oversight

Los Angeles Unified School District's Procedures for Calculating and Remitting Interest Earned on Federal Cash Advances

Published by the Department of Education, Office of Inspector General on 2008-12-02.

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

                  Los Angeles Unified School District’s 

                Procedures for Calculating and Remitting 

               Interest Earned on Federal Cash Advances 





                                 FINAL REPORT 





                                 ED-OIG/A09H0019 

                                  December 2008 





Our mission is to promote the                        U.S Department of Education
efficiency, effectiveness, and                       Office of Inspector General
integrity of the Department's                        Sacramento, CA
programs and operations.
                         NOTICE



 Statements that managerial practices need improvements, as well as
 other conclusions and recommendations in this report, represent the
   opinions of the Office of Inspector General. Determinations of
corrective action to be taken, including the recovery of funds, will be
    made by the appropriate Department of Education officials in
       accordance with the General Education Provisions Act.

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.
                                   UNITED STATES DEPARTMENT OF EDUCATION
                                                        OFFICE OF INSPECTOR GENERAL

                                                                                                                         Audit Services
                                                                                                                     Sacramento Region
                                                              December 2, 2008


Mr. Jack O’Connell
State Superintendent of Public Instruction
California Department of Education
1430 N Street
Sacramento, CA 95814

Dear Mr. O’Connell:

Enclosed is our final audit report, Control Number ED-OIG/A09H0019, entitled Los Angeles
Unified School District’s Procedures for Calculating and Remitting Interest Earned on Federal
Cash Advances. 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 Education
Department official, who will consider them before taking final Departmental action on this
audit:

                                           Thomas Skelly
                                           Acting Chief Financial Officer
                                           Office of the Chief Financial Officer
                                           U.S. Department of Education
                                           400 Maryland Avenue, SW
                                           Washington, D.C. 20202


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

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

                                                                 Sincerely,

                                                                 /s/
                                                                 Gloria Pilotti
                                                                 Regional Inspector General
                                                                 for Audit
Enclosure



 The Department of Education's mission is to promote student achievement and preparation for global competitiveness by fostering educational
                                                   excellence and ensuring equal access.
                                              TABLE OF CONTENTS 




EXECUTIVE SUMMARY ...........................................................................................................1


BACKGROUND ............................................................................................................................3


AUDIT RESULTS .........................................................................................................................6


          FINDING NO. 1 -	 LAUSD Estimated Interest Earned on Federal Cash
                          Advances ............................................................................................6

          FINDING NO. 2 -	 LAUSD Inappropriately Reduced the Estimated
                           Interest Earned on Federal Cash Advances to
                           Compensate for Temporary Use of Other Available
                           Cash Resources................................................................................13

          FINDING NO. 3 – 	LAUSD Needs to Improve Internal Controls to
                           Ensure Earned Interest Identified As Due to the
                           Federal Government Is Promptly Remitted to CDE
                           and Other Grantors ........................................................................18

OBJECTIVES, SCOPE, AND METHODOLOGY ..................................................................22


ATTACHMENT – CDE and LAUSD Comments on the Draft Report ..................................24 

Final Report
ED-OIG/A09H0019                                                                               Page 1 of 39



                                    EXECUTIVE SUMMARY 



Over the 12-year period (fiscal year (FY) 1995 through FY2006), Los Angeles Unified School
District (LAUSD) received more than $8 billion in Federal revenues and earned millions of
dollars of interest on Federal cash advances. LAUSD retained the interest earnings instead of
remitting the earnings to the U.S. Department of Education (ED) and other Federal agencies as
required by Federal regulations. LAUSD’s noncompliance was repeatedly reported in its single
audit reports. On March 9, 2007, LAUSD began remitting the earned interest to the California
Department of Education (CDE) for submission to ED and other Federal agencies. At the time
of our review, LAUSD had remitted about $25 million to CDE for interest earned on Federal
cash advances from FY1995 through FY2007. Based on the results of our review, we estimated
that the remitted amount may not have included about $6.3 million of interest earned on Federal
cash advances during that period.1

The purpose of our audit was to determine whether LAUSD 1) used a methodology for
calculating the interest earned on Federal cash advances that was compliant with Federal
requirements, and 2) has policies and procedures in place to ensure that future interest earned on
Federal cash advances is accurately computed and remitted on a quarterly basis to CDE. To
evaluate LAUSD procedures, we reviewed LAUSD’s calculation and remittance of earned
interest on Federal cash advances for FY2004 through FY2007.

LAUSD does not have procedures that identify the actual amount of interest earned on Federal
cash advances. While LAUSD had developed a methodology for estimating the amount, the
reliability of the estimate was not readily determinable due to the design and application of the
methodology. Thus, LAUSD’s methodology may overstate or understate the interest earned on
Federal cash advances. We recommend that CDE work with the Los Angeles County Office of
Education (LACOE) and LAUSD to develop a method for LAUSD to identify actual interest
earned on Federal cash balances. We also recommend that, in the interim, LAUSD take the
following steps to improve the reliability of its current estimation methodology: 1) perform a
subsequent adjustment when the prior quarter earnings rate is used in calculations, and
2) improve the internal controls over performance of the calculations.

LAUSD did not remit the entire amount of estimated interest earned for FY2004 through
FY2007 that was due to ED and other Federal agencies. As we describe in the following
paragraphs, LAUSD improperly reduced the amount due by about $1.48 million and did not
demonstrate that another $817,784 of interest identified as due was actually remitted to CDE or
other grantors.




1
 The $6.3 million is the sum of amounts presented in the Executive Summary for additional amounts that may be
due to Federal agencies for interest earned during FY1995 through FY2007 ($1.48 million + $2.58 million
+ $817,784 + $1.42 million).
Final Report
ED-OIG/A09H0019                                                                     Page 2 of 39


LAUSD improperly reduced the amount of earned interest to be remitted to CDE and other
grantors to compensate LAUSD for the temporary use of other cash resources to operate Federal
programs. Our review identified about $1.48 million of earned interest that was excluded from
LAUSD’s estimates for FY2004 through FY2007 due to the improper reduction. We
recommend that LAUSD exclude from its procedures the reduction of earned interest for the
temporary use of other cash resources to operate Federal programs. We also recommend that
LAUSD remit to CDE the $1.48 million identified by our audit that was improperly excluded
from analysts’ calculations of earned interest due and identify and remit all other earned interest
improperly excluded for FY1995 through FY2007 and later. If the periods reviewed are
representative of the prior years, we estimate that about $2.58 million may have been improperly
excluded from amounts due to CDE and other grantors for interest earned during FY1995
through FY2003 to compensate for the temporary use of other cash resources to operate Federal
programs.

LAUSD’s current internal controls may not be adequate to ensure that amounts it identified as
due to CDE and other grantor agencies are promptly remitted. Our review identified about
$817,784 of earned interest for FY2004 through FY2007 that LAUSD’s accounting analysts
identified in their worksheets as due to CDE or other grantors, but was not included in provided
remittance documentation. We recommend that LAUSD remit the $817,784 or provide
documentation confirming the prior remittance of the amount. We also recommend that LAUSD
reconcile its documentation for FY1995 through FY2003 and for fiscal years after FY2007 to
identify any other amounts due in the analysts’ worksheets that were not remitted and remit those
amounts to CDE or other grantors. If the periods reviewed are representative of the prior years
(FY1995 through FY2003), there could be about $1.42 million of additional earned interest that
was identified by the analysts, but not remitted to CDE or other grantors. Finally, we
recommend that CDE review LAUSD’s internal controls for ensuring prompt remittance of all
interest earned to grantor agencies and monitor LAUSD, on an on-going basis, to ensure that
LAUSD continues to remit interest earnings to CDE on a quarterly basis.

In response to the draft report, CDE provided us with LAUSD’s written comments on the
reported findings and recommendations and stated that the comments and positions set forth in
the letter are solely those of LAUSD. LAUSD partially concurred with our findings and
concurred or partially concurred with our recommendations, except for those recommendations
that provided for the remittance of additional amounts of interest for periods earlier than the
five-year limitation period specified in the General Education Provision Act (GEPA).

CDE did not provide its own comments on the findings and recommendations except to state that
it would continue to work with LAUSD and ED in resolving the issues delineated in the audit
report. LAUSD’s comments are summarized at the end of each finding and the entire text of the
CDE and LAUSD letters are included in an attachment to the report.
Final Report
ED-OIG/A09H0019                                                                         Page 3 of 39




                                       BACKGROUND 



ED makes Federal funds available to state educational agencies for administration of Federal
education programs at local educational agencies (LEAs). State educational agencies are
responsible for providing the Federal funds to the LEAs (subgrantees).

ED General Administrative Regulations, at 34 C.F.R. § 80.21, prescribe the basic standards and
methods that ED must follow when making payments to grantees and that grantees must follow
when making payments to subgrantees. Paragraphs (c) and (d) of 34 C.F.R. § 80.21 state that
grantees and subgrantees are to be paid in advance, provided they maintain or demonstrate the
willingness and ability to maintain procedures to minimize the time elapsing between the transfer
and disbursement of funds by the grantee or subgrantee. When the grantee or subgrantee cannot
meet the timing requirement, reimbursement of incurred expenditures is the preferred method of
payment. Paragraph (i) requires grantees and subgrantees to remit to ED, at least quarterly,
interest earned on advances when the interest exceeds $100 per year.

CDE generally uses the advance method for providing Federal funds to LEAs. LEAs hold the
advanced funds in investment accounts with their respective County Treasurer’s Office until the
amounts are used for Federal program expenditures. California State law requires that County
Offices of Education provide fiscal oversight of the LEAs within their respective counties.

LAUSD is the nation’s second largest school district with over 700,000 students and total
revenues exceeding $10 billion in FY 2006, of which about $1 billion was revenue from the
Federal Government. As shown in Table 1, over the 12-year period from July 1, 1994 through
June 30, 2006, LAUSD received more than $8 billion in Federal revenues.

                         Table 1: LAUSD Revenues for FY 1995-2006 (a)
                                            (in thousands)
              Fiscal Year               Total                  Federal           Federal
          (July through June)        Revenues                 Revenues          Percentage
                  2006             $10,167,841               $1,150,060            11%
                  2005               8,566,578                1,071,628            13%
                  2004               7,498,310                  984,482            13%
                  2003               9,939,832                  814,681             8%
                  2002               7,390,773                  686,278             9%
                  2001               7,208,339                  598,540             8%
                  2000               6,425,483                  590,308             9%
                  1999               5,497,979                  504,998             9%
                  1998               5,392,988                  454,281             8%
                  1997               4,462,704                  426,404            10%
                  1996               3,951,167                  404,939            10%
                  1995               3,775,930                  471,216            12%
                 Totals            $80,277,924               $8,157,815            10%
         (a) Source: LAUSD’s Comprehensive Annual Financial Reports (CAFR). The report for
         FY2007 was not available at the time of our review.
Final Report
ED-OIG/A09H0019                                                                                      Page 4 of 39


Over the years, LAUSD earned millions of dollars of interest on Federal cash advances and
retained those earnings instead of remitting the interest earnings to ED and other Federal
agencies as required by Federal regulations. This condition was repeatedly reported as a
compliance finding by Independent Public Accountants (IPAs) that conducted single audits of
LAUSD.

       •	 Single audit reports for FY1995 and FY1996. In the FY1995 single audit report, the IPA
          included a finding that LAUSD was holding interest earned on excess Federal funds. In
          its response, LAUSD stated it would develop procedures to monitor cash received and
          expended for each Federal grant and develop a process for allocating interest earned to
          the appropriate funding agency.2 In the FY1996 single audit report, the IPA reported
          LAUSD had implemented the corrective action. However, as noted in the next
          paragraph, the finding was again reported in the FY1997 single audit.

       •	 Single audit report for FY1997. The IPA included a finding that LAUSD had not
          reported interest earned on Federal funds to the funding agency. The IPA recommended
          that LAUSD report the interest earned and either request permission to reprogram the
          interest as an increase of total program funding, or request instructions for remitting the
          interest. The IPA also reported that, for FY1997 and the prior two years, LAUSD had
          calculated the interest earned on Federal cash advances and established a liability to the
          Federal Government.

       •	 Single audit reports for FY1998 through FY2006. The IPAs repeatedly reported that
          LAUSD was not in compliance with 34 C.F.R. § 80.21(i) in findings in the single audit
          reports for FY1998 through FY2002 and FY2004 through FY2006. In the FY2003 single
          audit report, the IPA did not report this finding, but did include the finding in the status of
          the prior year’s finding section of the single audit report.

In its responses to the findings, LAUSD stated it had communicated with ED officials regarding
the interest earned on Federal cash advances that was being held by LAUSD.

       •	 Single audit report for FY1998. LAUSD reported that its Chief Financial Officer had
          written a letter to the ED Director of Compensatory Education Programs, dated
          February 20, 1998, reporting the interest earned and requesting permission for LAUSD to
          retain the interest as additional program funds.

       •	 Single audit report for FY1999. LAUSD reported that a letter was sent to ED on 

          April 23, 1999 as a follow up to its earlier letter. 


       •	 Single audit report for FY2004. LAUSD reported that another letter was sent to ED on
          December 8, 2003, and that no response was received from ED on that letter.3


2
  In the FY1995 report, the IPA incorrectly referred to the interest earned on Federal cash advances as program
income. The regulation at 34 C.F.R. § 80.25 states that program income is to be deducted from total allowable
program costs to determine the net allowable costs, but explicitly states interest earned on grant funds is not program
income. Thus, the IPA improperly recommended that the District credit all interest earned to each Federally funded
program.
3
    LAUSD provided a copy of its letter of December 8, 2003, but was unable to locate the earlier letters.
Final Report
ED-OIG/A09H0019                                                                  Page 5 of 39


   •	 Single audit report for FY2006. LAUSD reported that it had informal discussions with
      ED regarding the use of interest earned on Federal cash advances. LAUSD stated that it
      would decide in Fall 2006 whether to submit a plan for use of the interest earnings or to
      remit the amounts to ED.

In March 2007, LAUSD began remitting the interest earned on Federal cash advances to CDE
for transfer to ED and other Federal agencies. Documentation provided by LAUSD and CDE
confirmed the remittance of about $25 million for interest earned on Federal cash advances
during FY1995 through FY2007.
Final Report
ED-OIG/A09H0019                                                                   Page 6 of 39



                                    AUDIT RESULTS



LAUSD did not identify the actual amount of interest earned on Federal cash balances. While
LAUSD developed a methodology for estimating the amount, the reliability of the estimate was
not readily determinable due to the design and application of the methodology. In addition,
when determining the amount of earned interest to be remitted to CDE and other grantor
agencies, LAUSD improperly reduced the amount to compensate for the temporary use of other
cash resources to operate Federal programs. Also, LAUSD’s current internal controls may not
be adequate to ensure that amounts identified as due to the Federal Government are promptly
remitted to CDE and other grantors.


FINDING NO. 1 - LAUSD Estimated Interest Earned on Federal Cash Advances

LAUSD does not have procedures to identify the actual amount of interest earned on Federal
cash advances. ED General Administrative Regulations at 34 § C.F.R. 80.20 (b) establish the
standards for financial management systems at LEAs receiving Federal education grants and
subgrants. The standard on internal control addresses effective control and accountability of
cash and other assets.
       3) Internal control. Effective control and accountability must be maintained for
       all grant and subgrant cash, real and personal property, and other assets.
       Grantees and subgrantees must adequately safeguard all such property and must
       assure that it is used solely for authorized purposes. [Bold emphasis added.]

Other assets would include the interest earned on cash advances from Federal grants and
subgrants. Thus, LEAs should have financial procedures for identifying the interest earned on
Federal cash balances. The procedures should have a level of precision that ensures only an
amount up to $100 per year is retained for administrative expenses. Paragraph (i) of 34 C.F.R.
§ 80.21 states—
       …[G]rantees and subgrantees shall promptly, but at least quarterly, remit interest
       earned on advances to the Federal agency. The grantee or subgrantee may keep
       interest amounts up to $100 per year for administrative expenses.

Reports on Interest Earnings
Available to LAUSD

Cash received by LAUSD from Federal, state, and other sources is deposited in the School Fund
managed by the Los Angeles County Treasurer. The School Fund is a pooled investment fund
that includes cash received by various educational organizations, such as school districts,
community college districts, and charter schools. Each month, the Los Angeles County
Treasurer’s Office provides LACOE with a statement showing the interest earned that month on
cash held in the School Fund.
Final Report
ED-OIG/A09H0019                                                                       Page 7 of 39


LACOE allocates the amount of earned interest reported by the Treasurer’s Office to educational
organizations on a quarterly basis using financial records that LACOE maintains for each
organization’s funds and subfunds. For example, LACOE maintains financial records on
LAUSD’s General Fund, Adult Education Fund, and other funds and subfunds that account for
receipts from various Federal, state and local sources, including ED programs. LACOE uses the
financial records to determine the average daily cash balance for each fund/subfund and uses the
average balances to allocate the earned interest reported by the Treasurer’s Office for the quarter
to the funds/subfunds. LACOE provides educational organizations with quarterly reports
showing the average daily cash balance for each of the organization’s funds/subfunds and the
amount of interest allocated to each fund/subfund for the fiscal quarter.

LAUSD can not identify the interest earned on Federal cash balances from the LACOE reports
because LAUSD funds/subfunds contain amounts received from Federal, state, and other
sources. Thus, to identify the amount, LAUSD developed a methodology for estimating the
interest earned on Federal cash balances.

LAUSD’s Methodology for Estimating
Interest Earned on Federal Cash Balances

LAUSD used a methodology that estimated the earned interest on Federal cash balances by
revenue code. LAUSD’s financial accounting system uses revenue codes to trace receipts and
expenditures by funding source. A revenue code may be used to account for cash receipts and
expenditures for one or more Federal grants. Accounting analysts in LAUSD’s Accounting and
Disbursement Division are responsible for applying LAUSD’s methodology through the use of a
series of electronic files containing detailed and summary worksheets. Each analyst is assigned
responsibility for preparing the worksheets for groups of revenue codes.

      •	 Detailed Worksheet. The analyst prepares a detailed month-by-month worksheet for each
         assigned revenue code that covers a fiscal year. The worksheet begins with the amount
         of available cash for the revenue code. The analyst obtains the total cash receipts and
         expenditures by month for the revenue code from LAUSD’s accounting system and
         enters the amounts on the electronic worksheet. The receipts are added to the month’s
         beginning balance to obtain the available cash for the revenue code during the month.
         Then, the expenditures are subtracted from the available cash to derive the ending
         balance for the month and subsequent month’s beginning balance. The month’s ending
         balance is multiplied by one-twelfth of the School Fund interest earnings rate (School
         Rate)4 to compute an estimate of the interest earned for the month on Federal cash
         balances for each revenue code. When the ending balance for the month is negative
         (expenditures exceed available cash for the revenue code), the calculation results in a
         negative amount of interest for the month.

      •	 Summary Worksheet. The analyst prepares a summary worksheet to calculate the
         amount of the earned interest that is to be remitted to CDE or other grantor agencies for
         each assigned revenue code for the fiscal quarter and, in total, for the fiscal year. This
         worksheet is discussed in Finding No. 2.


4
    LAUSD obtains the annualized School Rate for each fiscal quarter from LACOE.
Final Report
ED-OIG/A09H0019                                                                                Page 8 of 39


The reliability of LAUSD’s estimated amounts of monthly earned interest could not be readily
determined due to the design and application of the methodology.

    •	 The methodology was designed to only provide calculations of the estimated earned
       interest for revenue codes from Federal sources. The calculations for all revenue codes in
       the General Fund or other funds would be needed to compare the total estimated earned
       interest derived using LAUSD’s methodology to the total actual interest earnings that
       LACOE reported to LAUSD.

    •	 The methodology was designed to use information from LAUSD’s financial accounting
       system when the actual interest earnings were determined by LACOE using information
       from LACOE’s financial records. Using information from a source other than the source
       used to calculate the actual interest earned by LAUSD increases the risk that LAUSD’s
       methodology may not produce reliable estimates.

    •	 The methodology was designed to calculate the estimated earned interest using the
       month-end cash balance rather than the average daily balance. As noted earlier, LACOE
       allocates the interest earnings to LAUSD and the other educational organizations using
       average daily balances. The daily cash balances for a revenue code would vary
       depending on the timing of receipts and expenditures.

    •	 The application of the methodology utilizes numerous worksheets and calculations
       prepared by various LAUSD analysts. For example, LAUSD provided us with detailed
       and summary worksheets for FY2007 covering 190 revenue codes. If monthly interest
       calculations were performed for all 190 revenue codes each month, the detailed
       worksheets for just this one year would contain 2,280 separate calculations (190 revenue
       codes times 12 months). Performing that number of calculations would mean that
       2,280 separate times the receipts and expenditures would be entered in the worksheets,
       month-end balances calculated, applicable School Rates identified, and the School Rate
       applied to the month-end balance. While the analysts used electronic worksheets, the
       worksheet formats varied among the analysts and were manually prepared using data
       obtained from LAUSD’s accounting system. Due to the number of individual
       worksheets, calculations, and data elements and the variance in analysts’ worksheets and
       their manual preparation, there is risk that the methodology may not be applied
       consistently, that the data used in the calculations may not be accurate, or the calculations
       may be incorrect. Our limited review5of the worksheets identified instances where
       analysts did not prepare summary worksheets, did not consistently apply the
       methodology, used an interest rate other than the applicable School Rate, or used an
       incorrect formula in the worksheets.

    •	 When the School Rate for the 4th quarter is not available at the time its analysts’ perform
       the calculations, LAUSD’s methodology provided for the analysts to use the School Rate
       for the prior fiscal quarter in the calculations of the estimated interest earned for the
       months in the 4th quarter. The methodology did not provide for the subsequent

5
 Due to the number of calculations and variability in the provided documentations, we limited our review to the
summary worksheets for FY2004 through FY2007. Our reviews of the detailed worksheets were limited to gaining
an understanding of LAUSD’s methodology and investigating anomalies in the summary worksheets.
Final Report
ED-OIG/A09H0019                                                                                     Page 9 of 39


         adjustment of the calculations when the School Rate for the 4th quarter became available.6
         LACOE’s list of School Rates for FY1998 through FY2007 showed that the 4th quarter
         rates were higher than the 3rd quarter rates in 7 of the last 10 fiscal years. Thus, when the
         analysts used the prior quarter School Rate for 4th quarter calculations, the methodology
         understated the estimated interest earned on Federal cash balance in seven of the fiscal
         years and overstated the amount in the other three fiscal years.

Due to the above factors, LAUSD’s methodology may overstate or understate the interest earned
on Federal cash advances.

We have not recommended that LAUSD revise its current methodology to address the above
factors, because the application of the methodology to all revenue codes and the calculation of
average daily balances for each month for all revenue codes would require a substantial increase
in the significant amount of staff resources already committed to the application of LAUSD’s
methodology. As we present in the next section, an alternative to LAUSD’s current
methodology may be available that would likely reduce the staff resources needed and identify
the actual interest earned on Federal cash advances. However, until an alternative is
implemented, LAUSD should take the following interim steps to improve the reliability of
estimates.

    •	 LAUSD could improve the reliability of its estimates by adjusting the calculations for the
       months of April, May, and June after receipt of the School Rate for the 4th quarter, or
       delay performance of the calculations until the 4th quarter rate is available.

    •	 Also, LAUSD could take additional steps to improve the internal control over application
       of its methodology. LAUSD issued Policy Bulletin ADD-007-004 in March 2007
       updating its procedures, which included a standard detailed worksheet for calculating the
       monthly interest for revenue codes. LAUSD should further enhance its procedures for
       applying the methodology by providing a standard summary worksheet and making the
       use of standard detailed and summary worksheets mandatory for analysts. LAUSD could
       also explore methods to incorporate internal controls within the design of the worksheets
       to ensure the accuracy of formulas and information entered into the worksheets. Taking
       these additional steps would improve the consistency and accuracy of interest
       calculations across all spreadsheets prepared by different analysts.

The above interim steps could improve the reliability of LAUSD’s estimate of the interest earned
on Federal cash balances without a significant increase in use of its staff resources.

LACOE Could Include in Its Reports the
Interest Earned on Federal Cash Balances

LACOE advised us that its current financial report system allows educational organizations, such
as LAUSD, to use subfunds within their General Fund and other funds to separately identify the
cash balance for Federal programs as long as all the Federal programs are grouped into the same

6
 Our review of analysts’ worksheets for FY2004 through FY2007 found that the actual School Rate for the
4th quarter was only used in estimated interest calculations for April, May, and June 2006 and then only by six of the
eight analysts who performed the calculations for FY2006.
Final Report
ED-OIG/A09H0019                                                                      Page 10 of 39


subfund(s) with no other non-federal programs maintained in the same subfund. This accounting
structure enables the interest allocation process in the current financial system to report quarterly
on the actual interest earned, in total, on Federal cash held in those subfunds for the individual
Federal programs. However, none of the educational agencies are currently maintaining such a
structure in the financial system. Any structural change requires all the agencies to perform
systematic tasks, such as a one-time crosswalk of all the existing balances from the current
subfund to the new one. This change would only be effective if LAUSD and other educational
agencies are allowed to remit interest earned on Federal cash balances in the subfund rather than
on a grant-by-grant basis.

Federal regulations applicable to ED programs do not require states or LEAs to return interest
earned on Federal cash balances on a grant-by-grant basis. Also, ED only identifies the grantee
remitting the amount (e.g., CDE) and does not record the individual program information since
the interest remittances are deposited in the U.S. Treasury as miscellaneous receipts.

If the subfunds were set up by Federal agency source, the LACOE reports could contain the
information needed by LAUSD to meet ED requirements for reporting and remitting the actual
interest earned on Federal cash balances. This change would substantially reduce the staff
resources currently expended by LAUSD to estimate earned interest on a grant-by-grant basis
while providing for the remittance of the actual interest earned on Federal cash balances.

Recommendations

We recommend that the Chief Financial Officer require CDE to—

1.1	   Work with LACOE and LAUSD to develop a methodology for LAUSD to identify actual
       interest earned on Federal cash balances.

1.2	   Instruct LAUSD to take the interim step to provide a more reliable estimate by revising
       its current methodology to either include a subsequent adjustment of the calculations
       when the School Rate for the 3rd quarter rate is used for months in the 4th quarter (April,
       May and June) or delay performance of the calculations until the 4th quarter rate is
       available.

1.3	   Instruct LAUSD to recalculate the estimated interest earned on Federal cash balances for
       the 4th quarter of FY1995 through FY2007 and later using the actual School Rates for the
       4th quarter, and remit any additional amounts due to CDE and other grantors, as permitted
       under Federal law.

1.4	   Instruct LAUSD to take the interim step to enhance the procedures for applying its
       current methodology by providing a standard summary worksheet for use by its analysts,
       making the use of the standard worksheets mandatory, and incorporating internal controls
       into the design of the worksheets to ensure the accuracy of formulas and information
       entered into the worksheets.

1.5	   Instruct LAUSD to implement appropriate reviews to ensure analysts are applying the
       new procedures consistently and accurately.
Final Report
ED-OIG/A09H0019                                                                    Page 11 of 39


LAUSD Comments

In its comments on the draft report, LAUSD agreed that its methodology for determining
remittance obligations was based on monthly estimates of interest earned on Federal cash
advances. However, LAUSD disagreed with the OIG’s finding that its methodology did not
produce a reliable determination of the actual interest earned. LAUSD cited its recalculation of
interest earned in FY2007 on Federal cash advances for the Elementary and Secondary
Education Act (ESEA), Title I, Part D Program to demonstrate the difference between using
month-end balances versus average daily balances in its calculations. LAUSD stated that the
difference between the two calculations was less than one percent.

LAUSD stated that it is not aware of any applicable statute, regulation, or ED guidance that
provided clear notice that the District’s methodology for estimating interest was improper.
LAUSD stated that neither 34 C.F.R. § 80.20(b), which states that Federal grantees must
maintain “[e]ffective control and accountability” over grant assets, nor 34 C.F.R. § 80.21(i),
which permits grantees to retain only up to $100 per year in earned interest, expressly requires
any particular interest calculation methodology. LAUSD stated that, absent clear notice, it was
unjust to penalize the District for its methodology especially since LAUSD repeatedly sought
guidance from ED regarding policies and practices for remitting interest on Federal cash
advances.

LAUSD expressed eagerness to work expeditiously with LACOE and CDE to develop an
alternative methodology for calculating interest earned on Federal cash balances, so long as the
resulting procedure is not significantly more burdensome to the District than its current
approach. LAUSD is willing to consider adoption of OIG’s proposed alternative methodology;
however, implementation would require support from LACOE and concurrence from CDE that
grant-by-grant reporting of interest remittances is no longer required. LAUSD stated that it has
had preliminary discussions with CDE and has begun reviewing its current methodology to
determine ways in which it might be streamlined.

LAUSD explained how it had already revised its interest calculation methodology in accordance
with Recommendation 1.2. LAUSD stated that it continues to estimate interest for the 4th quarter
using the 3rd quarter School Rate, but requires analysts to make a subsequent adjustment to the
calculations when the actual 4th quarter rate becomes available in the following fiscal year.
LAUSD provided inter-office correspondence, dated October 31, 2006, which advised staff to
recalculate interest for the 4th Quarter of FY2006 using the actual rate for the quarter.

LAUSD advised that it was in the process of verifying that remitted interest for FY2006 and
FY2007 was calculated using the actual School Rates for the 4th quarter. For periods prior to
FY2006, LAUSD contends that the District should not have to calculate and remit additional
interest. LAUSD stated that the statute of limitations provision of the GEPA applies to FY2003
and earlier. LAUSD cited a House Committee Report, which stated that the statute of limitations
was enacted to encourage more prompt audits and remove the threat of repayment of
expenditures made many years before an audit. LAUSD stated that, under the statute of
limitations, its monetary liability would at most extend no further back than five years from the
present (i.e., FY2004). LAUSD asserted that its earlier voluntary remittances of interest for
periods prior to FY2004 do not constitute a waiver of the statute of limitation provision and that
the earlier remittances were intended to demonstrate LAUSD’s good-faith commitment to work
Final Report
ED-OIG/A09H0019                                                                     Page 12 of 39


with ED and CDE to resolve the matter. LAUSD stated that significant staff resources would be
required to perform recalculations for the remaining two fiscal years—FY2004 and FY2005 and
that such calculations would likely yield small sums of additional interest.

LAUSD stated that it would develop a standard template for both detail and summary worksheets
to ensure accuracy of formulas and information entered into the worksheets and require staff to
use the template. LAUSD expects to have the standard templates developed by October 1, 2008
for use in performing recalculations for FY2009.

LAUSD stated a procedure was already in place for Senior Accounting Analysts to review each
worksheet and ensure that analysts are applying procedures consistently and accurately.
LAUSD stated that, through training and appropriate monitoring, it would ensure that this
procedure is followed rigorously and that the Senior Accounting Analysts perform careful and
thorough reviews.

OIG Response

We did not change our finding or recommendations. In its comments, LAUSD inaccurately
portrayed our conclusion regarding the reliability of its methodology. We concluded
reliability could not be readily determined due to the factors listed in the finding regarding
the design and application of the methodology. The recalculation for the ESEA, Title I,
Part D Program provided an isolated example of only one of the factors listed in our finding.
In addition, the pattern of receipts and disbursements for the ESEA, Title I, Part D Program
may not be representative of the pattern for other programs since CDE does not have a
standard method for determining the amount and timing of Federal cash disbursements to
LEAs. Additionally, LAUSD may disburse cash at different times within the month for other
programs.

The regulations cited in the finding clearly state the requirement to remit interest earned and,
as LAUSD acknowledged, its methodology produces an estimate of the earned amount, not
the amount actually earned. The cited regulations clearly state that LEAs need to have
effective accountability for assets and LEAs must return all interest in excess of $100. As we
noted in the Background section of the report, LAUSD’s letters to ED were requests for
permission to retain the interest or use the amounts for program purposes, not for information
on the methodology for determining the amount of interest earned on Federal cash advances.

We have not modified our recommendation in response to LAUSD’s argument that GEPA’s
statute of limitations provision prevents ED from recovering interest retained by LAUSD for
any period more than five years prior to an administrative determination by the Department.
During audit resolution, ED will determine the proper application of GEPA requirements to
the recovery of interest unlawfully and intentionally retained by LAUSD. As we noted in the
Background Section of the report, LAUSD was aware of the requirement to remit the interest
earned on Federal cash advances at the time its FY1995 single audit report was issued and its
FY1997 single audit report disclosed that LAUSD had begun calculating the interest earned
and had established a liability to the Federal Government. LAUSD, however, did not remit
any amounts until March 2007. We noted that the first remittance occurred immediately
after LAUSD was notified of the initiation of the OIG’s earlier review of LAUSD’s controls
Final Report
ED-OIG/A09H0019                                                                             Page 13 of 39


in accounting for Federal funds.7 The statute of limitations provision of GEPA does not
directly address this situation. The five-year provision addresses the liability of a recipient of
Federal education program funds to “return funds which were expended in a manner not
authorized by law….” [Emphasis added.] The earned interest amounts were neither program
funds received by LAUSD nor expenditures of LAUSD. We had identified the potential
GEPA issue in a footnote to our draft report. Since that issue is now included in LAUSD
comments and our response, we have removed the footnote from the final report.


FINDING NO. 2 - LAUSD Inappropriately Reduced the Estimated Interest
                Earned on Federal Cash Advances to Compensate for
                Temporary Use of Other Available Cash Resources

LAUSD understated the amount due to grantor agencies when it inappropriately reduced the 

estimated interest earned on Federal cash advances to compensate for the temporary use of other 

available cash resources for Federal programs. For purposes of the report, we refer to this 

process as “netting.” 


To calculate the amount of earned interest to be remitted to CDE and other grantors for the fiscal 

year, the analyst prepares a summary worksheet for each assigned revenue code showing an 

amount for each fiscal quarter. To obtain the quarterly amounts, the analyst combines the related 

monthly estimated earned interest amounts shown on the detailed worksheets. As we noted in 

Finding No. 1, LAUSD’s methodology can result in a negative amount for interest earned for a 

month when expenditures exceed the available cash for a revenue code. 


When a quarter has both positive and negative monthly amounts, the analyst nets the amounts to 

obtain the quarterly earned interest to be remitted for the revenue code (quarterly netting). Thus, 

netting at the quarterly level reduces the estimated earned interest to be remitted and can result in

a negative amount for the quarter. Then, the analyst combines the quarterly amounts on the 

summary worksheet to derive the amount to be remitted for the fiscal year. When a fiscal year 

has both positive and negative quarterly amounts, the analyst again nets the amounts to obtain 

the earned interest to be remitted for the fiscal year for the revenue code (fiscal year netting). 

Thus, fiscal year netting can further reduce the estimated earned interest to be remitted to the 

grantor agency. 


As we noted in Finding No. 1, 34 C.F.R. § 80.21(i) allows grantees or subgrantees to keep only 

up to $100 per year of interest earned on Federal cash advances for administrative expenses. 

Federal laws and regulations do not contain provisions for compensating LEAs for the use of 

other available cash resources to operate ED programs. In fact, Office of Management and 

Budget (OMB) Circular A-87, Cost Principles for State, Local, and Indian Tribal Governments, 

Attachment B which establishes the principles and standards for determining allowable costs for 

Federal awards, prohibits the use of Federal funds for such purposes. Attachment B, 

Paragraph 23.a states that costs incurred for “the use of a governmental unit’s own funds, 

however represented, are unallowable.” 

7
  ED-OIG issued a letter to LAUSD on February 8, 2007 announcing a review of LAUSD’s administration of the
Federal education funds. The review comprised an assessment of LAUSD’s controls in accounting for Federal
funds and administering programs authorized by the ESEA, as amended. Based on that assessment, the ED-OIG
initiated the audit that resulted in this report.
Final Report
ED-OIG/A09H0019                                                                                  Page 14 of 39



The U.S. Department of the Treasury regulation at 31 C.F.R. § 205.14(a), which is applicable to
ED programs8, allows states to collect interest from the Federal Government when funds are not
delivered to the state in time to fund a Federal program. There is no similar provision for LEAs
and the definition of a state used in the Treasury regulations specifically excludes local
governments. Also, the Federal Government may deny a state’s interest claim for interest if the
state fails to request Federal funds timely. In the case of the example of netting shown in
Table 2, the Elementary and Secondary Education Act (ESEA) funds for school year 2006-2007
were available to CDE on July 1, 2006. CDE did not make the initial advance to LAUSD until
December 2006. Thus, CDE had not made the Federal funds available to LAUSD when needed
for Federal program expenditures.

Impact of Quarterly Netting. The following example demonstrates the impact of netting when
determining the amount to be remitted for a quarter.

            Table 2: Impact of Fiscal Quarter Netting For Revenue Code R046-003F (a)
                                 October through December 2006
                                           Estimated Interest Earned
                 Month                                                         Notes
                                           From Detailed Worksheet
                                                                                   Expenditures exceeded
        October 2006                                     <$ 87,830>                available cash
                                                                                   Expenditures exceeded
        November 2006                                    <$212,229>                available cash
                                                                                   Available cash exceeded
        December 2006                                      $336,224                expenditures
LAUSD analyst’s calculation of interest
                                                           $36,165
earned for the quarter, with netting
OIG calculation of interest earned for the
                                                           $336,224
quarter, without netting
Additional interest due to CDE for the
                                                           $300,059
quarter
(a) ESEA, Title I, Part A – Basic Grants to LEAs




8
  The regulation at 34 C.F.R. § 80.21 provides the basic standard and the methods under which a Federal agency will
make payments to grantees, and grantees will make payments to subgrantees and contractors. The basic standard
refers to the regulations at 31 C.F.R. Part 205, issued by the U.S. Department of the Treasury.
Final Report
ED-OIG/A09H0019                                                                                   Page 15 of 39


Our review of the detailed worksheets for R046-003F identified a total of five quarters (including
the one above) in FY2004 through FY2007 where LAUSD’s analyst netted interest earned for
the quarter because of negative amounts for one or more of the months. The additional interest
due to ED for FY2004 through FY2007 because of quarterly netting for Revenue Code
R046-003F is as follows:
                  April – June 2004                                    $ 85,241
                  January – March 2006                                  119,131
                  October – December 2006                               300,059
                  January – March 2007                                  101,530
                  April – June 2007                                     281,831
                  Total Additional Interest Earned Due                 $887,792

The above example represents LAUSD’s largest Federal grant and, thus, would not be
representative of the impact that fiscal quarter netting had on other individual Federal programs.
However, the cumulative effect on the other Federal programs over the four year period would
likely be significant, as would the impact on the interest remitted for ESEA, Title I and other
Federal programs in prior years (FY1995 through FY2003).

Impact of Fiscal Year Netting. The following examples shown in Table 3 demonstrate the
impact of netting when determining the earned interest to be remitted for a fiscal year.

                Table 3: Impact of Fiscal Year Netting for Selected Revenue Codes
                                             FY 2006
                                                                             Revenue Code
                     Fiscal Quarter                              R344-634F (a)         Y349-636F (b)
                                                                  Example 1             Example 2

 July-Sept 2005                                                      $19,980                      $4,126
 Oct-Dec 2005                                                       <$4,700>                    <$10,866>
 Jan-Mar 2006                                                         $796                      <$15,684>
 Apr-June 2006                                                        $531                      <$15,921>
 LAUSD analyst’s calculation of interest with netting                $16,607                     None (c)
 OIG calculation of interest without netting                         $21,307                      $4,126
 Difference                                                          $4,700                       $4,126
 (a) ESEA, Title I, Comprehensive School Reform Grant
 (b)21st Century Community Learning Centers Grant
 (c) When the sum for the four quarters is a negative amount, the LAUSD analyst records the interest to be remitted
     as zero for the revenue code.

When the quarterly amounts include both positive and negative amounts, fiscal year netting
results in an understatement of the amount of earned interest to be remitted as shown by the
examples in Table 3. Fiscal year netting has no effect on the amount when quarterly amounts are
either all positive or all negative.
Final Report
ED-OIG/A09H0019                                                                                       Page 16 of 39


Our review of LAUSD’s summary worksheets for all Federal revenue codes for FY2004 through
FY2007 identified the following amounts, in total, that were not included in earned interest to be
remitted to grantor agencies because of LAUSD’s use of fiscal year netting.

                                       FY2004              $ 39,966
                                       FY2005               369,862
                                       FY2006               146,422
                                       FY2007                40,5809
                                       Total               $596,830

Our review identified a total of $1,484,622 ($887,792 + $596,830) of interest earned during
FY2004 through FY2007 that was excluded from amounts returned to grantors due to quarterly
and fiscal year netting. If the impact of netting in FY2004 through FY2007 is representative of
the impact in prior years, we estimated that the combination of quarterly and fiscal year netting
on interest remitted for FY1995 through FY2003 was about $2.58 million.10 Thus, the overall
impact of the use of netting on amounts remitted to grantors could be about $4.06 million.

The IPA reported a finding in LAUSD’s FY2005 single audit that netting was inappropriate and
recommended that LAUSD discontinue the practice. LAUSD disagreed with the IPA’s
recommendation. LAUSD stated that it “believes that the practice of netting the interest expense
incurred by the grant against the subsequent interest earnings of the grant funds is appropriate
and that the Federal Government does not want LAUSD to decrease its available regular
program resources so as to benefit the Federal programs.” The IPA repeated the finding and
recommendation in its report for the FY2006 single audit.11

Recommendations

We recommend that the Chief Financial Officer require CDE to—

2.1	     Instruct LAUSD to revise its procedures to exclude netting or any other method that
         reduces the interest due to grantor agencies for the temporary use of other available cash
         resources to operate Federal programs.




9
  In March 2007, LAUSD began remitting the interest earned on Federal cash advances to CDE for transfer to ED
and other Federal agencies. Since some of the interest remittances were for interest liabilities incurred during the
first three quarters of FY2007, LAUSD did not net across all revenue codes for the full fiscal year. Thus, we
calculated the effects of fiscal year netting only for the first 3 quarters of FY2007.
10
  We calculated the estimate for the prior FYs by applying the percentage of additional earned interest identified by
our audit for FY2004 through FY2007 to the earned interest that LAUSD remitted for the prior FYs.
Additional interest due from netting identified
by our audit for FY2004-2007              $1,484,622   X   $16,039,512               =   $2,576,853
Interest LAUSD remitted                   $9,240,968       Interest LAUSD remitted       Estimated additional interest due
for FY2004-2007                                            for FY1995-2003               from netting FY1995-FY2003
11
   LAUSD’s 2007 CAFR, which contains the single audit findings, was not yet available at the time of our
fieldwork.
Final Report
ED-OIG/A09H0019                                                                                 Page 17 of 39


2.2	    Instruct LAUSD to remit to CDE and other grantor agencies, as permitted under Federal
        law, the $1,484,622 ($887,792 + $596,830) that our audit identified as not included in its
        estimated interest earnings due to grantor agencies because of the use of netting in
        LAUSD’s calculations.

2.3	    Instruct LAUSD to identify other amounts of interest earned on Federal cash advances
        that were not remitted to CDE and other grantor agencies due to the use of netting in
        FY1995 through FY2007 and later, and remit the amounts to the agencies, as permitted
        under Federal law.12 We estimated that about $2.58 million may have not been remitted
        for FY1995 through FY2003 due to LAUSD’s use of quarterly and fiscal year netting.

2.4	    Promptly transmit to ED the interest amounts remitted by LAUSD under
        Recommendations 2.2 and 2.3.

LAUSD Comments

LAUSD agreed that it used a process called “netting” to reduce the remittances of interest
earned on Federal cash advances. While LAUSD disagreed that “netting” was improper, it
stated that staff were informed on July 29, 2008 to cease netting for FY2008. LAUSD stated
that it is willing to make this policy revision permanent, provided that CDE eliminates, or
substantially reduces, the time-lag between the date on which ED makes Federal funds
available to CDE and the date on which CDE makes the initial advance to LAUSD.

LAUSD disagreed that it should be required to undertake any recalculations or additional
remittances or that monetary liability should be imposed for its past practice of “netting.”
LAUSD stated it was not aware of any applicable statute, regulation, or ED guidance that
expressly prohibits netting where local educational agencies are recipients of Federal grant
funds that “pass through” from State agencies and reiterated that clear notice is required for
valid imposition of conditions upon a school district’s receipt of Federal funds.

LAUSD asserted that school districts should be allowed to use “netting” since current
U.S. Department of Treasury regulations allow states to collect interest from the Federal
Government when funds are not delivered in time to fund a Federal program. LAUSD cited
opinions issued in the 1980s by the U.S. Department of Justice and the U.S. Comptroller
General applying Federal statutory provisions applicable to States and their subgrantees.
LAUSD also stated it was unfair to prohibit “netting” when the procedure was used primarily
to mitigate the financial impact of delays in the receipt of Federal grant funds. LAUSD
stated that the delays have no impact on the State of California’s treasury and are beneficial
to the Federal Government since it may use the cash for other purposes until the grant funds
are drawn by the State. LAUSD reiterated its position that the statute of limitations provision
in the GEPA would be applicable to the period prior to FY2004 and stated that remittance of
additional funds would result in fewer resources being available to fund district programs.



12
  The $887,792 in Recommendation 2.2 includes the impact of quarterly netting for only the ESEA, Title I – Basic
Grants to LEAs for FY2004 through FY2007. Our review did not identify the impact of quarterly netting for other
Federal program advances.
Final Report
ED-OIG/A09H0019                                                                                  Page 18 of 39


OIG Response

We did not change our finding or recommendations. The regulation at 34 C.F.R. § 80.21 clearly
states the requirement to remit interest earned on Federal cash advances quarterly. Federal law
and regulations applicable to the time periods covered by our recommendations do not contain
provisions for compensating LEAs for the temporary use of cash from other available resources.
In fact, as we noted in the report, other Federal requirements explicitly state that the Federal
Government cannot be charged for a government unit’s use of its own funds.

The U.S. Department of Justice decision and the U.S. Comptroller General opinions are not
relevant to the interest remittance requirement for the periods covered by our recommendations.
These decisions related to a provision of the Intergovernmental Cooperation Act of 1968 that
was amended by the Cash Management Improvement Act (CMIA) of 1990.13 The current
Treasury regulations reflect the amended provision. While the CMIA amended the provision on
interest to provide for the payment of interest from states to the Federal Government and from
the Federal Government to states, the amended provision does not provide for payment of
interest by the Federal Government to local governments, such as school districts. Even if the
provision were applicable to local governments, LAUSD could not charge interest to the Federal
Government since, as we noted in the finding, Federal funds were available at the time to CDE
for disbursement to California LEAs.

We understand LAUSD’s desire to mitigate the financial impact of delays in its receipt of
Federal grant funds. However, LAUSD has no recourse with the Federal Government since the
Federal funds were available to CDE for disbursement to LEAs. As we noted earlier, ED will
make a determination during audit resolution on the appropriate application of the statute of
limitations provision in the GEPA.


FINDING NO. 3 – LAUSD Needs to Improve Internal Controls to Ensure Earned
                Interest Identified As Due to the Federal Government Is
                Promptly Remitted to CDE and Other Grantors

In March 2007, LAUSD issued Policy Bulletin ADD-007-004 updating its procedures to provide
for prompt remittance of interest earned on Federal cash advances to the grantor agency. In the
Bulletin, LAUSD included the procedures for interest calculation, interest remittance, and
remittance verification, and the standard worksheet to be used by analysts to calculate the
monthly interest for each revenue code. Based on our review of LAUSD’s documentation for
FY2004 through FY2007, LAUSD needs to take additional steps to ensure it has adequate
internal controls to ensure that amounts due to the Federal Government are promptly remitted to
CDE and other grantor agencies. Also, given that LAUSD had not previously remitted interest
timely, CDE needs to monitor LAUSD, on an on-going basis, to ensure that LAUSD continues to

13
   As explained in the General Accountability Office’s Principles of Federal Appropriation Law (Redbook), prior to
1968, the prohibition on retention of interest earned on Federal cash advances applied to states as well as other
grantees. The passage of the Intergovernmental Cooperation Act of 1968 created a major exception to the rule for
states—states were no longer required to return interest earned on grant funds pending their disbursement for
program purposes. That statutory exception did not prove satisfactory since grantor agencies complained of
premature drawdown of grant advances while grantee states complained of slow Federal payment in reimbursement
situations. The passage of the CMIA in 1990 amended the statute.
Final Report
ED-OIG/A09H0019                                                                                     Page 19 of 39


remit interest earnings to CDE on a quarterly basis. As we mentioned in Finding No. 1,
34 C.F.R. § 80.20(b) requires that financial management systems of grantees and subgrantees
meet specific standards, including an internal control standard that addresses the effective control
and accountability of cash and other assets. In Finding No. 1, we also mentioned that 34 C.F.R.
§ 80.21 requires grantees and subgrantees to promptly, but at least quarterly, remit interest
earned on Federal cash advances to the grantor agency.

LAUSD began remitting interest to grantor agencies in March 2007, but may not have remitted
all amounts its analysts identified in their worksheets as due for interest earned during FY1995
through FY2007. We compared amounts in LAUSD’s remittance documentation for FY2004
through FY2007 to the amounts shown as due on the analysts’ worksheets for those years. The
comparison identified additional earned interest amounts due to grantor agencies. Table 4 shows
the number of revenue codes and the $817,784 of related amounts identified in the comparison
that may not have been remitted to CDE and other grantor agencies.

                    Table 4: Results of OIG Comparison of Remittance Documentation
                                          to Analysts’ Worksheets
                                      Number of Revenue Codes
                                                                  Total Earned Interest
                  Fiscal Year            with Earned Interest
                                                                          Due
                                             Amounts Due
                     2004                         56                     $255,596
                     2005                         14                     $305,829
                     2006                         37                     $218,289
                    2007 (a)                      14                      $38,070
                     Total                                               $817,784
              (a) Information for FY2007 represents amounts through the 3rd quarter of the fiscal year. At
              the time of our review, the interest earned during the 4th quarter had not yet been remitted
              to the grantor agency.


The results of our comparison indicate LAUSD’s internal controls may not be adequate for
ensuring that all interest earned identified as due to the Federal Government is promptly remitted
to CDE and other grantor agencies.

Our comparison covered remittance documentation and analysts’ worksheets for FY2004
through FY2007 (3rd quarter). Amounts shown on analysts’ worksheets for earlier years
(FY1995 through FY2003) as due to grantor agencies may not have been included in LAUSD
documentation of amounts remitted to CDE and other grantor agencies. If the periods reviewed
were representative of the prior years (FY1995 through FY2003), there could be about
1.42 million14 of additional earned interest that was identified by the analysts, but not remitted to
CDE and other grantor agencies.




14
     The estimate for the prior FYs was calculated using the following formula:
Additional amounts due but not remitted
identified by our audit FY2004-2007       $817,784           X   $16,039,512                  = $1,419,423
Interest LAUSD remitted                   $9,240,968             Interest LAUSD remitted        Estimated additional interest
for FY2004-2007                                                  for FY1995-2003                due for FY1995-2003
Final Report
ED-OIG/A09H0019                                                                     Page 20 of 39


Recommendations

We recommend that the Chief Financial Officer require CDE to—

3.1	   Instruct LAUSD to remit the $817,784 to CDE and other grantor agencies, as permitted
       under Federal law, for the amounts LAUSD identified as due for interest earned during
       FY2004 through FY2007 (3rd quarter), or if previously remitted, provide documentation
       confirming the remittance.

3.2	   Instruct LAUSD to reconcile analysts’ worksheets amounts with remittance
       documentation to identify earned interest for FY1995 through FY2003 that was not
       remitted to CDE or other grantor agencies and remit the identified interest to the
       agencies, as permitted under Federal law. We estimated that about $1.42 million of
       additional earned interest may not have been remitted for FY1995 through FY2003.

3.3	   Promptly transmit to ED the interest amounts remitted by LAUSD under
       Recommendations 3.1 and 3.2.

3.4	   Obtain confirmation from LAUSD that it has remitted to CDE or other grantor agencies
       all amounts LAUSD identified as due for interest earned for the 4th quarter of FY2007
       and later.

3.5	   Evaluate LAUSD’s internal controls for ensuring that all interest earned on Federal cash
       advances are remitted promptly to grantor agencies and require LAUSD to implement
       any needed additional controls.

3.6	   Monitor LAUSD, on an on-going basis, to ensure that it continues to remit interest
       earnings to CDE on a quarterly basis.

LAUSD Comments

LAUSD stated that it will complete a review of its records to verify interest remittances for
FY2004 through FY2007 and provide the necessary documentation to confirm the
remittances. The target date for completion of the review was October 31, 2008. However,
LAUSD asserted that, even if the review identifies interest that has not been remitted, it
should not be required to remit the amounts. LAUSD stated that it already demonstrated a
good-faith commitment to resolve the audit by voluntarily remitting interest for periods
covered by the statute of limitations, and that the amounts previously remitted should more
than suffice to remedy any possible omissions due to discrepancies in documentation for
prior years. LAUSD also claimed that it was due, at least in part, to CDE’s grant-by-grant
reporting requirement that LAUSD developed such a staff-intensive interest remittance
methodology which, by its nature, was more prone to inadvertent calculation errors.

LAUSD stated that it will have, by September 30, 2008, remitted to CDE and other grantor
agencies all amounts it has identified as due for interest earned for the 4th quarter of FY2007
and for FY2008. LAUSD noted some delay in its remittances has occurred due to continued
implementation issues with its new financial accounting system. LAUSD did not expect that
such issues will affect interest remittances for FY2009 and subsequent years.
Final Report
ED-OIG/A09H0019                                                                   Page 21 of 39


LAUSD stated that it will collaborate with CDE in the evaluation of its internal controls for
ensuring that all interest earned on Federal cash advances is remitted promptly to grantor
agencies and discuss with CDE how best to implement a collaborative monitoring process.
LAUSD expressed willingness to implement additional controls provided such controls are
not unduly burdensome to the District. LAUSD also stated, if CDE agrees to make the
changes required to permit LAUSD to adopt the alternative interest calculation methodology
proposed in Finding No. 1, LAUSD’s procedures would be vastly simplified and, thus, much
more easily monitored and reviewed.

OIG Response

We did not change our finding or recommendations. LAUSD is required to remit interest
earned on Federal cash advances. LAUSD’s previous remittances do not negate its liability
for additional amounts that have been due to the Federal Government for periods of up to
13 years without penalty to LAUSD for late remittance. ED will make a determination
during audit resolution on the applicability of the statute of limitations provision.
Final Report
ED-OIG/A09H0019                                                                    Page 22 of 39




                 OBJECTIVES, SCOPE, AND METHODOLOGY 



The purpose of the audit was to determine whether LAUSD 1) used a methodology for
calculating the interest earned on Federal cash advances that was compliant with Federal
requirements, and 2) has policies and procedures in place to ensure that future interest earned on
Federal cash advances are accurately computed and remitted on a quarterly basis to CDE. To
evaluate LAUSD procedures, we reviewed LAUSD’s calculation and remittance of earned
interest on Federal cash advances for FY2004 through FY2007.

Originally, we had planned to review LAUSD’s calculations of interest earned on Federal cash
advances during FY1995 through FY2007. LAUSD was experiencing delays in responding to
our request due to problems experienced with implementation of a new financial accounting
system. After reviewing the initial documentation provided by LAUSD and assessing the staff
resources needed to review each fiscal year, we opted to focus our review on FY2004 through
FY2007.

Prior to initiating the audit, our office completed a general assessment of LAUSD’s controls
over, and administration of, Federal education funds provided under the ESEA. We used
information, documentation, and analyses previously obtained or conducted as part of the general
assessment to accomplish the objectives of this audit. We also—

   •	 Reviewed Federal laws and regulations related to cash management and financial 

      administration of Federal grants. 

   •	 Reviewed cash management findings reported in the single audit portion of LAUSD’s
      CAFRs from FY1995 through FY2006.
   •	 Interviewed officials and staff at ED, CDE, LACOE, and LAUSD to gain an
      understanding of their cash management activities, Federal cash advance processes, and
      their related oversight responsibilities.
   •	 Interviewed representatives from other Federal agencies including the Office of
      Management and Budget and the U.S. Treasury’s Financial Management Service to gain
      an understanding of laws and regulations regarding interest earned on Federal cash
      advances.
   •	 Interviewed the IPA that conducted all or a portion of the LAUSD’s single audits for
      FY1998 though FY2007 and reviewed audit documentation supporting the cash
      management finding reported in the single audit portion of the CAFR for FY2006.

To determine whether LAUSD used a methodology for calculating the interest earned on Federal
cash advances that was compliant with Federal requirements, we reviewed 34 electronic files
provided by LAUSD that contained detailed and summary worksheets for FY2004 through
FY2007. Since we concluded that LAUSD’s methodology did not result in a reliable amount for
the interest earned on Federal cash advances, we limited our review to confirming the accuracy
of formulas and interest rates on the summary worksheets and consistency of analysts’ adherence
to LAUSD’s calculation methodology. When we identified anomalies on the summary
Final Report
ED-OIG/A09H0019                                                                  Page 23 of 39


worksheets, we expanded our review to the related detailed worksheets when necessary to
resolve the anomaly. We did not confirm the accuracy of beginning cash balances and monthly
receipts and expenditure amounts entered on the worksheets. We also did not confirm that
LAUSD provided worksheets for all revenue codes for Federal programs.

To determine whether LAUSD has policies and procedures in place to ensure that future interest
earned on Federal cash advances are accurately computed and remitted on a quarterly basis to
CDE, we reviewed LAUSD’s Cash Management Policy Bulletin, dated March 2007. We also
reviewed copies of interest remittance documents supporting the submission of interest earned on
Federal cash advances for FY2004 through FY2007. We compared amounts in the remittance
documentation for FY2004 through FY2007 to the amounts due that were shown on the analysts’
worksheets for those years.

We performed our onsite fieldwork at LAUSD’s headquarters in Los Angeles, California. We
held an exit briefing with LAUSD officials on March 19, 2008 and CDE officials on
March 25, 2008. Our audit was performed in accordance with generally accepted government
auditing standards appropriate to the scope of the review described above.
Final Report
ED-OIG/A09H0019                                       Page 24 of 39



                                                   ATTACHMENT




                      CDE and LAUSD 

                  Comments on the Draft Report 

                                        August 15, 2008




Gloria L. Pilotti, Regional Inspector for Audit
U. S. Department of Education
Office of Inspector General
501 I Street, Suite 9-200
Sacramento, CA 95814-2559

Dear Ms. Pilotti:

Subject: Los Angeles Unified School District’s Procedures for Calculating and
         Remitting Interest Earned on Federal Cash Advances, Control Number ED-
         OIG/A09H0019

In response to the U.S. Department of Education, Office of Inspector General’s draft report
entitled Los Angeles Unified School District’s Procedures for Calculating and Remitting
Interest Earned on Federal Cash Advances, the Los Angeles Unified School District
(LAUSD) written comments on the reported findings and recommendations are contained in
the attached LAUSD letter; the comments and positions set forth in the LAUSD letter are
solely those of the LAUSD.

The California Department of Education (CDE) will continue to work with the LAUSD and
the U.S. Department of Education in resolving the issues delineated in the audit report.

If you have any questions regarding the LAUSD’s response to the draft report, please
contact me at 916-323-1547, or by e-mail at kchan@cde.ca.gov.

Sincerely,

/s/

Kevin W. Chan, Director
Audits and Investigations Division

kwc:ab
Gloria L. Pilotti, Regional Inspector for Audit
August 15, 2008
Page 2


cc: 	   Megan Reilly, Chief Financial Officer, Los Angeles Unified School District
        John Walsh, Legal Counsel, Los Angeles Unified School District
        Timothy Rosnick, Interim Controller, Los Angeles Unified School District
MEMBERS OF THE BOARD 	                                                       LOS ANGELES UNIFIED SCHOOL DISTRICT 


MONICA GARCIA, PRESIDENT                                                      Administrative Office
MARLENE CANTER                                                                333 South Beaudry Avenue, 24th Floor
YOLIE FLORES AGUILAR                                                          Los Angeles, California 90017
TAMAR GALATZAN                                                                Telephone: (213) 241-7000
JULIE KORENSTEIN                                                              Fax:          (213) 241-8442
MARGUERITE POINDEXTER LAMOTTE
RICHARD A. VLADOVIC                                                           DAVID L. BREWER III
                                                                              SUPERINTENDENT OF SCHOOLS



August 11, 2008

Mr. Jack O’Connell 

State Superintendent of Public Instruction

California Department of Education 

1430 N Street 

Sacramento, CA 95814 


RE: 	 Los Angeles Unified School District’s Procedures for Calculating and Remitting Interest 

      Earned on Federal Cash Advances, Control Number ED-OIG/ A09H0019 


Dear Superintendent O’Connell:

     The Los Angeles Unified School District (“LAUSD”) is pleased that the California Department of
Education (“CDE”) has extended this opportunity to submit a response to the Draft Audit Report, titled
Los Angeles Unified School District’s Procedures for Calculating and Remitting Interest Earned on
Federal Cash Advances, recently issued by the U.S. Department of Education (“ED”) Office of
Inspector General (“OIG”). The District has always strived to administer its Federal grants within the
purview of current Federal and State law, policies, and procedures. LAUSD is committed to working
with CDE on an ongoing basis to resolve this audit review.

      LAUSD is also appreciative of the hard work on the part of OIG in this audit review. The Draft
Audit Report helps clarify ED’s position on key aspects of the requirement set forth in ED’s General
Administrative Regulations that “grantees and subgrantees shall promptly, but at least quarterly, remit
interest earned on advances to the Federal agency.” 34 C.F.R. § 80.21(i). Since 1999, LAUSD has
made repeated contact with ED to seek clarification with respect to matters that the Draft Audit Report
addresses. Moreover, the District has frequently expressed its commitment to cooperate in good faith
with this audit review. In March 2007, for instance, LAUSD began remitting interest for the period
covered by this audit review to CDE for submission to ED and other Federal agencies. Without
conceding any defenses that may be applicable here, LAUSD has voluntarily remitted to date about $25
million for interest earned on Federal cash advances from FY1995 through FY2007, and will remit
additional amounts going forward.

       Set forth below are LAUSD’s specific responses to each of the preliminary findings and
recommendations identified in the Draft Audit Report. In addition, LAUSD asserts at the outset a
general statute of limitations defense that, in our view, requires amendment of several of OIG’s
recommendations to: (a) reduce the additional funds that the District would be directed to remit by at
least $4 million and perhaps more; and (b) to relieve the District of the obligation to investigate further
its interest remittance practices prior to FY2004.

                       Every LAUSD student will receive a state-of-the-art education in a safe, caring
                        environment, and every graduate will be college-prepared and career-ready.
Jack O’Connell
State Superintendent of Public Instruction
Los Angeles Unified School District’s Procedures for Calculating and Remitting Interest Earned
August 11, 2008
Page 2 of 12


I.	    OIG’S RECOMMENDATIONS SHOULD BE REVISED TO CONFORM TO THE
       APPLICABLE STATUTE OF LIMITATIONS

     LAUSD respectfully requests that OIG revise its recommendations so they are consistent with the
applicable statute of limitations set forth in 20 U.S.C. § 1234a(k). This provision mandates that
recipients of ED program funds are not “liable to return funds which were expended in a manner not
authorized by law more than 5 years before the recipient received written notice of a preliminary
departmental decision.” 20 U.S.C. § 1234a(k); see also 34 C.F.R. § 81.31(c); State of Cal. Dep’t of
Educ. v. Bennett, 851 F.2d 241, 242-43 (9th Cir. 1988) (reimbursement not required for funds expended
five years before ED issued notice of the violation).

      OIG concedes the existence of this statute of limitations but declines to express a view with respect
to its applicability to this audit review. See Draft Audit Report at 10 n.7. Yet, it is unquestionable that
this statute of limitations is operative in these circumstances. By enacting 20 U.S.C. § 1234a(k), “
‘Congress has clearly manifested its intention to raise a statutory barrier’ ” to avoid open-ended
investigations that would require ED grantees and subgrantees to worry constantly about the need to
reach far back into the past to reconstruct prior practices and undertake forensic reviews of financial
records. Harrod v. Glickman, 206 F.3d 783, 789 (8th Cir. 2000) (quoting United States v. Wurts, 303
U.S. 414, 416 (1938)). ED decision-makers, as well as OIG, have routinely acknowledged the
applicability of this statute of limitations. See, e.g., ED, Notice of Intent to Compromise Claim Against
Louisiana State Dep’t of Educ., 67 Fed. Reg. 64102, 64102 (Oct. 17, 2002); ED, Notice of Intent to
Compromise Claim Against Puerto Rico Dep’t of Educ., 67 Fed. Reg. 45103, 45104 (July 8, 2002); ED,
Notice of Intent to Compromise Claim Against Minnesota State Vocational Educ. Program, 50 Fed.
Reg. 4570, 4570 (Jan. 31, 1985); OIG, Audit of Funds Not Recovered Due to the Statute of Limitations,
ED-OIG/A19-C0004 (Jan. 6, 2004).

    Application of this statute of limitations here is consistent with the Congressional intent behind 20
U.S.C. §1234a(k), as reflected in the House Committee Report on the precursor to this provision:

      The Committee has adopted this amendment because it believes that such a five year “statute of
      limitations” will lead to better administration of ESEA programs. It will encourage HEW [of
      which the Department of Education was then a part] to make audits more promptly than has been
      the case. It will also remove the threat presently hanging over the heads of school administrators
      that some day, some time, they may be forced to make repayments of expenditures made many
      years before.

H. Rep. No. 805, 93rd Cong., 2d Sess. (1974), reprinted in 1974 U.S. Code Cong. & Ad. News 4093,
4160. This Congressional intent would be undermined if ED were to require LAUSD to repay funds
expended years ago for programs designed to improve achievement of school children in the District.

     To date, the five-year statutory period has not yet been triggered because ED has not yet issued
and LAUSD has not yet received a “written notice of a preliminary departmental decision.” 20 U.S.C. §
1234a(k). Pursuant to ED regulations, the Draft Audit Report does not constitute the requisite notice.
See 20 U.S.C. § 1234a(a); 34 C.F.R. § 81.34. Thus, LAUSD’s monetary liability would at most extend
no further back than five years from the present, i.e., August, 2003. As a result, there is no basis for any

                             Every LAUSD student will receive a state-of-the-art education in a safe, caring
                              environment, and every graduate will be college-prepared and career-ready.
Jack O’Connell
State Superintendent of Public Instruction
Los Angeles Unified School District’s Procedures for Calculating and Remitting Interest Earned
August 11, 2008
Page 3 of 12

of OIG’s preliminary recommendations that require recalculation or remittance of funds for periods
prior to FY2004. Depending on when ED decides to issue the requisite written notice, the statute of
limitations may also limit recovery for some or all of FY2004 and possibly periods thereafter.

      To the extent that LAUSD has voluntarily remitted interest for periods prior to FY2004, these
remittances do not constitute a waiver of the statute of limitations; rather, they were intended to
demonstrate the District’s good-faith commitment to work with ED and CDE to resolve the audit
review.

II.	 LAUSD’S SPECIFIC RESPONSES TO OIG’S PRELIMINARY FINDINGS AND
     RECOMMENDATIONS

(A)	 LAUSD CONCURS IN PART WITH PRELIMINARY FINDING NO. 1

      LAUSD agrees with OIG that the District has used a methodology for determining its remittance
obligations that is based on monthly estimates of interest earned on Federal cash advances. But LAUSD
respectfully disagrees with OIG’s finding that this methodology does not produce a reliable
determination of the interest LAUSD actually earned. Indeed, even OIG concedes that, in some fiscal
years, LAUSD’s methodology may have “overstate[d] . . . the interest earned on Federal cash advances.”
Draft Audit Report at 9.

     For example, LAUSD identified such an overstatement in a sample analysis previously shared with
OIG. LAUSD recalculated interest earned on Federal cash advances for its FY2007 Title I Part D grant,
using OIG’s proposed alternative methodology based on average daily balances. Under LAUSD’s
methodology, the interest earned totaled $50,663.03, which was the amount the District remitted. Under
OIG’s alternative, the amount of earned interest was $50,190. Thus, the District remitted more interest
than would have been required under OIG’s proposed alternative. Moreover, the difference between the
two approaches is extremely small: less than 1%.

       LAUSD further disagrees that its interest methodology is improper under existing law. OIG
asserts a broad interpretation of two regulatory provisions: (a) 30 C.F.R. § 80.20(b), which states that
Federal grantees must maintain “[e]ffective control and accountability” over grant assets, and (b) 30
C.F.R. § 80.21(i), which in pertinent part permits grantees to retain only up to $100 per year in earned
interest. See Draft Audit Report at 6. Although LAUSD appreciates OIG’s effort to clarify ED’s
interpretation of these provisions, it should be noted that both provisions are phrased in general terms,
and neither expressly requires any particular interest calculation methodology. Nor is LAUSD aware of
any applicable statute, regulation, or ED guidance that provides clear notice that the District’s
methodology for estimating interest is improper. Cf. Arlington Cent. Sch. Dist. Bd. of Educ. v. Murphy,
548 U.S. 291 (2006) (requiring clear notice for valid imposition of conditions upon school district’s
receipt of federal funds).

      Absent clear notice, it is unjust to penalize the District for the methodology it selected—especially
since, as OIG notes, LAUSD repeatedly sought—without success—guidance from ED regarding its
polices and practices for remitting interest on Federal cash advances. See Draft Audit Report at 4-5.
Moreover, as OIG also notes, it would have been extremely difficult if not impossible for LAUSD to

                             Every LAUSD student will receive a state-of-the-art education in a safe, caring
                              environment, and every graduate will be college-prepared and career-ready.
Jack O’Connell
State Superintendent of Public Instruction
Los Angeles Unified School District’s Procedures for Calculating and Remitting Interest Earned
August 11, 2008
Page 4 of 12

have adopted OIG’s preferred alternative methodology for interest calculations at any point from
FY1995 through the present due to limitations inherent in the technical finance systems used by the
County Treasurer’s office, accounting procedures maintained by the Los Angeles County Office of
Education (“LACOE”), and reporting requirements mandated by CDE, which are discussed further
below. Id. at 6-10.

(B) 	 LAUSD CONCURS IN PART WITH PRELIMINARY RECOMMENDATIONS 1.1
      THROUGH 1.5

      OIG recommends that ED’s Chief Financial Office (“CFO”) require CDE to take five corrective
actions to address its first preliminary finding. Below LAUSD provides its response to each of OIG’s
preliminary recommendations.

1.1 	 Work with LACOE and LAUSD to develop a methodology for LAUSD to identify actual
      interest earned on Federal cash balances.

      LAUSD partially concurs with Recommendation 1.1. Notwithstanding the concerns expressed
above, LAUSD is eager to work expeditiously with LACOE and CDE to develop an alternative
methodology for calculating interest earned on Federal cash balances, so long as the resulting procedure
is not significantly more burdensome to the District than its current approach. LAUSD has already
begun to review its current methodology to determine ways in which it might be streamlined.

      LAUSD appreciates OIG’s decision not to recommend that the District revise its current
methodology to calculate actual interest earned on a daily basis for all revenue codes. Draft Audit
Report at 9. As OIG notes, “calculation of average daily balances for each month for all revenue codes
would require a substantial increase in the significant staff resources already committed to the
application of LAUSD’s methodology.” Id. Instead, ED proposes an alternative approach that would
permit LAUSD to take advantage of the subfund component of LACOE’s current financial report
system and group together cash balances for all Federal programs. According to OIG, this subfund
approach would be satisfactory to ED because it would enable LAUSD to report quarterly on the actual
interest earned, in total, on Federal cash held in those subfunds. Id. at 9-10.

     LAUSD is willing to consider adoption of OIG’s proposed alternative methodology because it
would have the advantage of simplifying the District’s procedures by significantly reducing the number
of computations required. As a result, the District would likely be able to devote fewer staff resources to
Federal grant administration. Moreover, this alternative should also diminish the need for the sort of
heightened internal controls addressed by OIG in its third preliminary finding and related
recommendations.

     Yet, as OIG points out, there are two obstacles to implementation of its proposed alternative
methodology. First, LAUSD needs support from LACOE in order to use LACOE’s financial reporting
system to undertake a “one-time crosswalk” to the new subfund methodology. Id. at 10.

     Second, and perhaps more significantly, the subfund methodology would be more, not less,
resource-intensive than LAUSD’s current methodology (even if it were to be streamlined internally as

                             Every LAUSD student will receive a state-of-the-art education in a safe, caring
                              environment, and every graduate will be college-prepared and career-ready.
Jack O’Connell
State Superintendent of Public Instruction
Los Angeles Unified School District’s Procedures for Calculating and Remitting Interest Earned
August 11, 2008
Page 5 of 12

much as possible) if the District were required to continue remitting interest on a grant-by-grant basis.
OIG points out that under Federal law LAUSD is allowed to remit the total amount of interest earned in
a lump-sum payment rather than on a grant-by-grant basis. Id. Indeed, ED does not even record grant
program information for interest remittances. Id. Nonetheless, CDE has directed local educational
agencies to remit interest on a grant-by-grant basis. Before migrating to the new system, LAUSD would
need concurrence from CDE that grant-by-grant reporting of interest remittances is no longer required.
LAUSD has entered into preliminary discussions with CDE on this matter, but understands that CDE
has not yet made a determination whether to continue to require grant-by-grant reporting.

1.2 	 Instruct LAUSD to take the interim step to provide a more reliable estimate by revising its
      current methodology to either include a subsequent adjustment of the calculations when the
      School Rate for the 3rd quarter rate is used for months in the 4th quarter (April, May and
      June) or delay performance of the calculations until the 4th quarter rate is available.

      LAUSD concurs with Recommendation 1.2. It is LAUSD’s understanding that this
Recommendation is intended for the interim period while the District works with CDE to implement the
alternative methodology proposed in Recommendation 1.1. One aspect of LAUD’s current
methodology with which OIG takes issue is the District’s practice of using the prior fiscal quarter
School Rate in interest calculations for months in the 4th quarter of the fiscal year when the actual
School Rate is not yet available. LAUSD notes that this approach does not necessarily produce
outcomes favorable to the District. As OIG found, “the methodology understated the estimated interest
earned on Federal cash balance[s] in seven of the fiscal years and overstated the amount in the other
three years [that OIG analyzed].” Draft Audit Report at 9. Moreover, over time, the net fiscal impact of
this practice is quite minor.

      Nevertheless, LAUSD has already revised its interest calculation methodology in accordance with
this Recommendation. While LAUSD continues to estimate interest for the 4th quarter using the 3rd
quarter School Rate, it now requires analysts to make a subsequent adjustment to the calculations when
the actual 4th quarter rate becomes available in the following fiscal year. Please see the attached
memorandum, dated October 31, 2008, instructing staff to make this subsequent adjustment for
FY2006 and thereafter.

1.3 	 Instruct LAUSD to recalculate the estimated interest earned on Federal cash balances for the
      4th quarter of FY1995 through FY2007 and later using the actual School Rates for the 4th
      quarter, and remit any additional amounts due to CDE and other grantors, as permitted
      under Federal law.

       LAUSD partially concurs with Recommendation 1.3. Consistent with Recommendation 1.2,
LAUSD is willing to develop and implement on a prospective basis an interest calculation methodology
consistent with the Draft Audit Report. But the District contends that it should not have to remit
additional interest for FY1995 through FY2007 beyond the $25 million it has already voluntarily
remitted. Significantly, LAUSD believes that the interest amounts that the District has already remitted
for the period from FY2006 through FY2007 were calculated using the actual School Rates for the 4th
quarter because, as previously stated in our response to Recommendation 1.2, the District adjusted its
interest methodology in this respect, beginning with FY2006. LAUSD is in the process of verifying this

                             Every LAUSD student will receive a state-of-the-art education in a safe, caring
                              environment, and every graduate will be college-prepared and career-ready.
Jack O’Connell
State Superintendent of Public Instruction
Los Angeles Unified School District’s Procedures for Calculating and Remitting Interest Earned
August 11, 2008
Page 6 of 12

fact and will provide additional documentation once its review is complete. The target date for
completion of this review is October 31, 2008.

       For periods prior to FY2006, LAUSD contends that it should not be obligated to undertake further
remittances. As stated above, due to the five-year statute of limitations provision set forth in 20 U.S.C.
§ 1234a(k), LAUSD has no obligation to undertake any recalculations or additional remittances for the
period prior to FY2004. It would require significant staff resources to redo calculations for the
remaining two fiscal years—FY2004 and FY2005. And such calculations would likely yield small sums
of additional remittances. Remittances for these two years would also be inappropriate for the following
previously stated reasons: (a) ED failed to provide sufficiently clear notice with respect to its preferred
interest methodology; and (b) LAUSD tried unsuccessfully for years to obtain clarification from ED on
its interest remittance practices.

1.4 	 Instruct LAUSD to take the interim step to enhance the procedures for applying its current
      methodology by providing a standard summary worksheet for use by its analysts, making the
      use of the standard worksheets mandatory, and incorporating internal controls into the
      design of the worksheets to ensure the accuracy of formulas and information entered into the
      worksheets.

      LAUSD concurs with Recommendation 1.4. It is LAUSD’s understanding that this
Recommendation, similar to Recommendation 1.2, is intended to apply in the interim period while the
District works with CDE to implement the alternative methodology proposed in Recommendation 1.1.
To comply with this Recommendation, LAUSD will develop a standard template for both detail and
summary worksheets to ensure accuracy of formulas and information entered into the worksheets.
LAUSD will require staff to use this and only this template. We expect to have the standard templates
developed by October 1, 2008, in time to use them for FY2009 calculations.

1.5 	 Instruct LAUSD to implement appropriate reviews to ensure analysts are applying the new
      procedures consistently and accurately.

     LAUSD concurs with Recommendation 1.5. The District has in place a procedure for Senior
Accounting Analysts to review each worksheet and ensure that analysts are applying procedures
consistently and accurately. Through training and appropriate monitoring, we will ensure that this
procedure is followed rigorously and that the Senior Accounting Analysts perform careful and thorough
review.

(C) 	 LAUSD CONCURS IN PART WITH PRELIMINARY FINDING NO. 2

      LAUSD partially concurs with the OIG’s second preliminary finding. LAUSD agrees with OIG’s
determination that the District has used a process called “netting,” through which it has reduced its
remittances of interest earned on Federal cash advances to compensate for its temporary use of other
available cash resources in circumstances where CDE or ED was late in making Federal funds available.
Yet LAUSD respectfully disagrees with OIG’s conclusion that netting is improper.



                             Every LAUSD student will receive a state-of-the-art education in a safe, caring
                              environment, and every graduate will be college-prepared and career-ready.
Jack O’Connell
State Superintendent of Public Instruction
Los Angeles Unified School District’s Procedures for Calculating and Remitting Interest Earned
August 11, 2008
Page 7 of 12

      LAUSD is not aware of any applicable statute, regulation, or ED guidance that expressly prohibits
netting where, as here, local education agencies are recipients of Federal grants that “pass through” State
agencies—i.e., the State receives grant funds from a federal agency and then re-distributes the funds to a
local government entity or other sub-grantee. Under federal law, clear notice is required for valid
imposition of conditions upon a school district’s receipt of federal funds. Cf. Arlington Cent. Sch. Dist.
Bd. of Educ. v. Murphy, 548 U.S. 291 (2006).

      In the absence of clear notice, LAUSD adopted netting as a good-faith effort to reconcile its legal
obligations with the practical difficulties it has faced in Federal grants management. LAUSD relied on
precedent that supports application of the same interest remittances rules for State “pass-through” grants
as those that govern direct grants to States. Until the early 1990s, Federal law exempted States from the
general rule that interest earned on Federal grant funds belongs to the Federal government. While this
exemption did not cover direct Federal grants to local entities, the U.S. Department of Justice and
Comptroller General endorsed its application to situations in which States acted as “pass-through”
entities to local government entities or other sub-grantees. See U.S. Dep’t of Justice, Office of Legal
Counsel, Recovery of Interest on Advance Payments to State Grantees and Subgrantees, 6 U.S. Op. Off.
Legal Counsel 127 (1982); GAO, Office of General Counsel, Principles of Federal Appropriations Law
(Redbook), vol. II, at 10-86 (3d ed. 2006).

      This blanket exemption for States has been repealed, but U.S. Department of Treasury regulations
applicable to ED programs allow States to engage in netting by collecting interest from the Federal
Government when funds are not delivered in time to fund a Federal program. See 31 C.F.R. §
205.14(a); see also 31 U.S.C. § 6503(d)(1) (“If a State disburses its own funds for program purposes in
accordance with Federal law, Federal regulation, or Federal-State agreement, the State shall be entitled
to interest from the time the State’s funds are paid out to redeem checks or warrants, or make payments
by other means, until the Federal funds are deposited to the State’s bank account.”). OIG acknowledges
that CDE was authorized to engage in netting; but it fails to recognize that, under the same reasoning as
the Department of Justice and the Comptroller General previously endorsed, it would be rational to
conclude that netting should also apply to State “pass-through” grants to entities such as LAUSD.

      Moreover, from an equitable standpoint, it is unfair to proscribe LAUSD from netting when it used
this procedure primarily to mitigate delays in receipt of Federal grant funds. OIG found that CDE did
not make Federal funds available to LAUSD on a timely basis when they were needed for Federal
program expenditures. See Draft Audit Report at 12. For instance, OIG notes that for the 2006-2007
school year Elementary and Secondary Education Act funds were available to CDE on July 1, 2006, but
CDE did not make the initial advance to LAUSD until December 2006. Id. The consequences of this
delay were significant. Table 2 of the Draft Audit Report indicates that LAUSD expenditures exceeded
available expenditures by at least $300,059 ($87,830 + $212,229) in October and November 2006 alone.
Id. The overall financial impact to the District of such delay from FY1995 through the present is of far
greater magnitude.

      In sum, when Federal funds are not made available on a timely basis, LAUSD suffers significantly
because it must dip into other resources to fund Federal programs. By contrast, such delays have no
impact on the State’s treasury and are, in fact, beneficial to the Federal government. Until the moment
when grant funds are drawn down, the Federal government may use these moneys for other purposes.

                             Every LAUSD student will receive a state-of-the-art education in a safe, caring
                              environment, and every graduate will be college-prepared and career-ready.
Jack O’Connell
State Superintendent of Public Instruction
Los Angeles Unified School District’s Procedures for Calculating and Remitting Interest Earned
August 11, 2008
Page 8 of 12

And, as explained above, Federal law expressly permits the State to engage in netting. If LAUSD were
ordered to remit additional funds, it would have fewer resources available to fund future programs
simply because it took steps to ensure that such delays would not impede its continued operation of
critical Federal programs. Thus, at the end of the day, District school children would be the primary
victims of any corrective action required here.

(D) 	 LAUSD CONCURS IN PART WITH PRELIMINARY RECOMMENDATIONS 2.1
      THROUGH 2.4

      OIG recommends that ED’s CFO require CDE to take four corrective actions to address its second
preliminary finding. Below LAUSD provides its response to each of OIG’s preliminary
recommendations.

2.1 	 Instruct LAUSD to revise its procedures to exclude netting or any other method that reduces
      the interest due to grantor agencies for the temporary use of other available cash resources
      to operate Federal programs.

      LAUSD partially concurs with Recommendation 2.1. For the reasons stated above, LAUSD is
unwilling to concede that its netting practices were improper. Nevertheless, in light of the Draft Audit
Report’s preliminary findings, LAUSD has revised its procedures to cease netting for FY2008 as well as
the remainder of this audit review. Staff was informed of the change on July 29, 2008. LAUSD is
willing to make this policy revision permanent, provided that CDE eliminates—or at least substantially
reduces—the time-lag between the date on which ED makes Federal funds available to CDE and the
date on which CDE makes the initial advance to LAUSD.

2.2 	 Instruct LAUSD to remit to CDE and other grantor agencies, as permitted under Federal
      law, the $1,484,622 ($887,792 + $596,830) that our audit identified as not included in its
      estimated interest earnings due to grantor agencies because of the use of netting in LAUSD’s
      calculations.

      LAUSD disagrees with Recommendation 2.2. In the District’s view, ED should not impose
retrospective monetary liability for LAUSD’s past practices of netting. As explained above, in the
absence of clear guidance from ED, LAUSD adopted netting as a good-faith effort to reconcile legal
precedents regarding State “pass-through” grants with the practical difficulties it has faced.

2.3 	 Instruct LAUSD to identify other amounts of interest earned on Federal cash advances that
      were not remitted to CDE and other grantor agencies due to the use of netting in FY1995
      through FY2007 and later, and remit the amounts to the agencies, as permitted under
      Federal law. We estimated that about $2.58 million may have not been remitted for FY1995
      through FY2003 due to LAUSD’s use of quarterly and fiscal year netting.

      LAUSD does not concur with Recommendation 2.3. LAUSD should not be obligated to
undertake any recalculations or additional remittances for the period prior to FY2004 due to the five-
year statute of limitations set forth in 20 U.S.C. § 1234a(k), for the reasons explained above in Section I
of this response. Accordingly, LAUSD should not be required to remit the $2.58 million that OIG

                             Every LAUSD student will receive a state-of-the-art education in a safe, caring
                              environment, and every graduate will be college-prepared and career-ready.
Jack O’Connell
State Superintendent of Public Instruction
Los Angeles Unified School District’s Procedures for Calculating and Remitting Interest Earned
August 11, 2008
Page 9 of 12

estimates may have not been remitted for FY1995 through FY2003, or any other amount for this period,
due to LAUSD’s use of quarterly and fiscal year netting. Nor should LAUSD be required to undertake
further investigations to identify other amounts it may not have remitted for FY1995 through FY2003.

      Even for periods for which the statute of limitations does not apply, LAUSD disagrees, for the
reasons stated in its response to Recommendation 2.2, with OIG’s recommendation that the District
should be required to identify other amounts of interest earned on Federal cash advances that were not
remitted.

2.4 	 Promptly transmit to ED the interest amounts remitted by LAUSD under Recommendations
      2.2 and 2.3.

    LAUSD does not concur with Recommendation 2.4. Based on LAUSD’s objections to
Recommendations 2.2 and 2.3, it should not be obligated to remit any additional funds to CDE for
FY1995 through FY2007. Thus, this Recommendation should be moot.

(E)     LAUSD CONCURS IN PART WITH PRELIMINARY FINDING NO. 3

      As OIG notes, LAUSD issued Policy Bulletin ADD-007-004 in March 2007 to update its
procedures for prompt remittance of interest earned on Federal cash advances to CDE and other grantor
agencies. See Draft Audit Report at 15. This Policy Bulletin has substantially improved the District’s
internal controls for interest calculation, interest remittance, and remittance verification, and it has
helped update and standardize the worksheets analysts use to calculate monthly interest for revenue
codes.

       Notwithstanding these revisions, OIG found that LAUSD needs to make further improvements in
its internal controls. Id. OIG compared LAUSD’s analyst worksheets with the documentation
accompanying the $25 million in interest LAUSD has thus far remitted and found possible
discrepancies. Id. It should be noted that this finding was tentative, not conclusive.

      LAUSD believes that it has remitted all interest earned during the relevant period, but, as
explained further below, it is still in the process of reviewing its records to resolve the possible
discrepancies. Even if some discrepancies are identified, however, the District submits that
development and implementation of more rigorous internal controls going forward may not be
necessary. If CDE agrees to permit LAUSD to adopt OIG’s proposed alternative interest calculation
methodology, the District’s Federal grant administration obligations would be vastly simplified. As a
result, heightened internal controls should no longer be required.

(F) 	 LAUSD CONCURS IN PART WITH PRELIMINARY RECOMMENDATIONS 3.1
      THROUGH 3.6

      OIG recommends that ED’s CFO require CDE to take six corrective actions to address its third
preliminary finding. Below LAUSD provides its response to each of OIG’s preliminary
recommendations.


                             Every LAUSD student will receive a state-of-the-art education in a safe, caring
                              environment, and every graduate will be college-prepared and career-ready.
Jack O’Connell
State Superintendent of Public Instruction
Los Angeles Unified School District’s Procedures for Calculating and Remitting Interest Earned
August 11, 2008
Page 10 of 12


3.1 	 Instruct LAUSD to remit the $817,784 to CDE and other grantor agencies, as permitted
      under Federal law, for the amounts LAUSD identified as due for interest earned during
      FY2004 through FY2007 (3rd quarter), or if previously remitted, provide documentation
      confirming the remittance.

      LAUSD does not concur with Recommendation 3.1. LAUSD believes that it has remitted all
interest earned during FY2004 through the 3rd quarter of FY2007. As of the date of this letter, however,

LAUSD has not completed the extensive forensic accounting necessary to reconcile analysts’
worksheets with prior remittance records in order to provide the requested documentation confirming
the remittance. In the short response time permitted by OIG, other projects, such as fiscal year closeout,
required the attention of the District’s Controller’s office.

     Nevertheless, LAUSD fully intends to complete a full review of its records to verify the
appropriateness of its interest remittances for FY2004 through FY2007 and to provide necessary
documentation to confirm the remittance. The target date for completion of this review is October 31,
2008. The District reserves the right to supplement its response when the review is completed. 15/

       Should LAUSD find that some amounts of interest were not remitted for this period, however, ED
should not obligate recovery of those amounts. LAUSD has already demonstrated its good-faith
commitment to resolve the audit review by voluntarily remitting interest for periods that, as explained in
Section I, are covered by the five-year statute of limitations set forth in 20 U.S.C. § 1234a(k). Thus,
LAUSD has gone far above and beyond what would be technically required under applicable law. The
amounts LAUSD previously remitted should more than suffice to remedy any possible omissions due to
discrepancies in documentation for prior years. Moreover, as indicated above, it was due, at least in
part, to CDE’s grant-by-grant reporting requirement that LAUSD developed such a staff-intensive
interest remittance methodology in the first place. The more staff-intensive the District’s methodology,
the more likely inadvertent calculation errors may occur.

3.2 	 Instruct LAUSD to reconcile analysts’ worksheets amounts with remittance documentation
      to identify earned interest for FY1995 through FY2003 that was not remitted to CDE or
      other grantor agencies and remit the identified interest to the agencies, as permitted under
      Federal law. We estimated that about $1.42 million of additional earned interest may not
      have been remitted for FY1995 through FY2003.

       LAUSD does not concur with Recommendation 3.2. For the reasons discussed above in Section
I, the five-year statute of limitations in 20 U.S.C. § 1234a(k) bars ED from mandating that LAUSD
remit funds associated with periods prior to FY2004.


15
  /       LAUSD’s understanding is that this course of action will be satisfactory to OIG. OIG recently “clarif[ied] that it
is not necessary or expected that CDE or LAUSD complete the corrective actions to address the recommendations prior to
providing comments on the draft report. . . . When the recommendation requires the remittance of a specific amount (such
as recommendation 3.1), CDE could explain in its comments that LAUSD is reviewing its records to confirm the amount
due.” G. Pilotti, Email to K. Chan, regarding “Extension to provide comments on draft audit report ED-OIG/A09H0019”
(July 11, 2008).

                             Every LAUSD student will receive a state-of-the-art education in a safe, caring
                              environment, and every graduate will be college-prepared and career-ready.
Jack O’Connell
State Superintendent of Public Instruction
Los Angeles Unified School District’s Procedures for Calculating and Remitting Interest Earned
August 11, 2008
Page 11 of 12


3.3 	 Promptly transmit to ED the interest amounts remitted by LAUSD under Recommendations
      3.1 and 3.2.

      LAUSD does not concur with Recommendation 3.3. Based on LAUSD’s objection to
Recommendations 3.1 and 3.2, it should not be obligated to remit any additional funds to CDE. Thus,
this Recommendation should be moot.


3.4 	 Obtain confirmation from LAUSD that it has remitted to CDE or other grantor agencies all
      amounts LAUSD identified as due for interest earned for the 4th quarter of FY2007 and
      later.

      LAUSD concurs with Recommendation 3.4. By September 30, 2008, LAUSD will have
remitted to CDE and other grantor agencies all amounts it has identified as due for interest earned for the
4th quarter of FY2007 and for FY2008. There has been some delay in LAUSD’s remittances due to
continued implementation issues with the District’s new financial accounting system. LAUSD does not
expect that such issues will similarly affect interest remittances for FY2009 and subsequent years.

3.5 	 Evaluate LAUSD’s internal controls for ensuring that all interest earned on Federal cash
      advances are remitted promptly to grantor agencies and require LAUSD to implement any
      needed additional controls.

      LAUSD partially concurs with Recommendation 3.5. LAUSD is eager to collaborate with CDE
in the evaluation of its internal controls for ensuring that all interest earned on Federal cash advances is
remitted promptly to grantor agencies. LAUSD also is willing to implement additional controls
identified in the course of this evaluation, provided such controls are not unduly burdensome to the
District. Nevertheless, it is unlikely that such an evaluation will identify additional controls that will be
necessary going forward. Assuming CDE agrees to make the changes required to permit LAUSD to
adopt OIG’s proposed alternative interest calculation methodology, the District’s Federal grant
administration obligations will be vastly simplified and, thus, much more easily monitored and
reviewed.

3.6 	 Monitor LAUSD, on an on-going basis, to ensure that it continues to remit interest earnings
          to CDE on a quarterly basis.

     LAUSD partially concurs with Recommendation 3.6. LAUSD stands ready to assist CDE to
monitor the District, on an on-going basis, to ensure that it continues to remit interest earnings to CDE,
provided that such monitoring is not unduly burdensome to the District. LAUSD is eager to begin
conversations with CDE to discuss how best to arrange a fully collaborative monitoring process.

CONCLUSION

     In sum, LAUSD has acted in good-faith throughout this audit review process and is committed to
working with CDE, LACOE, and ED to revise its interest remittance policies and practices, on a
prospective basis, provided such revisions are not unduly burdensome to the District. LAUSD

                             Every LAUSD student will receive a state-of-the-art education in a safe, caring
                              environment, and every graduate will be college-prepared and career-ready.
Jack O’Connell
State Superintendent of Public Instruction
Los Angeles Unified School District’s Procedures for Calculating and Remitting Interest Earned
August 11, 2008
Page 12 of 12

disagrees, however, that it should be required to remit additional amounts beyond the $25 million it has
already repaid for the period from FY1995 through FY2007. Of the $6.3 million in additional interest
that OIG has recommended LAUSD remit, at least $4 million is excludable pursuant to the applicable
statute of limitations. Even where the statute of limitations may not apply, LAUSD believes it should
not be required to remit the remaining $2.3 million or any other amounts for fiscal years covered by this
audit review for the reasons stated in more detail above.

     LAUSD looks forward to working with you further on this matter, and will be pleased to answer
any questions you may have or to receive your comments.

Sincerely,

/s/

David L. Brewer III
Superintendent of Schools
Los Angeles Unified School District


c: 	 Gloria Pilotti
     Regional Inspector General for Audits
     U.S. Department of Education




                             Every LAUSD student will receive a state-of-the-art education in a safe, caring
                              environment, and every graduate will be college-prepared and career-ready.
                              Los Angeles Unified School District
                             INTER-OFFICE CORRESPONDENCE


TO:               ANALYSIS                                   Date: October 31, 2006

FROM:             HELEN RIEL

SUBJECT:          FY 06 4th QTR INTEREST INCOME ADJUSTMENT

Please recalculate the interest income (expense) of your Federal Grants for the 4th
Quarter FY 2005-06 based on the actual interest rate of 4.86%. Please book only the
difference of the amount booked at the rate of 4.27% and the recalculated amount at
4.86%.

Please use the following account codes to book the interest income (expense):

       For interest income earned:                        DR              CR

       31-001-07R-8534       Interest Income-FY           XXX
       02-001-9667           Federal Interest Payable                     XXX

A copy of your work papers and journal voucher should be give to Patt not later than
4:00 p.m. on 11/07/06 for review and approval.

Please see me if you have any questions.



HR: pp