oversight

State and Local Controls over ARRA Funds in California.

Published by the Department of Education, Office of Inspector General on 2010-01-15.

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

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


  American Recovery and
  Reinvestment Act of 2009
  State and Local Controls over ARRA Funds in California

                                         Audit Report




                                    California State Capitol
     Source: California Department of Water Resources




ED-OIG/A09J0006                                                January 2010
                                  UNITED STATES DEPARTMENT OF EDUCATION
                                        OFFICE OF INSPECTOR GENERAL

                                                                                                    AUDIT SERVICES
                                                                                                SACRAMENTO REGION
                                                        January 15, 2010

Cynthia Bryant
Deputy Chief of Staff and Director
Office of Governor Arnold Schwarzenegger
Office of Planning and Research
1400 Tenth Street, Room 100
Sacramento, CA 95812-3044

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

Anthony P. Sauer
Director
California Department of Rehabilitation
721 Capitol Mall
Sacramento, CA 95814

Dear Ms. Bryant and Messrs. O’Connell and Sauer:

This final audit report presents the results of our review to determine whether State agencies
charged with responsibility for overseeing education-related American Recovery and
Reinvestment Act funds have designed systems of internal control that are sufficient to provide
reasonable assurance of compliance with applicable laws, regulations, and guidance.

Statements that managerial practices need improvement, as well as other conclusions and
recommendations in this report, represent the opinions of the Office of Inspector General (OIG).
Determinations of corrective action to be taken will be made by the appropriate Department of
Education officials.

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

                                Thelma Meléndez de Santa Ana, PhD.
                                Assistant Secretary
                                Office of Elementary and Secondary Education
                                U.S. Department of Education
                                400 Maryland Avenue, S.W., Room 3W315
                                Washington, DC 20202


 The Department of Education's mission is to promote student achievement and preparation for global competitiveness by fostering educational
                                                   excellence and ensuring equal access.
                      Thomas Skelly
                      Acting Chief Financial Officer
                      Office of the Chief Financial Officer
                      U.S. Department of Education
                      400 Maryland Avenue, S.W., Room 5W313
                      Washington, DC 20202

                      Alexa E. Posny
                      Assistant Secretary
                      Office of Special Education and Rehabilitation Services
                      U.S. Department of Education
                      550 12th Street, S.W., Room 5107
                      Washington, DC 20202

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

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

                                             Sincerely,

                                             /s/

                                             Raymond Hendren
                                             Regional Inspector General for Audit
             Abbreviations and Acronyms Used in this Report

ARRA                  American Recovery and Reinvestment Act of 2009

CDE                   California Department of Education

C.F.R.                Code of Federal Regulations

Department            U.S. Department of Education

GAO                   Government Accountability Office

IDEA                  Individuals with Disabilities Education Act

IG                    Inspector General

LEA                   Local educational agency

OIG                   Office of Inspector General

OMB                   Office of Management and Budget

OPR                   Governor’s Office of Planning and Research

SELPA                 Special Education Local Plan Area

SERP                  Supplemental Early Retirement Plan

SFSF                  State Fiscal Stabilization Fund

USD                   Unified School District
       State and Local Controls over ARRA Funds in California
                              Control Number ED-OIG/A09J0006

                                           PURPOSE
The American Recovery and Reinvestment Act of 2009 (ARRA) places a heavy emphasis on
accountability and transparency and, in doing so, increases the responsibilities of the agencies
that are impacted by the Act. Overall, the U.S. Department of Education (Department) is
responsible for ensuring that education-related ARRA funds reach intended recipients and
achieve intended results. This report provides the results of our review to determine whether
agencies charged with responsibility for overseeing ARRA funds in California have designed
systems of internal control that are sufficient to provide reasonable assurance of compliance with
applicable laws, regulations, and guidance.

We focused our review on the design of State and local controls over cash management,
subrecipient monitoring, data quality, and use of funds. The controls are a key aspect in the
proper administration of ARRA funds for the State Fiscal Stabilization Fund (SFSF), Title I
Part A of the Elementary and Secondary Education Act (Title I), Part B of the Individuals with
Disabilities Education Act (IDEA), and Title I Part B of the Rehabilitation Act (Vocational
Rehabilitation).


                                           RESULTS

The State and local agencies we reviewed in California had systems of internal control in place
or were designing control systems to provide for the proper administration and use of education-
related ARRA funds. These systems consisted of controls established prior to the passage of
ARRA, modifications to existing controls in response to the Act, and/or planned controls not yet
implemented at the time of our review. Based on our assessment of the designed systems of
control planned for ARRA funds, we identified several areas in which controls need to be
strengthened or established to provide reasonable assurance of compliance with applicable laws,
regulations, and guidance. We concluded that the:

   •   California Department of Education (CDE) needs to ensure that local educational
       agencies (LEAs) receive Title I and SFSF funds when needed to pay program costs and
       timely remit interest earned on cash advances;
   •   CDE needs to improve existing monitoring procedures for Title I and IDEA under
       ARRA, and work with the Governor’s Office of Planning and Research (OPR) to
       implement a monitoring protocol for SFSF, in order to ensure timely and adequate
       oversight of LEAs’ administration and use of ARRA funds;
   •   CDE should take action to ensure that LEAs implement adequate controls to ensure
       appropriate use of ARRA funds based on issues identified at two of three LEAs
       reviewed; and
   •   CDE and OPR need to ensure that employees and subrecipients are informed of ARRA
       whistleblower protection and Office of Management and Budget (OMB) requirements for
       referrals to inspectors general.

We also found that California reported on recipients’ and subrecipients’ use of ARRA funds by
the October 10, 2009, deadline. We did not review the procedures for or quality of the reporting.
Audit Report
ED-OIG/A09J0006                                                                                  Page 2 of 16

However, we address as an Other Matter a concern that delays in implementing the reporting
system may create challenges for ensuring the quality of LEAs’ reported ARRA information.

We did not identify any reportable issues with respect to the education-related ARRA programs
administered by the California Department of Rehabilitation (Vocational Rehabilitation),
California Department of Corrections and Rehabilitation and the two State university systems
(SFSF), or Chico Unified School District (Title I, IDEA, and SFSF).

A preliminary copy of this report was provided to CDE, OPR, and the California Department of
Rehabilitation for comment. We discussed the results of our review and recommendations with
officials from OPR on November 5, and CDE on November 20, 2009. CDE and OPR concurred
with our findings and recommendations and provided updated information and technical
corrections, which we have incorporated where appropriate. They did not provide formal written
comments. The California Department of Rehabilitation did not provide comments.


FINDING NO. 1 – CDE Needs to Ensure LEAs Receive Title I and SFSF Funds
                When Needed to Pay Program Costs and Timely Remit Interest
                Earned on Cash Advances

We previously reported a number of cash management issues related to non-ARRA funds at
CDE and LEAs within the State. In particular, we were concerned with CDE’s inability to
disburse Federal funds to LEAs when needed to pay program costs, its lack of controls to ensure
that LEAs calculate interest earned on Federal cash advances, and LEAs’ inability to accurately
calculate and timely remit interest earnings. 1 Our ARRA work found that CDE made some
progress in addressing these issues, and confirmed that the issues still existed with respect to
CDE’s disbursement of Title I and SFSF funds to LEAs under ARRA. 2

The applicable cash management requirements are addressed in the Uniform Administrative
Requirements for Grants and Cooperative Agreements to State and Local Governments
(34 Code of Federal Regulations (C.F.R.) Part 80).



1
 Local Educational Agency Requirement to Remit Interest Earned on Federal Cash Advanced by State Educational
Agencies (Alert Memorandum, ED-OIG/L09I0013, July 14, 2009); California Department of Education Advances
of Federal Funding to Local Educational Agencies (Audit Report, ED-OIG/A09H0020, March 9, 2009);
Los Angeles Unified School District’s Procedures for Calculating and Remitting Interest Earned on Federal Cash
Advances (Audit Report, ED-OIG/A09H0019, December 2, 2008).
2
  The Government Accountability Office (GAO) also reported concerns about CDE and LEA cash management
practices involving Title I funds under ARRA. The 10 LEAs that were contacted by GAO reported carrying
significant Title I ARRA cash balances. Nine of the LEAs reported having processes in place to calculate and remit
interest on unused Title I funds, although the processes varied from location to location. As of November 2009,
CDE was planning to follow up with the one remaining LEA that the GAO report inferred did not have a process in
place for calculating and remitting interest. Recovery Act: Funds Continue to Provide Fiscal Relief to States and
Localities, While Accountability and Reporting Challenges Need to Be Fully Addressed (Appendixes), GAO
(GAO-09-1017SP, September 23, 2009).
Audit Report
ED-OIG/A09J0006                                                                              Page 3 of 16

    •   34 C.F.R. § 80.21 prescribes the basic standard and the methods under which grantees
        will make payments to subgrantees. The basic standard is that the “[m]ethods and
        procedures for payment shall minimize the time elapsing between the transfer of funds
        and disbursement by the grantee or subgrantee . . . .” Grantees and subgrantees shall be
        paid in advance if they maintain or demonstrate the willingness and ability to maintain
        procedures to minimize the time between receipt and disbursement of the funds to pay
        program costs.

    •   34 C.F.R. § 80.21(i) requires that “. . . [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.”

We did not identify issues related to minimizing time with respect to CDE’s method for
disbursing IDEA funds to LEAs under ARRA. CDE initially disbursed 20 percent of IDEA
funds to the 124 LEAs, which are known as Special Education Local Plan Areas (SELPAs). 3 To
receive additional funds, the SELPAs were to submit quarterly expenditure reports, which
included interest earned on unspent IDEA funds.

CDE’s Method for Disbursing Title I and SFSF
Funds Did Not Ensure LEAs Received the
Funds When Needed to Pay Program Costs

Because of the State’s fiscal crisis and reductions in State funding for education, CDE disbursed
most of the Title I and SFSF funds under ARRA without information about whether the LEAs
needed the funds at the time of disbursement. Between late May and early July, the State drew
down more than $4 billion in ARRA funds for disbursement to LEAs and other subrecipients.
The $4 billion represented about 80 percent of the Title I and 86 percent of the SFSF funds the
Department had awarded to California as of early August.

LEAs throughout the State may have received the ARRA funds too early under CDE’s
disbursement method. Our work at three LEAs showed that, while they received most of their
Title I and SFSF funds in June and early July, the LEAs had not spent any of the funds at the
time of our visits in late July. The LEAs were still planning how they would use the funds.
Planning considerations included the need to obtain approval from the LEA’s Board of
Education, to work with the teacher’s union for new teacher positions, and/or to seek technical
assistance from the Department on allowable uses of Title I funds under ARRA. One LEA
planned to spend half of its SFSF funds during school year 2009-10 and the other half during the
following year. This timeframe is more than a year after receiving the funds.

A general principle of ARRA is to expend the funding quickly consistent with prudent
management to achieve the Act’s purposes. Although CDE distributed funds quickly, it was just
as important for CDE not to draw and disburse ARRA funds before LEAs actually needed the
funds. Our prior cash management report (A09H0020) described the additional borrowing costs
3
 The SELPA is the LEA for IDEA funding purposes. A SELPA may be a single school district or composed 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.
Audit Report
ED-OIG/A09J0006                                                                                  Page 4 of 16

that the U.S. Treasury would not need to incur if CDE had disbursed the funds when needed by
LEAs to pay program costs. 4 Funds drawn too early may also be more susceptible to misuse
when held in local accounts for extended periods. Past OIG work in other States had found
instances involving non-ARRA funds where internal controls were weak, bypassed, or
nonexistent, and LEA officials were able to commit improper and illegal acts that resulted in
millions of dollars in misspent funds. 5

CDE Needs to Strengthen Controls to Ensure that
LEAs Remit Interest Earned on ARRA Cash Balances

We previously reported that CDE relied on LEAs to self-report and remit interest earned on
non-ARRA cash balances. Additionally, the nine LEAs included in that audit were either not
performing the required calculations or incorrectly calculating interest earned on Federal
advances. Our ARRA work found that similar conditions may exist at two of the three LEAs
reviewed.

Based on our review of existing controls, we concluded that San Diego USD and Tulelake Basin
Joint USD may not be computing and remitting interest correctly. San Diego USD officials
informed us that, although interest on Federal cash balances was earned in 2009, the LEA did not
earn interest from 2006 through 2008 even though it received large sums of Federal funds each
year. Tulelake Basin Joint USD was understating interest earnings by inappropriately reducing
the estimated interest earned on Federal cash advances to compensate for the temporary use of
other available cash resources for Federal programs (“netting”).

In response to a draft of our March 2009 audit report (A09H0020), CDE issued guidance to
LEAs on calculating and remitting interest earned on Federal funds. However, we noted in the
final report that the guidance did not identify appropriate methodologies for LEAs to use when
calculating interest. As of August, CDE had begun a pilot program to implement procedures to
monitor LEA compliance with the interest requirement for both ARRA and non-ARRA funds.
In addition, CDE’s Audits and Investigations Division hired an analyst to work with the nine
districts we reviewed to ensure that the interest-related deficiencies noted in our 2009 report are
corrected. The Audits and Investigations Division also began coordinating with the School
Fiscal Services Division to develop monitoring procedures to ensure that all LEAs remit interest
earnings. Moreover, CDE implemented monitoring procedures for the nine districts previously
mentioned. As of November 2009, CDE had drafted more detailed guidance to ensure that other
LEAs calculate interest correctly and remit interest earnings at least quarterly. Completion of the
guidance was delayed while CDE worked with the Department’s Risk Management Service on
the appropriate methodology for calculating interest earnings.


4
  Federal program funds drawn too early by CDE results in additional Federal borrowing costs because of the
Federal deficit, which requires the U.S. Treasury to borrow the cash needed to fund Federal programs and, as a
result, incur interest costs.
5
 Fiscal Issues Reported in ED-OIG Work Related to LEAs and SEAs (Management Information Report,
ED-OIG/X05J0005, July 21, 2009); An OIG Perspective on Improving Accountability and Integrity in ESEA
Programs (ED-OIG/S09H0007, October 16, 2007).
Audit Report
ED-OIG/A09J0006                                                                   Page 5 of 16

Recommendations

We recommend that the Chief Financial Officer require CDE to—

1.1    Fully implement planned cash management procedures and consider the cash needs of
       LEAs before disbursing the remaining ARRA funds so that LEAs can minimize the time
       between receipt and disbursement of Federal funds in accordance with
       34 C.F.R. § 80.21.

1.2    Ensure the guidance being developed on Federal interest requirements addresses
       appropriate methodologies for calculating interest earnings, as addressed in our previous
       audit report (A09H0020).


FINDING NO. 2 – CDE and OPR Need to Ensure that Timely and Adequate
                Subrecipient Monitoring Procedures Are Implemented for
                ARRA Subgrants to LEAs

CDE needs to strengthen its Title I and IDEA program monitoring procedures to ensure LEAs
comply with Federal fiscal requirements related to cash management and LEAs’ use of and
accounting for ARRA funds. At the time of our review, CDE had not modified existing Title I
and IDEA program monitoring procedures to ensure timely and adequate oversight of LEAs’
administration and use of ARRA funds for these programs. In addition, CDE and OPR had not
established subrecipient monitoring procedures for SFSF funds disbursed to LEAs.

Federal regulations at 34 C.F.R. § 80.40 (a) prescribe the basic standards under which grantees
will monitor program performance of subgrantees. The basic standards are that the “[g]rantees
are responsible for managing the day-to-day operations of grant and sub-grant supported
activities. Grantees must monitor grant and sub-grant supported activities to ensure compliance
with applicable Federal requirements and that performance goals are being achieved. Grant
monitoring must cover each program, function or activity.” On August 27, 2009, the Department
issued guidance addressing State monitoring of subrecipients receiving SFSF funds under
ARRA.

Although CDE informed us of plans to expand some existing processes to address ARRA
monitoring, we concluded that more timely enhancements were needed. As of August, CDE had
already disbursed significant amounts of Title I and SFSF funds to LEAs. Unless CDE takes
prompt action to enhance subrecipient monitoring practices, and works with OPR to implement
monitoring procedures for SFSF, the risk for LEA noncompliance with Federal grant
requirements and potential misuse of ARRA funds could be significant.
Audit Report
ED-OIG/A09J0006                                                                     Page 6 of 16

CDE Needs to Improve Monitoring Practices to Ensure LEAs
Administer and Use Title I and IDEA ARRA Funds Appropriately

Existing Title I and IDEA program monitoring practices need strengthening to more effectively
monitor LEA compliance with fiscal requirements related to cash management and LEAs’ use of
Federal funds. To ensure more timely oversight of Title I and IDEA funds under ARRA, CDE
should resume Title I monitoring visits, improve the timeliness and effectiveness of its process
for resolving LEA single audit findings, and implement other planned ARRA monitoring
procedures.

Under existing monitoring procedures, CDE conducts on-site monitoring for the Title I and
IDEA programs at most once every 4 years. 6 In February 2009, however, CDE suspended all
Title I monitoring visits for at least a year because of budget constraints. During the suspension
period, CDE was working to resolve a backlog of prior year monitoring findings. At the time of
our review, CDE was also developing a web-based system to collect Title I program compliance
information from LEAs to facilitate desk reviews.

On-site program monitoring procedures have not addressed LEAs’ administration and use of
Title I and IDEA funds. Instead, CDE reviews LEA single audit reports to monitor compliance
with applicable fiscal requirements. However, CDE’s reliance on single audits will not identify
or resolve problems with LEAs’ administration of ARRA funds in a timely manner. LEA single
audits are not due to CDE for more than 5 months after the State fiscal year ends on June 30.
Since significant amounts of Title I and SFSF ARRA funds were disbursed to LEAs between
May and July 2009 as reported in Finding No. 1, the single audits covering these funds would
not be available to CDE for more than a year after disbursement. We also found that CDE had
not ensured resolution of LEA single audit findings within the 6-month timeframe required by
Federal regulation (34 C.F.R. § 80.26(b)(3)). To improve the timeliness of the single audit
resolution process, CDE recently enhanced its database used to track LEA findings and began to
code all repeat findings for easier followup.

As of August 2009, CDE was in the process of developing program monitoring enhancements to
address cash management in general and ARRA, including Title I and IDEA. For Title I, CDE
redirected staff to provide LEAs with technical assistance on cash management issues and to
monitor LEA compliance with Federal interest requirements, including interest earned on
unspent ARRA funds. CDE planned to request additional administrative funding to ensure that
LEAs appropriately spend and account for ARRA funds. With the additional funding, CDE
planned to conduct Title I monitoring visits focused on previously identified high-risk program
monitoring findings. For IDEA, CDE planned to develop monitoring procedures addressing
fiscal requirements under ARRA.




6
    CDE visits Los Angeles USD, the largest LEA in the State, on an annual basis.
Audit Report
ED-OIG/A09J0006                                                                  Page 7 of 16

CDE and OPR Need to Implement Subrecipient
Monitoring for LEAs that Receive SFSF Funds

The Department awarded SFSF funds to the Governor’s Office. OPR on behalf of the
Governor’s Office entered into an interagency agreement with CDE to allocate and distribute the
funds to LEAs. The interagency agreement stated that CDE would work collaboratively with the
Governor and other State agencies to ensure compliance with applicable Federal regulations,
which would include the monitoring requirements at 34 C.F.R. § 80.40 (a). However, the
agreement did not define oversight responsibilities, such as which State agency would be
responsible for monitoring LEAs that receive SFSF funds.

At the time of our review, neither CDE nor OPR had implemented subrecipient monitoring
procedures to ensure timely and adequate oversight of the administration and use of SFSF funds.
Because SFSF was a new program under ARRA, CDE did not have a monitoring process in
place and stated that it was working with OPR to address monitoring responsibilities. OPR told
us that it viewed the monitoring of LEAs as CDE’s responsibility. As articulated in the
Department’s August 27 guidance, entitled States’ Responsibility to Monitor Subrecipients
Under the State Fiscal Stabilization Fund, State educational agencies should establish a
comprehensive monitoring protocol that includes a monitoring schedule, monitoring policies and
procedures, data collection instruments (such as interview guides and review checklists),
monitoring reports and feedback to subrecipients, and processes to verify corrective actions are
implemented. In November 2009, CDE informed us that planned enhancements to program
monitoring procedures previously mentioned for Title I and IDEA under ARRA will also address
fiscal monitoring for SFSF.

OPR similarly executed interagency agreements with but had not established procedures for
monitoring the use of SFSF funds by the California Department of Corrections and
Rehabilitation and the two State university systems. However, we found that the entities used
SFSF funds received solely to cover salary expenses shortly after receipt. Moreover, OPR had
sufficient procedures to monitor the few salary transactions.

Recommendations

We recommend that the Assistant Secretary for Elementary and Secondary Education and the
Assistant Secretary for Special Education and Rehabilitative Services require CDE to—

2.1    Implement planned enhancements to existing Title I and IDEA program monitoring
       practices to provide timely oversight of LEA compliance with fiscal requirements related
       to cash management and the appropriate use of and accounting for ARRA funds.

We further recommend that the Assistant Secretary for Elementary and Secondary Education
require CDE and OPR to—

2.2    Implement a comprehensive subrecipient monitoring protocol, consistent with
       Departmental guidance, to ensure timely and adequate oversight of LEAs’ administration
       and use of SFSF funds.
Audit Report
ED-OIG/A09J0006                                                                                Page 8 of 16

FINDING NO. 3 – CDE Should Take Action to Ensure that LEAs Implement
                Adequate Controls to Ensure Appropriate Use of ARRA Funds

Another principle of ARRA is to ensure accountability over the use of funds provided under the
Act. Our limited review of LEA internal controls identified two issues that may put ARRA
funds at risk for noncompliance with applicable OMB cost principles, ARRA guidance, and/or
State requirements. Both issues were related to expenditures for personnel costs at two of the
three LEAs reviewed.

Similar issues were likely more widespread across the State. In July 2009, the California State
Controller’s Office published a report, entitled Annual Financial Report of California K-12
Schools, which summarized the results of single audits for the period July 1, 2007, through
June 30, 2008. According to the report, more than half of all Federal compliance findings were
related to (1) allowable costs/adherence to OMB’s cost principles, (2) allowed or unallowed
activities, or (3) multi-funded positions not supported by required time distribution (time and
effort) records.

At the time of our review, OMB Circular A-87 Cost Principles for State, Local, and Indian
Tribal Governments governed LEAs’ use of Federal grant funds, including SFSF funds under
ARRA. On December 24, 2009, the Department issued guidance for grantees and auditors
related to SFSF funds in response to questions about recordkeeping, documentation, and
reporting requirements. Recognizing that SFSF funds are essentially general aid and may
support a broad array of activities, the guidance states that the specific cost principles in the
OMB Circulars do not apply to SFSF funds. However, the guidance also states that expenditures
attributed to SFSF must still be “reasonable and necessary” and consistent with applicable State
and local requirements. Although there are no specific Federal time and effort requirements
applicable to individuals whose salaries may be supported with SFSF funds, the guidance
requires LEAs to still maintain documentation to support the time and effort of these individuals
in the same manner as individuals performing similar duties who are paid with State or local
funds. Because this guidance applies to SFSF funds only, all other Federal grant funds remain
subject to the cost principles in the OMB Circulars.

San Diego USD Planned to Use ARRA Funds for Supplemental
Early Retirement Plan Costs Without Obtaining Prior Approval

At the time of our review, San Diego USD planned to use $31 million of its $52 million SFSF
allocation to pay for Supplemental Early Retirement Plan (SERP) costs. However, San Diego
USD did not seek prior approval from the Department, as required by State requirements.
Without this advance approval, SERP costs charged to the SFSF would be considered an
unallowable use of funds.

In 2007, we reported the same issue at San Diego USD regarding the unapproved use of
non-ARRA funds to pay SERP costs. 7 Our prior audit determined that payments to SERP

7
 San Diego Unified School District’s Use of Federal Funds for Costs of Its Supplemental Early Retirement Plan
(Audit Report ED-OIG/A09H0014, December 18, 2007).
Audit Report
ED-OIG/A09J0006                                                                                   Page 9 of 16

participants are considered “abnormal or mass severance pay” and the costs of such payments are
allowed only if approved by the cognizant Federal agency in advance of the payments. OMB
Circular A-87, Attachment B, section 8.g.(3) addresses compensation for personal services and
states that “[a]bnormal or mass severance pay will be considered on a case by case basis and is
allowable only if approved by the cognizant Federal agency.” Although OMB Circular A-87
does not apply to SFSF, the California School Accounting Manual requires LEAs to obtain prior
Federal approval for such costs. 8

In 2009, the Department entered into a settlement agreement with San Diego USD and CDE.
Under the terms and conditions of the agreement, San Diego USD was to comply with OMB
Circular A-87 and the California School Accounting Manual beginning with the 2007-08 school
year by obtaining approval from the cognizant Federal agency prior to charging abnormal or
mass separation costs to Federal programs. Once we informed San Diego USD officials of the
need for prior Departmental approval, they suspended the plan to use SFSF funds to cover SERP
payments. The officials stated that they were unaware of the advance approval requirement
despite our prior audit and would seek approval from the Department before using SFSF for this
purpose. 9

San Diego USD and Tulelake Basin Joint USD Did Not Document
and Review Personnel Costs for Multi-Funded Employees

Neither San Diego USD nor Tulelake Basin Joint USD had policies or procedures to require
employees, who work on multiple activities, to prepare personnel activity reports or equivalent
documentation to report actual employee time and effort funded by multiple Federal grants
(multi-funded employees). Employees in the two LEAs charged their time and effort to Federal
grants based on budget estimates rather than the actual time spent on these grant programs. This
practice did not ensure that actual time and effort costs were charged to Federal grants. Absent
adequate support for multi-funded employees’ time spent on different programs, Federal grants
could be inappropriately charged for activities that do not benefit Federal education programs, or
one Federal grant could be charged for activities benefiting another grant.

OMB Circular A-87, Attachment B, section 8.h., addresses support for wages and salaries. In
particular, subsection (4) requires multi-funded salaried employees to prepare personnel activity
reports or equivalent documentation to report actual activity. Subsection (5) requires employee
certifications based on signed personnel activity reports at least monthly or comparisons of
interim budget estimates to actual activity at least quarterly.

At San Diego USD, salaried employees working on multiple activities did not prepare personnel
activity reports to document and report the actual time spent on Federal programs. Instead,
San Diego USD used predetermined percentages (budget estimates) to allocate multi-funded
salaried employees’ time to the programs they worked on. Employees were to report only the

8
 California’s Education Code requires LEAs to follow the definitions, instructions, and procedures in the California
School Accounting Manual, which provides State accounting policies and procedures.
9
 On August 4, 2009, we brought the matter of San Diego USD’s planned use of SFSF funds for SERP costs to the
attention of the Department’s Office of the Chief Financial Officer.
Audit Report
ED-OIG/A09J0006                                                                         Page 10 of 16

overtime worked or leave hours taken during the month. Moreover, San Diego USD certified
actual time and effort for multi-funded employees every 6 months rather than quarterly, as
required by the Circular when budget estimates are used.

At Tulelake Basin Joint USD, the principal at the only school with multi-funded salaried
employees used the scheduled times for intervention classes targeted for Title I students as a
basis for charging seven employees’ time and effort to the Title I grant. Instead of requiring the
employees to complete personnel activity reports, Tulelake Basin Joint USD certified the
employees’ time and effort annually. Because of the small number of multi-funded employees in
Tulelake Basin Joint USD, the effect of noncompliance with OMB cost principles may not be
significant.

Recommendation

3.1        We recommend that the Assistant Secretary for Elementary and Secondary Education and
           the Chief Financial Officer require CDE to ensure that all LEAs operating within the
           State implement appropriate policies and procedures to provide assurance that (1) ARRA
           funds are used to pay only allowable program costs, (2) ARRA expenditures are
           “reasonable and necessary” and consistent with State and local requirements, and
           (3) personnel costs charged to Federal grants conform to applicable compensation
           requirements in OMB Circular A-87, ARRA guidance, and/or State requirements.


FINDING NO. 4 – CDE and OPR Need to Ensure that Employees and
                Subrecipients Are Informed of ARRA Whistleblower Protection
                and OMB Requirements for Referrals to Inspectors General

To ensure transparency and oversight of ARRA funds, the statute provides whistleblower
protection, and OMB guidance includes a provision for referrals to the inspectors general (IGs).
Our ARRA work in California found that State and local officials were unaware of these
requirements. The lack of employee awareness about protection from retaliation and LEA
awareness about the IG referral requirement could reduce the likelihood that concerns about
possible misuse of ARRA funds will be raised, investigated, and rectified.

Section 1553 of Division A of ARRA provides whistleblower protection for State and local
government and contractor employees, who report concerns about possible misuse of funds made
available under the Act. 10 The statute prohibits reprisals against whistleblowers, requires a
Federal investigation of all complaints, and requires recipients to notify employees of their rights
under ARRA. In November 2009, OPR informed us that senior managers of all State
departments and agencies were required to attend fraud training presented by California’s ARRA
Inspector General and local Federal IG offices. The training included a presentation on
whistleblower protection under ARRA. Additionally, OPR included the Section 1553
requirements in updated interagency agreements executed with the University of California in


10
     All subsequent section references to ARRA in this report are also to Division A.
Audit Report
ED-OIG/A09J0006                                                                    Page 11 of 16

September and California State University in October, and planned to include the requirements
in a new interagency agreement with CDE.

Section 5.9 of OMB’s updated implementing guidance for ARRA (dated April 3, 2009) directs
Federal agencies to include in their grant agreements a requirement that each grantee and
subgrantee shall promptly refer to the appropriate IG any credible evidence of a civil or criminal
violation involving ARRA funds. Section 1514 of ARRA requires Federal IGs to review any
concerns raised by the public about specific investments using funds made available under the
Act. We confirmed that the Department’s grant award to the Governor’s Office for SFSF, and
CDE for Title I and IDEA under ARRA, included the IG referral provision as a grant award
term, consistent with the OMB guidance.

At the time of our review, officials at the three LEAs reviewed were not aware of the
(1) whistleblower protection provided to non-Federal employees and the statutory requirement to
notify employees of the protection afforded them when reporting misuse of ARRA funds, or
(2) IG referral requirement. We found that CDE did not communicate the whistleblower
protection and IG referral requirements to LEAs when first disbursing ARRA funds to LEAs.
CDE did not include the referral requirement in LEAs’ initial subgrant award for Title I and
IDEA funds under ARRA because it was not aware of the requirement. Once we brought the
matter to its attention in May 2009, CDE included the referral provision in SFSF award letters to
LEAs and said the referral requirement would be included in future Title I and IDEA subgrant
awards.

Recommendations

We recommend that the Assistant Secretary for Elementary and Secondary Education and the
Assistant Secretary for Special Education and Rehabilitative Services require CDE and OPR to
ensure that—

4.1    Employees of State and local governments and contractors are notified of their rights
       protecting them from reprisals when reporting misuse of ARRA funds, in accordance
       with Section 1553 of the Act.

4.2    Recipients and subrecipients of ARRA funds are aware of the requirement to refer any
       credible potential violation of criminal or civil laws involving ARRA funds to the
       appropriate IG in accordance with grant award terms.
Audit Report
ED-OIG/A09J0006                                                                    Page 12 of 16

                                      OTHER MATTER

Delays in Implementing Reporting System May Create Challenges
for Ensuring the Quality of LEAs’ ARRA Information

Section 1512 of ARRA requires recipients and subrecipients to report quarterly on the use of
funds provided under the Act. The first quarterly report was due October 10, 2009. In
California, LEAs reported their data to CDE, which provided the data to the statewide
centralized reporting system for submission to the Federal ARRA reporting Web site
(FederalReporting.gov). CDE met the reporting deadline despite delays in receiving
Departmental guidance and difficulties in implementing its data collection system within
compressed timelines. CDE received a 99 percent response rate from the State’s more than
1,600 LEAs for the first quarterly report.

Even though CDE was able to report data for nearly all LEAs in the State, it recognized that
delays in implementing its data collection system created challenges for ensuring the quality of
the ARRA information reported. CDE cited the lack of specific guidance on reporting
requirements and the ongoing State budget crisis as reasons for delays in developing its ARRA
data collection system.

The compressed timeframe for developing, testing, and implementing CDE’s system may have
increased the risk of inaccurate and incomplete data. To help mitigate this risk, CDE told us
during our review that it planned to preload LEA information where possible to reduce data entry
errors, incorporate system checks for data input and completeness, and implement followup
procedures when errors in LEA data were identified. In November 2009, CDE informed us that
the new subrecipient monitoring procedures being developed for ARRA will also address the
quality of LEAs’ reported expenditures and estimates of the number of jobs saved and created.

We encourage CDE to take full advantage of the review period provided by
FederalReporting.gov to correct and disclose data quality issues each quarter. We also
encourage CDE to implement planned controls to CDE’s data collection system, as well as
assess and modify the controls as needed, to ensure LEA data are accurate and complete.


                                       BACKGROUND

California was scheduled to receive almost $9 billion in education-related funding for State and
local education programs under ARRA. Funds for SFSF, Title I, IDEA, and Vocational
Rehabilitation represented more than $8 billion of this total. As of September 17, 2009, the
Department had awarded 92 percent of the State’s SFSF allocation and 100 percent of the other
ARRA programs we reviewed. Across five grants, the State had drawn down more than half of
the ARRA funds awarded to date, as shown in Table 1.
Audit Report
ED-OIG/A09J0006                                                                   Page 13 of 16

 Table 1. ARRA Funding for Selected Programs in California, as of September 17, 2009
                                 (dollar amounts in millions)
                                                                                  Percent of
 Program                        Allocation      Awarded        Drawn Down
                                                                                Award Drawn
 SFSF – Education Stabilization    $4,875          $4,388          $3,020             62%
 SFSF – Government Services         1,085           1,085           1,085            100%
         SFSF Subtotal             $5,960          $5,473          $4,105             69%
 Title I                            1,125           1,125             463             41%
 IDEA                               1,227           1,227             261             21%
 Vocational Rehabilitation             56              56               3              6%
         Total                     $8,368          $7,881          $4,832             58%

For the ARRA-funded programs reviewed, the Department awarded grants to three State
agencies—OPR on behalf of the Governor’s Office (SFSF), CDE (Title I and IDEA), and
California Department of Rehabilitation (Vocational Rehabilitation). The funds awarded to CDE
and the Department of Rehabilitation supplemented existing programs. OPR took the following
steps to receive funds and administer the new SFSF grant. To receive SFSF funds, the Governor
signed an application on April 9, which was later amended on April 15. Because of State budget
revisions, the Office of the Secretary of Education and the Department of Finance on behalf of
the Governor’s Office later updated the application on May 15, and August 26. The Department
approved the last updated application on September 15, 2009, and at the Governor’s request,
made 90 percent of the State’s SFSF Education Stabilization funds available. Each application
stated that all SFSF Government Services funds would be used for public safety.

To administer the SFSF grants, OPR entered into interagency agreements in May 2009 with four
State-level entities—California Department of Corrections and Rehabilitation to expend SFSF
Government Services funds, the two State university systems (University of California and
California State University) to expend SFSF Education Stabilization funds, and CDE to allocate
and distribute SFSF funds to LEAs.

About 220,000 students were enrolled at 10 campuses comprising the University of California
system. The California State University system operates 23 campuses with an enrollment of
nearly 450,000 students. CDE oversees the State’s elementary and secondary education system,
which serves more than 7 million students in more than 9,000 schools. CDE passed through all
SFSF Education Stabilization funds not allocated to the higher education institutions, and most
Title I and IDEA funds, drawn down to date to more than 1,600 LEAs. At the time of our visits,
the three LEAs we reviewed planned to use some or all ARRA funds as listed in Table 2.


Table 2. Planned Use of ARRA Funds in Three LEAs
      LEA                   Title I                   IDEA                        SFSF
San Diego USD    Class size reduction       Professional development   SERP
Chico USD        New teaching positions     New teaching positions     Existing teaching positions
Tulelake Basin   Professional development   Summer school program
                                                                       Class size reduction
Joint USD        Part-time teacher          Capital expenditures
Audit Report
ED-OIG/A09J0006                                                                               Page 14 of 16

The California Department of Rehabilitation annually serves about 120,000 individuals with
significant physical and mental disabilities throughout the State. Before drawing down any
funds, the Department of Rehabilitation developed a comprehensive plan describing its
objectives and 10 projects to be funded by Vocational Rehabilitation funds under ARRA.
Between fiscal years 2009-10 and 2010-11, planned uses of funds include providing services to
individuals on the waiting list, increasing services to eligible consumers through on-the-job
training and internship opportunities, enhancing technology across the agency, and renovating its
orientation center for the blind. ARRA funds will also be used for temporary positions to plan,
monitor, implement, track, and report on the funded projects.

Several State-level entities are also responsible for overseeing ARRA funds coming into
California. In March 2009, the Governor established the California Recovery Task Force to
track the ARRA funds coming into the State, ensure the funding funneled through the State is
spent efficiently and effectively, and manage the State’s ARRA Web site. In April, the Governor
appointed a new Inspector General to make sure ARRA funds are used as intended and to
identify instances of fraud, waste, and abuse. At the request of the Task Force, the California
Department of Finance’s Office of State Audits and Evaluations reviewed selected State
agencies’ readiness for ARRA. For the State grants we reviewed, the readiness reviews
concluded that (1) OPR and the Office of the Secretary of Education needed to clarify oversight
responsibilities, (2) CDE had some necessary processes in place but as of July was waiting for
additional guidance, and (3) the California Department of Rehabilitation’s experience managing
Federal grants will assist its preparation for receipt, expenditure, and oversight of ARRA funds.

The California State Auditor conducts the State’s single audit and has increased its oversight and
accountability responsibilities under ARRA. In April 2009, the State Auditor identified
California’s implementation of ARRA as high risk based on past single audits, the vast amount
of ARRA funds the State was expected to receive, extensive requirements placed on recipients of
these funds, and the risk of losing ARRA funds if the State fails to comply with the
requirements. In June, the State Auditor reported that CDE was not fully prepared to administer
ARRA funding although progress had been made in correcting previously identified control
weaknesses. Subsequent to our review, the State Auditor began issuing interim single audit
reports concerning various State departments’ administration of Federal programs to ensure
proper accountability and transparency for ARRA expenditures. The State Auditor reported in
November that the California Department of Corrections and Rehabilitation’s use of SFSF funds
to reimburse payroll costs was appropriate. In December, the State Auditor reported five
findings involving internal control issues at the California Department of Rehabilitation that
could affect its administration of Vocational Rehabilitation funds under ARRA. 11



11
  California’s System for Administering Federal Recovery Act Funds, California State Auditor (2009-611,
April 22, 2009); High-Risk Update—California’s System for Administering Federal Recovery Act Funds: State
Departments Are Preparing to Administer Aspects of Recovery Act Funding, but Correction of Control Weaknesses
and Prompt Federal and State Guidance Are Needed, California State Auditor (2009-611.1, June 24, 2009); Federal
Compliance Interim Reporting (Recovery Act Programs) Fiscal Year 2008-09 Single Audit: Corrections and
Rehabilitation, California State Auditor (2009-002.1b, November 23, 2009); Interim Reporting: Fiscal Year
2008-09 Single Audit, California State Auditor (2009-002.2, December 21, 2009).
Audit Report
ED-OIG/A09J0006                                                                    Page 15 of 16

                             SCOPE AND METHODOLOGY

Our review covered five education-related ARRA grants. For each grant, the following list
identifies the original authorizing statute, abbreviated program name, and the Catalog of Federal
Domestic Assistance number under ARRA:

   •   ARRA, Title XIV
          o SFSF Education Stabilization (84.394)
          o SFSF Government Services (84.397)
   •   Elementary and Secondary Education Act of 1965, as amended
          o Title I Part A Basic Grants to LEAs (84.389)
   •   IDEA, as amended
          o Part B section 611 Special Education—Grants to States (84.391)
   •   Rehabilitation Act of 1973, as amended
          o Title I Part B Vocational Rehabilitation State Grants (84.390)

To gain an understanding of the requirements applicable to the design and implementation of
internal controls for Federal grant programs at State and local agencies receiving ARRA funds,
we reviewed Federal laws, regulations, OMB Circulars, and ARRA-specific guidance issued by
OMB and the Department. We assessed the designed systems of controls planned for ARRA
funds. In particular, we assessed whether State and local internal controls were sufficient to
provide reasonable assurance of compliance with Federal requirements in the following areas:

   •   Cash Management. We reviewed State and local entities’ controls for receiving,
       managing, disbursing, and expending ARRA funds. We also determined whether the
       three LEAs reviewed had policies and procedures for correctly calculating and timely
       remitting interest earned on Federal cash balances.

   •   Subrecipient Monitoring. We inquired about plans at CDE and OPR to monitor the
       SFSF activities of subrecipients. We also gained an understanding of CDE’s procedures
       for monitoring Title I and IDEA programs for LEA compliance with Federal fiscal
       requirements related to cash management and the use of funds under ARRA. We did not
       review subrecipient monitoring procedures at the California Department of
       Rehabilitation, which does not award Vocational Rehabilitation subgrants.

   •   Use of and Accounting for Funds. We assessed State and local entities’ plans for
       expending ARRA funds. We also reviewed each entity’s procedures for approving and
       accounting for ARRA expenditures, including the ability to separately account for ARRA
       funds and LEAs’ procedures for contracting, recording personnel expenses, and
       purchasing.

   •   Data Quality. We inquired about State grantees’ plans to collect and report the quarterly
       information required by Section 1512 of ARRA. We also reviewed related reporting
       guidance issued by CDE. In addition, we asked the State and local entities reviewed
       about their ability and willingness to report information required by the statute.
Audit Report
ED-OIG/A09J0006                                                                    Page 16 of 16

   •   Whistleblower Protection and IG Referral. We assessed each entity’s understanding
       of the whistleblower protection requirements provided under ARRA, as well as the IG
       referral requirement articulated in OMB guidance.

At the State level, we performed work at OPR, CDE, and California Department of
Rehabilitation, which are the State grantees to which the Department awarded ARRA funds for
the programs reviewed. We also conducted work at the three State subrecipients of SFSF
funds—that is, the University of California, California State University, and California
Department of Corrections and Rehabilitation. At the local level, we judgmentally selected three
LEAs that were to receive SFSF, Title I, and IDEA programs under ARRA. The three LEAs
represented a mix of (1) total Title I and SFSF funds allocated relative to other LEAs in the
State; (2) urban and rural locations; and (3) other risk factors, such as fiscal health and single
audit findings. We selected and conducted fieldwork at San Diego USD (large LEA), Chico
USD (medium LEA), and Tulelake Basin Joint USD (small LEA). Because Chico USD and
Tulelake Basin Joint USD were each a member of a multi-district SELPA (LEA) for IDEA
purposes, we also conducted work at their respective SELPAs—Butte County Office of
Education and Modoc County Office of Education.

Our review was limited to assessing the design of existing and planned internal controls. At the
State and local entities, we interviewed fiscal and program officials responsible for administering
the ARRA programs reviewed, and reviewed available documentation. Because implementation
of ARRA was in its early stages at the time of our fieldwork, we did not validate statements
made by officials in regard to existing and planned controls over the proper administration and
use of ARRA funds. We also considered the results and findings of prior single audits, OIG
audits, other State reviews, and Departmental program monitoring visits. We did not test the
controls. When we completed our fieldwork in August, the entities were still in the process of
designing and implementing controls under ARRA. Thus, the system of controls we reviewed
may have been substantially modified or not implemented as originally planned. Because of the
limited nature of our review and the other factors mentioned above, there may be additional
control weaknesses that were not identified by our review.

We conducted this performance audit in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions
based on our audit objectives. We believe that the evidence obtained provides a reasonable basis
for our findings and conclusions based on our audit objectives.
     Anyone knowing of fraud, waste, or abuse involving
      U.S. Department of Education funds or programs
  should call, write, or e-mail the Office of Inspector General.

                          Call toll-free:
                   The Inspector General Hotline
                1-800-MISUSED (1-800-647-8733)

                             Or write:
                     Inspector General Hotline
                   U.S. Department of Education
                    Office of Inspector General
                   400 Maryland Avenue, S.W.
                      Washington, DC 20202

                             Or e-mail:
                         oig.hotline@ed.gov

    Your report may be made anonymously or in confidence.

For information on identity theft prevention for students and schools,
  visit the Office of Inspector General Identity Theft Web site at:
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