oversight

U.S. Department of Education FY 2000 Financial Statement Audit Reports.

Published by the Department of Education, Office of Inspector General on 2001-02-28.

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

                          United States Department of Education

                        Notes to Principal Financial Statements
                                     September 30, 2000


Note 1.       Summary of Significant Accounting Policies
Reporting Entity
The U.S. Department of Education (the Department) was established on May 4, 1980, by
Congress, under the Department of Education Organization Act of 1979 (Public Law 96-88). It
is responsible, through the execution of its congressionally approved budget, for administering
direct loan, guaranteed loan, and grant programs.
Under the Higher Education Act Amendments of 1998, Student Financial Assistance (SFA)
became a Performance Based Organization within the U.S. Department of Education. SFA is
responsible for administering and reporting on the Federal Direct Student Loan Program, the
Federal Family Education Loan (FFEL) Program, Pell Grants, and the Campus-Based Program.
The Federal Direct Student Loan Program, authorized by the Student Loan Reform Act of
1993, makes loans directly to eligible undergraduate and graduate students and their parents
through participating schools. SFA borrows money from the Treasury Department to fund the
loans. The Federal Family Education Loan (FFEL) Program, authorized by the Higher
Education Act (HEA) of 1965, as amended, cooperates with state and private nonprofit Guaranty
Agencies to provide loan guarantees and interest subsidies on loans made by private lenders to
eligible students. The Pell Grant and Campus-Based Programs provide educational grants and
other financial assistance to eligible applicants.
The Department also administers numerous grant programs and the Facilities Loan Program.
Grant programs include grants for the disadvantaged, elementary and secondary education,
special education and rehabilitative services, and educational research and improvement. Under
the Facilities Loan Program, also authorized by the HEA of 1965, as amended, the Department
administers low interest loans to institutions of higher education for the construction and
renovation of facilities.

Basis of Accounting and Reporting
The financial statements present the financial position as of September 30, 2000, and the net
cost, changes in net position, and budgetary resources for the year ended September 30, 2000, as
required by the Chief Financial Officers Act of 1990 (Public Law 101-576), and the Government
Management Reform Act of 1994 (GMRA). They were prepared from the books and records of
the Department, in accordance with accounting principles generally accepted in the United States
as promulgated by the Federal Accounting Standards Advisory Board (FASAB) and are
presented in the format prescribed for form and content specified in Office of Management and
Budget (OMB) Bulletin No. 97-01, as amended. These statements are, therefore, different from
the financial reports, also prepared by the Department pursuant to other OMB directives, that are
primarily used to monitor and control the use of budgetary resources. The Balance Sheet,
Statement of Net Cost, and the Statement of Changes in Net Position consolidate the balances of
210 discrete appropriations that comprise 31 fund accounts within eight reporting groups. The
Statement of Budgetary Resources and the Statement of Financing are presented as combined
statements for the Department and as combining statements for the eight reporting groups. Inter-
                                               24
                           United States Department of Education

                         Notes to Principal Financial Statements
                                     September 30, 2000


program transactions and balances are eliminated under the consolidated basis but not under the
combined basis.
The reporting groups include: Student Financial Assistance (SFA); Office of Elementary and
Secondary Education (OESE); Office of Special Education and Rehabilitative Services
(OSERS); Office of Vocational and Adult Education (OVAE); Office of Postsecondary
Education (OPE); Office of Educational Research and Improvement (OERI); Office of Bilingual
Education and Minority Languages Affairs (OBEMLA); and Department Management (DM).
The accounting structure reflects both accrual and budgetary accounting transactions. Under
accrual accounting, revenues are recognized when earned and expenses are recognized when
incurred, without regard to receipt or payment of cash. Under budgetary accounting, budgetary
resources are obligated based on legal requirements, which may differ from when an accrual-
based transaction is recorded.

Use of Estimates in Preparing Financial Statements
The preparation of financial statements in accordance with accounting principles generally
accepted in the United States requires management to make assumptions and estimates that
directly affect the amounts reported in the financial statements. Actual results may differ from
those estimates.

Credit Reform - Present Value Accounting
Beginning October 1, 1991, the Federal Credit Reform Act of 1990 (Public Law 101-508)
requires agencies to measure the total costs of Federal credit programs at the time a loan is
committed. The Federal Credit Reform Act of 1990, the FASAB's Statement of Federal
Financial Accounting Standard (SFFAS) No. 2, Accounting for Direct Loans and Loan
Guarantees, and related regulations and guidance, require recording subsidy costs (the present
value of interest subsidies, defaults, fee offsets, certain administrative expenses and other cash
flows) associated with direct loans and loan guarantees in the year loans are disbursed. In
addition, subsidy costs are recorded as an allowance (reduction) for direct loans receivable or as
a liability for loan guarantees. All credit program receivables are recorded at the principal and
interest outstanding, net of the allowance for subsidy.
Subsidy costs are estimated based on the difference between the present values of expected
government cash outflows (e.g. net interest expense and defaults) and inflows (e.g. collections),
discounted by the interest rate earned on a Treasury debt instrument of similar term at the time
loans are disbursed. Subsidy costs are recognized as an expense in the year loans are disbursed.
Subsidy costs of credit program loans are re-estimated each year.




                                               25
                           United States Department of Education

                         Notes to Principal Financial Statements
                                    September 30, 2000


Budget Authority
Budget authority is the authorization provided by law for the Department to obligate for future
outlays of Federal funds. The Department’s budgetary resources as of September 30, 2000
include current authority (appropriations and borrowing authority) and unobligated balances
remaining from annual, multi-year, and no-year budget authority received in prior years.
Budgetary resources also include reimbursements received and other revenue (spending authority
from offsetting collections credited to an appropriation account and recoveries of prior year
obligations).   Pursuant to Public Law 101-510, unobligated balances associated with
appropriations expiring at the end of the fiscal year remain available only for obligation
adjustment, until the account is cancelled after five years.
Borrowing from Treasury provides most of the funding for the loan principal disbursements
made under the Federal Direct Student Loan Program. The costs of the Department’s programs
are generally funded with congressional appropriations. Revenues are recognized from other
agencies and from the public in exchange for goods or services. Major sources of reported
revenue include interest accrued from the Federal Direct Student Loan Program borrowers on
outstanding loans receivable and interest accrued from Treasury on uninvested fund balances.

Property and Equipment
Previously, the Department expensed all property when it was purchased. In FY 2000, the
Department elected to begin capitalizing bulk purchases of property and equipment with a total
cost of $500,000 or more. A bulk purchase is defined as the purchase of like items related to a
specific project or that occur within the same fiscal year, and have an estimated useful life
greater than 2 years. In accordance with FASAB’s Statement of Federal Financial Accounting
Standard (SFFAS) No. 6, Accounting for Property, Plant, and Equipment, these assets are
depreciated using the straight-line method. The Department has adopted the following useful
lives for classes of depreciable property:
   •     3-Year Property – Information Technology (IT) and Telecommunications equipment
   •     5-Year Property – Furniture and Fixtures

Leases
The Department leases office space from the General Services Administration (GSA).
Generally, leases are cancelable by either party without a penalty upon 120 days notice, and
future lease payments are not accrued as liabilities. Lease costs for office space for FY 2000
amounted to approximately $48.8 million, of which $15.6 million was for non-GSA owned
office space. Under existing commitments as of September 30, 2000, estimated future minimum
lease payments are as follows:




                                              26
                          United States Department of Education

                        Notes to Principal Financial Statements
                                       September 30, 2000




                                Future Minimum Lease Payments
                                      (Dollars in Thousands)
                               Fiscal Year End:           Amount
                               2001                        $20,136
                               2002                          19,974
                               2003                          20,473
                               2004                          20,985
                               After 2004                    21,510
                               Total                      $103,078


The Department does not have any capital leases.

Accounts Receivable
Accounts receivable are monies due from the public for items such as overpayments of
educational assistance. In addition, the Department enters into agreements with other Federal
agencies that result in amounts due the Department. Accounts receivable are estimated using the
net realizable value methodology (see Note 3).

Credit Program Receivables
Credit program receivables are recorded at the principal and interest outstanding, net of
allowances for subsidy. Allowances for subsidy represent the differences between the present
values of estimated cash inflows and outflows of the underlying credit program loans held by the
Department. The allowance for subsidy is amortized using the effective interest method based
on the interest rate at the time the loans were disbursed. All credit program receivables are
valued using net present value methodology (see Note 4).

Accounts Receivable - Guaranty Agency Reserves
Under Section 422A of the HEA of 1965, as amended, Guaranty Agencies were required to
establish a Federal Student Loan Reserve Fund (the "Federal Fund") and an Operating Fund by
December 6, 1998. The Federal Fund and the non-liquid assets developed or purchased by a
Guaranty Agency, in whole or in part with Federal reserve funds, regardless of who holds or
controls the Federal reserve funds or assets, are the property of the United States.

The Federal Fund is to be used only to pay lender claims and default aversion fees into a
Guaranty Agency's Operating Fund. The Operating Fund is the property of the Guaranty Agency
except for funds an agency borrows from the Federal Fund under Section 422A of the HEA of
1965, as amended. The Operating Fund is used by the Guaranty Agency to fulfill its
responsibilities. These include repaying money borrowed from the Federal Fund, default
aversion and collection activities.

                                               27
                            United States Department of Education

                         Notes to Principal Financial Statements
                                       September 30, 2000


Guaranty Agency reserves consist of the Department’s interest in the net assets of FFEL Program
Guaranty Agencies. Guaranty Agency assets include initial Federal start-up funds (Guaranty
Agency advances), receipts of Federal reinsurance payments, insurance premiums, Guaranty
Agency share of collections on defaulted loans, investment income and administrative cost
allowances, and other assets purchased out of reserve funds. Liabilities result from initial
Federal start-up funds, lender claims, operating expenses and Federal reinsurance fees. Guaranty
Agency reserves are recorded as a non-entity asset (see Note 3) and as a corresponding liability
due Treasury.

Liabilities
Liabilities represent the amount of funds likely to be paid as a result of transactions or events
which have already occurred. Liabilities without budget authority are classified as liabilities not
covered by budgetary resources. Most of the FFEL and Federal Direct Student Loan Program
liabilities result from entitlements covered by permanent indefinite budget authority.

Liabilities for Loan Guarantees
The estimated liability for loan guarantees under the FFEL Program is the estimated long-term
cost to the Department of its loan guarantees calculated on a net present value basis, excluding
administrative costs. Obligations for the subsidy cost will be recorded against budget authority
when a loan guarantee commitment is made (see Note 4). Subsidy costs are recognized as
expenses in the year loans are disbursed. This cost is re-estimated each year, which is
recognized as an increase or decrease of subsidy expense.

Borrowing from Treasury
Programs are generally funded by congressional appropriations. However, borrowing from the
U.S. Treasury provides most of the funding for loans made under the Federal Direct Student
Loan Program and Facilities Loan Program. The Department repays the loan principal based on
available fund balances. Interest on the debt is calculated at fiscal year end using rates set by the
U.S. Treasury. Principal and interest payments are remitted to the U.S. Treasury annually.

Accrued Grant Liability
Disbursements of grant funds are made to recipients through a drawdown request using the
Grants and Administrative Payment System (GAPS) and are recorded as expenditures at the time
of disbursement. However, some recipients do not request funds until after they incur the
expenditures. Therefore, the Department accrues a liability for those expenditures for which
drawdowns have not yet been requested. The accrual amount is estimated based on a statistical
sample.




                                                 28
                           United States Department of Education

                         Notes to Principal Financial Statements
                                      September 30, 2000


Net Position
Net position consists of unexpended appropriations and cumulative results of operation.
Unexpended appropriations include undelivered orders and unobligated balances, excluding
activity of the liquidating and financing accounts required under the Federal Credit Reform Act
of 1990. Cumulative results of operations represent the net result of operations since inception
(i.e. the difference between the Department’s financing sources and its expenses).

Prior Period Adjustments
Prior period adjustments are included in the calculation of the net change in cumulative results of
operations to correct errors from prior periods and reflect accounting changes with retroactive
effects.

Annual, Sick and Other Leave
The liability for annual leave, compensatory time off, and other leave is accrued when earned
and reduced when taken. Each year, the accrued annual leave account balance is adjusted to
reflect current pay rates. Annual leave earned but not taken, within established limits, is funded
from future financing sources. Sick leave and other types of non-vested leave are expensed as
taken.

Retirement Plans and Other Employee Benefits

Employees participate in either the Civil Service Retirement System (CSRS), a defined benefit
plan, or the Federal Employees Retirement System (FERS), a defined benefit and contribution
plan. For CSRS employees, the Department contributes 8.51 percent of pay. For FERS
employees, the Department contributes 10.7 percent of pay to the defined benefit plan and 1
percent of pay to the thrift savings plan (a defined contribution plan), and matches employee
contributions to the thrift savings plan up to an additional 4 percent of pay. For FERS
employees, the Department also contributes the employer’s share for Social Security (FICA) and
Medicare.

SFFAS No. 5, Accounting for Liabilities of the Federal Government, requires government
agencies to report the full cost of employee benefits for the CSRS, FERS, the Federal Employee
Health Benefit (FEHB), and the Federal Employees Group Life Insurance (FEGLI) programs.
The Department used the applicable cost factors provided by the Office of Personnel
Management (OPM) in these financial statements.

Federal Employees Compensation Act
A portion of the estimated liability for disability benefits assigned to the Department under the
Federal Employees Compensation Act (FECA), administered and determined by the Department
of Labor (DOL) is accrued. The liability is based on the net present value of estimated future

                                                29
                           United States Department of Education

                         Notes to Principal Financial Statements
                                      September 30, 2000


payments as determined by DOL.

Related Party Transactions
The Department’s financial activities interact with and depend upon those of the Federal
government as a whole. Specifically, the Department is subject to the financial decisions and
management controls of OMB and the U.S. Treasury. As a result of the relationship with other
Federal government entities, operations may not be conducted, nor financial position reported, as
they would if the Department were a separate and unrelated party.

Note 2.        Fund Balance with the U.S. Treasury

                                 Fund Balance with the U.S. Treasury
                                        (Dollars in Thousands)
                          Appropriated Funds                   $29,993,164
                          Revolving Funds                        12,104,012
                          All Other Funds                            63,543
                          Total                                $42,160,719


The Fund Balance with the U.S. Treasury represents appropriated funds and revolving funds,
which include undisbursed U.S. Treasury borrowings that are available to pay current liabilities
and finance loan programs. The Department has the authority to disburse the funds directly to
agencies and institutions participating in its programs. The U.S. Treasury processes cash receipts
and disbursements on behalf of the Department. The undisbursed account balances are entity
assets.
A portion of the appropriated funds included at September 30, 2000, were funded in advance by
multi-year appropriations for expenditures anticipated during the current and future fiscal years.
Revolving funds conduct continuing cycles of business-like activity and do not require an annual
appropriation. The Department also maintains undisbursed account balances with the U.S.
Treasury in deposit funds that are not available to fund the activities of the Department. In FY
2000, these balances amounted to $216 million.

Note 3.        Accounts Receivable

                                         Accounts Receivable
                                           Net Amount Due
                                        (Dollars in Thousands)
                      Entity Accounts Receivable
                       Governmental                                 $      82,703
                      Non-Entity Accounts Receivable                    2,231,814
                      Total Accounts Receivable                     $2,314,517

                                                  30
                           United States Department of Education

                         Notes to Principal Financial Statements
                                      September 30, 2000



Entity accounts receivable represent balances due from recipients of grant and other financial
assistance programs, and from other Federal agencies. They are recorded at their net realizable
value. Estimates for the allowance for loss on uncollectible accounts are based on historical
data.
Guaranty Agency reserves and Federal fund balances are recorded as a non-entity accounts
receivable and as a liability due to the U.S. Treasury. Guaranty Agency reserves and Federal
fund balances represent the Federal government’s interest in the net assets of state and non-profit
FFEL Program Guaranty Agencies.

Note 4.        Credit Program Receivables and Liabilities for Loan Guarantees
The Department provides loans to students and parents through the Federal Direct Student Loan
Program and the Federal Family Education Loan Program. The Department also administers low
interest loans through the Facilities Loan Program to assist in the construction, reconstruction, or
renovation of housing, academic facilities, and other educational facilities for students and
faculty at institutions of higher education.
Under the Federal Direct Student Loan Program, the Federal government provides loans directly
to qualified individuals through participating schools. Loans are available to students and their
parents regardless of income, and student borrowers who demonstrate financial need receive
Federal interest subsidies.
Under the FFEL Program, over 4,000 financial institutions make loans to students and parents.
The Federal government guarantees these loans against default, with 36 state or private non-
profit Guaranty Agencies acting as intermediaries in administering the guarantees. FFEL
Program participants receive Federal interest and special allowance subsidies and the Guaranty
Agencies receive administrative fee payments. All payments are set by statute. Lenders and
Guaranty Agencies also share in the cost of defaulted loans.
The Federal Credit Reform Act of 1990 governs direct loan obligations and loan guarantee
commitments, made after fiscal year 1991, and the resulting direct loans or loan guarantees. It
provides that the subsidy costs associated with direct loans and loan guarantees be recognized as
an expense in the year the direct or guaranteed loan is disbursed. The subsidy costs are revalued
annually, and are calculated as a net present value of interest subsidies, defaults, fee offsets,
certain administrative expenses, and other cash flows. Under credit reform, these subsidy cash
flows exclude direct Federal administrative expenses. (For the student loan programs, an
exception is made for contractual payments to third-party private loan collectors, who receive a
set percentage of amounts they collect.)
The Federal Direct Student Loan Program and defaulted FFEL Program loan receivables are
reported net of an allowance for subsidy computed at net present value. The FFEL program
estimated loan liability is reported at the net present value of estimated net cash outflows. The
                                                31
                           United States Department of Education

                         Notes to Principal Financial Statements
                                     September 30, 2000


Department has elected to report its pre-fiscal year 1992 defaulted FFEL program loans and loan
guarantee liabilities on a net present value basis.
The Department estimates all cash flows associated with loans made under the Federal Direct
Student Loan and FFEL Programs, including the loss related to future defaults. Projected cash
flows are used to develop subsidy estimates, which, as noted above, represent the net present
value of future Federal costs associated with a cohort of loans. These estimates are recorded as a
reduction of the direct loans and FFEL Program defaulted loans receivable outstanding, and as a
liability for the FFEL Program guarantees. To comply with the Federal Credit Reform Act of
1990 and related requirements, the Department employs a cash flow projection model to
compute the estimated subsidy cost. The Department estimates cash flows over the life of a loan,
grouping the loans by loan type, cohort year, and risk group. The cohort year for a loan
represents the year the direct loan is obligated or the FFEL Program loan is guaranteed. Risk
groups include students at two-year colleges, four-year colleges, graduate schools, and
proprietary schools.
In recent years, the consolidation of existing loans into new direct or guaranteed loans has
increased significantly. Under the Federal Credit Reform Act of 1990 and guidance provided by
OMB Circulars A-11 and A-34, the retirement of an existing loan through consolidation is
considered a payment of principal and interest to the loan holder: either a private lender or, in
the case of defaulted loans, the Department. One effect of this treatment is that Department
collections on defaulted loans are significantly higher than they would have been in the absence
of the increase in consolidations. Collections related to the disbursement of a new consolidation
loan reduce the subsidy cost of the retired underlying loans.
The liability and net receivable apply only to currently existing loans. As noted above,
borrowers may pre-pay and close out existing loans from capital raised through the disbursement
of a new consolidation loan. The FY 2000 loan liability and net receivable include estimates of
future prepayments of existing loans; they do not, however, reflect costs associated with these
anticipated consolidation loans, which do not currently exist.
The credit program receivables at September 30, 2000, are comprised of Direct Loans, defaulted
FFEL Program loans, and related interest receivable net of the allowance for subsidy. The credit
program receivables, presented by credit program, are summarized as follows:




                                               32
                                  United States Department of Education

                                Notes to Principal Financial Statements
                                              September 30, 2000




                                           Credit Program Receivables
                                               (Dollars in Thousands)
                                                        Defaulted FFEL Loans
                                        Direct                                       Facilities
                                        Loans          Pre 1992       Post 1991       Loans            Total
Loans Receivable                       $58,522,455     $14,986,951     $5,341,825        $504,976    $79,356,207
Interest Receivable                      1,707,927        2,006,678     1,188,792            9,342      4,912,739
Gross Program Receivables              $60,230,382     $16,993,629     $6,530,617         $514,318   $84,268,946
Less: Allowance for Subsidy              2,585,250     (14,086,594)     1,502,777        (108,375)   (10,106,942)
Net Credit Program Receivables         $62,815,632      $2,907,035     $8,033,394        $405,943    $74,162,004


The FY 2000 allowance for subsidy in Direct Loans and post-1991 FFEL loans have positive
balances. This is a function of the high collection rate on Department receivables and the
estimates that total future collections of principal and interest will exceed the current receivable
for these loans.
It is important to recognize that the credit program receivables, net amount, is not the same as the
proceeds that the Department would expect to receive from selling the loans. The proceeds the
Department would expect to receive would be determined by the marketplace.
As of September 30, 2000, total outstanding loan guarantees under FFEL were approximately
$139 billion. If all the loans currently guaranteed defaulted, the Department would not pay the
full guaranteed amount to the Guaranty Agencies. Instead, it would pay an amount ranging from
75 to 95 percent based on reinsurance rates and the default rate of the Guaranty Agency.
The present value of estimated losses on guaranteed loans as of September 30, 2000, is shown
below:

                                           Liability for Loan Guarantees
                                               (Dollars in Thousands)
                              Pre-1992 Guarantees, Present Value             $443,713
                              Post-1991 Guarantees, Present Value           13,224,270
                              Total Loan Guarantee Liability               $13,667,983



Loan liabilities and net receivables represent the net present value of future projected cash flows,
including principal and interest repayments. As such, these estimates vary significantly with
changes in forecasting assumptions, particularly involving the interest rates charged to students,
paid to loan holders, and used for discounting cash flows. The FY 2000 liability was calculated
using government-wide interest rate projections provided by the Office of Management and
Budget on November 21, 2000. The Bush Administration, which entered office, January 20,
2001, may issue revised interest rate forecasts that could produce a significantly different
                                                        33
                            United States Department of Education

                          Notes to Principal Financial Statements
                                        September 30, 2000


liability estimate. As a result, the President’s FY 2002 budget, which will reflect any revised
interest rate assumptions provided by the new Administration, may include a liability estimate
that differs from that included in the FY 2000 financial statements.
Total Direct Student Loan and FFEL Program subsidy expenses for the period ended September
30, 2000, are shown below:

                                             Subsidy Expense
                                          (Dollars in Thousands)
                                                Direct Student
                                                Loan Program     FFEL Program             Total
        Loan Defaults (Net of Recoveries)           $ 453,467       $ 1,262,779         $1,716,246
        Interest Subsidies                           (1,880,221)       2,815,910            935,689
        Fees                                             545,993     (1,067,831)          (521,838)
        Other Write-offs                               (187,889)         519,276            331,387
        Total Current Year Subsidy Transfers       $(1,068,650)      $ 3,530,134        $2,461,484
        Re-estimates                                 (2,864,278)     (3,234,603)        (6,098,881)
        Total Subsidy Expense                     $(3,932,928)          $   295,531   $(3,637,397)


The Facilities Loan Program incurred a negative subsidy expense of $596 thousand for FY 2000.

Note 5.        Property and Equipment
Property and equipment includes computer software for a new financial accounting system. As
of September 30, 2000, the acquisition cost was $1.3 million. Since the system was not yet in
service at the end of FY 2000, no amortization has been recognized.



Note 6.        Borrowing from Treasury

                                    Status of Debt to the U.S. Treasury
                                           (Dollars in Thousands)
                                                  Direct Student    Facilities
                                                       Loans         Loans          Total
             Beginning Balance                        $52,069,506 $379,803       $52,449,309
             New Borrowing                              16,346,598           0     16,346,598
             Repayments                                (3,069,223)       (298)    (3,069,521)
             Reclassified as a Payable to FFB                         (11,000)       (11,000)
             Ending Balance                         $65,346,881     $368,505     $65,715,386


The Department’s debt to the U.S. Treasury was $65.7 billion as of September 30, 2000. The
funds were borrowed to provide funding for the direct loan and facilities loan programs. The

                                                    34
                            United States Department of Education

                         Notes to Principal Financial Statements
                                        September 30, 2000


borrowing is authorized through indefinite permanent authority at interest rates set each year by
the U.S. Treasury. In FY 2000, the Department reclassified the debt related to the Historically
Black Colleges and Universities (HBCU) Capital Financing Program as a Payable to the Federal
Financing Bank (see Note 8).

Note 7.        Payable to Treasury
At September 30, 2000, the Department reported $7.9 billion as a payable to the U.S. Treasury.
$3.9 billion is associated with the FFEL Program liquidating fund and will be repaid from future
excess liquidating fund receivable collections. $4.0 billion represents a downward subsidy re-
estimate in the FFEL program fund. This amount will be repaid in FY 2001.

Note 8.        Payable to Federal Financing Bank
Public Law 102-325, the Higher Education Amendments of 1994, authorized the Department to
issue bonds on behalf of the HBCU Capital Financing Program. To date, all bonds issued under
this program have been purchased by the Federal Financing Bank (FFB). The Department
reports the corresponding liability for full payment of principal and interest as a payable to the
FFB under rules established by the Credit Reform Act of 1990.

                                   Payable to Federal Financing Bank
                                         (Dollars in Thousands)
                        Reclassified from Borrowing from Treasury          $11,000
                        New Borrowing                                        9,796
                        Repayments                                            (97)
                        Ending Balance                                     $20,699


Note 9.        Other Liabilities
Other liabilities covered by budgetary resources include contractual services, administrative
services, interagency agreement accruals, and suspense account balances. Other liabilities not
covered by budgetary resources include accrued annual leave and FECA disability benefits.

                                              Other Liabilities
                                          (Dollars in Thousands)
                   Other Liabilities Covered by Budgetary Resources:
                     Intragovernmental                                        $ 112,562
                     Governmental                                               186,424
                     Total                                                    $ 298,986
                   Other Liabilities Not Covered by Budgetary Resources:
                     Intragovernmental                                        $ 250,261
                     Governmental                                                44,734
                     Total                                                    $ 294,995
                   Total Other Liabilities                                    $ 593,981

                                                   35
                           United States Department of Education

                          Notes to Principal Financial Statements
                                        September 30, 2000



Note 10.       Accrued Grant Liability
The Department’s accrued grant liability of $2 billion represents an estimate of the expenses
incurred by grantees that have not yet been reimbursed. The total liability is allocated among the
reporting groups based on the grant balance available at September 30, 2000. The accrued grant
liability by reporting group is shown below:

                                       Accrued Grant Liability
                                       (Dollars in Thousands)
                                   Reporting           Allocated
                                      Group          Grant Liability
                                SFA                         $319,376
                                OESE                         752,098
                                OSERS                        486,687
                                OVAE                         137,219
                                OPE                          179,749
                                OERI                           80,245
                                OBEMLA                         50,755
                                Total                     $2,006,129


Note 11.       Net Position
Net Position is composed of two elements – unexpended appropriations and cumulative results
of operations. Unexpended appropriations represent appropriations not yet expended, which have
not lapsed, been withdrawn, or rescinded. The Department’s unexpended appropriations consist
of unobligated balances – available, unobligated balances – not available, and undelivered
orders. The Department’s unexpended appropriations as of September 30, 2000, are summarized
as follows:

                                       Unexpended Appropriations
                                         (Dollars in Thousands)
                  Unobligated
                    Available                                            $ 1,795,131
                    Not Available                                            566,462
                  Undelivered Orders                                      24,361,167
                  Total                                                 $ 26,722,760

Unexpended appropriations do not include any funding activity for which appropriations have
not been received. Therefore, the unobligated balances and undelivered orders for financing
funds are not included in unexpended appropriations. As a result, unexpended appropriations
reported in the Consolidated Balance Sheet will not agree with the balances of budget authority.



                                                  36
                          United States Department of Education

                         Notes to Principal Financial Statements
                                     September 30, 2000


Cumulative results of operations represent the net result of operations since inception. As of
September 30, 2000, the Department’s cumulative results of operations amounted to a $124
million deficiency (i.e. expenses exceeded financing). The deficiency consists primarily of
unfunded expenses for certain payroll accruals and a subsidy re-estimate for the Federal Direct
Student Loan Program that will be executed in FY 2001. These expenses are funded from future
appropriations and the cumulative results of operations will be reversed through the normal
accounting process when funding occurs.

Note 12.        Interest Revenue and Expense
The interest revenues and expenses directly attributable to the Federal Direct Student Loan
Program, the FFEL Program, and other remaining programs are summarized below:

                                   Interest Revenue and Expenses
                                       (Dollars in Thousands)
                           Federal Direct
                           Student Loan
                             Program            FFEL Program       Other Programs      Total
Interest Revenue
   Federal                      $1,261,281            $499,843            $      161   $1,761,285
   Non-Federal                   3,211,256                                    23,067    3,234,323
Total Interest Revenue          $4,472,537            $499,843            $ 23,228     $4,995,608
Interest Expense
   Federal                      $4,472,537            $499,843            $ 20,933     $4,993,313
   Non-Federal                         115                 109                  81            305
Total Interest Expense          $4,472,652            $499,952            $ 21,014     $4,993,618


Note 13.        Allocation of Direct and Indirect Cost
The reported salaries and administrative expenses include the allocation of direct and indirect
administrative costs among the reporting groups. The distribution was made in accordance with
the FASAB’s Statement of Federal Financial Accounting Standard (SFFAS) No. 4, Managerial
Cost Accounting Concepts and Standards for the Federal Government, and is calculated based on
a combination of full time employees and program costs.




                                                37
                          United States Department of Education

                        Notes to Principal Financial Statements
                                    September 30, 2000




                              Allocation of Administrative Expenses
                                      (Dollars in Thousands)
                          Reporting     Direct      Indirect    Total
                           Group        Costs        Costs      Costs
                          SFA          $ 50,580     $ 63,131   $113,711
                          OSERS           32,182      22,628     54,810
                          OCR                   0     30,076     30,076
                          OERI            34,806      14,304     49,110
                          OESE            23,304      23,124     46,428
                          OPE             25,878      12,468     38,346
                          OBEMLA           3,729       2,569      6,298
                          OVAE             9,943       7,077     17,020
                          Total        $180,422     $175,377   $355,799


Note 14.      Imputed Financing
The Statement of Changes in Net Position recognizes an imputed financing source of $20.8
million for the period ended September 30, 2000. A corresponding post-employment benefit
expense is recognized on the Statement of Net Cost as a program cost under salaries and
administrative expense. The imputed financing source represents annual service costs not paid
by the Department or employee contributions to the Civil Service Retirement System. No
imputed financing source is recognized for the Federal Employee Retirement System, since it is
a fully funded retirement service plan. The post-employment benefit expense represents the
Department's estimate of the funds necessary to pay employees future pension, life, and health
benefits.

Note 15.      Prior Period Adjustments
During FY 2000, the Department performed various analyses of its account balances in an effort
to improve the financial data recorded in its accounting records. Adjustments were made to
Fund Balance with Treasury, Loan Guarantee Liability, Disbursements in Transit, and other
financial statement accounts. Items of income and expense related to prior periods were
recorded as prior period adjustments and Net Position was amended to reflect the adjustments.




                                               38
                           United States Department of Education

                         Notes to Principal Financial Statements
                                      September 30, 2000




                                     Prior Period Adjustments
                                       (Dollars in Thousands)
                                                Adjustments Related
                       Equity and Loan           to GAPS Subsidiary
                      Guarantee Liability     System and Proprietary
                        Adjustment in               And Budgetary           Other
 Reporting Group     FFEL Financing Fund      Account Reconciliation     Adjustments       Total
 FFEL                             $820,123                     $12,805         $(8,283)   $824,645
 DL                                                                              20,694      20,694
 SFA Grants                                                     85,716                       85,716
 OESE                                                            3,701                        3,701
 OSERS                                                        (63,372)                     (63,372)
 OVAE                                                          (3,824)                      (3,824)
 OPE                                                          (27,925)           87,556      59,631
 OERI                                                         (27,935)                     (27,935)
 OBEMLA                                                         10,191                       10,191
 DM                                                           (35,863)                     (35,863)
 Total Adjustments                $820,123                   $(46,506)          $99,967   $873,584


The Department performed a detailed review of the FFEL financing fund to identify prior year
transactions that created cumulative results of operations as of Fiscal Year 1999 year-end. Under
Federal Credit Reform accounting, financing funds do not generate net costs or cumulative
results of operations. Prior period adjustments were made to comply with current credit reform
accounting practices which resulted in corrections to the Loan Guarantee Liability account and
Net Position.
The Department performed the following analyses during FY 2000 that resulted in prior period
adjustments related to its grant and loan programs:

   •   Analysis of undelivered order balances between the GAPS payment system (subsidiary
       system) and the general ledger.

   •   Reconciliation of transactions recorded in the Disbursement in Transit Account, dating
       back to Fiscal Year 1997, when the Department converted to its current accounting
       system.

   •   Relationships between Fund Balance with Treasury and budgetary accounts comprising
       unobligated balances, undelivered orders, and accounts payable and receivable.
The adjustments resulted in changes to Fund Balance with Treasury, Unexpended
Appropriations, Undelivered Orders, and Unobligated Balances.

Other prior period adjustments were made to correct transactions posted in prior years.

                                                 39
                          United States Department of Education

                        Notes to Principal Financial Statements
                                      September 30, 2000


Note 16.     Unobligated and Obligated Balances – Beginning of Period
During FY 2000, the Department performed a review of Fiscal Year 1999 ending balances and
recorded adjustments to correct account balances. The adjustments were made to Obligations
Incurred and beginning Obligated and Unobligated balances. The Statement of Budgetary
Resources reflects the adjusted beginning Unobligated and Obligated balances.         The
reconciliation is shown below.

                           Unobligated Balances – Beginning of Period
                                     (Dollars in Thousands)
                               Fiscal Year 2000                     Fiscal Year 2000
                              Beginning Balance                    Beginning Balance
              Reporting Group     (Unadjusted)      Adjustments        (Adjusted)
              FFEL                     $7,771,917       $498,922            $8,270,839
              DL                            29,794                              29,794
              SFA Grants                 4,720,204        182,208            4,902,412
              OESE                         349,420       (43,763)              305,657
              OSERS                        176,630         (7,741)             168,889
              OVAE                          68,870             (9)              68,861
              OPE                           80,431           (986)              79,445
              OERI                          22,278           (120)              22,158
              OBEMLA                         3,682                               3,682
              DM                            30,209       (17,675)               12,534
              Total                     $13,253,435      $610,836         $13,864,271



                            Obligated Balances – Beginning of Period
                                     (Dollars in Thousands)
                                Fiscal Year 2000                   Fiscal Year 2000
                              Beginning Balance                   Beginning Balance
              Reporting Group     (Unadjusted)      Adjustments       (Adjusted)
              FFEL                      $3,060,836      $745,255           $3,806,091
              DL                         6,907,766                          6,907,766
              SFA Grants                 2,807,498       143,208            2,950,706
              OESE                       9,751,345       (76,228)           9,675,117
              OSERS                      7,868,327        (3,320)           7,865,007
              OVAE                       1,912,742             11           1,912,753
              OPE                        1,572,427            (4)           1,572,423
              OERI                         704,807       (10,610)             694,197
              OBEMLA                       529,117                            529,117
              DM                           253,153             65             253,218
              Total                     $35,368,018      $798,377         $36,166,395




                                                40
                           United States Department of Education

                         Notes to Principal Financial Statements
                                      September 30, 2000


Note 17.       Statement of Budgetary Resources
The Statement of Budgetary Resources compares budgetary resources with the status of those
resources. As of September 30, 2000, budgetary resources outstanding were $81.3 billion and
outlays for the year were $48.6 billion. The Department had $33.1 billion in net budgetary
resources obligated for undelivered orders at September 30, 2000, consisting of $16.2 billion for
SFA, $8.1 billion for OESE, $4.6 billion for OSERS, $1.8 billion for OPE, $1.1 billion for
OVAE, and $1.3 billion for all other programs. An undelivered order is an amount of goods and
services ordered from another Federal agency or the public but not yet received, i.e., the amount
of orders for goods and services outstanding for which the liability has not yet accrued.
Borrowing authority is a budgetary resource used to fund loans made under the Federal Direct
Student Loan Program. Borrowing authority is authority granted to a Federal entity to borrow
and to obligate and expend the borrowed funds. This program may borrow from Treasury to
fund loans originated during the year. The available borrowing authority remaining for loans
originated during FY 2000 was $3.3 billion. Borrowings may be repaid to Treasury at any time
without penalty and funds not expended accrue interest as uninvested funds. The majority of the
funds used to repay Treasury borrowings are from collections on outstanding loans.
The Federal Direct Student Loan Program and the FFEL Program were granted permanent
indefinite appropriation budget authority through previously enacted legislation. The following
legislation pursuant to the HEA of 1965 (Part D of the William D. Ford Federal Direct Loan
Program and Part B of the Federal Family Education Loan Program) pertains to the existence,
purpose, and availability of the permanent indefinite appropriation authority:
“Federal Direct Student Loan Program: In General-There are hereby made available, in
accordance with the provisions of this part, such sums as may be necessary to make loans to all
eligible students (and the eligible parents of such students) in attendance at participating
institutions of higher education selected by the Secretary, to enable such students to pursue their
course of study at such institutions during the period beginning July 1, 1994.”
“Federal Family Education Loan Program: Authorization of appropriations for the purpose of
carrying out this part - there are authorized to be appropriated to the student loan insurance fund
(established by section 431) (A) the sum of $ 1,000,000 and (B) such further sums, if any as may
become necessary for the adequacy of the student loan insurance fund.”
The majority of the “Adjustments” line item on the Statement of Budgetary Resources consists
of repayments of borrowings, negative subsidy returns, and excess collections returned to
Treasury. In addition, adjustments were made in preparing the fiscal year 2000 Statement of
Budgetary Resources. The beginning obligated and unobligated balances were incorrect due to
systemic problems in the general ledger closing process and other accounting errors that
occurred in prior years. The Beginning Unobligated Balance was adjusted upward by
$611 million while the Beginning Obligated Balance was adjusted upward by $798 million
(see Note 16).

                                                41
                           United States Department of Education

                         Notes to Principal Financial Statements
                                        September 30, 2000


The Statement of Budgetary Resources is presented as a combined statement for the Department
and as a combining statement for its major programs. The budgetary resources obligated
balances, by reporting group, as of September 30, 2000, are summarized below:

                                        Obligated Balances
                                      (Dollars in Thousands)
                        Reporting Group                            Amount
                        SFA                                       $21,629,148
                        OESE                                        8,825,209
                        OSERS                                       5,118,981
                        OVAE                                        1,271,965
                        OPE                                         1,994,678
                        OERI                                          732,133
                        OBEMLA                                        557,130
                        Department Management                         220,591
                        Total                                     $40,349,835


Note 18.       Statement of Financing
The major resources that do not impact net cost of operations for the Department result from loan
guarantee and direct loan activities that fall under the purview of the Credit Reform Act of 1990.
Most cash flows that are normally recorded as an expense or revenue in accrual accounting are
recorded to liability for loan guarantees or the allowance for subsidy under present value
accounting. In addition, special circumstances surround unfunded expenses such as upward
subsidy re-estimates, accrued annual leave, and other payroll-related accruals. These unfunded
expenses affect the Statement of Net Cost but are not covered by budgetary resources, i.e. do not
give rise to a budgetary accounting event. Liabilities not covered by budgetary resources were
$295 million as of September 30, 2000.
The Statement of Financing is presented as a combined statement for the Department and as a
combining statement for its major programs. For the period ended September 30, 2000, the net
cost of operations, by reporting group, is shown below:
                                        Net Cost of Operations
                                        (Dollars in Thousands)
                                Reporting Group              Amount
                                SFA                         $ 6,234,813
                                OESE                         13,828,926
                                OSERS                         8,176,263
                                OVAE                          1,608,749
                                OPE                           1,542,678
                                OERI                            715,758
                                OBEMLA                          409,166
                                Department Management           202,471
                                Total Cost of Operations   $32,718,824

                                                  42
                              United States Department of Education

                            Notes to Principal Financial Statements
                                           September 30, 2000


Note 19.        Cost and Revenue by Budget Function
The Department’s costs and revenue, by budget function, are presented below:

                                    Cost and Revenue by Budget Function
                                           (Dollars in Thousands)
                                                                            Earned
      Budget Function                                        Gross Costs   Revenue      Net Costs
      Education, training, employment, and social services   $37,666,354   $5,086,278   $32,580,076
      Administration of justice                                  138,918          170       138,748
      Total                                                  $37,805,272   $5,086,448   $32,718,824


Note 20.        Contingencies
Guaranty Agencies
The Department can assist Guaranty Agencies experiencing financial difficulties by advancing
funds or by other means. No provision has been made in the principal statements for potential
liabilities related to financial difficulties of Guaranty Agencies because the likelihood of such
occurrences is uncertain and cannot be estimated with sufficient reliability.

Perkins Loans Reserve Funds
The Perkins Loan Program is a campus-based program providing financial assistance to eligible
post-secondary school students based on financial need. The Department provides about 86
percent of the capital used to make loans to eligible students. The remaining 14 percent is
provided by the institution. For the latest academic year (ended June 30, 2000) there were
approximately 653,000 loans made, totaling $1.1 billion at approximately 1,817 institutions,
averaging $1,700 per loan. As of September 30, 2000, the Department's share of the Perkins
Loan Program was approximately $6.2 billion.
Perkins Loan borrowers who meet statutory eligibility requirements--such as service as a teacher
in low-income areas, as a Peace Corp or VISTA volunteer, in the military, or in law enforcement,
nursing, or family services--may receive partial loan forgiveness for each year of qualifying
service. In these circumstances, the Department compensates Perkins Loan institutions for the
cost of lost borrower repayments.

Borrower Class Actions
The Department is involved in pending litigation challenging the enforceability of FFEL
Program loans made to students who attended various closed trade schools. In most instances, a
large percentage of the loans in question are in default and have been acquired by Guaranty
Agencies and/or the Department. No provision has been made in the principal statements for any
potential reductions in estimated future collections related to the outcome of these suits, since the
Department’s potential loss exposure is uncertain.
                                                       43
                           United States Department of Education

                         Notes to Principal Financial Statements
                                      September 30, 2000


Other Matters
The Department is involved in various other claims and legal actions related to its programs,
arising in the ordinary course of business. In addition, some portion of current year financial
assistance expenses (grants) may include funded recipient expenditures which were subsequently
disallowed through program review or audit processes. In the opinion of management, the
ultimate disposition of these matters will not have a material effect on the Department’s financial
statements.




                                                44
           REQUIRED SUPPLEMENTARY INFORMATION
                      For the Year Ended September 30, 2000


                    INVESTMENT IN HUMAN CAPITAL
The U. S. Department of Education (ED) executes programs under the Education,
Training, Employment and Social Services function established by Congress in the
Budget Act of 1974. This report presents Human Capital activity related to the execution
of the ED's congressionally approved budget and programs.

NARRATIVE DISCUSSION

The Department of Education’s mission is to ensure equal access to education and to
promote educational excellence throughout the nation. To carry out this mission, the
Department works in partnership with states, schools, communities, institutions of higher
education, and financial institutions--and through them with students, teachers and
professors, families, administrators, and employers. Key functions of the partnership are:

∙      Leadership to address critical issues in American education.
∙      Grants to education agencies and institutions to strengthen teaching and learning
       and prepare students for citizenship, employment in a changing economy, and
       lifelong learning.
∙      Student loans and grants to help pay for the costs of postsecondary education.
∙      Grants for literacy, employment, and self-sufficiency training for adults.
∙      Monitoring and enforcement of civil rights to ensure nondiscrimination by
       recipients of federal education funds.
∙      Support for statistics, research, development, evaluation, and dissemination of
       information to improve educational quality and effectiveness.

The Department promotes educational excellence for all students by providing financial
support to states and local agencies, promoting challenging standards, getting families
and communities involved in schools, providing information on the best educational
practices, ensuring that postsecondary education is affordable, and providing high-quality
statistics and evaluations on federal programs.

HUMAN CAPITAL PROGRAMS

Federal investment in Human Capital comprises those expenses for general public
education and training programs that are intended to increase or maintain national
economic productive capacity. Concern over America’s ability to compete in world
markets has highlighted the relationship between education and economic growth. The
Department of Education’s Human Capital programs include Elementary and Secondary,
Postsecondary, Student Financial Assistance, Special and Rehabilitative Education,




                                            45
           REQUIRED SUPPLEMENTARY INFORMATION
                       For the Year Ended September 30, 2000


Research and Improvement, Bilingual and Minority Languages, and Vocational and
Adult Education.

Elementary and Secondary Education

The Office of Elementary and Secondary Education provides leadership, technical
assistance, and financial support to State and local educational agencies for maintenance
and improvement of both public and private preschool, elementary, and secondary
education.

Compensatory Education Programs provide financial assistance to State and local
education agencies and other institutions to support services for children in high poverty
schools, institutions for neglected and delinquent children, homeless children, and certain
Indian children.

The Comprehensive School Reform Demonstration Program provides grants to States
to help public schools adopt or develop effective comprehensive school reforms with an
emphasis on basic academics and parental involvement. State educational agencies are
encouraged to place emphasis on schools with low levels of student achievement and
high dropout rates.

Goals 2000 Programs provide grants to support State and local district efforts to
improve schools and parental involvement in schools so all children can reach
challenging academic standards. The Parental Assistance Program helps parents better
understand their children’s educational needs and strengthens the partnerships between
parents and schools. The State and Local Education Systemic Improvement Program
assists States in developing plans to improve teaching and learning through long-term and
broad-based efforts to help students achieve higher standards of learning. The
Technology Literacy Challenge Fund supports State, local and private sector partnerships
focused on integrating technology into teaching and learning.

The Impact Aid Program provides financial assistance for the maintenance and
operations of school districts in which the Federal Government has acquired substantial
real property. It provides direct assistance to local educational agencies that educate
substantial numbers of federally connected pupils (children who live on, or whose parents
work on, federal property).

Indian Education supports the efforts of local educational agencies, Indian tribes, and
other entities to meet the academic needs of American Indians and Alaska Natives so
these students can achieve to the same State performance standards as all students.
Programs include professional development programs designed to increase the number of
Indian individuals in designated professions, a fellowship program for undergraduate and


                                            46
           REQUIRED SUPPLEMENTARY INFORMATION
                       For the Year Ended September 30, 2000


graduate study, programs for the gifted and talented, adult education, and national
research activities.

Migrant Education Programs support high-quality comprehensive educational
programs for migratory children to address disruptions in schooling and other problems
that result from repeated moves. States use funds to design programs to help migratory
children overcome academic, cultural, and language barriers, social isolation, health-
related problems, and other factors that hinder academic achievement.

Safe and Drug-Free Schools Programs provide leadership to ensure that all schools are
free of drugs and violence and the unauthorized presence of firearms and alcohol and that
all schools offer a disciplined environment that is conductive to learning. Students at all
levels of education, from elementary school through college, are supported by such
programs as: Elementary School Counseling and Demonstration, Middle School
Coordinators, Alternative Strategies, and Alcohol and Other Drug Prevention Models On
College Campuses.

School Improvement Programs provide financial assistance to State and Local
Educational Agencies, institutions of higher education, and other public and private
nonprofit organizations for general assistance, projects to meet special educational needs
of target children, and teacher development.

Class Size Reduction Program - Research demonstrates that students attending small
classes in the early grades make more rapid educational progress than students do in
larger classes. These achievement gains persist well after students move on to larger
classes in later grades. The Class-Size Reduction Program is an initiative to help schools
improve student learning by hiring additional, highly qualified teachers so children —
especially those in the early elementary grades — can attend smaller classes. Through
this program, classes in grades K-3 will be reduced to a nationwide average of 18
students. The fiscal year 2000 budget allowed for $1.3 billion dollars to be used for this
purpose.

The 21st Century Community Learning Centers Program is a key in the effort to
keep children safe and to provide academic enrichment and other recreational and
enrichment opportunities such as band, drama, art, and other cultural events for children.
It also provides life-long learning opportunities for community members.

The Community Technology Centers Program expands access to information
technology and learning services by creating computer learning centers in low-income
communities. The centers are used for pre-school preparation, workforce development,
after-school enrichment, and adult and continuing education.



                                            47
           REQUIRED SUPPLEMENTARY INFORMATION
                      For the Year Ended September 30, 2000


The Reading Excellence Program helps children learn to read through instruction based
on research, professional development, family literacy, and extended learning activities.

Postsecondary Education

The Office of Postsecondary Education formulates policy and coordinates programs that
assist postsecondary educational institutions and students pursuing a postsecondary
education.

Policy, Planning, and Innovation supports The Fund for the Improvement of
Postsecondary Education, which provides grants to colleges and universities to promote
reform, innovation, and improvement in postsecondary education.

Higher Education Programs (HEP) administer discretionary funds and provide support
services that improve student access to postsecondary education and foster excellence in
institutions of higher education. Program funds are awarded to elementary, secondary,
and postsecondary education institutions and non-profit organizations that assist in the
distribution and administration of federal funds. HEP also administers several fellowship
programs to graduate and undergraduate students in targeted areas of study.

Learning Anytime Anywhere Partnerships (LAAP) - The Office of Postsecondary
Education supports partnerships among colleges, businesses, and other organizations to
promote technology-mediated distance education that is not limited by time or place.
LAAP improves access to lifelong learning and promotes coordination and resource
sharing among distance education providers.

Student Financial Assistance (SFA) Programs

SFA administers need-based financial assistance programs for students pursuing
postsecondary education. ED makes available federal grants, loans and work-study
funding to eligible undergraduate and graduate students.

ED’s two major loan programs are the Federal Family Education Loan Program (FFELP)
and the William D. Ford Direct Student Loan Program. The FFELP operates with State
and private nonprofit guaranty agencies to provide loan guarantees and interest
supplements through permanent budget authority on loans by private lenders to eligible
students. The William D. Ford Direct Student Loan Program is a direct lending program
in which loan capital is provided to students by the Federal Government through
borrowing from the U.S. Treasury.




                                           48
            REQUIRED SUPPLEMENTARY INFORMATION
                       For the Year Ended September 30, 2000


Special Education and Rehabilitative Services

The Office of Special Education and Rehabilitative Services supports programs that assist
in educating children with special needs. It provides for the rehabilitation of youth and
adults with disabilities and supports research to improve the lives of individuals with
disabilities.

The Office of Special Education Programs administers programs and projects relating
to the free public education of all children, youth, and adults with disabilities from birth
through age 21. Most special education funds provide grants to states and territories to
assist them in providing education to all children with disabilities. The early intervention
and preschool grant programs provide grants to each state for children with disabilities
from birth through age five.

Rehabilitation Services Administration (RSA) oversees programs such as counseling,
medical and psychological services, job training, and other individualized services that
help individuals with physical or mental disabilities to obtain employment. RSA
provides funds to State vocational rehabilitation agencies to provide employment-related
services for individuals with disabilities, giving priority to severely disabled individuals.

The National Institute on Disability and Rehabilitation provides leadership and
support for a comprehensive program of research related to the rehabilitation of
individuals with disabilities.

Educational Research and Improvement

The Office of Educational Research and Improvement (OERI) is responsible for
expanding America’s fundamental knowledge and understanding of education through
research and development. OERI promotes excellence and equity in American education
by conducting research and demonstration projects that help improve education,
collecting statistics on the status and progress of schools, and distributing information
and providing technical assistance to those working to improve education.

Media and Information Services (MIS) provides leadership in developing effective
media and information services for OERI. MIS responds to customer needs through its
outreach and publication activities, ensuring all OERI media products are of the highest
quality in terms of content, format, and suitability for intended audiences.

The National Center for Education Statistics fulfills a Congressional mandate to
collect, collate, analyze, and report complete statistics on the condition of American
education, conduct and publish reports, and review and report on education activities
internationally.


                                              49
           REQUIRED SUPPLEMENTARY INFORMATION
                       For the Year Ended September 30, 2000



The National Institute on Early Childhood Development and Education administers
a comprehensive program of research and development to improve early childhood
development and education. These activities improve the learning, cognitive and
social-emotional development, and general well being of children from birth through age
eight and their families.

The National Institute on the Education of At-Risk Students administers a
comprehensive program of research and development for the improvement of education
for at-risk students. At-Risk Students are defined as those who because of limited
English proficiency, poverty, race, geographic location, or economic disadvantage face a
greater risk of low education achievement or reduced academic expectations.

The National Institute on Educational Governance, Finance, Policymaking, and
Management develops and disseminates information to guide the design and
implementation of effective governance strategies, coherent policy information,
reasonable management decisions, and equitable finance allocations to support high
levels of learning by all students.

The National Institute on Postsecondary Education, Libraries, and Lifelong
Learning provides information about the education and training of adults in a variety of
settings including postsecondary institutions, community-based education programs,
libraries, and the workplace. It conducts research and development activities promoting
quality and access to education and training for adults.

The National Institute on Student Achievement, Curriculum, and Assessment
administers a comprehensive program of research and development to provide leadership
for states and localities striving to improve student achievement in core content areas and
working to integrate these areas to enhance student learning.

The National Library of Education (NLE) is the largest federally funded library
devoted entirely to education. NLE serves in three areas: Reference and Information
Services, which responds to telephone, mail, electronic, and other inquiries for education
information; Collection and Technical Services, which directs the acquisition,
preparation, and assessment of all collections; and Resource Sharing and Cooperation,
which develops and maintains a network of national education resources.

The Office of Reform Assistance and Dissemination supports comprehensive
education reform by linking teachers, administrators, parents, policymakers, and the
public with the best knowledge from education research, statistics, and practice.
Responsibilities include providing technical and financial assistance for development,
conducting research on models for successful uses of knowledge, providing training for


                                            50
           REQUIRED SUPPLEMENTARY INFORMATION
                      For the Year Ended September 30, 2000


putting in place exemplary education programs, connecting schools and teachers with
appropriate sources of assistance, and disseminating useful research findings.

Bilingual Education and Minority Language Affairs

Congress passed the Bilingual Education Act in 1968 in recognition of the growing
number of linguistically and culturally diverse children enrolled in schools who, because
of their limited English proficiency, were not receiving an education equal to their
English-proficient peers. The Office of Bilingual Education and Minority Languages
Affairs helps school districts meet their responsibility to provide equal education
opportunity to limited English proficient children.

Office of Vocational and Adult Education

The Office of Vocational and Adult Education provides funds for vocational-technical
education for youth and adults. Most of the funds are awarded in the form of grants to
State education agencies. These grants are allotted according to a formula based on
States' populations in certain age groups and their per capita income.

STEWARDSHIP EXPENSES

In the Department of Education, discretionary spending constitutes approximately 91
percent of the budget and includes nearly all programs, the major exceptions being
student loans and rehabilitation services.

The Federal Government is mandated by law to cover the cost of guaranteeing and
directly making loans to students. The variable costs of the student loan programs are
largely beyond control, and the costs fluctuate based on the number of students who
borrow or default and the prevailing interest rates. The only other significant mandatory
funding in ED is for Rehabilitation Act programs. The Rehabilitation Act mandates that
the appropriation for State grants must increase each year at the rate of change in the
Consumer Price Index.

While spending for entitlement programs is usually a function of the authorizing statutes
creating the programs, and is not generally affected by appropriations laws, spending for
discretionary programs is decided in the annual appropriations process. Most Department
programs are discretionary - for example, Impact Aid, Vocational Education, Special
Education, Pell Grants, Research, and Statistics.




                                            51
           REQUIRED SUPPLEMENTARY INFORMATION
                      For the Year Ended September 30, 2000


               Fiscal Year 2000 Summary of Human Capital Expenses
                               (Dollars in Thousands)

Student Financial Assistance
  Direct Loan Subsidy Expense                                  $     (3,932,928)
  Guaranteed Loan Subsidy Expense                                       295,531
  Grant Program Expense                                               8,960,280
  Salaries & Administrative Expense                                     273,866
   Subtotal                                                    $      5,596,749

Other Departmental
 OESE Grant Expense                                                 $ 13,773,266
 OSERS Grant Expense                                                   8,104,963
 Other Departmental Program Expense                                    3,955,390
 Salaries & Administrative Expense                                       312,051
   Subtotal                                                        $ 26,145,670

Grand Total                                                        $ 31,742,419



Intra-governmental Amounts

Intra-governmental amounts by trading partner include assets and liabilities. Assets
primarily consist of $42.2 billion in fund balance with the Treasury. Liabilities to the
Treasury include the following: borrowings of $65.7 billion, payables of $7.9 billion, and
Guaranty Agency Federal & Restricted Funds of $2.2 billion. Payables due to the
Federal Financing Bank amount to $20.7 million. Accounts payable, interest payable,
and other intra-governmental liabilities covered by budgetary resources due to other
federal agencies amount to $6.6 million, $83.5 million, and $112.6 million, respectively.
Other intra-governmental liabilities not covered by budgetary resources due to other
federal agencies total $250.3 million.




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                       For the Year Ended September 30, 2000



PROGRAM OUTPUTS

Education is primarily a State and local responsibility in the United States. States and
communities, as well as public and private organizations, establish schools and colleges,
develop curricula, and determine requirements for enrollment and graduation. The
structure of education finance in America reflects this predominantly State and local role.
Combining ED’s expenditures of roughly $42 billion a year with funding from all other
federal agencies, such as the Department of Health and Human Services' Head Start
program and the Department of Agriculture's School Lunch program, the Federal
Government contributes approximately 9 percent of total national expenditures on
education. The remaining 91 percent come from State, local, and private sources. That
$42 billion is less than 2 percent of the Federal Government's $1.8 trillion budget.

ED currently administers 174 programs affecting every area and level of education. The
Department's elementary and secondary programs annually serve more than 15,000
school districts and more than 50 million students attending almost 90,000 public schools
and more than 27,000 private schools. Department programs also provide grant, loan,
and work-study assistance to more than 8 million postsecondary students.

While ED's programs and responsibilities have grown substantially over the years, the
Department itself has not. In fact, ED's fiscal year 2000 full time equivalent staff ceiling
of 4,717 is nearly 37 percent below the 1980 employee level of 7,528. These staff
reductions, along with a wide range of management improvements, have helped limit
administrative costs to less than 2 percent of the Department's budget. This means that
ED delivers more than 98 cents on the dollar in education assistance to States, school
districts, postsecondary institutions and students.

PROGRAM OUTCOMES

Education is the stepping stone to higher living standards for American citizens.
Education is key to national economic growth. But education’s contribution is more than
increased productivity and incomes. Education improves health, promotes social change
and opens doors to a better future for children and adults.

Economic outcomes, such as wage and salary levels, historically have been determined
by the educational attainment of individuals and the skills employers expect of those
entering the labor force. Recently, both individuals and society as a whole have placed
increased emphasis on educational attainment as the workplace has become increasingly
technological and employers now seek employees with the highest level of skills. For
prospective employees, the focus on higher level skills means investing in learning or



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           REQUIRED SUPPLEMENTARY INFORMATION
                       For the Year Ended September 30, 2000


developing skills through education. Like all investments, developing higher level skills
involves costs and benefits.

Returns, or benefits, of investing in education come in many forms. While some returns
accrue for the individual, others benefit society and the Nation in general. Returns
related to the individual include higher earnings, better job opportunities, and jobs that
are less sensitive to general economic conditions. Returns related to the economy and
society include reduced reliance on welfare subsidies, increased participation in civic
activities, and greater productivity.

Over time, the returns of developing skills through education have become evident.
Statistics illustrate the rewards of completing high school and investing in postsecondary
education:

•   Employment Rate: Between 1971 and 1998, the employment rate of male and
    female 25- to 34-year-olds was generally higher among those individuals with a
    higher level of education. The employment rate of males ages 25-34 decreased for
    those who had not finished high school and those with a high school diploma or GED,
    and remained relatively constant for those with some college and those with a
    bachelor's degree or higher. The employment rate of females ages 25-34 increased
    across all education levels. However, the rate of increase for females who did not
    complete high school was lower than the rate of increase for females who attained
    higher levels of education.

•   Annual Earnings: In 1997, the median annual earnings of adults ages 25-34 who had
    not completed high school were substantially lower than those of their counterparts
    who had done so (29 and 37 percent lower for males and females, respectively).
    Adults ages 25-34 who had completed a bachelor’s degree or higher earned
    substantially more than those who had earned no more than a high school diploma or
    GED (50 and 91 percent more for males and females, respectively).

These returns of investing in education directly translate into the advancement of the
American economy as a whole.




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