oversight

The Michigan Guaranty Agency's Administration of the Federal Family Education Loan Program Federal and Operating Funds.

Published by the Department of Education, Office of Inspector General on 2001-09-25.

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

                The Michigan Guaranty Agency’s
  Administration of the Federal Family Education Loan Program
                  Federal and Operating Funds


                                     FINAL AUDIT REPORT




                                            ED-OIG/A05-B0007
                                             September 2001




Our mission is to promote the efficiency,                      U.S. Department of Education
effectiveness, and integrity of the                            Office of Inspector General
Department’s programs and operations                           Chicago, Illinois
                               NOTICE
Statements that management practices need improvement, as well as other
conclusions and recommendations in this report, represent the opinions of the
Office of Inspector General. Determination of corrective action to be taken will
be made by appropriate Department of Education officials.

In accordance with the Freedom of Information Act (5 U.S.C. §552), reports
issued by the Office of Inspector General are available, if requested, to members
of the press and general public to the extent information contained therein is
not subject to exemptions in the Act.
Table of Contents
         The Michigan Guaranty Agency’s Administration of the Federal
         Family Education Loan Program Federal and Operating Funds

         Control Number ED-OIG/A05-B0007
                                                                                                                  Page

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

Audit Results

    Finding 1 – Unauthorized Transfer to the Operating Fund................................... 2

    Finding 2 – MGA Understated Interest Owed the Federal Fund........................... 3

    Finding 3 – MGA Did Not Transfer Imputed Interest SPA
                Earned While in the Operating Fund ............................................... 4

Other Matters ...................................................................................................... 5

Background......................................................................................................... 6

Audit Objective, Scope, and Methodology.............................................................. 6

Statement on Management Controls ...................................................................... 7

Attachment – MGA’s Comments to the Draft Report
                                   EXECUTIVE SUMMARY


Except for the findings discussed in this report, the Michigan Guaranty Agency (MGA) complied with
the Higher Education Act of 1965 (HEA), as amended, while establishing and maintaining its Federal
Family Education Loan (FFEL) program Federal and Operating Funds during the period October 1,
1998 through September 30, 1999. We identified three findings that affect the balances of the funds:

•   During the establishment of its Federal and Operating Funds, MGA transferred a Federal Reserve
    Fund receivable to the Operating Fund. Section 422A (a) of the HEA required each guaranty
    agency to deposit all funds, securities, and other liquid assets from the Federal Reserve Fund into a
    Federal Fund by December 6, 1998. Therefore, MGA understated the Federal Fund by $612,400
    and the Federal Fund lost about $81,000 in imputed interest.

•   MGA understated its interest liability to the Federal Fund due to MGA’s delayed deposit of the
    Federal Fund’s share of post-default collections. Section 422A (b) of the HEA required each
    guaranty agency to invest all funds deposited in the Federal Fund and specified that the Federal
    Fund’s earnings are the sole property of the Federal Government. Although MGA repaid some
    imputed interest, we estimated MGA owes the Federal Fund about $377,000 in additional imputed
    interest.

•   The Federal Fund lost about $30,000 of imputed interest while supplemental preclaims assistance
    (SPA), a Federal Fund asset, remained in the Operating Fund. Section 422A (c) (4) of the HEA
    required guaranty agencies to deposit all SPA payments into the Federal Fund.

We also noted an issue that warrants Student Financial Assistance’s (SFA) attention. MGA allocated
shared expenses, but had no cost allocation plan. According to 34 C.F.R. § 682.418 (c) (1998), if a
guaranty agency shares costs with any other program, agency, or organization, it must develop a cost
allocation plan consistent with the requirements of Office of Management and Budget (OMB) Circular
A-87.

We recommend that the Chief Operating Officer (COO) for SFA require MGA to return $1,100,400
to the Federal Fund and any additional imputed interest accruing after April 30, 2001.

We provided MGA a draft report. MGA agreed with Findings 1 and 3, and transferred the
recommended recovery amounts to the Federal Fund on August 23, 2001. MGA did not agree with
our recommendation in Finding 2. We paraphrased MGA’s comments after each finding and also
included them in their entirety as an Attachment.
Control Number ED-OIG/A05-B0007                                                                Page 2



                                        AUDIT RESULTS


During the period October 1, 1998 through September 30, 1999 (FY 1999), except as discussed
below, MGA complied with the HEA, as amended, while establishing and maintaining its FFEL
program Federal and Operating Funds. We identified three findings that affect the balances of the
funds. MGA elected not to transfer funds from the Federal Fund to the Operating Fund under § 422A
(f) of the HEA; therefore, MGA was not required to adhere to the prohibited uses of assets regulations.
 Also, MGA’s Federal Fund had no fixed assets in FY 1999; so, usage fees were not due from the
Operating Fund.


Finding 1 – Unauthorized Transfer to the Operating Fund


During the establishment of its Federal and Operating Funds, MGA transferred a Federal Reserve Fund
receivable to the Operating Fund. Effective October 1, 1998, MGA transferred most Federal Reserve
Fund assets to its new Federal Fund. However, it did not transfer a $612,400 receivable due from the
State Treasury to the Federal Fund. The $612,400 represented collection fees the State Treasury
overcharged MGA plus accrued interest on a Federal Reserve Fund U.S. Treasury Bill maintained by
the State Treasury in a trust fund. MGA transferred this asset to the Operating Fund. During FYs
1999 and 2000, MGA received payment from the State Treasury and deposited the funds into the
Operating Fund.

Section 422A (a) of the HEA required each guaranty agency to deposit all funds, securities, and other
liquid assets from the Federal Reserve Fund into a Federal Fund by December 6, 1998. Sections
422A (b) and (e) also required that deposited funds be invested, and specified that the Federal Fund
and its earnings are the property of the Federal Government. SFA issued interim guidance in January
and November 1999, and published regulations relating to the Federal and Operating Funds on
October 29, 1999. In administering Federal funds, a guaranty agency must exercise the level of care
required of a fiduciary charged with investing the money of others. 34 C.F.R. § 682.419 (a) (2000); 34
C.F.R. § 682.410 (a) (5) (1998).

MGA officials stated that they exercised professional judgment during the establishment of the Federal
and Operating Funds and considered the receivable to be an Operating Fund asset. MGA officials also
mentioned that MGA's independent auditors agreed with MGA’s handling of this accounting
transaction.

The Federal Fund also lost interest income while the asset was in the Operating Fund. Using the U.S.
Treasury Current Value of Funds Rate (CVFR), we calculated imputed interest totaling about $81,000
through April 30, 2001.
Control Number ED-OIG/A05-B0007                                                                  Page 3




Recommendations

We recommend that the COO for SFA require MGA to

1.1. Return $693,400 to the Federal Fund. This amount includes:

        (a) The $612,400 it transferred to the Operating Fund, and

        (b) Imputed interest of $81,000.

1.2. Return to the Federal Fund interest income earned on the $612,400 after April 30, 2001. This
interest should be computed using the applicable CVFR through the date this finding is resolved.


MGA Comments – MGA agreed with our audit finding and recommendations. On August 23, 2001,
MGA transferred $705,322 from the Operating Fund to the Federal Fund. The amount included
$612,400 plus $92,922 in imputed interest earned up to the time of the transfer.


Finding 2 – MGA Understated Interest Owed the Federal Fund


MGA understated its interest liability to the Federal Fund by about $377,000. From October 1998
through June 2000, MGA deposited post-default collections into the Operating Fund. Post-default
collections remained in the Operating Fund for a range of 56 to 273 days before MGA deposited the
Federal share in the Federal Fund each month. MGA transferred $52,569 from the Operating Fund to
the Federal Fund on August 3, 2000, based on its calculation of interest that Federal funds earned while
they remained in the Operating Fund. However, MGA did not consider all Federal funds deposited in
the Operating Fund or the entire period those funds remained in the Operating Fund.

Section 422A (c) (2) of the HEA required that the Federal share of post-default collections be
deposited in the Federal Fund. Section 422A (b) also required that deposited funds be invested and
specified that the earnings are the sole property of the Federal Government. In administering Federal
funds, a guaranty agency must exercise the level of care required of a fiduciary charged with investing
the money of others. 34 C.F.R. § 682.419 (a) (2000); 34 C.F.R. § 682.410 (a) (5) (1998).
Consistent with this fiduciary obligation, 34 C.F.R. § 682.419 (b) (6) (2000) specified that, a guaranty
agency must deposit the Federal share of default collections into its Federal Fund within 48 hours of
receipt. Guidance issued by the U.S. Department of Education (Department) instructed guaranty
agencies that they must deposit into the Federal Fund any investment income earned on the Federal
Control Number ED-OIG/A05-B0007                                                                   Page 4

share of collections between October 1, 1998 and September 1, 2000. Dear Colleague Letter G-00-
328 (July 18, 2000).

Using the 5 percent CVFR, we recalculated the amount of imputed interest due to the Federal share of
post-default collections while it remained in the Operating Fund. For example, the Federal share of
collections that MGA deposited into the Operating Fund during October 1998 totaled $2,339,028.
MGA transferred most of the Federal share into the Federal Fund on December 18, 1998 and the
remainder in March and October 1999. We estimated the Federal Fund lost about $21,651 while its
share remained in the Operating Fund. For the same period, MGA calculated interest of $1,999,
leaving an additional $19,652 in interest owed the Federal Fund. MGA’s calculation considered only
collections the State Treasury received ($1,107,057) from October 7th through October 31st, instead of
total collections over the entire time the funds remained in a non-Federal account (average of 203 days).
 Following the same process for all the months involved, we estimated that MGA owes the Federal
Fund about $377,000 more in imputed interest. We estimated the amount because MGA does not
have the data to calculate the actual imputed interest earned.


Recommendation

We recommend that the COO for SFA require MGA to

2. Return $377,000 to the Federal Fund for imputed interest Federal funds earned while they remained
in the Operating Fund.


MGA Comments – Past guidance is currently under advisement at the senior level within the
Department. Until the Department makes a final determination on whether to enforce the guidance or
amend it, MGA will not take action on the audit finding and recommendation.

OIG Response – MGA’s comments did not cause us to change our position. The guaranty agencies’
fiduciary responsibility with respect to Federal funds, the law, and the Department’s guidance all require
guaranty agencies to deposit investment income earned on the Federal Government’s share of
collections into the Federal Fund.


Finding 3 – MGA Did Not Transfer Imputed Interest SPA Earned While in the
Operating Fund


The Federal Fund lost about $30,000 of imputed interest while supplemental preclaims assistance
(SPA), a Federal Fund asset, remained in the Operating Fund. From December 1998 to May 1999,
Control Number ED-OIG/A05-B0007                                                                 Page 5

MGA transferred $369,287 in SPA from the Federal Fund to the Operating Fund. MGA returned the
$369,287 to its Federal Fund on August 31, 2000, but did not return imputed interest.

Section 422A (c) (4) of the HEA required guaranty agencies to deposit all SPA payments into the
Federal Fund. Section 422A (b) also required that deposited funds be invested and specified that the
earnings are the sole property of the Federal Government. In administering Federal funds, a guaranty
agency must exercise the level of care required of a fiduciary charged with investing the money of
others. 34 C.F.R. § 682.419 (a) (2000); 34 C.F.R. § 682.410 (a) (5) (1998).

MGA officials determined that they had complied with the HEA and met their fiduciary responsibility
when they transferred the SPA payments from the Operating Fund to the Federal Fund. Using the 5
percent CVFR, the Federal Fund lost about $30,000 in imputed interest through August 2000.


Recommendation

We recommend that the COO for SFA require MGA to

3. Return $30,000 to the Federal Fund for imputed interest SPA earned while in the Operating Fund.


MGA Comments – MGA agreed with our audit finding and recommendation. On August 23, 2001,
MGA transferred $29,683 from the Operating Fund to the Federal Fund.


                                       OTHER MATTERS


We noted an additional issue that warrants SFA’s attention. We did not fully develop the issue as a
finding due to its immaterial effect. MGA allocated shared expenses, but had no cost allocation plan.
According to 34 C.F.R. § 682.418 (c) (1998), if a guaranty agency shares costs with any other
program, agency, or organization, it must develop a cost allocation plan in accordance with the
requirements of OMB Circular A-87. MGA’s allocated expenses were primarily personnel and
building rental costs. Total allocated costs represented about 7 percent of MGA’s administrative
expenses in FY 1999.

To comply with Federal regulations, MGA should develop a cost allocation plan, maintain supporting
documentation for salaries and fringe benefits, and update its square footage calculations used to
allocate building rent in accordance with OMB Circular A-87.
Control Number ED-OIG/A05-B0007                                                                       Page 6

                                           BACKGROUND


The 1998 amendments to the HEA of 1965, enacted on October 7, 1998, required each guaranty
agency to establish a Federal Fund and an Operating Fund within 60 days. The final date for
establishing these funds was December 6, 1998. Unless otherwise specified, the 1998 amendments to
the HEA were effective October 1, 1998. SFA issued interim guidance in January and November
1999, and published regulations relating to the Federal and Operating Funds on October 29, 1999.

All funds, securities and other liquid assets of the guaranty agency’s FFEL program reserve fund were
to be transferred to the Federal Fund, which is the property of the Federal Government. The HEA
required a guaranty agency to deposit revenue from specified sources into the Federal Fund and also
specified the uses of Federal Fund assets. The HEA also specified deposits into the Operating Fund
and the general uses of Operating Fund assets. Except for funds transferred from the Federal Fund, the
Operating Fund is the property of the guaranty agency. If the Operating Fund contains funds
transferred from the Federal Fund, it may be used only as permitted by the regulations, which prohibit
certain uses of reserve funds.

MGA is a component of the Michigan Higher Education Assistance Authority and was established by
Act 77 of the Public Acts of 1960. MGA is the guaranty agency for the FFEL program in Michigan.


                 AUDIT OBJECTIVE, SCOPE, AND METHODOLOGY


The purpose of our audit was to determine whether MGA complied with the HEA and regulations
governing the establishment and operations of the Federal and Operating Funds. Specifically, we
evaluated the areas of (1) initial establishment of the two funds, (2) continued operations of the two
funds, (3) the Operating Fund’s compliance with prohibited uses of assets regulations, (4) ownership of
nonliquid assets and usage fees paid, and (5) reasonableness of the cost allocation plan.

To accomplish our objectives, we reviewed (1) FY 1999 accounting transactions relevant to the
establishment of the Federal and Operating Funds, (2) accounting transactions that occurred during FY
1999 related to the transfer of funds from the Federal Fund to the Operating Fund, (3) supporting
documentation for MGA’s shared operating expenses in FY 1999, (4) FYs 1999 and 2000
transactions for the distribution of post-default collections, and (5) transactions related to the distribution
of FY 1999 account maintenance fees, default aversion fees, and SPA. We reviewed MGA’s financial
reports for the years ended September 30, 1998 and 1999 and its OMB Circular A-133 reports for
the years ended September 30, 1997 and 1998, to determine whether there were significant findings
related to our audit. We reviewed the working papers of the independent public accountant that
performed those audits. We also interviewed various MGA personnel and SFA officials.
Control Number ED-OIG/A05-B0007                                                                         Page 7



To achieve our audit objectives, we relied on the accuracy of MGA’s automated general ledger system,
Micro Information Product. To assess the reliability of this data, we relied on the work completed by
the independent public accountant and completed additional tests. Based on these tests and
assessments, we concluded the data were sufficiently reliable to be used in meeting our objectives.

We conducted our field work from January 8, 2001 through June 8, 2001. We performed the majority
of our field work at MGA’s location in Lansing, Michigan. We performed our audit in accordance with
government auditing standards appropriate to the scope of review described above.


                     STATEMENT ON MANAGEMENT CONTROLS


As part of our audit, we made an assessment of MGA’s management control structure, policies,
procedures, and practices applicable to MGA’s administration of the FFEL program. The purpose of
our assessment was to assess the level of control risk, that is, the risk that material errors, irregularities,
or illegal acts may occur. We performed the control risk assessment to assist us in determining the
nature, extent, and timing of the substantive tests needed to accomplish our audit objectives.

To make our assessment, we identified significant controls and classified them into the following
categories:

S   Establishment of the Federal and Operating Funds
S   Maintenance of the Federal and Operating Funds
S   Ownership of fixed assets used to administer the FFEL program
S   Transfers of assets from the Federal Fund to the Operating Fund
S   Transactions involving the Federal Reserve Fund prior to the establishment of the Federal and
    Operating Funds which significantly impacted the opening balances of those funds

Due to inherent limitations, a study and evaluation made for the limited purpose described above would
not necessarily disclose all material weaknesses in the control structure. However, we identified
weaknesses in MGA’s controls over the establishment and maintenance of its Federal and Operating
Funds. We describe the weaknesses in the Audit Results and the Other Matters sections. We are not
recommending corrective action regarding control weaknesses in Findings 1 through 3 because MGA
will not establish the Federal and Operating Funds again.
Attachment
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Attachment
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                              Report Distribution List
                        Control Number ED-OIG/A05-B0007

                                                                                 Copies
Auditee                                                                           1

Action Officials

       Greg Woods, Chief Operating Officer                                        1
       Student Financial Assistance
       Department of Education
       ROB-3, Room 4004
       7th and D Streets, SW
       Washington, DC 20202-5132

Other ED Offices

       Deputy Secretary of Education, William D. Hansen                           1

       Chief of Staff, Terry Abbott                                               1

       Under Secretary, Eugene W. Hickok                                          1

       General Manager for Financial Partners, Student Financial Assistance       1

       Chief Financial Officer, Student Financ ial Assistance                     1

       Partner Services Director, Student Financial Assistance                    1

       Northern Region Partner Services Director, Student Financial Assistance    1

       Office of Public Affairs                                                   2

       Secretary’s Regional Representative, Region V                              1

OIG

       Inspector General                                                           1
       Deputy Inspector General                                                    1
       Assistant Inspector General for Investigation                               1
       Assistant Inspector General for Audit                                       1
       Assistant Inspector General for Analysis and Inspection                     1
       Deputy Assistant Inspector General for Audit                                1
       Director, Student Financial Assistance, Advisory and Assistance Team        1
       Regional Inspectors General for Audit                                     1 each