oversight

California Department of Education Advances of Federal Funding to Local Educational Agencies

Published by the Department of Education, Office of Inspector General on 2009-03-09.

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

   California Department of Education Advances of Federal
            Funding to Local Educational Agencies




                                 FINAL AUDIT REPORT




                                    ED-OIG/A09H0020
                                       March 2009


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

                                                           March 9, 2009

Jack T. O’Connell
State Superintendent of Public Instruction
California Department of Education
1430 N Street
Sacramento, California 95814

Dear Superintendent O’Connell:

Enclosed is our final audit report, Control Number ED-OIG/A09H0020, entitled California
Department of Education Advances of Federal Funding to Local Educational Agencies. 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
                                           Delegated to Perform the Functions of the
                                           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/

                                                                 Beverly A. Dalman
                                                                 Acting Regional Inspector General for Audit

Enclosures

Electronic cc:         Kevin Chan, Director, Audits and Investigations Division (AID), CDE
                       Annie Baccay, Audit Response Coordinator, CDE-AID
 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


                                                                                                                                   Page

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

BACKGROUND ............................................................................................................................4

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

          FINDING NO. 1 – CDE’s Method for Disbursing Federal Funds Must
                          Ensure that LEAs Receive Federal Funding When
                          Needed to Pay Program Costs ........................................................6

          FINDING NO. 2 – CDE Needs to Strengthen Controls to Ensure that
                          LEAs Correctly Calculate and Promptly Remit
                          Interest Earned on Federal Cash Advances ...............................20

OBJECTIVES, SCOPE, AND METHODOLOGY ..................................................................31

Enclosure 1: CDE Disbursement and Cash Management Procedures for
             FY 2005-06 Funding for Eight Programs ..........................................................35

Enclosure 2: OIG Estimate of Interest Earnings for Four Programs at Selected
             LEAs ......................................................................................................................43

Enclosure 3: CDE Comments on the Draft Report .................................................................44
Final Report
ED-OIG/A09H0020                                                                     Page 1 of 56



                               EXECUTIVE SUMMARY


The California Department of Education (CDE) received fiscal year 2007-08 grant awards
totaling $4.1 billion in Federal assistance from the U.S. Department of Education for
23 education programs. CDE passes most of the Federal education assistance through subgrants
to local educational agencies (LEAs), such as school districts, county offices of education, and
direct-funded charter schools. Hence, CDE needs to have an effective system for managing the
flow of cash to ensure LEAs receive Federal funds when needed to pay Federal program costs
while also ensuring Federal funds are not drawn earlier than needed. Premature draws of Federal
funds result in increased borrowing costs for the U.S. Department of the Treasury
(U.S. Treasury).

CDE has yet to implement an agency-wide cash management system that minimizes the time
elapsing between LEA receipt and disbursement of Federal education funds, despite repeated
audit findings over many years. Because it uses an advance payment method for most Federal
education programs, CDE needs a cash management system that ensures Federal program cash is
disbursed at or about the time that LEAs need to pay Federal program costs.

One objective of our audit was to determine whether CDE’s method for disbursing funds to
LEAs complies with Federal cash management requirements. We concluded that CDE’s
advance payment method does not comply with Federal requirements because it does not
consistently ensure that LEAs receive Federal funds when needed to pay program costs. Under
the advance method, CDE periodically disburses Federal funds to LEAs based largely on internal
CDE processes and timelines, rather than controlling the timing of cash flows based on known or
anticipated LEA program disbursement patterns. As a result, CDE disburses cash to LEAs well
in advance of the actual cash needs for some Federal programs, and long after the LEAs have
paid costs for other Federal programs. Our work at nine LEAs found that the timing of CDE
disbursements generally did not match the LEAs’ cash needs.

   •   CDE has not implemented cash management procedures for the largest Federal education
       program it administers—Title I, Part A, Basic Grants to LEAs of the Elementary and
       Secondary Education Act (ESEA). In State fiscal year 2006-07, CDE disbursed more
       than $1.6 billion to over 1,100 LEAs in California for the Title I Program. Auditors
       performing the annual single audit for the State of California have reported the lack of
       cash management procedures for the Title I Program for the last six years.

       CDE routinely disburses Title I funds to LEAs without determining whether the LEAs
       need program cash at the time of disbursement. Our work at nine LEAs indicates that
       CDE is likely disbursing Title I funds to LEAs across the State in advance of their needs
       for all or a significant part of the year. As a result of CDE’s premature Title I
       disbursements, we estimate that the U.S. Treasury has incurred additional borrowing
       costs of about $13 million annually, and will continue to incur these added costs until
       CDE implements cash management procedures that assess LEA cash needs prior to
       Title I disbursements.
Final Report
ED-OIG/A09H0020                                                                          Page 2 of 56

   •   CDE has implemented cash management procedures for other Federal programs, but we
       found that these procedures were inadequate and inconsistent. Specifically, CDE’s
       procedures were inadequate because they involved reviewing expenditure data to assess
       LEA funding needs, but did not take into account LEA cash balances that were available
       to pay program costs. CDE also did not assess LEAs’ actual or projected cash
       disbursements for individual programs. To ensure effective cash management, CDE
       should regularly review information on LEA cash balances, as well as actual or projected
       monthly cash disbursements. This would enable CDE to assess LEAs’ immediate cash
       needs and make disbursement decisions based on those needs.

       We also concluded that CDE’s cash management procedures were inconsistent in design
       and application. Individual CDE program offices developed their own procedures,
       funding thresholds, and reporting timeframes, with little coordination across programs.
       In addition, LEA reporting requirements and deadlines varied across programs.

The lack of a systemic approach for CDE’s disbursement of Federal program funds causes
confusion and increases the administrative burden for LEAs. LEA personnel must keep track of
the various reporting requirements across programs. In addition, they have little or no
information on when CDE will disburse Federal cash for a particular program.

The State of California recognizes that its financial management systems are outdated and
decentralized across State agencies, and is working to design and implement a single integrated
system known as the Financial Information System for California (FI$Cal). According to the
project manager, FI$Cal will provide CDE with the capability to perform cash management and
grant management activities for Federal and State funds disbursed to LEAs. The current project
plan indicates that CDE will convert to the new system in 2013. In the interim, CDE has
convened a task force to develop a proposal to address cash management in response to the
numerous and persistent single audit findings and concerns raised by U.S. Department of
Education officials. However, CDE’s options for a technology-based interim solution may be
restricted because the California Department of Finance placed a moratorium on information
system projects that duplicate functionality that is being developed under FI$Cal.

The second objective of our review was to determine the fiscal impact that CDE’s advance
payment method has on LEAs. Specifically, we assessed the impact on the amount of Federal
cash on hand at LEAs, including the use of cash from other resources to pay Federal education
program costs and the earning of interest on Federal cash balances. Our work at nine LEAs
found that LEAs experienced varying fiscal impacts depending on whether fiscal year 2005-06
Federal funds were received too late or too early.

   •   When CDE disbursed Federal program funds too late, LEAs used other available cash
       resources to pay program costs. The temporary use of other cash resources takes away
       the LEA’s opportunity to earn interest on the cash, which is no longer available for
       investment. We found that cash shortfalls were common across LEAs in the Special
       Education Program, which is authorized by Part B of the Individuals with Disabilities
       Education Act (IDEA), for a substantial part or all of State fiscal year 2005-06. Delayed
       disbursements of Federal program funds may also intensify situations in which LEAs are
       anticipating cash shortfalls or are experiencing fiscal stress as a result of budget shortfalls
       during economic downturns.
Final Report
ED-OIG/A09H0020                                                                      Page 3 of 56

       LEA officials told us that delays in receiving Federal program funds generally did not
       affect program implementation and the delivery of educational services. When Federal
       funds were delayed, the LEA was able to use other available cash resources to pay
       program costs without disrupting program operations.

   •   When CDE disbursed Federal funds too early, LEAs earned interest on the resulting cash
       balances. In some cases, LEAs earned significant amounts of interest on Federal cash
       advances. For example, we estimated that one LEA earned over $469,000 in interest for
       the Title I Program in State fiscal year 2005-06. Federal cash management rules require
       LEAs to remit interest earned on cash advances for any amounts exceeding $100 on a
       timely basis. Even though they earned interest on Federal cash balances, most of the
       LEAs we reviewed did not calculate and remit their interest earnings. Those LEAs that
       did calculate and remit interest made errors resulting in underpayments. Statewide, we
       estimate that LEAs earned about $11 million in interest on Title I cash balances in State
       fiscal year 2005-06.

       We found that CDE does not have an adequate system in place to ensure LEA
       compliance with the Federal interest requirement. In particular, CDE can do more to
       ensure LEA compliance by issuing consistent guidance to LEAs that accurately and
       completely communicates the regulatory requirements, instructs on the method to
       properly calculate interest earnings, and specifies when interest earnings are to be
       remitted.

We recommend that the Chief Financial Officer (CFO) encourage CDE to consider centralizing
its funding processes under the authority of a single organizational unit to ensure cash
management procedures are consistently and effectively implemented across all Federal
programs. We also recommend that the CFO require CDE to take other specified steps to
establish or strengthen cash management procedures to ensure that LEAs receive Federal funds
when needed to pay program costs. Additionally, we recommend that the CFO require CDE to
strengthen its controls to ensure that LEAs accurately calculate and promptly remit interest
earned on Federal cash advances.

CDE generally concurred with our findings in its comments to the draft report, but did not opine
on our overall projections of cash balances and interest estimates. CDE described the corrective
actions taken or planned to address each recommendation. Its comments on the draft report are
summarized at the end of each finding and included in their entirety, except for the attachment of
screen prints from its planned cash management reporting system, as Enclosure 3 to this report.
Final Report
ED-OIG/A09H0020                                                                                       Page 4 of 56



                                             BACKGROUND


Congress enacted the Cash Management Improvement Act of 1990, as amended, (CMIA) to
ensure greater efficiency, effectiveness, and equity in the exchange of funds between the Federal
Government and the states. California enters into an agreement with the U.S. Treasury
(Treasury-State Agreement or TSA) each year that prescribes specific cash management
principles that the State will adhere to for its largest Federal programs, including the methods
and timing for drawing Federal cash. The TSA in effect for State fiscal year (SFY) 2005-06
(July 1, 2005 to June 30, 2006) covered three Federal education programs administered by
CDE—84.010 Title I Basic Grants to LEAs (ESEA Title I), 84.027 Special Education Grants to
States (IDEA Special Education), and 84.367 Improving Teacher Quality State Grants (ESEA
Title II). The TSA specified that the State would use the pre-issuance funding method to draw
Federal funds, which meant that CDE was expected to disburse cash advances to LEAs not more
than three days after it drew down the Federal funds. 1 For programs not covered by the TSA,
CDE adopted a policy that disbursements of Federal funds to LEAs would occur within 14 days
of the funds being drawn from the U.S. Treasury.

Under 34 C.F.R. § 80.37(a)(4) of the Uniform Administrative Requirements for Grants and
Cooperative Agreements to State and Local Governments, states are required to substantially
conform advances of Federal grant funds to subgrantees to the same standards of timing and
amount that apply to cash advances received from Federal agencies. Under an advance payment
method, CDE would need to disburse Federal funds to LEAs in a manner that would ensure that
LEAs could comply with the same time periods specified in the TSA (3 days) or CDE’s own
policy (14 days).

The U.S. Department of Education (ED) provided about $4.1 billion in Federal assistance for
23 education programs for fiscal year (FY) 2007-08. 2 Most of the Federal education assistance
provided to CDE is passed through to LEAs, such as school districts, county offices of education
(COEs), and direct-funded charter schools. In 2007-08, there were 992 school districts operating
in the State, along with 58 COEs and 458 direct-funded charter schools. 3

CDE generally categorizes its funding processes for disbursing Federal and State funds to LEAs
as either apportionments or grants. The primary difference between the two funding processes is
the CDE entity that administers the process. Under the apportionments process, the School
Fiscal Services Division calculates LEA allocation amounts for general-purpose State funding


1
  Under the TSA, CDE would be required to calculate and remit interest to the U.S. Treasury on Federal funds held
from the date the funds are credited to a State account until the date they are disbursed to LEAs.
2
 As used in this report, FY refers to the Federal grant award year, which generally starts on July 1 and ends
15 months later on September 30. The SFY is a 12-month period beginning July 1. CDE tries to align Federal
programs with the SFY to the extent possible.
3
 A direct-funded charter school (charter school LEA) is a charter school that has opted to receive Federal and State
funds directly from CDE.
Final Report
ED-OIG/A09H0020                                                                                     Page 5 of 56

(principal apportionments), 4 and for State and Federal categorical programs (categorical
apportionments). Examples of categorical apportionment programs include Federal entitlement
programs, such as the Title I and Title II programs. Under the grants process, the respective
program office calculates LEA grant award amounts. Federal programs administered through
the grants process include the Special Education, Reading First, and Vocational Education
programs. 5

When the time comes to disburse Federal funds to LEAs, CDE draws the funds electronically
from ED’s grants payment system for deposit in the State Treasury. Disbursements to LEAs are
manual, and entail the California State Controller’s Office issuing a paper warrant to the LEA’s
County Treasurer or other designated payee.

By State education law, LEAs maintain substantially all cash received from Federal, State, and
local sources in the County Treasury, credited to the applicable LEA fund. Each County
Treasurer pools and invests cash holdings of school districts, county agencies, and other local
districts located within county boundaries. When an LEA needs to make a payment for goods or
services, it either issues a paper warrant, or requests the COE to issue the warrant, against its
cash held in the County Treasury. LEAs are responsible for accounting for the receipt and use of
funds for each Federal program.

Over the last six years, the California State Bureau of Audits has repeatedly found for various
Federal programs that CDE has not developed or implemented procedures to minimize the time
elapsing between LEA receipt and disbursement of Federal funds. The audits also identified
weaknesses in other programs in which CDE had implemented procedures to assess LEA
funding needs prior to releasing Federal funds.




4
  The majority of State funding for LEAs is allocated through principal apportionments, which provide a steady
stream of funds to LEAs throughout the year.
5
 The Reading First Program is authorized under Title I, Part B, Subpart 1 of the ESEA; and the Vocational
Education Program is authorized by the Carl D. Perkins Vocational and Technical Education Act of 1998.
Final Report
ED-OIG/A09H0020                                                                                  Page 6 of 56



                                          AUDIT RESULTS


CDE does not have an agency-wide cash management system to assess the immediate cash needs
of LEAs and disburse Federal funds in time to meet those needs. While some individual
programs have implemented procedures to assess LEA funding needs prior to disbursing Federal
funds, other programs have not implemented cash management procedures. We identified
weaknesses in the procedures, where implemented, as well as internal processes that delayed
disbursements to LEAs. Our work at nine LEAs found that the timing of CDE’s disbursements
generally did not match LEAs’ cash needs, and resulted in varying fiscal impacts. In most cases,
LEAs received Federal program funds either too late, and had to temporarily use other available
cash resources to pay program costs; or too early, and earned significant amounts of interest on
Federal cash balances. As a result, CDE cannot ensure that its advance payment method for
disbursing Federal funds to LEAs complies with Federal cash management requirements.

We concluded that CDE needs to do more to ensure compliance with applicable Federal
regulations. In particular, CDE should implement a coordinated approach to cash management
across all Federal programs. To comply with Federal cash management and interest
requirements, CDE’s method for disbursing Federal funds must ensure that LEAs receive
Federal funds when needed to pay program costs. CDE also needs to strengthen controls to
ensure that LEAs accurately calculate and promptly remit interest earned on Federal cash
advances.

Our review covered eight of the largest Federal education programs administered by CDE.
These eight programs received about $3.9 billion in Federal funding for FY 2005-06, or
89 percent of the total amount of Federal education assistance provided to CDE that year. We
also performed work at nine school districts in three counties: (1) Fresno County (Fresno
Unified School District (USD), Parlier USD, and Sierra USD); (2) Los Angeles County
(Glendale USD and Long Beach USD); and (3) Sacramento County (Center USD, Elk Grove
USD, Galt Joint Union High School District (JUHSD), and Sacramento City USD). 6 The eight
Federal education programs we covered, the legislation that authorized the programs, and our
LEA selection methodology can be found in the Objectives, Scope, and Methodology section of
the report.


FINDING NO. 1 – CDE’s Method for Disbursing Federal Funds Must Ensure that
                LEAs Receive Federal Funding When Needed to Pay Program
                Costs

CDE used the advance payment method to disburse FY 2005-06 grant funds to LEAs for the
eight programs we reviewed. This method generally entailed periodic disbursements of set
portions of an LEA’s entitlement or grant award throughout the period that Federal funding was
available. We concluded that CDE’s disbursement method does not minimize the time between

6
 We performed a focused review of the Title I Program only at Sacramento City USD, as described in the
Objectives, Scope, and Methodology section.
Final Report
ED-OIG/A09H0020                                                                                    Page 7 of 56

when LEAs receive and disburse the funds, as required by Federal regulation. In particular, CDE
does not have an agency-wide management system that encompasses all Federal education
programs. Depending on the program, cash management procedures were either nonexistent, or
inadequate and inconsistent. Moreover, CDE’s internal processes delayed disbursements to
LEAs. We found that CDE’s disbursement method had varying fiscal impacts on LEAs.
Pending conversion to a new financial management system, CDE needs to implement an interim
solution that adequately addresses cash management requirements.

Federal regulations at 34 C.F.R. § 80.21 prescribe the basic standard and the methods under
which grantees will make payments to subgrantees. The basic standard is that the “[m]ethod and
procedures for payment shall minimize the time elapsing between the transfer of funds and
disbursement by the grantee or subgrantee . . . .” The regulations address two payment methods:

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

        (d) Reimbursement. Reimbursement shall be the preferred method when the
        requirements in paragraph (c) of this section are not met.

CDE Does Not Have an Agency-Wide
Cash Management System

CDE does not have an agency-wide cash management system to assess the immediate cash needs
of LEAs and disburse Federal funds in time to meet those needs. Instead, responsibility for
funding decisions and cash management are decentralized across a variety of CDE organizational
components. There is no centralized management structure responsible for overseeing cash
management for the entire agency. The budget and accounting functions, including activities for
drawing Federal funds and generating claim schedules to the State Controller for disbursing
Federal and State funds to LEAs, are centralized within CDE’s Fiscal and Administrative
Services Division. However, neither this division, nor any other single organizational
component, has oversight responsibility to ensure that cash management requirements applicable
to Federal pass-through funds are met across all Federal programs.

CDE has standardized to some extent the way that it manages and allocates funds to LEAs. Its
Funding Handbook provides a guide for CDE staff on the funding processes (apportionments
and grants). Under the apportionments process, the School Fiscal Services Division calculates
LEA entitlement and apportionment amounts and, in some cases, uses data collected by the
program office to allocate funds. For programs funded through CDE’s grants process, program
offices determine LEA grant award and payment amounts. 7 Regardless of the funding process,
CDE holds the individual program office responsible for ensuring that LEAs do not accumulate
Federal funds in excess of immediate needs. However, we found little, if any, coordination
7
 As described in the Background section, CDE categorizes its funding processes as either apportionments (e.g.,
Title I and Title II programs) or grants (e.g., Special Education). Under the apportionments process, each
disbursement of Federal or State funds is referred to as an “apportionment.” Disbursements are called “payments”
under the grants process.
Final Report
ED-OIG/A09H0020                                                                                  Page 8 of 56

across programs regarding cash management procedures. Additionally, the Funding Handbook
does not include cash management procedures.

Cash Management Procedures Were Either
Nonexistent, or Inadequate and Inconsistent

CDE efforts to implement cash management procedures were nonexistent, or inadequate and
inconsistent, depending on the program. CDE cash management procedures were generally
developed in response to single audit findings targeting individual programs and were not
implemented across all Federal programs. Program offices for two of the eight programs we
reviewed had not implemented cash management procedures. The remaining six programs had
procedures in place to assess LEA funding needs prior to some disbursements of FY 2005-06
funds. (Each program’s procedures are described in Enclosure 1.)

Two Programs Did Not Have Cash Management Procedures

Two programs had not developed any procedures to assess LEA funding needs and ensure that
funding was disbursed when needed to pay program costs. The Title I and Title IV Safe and
Drug-Free Schools and Communities State Grants (ESEA Title IV) program offices had
procedures to review LEA expenditures reported on the Consolidated Application (ConApp), 8 in
order to ensure LEA compliance with Federal carryover limits. However, neither program office
used the LEA-reported expenditure data or any other information to assess LEA funding needs.
CDE has not developed cash management procedures for the Title I Program, even though the
program is substantially larger than all other Federal education assistance programs and has been
the subject of single audit findings about the lack of cash management procedures for the last six
years. Our work at nine LEAs found that the LEAs earned interest in SFY 2005-06 on cash
balances in the Title I Program.

Six Programs Had Cash Management Procedures

Six programs had implemented or were attempting to implement procedures to assess LEA
funding needs by reviewing LEA-reported expenditure or attendance data. However, we found
the procedures were not adequate to ensure CDE disbursements met LEAs’ immediate cash
needs for the following three reasons:

     •   No Assessment of LEA Cash Needs. Program office procedures did not consider LEAs’
         cash balances, or their actual or projected cash disbursements. One program used
         LEA-reported attendance data to determine interim disbursement amounts, and
         expenditure data for the final payment. For the remaining five programs, LEAs were
         required to report expenditure data at certain points during the funding period, but the
         expenditures may not have reflected actual cash disbursements. Moreover, four of the
         six programs instructed LEAs to include encumbrances or legally obligated expenditures
         when reporting expenditures. These unpaid obligations could be purchase orders,

8
  LEAs apply, and report expenditure and performance data, for some Federal and State categorical program funds
through the Consolidated Application process each year. The ConApp has two parts—Part I is due on June 30, and
Part II on January 31. It includes programs administered through the apportionments process, such as the ESEA
Title I, Title II, Title III, and Title IV programs we reviewed.
Final Report
ED-OIG/A09H0020                                                                                       Page 9 of 56

         contracts, and other commitments that may not require payment until a future period and
         may reflect less immediate cash needs. The six program offices generally compared
         LEA-reported expenditures to the program’s funding threshold prior to releasing a
         disbursement.

         CDE’s California Schools Accounting Manual (CSAM) defines “expenditure” as the cost
         of goods delivered or services rendered, whether paid or unpaid. 9 In contrast, the CSAM
         defines “disbursement” as payments by currency, check, or warrant, and points out that
         disbursements are not synonymous with expenditures. A comparison of expenditure and
         disbursement data for one LEA illustrates the difference. For SFY 2005-06, the LEA’s
         records for the Title II Program showed about $2.0 million in expenditures and
         $1.5 million in cash disbursements, or a difference of 35 percent.

         While six program offices had procedures to review LEA reported expenditure or
         attendance data, these methods did not assess the cash position of the LEAs or their
         immediate cash needs. To perform cash management, CDE’s procedures should take into
         account whether LEAs have a demonstrated need for cash. Information on LEA cash
         balances, and actual or projected monthly cash disbursements, would enable CDE to
         more accurately assess LEAs’ immediate cash needs as it makes disbursement decisions.
         Our work at LEAs showed that many program costs are related to routine, anticipated
         costs, such as employee pay and benefits. Therefore, LEAs should be able to project
         their immediate cash needs and report their anticipated needs to CDE in order to help
         ensure that funding can be made available to meet these needs. Reviewing LEA
         expenditure data that may or may not reflect immediate cash needs is not sufficient for
         cash management purposes.

     •   LEA Funding Needs Not Assessed Prior to Each Disbursement. While the six CDE
         program offices had implemented procedures to review LEA expenditures prior to the
         final FY 2005-06 disbursements, these program offices typically did not perform similar
         procedures for other disbursements during the period that Federal funds were available.
         For the four programs administered through the grants process, LEAs only had to submit
         a signed grant award notification to receive their first disbursement. To receive their
         final disbursement, the LEAs had to submit an expenditure report at the end of the grant
         period.

         Program offices for two of the apportionment programs we reviewed implemented
         procedures in FY 2005-06 to attempt to limit the funding provided to LEAs in advance of
         need. However, the procedures were not applied to one or more disbursements. To
         receive Title II and Title III English Language Acquisition State Grants (ESEA Title III)
         program funds, LEAs must have reported expenditures of at least 80 percent of their
         prior-year entitlement. If an LEA met the threshold, it received a portion of its
         entitlement in the first apportionment schedule, along with a like amount of funding
         automatically in the second apportionment schedule. LEAs not meeting the threshold
         would receive disbursements in subsequent apportionment schedules once funding
         thresholds were met. We found that the Title II program office deviated from its
9
 California State education law requires school districts to follow the accounting definitions, instructions, and
procedures in the CSAM. We use CDE’s definition of “expenditure” and “disbursement” throughout this report.
Final Report
ED-OIG/A09H0020                                                                      Page 10 of 56

        procedures by releasing a portion of FY 2005-06 funding to the majority of LEAs, which
        had not met the threshold initially, without re-assessing the LEAs’ need for funding.
        Title II program officials attributed this oversight to staff turnover and the significant
        passage of time between apportionment schedules.

    •   No Consistent Reporting Method. Variation in program office reporting procedures
        could reduce the accuracy of LEA-reported information. Two programs, which are
        funded through CDE’s apportionments process, collected expenditure data through the
        electronically submitted ConApp, as well as by requiring additional manual reports. The
        four programs funded through the grants process each relied on their own manual
        reporting process.

        The ConApp format was generally consistent across Federal programs and included
        automated error checks. However, it did not assure consistent reporting as LEAs were
        instructed to report year-to-date expenditures either without any specified dates or for
        different reporting periods.

        The manual reports required by the six CDE program offices differed in format,
        requested information, frequency, reporting periods, and due dates. Under a manual
        reporting process, CDE program office personnel are required to input LEA-reported data
        into their own database. While some program officials stated that procedures were in
        place to ensure the accuracy of data inputs, such manual processes require additional
        resources and are subject to data entry errors.

Beginning in the FY 2006-07 funding cycle, two of the six programs changed or modified their
disbursement method. In response to single audit findings, the Vocational Education Program
changed from an advance payment method to full reimbursement whereby LEAs could submit
quarterly claims for reimbursement. Instead of basing interim funding decisions on attendance
data, the 21st-Century Community Learning Centers Program modified its disbursement method
to a quasi-reimbursement method whereby CDE provides an initial advance payment and
subsequently reimburses LEAs for quarterly reported expenditures.

CDE’s Internal Processes Delayed Disbursements to LEAs

Disbursement schedules across the eight reviewed programs varied widely in the number of
disbursements, proportion of an LEA’s entitlement or grant award represented by each
disbursement, and disbursement dates. Depending on the program, disbursement schedules
generally involved two or three disbursements (apportionments or grant payments) of set
percentages of an LEA’s entitlement or grant award. (Each program’s disbursement schedule is
described in Enclosure 1.)

CDE disbursed FY 2005-06 funds to most LEAs during SFY 2005-06 or shortly thereafter.
However, disbursements for some programs did not occur for up to 12 months or more after the
SFY had ended. For example, final Title II disbursements of FY 2005-06 funds for most of the
LEAs we reviewed did not occur until June 2007, or nearly a full year after the SFY had ended.
In some cases, LEAs did not receive program funds until long after they spent their full
entitlement. Two LEAs reported they spent their entire Title II entitlement amount by
September 30, 2006, but did not receive their first disbursement until the third apportionment
Final Report
ED-OIG/A09H0020                                                                                      Page 11 of 56

schedule in April 2007. The LEAs had not met the program office’s funding threshold for the
first apportionment schedule a year earlier and, thus, were subject to funding delays caused by
program staff turnover. 10

For the eight reviewed programs, a significant portion, if not all, of the Federal education
assistance funds were available for CDE to draw down on or about July 1, 2005. By
October 2005, the remaining funds were available for drawdown. 11 Although Federal funds
were available for disbursement to LEAs early in the year, CDE’s internal processes delayed the
first disbursement of the funds by an average of 7 months, ranging from 4 to 11 months
depending on the program. CDE fiscal and program officials attributed the delays to the
following five factors:

       •   State Budget Process. Under California law, State agencies cannot disburse Federal
           funds until the State Legislature has enacted, and the Governor has signed, the State
           budget. State law also requires that the budget be enacted by June 30 to ensure funding is
           available at the beginning of the SFY on July 1. Since CDE cannot disburse any Federal
           funds to LEAs until the State budget is in place, a late budget could contribute to delays
           in making the first disbursements. However, California’s SFY 2005-06 budget was
           signed by the Governor on July 11, 2005 and, thus, did not contribute to delays in
           disbursing Federal funds to LEAs in that year.

       •   New or Significantly Expanding Charter School LEAs. For programs administered
           through the apportionments process, CDE waits until after September 30 to calculate
           LEA entitlements pending receipt of enrollment estimates for new or significantly
           expanding charter school LEAs. In California, charter schools complete an annual
           Charter Schools Funding Survey to indicate whether they want to receive Federal and
           State funds directly from CDE (direct-funded charter school or charter school LEA) or
           indirectly as a public school of a school district LEA. CDE also uses the Survey to
           collect estimated enrollment information for these charter schools. 12 State education law
           stipulates that a new charter school must commence instruction between July 1 and
           September 30 to be eligible for State funding. Although charter schools are expected to
           submit the Survey by May 31, CDE waits until September 30 to accommodate late
           submissions and the statutory deadline.

           CDE needs to explore alternatives to its policy of delaying LEA entitlement calculations
           until after September 30. This policy contributed to significant delays in disbursing

10
     The disbursement schedule and funding threshold for the Title II Program are described in Enclosure 1.
11
  Nearly all FY 2005-06 Federal funds for the Reading First Program were available to CDE by October 1, 2005;
the remaining 4 percent of the State grant award became available in September 2006.
12
  Under § 5206 of the ESEA, States must ensure that eligible new or significantly expanding charter schools that
open or expand enrollment on or before November 1 of an academic year receive a proportionate amount of Federal
funds. The SEA must base a new or expanding charter school LEA’s allocation on actual enrollment or eligibility
data. If actual data are not available when the charter school first opens or significantly expands enrollment, the
State may use estimates to calculate the charter school LEA’s allocation. The State must then use actual data to
make appropriate adjustments to the amount of funds previously allocated to the new or significantly expanding
charter school LEA, as well as to other LEAs under the applicable program, before program funds are allocated for
the succeeding academic year.
Final Report
ED-OIG/A09H0020                                                                                   Page 12 of 56

         FY 2005-06 Federal funds to as many as about 1,000 LEAs statewide pending
         information on 209 new or significantly expanding charter school LEAs. Federal
         guidance already permits states to reserve an appropriate amount from their Federal
         program allocation for new or expanding charter schools in order to reduce the
         administrative burden on states and LEAs. States can also use prior-year carryover,
         reallocations, State administration, or other discretionary funds for charter school LEA
         allocations. Thus, CDE could compute the entitlements for the larger body of LEAs and
         begin disbursing funds to them earlier, if warranted based on LEA cash needs, while
         setting aside Federal program funds for new or significantly expanding charter school
         LEAs. Alternatively, CDE could use historical data on new or significantly expanding
         charter schools and data available from the Charter Schools Funding Survey obtained to
         date to estimate LEA entitlements. Preliminary LEA entitlements could then be adjusted
         for late Survey submissions in order to finalize all LEA entitlements.

     •   New Cash Management Procedures. Program offices that began implementing
         procedures to assess LEA funding needs in SFY 2005-06 experienced additional delays
         in releasing the first disbursement of FY 2005-06 funds to LEAs. The first LEA
         disbursements occurred near the end of the SFY—in March 2006 for the Title II Program
         and June 2006 for the Title III Program. Both program offices have continued to refine
         their procedures in subsequent years with mixed results. The first disbursement of
         Title III funds was four months earlier for FY 2006-07 funding. However, the Title II
         program office has struggled with its attempts to improve procedures resulting in an even
         later first disbursement for FY 2006-07 and no disbursements of FY 2007-08 funds as of
         August 2008.

     •   Other Program Office Delays. For the Special Education Program, CDE released the first
         disbursement of FY 2005-06 program funds to LEAs in November 2005, or four months
         into the SFY. The program office could not calculate LEA grant amounts until special
         education pupil counts and poverty data were available in September 2005. Our LEA
         work found that funding to school districts that provide special education services may be
         delayed an additional month or so when the district is a member of a multi-district
         Special Education Local Planning Area (SELPA). 13

         For the Title IV Program, LEA entitlements were posted on CDE’s website in November
         2005. However, the program office has historically waited until after CDE releases the
         ConApp Part II in December before releasing Title IV funds for disbursement to LEAs.

     •   Review and Approval Process. Each disbursement (apportionment and grant payment)
         must be reviewed and approved before funds can be released to LEAs. All proposed
         disbursements of Federal education funds to LEAs are subjected to reviews by various
         levels of management within both the program and fiscal offices. We found that the
         review and approval process delays LEA disbursements by several weeks or, in some
         cases, even months. Once CDE releases the disbursements to the State Controller’s

13
  The SELPA is the LEA for Special Education funding purposes. A SELPA may be a single school district or
comprised of multiple districts. In a multi-district SELPA, the SELPA may provide special education services for
member districts, or disburse funds to districts to provide services.
Final Report
ED-OIG/A09H0020                                                                                      Page 13 of 56

         Office for payment, it takes about two additional weeks to issue the paper warrant and
         deposit the funds into the respective County Treasury.

The lack of a systemic approach or coordination across individual programs causes confusion
and increases the administrative burden for LEAs. LEA fiscal staff stated that a significant
amount of staff time is spent completing, filing, and tracking the various expenditure reports.
They would like to see more consistency across programs in reporting requirements and dates, as
well as the timing of disbursements. LEA fiscal staff also told us that they would prefer more
consistency across programs’ disbursement schedules, and to know the LEA’s final allocation
and receive Federal program funds earlier. The inconsistencies in disbursement schedules and
late disbursements can cause budgeting, planning, and staffing problems at the LEA. For
example, one LEA reported that its Reading First Program is regularly impacted because the
district cannot post or fill positions until program funding is in place. If funding is delayed, the
district must issue layoff notices to its reading coaches, and later retract the notices when the
funding becomes available. LEAs also reported a preference for more timely receipt of funds to
match their spending needs, and receipt of current-year funds during the SFY rather than in
subsequent years.

LEAs Have Little or No Control over When They Receive
Federal Funds Resulting in Varying Fiscal Impacts

CDE’s advance payment method disburses Federal funding to LEAs rather than allowing LEAs
to draw the funds when needed to pay program costs. Our analysis of LEA monthly cash
receipts and disbursements for four programs 14 showed that the LEAs either received Federal
program funds too late, and had to pay program costs by temporarily using other available cash
resources, or received funding too early, and earned interest on the program cash balances. We
concluded that LEAs can do little to minimize the time elapsing between receipt and
disbursement of Federal funds due to the absence of a funding system that assesses LEAs’
immediate cash needs, or that allows LEAs to draw funds when program costs need to be paid.

LEAs Pay Program Costs Whether or Not
CDE Has Disbursed Program Funds

LEAs pay Federal program costs whether or not CDE has disbursed Federal funds to the LEA for
the specific program. State education law requires that all cash received by an LEA be credited
to its General Fund, unless the cash is required to be placed in a separate fund. LEAs use their
General Fund to finance the ordinary operations of the LEA, including Federal education
programs. Most General Fund revenues are from non-Federal sources, such as continuously
appropriated State general purpose education funds and local property taxes. Federal dollars
comprise a small portion of the General Fund (4 to 14 percent in the nine LEAs we reviewed).

Once deposited in the County Treasury, the source of General Fund revenues (Federal and
non-Federal) is indistinguishable for purposes of paying LEA operational costs. An LEA’s
entitlement or subgrant award, as well as its approved budget, authorize the amount of funds
available to pay Federal program costs. From a program perspective, the LEA ensures that

14
  We reviewed the Title I, Title II, Title IV, and Special Education programs at eight LEAs, and only the Title I
Program at one LEA (as described in the Objectives, Scope, and Methodology section).
Final Report
ED-OIG/A09H0020                                                                                   Page 14 of 56

disbursements are for program purposes, are in accordance with the approved budget, and do not
exceed the LEA’s entitlement or subgrant award. From a fiscal perspective, the LEA ensures
that sufficient funds are available in the General Fund to pay program costs. Thus, LEA
accounting records will show a negative cash balance for a program when costs are paid in
advance of CDE disbursing program funds to the LEA. Conversely, there will be a positive cash
balance when CDE has disbursed program funds in advance of the LEA’s need. Thus, LEAs’
accounting process enables the LEA to mitigate the mismatch between the timing of program
disbursements and the receipt of revenues, and continue to operate Federal programs pending
receipt of program funds from CDE.

Eight LEAs Experienced Negative Fiscal Impacts

Delays in CDE disbursements resulted in eight of the nine reviewed LEAs experiencing cash
shortfalls in individual Federal programs during SFY 2005-06. The eight LEAs began the year
with cash shortfalls in at least one and as many as all four programs. The LEAs had negative
cash balances for as little as two months before prior-year FY 2004-05 funding was received in
SFY 2005-06, or for as long as the entire year despite receiving FY 2005-06 funds in the affected
programs. Cash shortfalls were most typical in the Special Education and Title IV programs as
seven LEAs had negative cash balances in both programs for a substantial part or all of the year.
Several LEAs also had cash shortfalls in the Title II Program for the entire year.

Negative fiscal impacts can result when cash shortfalls occur in a Federal program. When a
program has a negative cash balance, LEAs use other available cash resources to pay program
costs. All LEAs included in our review had cash available in their General Fund to pay program
costs pending receipt of Federal program funds. However, when an LEA has to temporarily use
other cash resources to pay Federal program costs, the amount of cash available to the LEA for
other educational purposes is decreased, which could put additional fiscal pressure on the LEA.
The use of other cash resources also causes a lost opportunity for the LEA to earn interest
because the cash is no longer available for investment. Every dollar of interest earnings that an
LEA is unable to generate because of the need to cover Federal program costs, is a dollar that
cannot be recovered and is no longer available for investment in the LEA’s other educational
programs. For example, we found that cash shortfalls were common across LEAs in the Special
Education Program for a substantial part or all of SFY 2005-06. We estimated that the eight
LEAs lost the opportunity to earn about $462,000 in interest because the cash from other General
Fund revenue sources, which the LEAs used to pay program costs pending receipt of Special
Education disbursements from CDE, was no longer available for investment. 15

LEA program and fiscal officials stated that delays in receipt of Federal funding did not affect
the delivery of services for the four programs because other cash resources in their General Fund
were available to pay program costs. However, four of the eight LEAs had expected to
experience cash shortfalls in their General Fund during SFY 2005-06. To address these
projected shortfalls, three of the LEAs issued short-term debt instruments called Tax Revenue
Anticipation Notes, which constitute borrowing against future tax and other revenues. The other
15
  We calculated the estimate of lost interest earnings by multiplying the LEA’s negative month-end cash balance for
the Special Education Program by the applicable monthly interest rate. For reporting purposes, we used month-end
cash balances to estimate interest. As noted in Finding No. 2, however, use of month-end balances could understate
or overstate the actual interest earned.
Final Report
ED-OIG/A09H0020                                                                                      Page 15 of 56

LEA obtained a loan from its COE. While not a direct cause for the shortfall in the General
Fund, delays in receipt of Federal funds were likely a contributing factor.

Nine LEAs Had Significant Cash Balances for Some Programs

All the reviewed LEAs had significant cash balances for one or more programs during
SFY 2005-06. The cash balances resulted from the LEA having unspent prior-year FY 2004-05
program cash advances that they either carried over from SFY 2004-05 or received the following
year, as well as FY 2005-06 advances received during SFY 2005-06. LEAs that had Federal
cash balances earned interest on these balances, particularly in the Title I Program. All nine
LEAs had cash balances in the Title I Program for some portion of the year. Six of the LEAs
had Title I balances for nearly the entire year. We estimated that the nine LEAs earned about
$858,000 in interest on Title I cash balances during the year. 16 Cash balances were not as
commonplace in the other three programs and, as a result, LEAs generally generated lower or no
interest earnings in those programs.

CDE Needs to Implement an Interim Solution that
Adequately Addresses Cash Management Requirements

Pending the State of California’s new statewide financial management system (FI$Cal), 17 CDE
plans to implement an interim solution to address cash management. In 2007, CDE convened a
task force to develop a cash management proposal in response to the longstanding single audit
findings, concerns raised by ED’s Risk Management Team, and the Office of Inspector
General’s (OIG) cash management audits. At the time of our review, CDE was planning to pilot
a web-based system for LEAs to report cash balances for the Title II Program, and phase in other
programs after it could verify the system was operating as intended.

Based on our State and LEA work, CDE should ensure that its interim solution takes into
account the following two factors:

      •   Consistent Requirements Across All Federal Programs. Reporting requirements that are
          consistent across programs, such as the format, requested information, frequency, and
          due dates, would help to minimize the administrative burden on LEAs and better assure
          the accuracy of LEA-reported information. Additionally, cash management procedures
          should be implemented for all Federal programs, including the Title I and Title IV
          programs.

      •   Assessment of LEA Cash Needs. Cash management procedures should involve a
          review of LEAs’ cash needs prior to all advances. To minimize the time between when
          LEAs receive and disburse Federal program funds, CDE should release funds in time to
          meet LEAs’ immediate cash needs (i.e., not too late or too early). Information on LEA

16
  We calculated the estimate of interest earnings similar to our calculation for interest losses. For each month, we
multiplied the LEA’s positive month-end cash balance for the Title I Program by the applicable monthly interest
rate.
17
  As described in the Executive Summary, FI$Cal will provide CDE with the capability to perform cash
management and grant management activities for Federal and State funds disbursed to LEAs. CDE is expected to
convert to the new system in 2013.
Final Report
ED-OIG/A09H0020                                                                                                 Page 16 of 56

            cash balances, and actual or projected monthly cash disbursements, would enable CDE
            to more accurately assess LEAs’ immediate cash needs as it makes disbursement
            decisions.

As it develops and implements an interim solution, we encourage CDE to involve LEAs and
COEs. LEAs have an inherent interest in receiving their Federal program funds timely. They
can help to ensure that the interim solution is practical and not overly burdensome. Making
LEAs a part of the solution would improve their understanding of CDE’s funding processes, and
better assure their cooperation and compliance with cash management procedures. The COEs
may also have information or suggestions that may be helpful in developing CDE’s interim
solution. As discussed in Finding No. 2, cash information may be available at COEs for many
school districts that could help CDE implement cash management procedures.

When CDE draws Federal funds for disbursement to LEAs too far in advance of their immediate
cash needs, there is an additional cost to the U.S. Treasury. Because of the Federal deficit, the
U.S. Treasury must borrow the cash needed to fund Federal programs and, as a result, incurs
interest costs. Federal program funds drawn too early results in additional Federal borrowing
costs that would not have been incurred if CDE had disbursed the funds to LEA when needed to
pay program costs. Thus, if CDE implements an effective cash management system, we estimate
that more timely disbursements to LEAs for the Title I Program alone would result in the
avoidance of about $13 million in future, annual borrowing costs to the U.S. Treasury. 18

Recommendations

We recommend that the Chief Financial Officer encourage CDE to—

1.1        Consider centralizing its funding processes under the authority of a single organizational
           unit to ensure cash management procedures are consistently and effectively implemented
           across all Federal programs

We further recommend that the Chief Financial Officer require CDE to—

1.2        Make the first disbursement of Federal funds available to LEAs earlier in the State fiscal
           year if LEAs have demonstrated the need for program funds. CDE should consider

18
     We estimated the $13 million of future, annual borrowing costs using the following formula:
                                       Estimated percentage of     Annualized interest rate stipulated in the
      Statewide FY 2006-07             allocation on-hand at       State of California’s Treasury-State
      Title I allocation to LEAs   X   LEAs statewide          X   Agreement for FY 2006-07
        $1,640,256,330                      15.65%                            5.02%

The “estimated percentage of allocation on-hand at LEAs statewide” was derived using the following formula:
                  Sum of the nine LEAs’ average SFY 2005-06 Title I cash balances
                                           $20,854,820
                                                                                       =      15.65%
                          FY 2006-07 Title I allocations for the nine LEAs
                                          $133,281,078
Each LEA’s average Title I cash balance was calculated by summing the LEA’s month-end cash balances for the
year and dividing by 12. The individual LEA calculations may have included months in which ending cash balances
were negative.
Final Report
ED-OIG/A09H0020                                                                           Page 17 of 56

          alternatives to enable earlier first disbursements, such as (1) providing a provisional first
          disbursement that is subject to adjustment once LEA entitlements and grant amounts are
          finalized; and/or (2) setting aside Federal program funds for new or expanding charter
          school LEAs to enable earlier calculation of LEA entitlements and disbursements, and
          performing separate entitlement calculations for these charter school LEAs after
          September 30, when enrollment estimates are available, while ensuring their funds are
          disbursed within statutory timelines.

1.3       Proactively work with the FI$Cal project development team to ensure that the cash
          management component of the new system meets Federal requirements, allows LEAs to
          draw Federal funds when needed to pay program costs, and includes internal controls to
          ensure LEAs minimize the time between when they receive and disburse Federal program
          funds. If CDE implements an effective cash management system, we estimate that more
          timely disbursements to LEAs for the Title I Program alone would result in the avoidance
          of about $13 million in future, annual borrowing costs to the U.S. Treasury.

1.4       Develop an interim solution that is consistent across all Federal programs, and assesses
          LEA cash needs prior to all advances.

CDE Comments and OIG Response

In its overall comments, CDE concurred with the finding in general, but did not opine on our
projections of cash balances and interest estimates. It stated that its foremost cash management
goals are to: (1) improve cash balance reporting, fiscal monitoring, and funding processes to
minimize the time between sub-recipients’ receipt and disbursement of Federal funds; and
(2) revert interest earned on unspent Federal funds to the U.S. Treasury. To help in this
endeavor, CDE is coordinating efforts with ED’s Risk Management Services for advice and
suggestions on improving CDE’s cash management over Federal funds.

CDE also provided comments and described the corrective actions already taken or planned for
each of our recommendations. Where we believe the stated corrective action did not sufficiently
address a recommendation, we provide our response below. We have not modified our
recommendations based on CDE’s comments.

      •   Recommendation 1.1. CDE stated that, upon consideration of centralizing the multitude
          of program funding processes under a single organizational unit, it determined it would
          be more feasible to consistently apply universal core cash management procedures to its
          grant and apportionment processes to ensure LEAs receive Federal funding when needed
          to pay program costs.

      •   Recommendations 1.2 and 1.4. In its response to Recommendation 1.2, CDE commented
          that its proposed quarterly funding process (described below) will enable CDE to
          effectively disburse Federal funding throughout the year and accommodate an LEA’s
          demonstrated need for program funds.

          In its response to Recommendation 1.4, CDE summarized its interim cash management
          improvement plan, which was recently submitted to ED. Under the plan, CDE would
          institute quarterly sub-recipient (LEA) reporting of cash balances and quarterly
Final Report
ED-OIG/A09H0020                                                                  Page 18 of 56

     disbursement of Federal funds. LEAs would use a web-based system to report
     outstanding cash balances by program. Based on this information, CDE would determine
     whether (1) adjustments are necessary to subsequent scheduled funding and (2) LEAs
     may have earned interest on unspent funds. CDE could adjust funding by releasing or
     increasing the following scheduled funding amount if an LEA reports a relatively small
     amount or negative cash balance. Alternatively, CDE could withhold or decrease the
     scheduled funding and query the LEA about the disposition of interest earnings when the
     cash balance is relatively high. CDE stated that program funding on a quarterly basis
     would allow more timely disbursements since, in theory, LEAs would not be without
     funding for longer than 90 days. While the plan refers to a quarterly funding schedule,
     CDE noted that the schedule may be modified to accommodate the complexities of
     individual programs. The system could also be modified to capture interest earned on
     Federal funds and other program information.

     Citing sensitive ramifications for programs currently funded less than four times a year,
     such as the Title I Program, CDE plans to pilot the new system with the Title II Program
     (Improving Teacher Quality). Other programs would be phased in after the new cash
     management system and processes are better understood and operating as intended.

     OIG Response. In addition to the corrective actions above, CDE needs to ensure its cash
     management improvement plan or other corrective actions address the following critical
     issues noted in the finding:

        o A timeline for implementing the pilot program and phasing in all other programs.
          In particular, CDE needs to phase in the Title I Program as soon as possible given
          the longstanding unresolved single audit findings and significant cash balances we
          found at many reviewed LEAs.

        o Steps to alleviate the internal delays that caused the first disbursement across
          reviewed programs to occur 4 to 11 months into the year. CDE officials had
          attributed the delays to such factors as the State budget process, new or
          significantly expanding charter school LEAs, and processes for reviewing and
          approving disbursements. LEAs with a demonstrated need for Federal program
          cash early in the year should not have to use other cash resources to cover Federal
          program costs.

        o More detailed assessment of LEA cash needs. Under the proposed cash
          management reporting system, having LEAs report only cash balances may not
          sufficiently address LEAs’ future cash needs. CDE could compare cash balances
          for two quarters to determine the amount spent in the preceding quarter to
          estimate an LEA’s future cash needs, However, this measure alone may not
          ensure individual LEAs receive Federal program funds to cover all anticipated
          Federal program costs. Also obtaining information from LEAs on projected cash
          needs would assure that LEAs receive sufficient funds in the following quarter for
          anticipated, non-routine costs, such as equipment, one-time costs, and other large
          purchases, in addition to routine costs, such as employee pay and benefits.
Final Report
ED-OIG/A09H0020                                                                   Page 19 of 56

       CDE should also solicit input from LEAs when designing and assessing the new cash
       management reporting system to better assure the system operates as intended and to
       determine whether LEAs are receiving funds when needed to pay program costs under
       the new system.

   •   Recommendation 1.3. CDE stated that representatives attend FI$Cal project
       development meetings and work proactively with the California Department of Finance
       on the CDE and government requirements that should be addressed and incorporated into
       the new statewide financial management project.

       OIG Response. When attending meetings and working with the State Department of
       Finance, CDE needs to proactively ensure the FI$Cal system meets Federal cash
       management requirements. In accordance with 34 C.F.R. § 80.21, CDE’s method and
       procedures for disbursing Federal program funds must enable LEAs to minimize the time
       between when LEAs receive and disburse the funds. Moreover, 34 C.F.R. § 80.37(a)(4)
       requires CDE to substantially conform advances of Federal program funds to LEAs to the
       same standards of timing and amount that apply to cash advances CDE receives from ED.
       CDE draws down Federal funds prior to making disbursements to LEAs, and is expected
       to disburse the funds within 3 days for programs covered by the Treasury-State
       Agreement on cash management principles and 14 days for non-TSA programs. Thus,
       LEAs must be able to comply with these same timelines.

       CDE’s current and proposed interim disbursement methods continue to largely control
       when LEAs receive Federal program funds since LEAs are unable to request or draw
       funds when actually needed. CDE’s interim plans for a quarterly disbursement schedule
       may help to improve the elapsed time between LEA receipt and disbursement of funds,
       but a system where “sub-recipients would not be without funding longer than 90 days”
       does not conform to the same timing standards (3 days for TSA programs and 14 days for
       non-TSA programs) applicable to CDE’s receipt of Federal funds from ED. Moreover,
       LEAs cannot be held responsible for minimizing the time between their receipt and
       disbursement of funds if they have little or no control over when funds are received.

       To comply with Federal cash management requirements, CDE needs to ensure the FI$Cal
       system enables LEAs to request or draw down Federal programs funds at or about the
       time the funds are needed to pay program costs. Once FI$Cal is in place, CDE should
       monitor subgrantee drawdowns to ensure LEAs adhere to cash management
       requirements.

We have not modified the finding, except to make some clarifying edits, update information on
CDE’s planned cash management reporting system, and update some of the figures used to
estimate interest earnings for the nine reviewed LEAs and future borrowing costs to the
U.S. Treasury. We re-calculated the interest estimates based on corrected Title I cash balance
data from one LEA.
Final Report
ED-OIG/A09H0020                                                                                       Page 20 of 56

FINDING NO. 2 – CDE Needs to Strengthen Controls to Ensure that LEAs
                Correctly Calculate and Promptly Remit Interest Earned on
                Federal Cash Advances

We concluded that CDE’s procedures to ensure LEA compliance with the Federal interest
requirement were ineffective. Our work at nine LEAs found that they had earned interest on
Federal cash balances in SFY 2005-06, but most LEAs did not remit interest. Moreover, the
LEAs that remitted interest did not calculate interest correctly or remit promptly. We found that
CDE procedures were inconsistent across Federal programs. Additionally, LEAs need guidance
on the proper method for calculating and frequency for remitting interest. We also identified
ways in which COEs could help CDE implement cash management procedures and LEAs
comply with the interest requirement.

When CDE releases funds to LEAs, the cash is deposited in an interest-bearing account until
disbursed for program costs. As described in Finding No. 1, LEAs may receive Federal program
funds well in advance of their need because CDE disburses funds without first assessing LEAs’
cash needs. The interest LEAs earn on Federal cash advances must be returned to ED in
accordance with regulatory requirements.

Federal regulation at 34 C.F.R. § 80.21(i) addresses requirements when interest is earned on
Federal cash advances. The regulation 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.

LEAs were generally instructed to remit interest earned on Federal program funds to CDE.
Upon receipt of an LEA’s remittance, CDE’s Accounting Office processed the payment and
mailed State warrants covering batches of LEA remittances to ED. 19 Our limited testing
concluded that, when it received checks from LEAs, the Accounting Office had adequate
controls in place to process and remit LEA interest payments to ED. However, we concluded
that CDE needs to strengthen controls to ensure that LEAs do remit interest, when required, and
calculate interest amounts properly.

CDE records show that few LEAs have remitted interest earned on Federal cash advances.
Statewide, only 24 of over 1,000 LEAs remitted interest earnings totaling about $409,000 during
SFY 2005-06, and 26 LEAs remitted about $692,000 in SFY 2006-07. 20 In the California single
audit for SFY 2005-06, the Auditor reported the SFY 2005-06 interest earnings total and
concluded that CDE did not appear to adequately monitor LEA compliance with cash
management requirements based on the number and amount of interest payments CDE had

19
     Upon receipt of interest remittances from grantees, ED returns the funds to the U.S. Treasury.
20
  The SFY 2006-07 interest earnings total does not include Los Angeles USD, which remitted almost $23 million
that it had earned and retained over more than a ten-year period. We recently reported that the LEA began in
March 2007 to remit interest that it had been earning across all Federal programs since 1995. (Los Angeles Unified
School District’s Procedures for Calculating and Remitting Interest Earned on Federal Cash Advances
(ED-OIG/A09H0019, December 2, 2008)).
Final Report
ED-OIG/A09H0020                                                                                    Page 21 of 56

remitted to ED on LEAs’ behalf. Our work at nine LEAs confirmed that many LEAs were not
complying with the Federal interest requirement.

CDE Procedures to Ensure LEA Compliance with Interest
Requirement Were Inconsistent Across Federal Programs

CDE relies on LEAs to self-report and remit interest earned on Federal cash balances. CDE
generally cites the applicable Federal regulation in program apportionment letters, grant award
notifications, and other documents distributed to local agencies. In addition, three of the eight
reviewed programs request LEAs to include interest earnings in the program’s year-end
expenditure report. However, we found that the information and instructions provided in these
documents did not ensure LEA compliance with the interest requirement for the following four
reasons:

     •   LEAs Unaware of Interest Requirement. Fiscal staff at five of the nine LEAs in our
         review stated that they were unaware of the interest requirement. Under its
         apportionments funding process, CDE addresses program funding letters to county-level
         officials and requests that the County Superintendent of Schools forward the information
         to the LEAs within the county. 21 The COEs we contacted either sent a copy of the
         funding letter to its LEAs, or posted the letters to a website.

         For seven of the eight programs reviewed, the requirement was included as standard
         language with other information in program funding letters (apportionment or grant
         award notifications). Instead of informing the LEA of the interest requirement in the
         grant award notification, the remaining program reminded LEAs of the requirement in
         the program’s expenditure report forms. Using these methods to disseminate information
         increases the potential for LEA staff to overlook the requirement.

     •   Inconsistent and Incomplete Information on Remittance Procedures. We found that
         program offices provided inconsistent information about where LEAs should remit
         interest payments. Six programs instructed LEAs to remit interest to CDE, while two
         programs instructed LEAs to remit directly to ED. Only one program informed LEAs
         that they should remit interest promptly and at least quarterly, as required by the
         regulation. The other programs did not address when or how often interest should be
         remitted.

     •   Inconsistent Reporting Requirements and Instructions. Three programs requested LEAs
         to report interest earned on FY 2005-06 funds in the program’s year-end or grant
         close-out expenditure report. The Title II and Title III programs indicated that LEAs
         would be invoiced for any reported interest, while the Special Education Program
         instructed LEAs to include a payment for interest earnings when submitting the
         expenditure report. The remaining five programs did not have LEAs report interest
         earnings.



21
  State law requires the County Superintendent of Schools, who is the chief administrator of the COE, to
disseminate the information to school districts in the county.
Final Report
ED-OIG/A09H0020                                                                                    Page 22 of 56

     •   Lack of Assurance that LEAs Report and Remit Interest Earnings. Even when LEAs are
         required to report interest earnings on expenditure reports, program offices have no
         assurance that LEAs will report the information. We identified six LEAs that did not
         report interest earnings on expenditure reports, even though our analyses of LEA cash
         reports determined that interest was earned. Four of the LEAs had not calculated interest
         earned on Federal cash balances. The remaining two LEAs incorrectly determined that
         one program had no interest earnings, and did not report interest earned in another
         program.

         The Federal interest requirement should be covered under each LEA’s single audit, which
         is performed by an Independent Public Accountant (IPA) each year. Thus, CDE should
         be able to rely on the single audits to help assure LEAs remit interest earnings. However,
         single audits for some LEAs may not have addressed the issue. We found that IPAs for
         six of the nine LEAs did not report instances in which interest was earned but not
         remitted. The six LEAs earned interest in programs designated by the IPA as a major
         program. Such designation requires the IPA to perform specific compliance tests,
         including testing whether the LEA complied with the interest requirement. 22 Absent
         assurance that the LEAs’ single audits cover the interest requirement, CDE should
         consider including steps to its categorical program monitoring process to review LEA
         compliance with the interest requirement. 23

We found that seven of the nine LEAs we reviewed did not remit any interest earned in
SFY 2005-06 on Federal cash balances for one or more of the four programs reviewed. We
estimated that the seven LEAs should have remitted nearly $625,000 for the year. Estimated
interest earnings for each LEA by program are listed in Enclosure 2.

LEAs Need Guidance on the Proper Method for
Calculating and Frequency for Remitting Interest

As described earlier, cash received by an LEA from Federal, State, and other sources is deposited
in a pooled investment account maintained by the County Treasurer. The investment account
also includes cash received by county agencies and other school and local districts. Each County
Treasurer distributes interest earned on its investments on a pro-rata basis to the local agencies
participating in the investment pool. The interest earned is then allocated to the applicable
participating funds, such as the General Fund, on a periodic basis. Under this process, an LEA
cannot identify the interest earned on Federal cash balances in the General Fund because the
fund contains amounts from Federal, State, and other sources. Thus, the LEA needs to calculate
the Federal portion of its interest earnings in order to comply with the regulatory requirement to
remit interest earned on Federal advances.


22
   OIG discussed this issue with the California State Controller’s Office, which has primary responsibility for
monitoring and assessing the quality of LEA single audits. In September 2008, the State Controller’s Office issued
its annual advisory providing information to assist IPAs in performing the SFY 2007-08 LEA audits, including the
need for IPAs to address the Federal interest requirement when conducting LEA single audits.
23
  Under its categorical program monitoring process, CDE monitors LEAs for compliance with categorical program
and fiscal requirements by conducting monitoring visits to each LEA every four years. Current monitoring
procedures do not address LEA compliance with the Federal interest requirement.
Final Report
ED-OIG/A09H0020                                                                      Page 23 of 56

CDE has not developed or communicated the proper method that LEAs should use to calculate
interest earnings, has not specified the data that LEAs should use to perform these calculations,
and has not routinely instructed LEAs to remit interest promptly and at least quarterly. Six of the
nine reviewed LEAs did not calculate or remit any Federal interest earnings. The three LEAs
that did remit interest, calculated their earnings incorrectly, remitted interest for SFY 2005-06
only once after the year had ended, and, in two cases, did not remit interest earned on cash
advances for all Federal programs. Absent guidance from CDE, the three LEAs developed their
own methodology for calculating interest. We found that the methodologies were generally
inconsistent across the LEAs, although calculations were commonly by individual program. For
the three LEAs that remitted interest, we identified the following seven errors:

   •   Actual Interest Earned Not Determined. When distributing interest to participating
       investors, State law requires the respective County Treasurer to calculate interest earned
       on the pooled investment account using the account’s average daily balance. However,
       the three LEAs did not use average daily balance data to calculate interest earned on
       Federal cash balances. Instead, the LEAs calculated interest based on the month-end
       balances for individual programs and, as a result, only calculated estimates of the interest
       earned. Use of month-end balances may understate or overstate the actual interest earned
       by the LEA. Using average daily balances to calculate interest is the generally accepted
       method among financial institutions. This method provides a more accurate interest
       calculation than using month-end balances because it factors in the daily fluctuations in
       an LEA’s cash balance resulting from cash receipts and disbursements.

       To illustrate the inaccuracy of the LEAs’ method, we analyzed average daily cash
       balances that one LEA was able to provide for the Title I Program for two separate
       months. When compared to the interest calculated using average daily balances, our
       analysis found that estimates of monthly interest earnings using the LEA’s month-end
       balances either overstated or understated the earnings for individual months because of
       the timing of cash receipts and disbursements during each month. We determined that
       using the month-end cash balances to calculate interest overstated this LEA’s estimated
       interest earnings for July 2005 by nearly $6,600, and understated interest earnings by
       nearly $5,400 in June 2006.

       To determine actual interest earnings, LEAs should calculate interest earned on Federal
       cash advances using the same methodology used to calculate their overall interest
       earnings (i.e., average daily balance method). However, we recognize that some LEAs
       may not have the information available or capacity to determine average daily balances
       and, thus, using this method may not be feasible or may be cost prohibitive.

   •   Improper Netting of Interest. Two of the three LEAs inappropriately reduced the interest
       amount due to ED for SFY 2005-06. The LEAs calculated negative interest amounts in
       months in which the LEA did not have adequate program cash available to pay program
       costs (i.e., a cash shortfall existed at month-end). They combined the months with
       positive month-end cash balances with the months that had negative balances (“netting”)
Final Report
ED-OIG/A09H0020                                                                                     Page 24 of 56

         to determine the amount of interest earned for the year. This practice reduced the interest
         earnings reported or remitted to CDE. 24

         Federal law and regulation do not contain provisions for compensating LEAs for the
         temporary use of cash from other available resources to pay program costs when program
         cash shortfalls exist. The two LEAs’ practice of netting interest resulted in incorrect
         determinations that interest earnings for the SFY were zero (or negative). Fiscal staff at
         one LEA told us that they were not aware that the netting of interest was contrary to the
         Federal interest requirement. Fiscal staff at the other LEA stated that they netted interest
         to compensate for the interest earnings lost in its investment account caused by CDE not
         making Federal program funds available during all or part of the year.

     •   Incorrect Data Used. LEAs should use actual cash held in accounts at the County
         Treasury (Cash in County Treasury) 25 to perform interest calculations. They should not
         use expenditure data for interest calculations because expenditures include amounts that
         the LEAs have recognized as expenses but have not yet issued payments (i.e., accrued
         expenses). These recorded expenditures may not impact a program’s cash account (cash
         disbursement) for weeks or even months. Use of expenditure data to calculate interest
         earnings would typically result in a lower amount of interest earned than if calculated on
         the Cash in County Treasury balance.

         Two of the three LEAs appropriately used cash data. However, the remaining LEA
         incorrectly used expenditure data to perform its calculations and remitted interest to CDE
         based on the incorrect data. When we reviewed Cash in County Treasury data provided
         by this LEA, we determined that its use of expenditure data understated interest earnings
         for the Title I Program by over 55 percent. Combined with other errors made by the LEA
         when calculating interest earnings, we estimated that it should have remitted about
         $59,000 for the Title I Program rather than the $33,113 it did remit for SFY 2005-06. 26

     •   Inappropriate Interest Rate Used. Because Federal regulation requires LEAs to “remit
         interest earned on advances,” LEAs should use the actual rate earned on funds held in
         their respective County Treasurer’s investment pool. We found that two of the three
         LEAs used an incorrect rate to perform their SFY 2005-06 interest calculations. To
         calculate interest earnings, fiscal staff at the two LEAs used the estimated fourth-quarter
         interest rate provided by the COE because the actual rate was not available at year-end
         when the LEA closed its books. The estimated rate happened to be the same as the actual
         third-quarter rate that year. When the actual fourth-quarter became available, the LEAs
         should have used the actual rate to adjust their calculations and remitted any additional
         interest, if applicable. Since the estimated rate used was lower than the actual rate, the
         two LEAs underestimated the amount earned.

24
  The third LEA that had remitted interest did not reduce interest earnings by negative monthly amounts in
SFY 2005-06, but informed us that the LEA began netting interest in SFY 2006-07 after consulting with its IPA.
25
 The CSAM defines “Cash in County Treasury” as a balance sheet account for cash balances on deposit in the
County Treasury for the various funds of the LEA.
26
  The LEA also incorrectly used expenditure data to calculate and remit interest for the ESEA Title II Part D
Education Technology Program in SFY 2005-06.
Final Report
ED-OIG/A09H0020                                                                                        Page 25 of 56

       •   Payments Not Remitted Quarterly. Federal regulation states that LEAs are to remit
           interest “promptly, but at least quarterly.” The three LEAs only remitted once for interest
           earned during SFY 2005-06.

       •   Interest Earnings Not Remitted on All Federal Programs. One of the three LEAs had
           procedures to calculate and remit interest earned on advances across all Federal programs
           as part of its SFY 2005-06 year-end fiscal closing process. However, the other two LEAs
           did not remit interest for all the Federal education programs in which the LEAs had
           earned interest.

           One of the two LEAs calculated interest earnings for each Federal program, but only
           remitted interest if it received an invoice from CDE. The LEA had reported interest
           earnings for its Title III Program on an expenditure report and subsequently remitted the
           interest upon receipt of the invoice. Since it had not received any other invoices from
           CDE, the LEA did not remit interest earned for other Federal programs, despite having
           calculated these amounts. We estimated that the LEA should have remitted nearly
           $12,000 for interest earned in SFY 2005-06 for three of the four programs we reviewed in
           detail.

           The other LEA only remitted interest for two Federal programs that had single audit
           findings for SFY 2005-06, even though the LEA had determined that interest was earned
           on other Federal programs. Combined with other errors the LEA made when calculating
           interest earnings, we estimated that the LEA should have remitted over $87,000 more for
           the four reviewed programs.

       •   Calculation Error. One LEA miscalculated the amount of interest earned on multiple
           programs by using the incorrect number of days in some months when the LEA
           computed the interest rate to apply to the month-end cash balances. In addition, the LEA
           understated the Title I ending cash balance for June 2006. In conjunction with its use of
           an incorrect rate in the fourth-quarter of SFY 2005-06, these errors resulted in an
           estimated underpayment of interest of about $16,000 for the four reviewed programs.

To ensure that LEAs calculate interest correctly and promptly remit interest earned on all Federal
cash advances, CDE needs to provide guidance to LEAs that addresses the noted deficiencies.
CDE should also include steps to confirm LEA compliance with the interest requirement when it
performs its periodic categorical program monitoring visits to LEAs since IPAs may not be
covering the requirement in LEA single audits.

We estimated that the nine reviewed LEAs earned Federal interest totaling about $937,000 in
SFY 2005-06 for the four reviewed programs. Only two LEAs remitted interest totaling
$208,581, or about 22 percent of the total estimated amount due from the nine LEAs. 27 We
estimated that the nine LEAs owe ED about $729,000 resulting from their incorrect calculations
or failure to calculate or remit interest. Our estimate of interest earnings for the nine LEAs and
our calculation methodology can be found in Enclosure 2.



27
     Interest remitted by a third LEA was for the Title III Program, which we did not review in detail at the LEA.
Final Report
ED-OIG/A09H0020                                                                                 Page 26 of 56

County Offices of Education Could Help CDE
Implement Cash Management Procedures and
Ensure LEAs Comply with Interest Requirement

There are 58 COEs statewide, which are required by California State law to provide fiscal
oversight of school districts within their respective county. With about 1,000 school districts
statewide, COEs could help CDE implement cash management procedures (addressed in Finding
No. 1) and ensure LEA compliance with the Federal interest requirement. Instead of collecting
information on cash balances and interest remittances from school districts separately, CDE
should consider exploring the capacity of COEs to assist in these efforts.

COEs Have Access to Cash Data for Many LEAs

Our work in three counties found that the COEs can either extract cash data from many school
districts’ accounting systems, or request districts to provide the desired data. Collecting the data
from the COEs would ease the administrative burden on school districts and provide information
CDE can use to assess LEAs’ immediate cash needs prior to disbursing Federal cash advances.
Information on LEA cash balances would also help CDE to monitor whether LEAs remit interest
earned on the balances, as required by regulation.

COEs Could Help LEAs Identify and
Remit Federal Interest Earnings

An OIG audit in Los Angeles USD, as well as our current work at CDE and selected LEAs,
identified the following three ways that COEs may be able to help CDE ensure that LEAs
comply with the Federal interest requirement:

     •   Actual Interest Earned on Federal Cash Balances. COEs may be able to help LEAs
         identify actual interest earned on Federal cash balances. As addressed in our audit report
         on Los Angeles USD’s procedures for calculating interest, 28 the respective COE’s
         financial reporting system allows educational agencies within the County to use subfunds
         within their General Fund to separately identify the cash balances for Federal programs
         as long as non-Federal programs are not included in the same subfund. There is no
         regulatory or ED requirement that requires states or LEAs to return interest earned on
         Federal funds on a program-by-program or grant-by-grant basis. Under the subfund
         concept, COE reports could contain the information LEAs need to determine and remit
         the actual interest earned on all Federal cash advances.

     •   Consolidation of LEA Interest Remittances. CDE could explore the feasibility of having
         the COE consolidate interest earnings for the LEAs within their jurisdiction and remit
         interest earnings on the LEAs’ behalf. Our review of LEA interest payments statewide
         found that some LEAs sent separate checks for individual programs, and other LEAs
         included payments for multiple programs in a single check. Consolidating interest
         payments at the COE would reduce the volume of interest remittances to CDE, as well as

28
  Los Angeles Unified School District’s Procedures for Calculating and Remitting Interest Earned on Federal Cash
Advances (ED-OIG/A09H0019, December 2, 2008).
Final Report
ED-OIG/A09H0020                                                                                        Page 27 of 56

          the administrative burden associated with processing and remitting interest payments to
          ED.

      •   LEA Certification of Compliance with Interest Requirement. CDE could require LEAs
          to confirm that they have the proper procedures in place and are remitting interest as
          required by Federal regulation. To ensure consistency and coverage of all Federal
          programs, the annual financial report that LEAs submit to their COE may be an
          appropriate mechanism for LEA certification. 29

Recommendations

We recommend that the Chief Financial Officer require CDE to—

2.1       Clearly and consistently communicate the Federal interest requirement at
          34 C.F.R. § 80.21(i) to LEAs, and reinforce the requirement’s applicability to all Federal
          education programs. To ensure they receive consistent and complete information across
          programs, CDE should also include appropriate information on the interest requirement
          in its accounting and/or financial management guidance distributed to LEAs, such as in
          the California Schools Accounting Manual.

2.2       Develop and disseminate guidance to LEAs on the proper method for calculating and
          frequency for remitting interest. To ensure that LEAs calculate interest correctly and
          remit interest earned on all Federal cash advances promptly, the guidance should include
          instructions specifying that (1) the netting of interest is not allowed, (2) interest should be
          calculated using Cash in County Treasury data, and (3) interest must be remitted
          promptly and at least quarterly in accordance with the applicable regulations.

2.3       Ensure that the nine reviewed LEAs (1) correct the noted deficiencies, (2) calculate
          interest on Cash in County Treasury correctly, and (3) remit interest earned in
          SFY 2005-06 and in subsequent years across all Federal education programs. We
          estimated that these LEAs owe ED about $729,000 for interested earned in SFY 2005-06
          for the four programs reviewed in detail, as shown in Enclosure 2.

2.4       Ensure that all LEAs within the State have calculated interest correctly and remitted
          interest earned in SFY 2005-06 and in subsequent years across all Federal education
          programs. CDE could work with the California State Controller’s Office to ensure the
          LEAs’ next single audit addresses LEA compliance with the Federal interest requirement,
          including correct interest calculations for all Federal cash advances and remittances for




29
  State education law requires each school district to submit an annual financial statement of the district’s receipts
and expenditures for the preceding SFY to the respective COE by September 15. After verifying the mathematical
accuracy of the districts’ statements, the COE must transmit a copy of the financial statements to CDE by
October 15.
Final Report
ED-OIG/A09H0020                                                                                     Page 28 of 56

         interest earned in SFY 2005-06 and subsequent years. We estimated that LEAs earned
         about $11 million in interest statewide in SFY 2005-06 for the Title I Program alone. 30

2.5      Absent assurance of adequate single audit coverage, include steps in its categorical
         program monitoring process to review LEA compliance with the interest requirement,
         including the LEAs’ methodology for computing interest earnings. To review
         compliance across all Federal programs, CDE could add appropriate procedures to the
         cross-cutting section of its monitoring protocol.

We further recommend that the Chief Financial Officer encourage CDE to—

2.6      Explore the potential for enlisting the assistance of COEs and their capacity to collect
         cash data to help CDE implement cash management procedures and ensure LEA
         compliance with the Federal interest requirement. COEs could facilitate and ease the
         administrative burden associated with collecting cash information on cash balances,
         identifying interest earnings, and processing interest remittances.

CDE Comments and OIG Response

In addition to the overall comments summarized at the end of Finding No. 1, CDE provided
comments and described the corrective actions already taken or planned for each of our
recommendations in this finding. Where we believe the stated corrective actions did not
sufficiently address a recommendation, we provide our response below. We have not modified
our recommendations based on CDE’s comments.

•     Recommendation 2.1. CDE identified three corrective actions already taken or to be
      considered. First, CDE referred to the Federal interest requirements included as standard
      language in various program funding correspondence, as noted in our report. Second, on
      December 24, 2008, CDE finalized a written communication on the applicability of the
      Federal requirements for interest earned on Federal funds to further remind LEAs to calculate
      interest correctly and remit interest earned on Federal cash advances promptly. Third, CDE
      plans to explore incorporating references to the Federal interest requirement in other written
      guidance, such as CSAM and the audit guide used by IPAs conducting single audits of LEAs.

      OIG Response: In addition to the second and third corrective actions above, CDE needs to
      ensure that the Federal interest requirements included as standard language in program
      funding correspondence is consistent and complete across all programs. Based on
      deficiencies noted in our review, some programs will need to modify their correspondence to
      convey consistent information on where and how often to remit interest. The program
      funding correspondence should be consistent with the information in CDE’s written
      correspondence of December 24, 2008, regarding interest earned on Federal funds.

30
   We estimated statewide interest earnings for the Title I Program by multiplying the FY 2005-06 Title I allocations
for all LEAs statewide ($1,652,080,458) by the “composite interest earnings percentage” derived for the nine LEAs
reviewed. To obtain the “composite interest earnings percentage,” we divided the total interest earnings that we
estimated for the nine LEAs ($858,152) by the total FY 2005-06 Title I allocations for the same nine LEAs
($134,306,028). CDE records did not always identify the program or applicable SFY associated with LEA interest
remittances. As a result, our statewide interest estimate has not been adjusted for interest earnings that LEAs have
already remitted to CDE.
Final Report
ED-OIG/A09H0020                                                                      Page 29 of 56

•   Recommendation 2.2. CDE stated that its December 24, 2008, correspondence on interest
    earned on Federal funds: (1) specifies the Federal interest requirements; (2) prohibits
    reducing or offsetting Federal interest earnings for the temporary use of non-Federal cash
    resources for Federal programs (netting); and (3) advises school district and charter school
    business officials to coordinate with their COEs in developing internal controls and a sound
    methodology to, at least quarterly, calculate and return interest over $100 to the U.S.
    Treasury via CDE.

    OIG Response: In addition to the above corrective action, CDE needs to provide more
    detailed guidance to LEAs and COEs on appropriate methodologies for calculating interest
    earned on Federal funds. The guidance should articulate standards applicable to all LEAs.
    For example, interest should be calculated using Cash in County Treasury data, the correct
    interest rate, and the appropriate number of days in the calculation period. While three
    reviewed LEAs and our estimates of interest earnings used month-end cash balances, average
    daily balance data (if available) would provide a more accurate interest calculation.
    Moreover, internal controls should include steps to ensure that LEA interest calculations are
    accurate and interest is remitted timely.

•   Recommendation 2.3. CDE plans to follow up with the nine reviewed LEAs on the
    corrective actions taken to address our reported deficiencies. Follow-up will include
    obtaining from the LEAs: (1) specific corrective actions taken; (2) interest calculation
    methodologies used; and (3) the amount of interest due and remitted for SFYs 2005-06
    through 2008-09.

•   Recommendation 2.4. CDE stated that it is exploring and considering the feasibility of
    options within limited available resources, including developing new single audit procedures,
    to obtain assurance that LEAs properly calculated and remitted interest on Federal funds
    during SFY 2005-06 and subsequent years across all Federal education programs. CDE also
    cited its correspondence of December 24, 2008, regarding interest earned on Federal funds,
    as a corrective action to ensure LEAs correctly calculate interest earnings.

•   Recommendation 2.5. CDE plans to develop and implement fiscal review processes that will
    strengthen the cross-cutting funding dimensions of categorical program monitoring and
    ensure LEAs are in compliance with Federal interest requirements. CDE is also considering
    new cash management monitoring during SFY 2008-09 that will entail high-level verification
    of LEAs’ reported quarterly Federal cash balances. If significant amounts of unspent Federal
    program funds are identified through this process, the sub-recipient may be required to:
    (1) submit a disbursement plan with the timeline for spending the funds on hand; (2) explain
    the need for additional funding; and (3) communicate the disposition of interest earned on
    unspent program funds.

•   Recommendation 2.6. CDE cited its written communication of December 24, 2008,
    encouraging district and charter school officials to coordinate with their COEs in developing
    internal controls and sound methodologies to calculate and return, at least quarterly, interest
    earned in excess of $100 on Federal program funds.
Final Report
ED-OIG/A09H0020                                                                    Page 30 of 56

   OIG Response: We believe that CDE needs to be more proactive in exploring the potential
   for COE involvement in cash management activities. In addition to encouraging LEAs to
   coordinate with their respective COE, CDE could solicit input and suggestions from all
   COEs about their capacity to collect cash data and assist LEAs throughout their respective
   counties in determining and remitting interest earned on Federal cash balances. CDE could
   also collect and disseminate information on best practices, such as in Los Angeles County
   where the COE’s financial reporting system allows educational agencies within the county to
   use subfunds to separately identify cash balances for Federal programs.

We have not modified the finding, except to update our interest estimates based on corrected
Title I cash balance data provided by one LEA.
Final Report
ED-OIG/A09H0020                                                                                  Page 31 of 56




                    OBJECTIVES, SCOPE, AND METHODOLOGY


The purpose of the audit was to review CDE’s process for disbursing Federal education funds to
LEAs. Our audit objectives were to: (1) determine whether CDE’s method for disbursing funds
to LEAs complies with applicable Federal laws, regulations, and other cash management
requirements; and (2) assess the impact that CDE’s disbursement method has on the amount of
Federal cash on hand at LEAs, including the use of cash from other resources to pay Federal
education program costs and the earning of interest on Federal cash balances. Our audit focused
on FY 2005-06 funding for eight Federal programs that were among the nine largest Federal
elementary and secondary education programs, based on CDE grant amounts received during
SFY 2005-06. 31 The eight programs were authorized by three statutes. The following list
includes the Catalog of Federal Domestic Assistance number and abbreviated program name:

     •   Elementary and Secondary Education Act of 1965, as amended (ESEA)
             Title I, Part A, Basic Grants to LEAs (84.010 Title I)
             Title I, Part B, Subpart 1, Reading First State Grants (84.357 Reading First)
             Title II, Part A, Improving Teacher Quality State Grants (84.367 Title II)
             Title III, English Language Acquisition State Grants (84.365A Title III)
             Title IV, Part A, Safe and Drug-Free Schools and Communities: State Grants
                 (84.186 Title IV)
             Title IV, Part B, 21st-Century Community Learning Centers (84.287 21st CCLC)
     •   Individuals with Disabilities Education Act, as amended (IDEA)
             Part B, Special Education—Grants to States (84.027 Special Education)
     •   Carl D. Perkins Vocational and Technical Education Act of 1998 (Perkins Act)
             Vocational Education—Basic Grants to States
                 (84.048A Vocational Education)

To address our audit objectives at the State level, we interviewed CDE program and fiscal
administrators and staff responsible for (1) overseeing each of the eight reviewed programs and
making LEA funding decisions, (2) releasing LEA funding results to the State Controller’s
Office for payment, and (3) processing and remitting LEA interest payments to ED. We also
interviewed CDE fiscal and audit managers, as well as representatives from the California
Department of Finance and the Legislative Analyst’s Office, about the State budget process as it
relates to the disbursement of Federal education funds to LEAs. We assessed CDE internal
controls (policies, procedures, and guidance provided to LEAs) regarding each program’s
(1) method and schedule for disbursing Federal funds, (2) activities to assess LEA funding needs
prior to disbursements, and (3) efforts to ensure LEAs remit interest earned on Federal funds.
We also assessed CDE policies and procedures for the receipt, processing, and remittance of
LEA interest payments to ED.



31
  Source: State of California: Internal Control and State and Federal Compliance Audit Report for the Fiscal Year
Ended June 30, 2006 (single audit report).
Final Report
ED-OIG/A09H0020                                                                       Page 32 of 56

To gain an understanding of the breadth of cash management issues at CDE, we reviewed State
of California single audit reports for SFY 2002-03 through SFY 2006-07. We also coordinated
our efforts with ED’s Risk Management Team, which has been working with CDE on these
issues for several years. To further understand CDE procedures for disbursing FY 2005-06
Federal funds, we reviewed the auditors’ working papers that describe CDE internal controls for
four of our reviewed programs (Special Education, Title I, Title II, and Title III) and support
cash management findings on the three ESEA programs. Based on our State-level work, we
selected the Title I, Title II, Title IV, and Special Education programs for more detailed work at
the local level. The four programs represent a mix of programs that had and had not
implemented procedures to assess LEA funding needs prior to CDE’s disbursement of
FY 2005-06 funds. The programs also provide a mix of other risk factors and attributes,
including (1) the number of subgrantees, (2) elapsed time between the start of the SFY and the
first disbursement date, (3) single audit coverage and cash management findings, and (4) CDE
designation of the funding process as an apportionment or grant.

At the local level, we judgmentally selected Fresno, Los Angeles, and Sacramento Counties,
which were among the largest counties in California based on 2005-06 enrollment. These
counties also included a significant number of school districts of diverse size within county
boundaries, and were located in different regions of the State.

Within each county, we judgmentally selected two to three school districts that participated in
the four programs selected for more detailed review. The eight selected districts represent a mix
of (1) enrollment size relative to other school districts in the county, (2) membership in a single-
or multi-district SELPA, (3) positive and negative program cash balances from COE data where
available, (4) overall financial condition from fiscal reports submitted to the State Controller’s
Office, and (5) interest remittances to CDE or lack thereof. We also selected an additional
school district for a focused review of the Title I Program because COE records indicated that
the district had significant balances of program cash on hand and CDE records indicated the
district had not remitted any interest. We excluded from our LEA selection universe the COE,
charter school LEAs, and school districts under State receivership. Additionally, we excluded
the Los Angeles USD where the OIG was conducting a separate audit of the district’s method for
calculating interest earned on Federal cash advances. To solicit LEA officials’ views on a
change in the disbursement method for the Vocational Education Program subsequent to our
audit period, we included unified and high school districts in the universe and excluded
elementary school districts. Based on the factors described above, we selected for local-level
work the nine school districts listed in the table below.
Final Report
ED-OIG/A09H0020                                                                           Page 33 of 56

                                 LEAs Selected for Local-Level Work
                                                  No. of
          LEA                    2005-06        Districts in   Special Education Local Planning Area
  (Geographic Location)         Enrollment      County or                  Membership
                                                LEA Size
Fresno County (Central California)
Countywide Totals              192,528              35
 Fresno USD                     79,046          Large          Single-district SELPA
 Parlier USD                     3,867          Medium         Member of Fresno County SELPA
 Sierra USD                      2,435          Small          Member of Fresno County SELPA
Los Angeles County (Southern California)
Countywide Totals            1,708,064              86
 Long Beach USD                 93,589          Large          Single-district SELPA
 Glendale USD                   28,002          Medium         Administrative unit for Foothills SELPA
Sacramento County (Northern California)
Countywide Totals              239,026              17
 Elk Grove USD                  60,735          Large          Single-district SELPA
 Center USD                      6,112          Medium         Member of Sacramento County SELPA
 Galt Joint Union HSD            2,251          Small          Member of Sacramento County SELPA
 Sacramento City USD (a)        50,408          Large          Not applicable
(a) Selected for focused review of the Title I Program only.



At each county, we interviewed COE fiscal staff about the COE’s role and responsibilities
regarding CDE’s disbursement of Federal funds to LEAs, interest earnings on Federal education
funds, the availability of countywide data on LEA cash balances for Federal education programs,
and the overall financial condition of LEAs within county boundaries. We also interviewed
County Treasurer officials in Fresno and Sacramento Counties on these same topics. We did not
contact the Los Angeles County Treasurer because we had obtained sufficient information from
the COE.

At eight LEAs, we interviewed LEA program administrators and staff responsible for overseeing
the four programs selected for more detailed review and the Vocational Education Program. We
also interviewed fiscal staff responsible for accounting for the receipt and disbursement of, and
calculation of interest earned on, Federal funds. We solicited LEA officials’ views on the fiscal
and programmatic impact of CDE’s methods for disbursing Federal funds, and the change from
the advance payment method to reimbursement for the Vocational Education Program. We
analyzed monthly cash reports generated by the LEA’s accounting system for SFY 2005-06 to
assess the fiscal impact of CDE disbursements (timing and amounts) on program cash balances.
For the four school districts that are members of multi-district SELPAs, we performed similar
work at the applicable SELPA that is the LEA for the Special Education Program (Fresno COE
for Parlier USD and Sierra USD, and Sacramento COE for Center USD and Galt Joint Union
HSD). At Sacramento City USD, our work was focused only on the Title I Program.

We assessed the reliability of computer-generated data at CDE and concluded that the data were
sufficiently reliable to use for (1) assessing disbursement schedules for FY2005-06 funding,
(2) identifying our LEA universe and selecting LEAs for local level work, and (3) testing CDE
Final Report
ED-OIG/A09H0020                                                                     Page 34 of 56

internal controls for processing and remitting LEA interest payments to ED. Specifically, we
assessed statewide data files that the CDE program office and/or School Fiscal Services Division
provided in support of funding decisions for the eight reviewed programs by performing the
following three steps. First, we verified the disbursement schedule (dates and percent of LEA
entitlement or grant award released in each disbursement) with information provided by program
and School Fiscal Services Division officials during interviews and in written policies,
procedures, and guidance to LEAs. Second, we confirmed that the data provided by both the
program office and School Fiscal Services Division were consistent, where applicable. Third,
we confirmed that the data were consistent with funding results published on CDE’s website,
where applicable. We also assessed the statewide interest payments database maintained by
CDE’s Accounting Office. We verified that CDE had received and processed interest payments
identified by the nine selected LEAs and Los Angeles USD as having been remitted to CDE
between July 1, 2005 and the time of our review. We also verified that ED had received the
checks covering all LEA interest payments, which CDE records indicated were remitted to ED
between October 2006 and August 2007. At the selected LEAs, we also confirmed CDE’s
disbursement dates and amounts for the four programs reviewed in more detail. We also
confirmed LEA-reported expenditures, which CDE program offices used to assess LEA funding
needs prior to disbursement of Title II and Special Education program funds.

At each selected LEA, we assessed the reliability of SFY 2005-06 cash data that the LEA had
extracted from its accounting system by verifying Federal revenue amounts and receipt dates
during the year for the four reviewed programs. We did not confirm the accuracy of beginning
cash balances for the year or expenses on the monthly cash reports. Based on our assessment,
we concluded that the data were sufficiently reliable for use in describing the fiscal impact of
CDE’s disbursement methods and estimating interest earnings on cash balances.

We performed our on-site work at CDE headquarters in Sacramento, as well as County and
district offices in Sacramento County (Sacramento, Antelope, Elk Grove, and Galt), Fresno
County (Fresno, Parlier, and Prather), and Los Angeles County (Downey, Glendale, and Long
Beach), California. We held an exit briefing with CDE officials on July 29, 2008. We
conducted this performance audit in accordance with generally accepted government auditing
standards appropriate to the scope of the review described above.
Final Report
ED-OIG/A09H0020                                                                                       Page 35 of 56

          Enclosure 1: CDE Disbursement and Cash Management
          Procedures for FY 2005-06 Funding for Eight Programs
For the eight programs reviewed, CDE used an advance payment method to disburse
FY 2005-06 Federal program funds to LEAs. For each program, this enclosure provides
information on: (1) CDE’s funding process (apportionments or grants); (2) amount of
FY 2005-06 Federal funding available for pass-through to LEAs; (3) number of LEA
subgrantees; (4) funding period (beginning and ending dates of the LEA subgrant); (5) period
that the funds remained available for LEA use; 32 (6) disbursement schedule, including the
number of disbursements, whether CDE had procedures to assess LEA funding needs prior to
disbursement and an applicable procedure number, proportion of LEA’s entitlement or grant
award disbursed, and disbursement dates; and (7) if applicable, program office procedures for
reviewing LEA-reported expenditure or attendance data (procedure number corresponds to the
procedure number shown in the disbursement schedule).


                          ESEA, Title I, Part A, Basic Grants to LEAs
                                         (84.010 Title I)
Funding Process:              Apportionments
Federal Funding Available for
                              $1,687,716,960
Pass-Through:
Number of LEA Subgrantees:    1,156
Funding Period:               7/1/2005 to 9/30/2006 (15 months)
Period of Availability:       7/1/2005 to 9/30/2007 (27 months)
                                Apportionment             Percent of LEA                       CDE Disbursement
Disbursement Schedule:
                                       No.                 Entitlement                               Date
                                         1                      40%                              11/16/2005
 For Most LEAs                           2                      40%                               3/29/2006
 (3 disbursements)                                              20%
                                         3                                                            6/2/2006
                                                        Final Disbursement
 For Small No. of LEAs                   4                     100%                                  9/15/2006
 (1 disbursement)                        5                     100%                                  3/15/2007
Procedures to Assess LEA
Funding Needs Prior to        None.
Disbursement:




32
  Under the “Tydings Amendment,” § 421(b) of the General Education Provisions Act, 20 U.S.C. § 1225(b), any
funds not obligated and expended during the period for which they were awarded become carryover funds and may
be obligated and expended during the succeeding fiscal year. For the program information presented in this
enclosure, a period of availability that was greater than the funding period is due to the LEA being able to carry over
program funds for use in the next fiscal year under the “Tydings Amendment.” For each program, CDE determined
both the funding period and the period the funds remained available for LEA use.
Final Report
ED-OIG/A09H0020                                                                            Page 36 of 56

                    ESEA, Title I, Part B, Subpart 1, Reading First State Grants
                                       (84.357 Reading First)
Funding Process:                  Grants
Federal Funding Available for
                                  $145,274,000
Pass-Through:
Number of LEA Subgrantees:        121 (all cohorts) (a)
Funding Period:                   For Cohort No. 3: 7/1/2005 to 8/31/2006 (14 months)
Period of Availability:           For Cohort No. 3: 7/1/2005 to 8/31/2007 (26 months)
                                                   Procedure to                           CDE
Disbursement Schedule:              Payment                         Percent of LEA
                                                    Assess LEA                        Disbursement
(4 disbursements)                      No.                           Grant Award
                                                   Funding Need                           Date
                                   1 – Batch 1          None             25%           10/29/2005
                                   2 – Batch 1           (1)             25%            5/22/2006
                                   3 – Batch 2                                          6/21/2006
  For Most Cohort No. 3 LEAs       3 – Batch 3           (2)             25%             8/8/2006
                                   3 – Batch 4                                           9/6/2006
                                                                         25%
                                   4 – Batch 8           (3)                            3/30/2007
                                                                      Final Disbursement
                                   The program office processed disbursements in batches (per Batch
                                   No.) based on when LEAs submitted required documents. Delays in
                                   LEA submission delayed the LEA’s next disbursement. Batch
                                   numbers above correspond to disbursements for Cohort No. 3 LEAs.

                                     Program funding threshold: An LEA must have actually expended
                                     75 percent of funds previously advanced to receive its next
                                     disbursement. LEA funding needs were not assessed prior to the first
                                     disbursement (Payment No. 1).
                                     (1) To receive a second disbursement, an LEA must have met the
                                         funding threshold based on actual expenditures as of 2/28/2006,
                                         as reported on its 1st Interim Expenditure Report due March 2006;
Procedures to Assess LEA
                                         when the threshold was met, the LEA received a disbursement
Funding Needs Prior to
                                         (Payment No. 2).
Disbursement:
                                     (2) To receive a third disbursement, an LEA must have met the
                                         funding threshold based on actual expenditures as of 6/30/2006,
                                         as reported on its 2nd Interim Expenditure Report due July 2006;
                                         when the threshold was met, the LEA received a disbursement
                                         (Payment No. 3, Batches 2 through 4).
                                     (3) To receive its final disbursement, an LEA must have met the
                                         funding threshold based on actual expenditures as of 8/31/2006,
                                         as reported on its End of Year Expenditure Report due when the
                                         grant award has been expended but no later than September 2006;
                                         when the threshold was met, the LEA received a final
                                         disbursement up to 25 percent of its grant award based on final
                                         expenditures (Payment No. 4).
(a) At the time of our review, CDE had awarded three-year Reading First grants to LEAs in four cohort
    groups. The beginning of each cohort’s funding cycle was different, ranging from June 1 to
    September 1. We limit our presentation to the LEAs in Cohort No. 3 and the disbursement schedule
    applicable to most of these LEAs. Cohort No. 3 LEAs were in the second year of their grant, and the
    start of their funding cycle corresponded to the beginning of the SFY.
Final Report
ED-OIG/A09H0020                                                                         Page 37 of 56

                  ESEA, Title II, Part A, Improving Teacher Quality State Grants
                                           (84.367 Title II)
Funding Process:                 Apportionments
Federal Funding Available
                                 $324,382,000
for Pass-Through:
Number of LEA Subgrantees: 1,207
Funding Period:                  7/1/2005 to 9/30/2006 (15 months)
Period of Availability:          7/1/2005 to 9/30/2007 (27 months)
Disbursement Schedule:
                                                    Procedure to                            CDE
(3 disbursements for Group A     Apportionment                     Percent of LEA
                                                     Assess LEA                         Disbursement
LEAs, and 2 disbursements for          No.                          Entitlement
                                                    Funding Need                            Date
Group B LEAs)
                                        1                 (1)           40%               3/21/2006
  For Group A LEAs
                                        2                None           40%               1/18/2007
  For Group B LEAs                                         (2)
                                        3                               80%               3/15/2007
  (most LEAs)                                            None
  For Groups A and B LEAs               4                 (3)           20%                6/6/2007
                                                                   Final Disbursement
 For some LEAs                        5                 (4)           Various %           9/17/2007
                                                                   Final Disbursement
                               Program funding threshold: An LEA must have expended or
                               encumbered 80 percent of its prior-year entitlement, or funds received
                               to date, to receive some disbursements.
                               (1) An LEA must have met the funding threshold based on year-to-date
                                   expenditures and encumbrances related to its prior-year
                                   entitlement, as reported on the 2005-06 ConApp Part I due
                                   6/30/2005 and Part II due 1/31/2006; if the threshold was met, the
                                   LEA received its first disbursement (Apportionment No. 1) and
                                   automatically received its second disbursement (Apportionment
                                   No. 2). (Group A LEAs)
                               (2) If the funding threshold was not met during the initial assessment
                                   (Group B LEAs), the procedure was to review year-to-date
                                   expenditures and encumbrances related to the LEA’s prior-year
                                   entitlement, as reported on the next ConApp; if the threshold was
                                   met, the LEA would receive its first disbursement (Apportionment
Procedures to Assess LEA
                                   No. 3). For FY 2005-06, the program office did not follow its
Funding Needs Prior to
                                   procedure for the Group B LEAs because of staff turnover and over
Disbursement:
                                   a year having passed since the Group A LEAs had received
                                   Apportionment No. 1.
                               (3) To receive its final disbursement, an LEA must have met the
                                   funding threshold based on expenditures and encumbrances as of
                                   3/31/2007 for funds received to date, as reported on the 2006-07
                                   ConApp Part II due 1/31/2007; if the threshold was met, the LEA
                                   received a final disbursement (Apportionment No. 4). (Groups A
                                   and B LEAs)
                               (4) If the funding threshold was not met, the program office reviewed
                                   expenditures and encumbrances as of 9/30/2007 for funds received
                                   to date, as reported on the subsequent ConApp (2007-08 ConApp
                                   Part I due 6/30/2007); if the threshold was met, the LEA received
                                   its final disbursement (Apportionment No. 5). Percent of LEA’s
                                   entitlement disbursed varied, depending on the amount of funds
                                   received to date.
Final Report
ED-OIG/A09H0020                                                                         Page 38 of 56

                    ESEA, Title III, English Language Acquisition State Grants
                                         (84.365A Title III)
Funding Process:                Apportionments
Federal Funding Available for
                                $150,550,536
Pass-Through:
Number of LEA Subgrantees: 587
Funding Period:                 7/1/2005 to 9/30/2006 (15 months)
Period of Availability:         7/1/2005 to 9/30/2007 (27 months)
                                                   Procedure to                             CDE
                                Apportionment                     Percent of LEA
Disbursement Schedule:                              Assess LEA                          Disbursement
                                       No.                          Entitlement
                                                   Funding Need                             Date
                                        1                (1)            40%                6/8/2006
 For Most LEAs                          2               none            40%               6/20/2006
 (3 disbursements)                                                      20%
                                        3                (2)                              9/15/2006
                                                                   Final Disbursement
 For Small No. of LEAs                4                 (3)           Various %           3/29/2007
                                                                   Final Disbursement
 For Small No. of LEAs                5                 (4)           Various %            9/7/2007
                                                                   Final Disbursement
                               Program funding threshold: An LEA must have expended or
                               encumbered 80 percent of its prior-year entitlement, or funds received
                               to date, to receive some disbursements.
                               (1) An LEA must have met the funding threshold based on year-to-
                                   date expenditures and encumbrances related to its prior-year
                                   entitlement, as reported on the 2005-06 ConApp Part I due
                                   6/30/2005; if the threshold was met, the LEA received its first
                                   disbursement (Apportionment No. 1) and automatically received its
                                   second disbursement (Apportionment No. 2).
                               (2) To receive its final disbursement, an LEA must have met the
                                   funding threshold based on expenditures and encumbrances as of
                                   6/30/2006 related to funds received to date, as reported on the
                                   program’s End of Year Expenditure Report due on or before
                                   10/1/2006; if the threshold was met, the LEA received a final
Procedures to Assess LEA           disbursement (Apportionment No. 3).
Funding Needs Prior to         (3) If the funding threshold was not met during program office reviews
Disbursement:                      in (1) and/or (2) above, an LEA must have met the funding
                                   threshold related to its prior-year entitlement and FY 2005-06
                                   funds received to date (if any), as reported on the program’s
                                   Interim Expenditure Reports or subsequent End of Year
                                   Expenditure Report; if the threshold was met, the LEA received a
                                   disbursement (Apportionment No. 4). Percent of LEA’s
                                   entitlement disbursed varied, depending on the amount of funds
                                   received to date.
                               (4) If the funding threshold was not met during previous reviews
                                   above, the program office reviewed expenditures and
                                   encumbrances reported on Interim Expenditure Report or
                                   subsequent End of Year Expenditure Report; if the threshold was
                                   met, the LEA received a final disbursement (Apportionment 5).
                                   Percent of LEA’s entitlement disbursed varied, depending on the
                                   amount of funds received to date.
Final Report
ED-OIG/A09H0020                                                                      Page 39 of 56

        ESEA, Title IV, Part A, Safe and Drug-Free Schools and Communities: State Grants
                                          (84.186 Title IV)
Funding Process:                  Apportionments
Federal Funding Available for
                                  $39,240,725
Pass-Through:
Number of LEA Subgrantees:        1,016
Funding Period:                   7/1/2005 to 9/30/2006 (15 months)
Period of Availability:           7/1/2005 to 9/30/2007 (27 months)
Disbursement Schedule:              Apportionment          Percent of LEA    CDE Disbursement
(2 disbursements for most LEAs)          No.                  Entitlement           Date
                                                                   40%
 For Most LEAs                             1                                       4/18/2006
                                                          First Disbursement
                                                                   40%
 For Some LEAs                             2                                        6/2/2006
                                                          First Disbursement
                                                                   60%
 For Most LEAs                             3                                       6/19/2006
                                                          Final Disbursement
                                                             60% or 100%
 For Some LEAs                             4                                      10/12/2006
                                                          Final Disbursement
                                                             60% or 100%
 For Small No. of LEAs                     5                                      12/22/2006
                                                          Final Disbursement
                                                             60% or 100%
 For Small No. of LEAs                     6                                       6/13/2007
                                                          Final Disbursement
                                  None.

Procedures to Assess LEA       To receive a disbursement, an LEA must have met program
Funding Needs Prior to         requirements, such as program approval to carry over prior-year funds
Disbursement:                  in excess of statutory limit, and having no outstanding billing
                               requests. Delays in meeting program requirements would delay the
                               LEA’s first or final disbursement.




                ESEA, Title IV, Part B, 21st-Century Community Learning Centers
                                        (84.287 21st CCLC)
Funding Process:                 Grants
Federal Funding Available for
                                 $123,038,972
Pass-Through:
Number of LEA Subgrantees:       216
Funding Period:                  7/1/2005 to 12/31/2006 (18 months)
Period of Availability:          7/1/2005 to 12/31/2006 (18 months)
                                                 Procedure to                         CDE
Disbursement Schedule:             Payment                        Percent of LEA
                                                  Assess LEA                      Disbursement
(6 disbursements)                     No.                           Grant Award
                                                 Funding Need                         Date
                                                                        15%
                                  1 – Batches
                                                      None         Administrative  11/18/2005
                                    1 and 2
                                                                     Entitlement
  For Most LEAs                   2 – Batches
                                                                                   11/18/2005
                                    1 and 2                         First Quarter
                                                       (1)
                                  2 – Batches                        Attendance
                                                                                    12/9/2005
                                    3 and 4
Final Report
ED-OIG/A09H0020                                                                     Page 40 of 56

              ESEA, Title IV, Part B, 21st-Century Community Learning Centers
                                      (84.287 21st CCLC)
                                                              Second Quarter
                                3 – Batch 1          (2)                              2/14/2006
                                                                Attendance
                                                               Third Quarter
                                4 – Batch 1          (3)                              5/12/2006
                                                                Attendance
                                5 – Batch 1                   Fourth Quarter           8/7/2006
                                                     (4)
                                5 – Batch 2                     Attendance            8/21/2006
                                                                Up to 10%
                                6 – Batch 1          (5)                              3/29/2007
                                                               Final Disbursement
                             The program office processed disbursements in batches (per Batch
                             No.) based on when LEAs submitted required documents. Delays in
                             LEA submission delayed the LEA’s next disbursement.

                             LEA funding needs were not assessed prior to the first disbursement
                             (Payment No. 1, Batches 1 and 2).
                             (1) To receive a second disbursement, an LEA must have reported the
                                 actual number of students served for the period 7/1/2005 to
                                 9/30/2005 in its 1st Quarter Attendance Report due 10/31/2005;
                                 the LEA was reimbursed for program services provided to
                                 students based on actual attendance multiplied by a State-
                                 legislated per pupil amount (PPA) (Payment No. 2, Batches 1
                                 through 4).
                             (2) To receive a third disbursement, an LEA must have reported
                                 actual attendance for the period 10/1/2005 to 12/31/2005 in its
                                 2nd Quarter Attendance Report due 1/31/2006; the disbursement
                                 amount was based on actual attendance multiplied by the PPA
                                 (Payment No. 3).
Procedures to Assess LEA     (3) To receive a fourth disbursement, an LEA must have reported
Funding Needs Prior to           actual attendance for the period 1/1/2006 to 3/31/2006 in its
Disbursement:                    3rd Quarter Attendance Report due 4/30/2006; the disbursement
                                 amount was based on actual attendance multiplied by the PPA
                                 (Payment No. 4).
                             (4) To receive a fifth disbursement, an LEA must have reported
                                 actual attendance for the period 4/1/2006 to 6/30/2006 in its
                                 4th Quarter Attendance Report due 7/31/2006; the disbursement
                                 amount was based on actual attendance multiplied by the PPA
                                 (Payment No. 5, Batches 1 and 2).
                             (5) To receive its final disbursement, an LEA must have reported
                                 actual and legally obligated expenditures for the period 7/1/2005
                                 to 12/31/2006 in its Closeout Expenditure Report due 1/31/2007;
                                 the disbursement amount was based on expenditures in excess of
                                 funds received to date, up to 10 percent of and not to exceed the
                                 LEA’s grant award (Payment No. 6).

                             Beginning in the FY 2006-07 funding cycle, the program office
                             changed the disbursement method to quasi-reimbursement whereby
                             LEAs receive an initial advance payment and subsequent
                             reimbursements for quarterly reported expenditures.
Final Report
ED-OIG/A09H0020                                                                        Page 41 of 56

                        IDEA, Part B, Special Education—Grants to States
                                   (84.027 Special Education)
Funding Process:                Grants
Federal Funding Available for
                                $967,188,533
Pass-Through:
Number of LEA Subgrantees:      120
Funding Period:                 7/1/2005 to 9/30/2006 (15 months)
Period of Availability:         7/1/2005 to 9/30/2006 (15 months)
                                                 Procedure to                             CDE
Disbursement Schedule:            Payment                         Percent of LEA
                                                 Assess LEA                          Disbursement
(3 disbursements)                    No.                           Grant Award
                                                Funding Need                              Date
                                1 – Round 1         None                 50%            11/9/2005
                                2 – Round 1           (1)                25%             4/6/2006
                                3 – Round 1                                              8/9/2006
  For Most LEAs                 3 – Round 2                                             9/13/2006
                                3 – Round 3           (2)            Up to 25%        10/19/2006
                                                                  Final Disbursement
                                3 – Round 4                                             12/7/2006
                                3 – Round 5                                           12/18/2006
                                1 – Round 2                                              1/4/2006
                                                     none                50%
                                1 – Round 3                                              2/7/2006
  For Small No. of LEAs         2 – Round 2           (1)                25%             5/1/2006
                                3 – Round 6                          Up  to 25%          2/2/2007
                                                      (2)
                                3 – Round 7                       Final Disbursement    4/13/2007
                               The program office processed disbursements in batches (per Round
                               No.) based on when LEAs submitted required documents. Delays in
                               LEA submission delayed the LEA’s next disbursement.

                                Program funding threshold: None stated. LEA funding needs were
                                not assessed prior to the first disbursement (Payment No. 1, Rounds 1
                                through 3).
                                (1) To receive its second disbursement, our review of the program’s
                                    payment data file determined that the LEAs had expended more
Procedures to Assess LEA            than half of the funds received to date based on actual or legally
Funding Needs Prior to              obligated expenditures as of 2/15/2006, as reported on their
Disbursement:                       Mid-Year Expenditure Report due on or before 3/31/2006; thus,
                                    when the prior disbursement was substantially expended, the LEA
                                    received a second disbursement (Payment No. 2, Rounds 1 and 2).
                                (2) To receive its final disbursement, an LEA must have expended an
                                    amount greater than or equal to disbursements received to date
                                    based on actual expenditures as of 9/30/2006, as reported on its
                                    Final Expenditure Report due on or before 11/30/2006; the LEA
                                    received a final disbursement up to 25 percent of its grant award
                                    based on the final expenditures (Payment No. 3, Rounds 1
                                    through 7).
Final Report
ED-OIG/A09H0020                                                                       Page 42 of 56

                     Perkins Act, Vocational Education—Basic Grants to States
                                  (84.0048A Vocational Education)
Funding Process:                   Grants
Federal Funding Available for
                                   $140,318,604
Pass-Through:
Number of LEA Subgrantees:         441
Funding Process:                   7/1/2005 to 6/30/2006 (12 months)
Period of Availability:            7/1/2005 to 6/30/2006 (12 months)
                                                    Procedure to                             CDE
Disbursement Schedule:               Payment                         Percent of LEA
                                                    Assess LEA                          Disbursement
(2 disbursements)                       No.                           Grant Award
                                                   Funding Need                              Date
                                    1 – Batch 1                                             2/6/2006
                                    1 – Batch 2                                             3/1/2006
  For All LEAs                                         None                75%
                                    1 – Batch 3                                            3/27/2006
                                    1 – Batch 4                                            4/10/2006
  For Most LEAs                     2 – Batch 1                                            8/11/2006
                                    2 – Batch 2                                            8/12/2006
                                                                        Up to 25%
                                    2 – Batch 3         (1)                                9/22/2006
  For Small No. of LEAs                                             Final Disbursement
                                    2 – Batch 4                                            9/25/2006
                                    2 – Batch 5                                           10/31/2006
                                  The program office processed disbursements in batches (per Batch
                                  No.) based on when LEAs submitted required documents. Delays in
                                  LEA submission delayed the LEA’s first or final disbursement.

                                 LEA funding needs were not assessed prior to the first disbursement
                                 (Payment No. 1, Batches 1 through 4).
                                 (1) To receive its final disbursement, an LEA must have expended an
Procedures to Assess LEA
                                     amount greater than or equal to its first disbursement based on
Funding Needs Prior to
                                     actual expenditures as of 6/30/2006, as reported on a Claim
Disbursement:
                                     Document due 7/31/2006; the LEA received a final disbursement
                                     up to 25 percent of its grant award based on its actual
                                     expenditures (Payment No. 2, Batches 1 through 5).

                                 Beginning in the FY 2006-07 funding cycle, the program office
                                 changed the disbursement method to full reimbursement and no longer
                                 advances funds to LEAs.
Final Report
ED-OIG/A09H0020                                                                           Page 43 of 56

               Enclosure 2: OIG Estimate of Interest Earnings
                    for Four Programs at Selected LEAs
We estimated that the nine selected LEAs earned Federal interest totaling about $937,000 in
SFY 2005-06 for the four reviewed programs. Only two LEAs remitted a total of $208,581, and
the remaining LEAs did not remit any interest for amounts earned in the four programs. We
estimated that the nine LEAs owe ED about $729,000 for interest earned in the four programs in
SFY 2005-06.

                             OIG Estimate of SFY 2005-06 Interest Earnings                LEA
          LEA               ESEA     ESEA      ESEA      Special      LEA                Remit-      Difference
                            Title I Title II Title IV Education       Total              tances
 Fresno County
  Fresno USD               $469,226       -          -           $1,859    $471,085         -         $471,085
  Parlier USD                 2,518       -          -            -           2,518         -            2,518
  Sierra USD                  1,711     $1,558       -            -           3,269         -            3,269
 Sacramento County
  Center USD                   3,372     3,965       $203           101       7,641         -             7,641
  Elk Grove USD                3,754     4,265       -            3,970      11,989        (a)           11,989
  Galt JUHSD                     164      -          -              184         348         -               348
  Sacramento City USD
                            128,000                                         128,000         -          128,000
    (b)
 Subtotal – LEAs that
                           $608,745     $9,788        $203       $6,114    $624,850         -         $624,850
 Did Not Remit Interest
 Los Angeles County
                                                                                       $33,113 (c)
 Glendale USD                 59,173       154            65     61,361     120,753
                                                                                                         87,640
  Long Beach USD            190,234        998           397      -         191,629 175,468 (d)          16,161
 Subtotal – LEAs that
                           $249,407     $1,152        $462      $61,361    $312,382      $208,581     $103,801
 Remitted Interest
 Total                      $58,152 $10,940           $665      $67,475    $937,232      $208,581     $728,651
 (a) Elk Grove USD remitted interest earned in the Title III Program, but did not remit interest for the four
     reviewed programs.
 (b) Our review in Sacramento USD was limited to the Title I Program only.
 (c) Remittance was for interest earned in the Title I Program; Glendale USD also remitted for the ESEA
     Title II Part D Education Technology Program.
 (d) Remittance was for interest earned in the Title I, Title II, and Title IV programs; Long Beach USD also
     remitted interest for numerous other Federal programs.



We estimated interest earnings by multiplying each LEA’s month-end cash balance for each
program spanning the period July 2005 to June 2006 by the applicable monthly interest rate. As
noted in Finding No. 2, the use of month-end balances could result in an overstatement or
understatement of interest earnings. The difference between our estimate of interest earnings and
amounts remitted by LEAs does not take into account the $100 of interest amounts that
34 C.F.R. § 80.21(i) allows LEAs to keep for administrative expenses.
Final Report
ED-OIG/A09H0020                                                                    Page 44 of 56




            Enclosure 3: CDE Comments on the Draft Report

CDE’s comments on the draft report included as an attachment screen prints from its planned
web-based cash management reporting system. Because of the voluminous number of pages, we
have not included the screen shots in this enclosure. Copies of the attachment are available upon
request.
                                        December 29, 2008


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

Dear Ms. Pilotti:

Subject: Draft Report—California Department of Education Advances of Federal
         Funding to Local Educational Agencies, Control Number ED-OIG/A09H0020

In response to the U.S. Department of Education (ED), Office of Inspector General’s (OIG) draft
report entitled California Department of Education Advances of Federal Funding to Local
Educational Agencies, the California Department of Education (CDE) respectfully requests that
CDE’s written comments on the reported findings and recommendations are noted and
considered in regard to the final report and subsequent program determinations.

The CDE is continually improving its cash management processes for disbursing Federal
program funds to sub-recipients. To further strengthen CDE’s processes for disbursing and
monitoring Federal funds, the CDE established an internal task force to develop a cash
management improvement plan. The CDE’s foremost cash management goals are to:
(1) improve cash balance reporting, fiscal monitoring, and funding processes to minimize the
time between sub-recipients’ receipt and disbursement of Federal funds; and (2) revert interest
earned on unspent Federal funds back to the U.S. Treasury. To bolster this endeavor, the CDE
is coordinating efforts with members of the U.S. Department of Education, Office of the
Secretary, Risk Management Service (RMS), for advice and suggestions on improving CDE’s
cash management over Federal funds.

In general, the CDE concurs with the OIG’s findings; however, without conducting in-depth
statewide analyses of local educational agencies’ current and past cash management practices,
the CDE does not opine on the OIG’s overall projections of cash balances and interest
estimates.

If you have any questions regarding the CDE’s response to the draft report, please contact
Kevin W. Chan, Director, Audits and Investigations Division, at 916-323-1547, or by e-mail at
kchan@cde.ca.gov.

Sincerely,

/s/

GAVIN PAYNE
Chief Deputy Superintendent of Public Instruction

GP:kwc:dr
Enclosures
                                                                           Enclosure 1
                                                                           Page 1 of 6

                      California Department of Education
   Response to the U.S. Department of Education, Office of Inspector General
               Draft Report, Control Number ED-OIG/A09H0020

   California Department of Education Advances of Federal Funding to Local
                             Educational Agencies


Finding No. 1 - CDE’s Method for Disbursing Federal Funds Must Ensure that Local
                Educational Agencies (LEAs) Receive Federal Funding When Needed
                to Pay Program Costs

      Recommendation 1.1:

      Consider centralizing funding processes under the authority of a single
      organizational unit to ensure cash management procedures are consistently and
      effectively implemented across all Federal programs.

            CDE Comments and Corrective Action:

            Upon consideration of centralizing the multitude of CDE’s educational
            program funding processes under a single organizational unit, the CDE
            determined that it would be more feasible to consistently apply universal
            core cash management procedures to CDE’s grant and apportionment
            funding processes in ensuring that LEAs timely receive Federal funding
            when needed to pay program costs.

      Recommendation 1.2:

      Make the first disbursement of Federal funds available to LEAs earlier in the
      State fiscal year (SFY) if LEAs have demonstrated the need for program funds.

            CDE Comments and Corrective Action:

            To accommodate an LEA’s demonstrated need for program funds, CDE’s
            proposed new adjustable quarterly funding processes will enable the CDE
            to effectively disburse federal funding throughout the year.

      Recommendation 1.3:

      Proactively work with the Financial Information System for California (FI$Cal)
      project development team to ensure that the cash management component of
      the new system meets Federal requirements, allows LEAs to draw Federal funds
                                                                            Enclosure 1
                                                                            Page 2 of 6

      when needed to pay program costs, and includes internal controls to ensure
      LEAs minimize the time between when they receive and disburse Federal
      program funds.

            CDE Comments and Corrective Action:

            CDE representatives attend FI$Cal project development meetings and
            work proactively with the California Department of Finance on both the
            CDE and government requirements that should be addressed and
            incorporated into the new statewide financial management project.

      Recommendation 1.4:

      Develop an interim solution that is consistent across all Federal programs and
      assesses LEA cash needs prior to all advances.

            CDE Comments and Corrective Actions:

            Since the CDE is not scheduled to convert to FI$Cal until 2013, the CDE
            has developed an interim cash management improvement plan that
            institutes quarterly sub-recipient reporting of cash balances and quarterly
            disbursement of Federal funds (see Enclosure 2 for a copy of a letter sent
            to the U.S. Department of Education, Office of the Secretary, summarizing
            CDE’s cash management improvement plan). As part of this plan, the
            CDE has created a web-based reporting format to facilitate sub-recipients’
            reporting of outstanding cash balances. Additionally, the CDE is currently
            recruiting staff that will be assigned duties specifically related to CDE’s
            new cash management processes.

            The CDE expects to commence the cash management improvement plan
            with a pilot Federal program. Once the pilot program is functioning as
            intended, and deemed successful, other Federal funded programs will be
            systematically incorporated into the new cash management processes.

Finding No. 2 – CDE Needs to Strengthen Controls to Ensure that LEAs Correctly
                Calculate and Promptly Remit Interest Earned on Federal Cash
                Advances

      Recommendation 2.1:

      Clearly and consistently communicate the Federal interest requirement to LEAs
      and reinforce the requirement’s applicability to all Federal education programs.
      To ensure they receive consistent and complete information across programs,
                                                                        Enclosure 1
                                                                        Page 3 of 6

the CDE should also include appropriate information on the interest requirement
in its accounting and/or financial management guidance distributed to LEAs,
such as in the California Schools Accounting Manual.

       CDE Comments and Corrective Actions:

       As the OIG states in the report, the CDE includes the federal interest
       requirements as standard language in various program funding
       correspondence (apportionment and grant notification letters). Resultantly,
       during the 2007-08 and 2008-09 state fiscal years, the CDE has remitted
       interest back to the Federal Treasury on behalf of over 70 LEAs.

       To further remind LEAs to calculate interest correctly and remit interest
       earned on Federal cash advances promptly, the CDE has prepared written
       communication on the applicability of the Federal requirements for interest
       earned on Federal funds. The written communication will be disseminated
       to all county and district superintendents, county and district chief
       business officials, and charter school administrators (see Enclosure 3).

       To provide consistent and complete guidance for all Federal education
       programs, the CDE will explore incorporating references to the Federal
       interest requirements (Title 34 Code of Federal Regulations, Part 80.21) in
       other written guidance, such as the California School Accounting Manual
       and the audit guide used by independent certified public accountants
       conducting single audits of LEAs.

Recommendation 2.2:

Develop and disseminate guidance to LEAs on the proper method for calculating
and frequency for remitting interest. To ensure that LEAs calculate interest
correctly and remit interest earned on all Federal cash advances promptly, the
guidance should include instructions specifying that: (1) the netting of interest is
not allowed; (2) interest should be calculated using Cash in County Treasury
data; and (3) interest must be remitted promptly and at least quarterly in
accordance with the applicable regulations.

       CDE Comments and Corrective Actions:

       The CDE has prepared and will issue written communication to all county
       and district superintendents, county and district chief business officials,
       and charter school administrators regarding Federal requirements on
       interest earned on Federal funds (see Enclosure 3). The written
       communication: (1) specifies the Federal requirements on interest earned
                                                                      Enclosure 1
                                                                      Page 4 of 6

      on Federal funds; (2) prohibits reducing or offsetting federal interest
      earnings for the temporary use of non-Federal cash resources for Federal
      programs; and (3) advises school district and charter school business
      officials to coordinate with their county offices of education in developing
      internal controls and a sound methodology to calculate and return, at least
      quarterly, interest over $100 to the Federal Treasury via the CDE.

Recommendation 2.3:

Ensure that the nine reviewed LEAs: (1) correct the noted deficiencies; (2)
calculate interest on cash in County Treasury correctly; and (3) remit interest
earned in SFY 2005-06 and in subsequent years across all Federal education
programs.

      CDE Comments and Corrective Actions:

      The CDE will follow up with the nine LEAs on the corrective actions taken
      to the ED OIG’s reported deficiencies. CDE’s follow-up will include
      obtaining from each of the nine LEAs: (1) specifics of corrective action
      taken on the reported deficiencies; (2) Federal interest calculation
      methodologies; and (3) the amount of interest due and remitted for the
      SFYs 2005-06 through 2008-09.

Recommendation 2.4:

Ensure that all LEAs within the State have calculated interest correctly and
remitted interest earned in SFY 2005-06 and in subsequent years across all
Federal education programs. The CDE could work with the California State
Controller’s office to ensure the LEAs’ next Single Audit addresses LEA
compliance with the Federal interest requirement, including correct interest
calculations for all Federal cash advances and remittances for interest earned in
SFY 2005-06 and subsequent years.

      CDE Comments and Corrective Actions:

      The CDE is exploring and considering the feasibility of options within
      limited available resources, including the development of new Single Audit
      procedures, to obtain assurance that LEAs properly calculated and
      remitted interest on Federal funds during the SFY 2005-06 and in
      subsequent years across all Federal education programs.

      To ensure that LEAs correctly calculate interest on advanced Federal
      funds, the CDE sent written communication on the Federal interest
                                                                      Enclosure 1
                                                                      Page 5 of 6

      requirements to all county and district superintendents, county and district
      chief business officials, and charter school administrators (see CDE’s
      responses and corrective actions for Recommendations 2.1 and 2.2
      above).

Recommendation 2.5:

Absent assurance of adequate Single Audit coverage include steps in its
categorical program monitoring process to review LEA compliance with the
interest requirement, including LEAs’ methodologies for computing interest
earnings. To review compliance across all Federal programs, the CDE could add
appropriate procedures to the cross-cutting section of its monitoring protocol.

      CDE Comments and Corrective Actions:

      To ensure that LEAs are in compliance with Federal interest requirements,
      the CDE plans to develop and implement fiscal review processes that will
      strengthen the cross-cutting funding dimensions of categorical program
      monitoring.

      Additionally, during SFY 2008-09, and depending on available resources,
      the CDE is considering new cash management monitoring that entails a
      high-level verification of LEAs’ reported quarterly Federal cash balances.
      In conducting cash management monitoring, CDE fiscal staff will verify the
      most recent quarter’s reported cash balances from a number of selected
      sub-recipients throughout the year. This verification process entails CDE
      staff contacting sub-recipients’ accounting offices to obtain fiscal
      information which reasonably supports reported cash balances. If
      significant amounts of unspent Federal program funds are identified
      through this process, the sub-recipient may be required to: (1) submit a
      disbursement plan delineating the timeline when funds on hand will be
      spent; (2) explain the need for additional funding; and (3) communicate
      the disposition of interest earned on unspent federal program funds.

Recommendation 2.6:

Explore the potential for enlisting the assistance of County Offices of Educations
(COEs) and their capacity to collect cash data to help the CDE implement cash
management procedures and ensure LEA compliance with the Federal interest
requirement. COEs could facilitate and ease the administrative burden
associated with collecting cash information on cash balances, identifying interest
earnings, and processing interest remittances.
                                                                Enclosure 1
                                                                Page 6 of 6

CDE Comments and Corrective Actions:

In CDE’s written communication to all county and district superintendents,
county and district chief business officials, and charter school
administrators, the CDE encourages district and school fiscal officials to
coordinate with their COEs in developing internal controls and sound
methodologies to calculate and return, at least quarterly, interest earned in
excess of $100 on Federal program funds administrators (see CDE’s
responses and corrective actions for Recommendations 2.1 and 2.2
above).
                                                                            Enclosure 2
                                                                            Page 1 of 1




                                     December 24, 2008




Cynthia Bond-Butler, Senior Consultant
U.S. Department of Education
Office of the Secretary
400 Maryland Avenue, SW
Washington, D.C. 20202


Dear Ms. Bond-Butler:

Subject: Cash Management Improvement Plan

Per your request, attached is a summary the California Department of Education (CDE)
draft plan for improving cash management over federal program funds. CDE’s cash
management improvement plan will commence with a pilot program, Title II Improving
Teacher Quality, and implementation of quarterly sub-recipient reporting of cash
balances and quarterly disbursement of federal funds. Although we initially discussed
including Special Education as a pilot program, the CDE implemented alternative
interim processes to ensure that sub-recipients receive and disburse federal funds in a
timely manner.

We appreciate the assistance that you have provided us in developing our cash
management improvement plan. If you have any questions regarding our plan, please
contact me directly at (916) 323-1547.

Sincerely,

Original Signed By:


Kevin W. Chan, Director
Audits and Investigations Division


Attachment
KWC:dr
                                                                            Enclosure 2 – Attachment 1
                                                                            Page 1 of 2


Cynthia Bond-Butler
December 24, 2008
Page 2

                 Cash Management Improvement Plan
This cash management improvement plan is designed to minimize the time elapsing
between a sub-recipient’s receipt and use of federal program funds by requiring sub-
recipients to submit fiscal information with which the California Department of Education
(CDE) can: (1) monitor and disburse federal funds timely to meet sub-recipients’ needs,
and (2) identify and follow up on fiscal conditions where interest may have been earned
on unspent federal funds.

This plan calls for sub-recipients to submit fiscal information utilizing a web-based
system specifically designed for minimizing the time between a sub-recipient’s receipt
and use of federal funds. The basic methodology behind this plan involves obtaining
sub-recipient fiscal information on a scheduled basis, disbursing funds in consideration
of cash balances, and identification of interest on unspent federal funds. This plan refers
to a quarterly funding schedule which may, for practical purposes, be modified to
accommodate the complexities of various individual federal programs.

Program funding on a quarterly basis would allow CDE to make more timely funding
disbursements. In theory, with quarterly funding, sub-recipients would not be without
funding longer than 90 days. However, since several of CDE’s federal programs are
currently funded less than four times a year, funding schedule changes may involve
sensitive ramifications and would have to be systematically phased in by program. For
example, Title I, CDE’s largest federal program, would require relatively major process
changes and may have significant fiscal impact to both large and small sub-recipients.
Therefore, this plan will commence with a pilot program, Title II Improving Teacher
Quality; other programs, such as Title I, will be phased in after the new cash
management system and processes are better understood and operating as intended.

To facilitate the CDE’s ability to make funding disbursement adjustments, this plan calls
for sub-recipients to submit periodic fiscal information to the CDE. Sub-recipients will be
required to quarterly report unspent federal funds by program; based on this
information, CDE will determine whether adjustments are necessary to subsequent
scheduled funding. For example, if a sub-recipient reports a relatively small amount or
negative cash balance, then the CDE can either release or increase the following
scheduled funding amount. On the other hand, if a sub-recipient reports a relatively high
cash balance, then the CDE can either withhold or decrease the following scheduled
funding, and query the sub-recipient of the disposition of possible interest earnings.
Attachment I contains screen prints of CDE’s newly developed web-based cash
management reporting system. This reporting system is designed to capture sub-
recipients’ federal program cash balances for a designated quarter period. The system
reports can also be readily modified to capture the amount of interest earned on federal
funds and other information to fit the needs of individual programs. CDE’s web-based
                                                                            Enclosure 2 – Attachment 1
                                                                            Page 1 of 2


Cynthia Bond-Butler
December 24, 2008
Page 3

reporting system is still in the finalization stage; however, once fully operational, sub-
recipients will be required to conveniently transmit and certify cash balance information
to the CDE electronically via the Internet.

If significant amounts of unspent federal program funds are identified through CDE’s
new cash management processes, sub-recipients may be required to: 1) submit a
disbursement plan delineating the timeline when funds on hand will be spent; 2) explain
the need for additional funding; and 3) communicate the disposition of interest earned
on unspent federal program funds.
                                                                                Enclosure 3
                                                                                Page 1 of 2




                                    December 24, 2008



Dear County and District Superintendents, County and District Chief Business Officials,
    and Charter School Administrators:


                      INTEREST EARNED ON FEDERAL FUNDS


The United States Department of Education, Office of Inspector General, has conducted
audits that review the cash management practices of the California Department of
Education (CDE) and Local Education Agencies (LEAs). These audits include an
examination of LEA compliance with those requirements of federal law that require
remission of interest earned on federal funds.

In this regard, Code of Federal Regulations, Title 34 –Education, Part 80 – Uniform
Administrative Requirements for Grants and Cooperative Agreements to State and
Local Governments, Subpart C – Post Award Requirements, Section 80.21 Payment,
requires grantees and sub-grantees to promptly, but at least quarterly, remit interest
earned on advances to the federal agency. The grantee or sub-grantee may keep
interest amounts up to $100 per year for administrative expense. Thus, LEAs are
required to remit to CDE interest earned on federal funds.

In addition, grantees and sub-grantees are prohibited from reducing or offsetting federal
interest earnings for the temporary use of non-federal cash resources for federal
programs. For example, although an LEA may have temporarily supported a federal
program with non-federal funds, the amount of interest that the sub-grantee could have
earned on those non-federal funds cannot be offset or netted against the interest
earned on the unspent funds of another federal program.

To ensure compliance with federal administrative requirements, school district and
charter school fiscal officials should coordinate with their county offices of education in
developing internal controls and a sound methodology to calculate and return at least
quarterly, interest earned in excess of $100 on federal program funds.
                                                                           Enclosure 3
                                                                           Page 2 of 2



If you have any questions regarding the administrative requirements for interest earned
on federal funds, please contact me directly at 916-323-1547, or by e-mail at
kchan@cde.ca.gov.

Sincerely,

Original Signed By:

Kevin W. Chan, Director
Audits and Investigations Division

KWC:dr