions within a JV), this response
addresses only the grants with the greatest dollar amounts at issue.

       Title I JVs (with reference by line to the OIG “Title I” spreadsheet)

   1.      JV ACC00006608 (lines 2-4) ($13,988.22 unallowable): The draft report states that it
           “[r]eveiewed [sic] School wide plan (swp) for Masterman. Unallow=core curriculum
           math books,” that “[t]he only mention of items in this purchase in the swp were
           supplemental math books unallowable=Copy paper,” and that “[a]ll of the rest of this
           purchase is unallowable (non-math books) since not mentioned in the SWP.” As
           noted above, the fact that a schoolwide plan does not enumerate every item that a
           school intends to purchase with Title I funds does not give rise in and of itself to a
           disallowance of a cost that was not mentioned in that plan. All of the subject
           expenditures here were in furtherance of the schoolwide plan and are therefore
           allowable. In addition, for the reasons discussed in the response to Finding 2, there is
           no supplanting.

   2.       JV ACC00007137 (lines 34-44) ($630.00 unallowable): The draft report states that
           two transactions within this JV – one for $390.00 to support a health fair, and the
           other for $240.00 relating to a “concert” – are not Title I-eligible activities. This is
           incorrect. The health fair served the goals of the schoolwide plan because it was a
           health education event for the benefit of both students and parents, and thus was part
           of an effort to upgrade the school‟s entire educational program. Similarly, the
           $240.00 facility rental charge was not exclusively for the purpose of a “concert.” The
           musical performance by Peter Yarrow of Peter, Paul, and Mary was only an element
           of a larger program focusing on conflict resolution in the schools. The program
           served an educational purpose as it sought both to teach basic life skills and to create
           a safer, less adversarial learning environment.

   3.      JV ACC00007162 (line 46) ($90.00 unallowable): The OIG states that the cost of
           water for NCLB liaison meetings among themselves and with the Title I program
           office director are “not necessary for Title I goals.” It is not, however, unreasonable
           to provide some modest refreshments for meetings the purpose of which is to discuss
           and coordinate Title I activities, nor is such an expenditure prohibited under OMB
           Circular A-87.

   4.      JV ACC00007304 (lines 78, 82) ($3,290.00 unallowable): The OIG states that two
           transactions within this JV – one for $685.00 for breakfast served at a staff meeting,
           and the other for $2,605.00 relating to a health fair and a community fair – are not
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          Title I-eligible activities. This is incorrect. Once again, it is not unreasonable to
          provide some modest refreshments for meetings the purpose of which is to discuss
          and coordinate Title I activities, nor is such an expenditure prohibited under OMB
          Circular A-87. The health fair served the goals of the schoolwide plan because it was
          a health education event for the benefit of both students and parents, and thus was
          part of an effort to upgrade the school‟s entire educational program. The community
          fair was a Title I-eligible parent involvement activity.

  5.      JV OMBG0001858 (lines 107, 109) ($112,382.81 unallowable): The draft report
          states that the allegedly unallowable amount consist of charges to the SDP‟s FY 2003
          Title I allocation after the period of availability of funds. Those funds were available
          for obligation for the twenty-seven month period from July 1, 2002 to September 30,
          2004. The OIG asserts that the $112,382.81 in charges covers expenditures incurred
          after September 2004. The SDP concurs with this finding and is in the process of
          identifying eligible costs not charged to the award that would offset the proposed
          disallowance.

  6.      JV OMBG0002964 (“Transfers” spreadsheet, lines 1157-1173) ($265,025.62
          unallowable): The draft report contends that the subject amounts consist of fringe
          benefit charges for part-time ESOL tutors not entitled to fringe benefits. The SDP
          concurs with this finding and is in the process of identifying eligible costs not charged
          to the award that would offset the proposed disallowance.

  7.      JV ACC00007002, JV ACC00007065, JV ACC00007137, JV ACC00007162, JV
          ACC00007304, JV ACC00007339 (lines 14-88) ($17,562.58 unsupported): The
          draft report questions various amounts spent on refreshments for parent meetings,
          parent workshops, and other school events based on the absence of sign-in sheets for
          those programs. Sign-in sheets are not necessary to support the subject costs. The
          documentation supplied demonstrates that (1) the SDP incurred the obligation (i.e., it
          arranged with a vendor to provide goods and services for value), and (2) the
          obligation related to a Title I activity. This is sufficient documentation. Sign-in
          sheets have no bearing on whether the costs are reasonable and/or allocable because
          they would be evidence that came into existence after the SDP already incurred the
          obligation. In other words, the number in attendance at any of the events is irrelevant
          to a determination of whether the costs “exceed[ed] that which would be incurred by
          a prudent person under the circumstances prevailing at the time the decision was
          made to incur the cost.” See OMB Circ. A-87, Att. A, § C.2.

      FIE JVs (with reference by line to the OIG “FIE” spreadsheet)

  1.      JV OMBG0002066 (“Results” tab, lines 2-84) ($1,200,011.80 unallowable): The
          draft report states that sixty-seven transactions within this JV are unallowable because
          the “[i]tems [are] not mentioned in FIE Federal Program Application.” These
          include, among other things, expenditures for transportation, student
          conferences/competitions, and matters relating to career and college awareness. As
          noted above, the fact that a given activity is not expressly identified in an award
          agreement or budget will not, in and of itself, warrant disallowance. The relevant
          inquiry is whether the cost falls within the scope or objectives of the project. 34
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        C.F.R. §§ 80.30(c), (d). A review of the questioned transactions reveals that either (1)
        the SDP did, in fact, mention the activity in its grant application, or (2) the activity
        was generally in furtherance the project purposes. See Exh. CC.

  2.    JV OMBG0002245 (lines 45-60) ($79,438.49 unallowable): The draft report
        contends that the SDP violated the “supplement, not supplant” requirement by
        transferring $79,438.49 in costs associated with the Saturday Morning Alternative
        Reach and Teach (“SMART”) program from the SDP‟s Empowerment Grant from the
        Commonwealth of Pennsylvania to FIE. This transfer is not supplantation for the
        reasons described in the response to Finding 2.

  3.    JV OMBG0002312 (lines 71-94) ($455,430.48 unallowable): The draft report states
        that $455,430.48 representing charges relating to the SDP‟s Truancy Center is
        unallowable because “[t]he truancy center is not mentioned in the FIE grant
        application.” These costs are allowable under the FIE grant because the Truancy
        Center is a key element of the Attendance and Truancy Intervention and Prevention
        Support (“ATIPS”) program, an activity referenced in the FIE grant application.
        Although the OIG staff auditors appear to believe that the Truancy Center and ATIPS
        are unrelated, they both operate in furtherance of the goal of “increasing student
        attendance and promoting safe and orderly learning environments” as set forth in the
        SDP‟s application. The Truancy Center expenses included in this finding therefore
        fall within the scope of the FIE award.

  4.    JV OMBG0002968 (lines 96-123) ($2,021,660.68 unallowable): The draft report
        states that $2,021,660.68 in teacher salaries and benefits incurred to prevent split
        classes (i.e., two grade classes in a single classroom) are unallowable because the
        “[c]harges do not fall under the programs listed in the FIE/Spector grant application.”
        The OIG auditors are mistaken with respect to this finding. The SDP‟s FIE grant
        application details the purposes and goals of its school reform efforts, including
        reducing class size in grades 3-11. The compensation charges relating to teachers
        placed in a position to reduce class size and to prevent a split class served to “reduce
        the number of students for which staff is responsible,” and thus enhanced the quantity
        and quality of student/staff interactions.

  5.    JV OMBG0002066 (lines 2-39; “Results” tab, Lines 2-84) ($1,035,071.38
        unsupported): The draft report asserts that the SDP did not present sufficient support
        for $1,035,071.38 in costs charged to FIE, consisting primarily ($983,080.63) of
        salary and fringe benefit expenses that the OIG questions due to lack of semi-annual
        certifications. As to these compensation costs, the corroborating documentation
        (other than semi-annual certifications) described in the response to Finding 1 would
        support these expenditures. It is unclear why the OIG audit staff claims the remaining
        costs to be unsupported as there is no indication in the draft report or the
        accompanying spreadsheets explaining precisely why the OIG staff found the SDP‟s
        documentation to be deficient.

        These cited costs include a payment of $11,420.00 that the OIG mistakenly
        characterizes as the cost of transportation to inner-city sporting events. This was, in
        fact, the cost of airfare to Atlanta, GA for fifty students to attend a robotics
Final Report
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          competition. The invoice and payment support is attached hereto as the Bates
          numbered exhibit designated “6263 through 6449 Finding 3 AP FIE.pdf” (pages 6391
          through 6403).

          The cited costs also include payments totaling approximately $28,000.00 that OIG
          staff appears to believe relate to transportation to sporting events, when these are
          actually costs related to college awareness events. The relevant documentation
          appears in the Bates numbered exhibit designated “6263 through 6449 Finding 3 AP
          FIE.pdf” (pages 6408 through 6412).

          As to the other costs questioned under this JV, the SDP cannot formulate an informed
          response in the absence of at least some detail as to the bases for the OIG staff‟s
          conclusions.

  6.      JV OMBG0002245 (lines 45-60) ($123,796.13 unsupported): The draft report states
          that the SDP did not produce time distribution records to support $123,796.13 in
          personnel charges relating to the SMART program. Attached as Bates numbered
          exhibit “5752 through 5889 Finding 3 AP FIE.pdf” (pages 5837 through 5843) are the
          TPERs for one pay period for seven individuals whose salaries were included in this
          JV. Due to time constraints, the SDP has not been able to complete a thorough search
          for the relevant records. The SDP will continue in its efforts to locate these
          documents and requests that the OIG consider any further documentation that the
          SDP is able to produce.

  7.      JV OMBG0002251 (lines 61-70) ($1,277,329.64 unsupported): The draft report
          indicates that the SDP did not maintain “time and effort logs” to support salary
          transfers for “Twilight Program” activities from the SDP‟s state Empowerment grant
          to FIE. The SDP has conducted a review of the files at nine of the thirteen Twilight
          Program locations during FY 2006 and has retrieved the relevant files from six of
          those locations. Those records are attached hereto as Bates numbered exhibit “5752
          through 5889 Finding 3 AP FIE.pdf” and are sufficient to support $678,106.40 of the
          $1,277,329.64 in questioned costs. The SDP will continue in its efforts to locate
          records to support the remaining questioned costs and requests that the OIG consider
          any further documentation that the SDP is able to produce.

      Transfers (with reference by line to the OIG “Transfers” spreadsheet)

  1.      JV OMBG0002168 (lines 653-660) ($30,443.71 unallowable): The draft report
          states that the costs included in this JV were not items listed in the schoolwide plan.
          As noted above, the fact that a schoolwide plan does not enumerate every item that a
          school intends to purchase with Title I funds will not give rise to a disallowance of a
          cost not mentioned in that plan. All of the subject expenditures here were in
          furtherance of the schoolwide plan and are therefore allowable.

  2.      JV OMBG0002487 (lines 895-928) ($1,403,071.00 unallowable): The draft report
          asserts that this JV includes $1,403,071.00 in costs for teacher prep time previously
          charged to Title I. The SDP concurs with this finding and is in the process of
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        identifying eligible costs not charged to the award that would offset the proposed
        disallowance.

  3.    JV OMBG0002943 (lines 1048-1111) ($576,595.56 unallowable): The draft report
        states that the SDP presented documentation showing that the salaries and benefits for
        eight teachers out of the thirty-one included in this JV transfer were not, in fact,
        reduced class size teachers, and that one more teacher was split-funded between Title
        I and the SDP‟s general fund. The SDP has reviewed its records and determined that
        one of the eight teachers it had previously identified as an incorrect transfer, Cidney
        Alexander, was actually RCS-eligible. Moreover, the semi-annual certificiations for
        the teacher listed as split-funded reveal that she performed RCS activities, and is
        therefore not properly part of this finding. The unallowable amount should be
        reduced to reflect these two matters.

  4.    JV OMBG0001999 (lines 343-368) ($66,214.79 unsupported): The draft report
        contends that the SDP did not maintain semi-annual certifications to support the
        compensation charges for teacher training moved from the SDP‟s state Empowerment
        Grant to Title II. The subject charges do not relate to individual‟s working
        exclusively on Title II activities, but instead consist of payments for participation in
        professional development. The SDP customarily keeps sign-in sheets for these types
        of trainings and will locate and provide any such records in its files upon request.

  5.    JV OMBG0002000 (lines 369-415) ($31,326.67 unsupported): The draft report
        contends that the SDP did not maintain semi-annual certifications to support the
        compensation charges for teacher training moved from the SDP‟s state Empowerment
        Grant to Title II. The subject charges do not relate to individuals working exclusively
        on Title II activities, but instead consist of payments for participation in professional
        development. The SDP customarily keeps sign-in sheets for these types of trainings
        and can locate and provide any such records in its files upon request.

  6.    JV OMBG0002058 (lines 489-533) ($2,299,224.69 unsupported): The draft report
        contends that none of the salaries and benefits transferred from the SDP‟s general
        fund to Title II as “literacy intern” compensation were for SDP literacy interns. That
        a grade teacher might appear in a JV relating to literacy intern salary transfers does
        not serve as a basis for disallowing these costs. The costs remain allowable so long
        as (1) the grade teacher was Title II/RCS eligible, and (2) the SDP maintains
        documentation of the teacher‟s time on Title II/RCS activities. The SDP does
        maintain such documentation, as was described in its response to Title II questioned
        costs in Finding 1.A.

  7.    JV OMBG0002232 (lines 661-707) ($296,781.81 unsupported): The draft report
        broadly asserts that these teacher retention and recruitment costs lacked sufficient
        support. Without further detail, the SDP cannot provide a response to this finding.

  8.    JV OMBG0002259 (lines 708-737) ($1,165,521.54 unsupported): The draft report
        states that the costs associated with principal training transferred from the SDP‟s state
        Empowerment Grant to Title II lacked sufficient support due to the absence of sign-in
        sheets. The documentation provided by the SDP included in the auditors‟ work
Final Report
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        papers is, however, adequate support for the subject charges. The records include
        dates of trainings, agendas, lists of participants, and the costs of such trainings.

  9.    JV OMBG0002269 (lines 738-777) ($157,962.69 unsupported): The draft report
        contends that the SDP did not maintain semi-annual certifications to support the
        compensation charges for teacher training moved from the SDP‟s state Empowerment
        Grant to Title II. The subject charges do not relate to individuals working exclusively
        on Title II activities, but instead consist of payments for participation in professional
        development. The SDP customarily keeps sign-in sheets for these types of trainings
        and will locate and provide any such records in its files upon request.

  10.   JV OMBG0002270 (lines 778-818) ($392,191.43 unsupported): The draft report
        contends that the SDP did not maintain semi-annual certifications to support the
        compensation charges for teacher training moved from the SDP‟s state Empowerment
        Grant to Title II. The subject charges do not relate to individuals working exclusively
        on Title II activities, but instead consist of payments for participation in professional
        development. The SDP customarily keeps sign-in sheets for these types of trainings
        and will locate and provide any such records in its files upon request.

  11.   JV OMBG0002378 (lines 819-849) ($1,165,521.54 unsupported): This is a duplicate
        of the finding relating to JV OMBG0002259 and should therefore be removed.

  12.   JV OMBG0002449 (lines 855-894) ($414,108.56 unsupported): The draft report
        contends that the salary/benefit transfers from Title VI Nonpublic to Title I are
        unsupported, presumably due to lack of semi-annual certifications. The report
        indicates in the accompanying spreadsheet that the SDP provided sign-in sheets, but
        that such documentation was somehow insufficient. As discussed in the response to
        Finding 1.A., the TPERs that the SDP produced document the fact that the subject
        employees actually worked the amount of time for which they were paid. Moreover,
        the employees worked in the SDP‟s Office of Accountability, Assessment, and
        Intervention, the purpose of which is to carry out the Title I activity of ensuring
        compliance with NCLB policies and goals. This, together with the TPERs, more than
        reasonably supports an inference that the personnel costs are allowable under Title I.

  13.   JV OMBG0002555 (lines 929-984) ($32,521.29 unsupported): Based on the OIG‟s
        description, this appears to be a duplication of the finding related to JV
        OMBG0002000 and should therefore be removed.

  14.   JV OMBG0002943 (lines 1048-1111) ($2,566,319.04 unsupported): The draft report
        asserts that the SDP has provided insufficient documentation to support compensation
        for twenty-two teachers charged to Title II as reduced class size teachers. According
        to the draft report, the evidence presented did not adequately show that the particular
        teacher charged to Title II was hired to fill the reduced class size slot, and was
        therefore inadequate. The materials that the SDP produced demonstrated that (1) the
        teachers regularly signed in at their assigned schools, (2) the schools were allotted
        one or more reduced class size positions, and (3) these positions were filled. The lack
        of proof regarding whether the teacher charged was hired for reduced class size
        purposes at most permits a determination that the compensation charges were
Final Report
ED-OIG/A03H0010                                                                     Page 128 of 131

           excessive to the extent that the actual salaries charged were at a level greater than that
           of a new hire. It does not allow a conclusion that the full $2,566,319.04 was
           unsupported.

   15.     JV OMBG0002967 (lines 1186-1216) ($677,024.12 unsupported): The draft report
           asserts that the SDP has provided insufficient documentation to support compensation
           for individuals charged to Title I that were working in the Office of Staff
           Development. The report takes issue with the absence of semi-annual certifications to
           show that these employees were devoted exclusively to Title I activities. The TPERs
           that the SDP produced demonstrate that the subject employees actually worked the
           amount of time for which they were paid. Moreover, the employees worked in the
           SDP‟s Office of Staff Development, the purpose of which is to carry out the Title I
           activity of coordinating and providing for professional development opportunities.
           This, together with the TPERs, more than reasonably supports the SDP‟s position that
           the personnel costs are allowable under Title I.

   16.     JV OMBG0002971 (lines 1217-1240) ($77,068.40 unsupported): The draft report
           broadly asserts that these “teacher induction charges” lacked sufficient support.
           Without further detail, the SDP cannot provide a response to this finding.

   17.     JV OMBG0002980 (lines 1241-1338) ($17,810.46 unsupported): The draft report
           states that the JV includes compensation charges for one hundred fifty employees
           listed at “transition support tutors,” seventy-eight of whom do not appear as
           “transition support tutors” on the print-out provided by the SDP‟s human resources
           department. It is presumably on this basis that the report questions the associated
           costs. Assuming that this is the case, the report is mistaken in that the cited print-out
           on which the report apparently relies contains a list of transition support tutors for the
           2004-2005 school year, not the 2005-2006 school year in which the questioned
           charges were made.

As to the portions of the finding addressing inventory controls and imprest funds, the SDP‟s
responses appear in the spreadsheet exhibit and supporting documentation for Finding #3. As to
the questioned travel costs, the OIG cannot reasonably conclude that lodging costs are
unallowable simply because they were not at government rate. At most, the OIG might question
lodging costs in excess of the government rate, but certainly not the entire amount.

Finally, the SDP‟s contract approval and invoice review procedures ensure that all contracts are
properly authorized and that vendor invoices contain adequate documentation for payment.
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ED-OIG/A03H0010                                                                    Page 129 of 131

FINDING #5 – PSD DID NOT HAVE WRITTEN POLICIES AND PROCEDURES FOR
                VARIOUS FISCAL PROCESSES
$208,081.00 Unallowable; $42,655.00 Unsupported; $422,956.00 Unallowable (Title II
Nonpublic); $10,050.00 Unsupported (Title II Nonpublic)

The SDP disputes this finding.

The bulk of the discussion in the draft report under Finding 5 relates to policies and procedures
that allegedly allowed for unsupported or unallowable AP and JV charges. The SDP has already
addressed these matters in its responses to Findings 3 and 4.

The element of this finding of greatest consequence appears in the addition received on July 14,
2009 entitled “B. Use of Title II, Part A Grant Funds.” This document asserts that $422,956.00
in Nonpublic professional development costs charged to Title II are unallowable “because they
were direct reimbursements to private school organizations (for example, the Archdiocese of
Philadelphia, and the Philadelphia Association of Christian Schools) and\or on behalf of their
affiliated private schools and other private schools (for example, the Politz Hebrew Academy,
Muhammad‟s Islamic Academy, Green Tree School and Chestnut Hill Academy).” According to
the document, the SDP failed to “maintain continuing administrative direction and control over
funds and property that benefit students enrolled in private schools” as required under 34 C.F.R.
§ 76.651 (a)(3).

In each instance where the SDP made a direct payment to a Nonpublic school, it did so only after
the school had already made a payment to a vendor for an eligible cost and the school then
sought reimbursement from the SDP. If anything, this allowed the SDP to retain greater
“administrative direction and control” over Title II funds than it would had it directly incurred an
obligation to pay a vendor. That is, the structure employed by the SDP permitted it to determine
after-the-fact whether a particular good, service, or activity was eligible under Title II, then
exercise its discretion either to pay or not to pay for that activity free from any contractual
obligation with the vendor. This is for all intents and purposes the method of reimbursement that
a Federal agency uses with the highest risk awardees. See, e.g., 34 C.F.R. § 80.12(b)(2)
(payment on cost reimbursement basis for high risk grantees and subgrantees).

The draft report document further contends that “[t]he majority of the expenditures ($248,572)
paid to the Nonpublic schools would also be unallowable because many of these expenditures
were for the incidental costs (i.e., travel, food and lodging) of the professional development
activity.” The auditors base this assertion on its view that an awardee cannot use grant funds to
pay for costs incidental to an eligible activity unless the grant pays for the activity itself.

This reasoning is not only tenuous, but it is also contrary to USDE guidance which encourages
grantees to coordinate professional development funding among Federal awards. See U.S. Dep‟t
of Educ., “Improving Teacher Quality State Grants – Non-Regulatory Guidance,” at 32 (2006)
(“Provided that an LEA maintains records of the amount of Title I and Title II, Part A funds used
for these professional development activities, and the Title I funds are used as permitted in the
Title I statute and regulations, Title I and Title II, Part A funds may be used jointly for this
purpose.”). The SDP does not believe the auditors were correct in adopting a contrary position to
disallow $248,572 in costs.
Final Report
ED-OIG/A03H0010                                                                    Page 130 of 131

Moreover, the draft report is incorrect to suggest that the professional development activities at
issue were funded from another source. The report seems to assume that “other” dollars paid for
the vendors conducting the trainings simply because Title II was not charged. In fact, the
vendors/presenters provided their services free of charge in most – if not all – of these cases.
The auditors‟ conclusions therefore rest substantially on inaccurate conjecture.

Once again, we have focused our efforts on responding to those portions of the finding that either
provide the best illustration of our reasoning in disputing a finding or comprise a significant part
of the dollar value attached to a finding. The omission of any particular finding line-item (Single
Audit costs, indirect cost allocation, school choice transportation, use of Office Depot web site)
here is not to be taken as agreement with that finding, but is instead the result of resource and
time limitations.
Final Report
ED-OIG/A03H0010                                                                     Page 131 of 131

                                         CONCLUSION

In light of the foregoing and the attached exhibits and documentation, the OIG should revise the
draft audit report to eliminate the vast majority of the findings of unsupported, questionable, and
unallowable costs. The SDP is able to support those costs either through primary or alternative
corroborating documentation. This alternative evidence is in many instances more
comprehensive and detailed than the method of documentation described in the relevant cost
principles. In addition, the most significant recommendations for cost disallowance are incorrect
under the law and/or the terms of the particular award(s).

Further, this response illustrates the fact that the SDP‟s financial practices and procedures
provide sufficient internal controls to safeguard Federal funds against loss or misuse. Despite the
administrative complexities associated with the decentralized nature of the schoolwide program
model, the SDP has systems in place that permit it to trace expenditures to source documentation
and to ensure that those expenditures are properly allocable to a Federal funding source. The
SDP continuously reviews its financial policies and practices both to identify and correct
weaknesses and to target areas for improvement. The SDP has redoubled its efforts in this regard
in order to ensure that it has the organizational structure, resources, data systems, policies and
procedures necessary for the successful implementation of its Imagine 2014 strategic plan and to
meet the enhanced accountability and transparency standards attaching to Federal funds under
the American Recovery and Reinvestment Act.

We reiterate our belief that the potential adverse consequences of the current draft
recommendations dictate further and careful consideration of the evidence and the arguments
presented by the SDP. As previously noted, the magnitude and severity of the draft report‟s
findings jeopardize the SDP‟s ability to build on the substantial advances it has made in meeting
the needs of the children and families that it serves. Supported by significant increases in Title I,
IDEA, and other Federal funds, the SDP has made steady progress in raising student
performance in math and reading over the past seven years, . As Exh. O shows, in FY 2002, 24%
of students in all grades were proficient or better in reading and 20% were proficient or better in
math. In FY 2009, the comparable figures were 48% in reading and 52% in math. PSSA testing
results reported by groups also show increases in all categories when reported by race/ethnicity,
students with disabilities, English Language Learners, and economically disadvantaged students.
The SDP intends to accelerate this progress as outlined in its Imagine 2014 strategic plan – a plan
whose objectives and strategies are highly consistent with the goals and strategic direction of the
Obama Administration‟s K-12 educational policies.

The SDP once again would like to express its appreciation for this opportunity to respond to the
draft audit report. The SDP stands ready to respond to any further questions or requests for
additional information that the OIG may have with respect to this audit.