oversight

Magdalena Municipal Schools' (Magdalena) administration of the Gaining Early Awareness and Readiness for Undergraduate Programs (GEAR UP) grant for the period September 15, 2000, through September 30, 2003.

Published by the Department of Education, Office of Inspector General on 2004-03-30.

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

                       UNITED STATES DEPARTMENT OF EDUCATION 

                                        OFFICE OF INSPECTOR GENERAL 

                                  1999 BRYAN STREET, HARWOOD CENTER, SUITE 2630 

                                             DALLAS, TEXAS 75201-6817 

                                       PHONE: (214) 880-3031 FAX: (214) 880-3023 





Mr. Doug Hulce, Superintendent
Magdalena Municipal Schools
P.O. Box 24
Magdalena, NM 87825

Dear Mr. Hulce:

This Final Audit Report (ED-OIGIA06-D0027) presents the results of our audit of Magdalena
Municipal Schools' (Magdalena) administration of the Gaining Early Awareness and Readiness
for Undergraduate Programs (GEAR UP) grant for the period September 15, 2000, through
September 30,2003. Our objective was to determine whether Magdalena properly accounted for
and used the GEAR UP grant funds in accordance with 1) the Higher Education Act of 1965, as
amended (REA), 2) Education Department General Administrative Regulations (EDGAR), 3)
GEAR UP grant terms, and 4) the cost principles in Office of Management and Budget (OMB)
Circular A-87.

We provided a draft of this report to Magdalena. In its response to our draft report, Magdalena
officials provided additional support and we reduced the amount of unallowable costs to $929.75
and the amount of unsupported costs to $4,333.05. We have summarized Magdalena's
comments in the body of the report and have included the response as Attachment B.




GEAR UP is a discretionary grant program designed to increase the number of low-income
students who are prepared to enter and succeed in postsecondary education. Signed into law as
Title IV, Part A, Sections 403 and 404 of the HEA, GEAR UP provides five-year, competitive
grants to States and partnerships for services at high-poverty middle and high schools.

GEAR UP grantees serve an entire cohort of students beginning no later than the seventh grade
and follow the cohort through high school. Funds are also used to provide college scholarships
to low-income students who are part of the same cohort.

In fiscal year 1999, 164 five-year GEAR UP partnership grants were awarded with first year
funding ranging from $70,000 to $3,843,000 and averaging $460,000. The maximum annual
Federal contribution is $800 per student served. The total fiscal year GEAR UP funding for
1999,2000,2001,2002, and 2003, respectively, was $120 million, $200 million, $295 million,
$285 million, and $293 million.




      Our mission is to promote the efficiency, effectiveness, and integrity o/the Department's programs and operations
ED-OIG/A06-D0027                                                                         Page 2 of 7

The U.S. Department of Education (Department) awarded Magdalena a five-year GEAR UP
partnership grant totaling $1,108,255. The award amounts were—

       Year One        September 15, 2000 – September 14, 2001               $ 173,597
       Year Two        September 15, 2001 – September 14, 2002               $ 197,597
       Year Three      September 15, 2002 – September 14, 2003               $ 221,597
       Year Four       September 15, 2003 – September 14, 2004               $ 245,867
       Year Five       September 15, 2004 – September 15, 2005               $ 269,597
                                                          Total              $1,108,255

Magdalena administers the GEAR UP partnership grant by providing services to students
through academic enrichment classes, remediation courses, after school activities, and summer
enrichment programs.


                                        AUDIT RESULTS


Magdalena did not properly account for and use GEAR UP partnership grant funds in accordance
with all applicable regulations, grant terms, and cost principles. Specifically, Magdalena
awarded GEAR UP scholarships to ineligible students ($16,500), charged the grant for fund-
raising costs ($929.75), used grant funds for expenditures that were not adequately supported
($4,333.05), and did not establish a separate trust fund to safeguard GEAR UP scholarship funds
($112,500). Details of the unallowable and unsupported expenditures are discussed in
Attachment A.

Unallowable Expenditures

Magdalena should not have awarded a total of $16,500 in GEAR UP grant funds for Year 2003
scholarships to 18 graduating seniors. As noted in its grant proposal application, Magdalena
currently serves a cohort of students in kindergarten through 10th grade. The 12th grade students
were ineligible to receive the scholarships because GEAR UP scholarships should be awarded
only to students within the eligible cohort.

According to 34 C.F.R. § 694.2 (2001), “A Partnership, or a State that chooses to use a cohort
approach in its GEAR UP early intervention component, must . . . (a) Provide services to at least
one entire grade level (cohort) of students . . . beginning not later than the 7th grade; (b) Ensure
that supplemental appropriate services are targeted to the students with the greatest needs; and
(c) Ensure that services are provided through the 12th grade to those students.”

According to 34 C.F.R. § 694.10(a) and (b), the scholarships are awarded under the eligibility
requirements of Section 404E the Higher Education Act of 1965, as amended (HEA). Section
404E(d)(4) of the HEA describes eligible scholarship recipients as students who participated in
the early intervention component required under Section 404D of the HEA.
ED-OIG/A06-D0027                                                                         Page 3 of 7

Magdalena also used $929.75 of grant funds for unallowable fund-raising costs. OMB Circular
A-87, Attachment B, Paragraph 21.a (1997) states, “Costs of organized fund raising . . . are
unallowable . . . regardless of the purpose for which the funds will be used.”

Unsupported Expenditures

Magdalena did not provide adequate documentation for expenditures totaling $4,333.05 for
tuition charges, student incentives, hotels, and airline tickets. OMB Circular A-87, Cost
Principles for State, Local, and Indian Tribal Governments, Attachment A, Paragraph C.1.b. & j.
(1997) states, “ . . . To be allowable under Federal awards, costs must . . . Be allocable to Federal
awards . . . [and] . . . Be adequately documented.”

GEAR UP Scholarship Funds Need to be in a Trust Fund

Magdalena had not set up a trust fund for $112,500 in scholarships awarded to eligible students
during the first three years of the GEAR UP grant program. The scholarships were to be
delivered to students after they completed high school and began their postsecondary education.
According to Magdalena's Performance Reports, the funds for scholarships had already been
placed in a trust fund. However, we found that Magdalena had not established an irrevocable
trust fund to safeguard the GEAR UP grant scholarship funds.

The Department requires a grantee to establish a separate trust fund that meets the requirements
of state law for trust funds. Because a grantee cannot enter into a binding written agreement with
itself, the agreement must be written with a separate trust entity in order to satisfy the obligation
requirement. State law will vary on the details, but essentially, there must be a group of people
who serve as trustees for the trust funds who manage those funds (expend the funds and receive
income to the trust) as required by the trust agreement.

We concluded that the above conditions occurred because Magdalena did not establish a formal
system of management controls to safeguard GEAR UP scholarship funds in an irrevocable trust
and to ensure that GEAR UP grant funds were adequately documented and used only to provide
services to the cohort of eligible students.


                                    RECOMMENDATIONS


We recommend that the Chief Financial Officer, in collaboration with the Assistant Secretary for
Postsecondary Education, instruct Magdalena to—

1. Refund to the Department $16,500 for scholarships awarded to ineligible students.

2. Refund to the Department unallowable costs of $929.75 for fund-raising costs.
ED-OIG/A06-D0027 	                                                                     Page 4 of 7

3. 	 Provide sufficient documentation to support costs of $4,333.05 or refund that amount to the
     Department.

4. 	 Deposit GEAR UP grant scholarship funds of $112,500 into a separate trust fund.

5. 	 Establish a formal system of management controls to ensure GEAR UP grant funds are
     adequately documented and used only to provide services to the cohort of eligible students.


                MAGDALENA’S COMMENTS TO THE DRAFT REPORT


Magdalena provided additional documentation to support some of the unallowable and
unsupported costs identified in the draft report. The documentation included receipts and
identification of the students in the cohort of eligible students for the following unallowable or
unsupported costs: football equipment of $1,719.00, room charges, hotels, meals, and recreation
charges for teachers and students of $6,474.81.

Magdalena agreed that charges for the hotel of $1,776.00 and airline tickets of $1,293.00 were
inappropriate. They stated that the hotels charges were refunded and the airline tickets were
cancelled.

Magdalena also agreed to refund $16,500 for scholarships awarded to non-cohort students.
Magdalena has established a GEAR UP Scholarship Trust Fund in the amount of $112,500 and
established a formal system of management controls to ensure GEAR UP funds are only used to
provide services to the cohort of eligible students.


                                       OIG’S RESPONSE


After reviewing Magdalena’s response, we reduced the amount of unsupported costs by
$6,474.81 and unallowable costs by $1,719.00. We accepted the following documentation as
adequate support: hotel receipts, meal receipts, travel reimbursement requests, and receipts for
student recreation activities for unsupported costs of $6,474.81.

We also accepted the documentation provided to support the charges for football equipment of
$1,719.00. In the grant application, Magdalena identified after school incentives including
tutoring and extension activities. In Magdalena’s response, they stated that students were tutored
for one hour and then participated in a sports/club activity for one hour. Therefore, Magdalena
demonstrated to us that the purchase of the football equipment was used as an incentive activity
for eligible GEAR UP students. Additionally, we discussed this expenditure with Department
GEAR UP program officials and they agreed that Magdalena could use sports activities as an
incentive on this grant. We made the corresponding adjustments to the figures in this report.
ED-OIG/A06-D0027 	                                                                    Page 5 of 7

Although the hotel receipt for the refund of $1,776.00 was provided, this amount was not
reimbursed to the GEAR UP fund. Furthermore, the $1,293.00 spent on travel was not
reimbursed to the GEAR UP fund and no documentation of airline receipts was provided.

We did not verify that Magdalena has established the scholarship trust fund as described in their
response. That verification should be provided to the Department officials identified in the
Administrative Matters section.


                      OBJECTIVE, SCOPE, AND METHODOLOGY


The objective of our audit was to determine whether Magdalena properly accounted for and used
the GEAR UP grant funds from September 15, 2000, through September 30, 2003, in accordance
with the HEA, as amended; EDGAR; GEAR UP grant terms; and the cost principles in OMB
Circular A-87.

To accomplish our objective, we—

   •	  Reviewed Magdalena’s Single Audit Report for the year ended June 30, 2002;
   •	  Reviewed Magdalena’s GEAR UP grant application and budget narrative;
   •	  Reviewed Magdalena’s GEAR UP grant Performance Report;
   •	  Reviewed Magdalena’s School Board Minutes, dated May 20, 2003;
   •	  Reviewed written policies and procedures for purchasing and requisitions;
   •	  Judgmentally selected and reviewed expenditures of financial budgets for Years 2000-01
       through 2003-04. Those included payroll transactions, purchase orders, invoices,
       cancelled checks, receipts, and other supporting documents. We reviewed all
       expenditures greater than $1,000 and most of the expenditures greater than $500. The
       reviewed expenditures accounted for 45 percent of the total expended by Magdalena for
       Year 2000-01, 21 percent of the total for Year 2001-02, 45 percent of the total for Year
       2002-03, and 23 percent for the completed portion of Year 2003-04; and
   • 	 Interviewed various Magdalena employees, school board members, and Department
       officials.

To achieve our audit objective, we relied, in part, on computer-processed data related to
Magdalena’s financial budget systems. We verified the completeness of the data by comparing
source records to the computer-generated data, and verified the authenticity by comparing
computer-generated data to source documents. Based on these tests, we concluded that the data
were sufficiently reliable to be used in meeting the audit’s objective.

We conducted our fieldwork at the Magdalena Municipal School District Offices in Magdalena,
New Mexico on October 6 – 9, 2003. We discussed the results of our audit with Magdalena
officials in an exit conference held on November 14, 2003. Our audit was performed in
accordance with generally accepted government auditing standards appropriate to the scope of
the audit described above.
ED-OIG/A06-D0027                                                                      Page 6 of 7


                     STATEMENT ON MANAGEMENT CONTROLS


We obtained a sufficient understanding of management controls for planning the audit and
determining the nature, timing, and extent of tests to be performed. As part of our review, we
relied on substantive testing of expenses charged to the GEAR UP grant to test management
controls. Our testing disclosed instances of non-compliance with federal regulations, grant
terms, and cost principles that led us to conclude that weaknesses existed in controls over GEAR
UP grant funds. These weaknesses and their effects are discussed in the AUDIT RESULTS
section of this report.


                               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 will be made by the appropriate Department of
Education officials.

If you have any additional comments or information that you believe may have a bearing on the
resolution of this audit, you should send them directly to the following Education Department
officials, who will consider them before taking final Departmental action on the audit:

                      Jack Martin
                      Chief Financial Officer
                      Office of the Chief Financial Officer
                      400 Maryland Avenue, SW, Room 4E313
                      Washington, DC 20202

                      Sally L. Stroup
                      Assistant Secretary for Postsecondary Education
                      U.S. Department of Education
                      1990 K Street, N.W.
                      Washington, DC 20006

It is the policy of the U.S. Department of Education to expedite the resolution of audits by
initiating timely action on the findings and recommendations contained therein. Therefore,
receipt of your comments within 30 days would be greatly appreciated.
ED-OIG/A06-D0027                                                                    Page 7 of 7


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


                                                   Sincerely,

                                                  /Signed/

                                                   Sherri L. Demmel
                                                   Regional Inspector General
                                                    for Audit


Attachments
                                                                           ATTACHMENT A


               Unallowable and Unsupported GEAR UP Grant Expenditures
                        September 15, 2000 – September 30, 2003


  GEAR UP                                                              Reason
 Budget Award             Expenditure                    Cost         Disallowed        Criteria*
     Year                      Item
   Year One        Fund raising - candles            $   929.75 Fund raising                2
   2000-2001                                                    activity
   Year Two        Hotel stay                        $ 1,776.00 Not reimbursed to           1
   2001-2002                                                    GEAR UP fund
                   Airline tickets                   $ 1,293.00 Not adequately              1
                                                                documented, and
                                                                not reimbursed to
                                                                GEAR UP fund
   Year Three      T-shirts for students             $ 265.25 Not adequately              1&3
   2002- 2003                                                   documented as to
                                                                which students
                                                                were in the cohort
                   Student incentives                $ 120.00 Not adequately                1
                                                                documented
                   Tuition for computer aided        $ 351.52 Not all students
                   drafting class at a university               were in the cohort          3
                   Tuition for basic automotive      $ 527.28 Not all students
                   class at a university                        were in the cohort          3
                                            Total    $ 5,262.80


*Criteria:

   1. 	 “To be allowable under Federal awards, costs must . . . be adequately documented.”
        OMB Circular A-87, Cost Principles for State, Local, and Indian Tribal Governments,
        Attachment A, Paragraph C.1.j (1997).

   2. 	 “Costs of organized fund raising, including financial campaigns, solicitation of gifts and
        bequests, and similar expenses incurred to raise capital or obtain contributions are
        unallowable, regardless of the purpose for which the funds will be used.” OMB Circular
        A-87, Cost Principles for State, Local, and Indian Tribal Governments, Attachment B,
        Paragraph 21.a (1997).

   3. 	 “A Partnership, or a State that chooses to use a cohort approach in its GEAR UP early
        intervention component, must . . . Provide services to at least one entire grade level
        (cohort) of students . . . beginning not later than the 7th grade.” 34 C.F.R. § 694.2(a)
        (2001).
BOARp OF ED! JCATION                                                            DOUG HULCE. Superintendent
COLLEEN ORAYSON; President                                                      JOE B. MAREZ. Mid-High Principal­
DAVID MONTOYA. Vice President
ABlE CARABAJAL. Secretary
ROGER ADAMS. Member
                                MAGDALENA MUNICIPAL SCHOOLS                     KlTIY MARTIN. Elementary Principal
                                                                                JUDY TANNER. Director of SPED
MARY ANNE RAEL. Member                          PO Box 24 
                     Human Resources. and Federal Programs
                                      Magdalena, Ntlw Mexico 87825 

                                  Phone: 505·854·2241 Fax: 505·854·2531 


                                                                                ATTACHMENT B
February 18, 2004

Ms. Sherri Demmel
Regional Inspector General for Audit
U.S. Department of Education
Office of Inspector General
1999 Bryan Street, Harwood Center, Suite 2630
Dallas, Texas 75201-6817

Dear Ms. Demmel:

In connection with your examination of Magdalena Municipal Schools' (MMS) Administration of the
GEAR UP Grant Fund, we acknowledge that we are responsible for the fair representation of
documents, records, and other information provided for your review. In that connection, we confirm
that to the best of our knowledge and belief:

• 	 There are no irregularities involvjng management or employees who have or had a significant role
    in MMS' compliance \f\4ith the Department's requirements contained in the Higher Education Act of
    1965, as amended, and 34 CFR Part 694, GEAR UP.

• 	 There are no irregularities involving any persons, outside consultants for example, that could have
    a material influence on the compliance with the requirements contained in the Higher Education
    Act of 1965, as amended, and 34 CFR Part 694, GEAR UP.

• 	 There are no material transactions that have not been properly recorded in the accounting records
    related to compliance with the Department's requirements contained in the Higher Education Act
    of 1965, as amended, and 34 CFR Part 694, GE~R UP.

 • 	 We have furnished all documents and reports requested during the course of the audit and they 

     are accurate and complete. 


• 	 We have complied or disclosed any noncompliance with all laws and regulations pertaining to the 

    Higher Education Act of 1965, as amended, and 34 CFR Part 694, GEAR UP. 

                                                                                     ATTACHMENT B




Response to Recommendations

   1. 	 Magdalena Municipal Schools agrees to refund $16,500 for scholarships awarded to non­
        cohort students.

   2. 	 Magdalena Municipal Schools agrees to refund $2,190.55 unallowable expenditures.
        Please see page 2 and the attached documentation for the rationale for our arrival at this
        figure.

   3. 	 A GEAR UP Scholarship Trust Fund, account number                     in the amount of
        $112,500 has been set up at Wells Fargo Bank.

   4. 	 Magdalena Municipal Schools has established a formal system of management controls
        to ensure GEAR UP grant funds are adequately documented and used only to provide
        services to cohort students.
                                                                                                   ATTACHMENT B




First Year of GEAR UP Progr8lll 2QOO*.001
    1. 929.75 spent on fundraising to by candles for resale - Unallowable Expenditure

Second Year of GEAR UP Program 2001·2002
    1. 	 $1,776.00 spent for hotel stay at the National GEAR UP Conference in Washington DC Oct. 5-9,2001.
         After the attacks September 11,2001, the Conference was cancelled and rescheduled for July 2002.-The
         receipt for the refund from the hotel provided (See attached)

    2. 	 $1,293 spent on travel for four people to attend the National GEAR UP Conference in Washington DC.
         GEAR UP program personnel, a representative from our partners (Maternal and Child Health of Socorro),
         and external evaluator were scheduled to attend the National GEAR UP Conference Oct. 5-9, 2001. After
         the attacks September II, 200 I, the Conference was cancelled and rescheduled for July 2002, and all
         airline tickets with an arrival into Reagan National Airport in Washington DC were cancelled. The tickets
         were never reissued.

    3. 	 $1,719.00 spent on football equipment, the equipment purchased with GEAR UP funds ($123.00 each) was
         used by the 14 cohort students, and continues to be used by GEAR UP students annually. The equipment
         was purchased as an incentive for cohort students participating in the after school GEAR UP tutorial
         program in which cohort students were tutored for 1 hour and then participated in a sport/club activity for
         an hour (see page 11 Magdalena's grant application: Continuum ofSpecial Services). - Receipt provided
         (See attached)

    4. 	 $1,290.00 sps,nt on hotel stay for the National GEAR UP Conference-Receipts provided (see attached)


Third Year of GEAR UP Program 2002·2003
    1. 	 $450.00 spent on meals for teacher training - Missing perdium documentation provided (see attached)

    2. 	 $265.00 spent on Renaissance T-Shirts for non-cohort students - Unallowable Expenditure

    3. 	 $360.00 spent on housing expenses for FFA students at the National FFA Convention. A total of $1,590
         was spent for housing and conference registration. GEAR UP contributed $540.00, and $1,050 was spent
         from the district operational account. The total spent for each student was $270. The GEAR UP
         contribution - 2 students x $270.00 - $540.00. (See attached)

    4. 	 $120.00 spent on Renaissance incentives for non-cohort students - Unallowable Expenditure

    5. 	 $3,191.08 spent on a hotel stay by teachers-Receipts provided (See attached)

    6. 	 $156.00 spent on Putt-Putt golf for students participating in Mid-School School on Wheels- Receipts
         provided (See attached)

    7. 	 $425.43 spent on hotel stay by teachers- Receipts provided (See attached)

    8. 	 $351.52 spent on tuition for CAD for non-cohort students - Unallowable Expenditure

    9. 	 $527.28 spent on tuition for Basic Automotive Class for non-cohort students - Unallowable Expenditure

    10. $157.50 spent on meals for teacher training - Missing perdium documentation provided (see attached)

Fourth Year of GEAR UP Program 2003·2004
    1. 	 $425.43 spent on hotel stay by consultants- Receipts provided (See attached) 


                 TOTAL AMOUNT OF UNALLOWABLE EXPENDITURES:                                $2,190.55 


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