oversight

Systems of Internal Control Over Selected ARRA Funds in the State Of Texas.

Published by the Department of Education, Office of Inspector General on 2010-01-27.

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

31, 2007
           U.S. Department of Education
            Office of Inspector General


     American Recovery and
     Reinvestment Act of 2009
                Systems of Internal Control Over
           Selected ARRA Funds in the State of Texas
                            Audit Report




                     Texas State Capitol Building

 ED-OIG/A06J0013                                JANUARY 2010
               Acronyms/Abbreviations Used in this Report


ARRA                American Recovery and Reinvestment Act of 2009

C.F.R.              Code of Federal Regulations

Cleburne            Cleburne Independent School District

DARS                Texas Department of Assistive and Rehabilitative Services

DISD                Dallas Independent School District

Department          U.S. Department of Education

Fort Bend           Fort Bend Independent School District

Governor’s Office   State of Texas Governor’s Office

IDEA                Part B of the Individuals with Disabilities Education Act of 2004

IHE                 Institution of Higher Education

LEA                 Local Educational Agency

OIG                 Office of Inspector General

OMB                 Office of Management and Budget

Perkins             Federal Perkins Loan Program

SAO                 Texas State Auditor’s Office

SEA                 State Educational Agency

SFSF                State Fiscal Stabilization Fund

TEA                 Texas Education Agency

THECB               Texas Higher Education Coordinating Board

Title I             Title I, Part A of the Elementary and Secondary Education Act of 1965, as
                    amended
                             UNITED STATES DEPARTMENT OF EDUCATION
                                  OFFICE OF INSPECTOR GENERAL

                                                                              AUDIT SERVICES
                                                          Chicago/Kansas City/Dallas Audit Region


                                         January 27, 2010


Mike Morrissey, J.D.
Senior Advisor
Texas Office of the Governor
P.O. Box 12428
Austin, Texas 78711

Robert Scott, Commissioner
Texas Education Agency
1701 North Congress Avenue
Austin, Texas 78701

Terrell I. Murphy, Commissioner
Department of Assistive and Rehabilitative Services
4800 North Lamar Boulevard
Austin, Texas 78756

Raymund A. Paredes, Ph.D.
Commissioner of Higher Education
Texas Higher Education Coordinating Board
1200 East Anderson Lane
Austin, Texas 78752

Dear Sirs:

This final audit report presents the results of our audit of the systems of internal control over
selected American Recovery and Reinvestment Act of 2009 funds in the State of Texas.

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 in accordance with the General Education Provisions Act.

If you have any additional comments or information that you believe may have a bearing on the
resolution of this audit, you should send them directly to the following Education Department
official, who will consider them before taking final Departmental action on this audit.
                             Thelma Meléndez de Santa Ana, Ph.D.
                                       Assistant Secretary
                                 U.S. Department of Education
                         Office of Elementary and Secondary Education
                                    400 Maryland Ave., S.W.
                                     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 days would be appreciated.

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


                                             Sincerely,

                                             /s/

                                             Gary D. Whitman
                                             Regional Inspector General for Audit
                       Systems of Internal Control Over
                  Selected ARRA Funds in the State of Texas
                               Control Number ED-OIG/A06J0013

                                            PURPOSE
The American Recovery and Reinvestment Act of 2009 (ARRA) places a heavy emphasis on
accountability and transparency. Federal agencies and others who are affected by ARRA have
the responsibility to ensure that ARRA funds reach intended recipients and achieve intended
results. This includes effectively implementing and controlling funds at the Federal, State, and
local levels; ensuring that recipients understand requirements and have proper controls in place
over the administration and reporting of ARRA funds; and promptly identifying and mitigating
instances of fraud, waste, and abuse of the funds. Proper systems of internal control are essential
for ensuring ARRA funds are administered properly and used in ways that coincide with the
requirements of ARRA.

The purpose of our audit was to determine whether the Texas Education Agency (TEA), other
State of Texas agencies, and selected LEAs charged with responsibility for overseeing ARRA
funds had designed systems of internal control that are sufficient to provide reasonable assurance
of compliance with applicable laws, regulations, and guidance. Our audit covered TEA’s and
other State of Texas agencies’ designs for systems of internal control over the administration and
use of ARRA funds as of September 30, 2009.

We assessed the design of State-level internal control that TEA, the Texas Department of
Assistive and Rehabilitative Services (DARS), the Texas Higher Education Coordinating Board
(THECB), and the State of Texas Governor’s Office (Governor’s Office) planned to use in
administering funds received under ARRA. We assessed the design of internal control over the
administration of ARRA funds for Title I, Part A of the Elementary and Secondary Education
Act of 1965, as amended (Title I); Part B of the Individuals with Disabilities Education Act, as
amended (IDEA); the Vocational Rehabilitation Act; and the State Fiscal Stabilization Fund
(SFSF) programs. We assessed the design of State-level internal control related to data quality,
cash management, and subrecipient monitoring. In addition, we assessed the design of control
for the three areas listed above and use of funds at three local educational agencies (LEAs):
Dallas Independent School District (DISD), Fort Bend Independent School District (Fort Bend),
and Cleburne Independent School District (Cleburne).
Audit Report
ED-OIG/A06J0013                                                                  Page 2 of 23


                                          RESULTS

The State of Texas has been proactive in its efforts to ensure the proper administration of ARRA
funds. The Texas State Auditor’s Office (SAO) is hiring additional staff to handle the
anticipated increase in audit effort. TEA has created a task force that is responsible for
overseeing ARRA funds. The 22-member Commissioner’s Task Force on Federal Stimulus and
Stabilization is composed of TEA managers. The chairman of the task force, with assistance
from the executive committee, is charged with coordinating agency plans in response to Federal
legislation. In addition, TEA is hiring additional personnel to conduct subrecipient monitoring
of LEAs receiving ARRA funds.

Because ARRA was in its early stages, THECB, TEA, and the LEAs had not completed
designing systems of internal control that are sufficient to provide reasonable assurance of
recipient compliance with applicable laws, regulations, and guidance. During our audit, we
identified preliminary issues that we brought to the attention of THECB, the Governor’s Office,
and two LEAs. As a result of the issues we raised during our audit and guidance disseminated
by the Office of Management and Budget (OMB) and U.S. Department of Education
(Department), THECB, the Governor’s Office, and the LEAs made changes to their systems of
internal control. For example, the Governor’s Office had not designated a State agency to
administer the SFSF Government Services fund. The Governor’s Office subsequently
designated THECB to administer the Government Services fund. Also, THECB decided to use
the reimbursement method, which aligns with current procedures at the THECB for the fiscal
administration of Federal awards.

However, THECB’s, TEA’s, and the LEAs’ systems of internal control still could be improved
so they provide reasonable assurance of subrecipient compliance with applicable laws,
regulations, and guidance. We concluded that, as of September 30, 2009–

   •   THECB could improve its monitoring of subrecipients and their collection and reporting
       system to support the reporting of ARRA data to ensure compliance with ARRA
       reporting requirements.
   •   TEA could improve its oversight to ensure LEAs’ compliance with ARRA requirements.

We provided a preliminary version of this final audit report to the Governor’s Office, THECB,
DARS, and TEA for review and comment on December 1, 2009. The Governor’s Office
provided consolidated comments on December 16, 2009. The Governor’s Office did not fully
agree with our findings and recommendations because our work was performed at an early phase
in the ARRA process, and the audit did not reflect many of the current structures established to
ensure proper administration and monitoring of ARRA funds.

Based on the comments, we modified our Finding No. 1 and deleted a recommendation to
develop and implement monitoring procedures. The Governor’s Office comments are
summarized at the end of each finding. The entire narrative of the Governor’s Office comments
is included as an Enclosure to this report.
Audit Report
ED-OIG/A06J0013                                                                            Page 3 of 23

FINDING NO. 1 — THECB Could Improve Its Monitoring of Subrecipients and Its
                Collection and Reporting System to Support the Reporting of ARRA
                Data to Ensure Compliance with ARRA Reporting Requirements

THECB was not prepared to monitor the additional SFSF Government Services funds or report
accurate data given its increase in oversight responsibility. At the time of our audit, the THECB
was preparing to administer approximately $80 million in SFSF Government Services funds as
part of an incentive grants program for institutions of higher education (IHE). In an
August 28, 2009, memorandum, the Governor’s Office identified THECB as the administrator of
the more than $723 million in SFSF reserved for government services. With the addition of the
ARRA SFSF programs, THECB’s responsibility increased significantly with the additional IHEs
that will receive SFSF and with various other entities, outside the education field, that will
receive SFSF Government Services funds.

THECB Needed to Modify its Policies and Procedures to Ensure Adequate Oversight of
Recipients of SFSF Government Services Funds

We concluded that the procedures that THECB had in place as of September 30, 2009, to
monitor recipients of SFSF Government Services funds might not provide reasonable assurance
that ARRA funds are safeguarded. THECB management informed us that it is committed to
ensuring that adequate resources are available to monitor funds. However, THECB previously
administered only one Federal program, the Federal Perkins Loan Program (Perkins). Only
about 50 institutions participate in the Perkins program. With the addition of the ARRA SFSF
program, THECB’s responsibility increased significantly. Additional IHEs and various other
entities outside the education field, such as the Commission on the Arts and the Historical
Commission, now will receive SFSF Government Services funds. THECB was in the process of
developing a comprehensive ARRA application for the IHEs receiving SFSF funds. THECB
also planned to use its current process for monitoring the Perkins program to monitor the ARRA
funds at IHEs. However, as of September 30, 2009, the process had not been modified to cover
non-educational entities that will receive ARRA SFSF Government Services funds.

The Education Department General Administrative Regulations (EDGAR) contain provisions
requiring States to monitor subrecipients to ensure compliance with applicable Federal
requirements. According to 34 Code of Federal Regulations (C.F.R.) § 80.40(a), 1 “Grantees are
responsible for managing the day-to-day operations of grant and subgrant supported activities.
Grantees must monitor grant and subgrant supported activities to assure compliance with
applicable Federal requirements and that performance goals are being achieved. Grantee
monitoring must cover each program, function or activity.” The Department reiterated the
monitoring requirements for SFSF funds in an August email to States.

Subsequent to our audit, THECB established policy and procedures to ensure adequate oversight
of all subrecipients receiving ARRA SFSF Government Services funds. The policies and
procedures cover eligible IHE, community and junior colleges, State agencies, and non-profit
entities. The monitoring process that THECB established includes multiple elements but is not
limited to: (1) advising subrecipients of requirements and providing the most current information
available to the subrecipients; (2) monitoring the costs and activities of the subrecipients, as
appropriate; (3) conducting subrecipient monitoring activities during pre-payment reviews, desk

1
    All regulatory citations are to the January 1, 2008, version unless otherwise noted.
Audit Report
ED-OIG/A06J0013                                                                        Page 4 of 23

reviews, audits, and on-site monitoring visits; (4) monitoring subrecipients to assure that invoices
and progress reports are submitted in a timely manner; and (5) questioning costs that differ
materially from the approved budget or that appear unusual or unallowable and withholding
payment until resolved. THECB officials also informed us that the ARRA grant award contracts
will specify that grantees are required to submit monthly programmatic data and fiscal
reimbursement requests. Recipients will undergo desk reviews that consist of analysis of these
reported monthly programmatic data and fiscal reimbursement requests. If exceptions are noted,
THECB will bring the exceptions to the attention of institutions for necessary explanations.

THECB Needs to Improve Its Internal Control Over ARRA Data Reporting

THECB’s collection and reporting system needs to be improved to support the reporting of
ARRA data. THECB planned to require subrecipients to electronically submit the required
Section 1512 of Division A of ARRA 2 data elements using an Excel spreadsheet. THECB will
collect, compile, and report ARRA data from subrecipients related to SFSF Government Services
funds. Though THECB had not completed the modifications to combine the information from
the various sources, its management informed us that it is committed to ensuring that data
collected by the THECB are necessary, verifiable, timely, and meet the needs of the public.

According to THECB officials, the comprehensive ARRA application will identify the necessary
reporting elements, and the agency has a secure data transmittal site for receiving and sending
this information to the subgrantees. However, at the time of our audit, THECB had not yet
developed the criteria or methodologies that subgrantees should use to estimate the number of
jobs created and retained as a result of ARRA funds. THECB informed us that criteria and
methodologies are currently being developed for assessing attainment of these estimates by its
subrecipients.

THECB planned to: (1) monitor subrecipients’ data collection efforts relating to the ARRA
reporting requirements; (2) use a status list to monitor data submissions and certifications with
data reports currently in use; and (3) require its subrecipients to certify that the data provided are
complete, accurate, and reliable. However, at the time of our audit, THECB was still developing
a schedule for gathering reports and related documentation on ARRA expenditures and program
performance from the subrecipients.

According to Section 1512 (c) of the ARRA, each recipient that receives ARRA funds from a
Federal agency shall submit a report to that agency that contains, among other items: (1) the total
amount of ARRA funds received from the agency, (2) the amount of ARRA funds that were
expended or obligated for projects or activities, (3) a detailed list of all projects or activities for
which ARRA funds were expended or obligated, and (4) an estimate of the number of jobs
created and retained by the project or activity. In addition, 34 C.F.R. § 80.20(a) requires that
fiscal control and accounting procedures of the State and its subgrantees must permit preparation
of reports required by statute and permit the tracing of funds to a level of expenditures adequate
to establish that funds have not been misused.




2
    All subsequent section references to ARRA in this report are to Division A.
Audit Report
ED-OIG/A06J0013                                                                      Page 5 of 23

Recommendations

We recommend that the Assistant Secretary for Elementary and Secondary Education require the
Governor’s Office to instruct THECB to —

1.1   Develop or modify its data collection system to reflect the additional reporting
      requirements of ARRA;

1.2   Monitor and verify the subrecipients’ data collection efforts relating to the reporting
      requirements; and

1.3   Develop criteria and methodologies for entering and reporting on Section 1512 data
      elements.

Governor’s Office Comments

While the Governor’s Office did not disagree with our finding, it pointed out that, at the time of
the audit, THECB had not awarded any ARRA funds and was still preparing subrecipient
monitoring and reporting processes. Therefore, the findings do not accurately reflect THECB’s
recently established monitoring and reporting processes. According to the Governor’s Office,
THECB management has acquired the resources to administer and monitor the SFSF
Government Services funds assigned to the agency by the Governor’s Office. Specifically,
THECB established an ARRA Grants Program office and staffed it with five full-time
equivalents who have the combined experience and skill sets required to monitor subrecipients
and their collection and reporting systems to ensure compliance with ARRA.

Subsequent to the audit, THECB established policies and procedures to ensure adequate
oversight of all subrecipients receiving ARRA SFSF Government Services funds, including
eligible IHE, community and junior colleges, State agencies, and non-profit entities. It also
conducted a training seminar in September 2009 to ensure eligible entities were aware of ARRA
guidelines. THECB established an application process for Government Services funds. The
process requires potential recipients to undergo an application and notice of grant award process
and to report monthly regarding their grant awards.

For the original Recommendation 1.1, relating to the development and implementation of
monitoring procedures that address ARRA requirements, the Governor’s Office stated that, since
the OIG’s review, THECB has established monitoring and reporting processes. Therefore, the
finding does not accurately reflect the current situation. THECB has developed and
implemented procedures designed to perform stewardship activities for its ARRA SFSF-
Government Services fund awards.

For the original Recommendation 1.2 (now Recommendation 1.1), the Governor’s Office stated
that THECB is committed to ensuring that data collected by THECB are verifiable and timely to
meet the needs of the public. This is consistent with a long history of data collection for both
federally supported career and technical programs and for State accountability programs.
THECB has developed systems and safeguards to ensure data collection. Prior to the
disbursement of ARRA funds, grantees are required to submit an application for funds to
THECB, which requires the collection of all relevant data elements required for ARRA
Section 1512 quarterly reporting.
Audit Report
ED-OIG/A06J0013                                                                   Page 6 of 23


In addition, THECB currently is conducting a comprehensive review of ARRA and Federal
agency reporting requirements. If additional requirements are identified through this process,
the current reporting templates provided on the THECB ARRA Web site will be modified to
incorporate any additional elements for subrecipient reporting. Existing internal systems that
support THECB grants management activities are being modified and tested in order to meet
short timelines for implementation.

For the original Recommendation 1.3 (now Recommendation 1.2), the Governor’s Office stated
that THECB has processes to ensure the activities funded by ARRA SFSF Government Services
funds will be monitored on a monthly basis as part of the comparison of grant expenditures. The
monitoring will include a combination of desk reviews and on-site visits to subrecipients using
approved sampling techniques. Subrecipients are required to provide both a progress report
(which includes required Section 1512 reporting data elements) and a budget report on a monthly
basis. The subrecipient inbound reports will be compared for accuracy to fiscal reports
submitted monthly for cost reimbursement. In addition, THECB will verify the information by
sampling techniques accepted by its internal audit department.

For the original Recommendation 1.4 (now Recommendation 1.3), the Governor’s Office stated
that THECB is developing and implementing agency-wide ARRA reporting requirements. These
include (1) processes to collect, review, and report all required data elements in
Section 1512; (2) a plan or method to ensure the accuracy, completeness, and timely reporting of
the required data; (3) methodology by which subrecipients are to estimate the number of jobs
created or retained to ensure ARRA subrecipients report consistent and reliable job number data;
and (4) performance of data quality reviews for material omissions or significant reporting
errors, or both, make appropriate and timely corrections to subrecipient data; and work with
subrecipients to address data quality issues.

OIG Response

After reviewing the information provided by the Governor’s Office, we modified Finding No. 1
to reflect the subrecipient monitoring procedures THECB established after September 30, 2009 ,
and removed the original Recommendation 1.1 (dealing with monitoring procedures). Although
THECB is making positive steps toward improving its system of internal control, it had not
completed its actions on the other recommendations. Therefore, we did not make any changes
regarding those recommendations or the portions of the finding on collecting and reporting of
data and ensuring compliance with ARRA reporting requirements.

FINDING NO. 2 — TEA Could Improve Oversight of LEAs to Ensure Compliance with
                ARRA Requirements

We visited three LEAs (DISD, Fort Bend, and Cleburne) to review the LEAs’ systems of internal
control over data quality, cash management, subrecipient monitoring, and use of ARRA Title I,
IDEA, and SFSF funds. We identified issues at two of the three LEAs. Improved oversight by
TEA could reduce the risk of these and other types of issues occurring in the future.
Audit Report
ED-OIG/A06J0013                                                                     Page 7 of 23

Fort Bend’s Accounting System Was Vulnerable to Unauthorized Users

Fort Bend’s accounting system was not secure. It allowed unauthorized users to access the
system. When Fort Bend installed its accounting system, the security features were not fully
engaged. 3

According to 34 C.F.R. § 80.20(a), a State must expend and account for grant funds in
accordance with State laws and procedures for expending and accounting for its own funds.
Fiscal control and accounting procedures of the State and its grantees must be sufficient to
permit the preparation of required reports and permit the tracing of funds to a level of
expenditures adequate to establish that funds have not been used in violation of applicable
statutes and regulations.

Fort Bend has been allocated more than $18 million in ARRA funds. An unsecure accounting
system could lead to unauthorized users accessing the LEA’s accounting system and
jeopardizing ARRA funds. Unauthorized users could misuse or misappropriate ARRA funds or
even change accounting records so that they are no longer an accurate depiction of ARRA
expenditures.

DISD Took Corrective Action on Issues We Identified

During our review of DISD’s system of control over ARRA funds, we identified two issues.
DISD did not have adequate written procedures for: (1) monitoring its schools that are receiving
ARRA funds and (2) implementing “supplement not supplant” procedures. Subsequent to our
fieldwork, DISD officials corrected the two issues.

Recommendations

We recommend that the Assistant Secretary for Elementary and Secondary Education require
TEA to instruct—

2.1        Fort Bend to implement accounting system security features and assign appropriate levels
           of access and restrictions to district personnel; and
2.2        All LEAs about the importance of computer security.

Governor’s Office Comments

For Recommendation 2.1, the Governor’s Office stated that Fort Bend is in the process of
upgrading its software program, and security will be the top priority. User access will be
assigned by role rather than by individual. The business office will be working closely with
information services staff in the assignment of security to ensure that Fort Bend has adequate
separation of duties and that staff have access only to needed areas.

For Recommendation 2.2, the Governor’s Office stated that TEA has emphasized, and will
continue to emphasize, to the LEAs the importance of computer security. Throughout the
Financial Accountability System Resource Guide, TEA discusses the importance of computer
security and protecting the district’s funds and records. TEA will send out correspondence to all

3
    This issue also was identified by the LEA’s independent public accountant.
Audit Report
ED-OIG/A06J0013                                                                    Page 8 of 23

LEAs reminding them of the importance of secure fiscal control and accounting procedures to
ensure that unauthorized users cannot access their accounting system and jeopardize ARRA
funds.

OIG Response

Because actions responsive to the recommendations have not been completed at this time, we did
not make any changes to the finding or the recommendations.

                                     OTHER MATTERS

Texas Legislature Passed a Pay Raise Contingent on Receipt of SFSF Funds

The SFSF program is a one-time ARRA appropriation of $48.6 billion awarded to States to help
stabilize State and local government budgets to minimize reductions in education and to avert
cuts and retain teachers. The Department determined that $3.25 billion of the SFSF funds was
available to the State of Texas to allocate to its LEAs. Departmental guidance on the SFSF
program, issued in April 2009, states that neither the Governor nor the SEA may mandate how
an LEA will or will not use the SFSF funds, even though the State determines the allocation of
SFSF funds to the LEAs.

The State of Texas submitted its SFSF application to the Department on July 1, 2009. In its
application, the State noted that the Texas legislature appropriated $3.25 billion in SFSF funds
through House Bill 3646 (HB 3646), enacted on May 26, 2009. HB 3646 mandated a pay raise
for each classroom teacher and full-time speech pathologist, librarian, counselor, and nurse
employed at an LEA in school year 2009-2010. Section 95 of HB 3646 states that the mandated
pay raises are “expressly contingent” on whether Texas’s commissioner of education
(commissioner) determines that the pay raises are allowable uses of Federal funds under ARRA.
On July 24, 2009, the Department approved the State of Texas’s SFSF application. In an August
6, 2009, letter to school administrators, the commissioner determined that Federal funds received
by LEAs under ARRA may be used for the pay increases required under HB 3646, and the letter
triggered the requirement for LEAs to provide pay increases to certain employees.

The State was aware of Department guidance prohibiting it from mandating the use of SFSF
funds and included a statement in its SFSF application, submitted on July 1, 2009, that LEAs
have discretion as to which funds (State, local, or SFSF) to use to cover the pay raises. However,
LEAs did not receive any additional State funds for the pay raises under HB 3646. Conversely,
in 1999 and 2006, LEAs received State funding for the pay raises mandated by the legislature.
Based on declining market projections announced by the Texas Comptroller of Public Accounts,
it does not appear likely that much, if any, local funding will be available to pay for the raises.
In fact, two of the three LEAs that we visited were working with budget deficits. Officials at one
district stated that the “district was directed by the legislature to provide raises to ‘scheduled’
employees, and it has certainly contributed to our deficit situation.” The officials at another
district did not believe that they had any discretion in funding sources for the raises. TEA
estimated that $481 million in SFSF funds will be used to cover the mandatory pay raises under
HB 3646 for school year 2009-2010.

It is unclear whether Texas’s mandatory across-the-board pay raises were consistent with ARRA
and Departmental requirements. The Department has communicated that the overall goals of
Audit Report
ED-OIG/A06J0013                                                                      Page 9 of 23

ARRA have been to save jobs and drive reforms. The Department’s April 2009 guidance states
that ARRA funds may be used for activities such as paying the salaries of administrators,
teachers, and support staff. A September 4, 2009, press release by the Department states that
ARRA funds may be used as resources to attract, reward, and retain highly effective teachers in
hard-to-staff schools. In Texas’s case, the legislation provided for mandatory across-the-board
pay raises that were contingent on ARRA funding. The raises were not designed to save jobs or
retain particular teachers in particular schools. Unless additional State funds or other Federal
funds are made available to cover the pay raises at the LEA level, ARRA will be the source of
funds for the mandatory pay raises.

Governor’s Office Comments

The Governor’s Office disagreed with our position and stated that the State’s approved
application for SFSF stated that LEAs are not required to use ARRA funds to pay for salary
increases detailed in HB 3646. Under the provisions of HB 3646, LEAs are free to use local,
State, or Federal funds to pay for salary increases. Although HB 3646 stated that salary
increases were contingent on the Department’s approval of the State’s application for ARRA
funding, the legislation did not direct LEAs to use ARRA funding to pay for the salary increases.
Despite the misinformed statements of the LEA questioned by ED-OIG, LEAs were clearly
notified that salary increases may be funded by ARRA or local or State or other Federal funds.

In July 2009, TEA issued written strategic guidance to LEAs regarding SFSF funding. The
guidance included a discussion of the HB 3646 pay raises: “The pay raise required under the bill
may be funded using State Fiscal Stabilization Fund (SFSF), state or local funds. However, there
is no requirement under HB 3646 that SFSF funds be used to fund these salary increases.” This
point also was included in a July 30, 2009, letter to LEA administrators. Similar language was
used in an August 6, 2009, communication to LEA administrators: LEAs may use ARRA funds
received as they see fit, as long as they comply with Federal and State law and reporting and
auditing requirements.

With regard to OIG’s concern that these salary increases were not consistent with the
Department’s press release encouraging the use of SFSF funds for targeted schools or teachers,
the Governor’s Office points out that this press release was issued in September 2009, 3 months
after the enactment of HB 3646. In addition, the press release encourages, but does not require,
SFSF funds to be spent on the aforementioned purposes. Under ARRA, LEAs alone determine
how to spend SFSF funds, and the Department’s press release was merely guidance. Texas has
encouraged LEAs to spend SFSF and other ARRA monies consistently with U.S. Department of
Education guidance. Both the July 30, 2009, letter to LEAs and the July 2009 guidance on SFSF
encouraged LEAs to use funds toward the four reform areas established by the Department.
Furthermore, Texas LEAs were required to outline in their SFSF grant applications how SFSF
funds would be used to promote the four reform areas.




OIG Response

We did not change this section based on the Governor’s Office comments. The legislation does
not mention that these raises are intended to save jobs or retain particular teachers in particular
schools. Section 95 of HB 3646 is a contingency provision which specifies that the pay raise
Audit Report
ED-OIG/A06J0013                                                                    Page 10 of 23

requirement would not take effect unless it was determined that the pay increases were an
allowable use of Federal stimulus funds under ARRA.Based on this provision, the Legislature’s
intent appears to be that the teacher pay raises be funded with Federal SFSF funds. Given the
state of many LEAs’ budgets at the time of the legislation’s passage, unless additional State
funds or other Federal funds were made available to cover the pay raises, ARRA would have to
be the source of funds for the mandatory pay raises. ARRA is a one-time infusion of new
resources. According to Department guidance, these funds should be invested in ways that do
not result in unsustainable continuing commitments after the funding expires. By not providing
any State funds for the pay raises, the State or the LEAs, or both, may be required to identify
additional funding to support the pay raises after SFSF funds are no longer available.

                                       BACKGROUND

The Texas Governor’s Office was allocated $2.9 billion for SFSF. The State also was allocated
$959 million in ARRA Title I and IDEA funding and $17.9 million in ARRA Vocational
Rehabilitation Act funding. In Texas, the Governor’s Office identified THECB as the
administrator of the SFSF Government Services funds. Title I, IDEA, and SFSF Education
Stabilization Funds are administered by TEA. Vocational Rehabilitation funds are administered
by the DARS.

On April 1, 2009, the Department made available 50 percent of the funds for the State’s Title I,
IDEA, and Vocational Rehabilitation Act programs authorized through ARRA. As of
October 8, 2009, TEA had drawn down more than $29 million in funds. DARS had not drawn
down any funds.

                                         Table 1. TEA
                                       Allocation         Award                   Drawdown
                                        Amount           Amount                    Amount
           Title I                    $948,737,780    $474,368,891              $13,403,670
           IDEA                       $969,964,750    $484,982,375              $15,823,147
          TOTAL:                    $1,918,702,530    $959,351,266              $29,226,817

The State’s Application for Initial Funding under the SFSF Program was approved on
July 24, 2009. As of August 28, 2009, the State had not drawn down any SFSF funds.

                                  Table 2. Governor’s Office
                                      Allocation           Award                  Drawdown
                                       Amount              Amount                  Amount
    Education Stabilization        $3,250,200,000      $2,177,682,329                 -
     Government Services             $362,592,500            -                        -
        Total SFSF                 $3,612,792,500      $2,177,682,329                 -
Audit Report
ED-OIG/A06J0013                                                                     Page 11 of 23


                              SCOPE AND METHODOLOGY

Our audit covered TEA’s and other State of Texas agencies’ designs for systems of internal
control over the administration and use of ARRA funds as of September 30, 2009. We assessed
the design of State-level internal control that TEA, DARS, THECB, and the Governor’s Office
planned to use in administering funds received under ARRA for Title I, IDEA, Vocational
Rehabilitation Act, and SFSF programs. We reviewed State-level control over data quality, cash
management, and subrecipient monitoring. In addition, we assessed the design of control for the
three areas listed above and the use of funds at three LEAs: DISD, Fort Bend, and Cleburne.

Our audit was limited to assessing the design of internal control. We did not evaluate or test the
implementation of the control. Also, during and subsequent to our fieldwork, TEA, DARS,
THECB, and the Governor’s Office were continuing the process of designing and implementing
internal control over their administration of ARRA funds. Thus, the plans and processes
reviewed during our audit might be substantially modified or not implemented as designed. In
addition, because TEA, DISD, Fort Bend, Cleburne, DARS, and THECB had not used ARRA
funds at the time of our audit for Title I, IDEA, Vocational Rehabilitation Act, and SFSF
programs, we were not able to test the use of funds and might not have been aware of unique
factors related to the administration of ARRA funds during our assessment of the design of
internal control. Because of the limited nature of our review and the other factors, there is a
more than a remote possibility that other opportunities for improvement in the State and local-
level systems of internal control could exist but not be identified by our audit.

To assess the design of internal control, we:

  •    Reviewed prior single audits and applicable reports issued by the Government
       Accountability Office, the OIG, and the Texas SAO;
  •    Gained an understanding of the portions of the law, regulations, Department guidance,
       OMB Circulars, and contract and grant agreements relevant to the audit’s objectives;
  •    Identified ARRA funds allocated to TEA and the Governor’s Office for Title I, IDEA,
       Vocational Rehabilitation Act, and SFSF programs;
  •    Interviewed TEA officials responsible for Title I, IDEA, and SFSF;
  •    Interviewed DAR program officials responsible for the Vocational Rehabilitation Act;
  •    Interviewed THECB officials involved with the SFSF Government Services funds;
  •    Obtained and reviewed written policies and procedures related to data quality, cash
       management, and subrecipient monitoring for Title I, IDEA, the Vocational
       Rehabilitation Act, and SFSF;
  •    Obtained and reviewed TEA’s monitoring protocols for Title I, IDEA, and SFSF;
  •    Interviewed officials at the Governor’s Office, including the Senior Advisor to the
       Governor;
  •    Interviewed officials at the Texas State Comptroller;
  •    Obtained and reviewed Texas’ approved Part I SFSF application and the Texas State
       Biennial budget; and
  •    Interviewed school district officials at DISD, Fort Bend, and Cleburne.

We conducted our work from May through September 2009 at TEA, DARS, THECB, and the
Governor’s Office in Austin, Texas; at Dallas Independent School District in Dallas, Texas; at
Audit Report
ED-OIG/A06J0013                                                                  Page 12 of 23

Fort Bend Independent School District in Fort Bend, Texas; and at Cleburne Independent School
District in Cleburne, Texas. We discussed the results of our audit and recommendations with
TEA, DARS, THECB, and the Governor’s Office officials on September 3, 2009. In addition,
we took into consideration information provided by the Governor’s Office on
December 16, 2009.

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 that the evidence obtained provides a reasonable basis
for our findings and conclusions based on our audit objectives.
Audit Report
ED-OIG/A06J0013                                                           Page 13 of 23




                                Enclosure:
                        Governor’s Office Comments


            NOTE: Recommendation 1.1 was deleted in the final report and subsequent
         recommendations were renumbered. Therefore, the reference in the comments to
      Recommendation 1.2 relates to Recommendation 1.1; references to Recommendation 1.3
            relate to Recommendation 1.2; references to Recommendation 1.4 relates to
                            Recommendation 1.3 in the final report.
                                                 OFFICE OF THE GOVERNOR
RICK PERRY
GOVERNOR




             December 16, 2009
             Mr. Gary D. Whitman
             Regional Inspector General for Audit, Region V
             Office of the Inspector General
             U.S. Department of Education
             400 Maryland Avenue, Southwest
             Washington, D.C. 20202
             RE: Control Number ED-OIG/A06J0013

             Dear Mr. Whitman:

             Thank you for the opportunity to respond to the Office of the Inspector General's (OIG) findings
             outlined in your draft report dated December 2009 and titled "Systems of Internal Control over
             Selected American Reinvestment and Recovery Act (ARRA) funds in the State of Texas." We
             understand that this report was issued after a preliminary review of internal controls by the OIGs
             of a number of Texas state agencies and local education agencies (LEAs) receiving funds under
             ARRA.

             As OIG indicated, its review was performed before many of the Texas agencies and LEAs
             received or disbursed ARRA funding. Because it was performed at such an early date in the
             ARRA process, the review does not currently reflect many of the structures established to ensure
             the proper administration and monitoring of ARRA funds. The State of Texas is committed to
             ensuring that it adheres to the accountability and transparency requirements of ARRA. In June
             2009, Governor Perry issued an executive order requiring all state agencies and institutions of
             higher education to adhere to all federal and state statutes, laws and policies related to ARRA.

             Although the review was preliminary, we were encouraged that OIG recognized substantial
             efforts Texas had already made to ensure accountability and transparency, including the addition
             of staff in the state auditor's office and the Texas Education Agency (TEA) for monitoring of
             ARRA recipients, and the TEA Commissioner's Task Force on Federal Stimulus and
             Stabilization. As you will see by our response, Texas has put structures in place to ensure
             oversight of these programs.


                                                                                                               POST OFFICE BOX
                                                                                                               12428 AUSTIN,
                           TEXAS 78711 (512)463-2000 (VoicE)/Ditu. 7-1-1 FOR RELAY SERVICES
                                       VISIT WWW.TEXASONLINE.COM THE OFFICIAL WEB SITE OF THE STATE OF TEXAS
Audit Report
ED-OIG/A06J0013                                                                  Page 15 of 23

Mr. Gary D. Whitman
December 16, 2009
Page 2


Included in this letter are responses to OIG's findings and recommendations based on input from
TEA, Texas Higher Education Coordinating Board, the Fort Bend Independent School District
and the Office of the Governor. We look forward to working with the OIG to ensure that Texas
remains in compliance with ARRA requirements.

Sincerely,

     /s/
Mike Morrissey
Senior Advisor
Office of the Governor


MM:jwp
Enclosure
Audit Report
ED-OIG/A06J0013                                                                    Page 16 of 23

FINDING

1. THECB Could Improve Its Monitoring of Subrecipients and Their Collection and Reporting
System to Support the Reporting of ARRA data to Ensure Compliance with ARRA Reporting
Requirements

RESPONSE
At the time of the preliminary review, THECB had not awarded any ARRA funds and was still
preparing subrecipient monitoring and reporting processes. No funds were awarded during the
reporting period, which ended September 30, 2009. To date, $370 million of the total ARRA
funding designated to THECB has been awarded. Therefore, the review findings do not
accurately reflect THECB's established monitoring and reporting processes. Please see
http://www.thecb.state.tx.us/index.cfm?objectid=-EDA08572-D9A5-77E9-
D5F432A2A7EEOD6B for information about THECB and ARRA.

THECB management has acquired the resources to administer and monitor the State Fiscal
Stabilization Fund (SFSF) — Government Services Funds (GSF) assigned to the agency by the
Office of the Governor. Specifically, THECB established an ARRA Grants Program office and
staffed it with five full-time equivalents (FTEs) with the combined experience and skill sets
required to monitor subrecipients and their collection and reporting systems to ensure
compliance with ARRA.

If necessary, the ARRA Grants Program office has the capability to rapidly expand its resources
with experienced temporary personnel, and is fully supported by existing THECB staff in the
areas of finance, legal, strategic planning, external relations and internal audit. THECB staff is
experienced in federal grant management and higher education administration, and is dedicated
to the transparent and accountable implementation of the ARRA SFSF-GSF subawards. The
institutions and agencies that will be receiving ARRA funds through THECB will be held
accountable for their projects in all respects. THECB has a strong working relationship with
higher education, community colleges and other eligible institutions participating in the GSF
program.

Subsequent to the review, THECB established policies and procedures to ensure adequate
oversight of subrecipients receiving ARRA SFSF-GSF funding, to include eligible institutions of
higher education, community and junior colleges, state agencies, and non-profit entities. It also
conducted a training seminar in September 2009 to ensure eligible entities were aware of ARRA
guidelines. THECB established an application process for GSF funding, requiring potential
recipients to undergo an application and notice of grant award process, and to report monthly
regarding their grant awards.

RECOMMENDATION

1.1. Develop and implement monitoring procedures that address ARRA requirements, including
those requirements specific to the SFSF program, for all entities receiving the SFSF Government
Services Funds
Audit Report
ED-OIG/A06J0013                                                                   Page 17 of 23


RESPONSE

At the time of the preliminary review, THECB had not awarded any ARRA funds and was still
preparing subrecipient monitoring and reporting processes. No funds were awarded during the
reporting period ending September 30, 2009. To date, $370 million of the total ARRA funding
designated to THECB has been awarded. Therefore, the review finding does not accurately
reflect THECB's established monitoring and reporting processes. Please see
http://www.thecb. state .tx.us/index.cfm?objectid=EDA08572-D9A5-77E9-
D5F432A2A7EE0D6B for information about THECB and ARRA.

THECB has developed and implemented procedures designed to perform the following
stewardship activities for its ARRA SFSF-GSF awards:

   a. Advise subrecipients of requirements imposed on them by federal laws, regulations of the
      flow-down provisions of the prime contract or grant agreement, and any supplemental
      requirements imposed by THECB dependent on level of risk as determined by THECB.
      (Please see the ARRA GSF Terms and Conditions and the ARRA GSF Guidelines posted
      on THECB ARRA web site indicated above.) THECB will continue to provide
      subrecipients with new information as it becomes available.
   b. Provide the most current information available to describe the federal prime award to
      each subrecipient, including the Catalog of Federal Domestic Assistance (CFDA) title
      and number, award name and number, award year, the type of award, and the name of the
      federal sponsor, as required by OMB Circular A-133.
   c. Monitor the costs and activities of subrecipients as appropriate, to confirm that funding
      provided to the subrecipient is used for purposes authorized in the negotiated agreement,
      and that performance goals (scope of work or specific aims) articulated in the scope of
      work are achieved.
   d. Upon receipt of an unfavorable audit report from a subrecipient, confirm that the
      subrecipient has taken appropriate and timely corrective action. If a material weakness or
      other reportable condition exists, monitoring of the subrecipient will be more frequent
      and appropriate management actions will be taken.
   e. Require each subrecipient to permit the sponsor and/or the THECB and its auditors to
       have access to the subrecipient's pertinent records and financial statements, as necessary.
   f. Confirm that subrecipients expending $500,000 (for fiscal years ending after December
      31, 2003) or more in federal awards during the subrecipient's fiscal year are compliant
      with OMB Circular A-133 audit requirements. Identify any material weaknesses or
      reportable conditions that result from the A-133 audit.
   g. Conduct subrecipient monitoring activities during pre-payment reviews, desk reviews,
      audits, and on-site monitoring visits, that will include, but not be limited to:
      1) Pre-payment review of invoices received from the subrecipient for allocability,
          allowability and reasonableness of costs and that charges are within the period of
          performance of the prime award. Subrecipient invoices will include sufficient detail
          to determine how awarded funds are being used. ARRA administrative unit
          reviewers will coordinate closely with the ARRA Grants Director in order to
          determine that costs are appropriate for the subaward.

                                                2
Audit Report
ED-OIG/A06J0013                                                                     Page 18 of 23

       2) Monitoring subrecipients to assure that invoices and progress reports are submitted in
          a timely manner.
       3) Questioning costs that differ materially from the approved budget or that appear
          unusual or unallowable, and withhold payment until a satisfactory explanation is
          received.
       4) Ensure that final invoices are identified as such, and assist as needed in completing
          project closeout requirements in accordance with federal award terms. Payments will
          not be approved until aggregated reported expenditures are compared to the approved
          budget costs for each cost category.
       5) Managing accurate and timely payment of all invoices. The invoice will be reviewed
          to ensure that the invoice number is correct, the amount invoiced is within the
          approved total cost of the subrecipient agreement, costs have been incurred within the
          subaward period, and final invoices are submitted within 60 days of the termination
          of the subaward.

RECOMMENDATION

1.2. Develop or modify its data collection system to reflect the additional reporting requirements
of ARRA

RESPONSE

At the time of the review, THECB had not awarded any ARRA funds and was still developing
data collection system processes. No funds were awarded during the reporting period ending
September 30, 2009. To date, $370 million of the total ARRA funding designated to THECB
has been awarded. Therefore, the review finding does not accurately reflect THECB's ARRA
established data collection systems. Please see
http://www.thecb.state.tx.us/index.cfm?objectid=EDA08572-D9A5-77E9-
D5F432A2A7EE0D6B for information about THECB and ARRA.

THECB is committed to ensuring that data collected by THECB is verifiable and timely to meet
the needs of the public. This is consistent with a long history of data collection for both federally
supported career and technical programs, and for state accountability programs. THECB has
developed systems and safeguards to ensure data collection. Prior to disbursement of ARRA
funds, grantees are required to submit an application for funds to THECB, which requires the
collection of all relevant data elements required for ARRA Section 1512 quarterly reporting.
These applications require the entity to agree to provide accurate and timely data. In addition,
THECB is currently conducting a comprehensive review of ARRA and federal agency reporting
requirements. If additional requirements are identified through this process, the current reporting
templates provided on the THECB ARRA web site will be modified to incorporate any
additional elements for subrecipient reporting. Existing internal systems that support THECB
grants management activities are being modified and tested in order to meet short timelines for
implementation. THECB has a secure web portal for receiving, sharing and sending data to
external users (subrecipients), and written procedures are being established that provide quality
control of all data collected and reported.



                                                  3
Audit Report
ED-OIG/A06J0013                                                                        Page 19 of 23


1.3. Monitor and verify the subrecipients' data collection efforts relating to the reporting
requirements

RESPONSE

At the time of the review, THECB had not awarded any ARRA funds and was still developing
data collection system processes relating to reporting requirements. No funds were awarded
during the reporting period ending September 30, 2009. To date, $370 million of the total
ARRA funding designated to THECB has been awarded. Therefore, the review finding does not
accurately reflect THECB's ARRA established data collection efforts. Please see
http://www.thecb.state.tx.us/index.cfm?objectid=EDA08572-D9A5-77E9-
D5F432A2A7EE0D6B for information about THECB and the ARRA.

THECB has processes to ensure the activities funded under the ARRA SFSF-GSF will be
monitored on a monthly basis as part of the comparison of grant expenditures. The monitoring
will include a combination of desk reviews and on-site visits to subrecipients using approved
sampling techniques. Subrecipients are required to provide both a progress report (which
includes required 1512 reporting data elements) and a budget report on a monthly basis. The
subrecipient inbound reports will be compared for accuracy to fiscal reports submitted
monthly for cost reimbursement. In addition, THECB will verify the information by sampling
techniques accepted by our internal audit department.

THECB is responsible for verifying data elements by reviewing the completed Section 1512
report against supporting records. Responsibilities include, but are not limited to:

   a. Collecting, reviewing and staying current on all applicable policies related to Section
      1512 (e.g., statewide policies, agency specific policies, OMB policies and federal grantor
      agency policies) so that the agency preparer is reporting data elements in a manner
      consistent with relevant policies.
   b. Using an agency reviewer checklist, conduct a review of the Section 1512 report.
   c. Documenting exceptions resulting from review of the agency approval, data exception
       and remediation plans. Exceptions will be described either in quantitative or qualitative
       terms so the significance or materiality of the exception is understood.
   d. Summarizing the exceptions noted by award/project on the agency approval, data
       exception and remediation plans to the agency deputy commissioner for review and
       certification.
   e. Data quality associated with the American Recovery and Reinvestment Act will be taken
      into consideration in conducting the review process. The following OMB documents are
      relevant: Implementing Guidance for the Reports on Use of Funds Pursuant to the
      American Recovery and Reinvestment Act of 2009, June 22, 2009, and Assessing the
      Reliability of Computer-Processed Data, July 2009, External Version I.




                                                   4
Audit Report
ED-OIG/A06J0013                                                                    Page 20 of 23

RECOMMENDATION

1.4. Develop criteria and methodologies for entering and reporting on Section 1512 data
elements

RESPONSE

At the time of the review, THECB had not awarded any ARRA funds and was still developing
data collection system processes relating to reporting requirements. No funds were awarded
during the reporting period ending September 30, 2009. To date, $370 million of the total
ARRA funding designated to THECB has been awarded. Therefore, the review finding does not
accurately reflect THECB's ARRA established methodology for entering and reporting Section
1512 data. Please see http://www.thecb.state.tx.us/index.cfm?objectid=EDA08572-D9A5-77E9-
D5F432A2A7EE0D6B for information about THECB and ARRA.

THECB is developing and implementing the following agency-wide ARRA reporting
requirements:

   a.   Processes to collect, review and report all required data elements in Section 1512.
   b.   A plan or method to ensure the accuracy, completeness and timely reporting of the
        required data.
   c.   Methodology by which subrecipients are to estimate the number of jobs created or
        retained to ensure ARRA subrecipients report consistent and reliable job number data.
   d.   Perform data quality review for material omissions and/or significant reporting errors,
        make appropriate and timely corrections to subrecipient data, and work with
        subrecipients to address data quality issues.

THECB is responsible for preparing the prime recipient Section 1512 report. Because no funds
were disbursed during the reporting period that ended September 30, 2009, the reporting period
ending December 31, 2009, will be the first period for which THECB prepares the prime
recipient 1512 report including information from subrecipient IHEs and state agencies. THECB
will perform several activities, including, but not limited to:

   a.   Collecting, reviewing and staying current on all applicable policies related to Section
        1512 (e.g., statewide policies, agency specific policies, OMB policies and federal grantor
        agency policies) to ensure reports are consistent with all applicable policies.
   b.   Obtaining, reviewing and reconciling data provided to THECB from subrecipients.
   c.   Collecting all necessary data from subrecipients/vendors to complete the Section 1512
        report.
   d.   Conducting a review of the data collected from the subrecipients/vendors to ensure the
        application of policies and guidance (e.g., measurement of jobs created and retained) are
        consistent.
   e.   Communicating data exceptions or differences noted to the subrecipient/vendor so that
        the appropriate remediations can be made.
   f.   Conducting follow-up procedures as well as reviews of updated data provided by the
        subrecipients/vendor to ensure the data exceptions were appropriately addressed.
Audit Report
ED-OIG/A06J0013                                                                       Page 21 of 23

   g. Completing the 1512 reporting template.
   h. Conducting a completeness and accuracy review of the completed Section 1512 report
      prior to submittal.
   i. Preparing and retaining all necessary supporting schedules and documentation.
   j. Establishing a remediation plan, based on recommendations from the agency reviewers or
      others, for each exception noted.

FINDING

2. TEA Could Improve Oversight of LEAs to Ensure Compliance with ARRA Requirements

RESPONSE

To receive ARRA funding, LEAs must apply to TEA. An LEA's application must provide
assurances to TEA that the LEA's fiscal control and accounting procedures permit the tracing of
funds to a level of expenditure adequate to establish that funds have been used in accordance
with the approved grant application. To review the application for the ARRA programs
reviewed by ED-OIG, please visit
http://burleson.tea.state.tx.us/GrantOpportunities/forms/GrantProgramSearch.aspx.

The applicant must maintain effective control over and accountability for all funds, property and
other assets. LEAs have been provided with extensive training and information on required
actions LEAs must take to comply with the ARRA reporting and compliance. To view a TEA
LEA webinar please visit http://www.tea.state.tx.us/webinar.aspx.

In addition, the TEA established a Special Monitoring Unit section within the Division of
Financial Audits. The section was created specifically to carry out oversight responsibilities of
subrecipient use of ARRA funded grants. The section consists of experienced audit staff
members including five additional auditors.

During its review, OIG found that the Fort Bend Independent School District's accounting
system was not secure, as it allowed unauthorized users to access the system. An insecure
accounting system could lead to unauthorized users accessing the local education agency's
accounting system and jeopardizing ARRA funds.

OIG made two recommendations related to this finding.

RECOMMENDATION

2.1. Implement accounting system security features [at Fort Bend ISD] and assign appropriate
levels of access and restrictions to district personnel

RESPONSE

Fort Bend ISD is in the process of upgrading its software program and security will be the top
priority. User access will be assigned by role rather than by individual. The business office will

                                                   6
Audit Report
ED-OIG/A06J0013                                                                    Page 22 of 23

be working closely with information services staff in the assignment of security to ensure that
they have adequate separation of duties and that staff only have access to needed areas.

RECOMMENDATION

2.2. Instruct all LEAs about the importance of computer security

RESPONSE

The agency has emphasized and will continue to emphasize to the LEAs the importance of
computer security. Throughout the Financial Accountability System Resource Guide the agency
discusses the importance of computer security and protecting the district's funds and records.
The agency will send out correspondence to all LEAs reminding them of the importance of
secure fiscal control and accounting procedures to ensure that unauthorized users cannot
access their accounting system and jeopardize ARRA funds. Please see
http://www.tea.state.tx.us/index4.aspx?id=1222 for a copy of this guide.

OTHER MATTERS

Texas Legislature Passed a Pay Raise Contingent on Receipt of SFSF Funds

OIG identified a concern with a pay raise included in Texas House Bill 3646, signed into law on
June 19, 2009. This legislation provided for mandatory pay raises for many local education
agency (LEA) staff, provided that TEA was able to confirm that such raises would be an
acceptable use of ARRA funds assigned to the district. Based on the fact that this legislation
did not specifically designate certain funds for these raises, that the raises are effective
provided ARRA may be used for them, and the fact that one district interviewed indicated that
they "did not believe they had any discretion in the funding sources for the raises," OIG
indicated that these raises were contrary to April 2009 Department of Education guidance
which indicates that the state may not mandate how an LEA will use SFSF funds.

In addition, OIG expressed concern that these raises were not consistent with a September 2009
press release by the department that encourages ARRA funds to be used as "resources to attract,
reward, and retain highly effective teachers in hard-to-staff schools." Because these raises
were not focused on specific schools or teachers, OIG expressed concern that the raises were
inconsistent with this guidance.

RESPONSE

As specifically stated in the state's approved application for SFSF to the U.S. Department of
Education, LEAs are not required to use ARRA funds to pay for salary increases detailed in HB
3646. Under the provisions of HB 3646, LEAs are free to use local, state or federal funds to pay
for salary increases. While, under HB 3646, salary increases were contingent on the U.S.
Department of Education's approval of the state's application for ARRA funding, the legislation
did not direct LEAs to use ARRA funding for the salary increases. Despite the misinformed



                                                 7
Audit Report
ED-OIG/A06J0013                                                              Page 23 of 23

statements of the LEA questioned by ED-OIG, LEAs were clearly notified that salary increases
may be funded by ARRA or local or state or other federal funds.
In July 2009, TEA issued written strategic guidance to LEAs regarding SFSF funding, including
a discussion of the HB346 pay raises. (Please see
http://ritter.tea.state.tx.us/edex/docs/ARRAstrategicGUIDANCE.pdf for this document.) It
specifically states, "The pay raise required under the bill may be funded using State Fiscal
Stabilization Fund (SFSF), state or local funds. However, there is no requirement under HB
3646 that SFSF funds be used to fund these salary increases." This point was also included in a
July 30, 2009, letter to LEA administrators. (Please see
http://ritter.tea.state.tx.ushaa/formfund073009.html.) Similar language is used in an August
6, 2009, communication to LEA administrators, as well. (See
http://ritter.tea.state.tx.us/taa/eqs080609.html.) It is at the discretion of the LEAs to use ARRA
funds received as they see fit so long as they comply with federal and state law and reporting and
auditing requirements.

With regard to OIG's concern that these salary increases were not consistent with the U.S.
Department of Education press release encouraging use of SFSF funds for targeted schools or
teachers, this press release was issued in September 2009, three months after the enactment of
HB3646, and encourages, but does not require, SFSF funds to be spent on the aforementioned
purposes. Under ARRA, LEAs alone determine how to spend SF SF funds, and the U.S.
Department of Education press release was merely guidance. Texas has encouraged LEAs to
spend SFSF and other ARRA monies consistently with U.S. Department of Education guidance.
Both the July 30, 2009, letter to LEAs and the July 2009 guidance on SFSF encourage LEAs to
use funds toward the four reform areas established by the U.S. Department of Education.
Furthermore, Texas LEAs were required to outline in their SFSF grant applications how SFSF
funds would be used to promote the four reform areas. Please see the SFSF grant application at
http://maverick.tea.state.tx.us:8080/Guidelines/SFSF/ARRASF10/SF SF Grant
Application.pdf.




                                              8
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