oversight

Missouri: Use of and Reporting on Selected American Recovery and Reinvestment Act of 2009 Program Funds.

Published by the Department of Education, Office of Inspector General on 2011-06-07.

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

           U.S. Department of Education
            Office of Inspector General


    American Recovery and
    Reinvestment Act of 2009
          Missouri: Use of and Reporting on Selected
American Recovery and Reinvestment Act of 2009 Program Funds


                     Final Audit Report




                      Missouri State Capitol


   ED-OIG/A07K0002                             June 2011
       Abbreviations, Acronyms, and Short Forms
                  Used in this Report
___________________________________________________
C.F.R.                     Code of Federal Regulations

Department                 U.S. Department of Education

DESE                       Missouri Department of Elementary and Secondary Education

FTE                        Full-time equivalent

IDEA                       Part B of the Individuals with Disabilities Education Act, as amended

IHE                        Institution of Higher Education

Kansas City                Kansas City Missouri School District

LEA                        Local educational agency

Office of Administration   Missouri Office of Administration

OMB                        Office of Management and Budget

Recovery Act               American Recovery and Reinvestment Act of 2009

SFSF                       State Fiscal Stabilization Fund

SFSF-Education             State Fiscal Stabilization Fund, Education Stabilization Fund

SFSF-Government            State Fiscal Stabilization Fund, Government Services Grant

St. Louis                  St. Louis Public Schools

Title I                    Title I, Part A of the Elementary and Secondary Education Act of
                           1965, as amended

TSA                        Treasury-State Agreement

Treasury Office            State of Missouri Treasury Office

University of Missouri     University of Missouri System
                           UNITED STATES DEPARTMENT OF EDUCATION
                                            OFFICE OF INSPECTOR GENERAL

                                                                                          AUDIT SERVICES
                                                                             Chicago/Kansas City Audit Region


June 7, 2011



Chris L. Nicastro, Ph.D.                                           Linda Luebbering
Commissioner of Education                                          Budget Director
Missouri Department of Elementary                                  Office of Administration
and Secondary Education                                            Division of Budget and Planning
205 Jefferson Street                                               P.O. Box 809
P.O. Box 480                                                       Jefferson City, MO 65102
Jefferson City, MO 65102

Dear Dr. Nicastro and Ms. Luebbering:

Enclosed is our final audit report, Control Number ED-OIG/A07K0002, titled ―Missouri: Use
of and Reporting on Selected American Recovery and Reinvestment Act of 2009 Program
Funds.‖ This report incorporates the comments you provided in response to the draft report.

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

                                             Ann Whalen
                                     Deputy Director for Programs
                                   Implementation and Support Unit
                                    Office of the Deputy Secretary
                                    U.S. Department of Education
                                     400 Maryland Avenue, S.W.
                                       Washington, DC 20202

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




      The Department of Education’s mission is to promote student achievement and preparation for global
                competitiveness by fostering educational excellence and ensuring equal access.
Chris L. Nicastro, Ph.D., et al.
Page 2

                              Thelma Meléndez de Santa Ana, Ph.D.
                   Assistant Secretary for Elementary and Secondary Education
                          Office of Elementary and Secondary Education
                                  U.S. Department of Education
                                   400 Maryland Avenue, 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.

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 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
Final Report
ED-OIG/A07K0002                                                                     Page 1 of 25

                U.S. Department of Education – Office of Inspector General
                         Missouri: Use of and Reporting on Selected
               American Recovery and Reinvestment Act of 2009 Program Funds
                           Control Number ED-OIG/A07K0002

                                            PURPOSE
The American Recovery and Reinvestment Act of 2009 (Recovery Act) placed a heavy emphasis
on accountability and transparency and, in doing so, increased the responsibilities of the agencies
that are impacted by the Recovery Act. Overall, the U.S. Department of Education (Department)
is responsible for ensuring that education-related Recovery Act funds reach intended recipients
and achieve intended results. This includes effectively implementing and controlling funds at the
Federal level; ensuring that recipients understand requirements and have proper controls in place
over the administration of and reporting on Recovery Act funds; and promptly identifying and
mitigating instances of fraud, waste, and abuse of the funds.

The objectives of our audit were to determine whether Missouri and its subrecipients (1) used
Recovery Act funds in accordance with applicable laws, regulations, and guidance; and
(2) reported Recovery Act data that were accurate, reliable, complete, and in compliance with
Recovery Act reporting requirements. This report provides the results of the audit we conducted
at the Missouri Department of Elementary and Secondary Education (DESE), the Missouri
Department of Higher Education, Kansas City Missouri School District (Kansas City), St. Louis
Public Schools (St. Louis), and the University of Missouri System (University of Missouri). We
focused our audit on State-level and local-level uses of funds and data quality related to 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); and State Fiscal
Stabilization Fund (SFSF) grant funds received through the Recovery Act. For use of funds, we
reviewed expenditures incurred from July 2009 through February 2010. For data quality, we
reviewed data for the quarterly reporting periods that ended September 30, 2009, and December
31, 2009.


                                      RESULTS IN BRIEF

Missouri made proactive efforts to ensure subrecipients’ compliance with Recovery Act
requirements. These efforts included the timely distribution of information and guidance to
assist local educational agencies (LEA) and institutions of higher education (IHE) in
understanding their Recovery Act responsibilities. Missouri also required LEAs and IHEs to
provide assurances that funds would be used only for activities authorized by the Recovery Act.
LEAs and IHEs also were required to provide assurances that they would be accountable and
transparent in the reporting of their data. Although these assurances were provided,
subrecipients in Missouri might not have used Recovery Act funds for authorized activities and
did not always report accurate, reliable, and complete data.
Final Report
ED-OIG/A07K0002                                                                                     Page 2 of 25
We found that

        three subrecipients we visited did not properly account for $59.8 million in SFSF funds;
        Missouri and its subrecipients did not always follow Federal cash management
         requirements; and
        data reported to the Federal government were not always accurate, reliable, and complete.

To reduce the likelihood of such problems occurring in the future, Missouri and its subrecipients
need to improve their systems of internal control to provide reasonable assurance that

        SFSF funds are accounted for properly;
        cash management procedures are aligned with Federal regulations; and
        data reported to the Federal government are accurate, reliable, and complete.

We provided the draft of this report to Missouri for review and comment on January 20, 2011. On
February 15, 2011, the Missouri Office of Administration (Office of Administration)1 provided
comments on behalf of itself, DESE, and the Missouri Department of Higher Education, stating
that Missouri did not entirely concur with Finding Nos. 1, 2, and 3. Missouri concurred or
partially concurred with draft Recommendations 1.1, 1.3, 2.1, 2.2, and 3.1 and explained its
corrective plans for these five recommendations. (Missouri completed corrective action on draft
Recommendation 1.3; therefore, we did not include the recommendation in this final audit
report.) Missouri’s comments are summarized at the end of each finding and are included in their
entirety as an Enclosure.

Based on Missouri’s comments and subsequent documentation received from the Office of
Administration and DESE, we revised our findings and recommendations. We removed our
finding that two subrecipients we did not visit used Recovery Act funds for unallowable
purposes. We also deleted references to formal interagency agreements in Finding Nos. 1 and 3
and removed draft Recommendations 1.2 and 3.2. We agree with Missouri that interagency
agreements between the Office of Administration and the State agencies receiving SFSF funds
would not be practical at this time because Missouri’s subrecipients already have expended the
majority of their SFSF funds. We did not make any other significant changes to our findings or
recommendations.

In the draft of this report, we reported in the Other Matters section that Recovery Act programs
should be covered by Missouri’s Treasury-State Agreement (TSA), but Missouri’s TSA did not
list Recovery Act Title I, IDEA, or SFSF as major programs even though they each exceeded the
major program threshold as defined by Missouri’s TSA. However, based on Missouri’s
comments and follow-up communications that we had with the U.S. Department of the Treasury,
we concluded that Missouri’s TSA covering the fiscal year that ended June 30, 2009, was not
required to include Recovery Act programs because the programs were not identified as major




1
 The grantee project director for SFSF, as listed on the grant award notification, is the Missouri Budget Director,
Office of Administration, Division of Budget and Planning.
Final Report
ED-OIG/A07K0002                                                                                  Page 3 of 25
Federal assistance programs in Missouri’s most recent Single Audit.2 Therefore, we removed
from the Other Matters section the suggestion that Recovery Act programs should be covered by
Missouri’s TSA.


                                              BACKGROUND

The Recovery Act was signed into law on February 17, 2009, and had three immediate goals:
(1) create new jobs and save existing ones, (2) spur economic activity and invest in long-term
growth, and (3) foster accountability and transparency in government spending. To ensure
transparency and accountability of Recovery Act spending, recipients are required to submit
quarterly reports on Recovery Act awards, spending, and jobs impact (§ 1512 of the Recovery
Act). According to the Office of Management and Budget (OMB), the reports should contain
detailed information on the projects and activities funded by the Recovery Act and will provide
the public with transparency into how Federal dollars are being spent. The reports also will help
drive accountability for the timely, prudent, and effective spending of Recovery Act funds.

Missouri was awarded more than $1 billion in education-related Recovery Act funds. As of
July 19, 2010, Missouri had received more than $750 million. Table 1 shows the amount of
funds awarded to and received by the Executive Office of the State of Missouri and DESE (data
are limited to Recovery Act funding related to the Title I, IDEA, and SFSF programs).

Table 1. Recovery Act Funding for Selected Programs in Missouri, as of July 19, 2010
                                                                    Percentage of Award
        Program            Awarded                Received              Received (%)
SFSF-Education            $753,172,335          $504,625,464                  67
SFSF-Government           $167,576,241           $62,645,285                  37
SFSF Subtotal             $920,748,576          $567,270,749                  62
Title I                   $146,140,449           $75,312,487                  52
IDEA                      $227,175,274          $107,482,112                  47
        TOTAL           $1,294,064,299          $750,065,348                  58

Table 2 shows the amounts awarded to the three subrecipients we included in this audit. Table 2
also includes the amounts of Recovery Act Title I and IDEA funds expended by the
subrecipients and the percentage of the awarded amounts that each subrecipient had expended
during the time period reviewed. The three subrecipients we included in this audit were awarded
approximately 11 percent of the Recovery Act funding awarded to Missouri.




2
 Treasury regulations at Title 31 Code of Federal Regulations (C.F.R.) § 205.5(e) provide that ―unless specified
otherwise, major Federal assistance programs must be determined from the most recent Single Audit data available.‖
All regulatory citations are to the July 1, 2009, volume unless otherwise specified.
Final Report
ED-OIG/A07K0002                                                                         Page 4 of 25
Table 2. Recovery Act Awards and Expenditures by Subrecipient
                                                               Percentage of
                                                                  Award
                       Amount                Amount             Expended             Time Period
   Program             Awarded              Expended               (%)                 Reviewed
                                              Kansas City
Title I                $8,678,293          $1,670,424               19              7/1/09-2/28/10
IDEA                   $5,887,978          $1,135,313               19              7/1/09-2/28/10
Subtotal              $14,566,271          $2,805,737               19
SFSF-
Education             $16,844,861             N/A                  N/A                   N/A
SFSF-
Government               $162,400             N/A                  N/A                   N/A
Subtotal              $17,007,261             N/A                  N/A
                                                St. Louis
Title I               $15,198,339          $4,207,810               28              7/1/09-2/28/10
IDEA                   $8,587,603          $1,497,919               17              7/1/09-2/28/10
Subtotal              $23,785,942          $5,705,729               24
SFSF-
Education             $17,373,473             N/A                  N/A                   N/A
SFSF-
Government                $32,000             N/A                  N/A                   N/A
Subtotal              $17,405,473             N/A                  N/A
                                         University of Missouri
SFSF-
Education             $49,772,727             N/A                  N/A                   N/A
SFSF-
Government            $24,278,199             N/A                  N/A                   N/A
Subtotal              $74,050,926             N/A                  N/A
We could not identify SFSF-Education or SFSF-Government expenditures, because the three
subrecipients did not establish expenditure codes for the programs. (See Finding No. 1.)

The Missouri legislature and Governor determined that a portion of the State’s primary funding
formula for elementary and secondary education would be funded from SFSF-Education
Stabilization Fund (SFSF-Education) funds. The legislature and Governor also authorized
SFSF-Government Services Fund (SFSF-Government) funds for other elementary and secondary
education purposes. SFSF-Education and SFSF-Government funds also were assigned to the
Missouri Department of Higher Education for specific IHEs.

The Governor designated DESE as the payee for SFSF-Education and SFSF-Government funds.
DESE draws Federal funds on a monthly basis and deposits all education-related funds in the
State account at Missouri’s Treasury Office (Treasury Office). DESE disburses payments to the
subrecipients from the Treasury Office account.
Final Report
ED-OIG/A07K0002                                                                  Page 5 of 25


                       FINDINGS AND RECOMMENDATIONS

FINDING NO. 1  Not All Missouri Subrecipients Accounted for SFSF in Accordance with
                Applicable Laws, Regulations, and Guidance

As of December 31, 2009, the three subrecipients we visited had received $47.8 million in
SFSF-Education funds and $12 million in SFSF-Government funds. However, none of the three
subrecipients adequately accounted for their SFSF funds. The subrecipients transferred their
SFSF funds into general accounts and did not maintain contemporaneous records sufficient to
demonstrate how SFSF funds were specifically used.

Inadequate Accounting for SFSF Funds

Kansas City Missouri School District
Kansas City was awarded $16.84 million in SFSF-Education and $162,400 in SFSF-Government
funds. By December 31, 2009, DESE had provided $11.2 million in SFSF-Education and
$162,400 in SFSF-Government funds to Kansas City. However, Kansas City did not establish
specific accounting codes for SFSF fund expenditures, which would have clearly identified the
expenditures that were supported by SFSF revenues.

When we asked for a list of specific personnel and non-personnel expenditures paid with
SFSF funds, Kansas City could not identify in its accounting records the specific expenditures
that it charged against SFSF revenue. Instead, Kansas City’s Grant Compliance and Financial
Reporting Manager ran a report that included certified employees, sorted the list in descending
order by annual salary amount, and selected the highest salaried employees until 252 employees
were selected. The 252 employees’ total salaries were about $3,000 less than Kansas City’s total
SFSF-Education allocation. The Grant Compliance and Financial Reporting Manager selected
the 252 employees to represent employees paid with SFSF-Education, because Kansas City
reported 252 jobs as created or retained by SFSF-Education funds on its quarterly report for the
period that ended December 31, 2009. However, Kansas City reported the number of jobs
created or retained using SFSF-Education funds based on dividing its SFSF revenue by the
average teacher salary. As illustrated above, Kansas City did not identify the individuals whose
salaries were paid with the SFSF funds; therefore, Kansas City could not determine the ―actual
hours worked in funded jobs‖ needed for reporting jobs created or retained. (See Finding No. 3
on page 14 of this report.) Kansas City also identified selected non-personnel expenditures that
approximately amounted to the SFSF-Government funds received from DESE to represent costs
funded by SFSF-Government funds. Although the expenditures Kansas City selected generally
would be appropriate uses of SFSF, because the identified expenditures were not reflected in
Kansas City’s accounting records as being funded by SFSF, we cannot be assured that they are
the actual expenditures paid with SFSF funds.

St. Louis Public Schools
St. Louis was awarded $17.4 million in SFSF-Education and $32,000 in SFSF-Government
funds. By December 31, 2009, DESE had provided $12.4 million in SFSF-Education and
$32,000 in SFSF-Government funds to St. Louis. When we asked for a list of specific personnel
Final Report
ED-OIG/A07K0002                                                                     Page 6 of 25
expenditures paid with SFSF funds, St. Louis provided a record that showed it used $1,865,138
of its SFSF-Education funds for administrative salaries, $14,026,418 for teacher salaries, and
$1,481,918 for support services salaries. However, the records neither specified the individuals
who were paid with SFSF-Education funds nor identified a pool of employees whose salaries
were paid with SFSF-Education funds (for example, all regular teachers at a particular high
school for a specific month). Because the records were not sufficiently detailed, St. Louis could
not show whether the individuals (a) worked sufficient hours to justify the salaries, (b) received
salaries similar to other employees who performed similar work and were paid from other
sources, and (c) were not paid more than once for the same work. Without such records, St.
Louis was not able to demonstrate that the salaries paid with SFSF-Education funds were
reasonable and necessary.

In addition, St. Louis did not establish specific accounting codes for SFSF-Government fund
expenditures, which would have clearly identified the expenditures that were supported by
SFSF revenues. When we asked for a list of specific non-personnel expenditures paid with
SFSF-Government funds, St. Louis identified selected non-personnel expenditures that
approximately amounted to the SFSF-Government funds received from DESE to represent costs
funded by SFSF-Government funds. Although the non-personnel expenditures that St. Louis
selected generally would be appropriate uses of SFSF-Government funds, because the identified
expenditures were not reflected in St. Louis’ accounting records as being funded by SFSF, we
cannot be assured that they are the actual expenditures paid with SFSF-Government funds.

The University of Missouri
The University of Missouri was awarded $49.8 million in SFSF-Education and $24.3 million in
SFSF-Government funds. By December 31, 2009, the Missouri Department of Higher Education
had provided $24.1 million in SFSF-Education and $11.8 million in SFSF-Government funds to
the University of Missouri. However, the University of Missouri did not establish specific
accounting codes for SFSF fund expenditures, which would have clearly identified the
expenditures that were supported by SFSF revenues.

When we asked for a list of specific personnel and non-personnel expenditures paid with
SFSF funds, the University could not identify in its accounting records the specific expenditures
that it charged against SFSF revenue. Instead, the University identified $48,281,536 in general
operating personnel expenditures to represent personnel expenditures paid with SFSF-Education
funds and identified $23,550,390 in general operating scholarship expenses to represent
non-personnel expenditures paid with SFSF-Government funds. However, the documentation
provided to support the expenses indicated that the expenses were funded by the University’s
general revenue pool. Therefore, the campus expending funds for salaries would be able to show
only that the salaries were funded from the general revenue pool and not specifically from
SFSF-Education funds. In addition to the SFSF funds, the general revenue pool contained
revenue from lottery proceeds, tuition and fees, and investments. The University did not provide
any documentation to show that separate expenditure codes were established for SFSF fund
expenditures or to show that an adjusting journal entry was done to apply the identified
expenditures to a unique SFSF expenditure account. Although the expenditures the University
selected generally would be appropriate uses of SFSF funds, because the identified expenditures
Final Report
ED-OIG/A07K0002                                                                          Page 7 of 25
were not reflected in the University’s accounting records as being funded by SFSF, we cannot be
assured that they are the actual expenditures paid with SFSF funds.

Federal Regulations Require Entities to Adequately Account for Federal Funds
Before receiving SFSF funds, Missouri stated on its ―Application for Initial Funding under the
State Fiscal Stabilization Fund Program‖ that the State and other entities would comply with
34 C.F.R. Parts 74, 76, and 80. According to 34 C.F.R. § 74.21(b), recipients’ financial
management systems shall provide for records that adequately identify the source and application
of funds for federally sponsored activities. Fiscal control and fund accounting requirements are
prescribed by 34 C.F.R. § 76.702, which states that States and subgrantees ―shall use fiscal
control and fund accounting procedures that insure proper disbursement of and accounting for
Federal funds.‖ According to 34 C.F.R. § 76.730, records related to grant funds maintained by
States and subgrantees should fully show the amount of funds under the grant or subgrant, how
the State or subgrantee used the funds, total cost of the project, the share of that cost provided
from other sources, and other records to facilitate an effective audit.

The Department’s ―Guidance for Grantees and Auditors, State Fiscal Stabilization Fund
Program‖ (December 24, 2009) states that

       the LEA must assure that it will (1) administer the program in accordance with all applicable
       statutes and regulations; and (2) use fiscal control and fund accounting procedures that will
       ensure proper disbursement of, and accounting for, the funds.

In other words, an entity that receives SFSF funds must maintain records that clearly account for
those funds.

The Department’s SFSF guidance also advises that, in accordance with the requirements of
Section 443(a) of the General Education Provisions Act (20 U.S.C. § 1232f(a)), each recipient of
SFSF funds must maintain records that fully disclose how those funds were used, the total cost of
the activity for which the funds were used, the share of that cost provided by other sources, and
such other records as will facilitate an effective audit. For instance, it would be impermissible for
an entity to maintain documentation that the SFSF funds were transferred into a general account
without further documenting how the SFSF funds were specifically used.

The Department’s SFSF guidance further states that States, LEAs, and IHEs must maintain
documentation that demonstrates the amount of SFSF funds used to support salaries. Entities
may demonstrate, at a minimum, that an aggregate amount of funds was used to support a group
of salary expenditures. However, to show that these costs are reasonable and necessary, the
entities must maintain contemporaneous documentation to show that individuals for whom salary
is paid worked sufficient hours to justify the salary, the levels of salaries were similar to other
employees who performed similar work and were paid from other sources, and that the
individuals were not paid more than once for the same work.
Final Report
ED-OIG/A07K0002                                                                   Page 8 of 25
Missouri’s and Its Subrecipients’ Systems of Internal Control over Monitoring Recovery
Act Funds Should Be Enhanced
The three subrecipients did not properly account for SFSF funds in part because of weaknesses
in Missouri’s system of internal control over Recovery Act funds. Pursuant to 34 C.F.R.
§ 80.40(a), ―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.‖

We concluded that stronger oversight of subrecipients is needed. The Office of Administration
is the SFSF grantee yet plays a minimal role in the administration and oversight of the
SFSF funds. Instead, the responsibility for SFSF falls to the individual State agencies receiving
the grants. However, DESE’s monitoring of the LEAs’ uses of SFSF-Education funds was
limited to reviewing LEAs’ A-133 audit reports and year-end financial summaries. Additionally,
the Missouri Department of Higher Education did not have an audit function and had a
decentralized structure that was not conducive to effective monitoring of the IHEs’ use of
SFSF funds.

The subrecipients we visited did not adequately account for SFSF expenditures for a variety of
reasons. Kansas City’s Grant Compliance and Financial Reporting Manager indicated that
Kansas City believed it was sufficient to simply select personnel and non-personnel expenditures
to represent the costs paid with SFSF funds. St. Louis’ Director of Federal Grants believed that
the SFSF guidance, which states that an entity may demonstrate that an aggregate amount of
funds was used to support a group of salary expenditures, allowed for the method St. Louis used
to account for SFSF-Education fund expenditures. The University of Missouri’s Assistant
Controller, Sponsored Programs Administration, considered it sufficient to elect to include
SFSF funds in the general operating pool and use the SFSF funds first to support personnel and
scholarship costs. However, because the University of Missouri did not code SFSF fund
expenditures, we could not determine whether SFSF funds were in fact expended first.

Because the SFSF expenditures that the subrecipients selected were not clearly identified in the
subrecipients’ accounting records, we could not determine whether the individuals (a) worked
sufficient hours to justify the salaries, (b) received salaries similar to other employees who
performed similar work and were paid from other sources, and (c) were not paid more than once
for the same work. We also could not determine whether the subrecipients used the SFSF funds
only for allowable costs and not for costs prohibited by the Recovery Act. As a result, about
$84 million in SFSF-Education funds and more than $24 million in SFSF-Government funds
were at increased risk of fraud, waste, and abuse. Given the current economic climate,
subrecipients might be experiencing tight budget constraints, increasing the risk of unallowable
or inadequately documented expenditures or misuse of funds related to Recovery Act programs.
Final Report
ED-OIG/A07K0002                                                                      Page 9 of 25
RECOMMENDATION

We recommend that the Director of the Implementation and Support Unit require Missouri to—

1.1   Instruct all Missouri subrecipients to (a) clearly account for the receipt and expenditure of
      all SFSF funds and (b) provide Missouri with written assurances that they have adequately
      accounted for all SFSF funds.

Auditee Comments
Missouri stated that it did not entirely concur with the finding.

Missouri concurred with draft Recommendation 1.1, stating that DESE and the Missouri
Department of Higher Education will provide guidance to subrecipients concerning accounting
for the receipt and expenditure of SFSF funds. In addition, the Office of Administration will
require subrecipients to provide written assurances that they have adequately accounted for all
SFSF funds by March 31, 2011. On March 28, 2011, the Office of Administration informed us
that it had received written assurances from the LEAs, which stated that the LEAs had
adequately accounted for all SFSF funds.

Missouri did not concur with draft Recommendation 1.2, which instructed Missouri to develop
formal interagency agreements between the Office of Administration and the State agencies
receiving SFSF funds. Missouri stated that formal interagency agreements between the Office of
Administration and the State agencies receiving SFSF funds are not necessary to administer the
SFSF grants. The State agencies (Office of Administration, DESE, and Missouri Department of
Higher Education) are part of the Executive branch of State government, and there can be
seamless cooperation on financial oversight without formal agreements. However, the Office of
Administration will continue to work closely with the State agencies to ensure that the State
agencies are aware of their roles and responsibilities for monitoring subrecipients’ accounting for
and use of SFSF funds.

Missouri partially concurred with draft Recommendation 1.3, which instructed Missouri to return
to the Department $272,627 in SFSF-Education funds that were used for the payment of
potentially unallowable maintenance costs. However, instead of returning to the Department the
SFSF funds that possibly were used for unallowable purposes, Missouri stated that DESE would
provide us with documentation showing that the LEAs reclassified the $272,627, charging the
costs to State and local sources instead of SFSF funds. DESE provided us the supporting
documentation on March 28, 2011.

OIG Response
We made changes to the finding and removed draft Recommendations 1.2 and 1.3. By
April 2011, Missouri had received and expended the majority of its SFSF-Education and
SFSF-Government funds. Because it would be impractical for the Office of Administration to
put interagency agreements in place for the administration of SFSF funds after the majority of
SFSF funds have been expended, we removed the recommendation pertaining to interagency
agreements. We also examined the supporting documentation that DESE provided and
determined that the $272,627 in maintenance costs that subrecipients originally charged to
Final Report
ED-OIG/A07K0002                                                                   Page 10 of 25
SFSF-Education funds were reassigned to non-SFSF sources in the subrecipients’ accounting
records. Therefore, we removed references to the $272,627 from the final audit report.

FINDING NO. 2  Missouri and Its Subrecipients Did Not Always Follow Federal Cash
                Management Requirements

Neither DESE’s nor the three subrecipients’ cash management policies and procedures were
aligned with Federal cash management requirements. DESE did not monitor whether
subrecipients had positive cash balances on hand before it disbursed the subrecipients’ next
Recovery Act monthly payments. In addition, all three of the subrecipients (Kansas City,
St. Louis, and the University of Missouri) we visited did not adequately monitor their
SFSF accounts for excess cash.

Noncompliance with Cash Management Requirements at the Prime Recipient-Level
DESE did not have an adequate process for monitoring subrecipients’ cash balances on hand
before it disbursed the subrecipients’ next Recovery Act monthly payments. DESE considered
monitoring LEAs for excess cash as part of its program monitoring for Title I and IDEA, which
is conducted using a risk-based approach, as sufficient control. As required by the Missouri
School Improvement Program, DESE conducts on-site monitoring of its Title I program at every
LEA at least once every 5 years (currently, SFSF is not included in DESE’s monitoring
protocols). Some LEAs are monitored more frequently than every 5 years using a risk
assessment based on size, audit issues, allegations, and failure to meet maintenance of effort
requirements. However, using this risk-based approach, some LEAs that are considered lower
risk could maintain excess cash balances for 5 years until DESE would detect the balances.
Whether LEAs are monitored every 5 years or more frequently, LEAs’ cash balances should be
monitored on an on-going basis rather than periodically to provide reasonable assurance that
Recovery Act payments are not made too far in advance of LEAs’ needs.

Noncompliance with Cash Management Requirements at the Subrecipient–Level
We found the following instances of non-compliance with Federal cash management
requirements at the three subrecipients we visited.

Kansas City Missouri School District
Kansas City received SFSF funds from DESE beginning in July 2009. SFSF-Education funds
were disbursed to Kansas City based on a funding formula rather than based on actual cash
needs. Also, as discussed in Finding No. 1, Kansas City recorded the SFSF-Education and
SFSF-Government funds as revenue but did not create accounting codes to separately account
for SFSF-Education and SFSF-Government expenditures. Because it did not create separate
accounting codes for its SFSF expenditures, Kansas City did not have the means to detect
whether it had excess cash balances on hand before it received subsequent disbursements of
SFSF funds.

St. Louis Public Schools
St. Louis’ interest calculations included the Recovery Act Title I and IDEA programs. However,
St. Louis did not accurately calculate cash balances when it determined the amount of interest to
Final Report
ED-OIG/A07K0002                                                                                      Page 11 of 25
remit to the Department.3 When St. Louis calculated its monthly cash balances to determine
whether interest was due, it

        included revenue from other programs (Safe Schools, Homeless Education, and Title II)
         with revenue for the Recovery Act Title I program;
        deducted Recovery Act Title I salary expenditures at the end of each month instead of
         when the salaries were actually paid or expended;
        deducted indirect costs inconsistently at the end of each quarter or month instead of when
         the indirect costs were actually incurred;
        included unidentified credits in its Recovery Act Title I expenditures for March 2010,
         which increased St. Louis’ monthly cash balance on hand; and
        completed its interest calculations to determine the amount of interest it must remit to the
         Department for the Recovery Act Title I and IDEA programs annually, even though
         Federal regulations stipulate that LEAs must remit interest at least quarterly.

St. Louis received SFSF funds from DESE beginning in July 2009, but it did not establish
accounting codes to separately account for its SFSF-Government expenditures. It established
accounting codes for SFSF-Education funds, which it used for personnel costs, but it did not
maintain records sufficient to identify the specific employees or pool of employees paid with
SFSF funds.

St. Louis officials believed that the disbursements from DESE were reimbursing the district for
previous expenditures. Therefore, they did not believe that they needed a process to detect
whether St. Louis had cash balances on hand before receiving subsequent disbursements.
However, our recalculations of St. Louis’ monthly cash balances for the Recovery Act Title I
program showed that St. Louis might have had cash balances on hand during 6 of the 9 months
tested yet still received its next scheduled transfer of funds from DESE. For example, during
January 2010, records indicated that St. Louis had a cash balance on hand of as much as
$1.2 million. Because of the inaccuracies and inconsistencies noted above, we could not
determine definitively whether St. Louis had positive cash on hand.

The University of Missouri
The University of Missouri received SFSF funds from the Missouri Department of Higher
Education beginning in September 2009. The University of Missouri established revenue codes
for the SFSF funds but did not establish accounting codes to separately account for
SFSF expenditures. The University of Missouri considered itself on the reimbursement method,
because it did not receive its first SFSF funds until September 2009. The September 2009
disbursement included monthly disbursements for July and August 2009.

Post-September 2009 disbursements were received at the beginning of each month and expended
during the month, which could result in cash balances on hand before the University of Missouri
received subsequent disbursements. However, because the University of Missouri considered
itself on the reimbursement method and because it did not create accounting codes for its

3
 The last time that St. Louis calculated positive cash balances and had interest that needed to be remitted to the
Department was for the fiscal year that ended June 30, 2007.
Final Report
ED-OIG/A07K0002                                                                       Page 12 of 25
SFSF expenditures, it neither monitored cash balances on hand before it received its next
disbursement from the Missouri Department of Higher Education nor calculated interest earned
on excess cash.

Federal Regulations Outline Cash Management Requirements
The Department’s guidance for funds made available under the Recovery Act addresses the
fiscal rules for these funds. The guidance states that the Recovery Act funds made available
under the Title I, IDEA, and SFSF programs must follow the requirements set forth at 34 C.F.R.
§ 80.21(b) and 34 C.F.R. § 80.21(i). Federal regulations at 34 C.F.R. § 80.21 prescribe the basic
standard and the methods under which grantees will make payments to subgrantees. The basic
standard is that the procedures for payment will minimize the time elapsing between the transfer
of funds and disbursement by the grantee or subgrantee. The regulations address two payment
methods:

   1. Advances. Grantees and subgrantees are paid in advance, provided they maintain or
      demonstrate the willingness and ability to maintain procedures to minimize the time
      elapsing between the transfer of the funds and their disbursement by the grantee or
      subgrantee.

   2. Reimbursement. Reimbursement is the preferred method when the requirements for
       advances are not met.

In addition, 34 C.F.R. § 80.21(i) states that grantees and subgrantees shall promptly, but at least
quarterly, remit interest earned on advances to the Department. The grantee or subgrantee may
keep interest amounts up to $100 per year for administrative expenditures.

According to 34 C.F.R. § 80.40(a), 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 achievement
of performance goals. Monitoring must cover each program, function, or activity.

Noncompliance with Cash Management Requirements Increases the Risk of Harm to the
Federal Interest
The incorrect computation of cash balances and interest earned could result in a reduction of
interest earnings reported or remitted to the Department. Prime recipients must not draw and
disburse Federal funds before subrecipients need the funds. The U.S. Department of the
Treasury incurs additional borrowing costs when the prime recipient draws and disburses Federal
funds to subrecipients in advance of their immediate cash needs. Because of the Federal deficit,
the U.S. Department of the Treasury must borrow the cash needed to fund Federal programs and,
as a result, incurs interest costs. Federal funds also should not be drawn prematurely because the
funds might be more susceptible to misuse when held in local accounts for extended periods.
Final Report
ED-OIG/A07K0002                                                                    Page 13 of 25
RECOMMENDATIONS

We recommend that the Chief Financial Officer require Missouri to—

2.1 Strengthen its procedures for monitoring subrecipients’ cash balances on hand prior to
    disbursing subrecipients’ next Recovery Act monthly payments. The procedures should be
    sufficient to minimize the time elapsing between the transfer by the State of Federal
    Recovery Act and non-Recovery Act funds and disbursement to the subrecipients.

2.2. Ensure Missouri subrecipients implement procedures for monitoring cash balances,
     calculating interest earned on positive cash balances, and remitting interest in a timely
     manner. The procedures should be sufficient to minimize the amount of time between the
     receipt and expenditure of funds by the subrecipients.

Auditee Comments
Missouri did not entirely concur with the finding.

Missouri partially concurred with Recommendation 2.1, which recommended Missouri
strengthen its procedures for monitoring subrecipients’ cash balances on hand prior to disbursing
subrecipients’ next Recovery Act monthly payments. To strengthen monitoring of cash balances
for LEAs, Missouri stated that DESE would include a field on the internal grant system to
include cash balances on hand prior to disbursing payments. The change should be completed by
June 30, 2011. As far as Recommendation 2.1 relates to IHEs, Missouri stated that because the
Missouri Department of Higher Education disbursed SFSF funds to IHEs in 1/12 increments
each month with the disbursements for July and August 2009 made in September 2009, the IHEs
operated on a reimbursement basis. Therefore, there was no need for a procedure to monitor
cash balances.

Missouri concurred with Recommendation 2.2, which instructed Missouri to ensure Missouri
subrecipients implement procedures for monitoring SFSF cash balances, calculating interest
earned on positive cash balances, and remitting interest in a timely manner. Missouri stated that
DESE would send out guidance, by March 31, 2011, to LEAs on calculating interest earned on
positive cash balances and timely remitting of interest earned. Missouri also stated that the
Missouri Department of Higher Education would provide the IHEs with (a) information on
Federal cash management requirements and (b) guidance by March 31, 2011, on calculating
interest earned on positive cash balances and timely remitting of interest earned.

OIG Response
We did not revise our finding or our recommendations. None of the three subrecipients we
visited properly accounted for SFSF expenditures. Therefore, it was not possible for us to verify
whether SFSF funds were expended before subrecipients received additional monthly payments.
Also, the Missouri Department of Higher Education is not in compliance with cash management
requirements when it assumes that subrecipients have expended SFSF funds before receiving
additional payments and does not monitor cash balances.
Final Report
ED-OIG/A07K0002                                                                        Page 14 of 25
FINDING NO. 3  Missouri Did Not Ensure Reported Data Were Accurate, Reliable, and
                Complete

The three subrecipients we visited did not adequately account for SFSF-Education expenditures.
Because we could not identify specific personnel costs supported by SFSF-Education funds, we
could not determine whether the subrecipients’ methods for calculating full-time equivalents
(FTE) for jobs created or retained resulted in the over- or underreporting of FTEs. However, we
did determine that all three of the subrecipients we visited inaccurately reported jobs created or
retained data for the quarterly reporting period that ended December 31, 2009.

      Kansas City and St. Louis determined the number of jobs created or retained with
       SFSF-Education funds by dividing their SFSF allocations by average teacher salary. For
       example, Kansas City’s SFSF allocation was $16,844,861 and the average teacher salary
       was $66,845. Therefore, Kansas City considered 252 jobs as created or retained by
       Recovery Act funds. However, this method did not consider the actual hours worked by
       individuals whose jobs were created or retained by Recovery Act SFSF funds.

      The number of jobs Kansas City and St. Louis reported as created or retained with
       Recovery Act Title I funds included unfilled positions. Kansas City reported
       10.5 unfilled positions, and St. Louis reported 5 unfilled positions. However, Kansas
       City and St. Louis should not have included unfilled positions.

      The University of Missouri determined the number of jobs created or retained with
       SFSF-Education funds by dividing its SFSF allocation by average compensation.
       However, the University of Missouri did not consider the number of actual hours worked
       or the percentage of effort directly charged to Recovery Act awards.

According to OMB’s ―Updated Guidance on the American Recovery and Reinvestment Act –
Data Quality, Non-Reporting Recipients, and Reporting of Job Estimates‖ (December 18, 2009),
the estimate of the number of jobs created or retained by the Recovery Act should be expressed
as FTE. In calculating FTE,

       the number of actual hours worked in funded jobs are divided by the number of hours
       representing a full work schedule for the kind of job being estimated. These FTEs are
       then adjusted to count only the portion corresponding to the share of the job funded by
       Recovery Act funds. Alternatively, in cases where accounting systems track the billing
       of workers’ hours to Recovery Act and non-Recovery Act accounts, recipients may
       simply count the number of hours funded by the Recovery Act and divide by the number
       of hours in a full-time schedule.

OMB recognized that practices vary among educational institutions as to the activity constituting
a full workload. Therefore, the guidance allows IHEs to consider percentage of effort when
calculating FTE: ―For recipients of assistance agreements that must comply with OMB Circular
A-21, Cost Principles for Educational Institutions, an alternative calculation based upon the
allocable and allowable portion of activities expressed as a percentage is acceptable to estimate
jobs created and retained.‖
Final Report
ED-OIG/A07K0002                                                                     Page 15 of 25
OMB’s updated guidance defined a job created as a new position created and filled, or
previously unfilled position that is filled, that is funded by the Recovery Act. OMB defined a
job retained as an existing position that is now funded by the Recovery Act.

Although DESE and the Missouri Department of Higher Education reviewed SFSF jobs’ data
submitted by LEAs and IHEs for reasonableness, the review procedures were not sufficient to
ensure that reported data were accurate, reliable, and complete. On December 31, 2009, DESE
provided LEAs with a memorandum regarding the issuance of OMB’s updated guidance for the
reporting of jobs created or retained. The memorandum directed the LEAs to access their
previously submitted web report forms and specify whether they were using Recovery Act funds
for salaries. Although DESE’s memorandum contained a link to the updated guidance, DESE
did not provide specific instructions to LEAs (other than directing LEAs to specify on the web
report form whether they used Recovery Act funds for salaries).

The subrecipients we visited did not accurately report jobs created or retained data for a variety
of reasons. Because the subrecipients did not adequately account for SFSF-Education
expenditures, they could not adhere to OMB’s updated guidance and consider actual hours
worked, or percentages of effort, when calculating FTE for jobs created or retained with
SFSF-Education funds. Additionally, Kansas City’s Grant Compliance and Financial Reporting
Manager stated that Kansas City was following DESE’s previously issued guidance rather than
OMB’s updated guidance. According to the University of Missouri’s Assistant Controller,
Sponsored Programs Administration, the University of Missouri was in compliance with OMB’s
guidance for calculating jobs created or retained because an educational institution is not
required to calculate jobs based on the number of hours worked. The University of Missouri
implemented the option to calculate jobs based on the allowable portion of Recovery Act funded
compensation expressed as an FTE percentage. However, the method that the University of
Missouri used for calculating jobs created or retained with SFSF-Education funds did not
actually consider percentage of effort. St. Louis’ Director of Federal Grants stated that the
timing of OMB’s updated guidance, which was issued when St. Louis’ offices were closed for
winter break, presented a challenge.

RECOMMENDATION

We recommend that the Director of the Implementation and Support Unit, in conjunction with
the Assistant Secretary for Elementary and Secondary Education, require Missouri to—

3.1 Enhance its procedures to provide reasonable assurance that all subrecipients (LEAs and
    IHEs) understand applicable guidance and report accurate jobs created or retained data for
    the Recovery Act Title I and SFSF-Education programs.

Auditee Comments
Missouri stated that it did not entirely concur with the finding.

Missouri concurred with Recommendation 3.1, which instructed Missouri to enhance its
procedures to provide reasonable assurance that all subrecipients (LEAs and IHEs) understand
applicable guidance and report accurate jobs created or retained data for the Recovery Act Title I
Final Report
ED-OIG/A07K0002                                                                     Page 16 of 25
and SFSF-Education programs. Missouri stated that DESE altered its procedures and now
provides guidance quarterly to the LEAs to ensure that accurate jobs created or retained data are
reported. In addition, the Missouri Department of Higher Education will continue to provide
information to the IHEs to ensure that they are aware of § 1512 reporting requirements.
However, Missouri stated that formal interagency agreements between the Office of
Administration and the State agencies receiving SFSF funds are not necessary to administer the
SFSF grants. The State agencies (Office of Administration, DESE, and Missouri Department of
Higher Education) are part of the Executive branch of State government, and there can be
seamless cooperation on financial oversight without formal agreements.

OIG Response
We made changes to the finding and removed draft Recommendation 3.2, which instructed
Missouri to develop formal interagency agreements that would define agency roles and
responsibilities for monitoring subrecipients’ Recovery Act § 1512 reporting requirements for
SFSF funds. By April 2011, Missouri had received and expended the majority of its
SFSF-Education and SFSF-Government funds. Because it would be impractical for the Office of
Administration to put interagency agreements in place for the administration of SFSF funds after
the majority of SFSF funds have been expended, we removed the recommendation pertaining to
interagency agreements.


                                     OTHER MATTERS

During our audit, we identified an issue that we considered important enough to bring to the
attention of Missouri and Department officials but not significant enough to include as a finding.

Kansas City Reported Inaccurate Amounts That Were Paid to Vendors
Kansas City underreported its IDEA vendor payments in DESE’s Recovery Act reporting system
during the quarterly reporting period that ended December 31, 2009. Kansas City made vendor
payments of $664,521 for the quarterly reporting period but reported only $373,846. Kansas
City’s Grant Compliance and Financial Reporting Manager stated that the reporting timelines
impacted Kansas City’s ability to report with accuracy. Kansas City processed cash
disbursements after the reporting deadline but before the end of the quarter.

OMB’s data dictionary defines ―Total Federal Amount of Recovery Act Expenditures‖ as the
amount of Recovery Act funds received that were expended on projects or activities. DESE’s
Associate Commissioner, Administrative and Financial Services, informed us that DESE’s
§ 1512 reported expenditures equal the payments made to LEAs. Although DESE reported
Recovery Act expenditures to FederalReporting.gov in accordance with OMB’s guidance, DESE
should ensure that Kansas City is reporting accurate vendor payments in DESE’s Recovery Act
reporting system for future reporting periods so that DESE is better able to monitor Kansas
City’s Recovery Act expenditures.ER
Final Report
ED-OIG/A07K0002                                                                   Page 17 of 25
ATS
                             SCOPE AND METHODOLOGY

The objectives of our audit were to determine whether Missouri and its subrecipients (1) used
Recovery Act funds in accordance with applicable laws, regulations, and guidance; and
(2) reported Recovery Act data that were accurate, reliable, complete, and in compliance with
Recovery Act reporting requirements. This report provides the results of the audit we conducted
at DESE, the Missouri Department of Higher Education, Kansas City, St. Louis, and the
University of Missouri. We focused our audit on State-level and local-level uses of funds and
data quality related to Title I, IDEA, and SFSF funds received through the Recovery Act. For
use of funds, we reviewed expenditures incurred from July 2009 through February 2010. For
data quality, we reviewed data for the quarterly reporting periods that ended September 30, 2009,
and December 31, 2009.

To achieve our objectives, we performed the following procedures.

1. Obtained background information about the programs, activities, and organizations being
   audited.
2. Reviewed Recovery Act guidance issued by OMB and the Department, OMB Circulars, and
   Federal laws and regulations to gain an understanding of the requirements applicable to
   States’ and subrecipients’ uses of funds and reporting of data.
3. Reviewed the ―State of Missouri Single Audit Year Ended June 30, 2007,‖ and the ―State of
   Missouri Single Audit Year Ended June 30, 2008,‖ prepared by the Missouri State Auditor as
   well as Kansas City’s, St. Louis’, and the University of Missouri’s Single Audit reports
   prepared by independent public accountants for fiscal years 2008 and 2009 to determine
   whether prior reports contained findings relevant to our audit objectives.
4. Identified from the Department’s grant award notifications the amount of Recovery Act
   Title I, IDEA, and SFSF funds allocated to DESE and the Office of Administration.
5. Identified from Missouri’s Recovery Act Reporting System the amount of funds disbursed by
   DESE and the Missouri Department of Higher Education to LEAs and IHEs.
6. Interviewed various auditee officials and obtained auditee responses to questionnaires to gain
   an understanding of the systems of internal control over use of funds, cash management, and
   data quality.
7. Tested Missouri’s system of internal control over minimizing the time between receipt of
   Federal funds and disbursement and Missouri’s and subrecipients’ systems of internal control
   over computing and timely remitting all interest earned on Federal funds. For DESE, we
   judgmentally selected 2 of 47 receipts that occurred from September 2009 through January
   2010. We selected the receipts because it appeared DESE might have had a positive cash
   balance prior to the receipt. For the Missouri Department of Higher Education, we compared
   the dates it received SFSF funds to the dates that it disbursed the funds for the months of
   September 2009 through March 2010.
8. Tested various data elements, including the amount of the subaward, subaward funds
   disbursed, and jobs created and retained, at the prime recipient and selected subrecipients to
   ensure that data reported to the Federal government were accurate, reliable, complete, and in
   compliance with Recovery Act reporting requirements.
Final Report
ED-OIG/A07K0002                                                                                   Page 18 of 25
9. Selected three subrecipients (Kansas City, St. Louis, and the University of Missouri), based
    on risk factors such as the amount of Recovery Act funds allocated and expended and Single
    Audit findings, from a universe of 529 subrecipients to determine whether Recovery Act
    personnel and non-personnel expenditures were allowable.
10. Tested all three subrecipients’ Recovery Act receipts and expenditures to ensure that the time
    between receipt and expenditure of Recovery Act funds was minimized and any interest
    earned on Recovery Act funds, if applicable, was properly calculated and returned to the
    Department.4 For Kansas City, we judgmentally selected 8 of 47 Recovery Act Title I
    expenditures. Our sample for cash management purposes totaled $481,462 and represented
    33 percent of the total universe of $1,466,388 (we selected expenditures based on the dollar
    value). We also judgmentally selected 8 of 55 Recovery Act IDEA expenditures to test for
    cash management purposes. We used judgmental sampling so that we could select the
    highest dollar items and cover more of the universe. Our sample totaled $640,551 and
    represented 58 percent of the total universe of $1,112,437.

To test Kansas City’s uses of Recovery Act funds, we judgmentally selected samples of
personnel and non-personnel expenditures charged to the Recovery Act Title I and
IDEA programs. We used judgmental sampling so that we could select pay codes that
represented the largest type of personnel expenditures for Kansas City and select personnel
expenditures that occurred in October, which we considered a typical payroll month. We also
used judgmental sampling so that we could select larger dollar value transactions, which allowed
us to cover more of the universe, and transactions that appeared unusual, which represented
greater risk. For Kansas City’s Recovery Act Title I program, we selected personnel
expenditures for 10 of 191 employees and 11 of 1,349 non-personnel expenditures. For Kansas
City’s Recovery Act IDEA program, we selected personnel expenditures for 8 of 131 employees
and 13 of 485 non-personnel expenditures. We judgmentally selected larger dollar value
transactions and transactions that appeared unusual for the program. We considered an
expenditure to be unusual if it was a type not normally associated with the program, contained an
ambiguous description (such as consulting fees), or was from a little known vendor.
(See Table 3.)

Table 3. Universe and Sample Information for the Audit of Kansas City
                                                            Percentage
                 Expenditure      Universe                  of Universe                             Sample
   Program          Type            Size      Sample Size Sampled %                                 Method
IDEA           Personnel           $243,621       $3,183          1                              Judgmental
IDEA           Non-personnel       $891,691     $162,301         18                              Judgmental
Title I        Personnel         $1,473,903      $13,023          1                              Judgmental
Title I        Non-personnel       $196,520      $26,719         14                              Judgmental

For St. Louis, we recalculated cash balances on hand, which included receipts and expenditures
from August through March 2010. We tested all $5,266,563 in Recovery Act Title I and all
$1,894,686 in Recovery Act IDEA expenditures for cash management purposes. To test

4
 We did not test uses of SFSF funds because subrecipients did not account for SFSF expenditures in their
accounting systems (See Finding No. 1). The University of Missouri is not included in a table because it received
only SFSF-Education and Government funds.
Final Report
ED-OIG/A07K0002                                                                    Page 19 of 25
St. Louis’ uses of Recovery Act funds, we judgmentally selected a sample of 10 of
48 non-personnel expenditures charged to the Recovery Act IDEA programs. We used
judgmental sampling so that we could select larger dollar value transactions and transactions that
appeared unusual. For St. Louis, we also randomly selected Recovery Act Title I program
personnel expenditures covering 10 of 310 employees and judgmentally selected 5 of 3,555
non-personnel expenditures. We used random sampling to ensure that the sample was
representative of the population. We used judgmental sampling to ensure that we selected larger
dollar value transactions and transactions that appeared unusual. (See Table 4.)

Table 4. Universe and Sample Information for the Audit of St. Louis
                                                              Percentage
                                                                   of
                                                               Universe
                 Expenditure     Universe                      Sampled      Sample
   Program          Type           Size        Sample Size        %         Method
IDEA1          Non-personnel    $1,497,919      $438,083         29.00   Judgmental
Title I        Personnel        $3,379,812        $8,018          0.24   Random
Title I        Non-personnel      $827,998       $44,140          5.00   Judgmental
1
    St. Louis did not use Recovery Act IDEA funds for personnel expenditures.

We also relied, in part, on computer-processed data from Missouri’s State reporting tool and
DESE’s Recovery Act reporting system. To determine whether the computer-processed data
were reliable, we first gained a limited understanding of related computer system controls by
interviewing Office of Administration, Information Technology Services Division, and
DESE employees charged with maintaining and processing the reporting systems’ data. We also
reviewed the systems’ written security procedures and analyzed quarterly reporting data
contained in DESE's system for the reporting periods that ended September 30, 2009, and
December 31, 2009. We performed various logic tests on the data, and our review did not reveal
any missing data that would indicate the data were not reliable. The relationships between the
data elements were logical, and no dates were outside of valid time frames or in an illogical
progression.

We performed additional analysis on the reporting data. Our additional analysis included
comparing selected subrecipient data elements to the corresponding prime recipient data
elements. We also ensured that data contained in the Recovery Act reporting systems were
accurately reported to FederalReporting.gov. At the subrecipient level, we compared the data for
subaward, subaward funds disbursed, and jobs to corroborating documentation maintained by the
subrecipients. Corroborating documents included bank statements, vendor invoices, purchase
orders, and cancelled checks. Based on our assessment and comparison of selected data
elements, revenues, and expenditures to source documents, we concluded that the data were
sufficiently reliable for the purposes of our audit.

We performed this audit at DESE and the Missouri Department of Higher Education (Jefferson
City, Missouri), Kansas City (Kansas City, Missouri), St. Louis (St. Louis, Missouri), the
University of Missouri (Columbia, Missouri), and our offices from January through
October 2010. We discussed the results of our audit with DESE officials on August 27, 2010;
Final Report
ED-OIG/A07K0002                                                                   Page 20 of 25
with the Missouri Department of Higher Education and Office of Administration officials on
September 7, 2010; with Kansas City officials on September 16, 2010; with University of
Missouri officials on September 22, 2010; and with St. Louis officials on September 29, 2010.

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.
Final Report
ED-OIG/A07K0002                                                                     Page 21 of 25




                                         Enclosure:

                                   Auditee Comments
   Subsequent to Missouri’s official comments, the Office of Administration and DESE provided
additional documentation. Because of the voluminous nature of the additional documentation, we are
  not including it in this report. However, the additional documentation is available upon request.

NOTE: We removed draft Recommendations 1.2, 1.3, and 3.2 from the final report. Therefore,
 the reference in Missouri’s comments to Recommendations 1.2, 1.3, and 3.2 relate to the draft
     recommendations and not the final recommendations included in this final audit report.
Final Report
ED-OIG/A07K0002                                                                 Page 22 of 25
Enclosure


  Jeremiah W. (Jay) Nixon
         Governor


                                           State of Missouri
                                       OFFICE OF ADMINISTRATION
                                   Division of Budget and Planning
                                     Capitol Building, Room 124
     Kelvin L. Simmons                   Post Office Box 809                 Linda S. Luebbering
       Commissioner                       Jefferson City, MO                       Director
                                              65102-0809                     Budget and Planning
                                             573-751-2345
                                        573-526-4811 (FAX)

February 11, 2011


Gary D. Whitman
Regional Inspector General for Audit
U.S. Department of Education
Office of Inspector General
500 W. Madison St., Suite 1414
Chicago, IL 60661

Dear Mr. Whitman,

Thank you for the opportunity to respond to the draft audit report, Control Number ED-
OIG/A07K0002 (State of Missouri: Use of and Reporting on Selected American Recovery and
Reinvestment Act of 2009 Program Funds). Our comments are detailed below.

FINDING NO.1 – Not all Missouri Subrecipients Accounted for or Used SFSF in
Accordance with Applicable Laws, Regulations and Guidance

We do not concur with this finding in its entirety.
Note: Pages 4 and 5 of the report read that the three subrecipients received $47.8 million in
SFSF-Education funds and $12 million in SFSF-Government Services Funds. This is incorrect.
Table 2 on page 3 correctly shows that the three subrecipients received $84 million in SFSF-
Education funds and $24.5 million in SFSF-Government Services Funds.

RECOMMENDATIONS:
1.1. Require all Missouri subrecipients to (a) clearly account for the receipt and
expenditure of all SFSF funds and (b) provide Missouri with written assurances that they
have adequately accounted for all SFSF funds.
Final Report
ED-OIG/A07K0002                                                                   Page 23 of 25
We concur with the recommendation.

Corrective Action Plan:
The DESE and DHE will provide guidance to the LEAs and IHEs concerning accounting for the
receipt and expenditure of all SFSF funds, and request written assurances from the LEAs and
IHEs that they have adequately accounted for all SFSF funds by March 31, 2011.

1.2. Develop formal interagency agreements between the Office of Administration and the
State agencies receiving SFSF funds. The agreements would define agency roles and
responsibilities for monitoring subrecipients’ accounting for and use of SFSF funds.

We do not concur with this recommendation. We do not believe a formal interagency agreement
between the Executive Office of the State of Missouri and the Missouri Department of Higher
Education (MDHE) or the Missouri Department of Elementary and Secondary Education
(DESE) is necessary for the administration of SFSF. The MDHE, DESE and the Office of
Administration (OA) work very closely together on the administration of these funds, as they do
on the administration of all other relevant funds. Since all three agencies are part of the
Executive Branch of state government, there can be seamless cooperation on financial oversight
without formal interagency agreements.

Corrective Action Plan:
We will continue to work closely together to ensure each agency is aware of their roles and
responsibilities for monitoring subrecipients’ accounting for and use of SFSF funds.

1.3. Ensure that the $273,000 in SFSF-Education funds that were used for the unallowable
payment of maintenance costs were returned to the Department.

We partially concur with this recommendation.

Corrective Action Plan:
We will ensure that SFSF-Education funds are not used for unallowable costs. The DESE
proposes to provide the OIG with documentation of the correction by the LEAs for the $273,000
in unallowable expenditures in lieu of returning the funds to the Department. The documentation
will be provided on or before March 31, 2011.

FINDING NO.2 – Missouri and Its Subrecipients Did Not Always Follow Federal Cash
Management Requirements

We do not concur with this finding in its entirety.

RECOMMENDATIONS
2.1. Strengthen procedures for monitoring subrecipients’ cash balances on hand prior to
disbursing subrecipients’ next Recovery Act monthly payments. The procedures should be
sufficient to minimize the time elapsing between the transfer by the State of Federal
Recovery Act and non-Recovery funds and disbursement to the subrecipients.
The DESE concurs with the recommendation.
Final Report
ED-OIG/A07K0002                                                                    Page 24 of 25
Corrective Action Plan:
The DESE is in the process of working with the Office of Administration-Information
Technology Services Division to include a field on the internal grant system to include cash
balances on hand prior to disbursing payments. This should be completed by June 30, 2011.

The DHE does not concur with this recommendation. SFSF funds were disbursed to the IHEs in
1/12 increments each month with the disbursements for July and August 2009 made in
September 2009. The IHEs therefore operated on a reimbursement basis and do not need a
procedure to monitor cash balances.

Corrective Action Plan:
The DHE will again provide the IHEs with information on federal cash management
requirements.

2.2. Ensure the Missouri subrecipients implement procedures for monitoring SFSF cash
balances, calculating interest earned on positive cash balances, and remitting interest in a
timely manner. The procedures should be sufficient to minimize the amount of time
between the receipt and expenditure of funds by the subrecipients.

We concur with this recommendation.

Corrective Action Plan:
The DESE and DHE will send out guidance to the LEAs and IHEs concerning calculating
interest earned on positive balances and remitting interest in a timely manner. This will be done
by March 31, 2011.

FINDING NO.3 – Missouri Did Not Ensure Data Reported Were Accurate, Reliable, and
Complete

We do not concur with this finding in its entirety.

RECOMMENDATIONS:
3.1. Enhance its procedures to provide reasonable assurances that all subrecipients (LEAs
and IHEs) understand applicable guidance and report accurate jobs created or retained
data for the Recovery Act Title I and SFSF-Education programs.

We concur with this recommendation.
Corrective Action Plan:
The DESE has altered its procedures and now provides guidance quarterly to the LEAs to ensure
that accurate jobs created or retained data is remitted.

The DHE will continue to provide information to the IHEs to ensure they are aware of the 1512
reporting requirements.
Final Report
ED-OIG/A07K0002                                                                      Page 25 of 25
3.2. Develop formal interagency agreements between the Office of Administration and the
State agencies receiving SFSF that would define agency roles and responsibilities for
monitoring subrecipients’ Recovery Act 1512 reporting requirements for SFSF grants.

We do not concur with this recommendation. We do not believe a formal interagency agreement
between the Executive Office of the State of Missouri and the Missouri Department of Higher
Education (MDHE) or the Missouri Department of Elementary and Secondary Education
(DESE) is necessary for the administration of SFSF. The MDHE, DESE and the Office of
Administration (OA) work very closely together on the administration of these funds, as they do
on the administration of all other relevant funds. Since all three agencies are part of the
Executive Branch of state government, there can be seamless cooperation on financial oversight
without formal interagency agreements. In addition, the Office of Administration provided
guidance to the departments on Recovery Act reporting requirements.

OTHER MATTERS – Recovery Act Programs Should Be Covered by Missouri’s
Treasury-State Agreement

The State of Missouri has discussed the ARRA Act funds with the U.S. Department of Treasury.
Based on those discussions, we do not believe our TSA needs to be modified. It is our
understanding that in order for a program to be listed in the TSA, it needs to undergo the regular
determination process: complete Single Audit, calculate total federal financial assistance and a
corresponding threshold, and determine the major programs. In the meantime, programs are
subject to subpart B of the CMIA regulations, which requires States to draw down Federal funds
―as close as is administratively feasible to a state’s actual cash outlay.‖ Further ―Neither a State
nor the Federal government will incur an interest liability under this part on the transfer of funds
for a Federal assistance program subject to subpart B.‖

If you have questions or need further clarification, please contact me at 573-751-2345.

Sincerely,


Linda S. Luebbering
State Budget Director

c:   Dr. Chris Nicastro – DESE
     Dr. Ronald Lankford – DESE
     Dr. David Russell – DHE
     Paul Wagner - DHE
     Judy Eggen – OA-B&P
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