Oregon Student Assistance Commission’s Administration of the Federal Family Education Loan Program Federal and Operating Funds FINAL AUDIT REPORT ED-OIG/A09-B0016 MAY 2002 Our mission is to promote the efficiency, U.S. Department of Education effectiveness, and integrity of the Office of Inspector General Department’s programs and operations Sacramento, California 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. Determination 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 made available, if requested, to members of the press and general public to the extent information contained therein is not subject to exemptions under the Act. TABLE OF CONTENTS Page EXECUTIVE SUMMARY ...........................................................................................................1 AUDIT RESULTS .........................................................................................................................2 FINDING NO. 1 – OSAC Improperly Excluded $1.6 Million When It Established the Federal Fund ...............................................................2 Recommendations ...................................................................................4 OSAC Comments ....................................................................................5 OIG Response..........................................................................................5 FINDING NO. 2 – OSAC Improperly Deposited $160,000 of Supplemental Preclaims Assistance in the Operating Fund .......................................7 Recommendations ...................................................................................8 OSAC Comments ....................................................................................8 FINDING NO. 3 – OSAC Did Not Comply with Federal Regulations and OMB Circular A-87 for Costs Charged to the Operating Fund.......................................................................................8 Recommendations .................................................................................12 OSAC Comments ..................................................................................13 OIG Response........................................................................................13 OTHER MATTERS ....................................................................................................................14 BACKGROUND ..........................................................................................................................15 AUDIT OBJECTIVE, SCOPE, AND METHODOLOGY ......................................................15 STATEMENT ON MANAGEMENT CONTROLS.................................................................17 ATTACHMENT - OSAC Comments on the Draft Report......................................................18 ED-OIG/A09-B0016 Page 1 of 18 EXECUTIVE SUMMARY The Oregon Student Assistance Commission (OSAC) did not fully comply with the Higher Education Act of 1965 (HEA), as amended, and applicable Federal regulations in its establishment and in the use of Federal and Operating Funds for the Federal Family Education Loan (FFEL) program. We found that— OSAC improperly excluded about $1.6 million from the fund balance when it established the Federal Fund. OSAC claimed that the amount was owed to the Commission for the remaining principal balance and accrued interest on State funds, held in the reserve fund, for the period October 1967 through November 1998. OSAC improperly deposited about $160,000 of supplemental preclaims assistance payments received after October 1, 1998, in the Operating Fund instead of the Federal Fund. OSAC did not comply with Federal regulations and Office of Management and Budget (OMB) Circular A-87 for costs charged to the Operating Fund as required by 34 C.F.R. § 682.423(a). Specifically, OSAC did not (1) follow the OMB Circular A-87 in developing its cost allocation plan, (2) consistently apply the percentages stated in its cost allocation plan, (3) provide periodic certifications for staff who worked solely on the FFEL program, and (4) ensure that charges to the Operating Fund were allocable to the FFEL program and adequately documented. We recommended that the Chief Operating Officer for Federal Student Aid1 require OSAC to transfer about $2 million from its Operating Fund to the Federal Fund and to take corrective action to ensure that costs charged to the Operating Fund comply with Federal requirements. The OTHER MATTERS section of the report provides information on additional areas that came to our attention during the review regarding (1) investment interest income earned on the Federal share of collections, (2) late payment of usage fees, and (3) sponsorship fees for the “Mapping Your Future” program exceeded the allowed contribution limit. In its comments to the draft report, OSAC did not agree with our finding that it improperly excluded $1.6 million from the fund balance when it established the Federal Fund. OSAC generally agreed with the other findings and recommendations. The full text of OSAC comments is provided as an attachment to the report. 1 Formerly the U.S. Department of Education’s Student Financial Assistance (SFA). SFA changed its name to Federal Student Aid on March 6, 2002. ED-OIG/A09-B0016 Page 2 of 18 AUDIT RESULTS We concluded that OSAC complied with the HEA and regulations governing the initial establishment of the Federal and Operating Funds, except that OSAC improperly excluded about $1.6 million from the Federal Fund. We found that OSAC did not fully comply with the HEA and regulations governing sources of funds when it did not deposit supplemental preclaims assistance payments, totaling about $160,000, in the Federal Fund. From our review of financial transactions for the period July 1, 1998, through June 30, 2001 and cost allocation plans for fiscal years 1999 through 2002, we found that OSAC had not fully complied with regulations governing uses of funds and OMB Circular A-87 when it charged administrative costs to the Operating Fund. We concluded that OSAC had properly identified the ownership of fixed assets, but, as disclosed in the OTHER MATTERS section of the report, OSAC did not deposit usage fees in the Federal Fund on a timely basis. FINDING NO. 1 – OSAC Improperly Excluded $1.6 Million When It Established the Federal Fund The 1998 amendments to the HEA of 1965, enacted on October 7, 1998, required each guaranty agency to establish a Federal Fund and an Operating Fund. HEA § 422A(a) states— Each guaranty agency shall, not later than 60 days after the date of enactment of this section, deposit all funds, securities, and other liquid assets contained in the reserve fund established pursuant to section 422 into a Federal Student Loan Reserve Fund [Federal Fund] . . . . Our review found that at the time OSAC established the Federal Fund, it improperly placed $1,586,006 from its FFEL Program Account2 into the Operating Fund rather than the Federal Fund. According to OSAC officials, the $1,586,006 represented State money ($18,573) held in the FFEL Program Account on December 6, 1998, and accrued interest ($1,567,433) on State money held in the FFEL Program Account during various times from October 1967 to November 1998. OSAC provided an agency-prepared worksheet as support for its calculation of the $1,586,006. The worksheet shows the State money that OSAC claimed was in its reserve each month and the accrued interest compounded monthly. To identify the State money in its reserve each month, OSAC used amounts reported on 2 Prior to December 6, 1998, OSAC had one account with the Oregon State Treasury (called the FFEL Program Account) which contained the money for two OSAC funds: Fund 0110–FFEL Program Limited Fund and Fund 0150–FFEL Program Non-limited Fund. As of December 6, 1998, the money in the FFEL Program Account was allocated to two OSAC funds with separate accounts in the Oregon State Treasury: Fund 0165–Federal Student Loan Reserve (referred to as the Federal Fund in our report) and Fund 0110–Student Loan Guarantee Fund Account (referred to as the Operating Fund in our report). ED-OIG/A09-B0016 Page 3 of 18 ED’s Form 11303 (Line 1 – State Appropriations and Funds from Other Sources). The amounts included State funds available to OSAC under a continuing appropriation. OSAC’s audited financial statements for the period July 1, 1966 to December 31, 1967 included the following reference to the State of Oregon statute that provided the initial appropriation in 1967. Oregon Revised Statute 348.570(3) states— “Out of the moneys in the General Fund, there is continuously appropriated to the State Scholarship Commission such sums as are necessary, but not to exceed $240,000 in total [this amount was increased to $550,000 in 1975], to guarantee payment of loans made by eligible lending institutions to student residents of the State of Oregon… Funds may be disbursed from this appropriation on order of the State Scholarship Commission to reimburse eligible lending institutions where the lendee has failed to repay the principal sum of any loan specifically guaranteed by the appropriation made by this subsection.” We concluded from information contained in OSAC’s audited financial statements covering periods from July 1, 1966, through December 31, 1976, that the entire amounts of the 1967 and 1975 continuing appropriations were not deposited in the FFEL Program Account. The audited financial statements showed the following amounts were used from the continuing appropriations to reimburse lenders. 1967 and 1975 Continuing Appropriations Financial Statement Period Expenditures From To July 1, 1966 December 31, 1967 $ — January 1, 1968 December 31, 1968 4,484 January 1, 1969 December 31, 1969 18,871 January 1, 1970 December 31, 1971 800 January 1, 1972 December 31, 1973 — January 1, 1974 December 31, 1976 — a Total Expenditures $24,155 a The actual amount may be lower because recoveries from borrowers on the defaulted loans were deposited to the credit of the State General Fund. Note 4 to the Financial Statements for January 1, 1974, to June 30, 1976, states— Prior to the 1975 enactment, the accounting records reflected appropriations totaling $22,847.32 . . . Taking into account payments and recoveries of payments, the amount of the continuous appropriation is overstated by approximately $14,500. For this same period, the agency-prepared worksheet showed amounts totaling $568,573. The audited financial statements also disclosed that funds from the continuing appropriation were transferred to the FFEL Program Account, as needed, to reimburse lenders. The financial 3 The 1968 through 1984 versions of the Form 1130 used by OSAC to identify the State money in its reserve each month are obsolete. ED-OIG/A09-B0016 Page 4 of 18 statements for January 1, 1968, through December 31, 1968, included the following explanation regarding an amount due to the FFEL Program Account from the continuing appropriation.4 The $507.50 balance is the amount required to be transferred from the continuing guarantee loan appropriation for the purpose of reimbursing lending banks for loans defaulted prior to December 31, 1968. The continuing guarantee loan appropriation is reflected in the records [of the FFEL Program Account] only as it is needed to reimburse lenders for defaulted loans . . . . Thus, the funds provided by the continuing appropriations did not remain in the FFEL Program Account for a lengthy period of time. Based on the information presented in its audited financial statements, OSAC did not have a valid basis for excluding the $1,586,006 from the Federal Fund. OSAC has not provided us with documentation to show that the 1967 and 1975 appropriations in their entirety or that interest earned on those funds were deposited in the FFEL Program Account. Recommendations We recommend that the Chief Operating Officer for Federal Student Aid require OSAC to— 1.1. Transfer $1,859,592 from the Operating Fund to the Federal Fund. This amount is comprised of the $1,586,006 plus $273,586 of imputed interest from October 1, 1998, through December 31, 2001.5 1.2. Return to the Federal Fund interest earned on the $1,586,006 from December 31, 2001. This interest should be computed using the CVFR and calculated through the date that the $1,586,006 was transferred to the Federal Fund. OSAC Comments OSAC did not agree with our finding and recommendations. In its comments to our draft report, OSAC stated its belief that the Federal and Operating Funds were accurately and appropriately established. OSAC described the process it used to determine that the funds and accrued interest from the 1967 and 1975 continuing appropriations were in the FFEL Program Account. OSAC stated that it— 4 The financial statements also provided an explanation of the amount reported on the Form 1130: “It is noted that the unrecorded balance of this continuing appropriation at December 31, 1968, is $235,515.85, and that reports to the Federal Government include this appropriation as a part of the reserve fund balance used in computing the total loan capacity available under the Guarantee Student Loan Program [FFEL Program].” 5 We calculated the imputed interest using the U.S. Treasury Current Value of Funds Rate (CVFR) of five percent for calendar years 1998, 1999, and 2000 and the CVFR of six percent for calendar year 2001. ED-OIG/A09-B0016 Page 5 of 18 Confirmed that the State of Oregon provided State funds for the purpose of administering the FFEL program and that the funds were continuously appropriated. Contacted the State of Oregon Audits Division and the State of Oregon Treasury to gain an understanding of the accounting treatment for continuous appropriations. According to OSAC, it was informed by these state agencies that “[m]onies continuously appropriated are held at Treasury, but are tracked individually with both principle [sic] and interest accruing to the designated FFELP [FFEL Program] account.” Verified that balances on its Form 1130s were accurate and represented actual funds available. Obtained a certified public accountant’s (CPA’s) confirmation of OSAC’s interest calculation and the CPA’s analysis of interest earnings, and conclusion from that analysis, that the FFEL Program Account contained the State funds. OSAC also stated that the U.S. Department of Education did not raise questions during its two reviews that specifically looked at OSAC’s establishment of the Operating Fund. OSAC stated that it plans to obtain additional documentation to support its position that the funds and accrued interest from the 1967 and 1975 continuing appropriations were in the FFEL Program Account. As part of its response, OSAC provided letters from its CPA and the Oregon State Treasury. OSAC stated that, in combination, the two letters further reinforce its position. OIG Response OSAC provided no additional reliable evidence that would contradict the information contained in its audited financial statements regarding the accounting for the 1967 and 1975 continuing appropriations. The State of Oregon Treasury letter and records, which were submitted for our review, provided no evidence that the total amount of State funds provided by the continuing appropriations or that interest earned on those State funds were deposited in the FFEL Program Account. The CPA analyzed interest earnings reported for three separate financial statement periods: January 1, 1972 through December 31, 1973; January 1, 1974 through June 30, 1976; and July 1, 1981 through June 30, 1984. We found that the CPA’s analysis of interest earnings was based on unsubstantiated assumptions rather than verified facts. Also, the analysis was incomplete, contained calculation errors, and generally disregarded explanations and financial statements information that were contrary to OSAC’s assertions. We did not contest the fact that the 1967 and 1975 continuing appropriations made State funds available for the purpose of administering the FFEL program. Nor have we questioned the accuracy of OSAC’s Form 1130s or that the amounts shown on the forms represented actual funds available to guarantee loans. Neither the existence of the continuing appropriations nor the accuracy of the Form 1130s provide evidence that the State funds were, in fact, held in the FFEL Program Account or that interest earned on those State funds were deposited in the FFEL Program Account. Even if OSAC was able to document that the full amount or a partial amount of State funds from ED-OIG/A09-B0016 Page 6 of 18 the 1967 and 1975 continuing appropriations were placed in the FFEL Program Account, it still would have been improper for OSAC to exclude the $1.6 million from the fund balance when it established the Federal Fund. Once funds are deposited into the FFEL Program Account, the funds lose their character as State funds and became the property of the Federal Government. The 1998 Amendments to the HEA required that the assets of the FFEL Program Account be deposited in the Federal Fund. OSAC provided no authority for excluding the amount it claimed to be State funds or accrued interest from the Federal Fund. The Department’s regulations permit a guaranty agency to return funds provided to the agency by a State under certain limited circumstances. Specifically, the regulations at 34 C.F.R. § 682.410(a)(2)(ix)(A) allow a guaranty agency to repay funds to a state if the agency provides the Department with 30 days prior notice of the repayment and demonstrates that: (1) the amounts were originally received on a temporary basis only as shown by appropriate contemporaneous documentation; (2) the objective for which the funds were provided has been fully achieved; and (3) repayment of the funds will not cause the agency to drop below the required minimum reserve levels. OSAC did not notify the Department of the proposed repayment of the funds or meet any of the conditions. Also, the HEA and the Department’s regulations contain no provision for charging interest to the Federal Government on State funds held in the FFEL Program Account. Thus, even if the State funds and related accrued interest had been deposited in the FFEL Program Account, OSAC would have had no authority to unilaterally return the funds to the State or to deposit those funds into the Operating Fund. Staff from the Department’s Federal Student Aid, Financial Partners Channel did conduct a technical review in March 2000 and program review in January 2001, that covered aspects of the establishment of the Federal and Operating Funds. Financial Partners Channel staff obtained OSAC’s calculation of the $1.6 million, but did not request support for OSAC’s assertion that the State funds and accrued interest from the 1967 and 1975 continuing appropriations were in the FFEL Program Account or review the working papers supporting the CPA’s conclusions. The limited nature of the technical and program reviews neither negates OSAC’s responsibility to comply with HEA and applicable regulations in the establishment of the Federal and Operating Funds, nor limits the OIG’s authority to report noncompliance and recommend corrective action. ED-OIG/A09-B0016 Page 7 of 18 FINDING NO. 2 – OSAC Improperly Deposited $160,000 of Supplemental Preclaims Assistance in the Operating Fund Guaranty agencies are required to deposit supplemental preclaims activity payments for activity periods prior to October 1, 1998, in the Federal Fund. After the establishment of the Federal Fund, a guaranty agency shall deposit into the Federal Fund . . . all amounts received from the Secretary as payment for supplemental preclaims activity performed prior to the date of enactment of this section . . . . HEA § 422A(c)(4) The agency must deposit into the Federal Fund . . . Federal payments for supplemental preclaims assistance activities performed before October 1, 1998 . . . . 34 C.F.R. § 682.419(b)(4) We found that over the period December 1998 through May 1999, OSAC improperly deposited $160,099 of supplemental preclaims activity payments in the Operating Fund. The deposits represented supplemental preclaims activity payments for activities performed prior to October 1, 1998. The following table shows the amounts received and the imputed interest through December 31, 2001. Supplemental Preclaims Activity Payments Date OIG Imputed Amount a Received Interest 12/07/98 $ 39,817 $ 6,371 12/29/98 43,749 7,000 01/29/99 25,535 3,979 02/24/99 24,924 3,780 03/18/99 17,151 2,530 04/15/99 8,802 1,262 05/11/99 121 16 Totals $160,099 $24,938 a We calculated the imputed interest using the CVFR of five percent for calendar years 1998, 1999, and 2000, and the CVFR of six percent for calender year 2001. ED-OIG/A09-B0016 Page 8 of 18 Recommendations We recommend that the Chief Operating Officer for Federal Student Aid require OSAC to— 2.1. Transfer $185,037 ($160,099 plus $24,938 of imputed interest through December 31, 2001) from the Operating Fund to the Federal Fund. 2.2. Return to the Federal Fund interest earned on the $160,099 from December 31, 2001. This interest should be computed using the CVFR and calculated through the date that the $160,099 was transferred to the Federal Fund. OSAC Comments OSAC concurred with the finding and recommendations. OSAC stated that it began handling the transactions correctly once the error was recognized. FINDING NO. 3 – OSAC Did Not Comply with Federal Regulations and OMB Circular A-87 for Costs Charged to the Operating Fund OSAC is required to comply with OMB Circular A-87, which sets forth the cost principles and standards for determining costs for Federal awards carried out through grants, cost reimbursement contracts, and other agreements with State and local governments. OSAC is also required to comply with Federal regulations at 34 C.F.R. § 682.423(a). When OSAC established the Operating Fund, it transferred $2.7 million from the Federal Fund to the Operating Fund with a plan to return the funds in two equal installments in September 2002 and 2003. Federal regulations at 34 C.F.R. § 682.423(a) state— During periods in which the Operating Fund contains funds transferred from the Federal Fund, the Operating Fund may be used only as permitted by 34 C.F.R. §§ 682.410(a)(2) and 682.418. Among the provisions in the cited sections are the requirements that (1) costs charged to the Operating Fund are ordinary and necessary for the agency to fulfill its responsibilities under the HEA, (2) costs charged are allocable to the FFEL program, and (3) guaranty agencies that share costs with other programs shall develop a cost allocation plan consistent with the requirements described in OMB Circular A-87. OSAC did not fully comply with OMB Circular A-87 and 34 C.F.R. § 682.423(a) for costs charged to the Operating Fund. Specifically, OSAC did not (1) follow OMB Circular A-87 in developing its cost allocation plan, (2) consistently apply the percentages shown in its cost allocation plan, (3) provide periodic certifications for staff who worked solely on the FFEL program, and (4) ensure that costs charged were allocable, and adequately documented. ED-OIG/A09-B0016 Page 9 of 18 OSAC Did Not Follow OMB Circular A-87 in Developing Its Cost Allocation Plan In addition to the FFEL program, OSAC administers the State Opportunity Grant Program, over 200 privately funded scholarship programs, and other programs. The regulations at 34 C.F.R. § 682.418(c) state— Each guaranty agency that shares costs with any other program . . . shall develop a cost allocation plan consistent with the requirements described in OMB Circular A-87 and maintain the plan and related supporting documentation for audit . . . . A cost allocation plan is used to facilitate an equitable distribution of costs that are (a) incurred for a common or joint purpose benefiting more than one program, and (b) not readily assignable to the program specifically benefitted, without expending effort disproportionate to the results achieved. OMB Circular A-87, Attachment E, C.3.c lists the criteria for an acceptable allocation base— (1) [I]t can readily be expressed in terms of dollars or other quantitative measures (total direct costs, direct salaries and wages, . . . ) and (2) it is common to the benefitted functions during the base period. OSAC’s cost allocation plans contain percentages for charging general administrative costs to the FFEL program and non-FFEL programs. OSAC developed separate percentages for each administrative position and each group of services and supplies costs that could not be directly associated with a program. Our review of OSAC’s cost allocation plans for fiscal years 1999, 2000, 2001, and 2002 found that (1) OSAC could not provide documentation showing its calculation of the percentages, and (2) the allocation bases described in the plans for fiscal years 2000, 2001, and 2002 did not meet the criteria specified in Attachment E, C.3.c. Administrative employee salary costs Cost allocation plan for fiscal year 1999. The plan states that OSAC used data from work activity logs prepared by employees during July 1997 through May 1998 to allocate administrative employee salary costs.6 The logs showed the hours recorded for activities related to FFEL program and non-FFEL programs and activities that could not be identified to one program. OSAC provided the work activity logs for our review, but it had not retained documentation showing the calculation of the allocation percentages from the information on the logs and OSAC staff could not provide a verbal explanation of the procedures used to perform the calculations. 6 OSAC did not require administrative employees to prepare work activity logs after May 1998. ED-OIG/A09-B0016 Page 10 of 18 Cost allocation plans for fiscal years 2000, 2001, and 2002. For administrative salary costs, the plans state that OSAC used data collected from the administrative employees and their official job descriptions to derive the allocation percentages. According to OSAC’s Fiscal Coordinator, administrative employees provided the information verbally to her at the beginning of the year on how they would allocate their time between the FFEL and non-FFEL program activities during the year. The Fiscal Coordinator did not retain documentation of the information provided. The official job descriptions did not contain information that could be used to develop a quantitative measure. Because OSAC could not provide documentation showing its calculation of the percentages and used allocation bases that did not meet the requirements of OMB Circular A-87, we were unable to determine whether the percentages in OSAC’s cost allocation plans provided an equitable distribution of general administrative salary costs to the FFEL program. During fiscal years 1999, 2000, and 2001, OSAC charged about $1,979,407 of unsupported general administrative salary costs to the FFEL program. (The amount is comprised of $524,580 for fiscal year 1999, $705,803 for fiscal year 2000, and $749,024 for fiscal year 2001). Administrative services and supplies costs Cost allocation plan for fiscal year 1999. The plan allocated administrative services and supplies costs by the full-time equivalents who worked 100 percent for the FFEL or a non-FFEL program. We concluded that this base provided an equitable distribution of the costs. Cost allocation plans for fiscal years 2000, 2001, and 2002. For administrative services and supplies costs, the plans state that the allocation percentages were determined by management analysis. The allocation percentages actually reflected the proportion of the agency’s biennium state budget not funded by State general funds. Even though OSAC did not use an acceptable base in its cost allocation plans for administrative services and supplies, the allocation percentages in the plans for fiscal year 2000 and 2001 appear reasonable. The percentages were not significantly different from the percentages based on full-time equivalents that worked 100 percent on the FFEL or a non-FFEL program. For fiscal year 2002, the percentages in the cost allocation plan differed significantly from the percentage of full-time equivalents. OSAC Did Not Consistently Apply Percentages Stated in Its Cost Allocation Plan According to the OSAC’s Fiscal Coordinator, the allocation percentages specified in the cost allocation plan for general administrative employee salaries are preset in the payroll system at the beginning of each fiscal year. Our analysis of salary charges to the Operating Fund for fiscal years 1999, 2000, and 2001 found that the percentages of salary costs charged to the FFEL program differed from the percentages stated in the cost allocation plans. Generally, the percentages used were higher than the percentages in the cost allocation plans. We also found that the cost allocation plans did not contain allocation percentages for all general administrative positions. ED-OIG/A09-B0016 Page 11 of 18 General Administrative Employees Percentage Used Total Employees With Fiscal Position Not Percent of Total Differed From Salary Allocations Not Year Listed in the Plan Employees Percentage in Plan Supported By the Plan a 1999 15 4 – 4 27% b 2000 23 3 2 5 22% c 2001 22 5 6 11 50% a For the 3 employees, the percentages used were 10 and 12 percentages higher than those in the plan. For the other employee, the percentage used was 7 percent lower. b The percentages used were 25, 15, and 11 percentages higher than those in the plan. c For the 3 employees, the percentages used were 80, 10, and 6 percentages higher than those in the plan. For the other 2 employees, the percentages used were 4 and 10 percent lower. As shown in the above table, salaries costs charged to the FFEL program were not supported by OSAC’s cost allocation plan for 22 to 50 percent of the general administrative staff during fiscal years 1999 to 2001. OSAC Did Not Provide Periodic Certifications for Employees Who Worked Solely on the FFEL Program OSAC’s Loan Processing Division, Default Prevention & Claims Division, and Collections Division work exclusively in the FFEL program. OMB Circular A-87 requires certifications, at least semi-annually, for employees who work only for a Federal program. Attachment B, 11.h(3) states— Where employees are expected to work solely on a single Federal award or cost objective, charges for their salaries and wages will be supported by periodic certifications that the employees worked solely on that program for the period covered by the certification. These certifications will be prepared at least semi- annually and will be signed by the employee or supervisory official having first hand knowledge of the work performed by the employee. During fiscal years 1999, 2000, and 2001, OSAC did not require employees who worked 100 percent on the FFEL program to complete certifications. According to OSAC’s Executive Director, the certification requirement was overlooked for a period of time due to staff turnover and workloads. He informed us that OSAC would reinstate a semi-annual certification requirement during fiscal year 2002. Even though OSAC did not have the required certifications, we concluded, based on interviews with long-term employees, payroll documentation, and OSAC’s organizational structure, that salary costs charged to the FFEL program were appropriate for staff in the Loan Processing, Default Prevention & Claims, and Collections Divisions. ED-OIG/A09-B0016 Page 12 of 18 OSAC Did Not Ensure that Charges to the Operating Fund Were Allocable to the FFEL Program and Adequately Documented Permitted uses of the Operating Fund during periods that the fund contains funds transferred from the Federal Fund are listed in 34 C.F.R. § 682.410(a)(2). Paragraph (ii) of this section lists— Costs that are reasonable . . . and that are ordinary and necessary for the agency to fulfill its responsibilities under the HEA . . . Those costs must be— (A) Allocable to the FFEL Program . . . (E) Documented in accordance with applicable legal and accounting standards . . . . OMB Circular A-87 Attachment A, Paragraph C.1, contains similar provision on the allowability of costs. During our review of Operating Fund expenditures for fiscal years 1999 and 2000, we identified 7 the following transactions that did not meet these provisions. Not allocable to FEEL program. OSAC charged $192 for coffee provided at a private awards meeting. According to the Fiscal Coordinator, the amount was erroneously charged to the Operating Fund due to a coding error. Not adequately documented. OSAC lacked adequate documentation for six reviewed transactions totaling $6,221 in charges to the Operating Fund. OSAC did not provide any documentation for two transactions and only a staff email message for another. For three transactions, OSAC did not provide invoices or shipping receipts for charges on credit card statements. OSAC needs to have sufficient management controls to ensure that charges to the Operating Fund meet Federal requirements. Recommendations We recommend that the Chief Operating Officer for Federal Student Aid require OSAC to— 3.1 Develop a cost allocation plan for fiscal year 2002 that is consistent with requirements of OMB Circular A-87, submit the plan for the Department’s review and approval, and make any needed adjustments for costs allocated to the Operating Fund for the fiscal year. For the review of the cost allocation plan, Federal Student Aid, Financial Partners Channel should consider soliciting assistance from Financial Improvement and Post Audit Operations in ED’s Office of the Chief Financial Officer. 3.2 Either develop cost allocation plans for fiscal years 1999, 2000, and 2001 that are 7 These transactions were identified during our review of 181 transactions that were judgmentally selected from the FFEL Program Account and Operating Fund transactions for fiscal years 1999 and 2000. ED-OIG/A09-B0016 Page 13 of 18 consistent with requirements of OMB Circular A-87 and make any needed adjustments for costs allocated to the appropriate fund for those fiscal years or return $1,979,407 to the appropriate fund. 3.3. Provide confirming documentation that OSAC implemented a written policy for preparing semi-annual certification and that certifications were prepared for the most recent period. 3.4. Evaluate its policies and procedures to identify and implement steps that will provide increased assurance that future expenditures charged to the Operating Fund meet Federal regulations and OMB Circular A-87 requirements, including assurances that OSAC staff responsible for approving and coding transactions are knowledgeable of applicable Federal regulations and OMB Circular A-87 requirements. 3.5. Either provide appropriate documentation for the unsupported expenditures or return $6,221 to the Operating Fund. 3.6. Return the $192 that was used for coffee at the private awards meeting to the Operating Fund. OSAC Comments OSAC generally concurred with the finding and recommendations. In its response to the draft report, OSAC described the corrective actions taken and provided a copy of its revised cost allocation plan effective July 1, 2001. OSAC stated that it surveyed current employees whose positions were partially funded by the FFEL Program and concluded that, in each situation, the survey results were consistent with the percentages identified in past allocation plans. OSAC identified $61,357 to be returned to the Operating Fund to correct over charges for the past three fiscal years that resulted from the inconsistent use of percentages stated in its cost allocation plans. OSAC stated that employees who were working solely on the FFEL Program completed certifications in September 2001 and March 2002. OSAC agreed to return the $192 used for coffee at the private awards meeting to the Operating Fund and provide the Department with documentation for the $6,221 of unsupported expenditures. OIG Response As noted in our recommendation, we suggest that the Federal Student Aid, Financial Partners Channel obtain assistance from Financial Improvement and Post Audit Operations when reviewing OSAC’s revised cost allocation plan effective July 1, 2001, employee survey, and support for the amount to be returned to the Operating Fund to correct past years’ allocations. In the draft report, Recommendation 3.6 included $1,029 that OSAC charged to the Operating Fund for polo shirts provided to employees of the Loan Processing Division. OSAC provided an acceptable justification for the expenditure. Thus, we eliminated the $1,029 expenditure from the finding and recommendation. We have provided OSAC with a list of the transactions comprising the $6,221 of unsupported expenditures. ED-OIG/A09-B0016 Page 14 of 18 OTHER MATTERS Interest earned on the Federal share of collections. In a program review report, dated April 16, 2001, the Financial Partners Channel for Federal Student Aid (FSA) reported that OSAC had not transferred into the Federal Fund the investment interest accrued on the Federal share of loan collections held in a holding account from October 1998 through August 2000. FSA’s Dear Guaranty Agency Director Letter, dated July 18, 2000, informed guaranty agencies that their procedures must provide that the Federal share of loan collections, including investment income earned on the Federal share, is deposited into the Federal Fund no later than 30 days after receipt. FSA delayed its enforcement of the requirement to transfer the investment interest until the Department concludes on-going discussion of the requirement with the National Council of Higher Education Loan Programs. In September 2000, OSAC discontinued its use of the holding account and began depositing loan collections directly into the Federal Fund. Late payment of usage fees. If a guaranty agency uses the Federal portion of a nonliquid asset for purposes other than the performance of its guaranty activities, the agency must promptly deposit into the Federal Fund an amount representing the net fair value of the use of the asset (usage fees). During its program review, FSA’s Financial Partners Channel found that OSAC had calculated the usage fees for quarters ended September 30, 2000, and December 31, 2000, but OSAC had not deposited the fees in the Federal Fund. The regulations at 34 C.F.R. § 682.420(c)(2) state that payments to the Federal Fund for usage fees must be made no less frequently than quarterly. On June 30, 2001, OSAC deposited $46,243 in the Federal Fund for usage fees covering the period July 1, 2000, through June 30, 2001. In its response to the draft report, OSAC stated that it is current with its payment of usage fees. Sponsorship fees for the “Mapping Your Future” program exceeded the contribution limit. The HEA, § 422(h) required that $1 billion of guaranty agency reserve funds be placed in escrow accounts over five years for deposit in the U.S. Treasury in September 2002. To comply with this requirement, FSA instructed each guaranty agency to set aside a specific amount each year in a restricted funds account. The HEA, § 422(h)(4)(B) allows a guaranty agency to use earnings from the restricted funds account for default reduction activities. In a November 1999 letter, the Department approved guarantee agencies’ use of investment earnings for contributions of up to $1,500 to the “Mapping Your Future” program. OSAC’s contribution for the Fiscal Year 2000 Annual Sponsorship Fees for the “Mapping Your Future” program totaled $7,500. Thus, OSAC improperly contributed $6,000 more than the allowed contribution limit. In its response to the draft report, OSAC stated that it plans to request permission from the Department to allow the excess expenditure. ED-OIG/A09-B0016 Page 15 of 18 BACKGROUND The 1998 amendments to the HEA of 1965, enacted on October 7, 1998, required each guaranty agency to establish a Federal Fund and an Operating Fund. The final date for establishing these funds was December 6, 1998. The guaranty agencies were to transfer all funds, securities and other liquid assets of the guaranty agency’s FFEL program reserve fund to the Federal Fund, which is the property of the Federal Government. The HEA required guaranty agencies to deposit revenue from specific sources into the Federal Fund and defined the uses of Federal Fund assets. The HEA also specified the deposits to be made into the Operating Fund and the general uses of Operating Fund assets. Except for funds transferred from the Federal Fund, the Operating Fund is the property of the guaranty agency. If the Operating Fund contains funds transferred from the Federal Fund, the Operating Fund assets may be used only as permitted by the regulations. OSAC, formerly called the Oregon State Scholarship Commission, is the state agency responsible for administering student financial aid in the State of Oregon. OSAC became responsible for administering the FFEL program in 1967. OSAC contracts with USA Group or FFEL program related computer services, except for loan collections, which is supported by in- house staff. OSAC also administers a variety of Federal, State, and privately funded student financial aid programs for the benefit of Oregonians attending institutions of postsecondary education. Commissioners are members of the public appointed by the Governor. Its main office is located in Eugene, Oregon. AUDIT OBJECTIVE, SCOPE, AND METHODOLOGY The objective of the audit was to determine whether OSAC complied with the HEA and regulations governing the establishment and operations of the Federal and Operating Funds. Specifically, we evaluated the (1) initial establishment of the two funds, (2) sources and uses of the funds, and (3) ownership of nonliquid assets and usage fees paid. We gained an understanding of applicable HEA provisions and Federal regulations; the State of Oregon accounting system, reports, and records; and OSAC’s management controls. We reviewed OSAC’s audited financial statements and single audits covering the periods July 1, 1997, through June 30, 2000. We reviewed the working papers prepared by the independent public accountant (IPA) that conducted the single audit for fiscal year 2000. We reviewed the FSA-Financial Partners Channel report issued on April 16, 2001, covering its program review conducted at OSAC on January 22-25, 2001. We interviewed various OSAC personnel and ED-OIG/A09-B0016 Page 16 of 18 FSA-Financial Partners Channel officials. We reviewed relevant FSA Dear Colleague Letters, FSA Dear Guaranty Agency Director Letters, and correspondence between OSAC and FSA. To evaluate compliance with the HEA and regulations governing the establishment of the Federal and Operating Funds, we reviewed OSAC’s procedures used to establish the fund balances and supporting documentation. We confirmed OSAC’s General Ledger Trail Balance at September 30, 1998. We reviewed OSACs audited financial statements covering the periods July 1, 1966, through December 31, 1976, and July 1, 1981, through June 30, 1984. We reviewed the IPA’s working papers supporting the Independent Accountant’s Report on Applying Agreed-Upon Procedures.8 We reviewed transactions recorded in the FFEL Program Account from July 1, 1998, to September 30, 1998, and traced 35 transactions (judgmentally selected) to supporting documentation. To evaluate the OSAC’s management controls covering sources and uses of the Federal and Operating Funds, we reviewed transactions recorded in the FFEL Program Account, Federal Fund and Operating Fund from October 1, 1998, to June 30, 2000, and traced 146 transactions (judgmentally selected) to supporting documentation. The auditors selected transactions related to establishment of the Federal and Operating Fund, transactions described as miscellaneous or had other descriptions that were not readily identifiable, and travel expenditures with higher dollar amounts. We also reviewed supporting documentation related to the claims, default aversion fee, and collection processes for 25 borrowers. The borrowers were judgmentally selected from OSAC’s default aversion fee reports dated May 31, 2000, and April 30, 2001. The auditors selected transactions that represented a variety of purchase dates, loan amounts, and lenders and loan servicers. We reviewed OSAC’s cost allocation plans for fiscal years 1999, 2000, 2001, and 2002. We analyzed expenditure transactions for general administrative salary costs recorded in the Operating Fund for fiscal years 1999, 2000, and 2001. There is no assurance that the judgmental samples were representative of the entire populations and should not be used for projections. To review the ownership of nonliquid assets and usage fees paid, we reviewed OSAC’s schedule of nonliquid assets and the audited financial statements to identify unlisted assets. We evaluated the reasonableness and accuracy of usage fees charges and traced usage fees payments to the Federal Fund. To achieve our audit objective, we relied on standard reports from USA Group’s loan processing system and OSAC’s loan collection system. We also used standard reports and electronic data from the State of Oregon’s Statewide Financial Management System. Our assessment of the reliability of the data was limited to confirming the data to supporting documentation for the transactions reviewed in our judgmental samples and obtaining assurances in OSAC’s management representation letter of the propriety of the data provided. Based on these tests and assurances, we concluded that the data are sufficiently reliable to be used in meeting our objective. 8 The working papers showed that the audit work was conducted in January 2000. (The report was not dated.) ED-OIG/A09-B0016 Page 17 of 18 We conducted our fieldwork from July 16, 2001, through September 19, 2001. We performed the majority of our fieldwork at OSAC’s location in Eugene, Oregon. We performed our audit in accordance with government auditing standards appropriate to the scope of review described above. STATEMENT ON MANAGEMENT CONTROLS As part of our audit, we made an assessment of OSAC’s management control structure, policies, procedures, and practices applicable to OSAC’s administration of the FFEL program. The purpose of our assessment was to assess the level of control risk, that is, the risk that material errors, irregularities, or illegal acts may occur. We performed the control risk assessment to assist us in determining the nature, extent, and timing of the substantive tests needed to accomplish our audit objectives. To make our assessment, we identified significant controls and classified them into the following categories: Establishment of the Federal and Operating Funds Sources and Uses of the Federal and Operating Funds Ownership of fixed assets and usage fees Due to inherent limitations, a study and evaluation made for the limited purpose described above would not necessarily disclose all material weaknesses in the control structure. However, we identified weaknesses in OSAC’s procedures used to establish the funds and controls over the sources and uses of the funds. We describe the weaknesses in the AUDIT RESULTS and the OTHER MATTERS sections of the report. ED-OIG/A09-B0016 Page 18 of 18 ATTACHMENT OSAC Comments on the Draft Report REPORT DISTRIBUTION LIST CONTROL NO. ED-OIG/A09-B0016 Auditee ED Action Official Mr. Jeff Svejcar Mr. Greg Woods Executive Director Chief Operating Officer Oregon Student Assistance Commission Federal Student Aid 1500 Valley River Drive, Suite 100 Eugene, OR 97401 Other ED Officials/Staff (electronic copy) Audit Liaison Officer Press Secretary Financial Partners Office of Public Affairs Federal Student Aid Correspondence Control Assistant General Counsel Office of General Counsel Office of the General Counsel Assistant Secretary Deputy Secretary Office of Legislation and Office of the Deputy Secretary Congressional Affairs Assistant Secretary Chief of Staff Office of Intergovernmental Office of the Secretary and Interagency Affairs Director Under Secretary Financial Improvement and Office of the Under Secretary Post Audit Operations Office of the Chief Financial Officer Post Audit Group Supervisor Director Financial Improvement and Office of Public Affairs Post Audit Operations Office of the Chief Financial Officer Indirect Cost Group Supervisor Director, Western Region Financial Improvement and Partner Services, Financial Partners Channel Post Audit Operations Federal Student Aid Office of the Chief Financial Officer Other Ms. Cathy Pollino, Director Ms. Patty Williams, Chair Audits Division Oregon Student Assistance Commission Office of the Secretary of State 1500 Valley River Drive, Suite 100 State of Oregon Eugene, OR 97401 255 Capital Street NE, Suite 500 Salem, OR 97310
Oregon Student Assistance Commission's Administration of the Federal Family Education Loan Program Federal and Operating Funds.
Published by the Department of Education, Office of Inspector General on 2002-05-09.
Below is a raw (and likely hideous) rendition of the original report. (PDF)