oversight

The North Carolina Department of Public Instruction's Administration of its Race to the Top Grant

Published by the Department of Education, Office of Inspector General on 2015-07-13.

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

                                 UNITED STATES DEPARTMENT OF EDUCATION
                                               OFFICE OF INSPECTOR GENERAL

                                                                                                                AUDIT SERVICES
                                                                                                   Chicago/Kansas City Audit Region



                                                             July 13, 2015

                                                                                                     Control Number
                                                                                                     ED-OIG/A05O0005


Dr. June St. Clair Atkinson
State Superintendent
North Carolina Department of Public Instruction
301 North Wilmington Street
Raleigh, NC 27601

Dear Dr. Atkinson:

This final audit report, “The North Carolina Department of Public Instruction’s Administration
of its Race to the Top Grant,” presents the results of our audit of selected aspects of how the
North Carolina Department of Public Instruction (North Carolina) administered its $399 million
Race to the Top grant. We audited two of the seven educational topic areas on which
North Carolina spent Race to the Top funds: Area C, “Data Systems to Support Instruction”
(Area C), and Area D, “Great Teachers and Leaders” (Area D). 1

The objectives of our audit were to determine whether North Carolina

           1. accurately and completely reported Area D grant performance data to the
              U.S. Department of Education (Department), 2

           2. spent Race to the Top funds only on allowable activities and in accordance with
              program requirements and North Carolina’s approved grant application for Areas C
              and D, and

           3. ensured that each local educational agency (LEA) and charter school receiving
              Race to the Top subgrants from North Carolina spent the funds only on allowable
              activities and in accordance with program requirements and North Carolina’s
              approved grant application for Areas C and D.


1
    See a list of all seven areas in the Background section of this report.
2
    The Department did not require North Carolina to report any Area C performance data.


        The Department of Education’s mission is to promote student achievement and preparation for global competitiveness by fostering
                                              educational excellence and ensuring equal access.
Final Audit Report
ED-OIG/A05O0005                                                                                       Page 2 of 27

We audited North Carolina and one judgmentally selected LEA: Winston-Salem Forsyth County
Schools (Forsyth County). 3 For the first objective, our audit covered North Carolina’s
2012–2013 annual performance report only for Area D. For the second and third objectives,
our audit covered July 1, 2010, through September 30, 2013, only for Areas C and D.

Except for one minor error, we found that North Carolina accurately and completely reported
Area D grant performance data to the Department in its 2012–2013 annual performance report.
We also found that North Carolina generally spent Race to the Top funds on allowable activities
and in accordance with program requirements and North Carolina’s approved grant application.
However, North Carolina paid about $1.4 million of a $2.4 million amendment to a contract
for help desk and implementation support to schools involved in North Carolina’s reading and
diagnostic assessment program without sufficiently documenting that employees obtained
all required approvals. Additionally, North Carolina did not design its review and approval
processes so that they provided reasonable assurance that employees could not bypass legal
review of purchases greater than $100,000. Also, North Carolina did not provide documentation
sufficient to show that the pay rates it paid for two employees were reasonable. Therefore, we
concluded that North Carolina did not adequately document $31,458 charged to the Race to
the Top grant.

Finally, North Carolina did not ensure that Forsyth County spent Race to the Top funds only on
allowable activities and in accordance with program requirements, North Carolina’s approved
grant application, and Forsyth County’s detailed scope of work. 4 We found that North Carolina
did not ensure that Forsyth County (1) minimized the amount of time elapsing between the
receipt and disbursement of Race to the Top funds, (2) spent $12,532 in Race to the Top funds
only on allowable activities, and (3) adequately documented $3,518 in Race to the Top
expenditures. 5

North Carolina could improve the administration of its Race to the Top grant by strengthening
its systems of internal control over contracting and by more closely monitoring the fiscal activity
of participating LEAs and charter schools to ensure that they comply with all applicable
Federal requirements. 6

On April 7, 2015, we provided the draft of this report to North Carolina for comment. In
comments dated May 7, 2015, North Carolina neither agreed nor disagreed with the two findings

3
  We selected Forsyth County based on the amount of funds that it received and selected risk factors (see “Sampling
Methodology” in the Objectives, Scope, and Methodology section of this report).
4
  To participate in Race to the Top, the Department required North Carolina to obtain detailed scopes of work from
its participating LEAs and charter schools. The detailed scopes of work outlined the Race to the Top initiatives that
the LEAs and charter schools planned to implement, the timelines for implementing the initiatives, key personnel
responsible for implementing the initiatives, and amounts budgeted to implement the initiatives.
5
  Because we did not statistically select the LEA or expenditures, our results might not be representative of the
entire universes and, therefore, cannot be projected to the universes (see the “Sampling Methodology” in the
Objectives, Scope, and Methodology section of this report).
6
  Participating LEAs and charter schools means LEAs and charter schools that chose to work with the State
to implement all or significant portions of the State’s Race to the Top plan, as specified in each LEA’s and
charter school’s agreement with the State.
Final Audit Report
ED-OIG/A05O0005                                                                      Page 3 of 27

but stated that it agreed with five of our six recommendations. North Carolina did not agree that
it charged unreasonable employee pay rates to the Race to the Top grant. North Carolina stated
that it used the contracting practices in place at that time, and the Human Resources Director at
the time deemed that the pay rates were appropriate for the work specified in the initial
agreements with the two employees. Therefore, North Carolina disagreed that it should repay
the $31,458 to the Department. We summarized North Carolina’s comments after each finding
and included the full text of North Carolina’s comments as Attachment 2.

We considered North Carolina’s comments. However, North Carolina did not provide any
additional evidence to demonstrate that the employee compensation paid to the two individuals
was reasonable. We clarified Finding No. 1 to state that we did not conclude that the rates were
unreasonable. Rather, we could not determine whether the rates were reasonable because
North Carolina did not provide sufficient documentation, such as salary qualification worksheets,
to demonstrate the reasonableness of employee compensation. We did not revise our
recommendations.




                                      BACKGROUND


The American Recovery and Reinvestment Act of 2009 (Recovery Act) provided $4.35 billion
for the Race to the Top fund, a competitive grant program designed to encourage and reward
States that are

       1. creating the conditions for education innovation and reform;

       2. achieving significant improvement in student outcomes, including making substantial
          gains in student achievement, closing achievement gaps, improving high school
          graduation rates, and ensuring student preparation for success in college and careers;
          and

       3. implementing ambitious plans in four core education reform areas: (a) adopting
          standards and assessments that prepare students to succeed in college and the
          workplace and to compete in the global economy; (b) building data systems that
          measure student growth and success and inform teachers and principals about how
          they can improve instruction; (c) recruiting, developing, rewarding, and retaining
          effective teachers and principals, especially where they are needed most; and
          (d) turning around the lowest achieving schools.

The Department made awards to 11 States and the District of Columbia (Phase 1 and Phase 2
awards) from the $4.35 billion appropriated under the Recovery Act. The Department also used
funds appropriated under the Recovery Act to make two awards totaling about $330 million
under the Race to the Top Assessment program to the Partnership for the Assessment of
Readiness for College and Careers and the Smarter Balanced Assessment Consortium.
Final Audit Report
ED-OIG/A05O0005                                                                     Page 4 of 27

The Department made about $200 million in awards to seven States (Phase 3 awards) from funds
appropriated for fiscal year 2011.

Section 14006(c) of the Recovery Act requires each State that is awarded a Race to the Top grant
to allocate at least 50 percent of the funds to participating LEAs and charter schools. The State
must allocate these funds according to the percentage of funding that each participating LEA and
charter school received under Part A of Title I of the Elementary and Secondary Education Act
of 1965, as amended, for the most recent year. States have considerable flexibility in allocating
the remaining 50 percent of their Race to the Top funds. The funds may be used for State-level
activities, supplemental disbursements to participating LEAs, and other purposes as the State
proposed in its approved application.

Each State receiving a Race to the Top grant must validate and certify the accuracy of the data
in annual performance reports submitted by the State to the Department. According to the
Department, before the end of the annual reporting period (July 1 through June 30), each State
submits information about outcomes to date, the State’s performance against the measures
established in the State’s application, and other relevant data. The Department reviews each
State’s preliminary data for completeness and reasonableness. A State must address the
Department’s comments, if any, and then resubmit and validate sections of the annual
performance report in the Department’s annual performance report collection system. The State
then must certify the accuracy of the entire annual performance report and submit the final
version through the annual performance report collection system.

The Department awarded North Carolina’s Office of the Governor a $399,465,769 Race to
the Top grant. The North Carolina’s Office of the Governor’s application included the following
seven educational topic areas on which the State of North Carolina planned to spend Race to
the Top funds:

       •   Area A, “State Success Factors;”

       •   Area B, “Standards and Assessments;”

       •   Area C, “Data Systems to Support Instruction;”

       •   Area D, “Great Teachers and Leaders;”

       •   Area E, “Turning Around North Carolina’s Lowest-Achieving Schools;”

       •   Area F, “General State Reform Conditions Criteria;” and

       •   Priority area, “STEM.”

According to the Director of Regional Leads for North Carolina, six regional leads provided
guidance and assistance to each LEA and charter school that had a Race to the Top participation
agreement with North Carolina. In addition, North Carolina required its participating LEAs and
charter schools to submit annual progress reports. The regional leads reviewed the progress
Final Audit Report
ED-OIG/A05O0005                                                                                    Page 5 of 27

reports to ensure that the participating LEAs and charter schools were making sufficient progress
toward accomplishing their Race to the Top initiatives and were using Race to the Top funds
only for the purposes outlined in their participation agreements. The regional leads would follow
up on any issues, such as insufficient progress toward accomplishing Race to the Top initiatives
or use of funds for purposes other than those outlined in their participation agreements, disclosed
during their reviews of the progress reports.

As of September 30, 2013, North Carolina and the participating LEAs and charter schools had
spent about $233 million of the approximately $399.5 million awarded to North Carolina’s
Office of the Governor. Table 1 shows the allocations and expenditures for the two entities
covered by our audit: North Carolina and Forsyth County.

Table 1. Race to the Top Allocations and Expenditures as of September 30, 2013

                                           Total Expenditures for                   Total Expenditures
                                             Educational Topic                      for All Educational
      Entity              Total Allocation    Areas C and D                             Topic Areas
North Carolina                $199,465,769           $45,729,680                             $109,008,466
Forsyth County                  $9,685,633            $2,385,185                               $6,411,883
Total                         $209,151,402           $48,114,865                             $115,420,349

From North Carolina’s $199 million allocation, Forsyth County received about $151,000 for
a recruitment incentive grant and managed about another $4.2 million that other LEAs and
charter schools spent on training programs related to a leadership academy grant. 7 These
two grants were in addition to the allocations shown in Table 1.




                                           AUDIT RESULTS


The objectives of our audit were to determine whether North Carolina (1) accurately and
completely reported Area D grant performance data to the Department, (2) spent Race to the Top
funds only on allowable activities and in accordance with program requirements and
North Carolina’s approved grant application for Areas C and D, and (3) ensured that LEAs and
charter schools receiving Race to the Top subgrants from North Carolina spent the funds only
on allowable activities and in accordance with program requirements and North Carolina’s
approved grant application for Areas C and D.

Except for one minor error, we found that North Carolina accurately and completely reported
Area D grant performance data to the Department in its 2012–2013 annual performance report.
7
 We could not determine what specific educational topic areas the recruitment incentive and leadership academy
grants related to. Therefore, we included them in the scope of our audit (see “Sampling Methodology” and
“Comparative and Verification Procedures” in the Objectives, Scope, and Methodology section of this report).
Final Audit Report
ED-OIG/A05O0005                                                                       Page 6 of 27

Of the seven reported Area D performance measures, North Carolina reported zero percent for
all three of the performance measures that related to principal preparation programs and reported
making progress on the remaining four Area D performance measures. However, when we
requested supporting documentation for the performance measures, North Carolina noticed that
it made an error when reporting the results for 1 of the 4 Area D performance measures.
North Carolina reported to the Department that it had 49 teacher preparation programs and that
48 (98 percent) of the 49 teacher preparation programs had publically available data on the
achievement and growth of the students being taught by the teachers who graduated from the
teacher preparation programs. We found that the public could access these data for
only 46 (94 percent) of the 49 programs. After noticing the error, North Carolina submitted a
request to the Department to update its 2012-2013 annual performance report with the corrected
information. North Carolina’s 2012-2013 annual performance report is now correct, showing
that 46 (94 percent) of the 49 teacher preparation programs had publically available data on the
achievement and growth of the students being taught by the teachers who graduated from
the teacher preparation programs.

We also found that North Carolina generally spent Race to the Top funds on allowable activities
and in accordance with program requirements and North Carolina’s approved grant application.
However, we found a weakness in North Carolina’s system of internal control that resulted in
North Carolina paying about $1.4 million of a $2.4 million amendment to a contract for help
desk and implementation support to schools involved in North Carolina’s reading and diagnostic
assessment program without sufficiently documenting that employees obtained all required
approvals. Additionally, North Carolina did not design its review and approval processes so that
they provided reasonable assurance that employees could not bypass legal review of purchases
greater than $100,000. Also, North Carolina did not provide documentation, such as salary
qualification worksheets, sufficient to show that the pay rates it paid two employees were
reasonable. Therefore, we concluded that North Carolina did not adequately document $31,458
charged to the Race to the Top grant.

Finally, North Carolina did not ensure that Forsyth County spent Race to the Top funds only
on allowable activities and in accordance with program requirements, North Carolina’s approved
grant application, and Forsyth County’s detailed scope of work. We found that North Carolina
did not ensure that Forsyth County (1) minimized the amount of time elapsing between the
receipt and disbursement of Race to the Top funds, (2) spent $12,532 in Race to the Top funds
only on allowable activities, and (3) adequately documented $3,518 in Race to the Top
expenditures.

North Carolina could improve the administration of its Race to the Top grant by strengthening
its system of internal control over contracting and by more closely monitoring the fiscal activity
of participating LEAs and charter schools to ensure that they comply with all applicable
Federal requirements.
Final Audit Report
ED-OIG/A05O0005                                                                     Page 7 of 27

FINDING NO. 1 – North Carolina Could Strengthen Its Systems of Internal Control
                Over Contracting and Should Justify the Reasonableness of Employee
                Compensation

North Carolina could strengthen its processes for approving procurements. We reviewed
$8,599,164 (22 percent) of $39,345,706 of Race to the Top nonpersonnel expenditures that
North Carolina charged to the Race to the Top grant for Areas C and D from July 1, 2010,
through September 30, 2013. We found that North Carolina paid about $1.4 million of a
$2.4 million amendment to a contract for help desk and implementation support to schools
involved in North Carolina’s reading and diagnostic assessment program without sufficiently
documenting that employees obtained the required sole-source justification approvals.
Additionally, North Carolina did not design its review and approval processes so that they
provided reasonable assurance that employees could not bypass legal review of purchases greater
than $100,000.

We also reviewed $99,299 (2 percent) of $6,383,974 of the Race to the Top personnel
expenditures that North Carolina charged to the Race to the Top grant for Areas C and D from
July 1, 2010, through September 30, 2013. We found that North Carolina paid one employee
$30,383 without documentation sufficient to show that the compensation was reasonable.
We also found that North Carolina paid another Race to the Top employee who was not included
in our sample $1,075 without documentation sufficient to show that the compensation was
reasonable. Therefore, we concluded that North Carolina did not adequately document $31,458
charged to the Race to the Top grant.

Procurement Approval Process Could Be Strengthened
North Carolina could strengthen its procurement approval process. On September 1, 2010,
the State Superintendent and Chief Financial Officer signed a contract with a vendor to provide
about $6 million worth of diagnostic assessments and other services from September 1, 2010,
through October 31, 2011. 8 North Carolina gave students diagnostic assessments to determine
their current levels, progression, and strengths and weaknesses in certain subject areas. On
September 26, 2011, North Carolina amended the original contract, adding $2.4 million worth
of services for help desk and implementation support to schools involved in the reading and
diagnostic assessment program. As of December 12, 2011, North Carolina had paid about
$1.4 million for these additional services using Race to the Top funds and planned to use Race to
the Top funds for the remaining balance. This amendment extended the service period for the
original contract from October 31, 2011, to August 31, 2012.

Approvals for Sole-Source Justification Not Adequately Documented
According to Title 34, Code of Federal Regulations (C.F.R.), Section (§) 80.36(a), a State must
follow its procurement policies and procedures when procuring services under a Federal grant.
According to Office of Management and Budget, Circular A-87, Attachment A, (C), costs must
be adequately documented to be allowable under Federal awards. North Carolina’s contracts
policy, effective August 2009, provided that if North Carolina requested a sole source for a

8
    North Carolina used State funds to pay for this original contract.
Final Audit Report
ED-OIG/A05O0005                                                                       Page 8 of 27

contract, the Section Chief for Purchasing and Contracts and the North Carolina Department of
Administration’s Division of Purchasing and Contracts must approve a “Memorandum of Sole
Source Justification” form that includes a detailed justification for that request.

North Carolina did not provide us with documentation showing that it obtained two of the
required approvals when amending the original $6 million contract. North Carolina prepared
a sole-source justification memorandum for the $2.4 million worth of services described in
the amendment, dated August 29, 2011, addressed to the Section Chief for Purchasing and
Contracts. Although it provided documentation showing that the State Superintendent and
Chief Financial Officer approved the amendment, North Carolina did not provide documentation
showing that the Section Chief for Purchasing and Contracts or the North Carolina Department
of Administration’s Division of Purchasing and Contracts approved the sole-source justification
for the amendment. The memorandum included a field in which the Section Chief for
Purchasing and Contracts was to sign for approval. However, the approval section was blank.
As a substitute, North Carolina provided us with an electronic approval record from its
procurement system. The electronic record showed that the Section Chief for Purchasing and
Contracts had made changes related to the amendment on August 30, 2011, but the electronic
approval record did not clearly show whether the Section Chief for Purchasing and Contracts
approved the amendment. North Carolina did not provide us with any evidence that the
Section Chief for Purchasing and Contracts delegated the authority to approve the amendment.

State of North Carolina Attorney General’s Office Signature Not Required
for Contract Amendments
The contract for the $6 million purchase and the $2.4 million amendment to the contract did not
have the signature of a representative of the State Attorney General’s office. North Carolina’s
contracts policy in effect at the time that the original contract and amendment were signed stated
that a representative from the State Attorney General’s office must sign contracts exceeding
$100,000. However, this policy did not explicitly state that the requirement applied to contract
amendments. As a result, North Carolina could use amendments to purchase more than
$100,000 of goods or services and bypass the internal control. If North Carolina created a
new contract for the $2.4 million purchase, instead of amending the original contract, it would
have had to obtain the signature of a representative from the State Attorney General’s office.

By not designing and implementing effective internal control over its contracting process,
North Carolina increased the risk that Federal funds would be misused or not used to accomplish
the goals set forth in North Carolina’s approved grant application. For example, North Carolina
increased the risk that it would not (1) acquire suitable goods and services at the lowest possible
cost, (2) select vendors using established and equitable methods, and (3) select vendors based on
appropriate selection criteria.

Compensation Rates Paid to Employees Not Always Adequately Documented
According to Appendix A of 2 C.F.R. Part 225, to be allowable under Federal awards, costs must
be reasonable and adequately documented. A cost is reasonable if “it does not exceed that which
would be incurred by a prudent person under the circumstances prevailing at the time the
decision was made to incur the cost.”
Final Audit Report
ED-OIG/A05O0005                                                                       Page 9 of 27

We found that North Carolina did not provide sufficient documentation to show that the
pay rates for two employees paid with Race to the Top funds were reasonable. We reviewed
time and effort documentation (see the Other Matters section of this report) for 11 (14 percent) of
the 79 North Carolina employees working on Areas C or D during our audit period.
North Carolina hired 1 (9 percent) of the 11 as a Race to the Top specialized skill worker
on November 21, 2011. At that time, the State of North Carolina’s Office of State Human
Resources had granted North Carolina the authority to determine the salaries of employees.
North Carolina signed a contract with one employee at a pay rate of $42 per hour. However,
North Carolina did not provide documentation, such as a salary qualification worksheet,
sufficient to show how it determined that the pay rate was reasonable. When the employee’s
manager submitted a request to extend the employee’s contract, North Carolina had a different
Director of Human Resources and, according to North Carolina, a new process for approving pay
rates. As required by this new process, a classification and compensation analyst reviewed the
duties of the position and completed a salary qualification worksheet that supported a $24 per
hour pay rate. After this review, North Carolina extended the employee’s contract, effective
September 1, 2012, at a pay rate of only $24 per hour—$18 per hour less than the rate previously
paid. As a result, North Carolina paid the employee $30,383 more than it would have paid at the
lower pay rate for the time period.

North Carolina identified another employee, not included in our sample, who began working
for North Carolina on January 23, 2012, and whose hourly pay rate was reduced after a review of
the duties of the position. North Carolina originally signed a contract with the employee at a
pay rate of $37.50 per hour. North Carolina did not provide documentation sufficient to show
how it determined that the pay rate was reasonable. When the employee’s manager submitted a
request to extend the employee’s contract, North Carolina had a different Director of Human
Resources and, according to North Carolina, a new process for approving pay rates. As required
by this new process, a classification and compensation analyst reviewed the duties of the position
and completed a salary qualification worksheet that supported a $30 per hour pay rate. After this
review, North Carolina extended the employee’s contract, effective September 1, 2012, at a pay
rate of only $30 per hour—$7.50 per hour less than the pay rate previously paid. As a result,
North Carolina paid the employee $1,075 more than it would have paid at the lower pay rate for
the time period.

Because it did not provide documentation sufficient to show that the original hourly pay rates for
the two employees were reasonable, we concluded that North Carolina inappropriately charged
$31,458 to the Race to the Top grant.

Recommendations

We recommend that the Chief Financial Officer, in conjunction with the Assistant Secretary for
Elementary and Secondary Education, require North Carolina to—

1.1    Retain sufficient documentation to show that it obtained all required approvals for any
       procurement of goods and services using Federal funds.
Final Audit Report
ED-OIG/A05O0005                                                                       Page 10 of 27

1.2    Strengthen its procurement policy by requiring amendments to contracts for purchasing
       goods and services exceeding $100,000 using Federal funds to receive the same
       approvals as original contracts.

1.3    Justify the pay rates for the two employees paid with Race to the Top funds without
       adequate documentation of the reasonableness of the pay rates, find another allowable
       use for the funds, or return $31,458 to the Department.

North Carolina’s Comments

North Carolina agreed with Recommendations 1.1 and 1.2, stating that it has begun
implementing new policies and procedures to ensure that all contracts and contract amendments
receive the appropriate approvals and that North Carolina maintains contract documentation.

North Carolina did not agree with Recommendation 1.3. North Carolina stated that the
Director of Human Resources at the time had the authority to set salaries and that the
pay rates for the two employees were reasonable. North Carolina negotiated lower pay rates
as part of contract extensions using a new process that was put in place after the initial
contract. Therefore, the Race to the Top grant was not improperly charged.

OIG Response

Based on North Carolina’s comments, we clarified the finding to state that North Carolina did
not provide documentation, such as the salary qualification worksheets it currently uses,
sufficient to demonstrate the reasonableness of the pay rates paid to the two employees. While
we agree that the Director of Human Resources had the authority to set pay rates, North Carolina
did not provide any additional evidence to show that the higher pay rates that the two employees
initially received were reasonable. Even though North Carolina stated that it changed its process
for reviewing pay rates after it approved the initial employee contracts, it should still be able to
justify that the pay rates approved under the initial employee contracts were reasonable.
Therefore, we did not change Recommendation 1.3.

FINDING NO. 2 – North Carolina Could More Closely Monitor LEAs’ and Charter
                Schools’ Compliance With Federal Fiscal Requirements

We found that North Carolina did not ensure that Forsyth County (1) minimized the amount of
time elapsing between Forsyth County’s receipt and use of Race to the Top funds, (2) spent
Race to the Top funds only on allowable activities, and (3) adequately documented all Race to
the Top expenditures. We reviewed the amount of Race to the Top funds that Forsyth County
drew down and the amount of month-end balances that North Carolina required Forsyth County
to return from June 2011 through September 2013. We found that Forsyth County consistently
maintained Race to the Top funds in excess of immediate needs.

We also reviewed records for $986,730 (54 percent) of the $1,839,987 in nonpersonnel
expenditures that Forsyth County charged to its main Race to the Top LEA grant for Areas C and
D from July 1, 2010, through September 30, 2013. We found that Forsyth County used $12,458
Final Audit Report
ED-OIG/A05O0005                                                                                     Page 11 of 27

(1 percent) of the $986,730 for unallowable activities. 9 Additionally, Forsyth County did not
provide sufficient documentation to show that it used another $3,518 only for allowable
activities.

Funds Maintained in Excess of Immediate Needs
We found that Forsyth County regularly requested and then maintained more Race to the Top
funds than needed to meet its immediate needs. We reviewed the amount of Race to the Top
main LEA, leadership academy, and recruitment incentive grant funds that Forsyth County drew
down and all of the month-end balances that North Carolina required Forsyth County to return
for the 28 months from June 2011 through September 2013. 10 We found that North Carolina
required Forsyth County to return $5,882,919 (49 percent) of the main LEA grant, $4,675,722
(53 percent) of the leadership academy grant, and $16,530 (10 percent) of the recruitment
incentive grant funds that Forsyth County drew down during the period.

Main Grant
During the 28 months from June 2011 through September 2013, Forsyth County drew down
$12,094,000 for its Race to the Top main LEA grant. Forsyth County maintained balances in
excess of its immediate needs at the end of 24 of the 28 months. The excess balances reached
a high of $1.28 million at the end of November 2011 (see Table 2).

Leadership Academy Grant
During the 26 months from July 2011 through August 2013, Forsyth County drew down
$8,774,500 for its Race to the Top leadership academy grant. Forsyth County maintained
balances in excess of its immediate needs at the end of 23 of the 26 months. The excess balances
reached a high of $1.42 million at the end of November 2011 (see Table 2).

Recruitment Incentive Grant
During the 18 months from December 2011 through May 2013, Forsyth County drew down
$167,261 for its Race to the Top recruitment incentive grant. North Carolina reviewed cash
balances at the end of only 3 of the months. North Carolina found that Forsyth County
maintained excess balances at the end of all 3 of those months and required Forsyth County
to return $16,530 in recruitment incentive grant funds—$15, 977 for December 2011, $1 for
December 2012, and $552 for May 2013 (see Table 2).




9
  We also found that Forsyth County spent an additional $74 on unallowable travel that was not included in the
$986,730 that we sampled, bringing the total unallowable charges to $12,532.
10
   We did not request data at a level of detail needed to determine the exact number of days during each month that
Forsyth County maintained excess balances because we did not need such detailed information to address our audit
objectives.
Final Audit Report
ED-OIG/A05O0005                                                                  Page 12 of 27

Table 2. Race to the Top Fund Balances Required to Be Returned
                                                                         Balances
                                          Balances Required to        Required to Be
                      Balances Required      Be Returned—               Returned—
                      to Be Returned—     Leadership Academy            Recruitment
 Month and Year          Main Grant              Grant                Incentive Grant
June 2011                        $325,479                 N/A                      N/A
July 2011                         $24,309                   $0                     N/A
August 2011                            $0              $76,714                     N/A
September 2011                   $379,211             $626,473                     N/A
October 2011                     $182,254              $42,298                     N/A
November 2011                  $1,280,326           $1,418,445                     N/A
December 2011                    $485,192               $7,921                 $15,977
January 2012                     $372,835             $210,761                     N/A
February 2012                    $236,772             $180,094                     N/A
March 2012                       $330,581              $81,435                     N/A
April 2012                       $187,484              $93,852                     N/A
May 2012                         $254,389             $118,930                     N/A
June 2012                        $488,595             $540,424                     N/A
July 2012                        $120,730              $99,674                     N/A
August 2012                      $375,416             $497,170                     N/A
September 2012                   $138,280             $113,084                     N/A
October 2012                     $234,328              $37,802                     N/A
November 2012                          $0                   $0                     N/A
December 2012                     $24,456                   $0                      $1
January 2013                      $78,066             $132,451                     N/A
February 2013                     $10,668               $3,042                     N/A
March 2013                             $0             $156,068                     N/A
April 2013                       $150,587             $105,692                     N/A
May 2013                               $0              $61,072                    $552
June 2013                         $62,640              $18,239                     N/A
July 2013                         $22,090               $5,362                     N/A
August 2013                       $93,725              $48,719                     N/A
September 2013                    $24,506                 N/A                      N/A
Total Required to
be Returned                    $5,882,919               $4,675,722              $16,530

Grantees Should Draw Down Federal Funds Only to Meet Immediate Needs
North Carolina used the advance method of funding when providing Race to the Top funds to
participating LEAs and charter schools. From July 1, 2010, through June 30, 2013, the State of
North Carolina did not include the Race to the Top grant in its Treasury-State Agreement. A
Treasury-State Agreement documents the accepted funding techniques and methods agreed upon
by the U.S. Department of the Treasury and a State for calculating interest for the Federal
assistance programs governed by the Treasury-State Agreement. A Treasury-State Agreement
Final Audit Report
ED-OIG/A05O0005                                                                      Page 13 of 27

remains in effect until terminated unless the U.S. Department of the Treasury and a State agree to
a specific termination date (31 C.F.R. § 205.6).

When a program is not included in a Treasury-State Agreement, the regulations at 34 C.F.R.
Part 80 state the requirements for grant funds management. According to 34 C.F.R. § 80.21(b),
grantees and subgrantees must use methods and procedures for payment that minimize the time
elapsing between the transfer of funds from the U.S. Department of the Treasury and the State’s
payout of funds for Federal assistance purposes. The Department defines this requirement as
maintaining a level of cash that is not in excess of immediate (usually 3 days) needs (“Recipients
of ED Grants and Cooperative Agreements Frequently Asked Questions,” June 2010).
According to 34 C.F.R. § 80.37(a)(4), a State must substantially conform any advances of grant
funds to subgrantees to the same standards of timing and amount that apply to cash advanced to
the State by Federal agencies.

From July 1, 2013, through June 30, 2014, the State of North Carolina included the Race to the
Top grant in its Treasury-State Agreement. The Treasury-State Agreement required North
Carolina to request funds in such a manner that the funds would be deposited in a State account
not more than 3 days before the day the State makes a disbursement to an LEA. The “Recipients
of ED Grants and Cooperative Agreements Frequently Asked Questions,” June 2010, states that
if a State draws funds under a program in its Treasury-State Agreement to make payments to
a subrecipient, then the payment request to the Department should only be as needed to pay for
program costs. The guidance states that subrecipients must make draw requests to the State as
required under the requirements in 34 C.F.R. Part 80. As noted above, those regulations require
States to monitor their subrecipients’ payment requests and to ensure that those requests conform
to the same payment requirements that apply to the recipient.

Forsyth County maintained fund balances in excess of its immediate needs, in part, because
North Carolina did not have a mechanism in place to estimate the amount of funds that each
LEA and charter school needed to meet immediate needs. In addition, North Carolina reviewed
fund balances only as they existed as of the end of a month. If an LEA or a charter school did
not spend all the funds by the end of a month, North Carolina required the LEA or charter school
to return those funds. Reviewing fund balances only at the end of the month did not allow
North Carolina to determine whether its LEAs were in compliance with the 3-day rule
throughout the entire month.

When a State does not ensure that LEAs minimize the time elapsing between the receipt and use
of Race to the Top funds, the U.S. Department of the Treasury might incur additional borrowing
costs, including interest. In addition, the Federal program is potentially harmed because the risk
of theft or misuse of the excess funds increases.

Funds Used for Unallowable Activities
We found that Forsyth County spent $12,532 in Race to the Top funds for a workshop on
systems thinking and related travel costs for people who were not listed as key personnel as
outlined in Forsyth County’s Race to the Top detailed scope of work. Forsyth County charged to
its main Race to the Top grant $8,550 for registration fees for six students, one companion of an
employee, and a board member to attend the workshop in Tucson, Arizona. Forsyth County
Final Audit Report
ED-OIG/A05O0005                                                                                      Page 14 of 27

charged to the main Race to the Top grant another $3,982 for the associated travel expenses for
the six students: hotel-related charges of $2,659, daily meals and a cash advance fee totaling
$1,051, baggage fees of $125, and shuttle charges of $147. 11

The detailed scope of work for fiscal years 2011 through 2014 stated that Forsyth County would
use Race to the Top funds to send key personnel to a national conference on systems thinking.
The detailed scope of work identified teachers, the superintendent, the Race to the Top project
director, and principals at participating schools as key personnel. According to 2 C.F.R.
Part 225, Appendix A, to be allowable, costs must “be necessary and reasonable for proper and
efficient performance and administration of Federal awards. . . 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.” The six students, the companion of
one employee, and the one board member were not listed in the detailed scope of work as
key personnel. Therefore, the costs associated with sending the eight people to the systems
thinking workshop were not chargeable or assignable to the Race to the Top grant. When
Forsyth County uses funds for unallowable activities, Federal programs are harmed because
Forsyth County will not have all the funds needed to accomplish the goals indicated in its
approved scope of work.

Costs Not Adequately Documented
Forsyth County did not adequately document $3,518 of its Race to the Top expenditures.
The expenditures were all charged to credit cards and appeared on credit card statements.
However, Forsyth County did not provide us with receipts supporting $1,868 for hotel charges
related to a workshop in Tucson, Arizona; $1,260 for hotel accommodations in Stowe, Vermont;
$347 for airfare to New Haven, Connecticut; and $44 for airport parking.

According to Appendix A of 2 C.F.R. Part 225, to be allowable under Federal awards, costs must
be adequately documented. According to Forsyth County’s policy, AR 4133 “Travel
Compensation and the Use of School Vehicles,” employees must attach original receipts to
travel expense reimbursement forms. According to “A Guide to The Winston-Salem
Forsyth County Schools Out-Of-County Travel Expense Reimbursement Policy,” employees
must submit a travel expense reimbursement form to obtain reimbursement for travel expenses
for which they have written receipts. Forsyth County's Online Travel Form, “How To Get
Reimbursed For Your Work-Related Travel,” states that an employee must complete an
“Out-Of-County Travel Reimbursement Form” within 30 days of returning from a trip and must
attach to the form all required receipts. The form explains that required receipts are copies of
itemized receipts for gasoline and all expenses other than food. Receipts must be attached to the
travel reimbursement forms or Forsyth County will not reimburse the employees.

Failing to follow its own policies for obtaining and maintaining sufficient documentation to
support Race to the Top expenditures increased the risk that Forsyth County’s Race to the Top
funds would be misused. When funds are misused, Federal programs are harmed because
11
  Forsyth County paid half ($73) of the shuttle charges in advance. For nonpersonnel expenditures, we selected
the transaction that included the $73. We did not select the transaction that included the second installment ($74)
for our sample of nonpersonnel expenditures.
Final Audit Report
ED-OIG/A05O0005                                                                     Page 15 of 27

Forsyth County will not have all the funds needed to accomplish the goals indicated in its
approved scope of work.

Recommendations

We recommend that the Chief Financial Officer, in conjunction with the Assistant Secretary for
Elementary and Secondary Education, require North Carolina to—

2.1    More closely monitor the fiscal activity of LEAs and charter schools to ensure that the
       amount of time elapsing between the LEAs’ and charter schools’ receipt of Race to the
       Top funds from North Carolina and the LEAs’ and charter schools’ uses of the funds is
       minimized in accordance with Federal cash management requirements.

2.2    Instruct Forsyth County to identify allowable uses of funds consistent with
       North Carolina’s approved Race to the Top application or return to North Carolina the
       $12,532 in Race to the Top funds that Forsyth County used for unallowable activities.

2.3    Instruct Forsyth County to provide documentation sufficient to support the $3,518 in
       expenditures that we sampled but could not verify. If Forsyth County cannot provide
       sufficient documentation for the $3,518, then North Carolina should instruct
       Forsyth County to identify allowable uses of funds consistent with North Carolina’s
       approved Race to the Top application or return to North Carolina the amount of the
       expenditures that Forsyth County cannot adequately support.

North Carolina’s Comments

North Carolina agreed with all three recommendations. North Carolina stated that, during the
period under review, its policies and procedures for minimizing the time between drawdown
and disbursal of Race to the Top funds were not finalized or fully implemented. However, it
has made significant progress by implementing an online cash management system that enables
it to identify noncompliance with Federal cash management requirements and also allows for
LEAs to self-monitor compliance. North Carolina also includes cash management monitoring
in North Carolina’s on-site fiscal monitoring procedures. Additionally, North Carolina
implemented a new accounting procedure that enables it to use excess cash balances more
expeditiously.

OIG Response

We commend North Carolina on designing corrective actions intended to improve its ability to
ensure subgrantee compliance with Federal cash management requirements. We would like to
emphasize that North Carolina needs to fully implement these enhancements, or it will not be
able to ensure subgrantee compliance and fully address our recommendations. Specifically, by
designing system enhancements that allow North Carolina to identify subgrantee noncompliance
and also allow subgrantees to self monitor, North Carolina has put in place tools that should
enhance subgrantee compliance with the 3-day rule. However, the timing of the monitoring will
be critical for North Carolina to ensure these new tools enhance subgrantee compliance.
Final Audit Report
ED-OIG/A05O0005                                                                     Page 16 of 27



                                    OTHER MATTERS


North Carolina could strengthen its control activities to provide reasonable assurance that it
retains adequate documentation of its employees’ time and effort certifications. Additionally,
Forsyth County could strengthen its control activities to provide reasonable assurance that it
adequately records the purchase and tracks the location of all portable computing devices.

Control Over Time and Effort Certifications Could Be Strengthened
We reviewed time and effort documentation for 11 (14 percent) of the 79 North Carolina
employees assigned to work on Areas C or D during our audit period. North Carolina did not
provide us with time and effort certifications for 5 (45 percent) of the 11 employees. We
interviewed 4 of the 5 employees and confirmed that they worked solely on Race to the Top
grant activities during the periods covered by our audit. The fifth employee no longer worked at
North Carolina.

Office of Management and Budget Circular A-87, Attachment B, 8.h(3) states that employees
who work solely on a single Federal award should at least semi-annually prepare certifications
that they worked solely on the award for the period covered by the certification.

Control Over Portable Computing Devices Could Be Strengthened
Forsyth County did not ensure that it adequately recorded the purchase and tracked the location
of all portable computing devices purchased with Race to the Top funds. Forsyth County spent
$302,977, about 3 percent of its total Race to the Top allocation, on laptop and tablet computers.
We reviewed records for 3 purchases of laptop and tablet computers: one of 674 laptop
computers, one of 42 laptop computers, and one of 60 tablet computers. We found that
Forsyth County did not record in its fixed asset database 735 of the 776 laptop and tablet
computers: 633 from the purchase of 674 laptop computers and none from the purchases of
42 laptop computers and 60 tablet computers.

We also found that Forsyth County could not easily locate all the portable computing devices.
To ensure that the laptop and tablet computers actually existed and were located where indicated
in Forsyth County’s records, we randomly selected 15 laptop computers from the purchase of
674 laptop computers and compared the serial numbers on the laptop computers to Forsyth
County’s records. Initially, we found 1 of the 15 laptop computers on a pallet in a warehouse
along with 1,535 other laptop computers waiting to be reimaged. Forsyth County employees had
to search through all 1,535 laptop computers until they found the remaining 14 for which we
were looking.

We also attempted to locate all 42 laptop computers from another purchase. Forsyth County
provided us with documentation showing that it distributed 30 of the laptop computers to
1 elementary school and 12 to the corporate office. However, we found 32 of the laptop
computers at the elementary school and none at the corporate office. Forsyth County
Final Audit Report
ED-OIG/A05O0005                                                                      Page 17 of 27

subsequently searched for and found the other 10 laptop computers at a different elementary
school than shown in Forsyth County’s records.

Finally, we judgmentally selected a sample of 30 tablet computers from the purchase of 60 tablet
computers and attempted to locate them. Forsyth County told us that it distributed the 60 tablet
computers to one high school and two elementary schools. However, we found that the
high school did not have any of the 60 tablet computers. Instead, the two elementary schools
each had 30 of the tablet computers.

According to the U.S. Government Accountability Office’s “Internal Control Management and
Evaluation Tool,” physical control to secure and safeguard assets can be accomplished by
developing, implementing, and communicating to all employees policies and procedures to
secure and safeguard assets; periodically counting and reconciling assets, such as cash,
securities, supplies, inventories, and equipment; and affixing identification plates and numbers to
office furniture and fixtures, equipment, and other portable assets.

To minimize the risk of theft and the risk that the portable computing devices will not be used as
intended, we suggest that Forsyth County locate the remaining 659 laptop computers from the
purchase of 674 that we did not ask it to locate, ensure that its fixed asset database accurately
reflects the 735 laptop and tablet computers that were not originally recorded, and strengthen and
then follow its policies and procedures for recording, tracking, and safeguarding portable
computing devices.




                 OBJECTIVES, SCOPE, AND METHODOLOGY


The objectives of our audit were to determine whether North Carolina

       1. accurately and completely reported Area D grant performance data to the Department,

       2. spent Race to the Top funds only on allowable activities and in accordance with
          program requirements and North Carolina’s approved grant application for Areas C
          and D, and

       3. ensured that LEAs and charter schools receiving Race to the Top subgrants from
          North Carolina spent the funds only on allowable activities and in accordance with
          program requirements and North Carolina’s approved grant application for Areas C
          and D.

For the first objective, our audit covered North Carolina’s 2012–2013 annual performance report
only for Area D. For the second and third objectives, our audit covered July 1, 2010, through
September 30, 2013, only for Areas C and D.
Final Audit Report
ED-OIG/A05O0005                                                                    Page 18 of 27

To gain an understanding of the Race to the Top program requirements, we reviewed
information posted on the Department’s Web site; the Recovery Act, Sections 14005-14006,
Title XIV (Public Law 111-5); Federal regulations at 2 C.F.R. Part 225, 31 C.F.R. § 205.11, and
34 C.F.R. Parts 75 and 80; 70 Federal Register 51910 (August 31, 2005); 74 Federal Register
59688 (November 18, 2009); and 75 Federal Register 19496 (April 14, 2010).

To gain an understanding of how North Carolina administered its Race to the Top program and
the environment in which North Carolina operated, we reviewed North Carolina’s Race to
the Top grant application, 2012–2013 annual performance report, Web site, and organizational
charts. We also reviewed prior Office of Management and Budget Circular A-133 compliance
audits for North Carolina to identify areas of potential internal control weaknesses related to
our audit objectives.

To achieve our third objective, we judgmentally selected Forsyth County for review from
the 142 LEAs and charter schools that were participating in North Carolina’s Race to the Top
program as of April 2014 (see “Sampling Methodology”). To gain an understanding of how
Forsyth County administered its Race to the Top program and the environment in which
Forsyth County operated, we reviewed Forsyth County’s Race to the Top scope of work,
Web site, and organizational charts. We also reviewed prior Office of Management and Budget
Circular A-133 compliance audits for Forsyth County to identify areas of potential internal
control weaknesses related to our audit objectives.

Internal Control
To gain an understanding of North Carolina’s system of internal control over reporting Race to
the Top performance data to the Department, we interviewed North Carolina and Forsyth County
officials. To gain an understanding of North Carolina’s and Forsyth County’s systems of
internal control over spending and North Carolina’s system of internal control for ensuring that
participating LEAs and charter schools spent Race to the Top funds only on allowable activities
and in accordance with applicable Federal requirements, we interviewed North Carolina and
Forsyth County officials and reviewed North Carolina’s and Forsyth County’s written policies
and procedures for purchasing and contracting. Our review disclosed weaknesses in
North Carolina’s and Forsyth County’s systems of internal control over spending Race to
the Top funds (see Finding No. 1 and Finding No. 2).

Data Reliability
To achieve our first objective, we relied on third-party data, such as graduation reports from
institutions of higher education and reports showing whether teachers contributed to the
academic success of their students. We assessed the reliability of these data by looking for
duplicate entries, invalid identifiers, missing data, inappropriate relationships to other data,
values outside a designated range, or values outside valid periods. We determined that these data
were sufficiently reliable for our intended use.

To achieve our second and third objectives, we relied, in part, on expenditure data from the
North Carolina Accounting System and Forsyth County’s financial system. We reviewed the
data for completeness by comparing North Carolina’s expenditure totals to the total drawdowns
shown in the Department’s G5 system and comparing Forsyth County’s expenditure totals to
Final Audit Report
ED-OIG/A05O0005                                                                                   Page 19 of 27

the total expenditures shown in the North Carolina Accounting System. We also analyzed the
records from the North Carolina Accounting System and Forsyth County’s financial system,
looking for duplicate entries, invalid identifiers, missing data, inappropriate relationships to other
data, values outside a designated range, or values outside valid periods.

Based on the results of our comparison and analyses, we concluded that the data provided by
both North Carolina and Forsyth County were sufficiently reliable for our intended use.

Sampling Methodology
We used sampling to achieve our audit objectives. We judgmentally selected one LEA; Race to
the Top expenditures incurred by North Carolina and Forsyth County from July 1, 2010, through
September 30, 2013, only for Areas C and D; 12 and tablet computers purchased with Race to
the Top funds that were included in our sample of Forsyth County’s expenditures. 13 In addition,
we randomly selected 15 laptop computers that were part of a transaction included in our sample
of Forsyth County’s expenditures. Because we judgmentally selected our samples, the sampling
results might not be representative of the entire universes and, therefore, cannot be projected to
the universes.

Selection of LEA
We judgmentally selected 1 (less than 1 percent) of the 142 LEAs and charter schools that were
participating in North Carolina’s Race to the Top program as of April 2014. We selected
Forsyth County because its allocation of Race to the Top funds was relatively large (fifth highest
in the State of North Carolina) and prior audit reports on Forsyth County identified findings that
we considered significant within the context of our audit objectives.

Selection of Expenditures
We selected 79 expenditures totaling $9,790,896 from the 13,286 expenditures totaling
$48,265,595 that North Carolina and Forsyth County charged to their Race to the Top grants
from July 1, 2010, through September 30, 2013, only for Areas C and D (see Tables 3 and 4,
respectively). For personnel expenditures charged by North Carolina, we judgmentally selected
the highest charges to each of the two areas. We limited our selection of nonpersonnel
expenditures charged by North Carolina to those for contractual services, educational supplies,
food services, instructional improvement, software, technology services, and travel expenses.
For personnel expenditures charged by Forsyth County, we judgmentally selected charges for
salaries and benefits for personnel working on assessments and for bonuses paid to any employee
working on Areas C and D Race to the Top initiatives. We limited our selections of
nonpersonnel expenditures charged by Forsyth County to those for computers, membership dues
and fees, software, supplies and materials, wireless receivers, and workshop expenses.
Additionally, Forsyth County received a recruitment incentive grant from North Carolina’s
allocation of Race to the Top funds. Because we could not determine to which Race to the Top


12
  We did not limit our sample of expenditures for Forsyth County’s recruitment incentive grant to only Areas C and
D because we could not determine which Race to the Top application areas the expenditures applied to.
Final Audit Report
ED-OIG/A05O0005                                                                     Page 20 of 27

application areas the recruitment incentive grant applied, we selected the two highest charges
to the grant.

Table 3. North Carolina Expenditures
                Number       Total
 Expenditure    of Items   Items in               Amount    Amount in
    Type        Sampled Universe Percentage Sampled          Universe   Percentage
Area C
Personnel              15        218           7    $28,420    $375,020          8
Area D
Personnel              26      3,988 less than 1    $70,879 $6,008,954           1
Area C
Nonpersonnel            5        992 less than 1 $5,351,067 $9,979,024          54
Area D
Nonpersonnel           10      7,189 less than 1 $3,248,096 $29,366,681         11
Total                  56     12,387 less than 1 $8,698,462 $45,729,679         19

Table 4. Forsyth County Expenditures
                Number      Total
 Expenditure    of Items  Items in             Amount Amount in
    Type       Sampled    Universe Percentage Sampled    Universe Percentage
Area C
Personnel               5       290         2    $34,724   $524,740        7
Area D
Personnel               1         20        5     $4,794    $20,458       23
Area C
Nonpersonnel           12       404         3   $931,232 $1,766,795       53
Area D
Nonpersonnel            3         49        6    $55,499    $73,192       76
Subtotal               21       763         3 $1,026,249 $2,385,185       43
Recruitment
Incentive
Grant                   2       136         2    $66,185   $150,731       44
Total                  23       899         3 $1,092,434 $2,535,916       43

Selection of Laptop and Tablet Computers
We also verified the existence of a random selection of laptop computers and a judgmental
selection of tablet computers that Forsyth County purchased with Area C funds. We randomly
selected 15 (2 percent) of 674 laptop computers from one purchase and judgmentally selected
30 (50 percent) of 60 tablet computers from another purchase. We had no reason to believe that
inventory at one location was any more susceptible to loss or theft than inventory at any other
location. Therefore, we judgmentally selected these 30 tablet computers because
Forsyth County’s records showed that they were located in a high school and two elementary
schools that were near Forsyth County’s administrative offices.
Final Audit Report
ED-OIG/A05O0005                                                                     Page 21 of 27

Comparative and Verification Procedures
To achieve our first objective, we verified the accuracy of the results that North Carolina
reported in its 2012–2013 annual performance report for the four Area D performance measures
by reviewing information from third parties.

To achieve our second and third objectives, we reviewed North Carolina’s and Forsyth County’s
contracts, invoices, and payroll records to verify the amount and appropriateness of the selected
expenditures. We also verified the existence of laptop and tablet computers that Forsyth County
purchased with Area C funds. For 87 (11 percent) of 776 laptop and tablet computers that
Forsyth County obtained through three purchases, we verified the existence of the laptop and
tablet computers by comparing the serial numbers on the laptop and tablet computers to
Forsyth County’s inventory records. In addition, we reviewed Race to the Top fund balances
to determine whether North Carolina and Forsyth County only drew down grants funds
necessary for their immediate needs.

Forsyth County was the fiscal agent for a $4,216,760 leadership academy grant from
North Carolina’s allocation of Race to the Top funds. We did not select expenditures charged
to the leadership academy grant for review because other LEAs, not Forsyth County, spent those
funds. However, we reviewed the fund balances for this grant because Forsyth County was
responsible for drawing down and distributing the grant funds to the other LEAs.

We conducted this audit from March 2014 through February 2015 in Raleigh and
Winston-Salem, North Carolina, and at our offices in Atlanta, Georgia; Chicago, Illinois; and
Dallas, Texas.

We discussed the results of our audit with North Carolina officials on February 2, 2015, and
with Forsyth County officials on January 9, 2015.

We conducted this performance audit in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions
based on our audit objectives. We believe the evidence that we obtained provides a reasonable
basis for our findings and conclusions based on our audit objectives.




                            ADMINISTRATIVE MATTERS


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 the recovery of funds, will be made by
the appropriate Department of Education officials in accordance with the General Education
Provisions Act.
Final Audit Report
ED-OIG/A05O0005                                                                      Page 22 of 27

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:

                              Thomas P. Skelly
                              Chief Financial Officer
                              U.S. Department of Education
                              Office of the Chief Financial Officer
                              550 12th Street, SW
                              Washington, DC 20202

                              Ann Whalen
                              Delegated the Duties of the Assistant Secretary
                              U.S. Department of Education
                              Office of Elementary and Secondary Education
                              400 Maryland Ave., SW
                              Washington, DC 20202

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

We appreciate the cooperation given us during this audit. If you have any questions or require
additional information, please do not hesitate to contact me or Jon Enslen, Assistant Regional
Inspector General for Audit, at (312) 730-1620.


Sincerely,

/s/

Gary D. Whitman
Regional Inspector General for Audit

Attachments
Final Audit Report
ED-OIG/A05O0005                                                                 Page 23 of 27

                                                                               Attachment 1

               Acronyms, Abbreviations, and Short Forms Used in this Report

Area C               Application Area C, “Data Systems to Support Instruction,” of
                     North Carolina’s Grant Application

Area D               Application Area D, “Great Teachers and Leaders,” of North Carolina’s
                     Grant Application

C.F.R.               Code of Federal Regulations

Department           U.S. Department of Education

Forsyth County       Winston-Salem Forsyth County Schools

LEA                  Local Educational Agency

North Carolina       North Carolina Department of Public Instruction

Recovery Act         American Recovery and Reinvestment Act of 2009
Final Audit Report
ED-OIG/A05O0005                                                                                       Page 24 of 27

                                                                                                      Attachment 2

                          North Carolina’s Comments on the Draft Report




May 7, 2015
Mr. Gary D. Whitman, Regional Inspector General for
Audit U.S. Department of Education, Office of Inspector
General Citigroup Center
500 West Madison Street, Suite 1414
Chicago, IL 60661

Mr. Whitman:

The North Carolina Department of Public Instruction (NCDPI) appreciates the opportunity to
respond to the draft audit report, “The North Carolina Department of Public Instruction’s
Administration of its Race to the Top Grant”. NCDPI strives for excellence in all aspects of
our work. We appreciate the help provided by your office to identify areas for improvement.
Our response to the findings and recommendations in your report are below.

Recommendation 1.1 Retain sufficient documentation to show that it obtained all
required approvals for any procurement of goods and services using Federal funds.

                                                       AND

Recommendation 1.2 Strengthen its procurement policy by requiring amendments to
contracts for purchasing goods and services exceeding $100,000 using Federal funds receive
the same approvals as original contracts.

                         OFFICE OF THE STATE SUPERINTENDENT
               June St. Clair Atkinson, Ed.D., State Superintendent|june.atkinson@dpi.nc.gov
     6301 Mail Service Center, Raleigh, North Carolina 27699-6301|(919) 807-3430|Fax (919) 807-3445
                     AN EQUAL OPPORTUNITY/AFFIRMATIVE ACTION EMPLOYER
Final Audit Report
ED-OIG/A05O0005                                                                       Page 25 of 27

NCDPI concurs with the recommendation to improve our process for documenting contracts
and the various approvals required to execute them. We have already begun implementing new
policies and procedures to ensure that all contracts receive the requisite approvals internally and
externally, and that we maintain appropriate contract files. NCDPI has also implemented
enhanced procedures for approval of contract amendments. These procedures will supplement
the electronic procedures for purchasing approval that were already in place.
Recommendation 1.3 Justify the pay rates for the two employees paid with Race to the
Top funds without adequate documentation of the reasonableness of the pay rates, find
another allowable use for the funds, or return $31,458 to the Department.

NCDPI feels that pay rates for the two employees in question were reasonable at the time the
determination was made. NCDPI utilized contracting practices in place at that time to contract
with the individuals identified above at the rates deemed appropriate for the work specified in
the initial agreements. The Personnel Action Requests for both contract employees were
signed by the Human Resources Director at the time, who had authority from the State Office
of Personnel to set such salaries. At the later date when a contract extension was proposed for
each of the two contractors in question, NCDPI Human Resources (HR) employed the current
process (one that had been updated since the initial contract date) to determine proposed terms
for the contract extension offer; as a result of that process, HR recommended a lower rate for
each contract going forward, and in both cases the contractor agreed to the contract extension
at a renegotiated/lower hourly rate. All of the contracts in question were appropriate
expenditures of RttT funds. The Race to the Top grant was not improperly charged. NCDPI
therefore does not believe it is necessary or reasonable to reimburse the RttT grant.

Recommendation 2.1 More closely monitor the fiscal activity of LEAs and charter schools to
ensure that the amount of time elapsing between the LEAs’ and charter schools’ receipt of
Race to the Top funds from North Carolina and the LEAs’ and charter schools’ uses of the
funds is minimized in conformance with the State of North Carolina’s Treasury-State
Agreement.
NCDPI concurs that during the period under review that the agency’s policies and procedures
for minimizing the time between drawdown and dispersal of RttT funds were not finalized or
fully implemented. We have, however, made significant progress in that direction.
In March of 2013 NCDPI went live with the online cash Management Monitoring System
(CMMS). Implementation of the CMMS better enables the LEAs to self-monitor for
compliance with state and federal cash management requirements.
As of April 2014, LEAs had been trained in the use of the system and had subscribed to the
CMMS and obtained access to the data. The CMMS produces reports comparing the date funds
were received and the amount of funds expended within three days of receipt. The system is
able to generate two reports that clearly identify individual instances of noncompliance with the
3-day rule. Any funds not expended within three days are marked as “out of compliance” with
the “three-day rule.” In May 2014, the State provided reports to show that its efforts to address
cash management issues were helping decrease the number of LEAs being out of compliance
Final Audit Report
ED-OIG/A05O0005                                                                         Page 26 of 27

with cash management rules. The CMMS continues to be available to LEAs as a tool for self-
monitoring of compliance with the “three-day rule.”
The NCDPI Division of School Business included cash management monitoring in its on-site
fiscal monitoring policy and procedures effective September 1, 2014. Language in the fiscal
monitoring report template cites the appropriate requirements for cash management monitoring
and adherence and includes notification that, “Recipient must promptly remit (at least
quarterly) interest earned on advances of grant funds in excess of $100. Recipients are allowed
to retain $100 annually to offset costs of maintaining the account.” Corrective action for cash
management deficiencies identified during fiscal monitoring adheres to the following protocol:
       Required Actions: If the recipient earned interest on funds in violation of
       CMIA then we request corrective action (example – policy and procedures
       revised, provided to us, etc.) and remittance of calculated interest earned (but
       leave the calculation up to the LEA) to us. The address for interest remittances
       to NCDPI:
                             NC Department of Public Instruction
                             6334 Mail Service Center
                             Raleigh, NC 27699-6334

       The remittance should be accompanied by a letter stating that the remittance is
       for "interest earned on Federal funds (identified by PRC)” and the LEA/charter
       school’ DUNS number.
The fiscal monitoring report cover letter also notifies the LEA/charter school that failure to
respond to the fiscal monitoring report and address identified deficiencies will result in
enforcement action for noncompliance. School Business will communicate to the
LEA/charter school the specific remedies for sub-grantee non-compliance in the Education
Department General Administrative Regulations (EDGAR) Title 34 Code of Federal
Regulations (specifically CFR 80.43 and 34 CFR 81.30). School Business will communicate
that NCDPI is within its rights to:

       •   Withhold cash payments temporarily, pending correction of the deficiency by
           the subgrantee
       •   Deny the use of funds for all or a portion of the cost associated with the
           non- compliant activity
       •   Terminate all or a portion of the sub-grantee’s current
           award
       •   Withhold further rewards for the program or take other legal
           remedies.
NCDPI put a new accounting procedure in place at 2013-14 fiscal year end, enabling the
agency to use excess cash balances more expeditiously. After final reconciliation of the cash
balances, the agency returned all unused cash to the appropriate federal awarding agency as
required by the CMIA.
Final Audit Report
ED-OIG/A05O0005                                                                     Page 27 of 27

Recommendation 2.2 Instruct Forsyth County to identify allowable uses of funds consistent
with North Carolina’s approved Race to the Top application or return to North Carolina the
$12,532 in Race to the Top funds that Forsyth County used for unallowable activities.
NCDPI agrees with the recommendation and will take appropriate action.
Recommendation 2.3 Instruct Forsyth County to provide documentation sufficient to
support the $3,518 in expenditures that we sampled but could not verify. If Forsyth County
cannot provide sufficient documentation for the $3,518, then North Carolina should instruct
Forsyth County to identify allowable uses of funds consistent with North Carolina’s
approved Race to the Top application or return to North Carolina the amount of the
expenditures that Forsyth County cannot adequately support.
NCDPI agrees with the recommendation and will take appropriate action.

NCDPI feels that appropriate action has been taken to address the findings noted in the audit
report. Procedures have been implemented to prevent future occurrence of the issues noted.
Again, we thank you for bringing the issues to our attention and for offering us the opportunity
to respond.

Sincerely,



Adam Levinson
Director, NC Race to the Top Program
NC Department of Public Instruction

cc: Philip Price, Chief Financial Officer
    Sarah Harris, Director of Financial Services
    Jeani Allen, Director of Internal Audit and Assurance Services