oversight

U.S. Department of Education's FY 2009 Annual Financial Report

Published by the Department of Education, Office of Inspector General on 2009-11-16.

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

U.S. Department of Education
Arne Duncan
Secretary

Office of the Chief Financial Officer
Thomas Skelly
Delegated to Perform Functions of Chief Financial Officer

November 16, 2009

This report is in the public domain. Authorization to reproduce it in whole or in part is granted. While permission to
reprint this publication is not necessary, the citation should be: U.S. Department of Education, Agency Financial
Report, Washington D.C., 2009.

This report is available on the Department’s Web site at: http://www.ed.gov/about/overview/focus/performance.html.

On request, this publication is available in alternative formats, such as Braille, large print or computer diskette. For
more information, please contact the Department’s Alternate Format Center at 202-260-0852 or 202-260-0818.

The Department’s Strategic Plan is available on the Web at: http://www.ed.gov/about/reports/strat/index.html.

Department annual plans and annual reports are available on the Web at:
http://www.ed.gov/about/reports/annual/index.html.

   The Department welcomes all comments and suggestions on both the content and presentation of this report.
                               Please forward them to: PARcomments@ed.gov

                                            Office of the Chief Financial Officer
                                              U.S. Department of Education
                                              Washington, D.C. 20202-0600

                           The following companies were contracted to assist in the preparation of the
                                U.S. Department of Education FY 2009 Agency Financial Report:

                           For general layout and Web design:    ICF Macro
                                          For database design:   Plexus Corporation
                                      For accounting services:   IBM Business Consulting Services
                                                                 FMR Consulting, Inc.
                                                                 Cotton & Company, LLP




                                                                                    FY 2009 Agency Financial Report—U.S. Department of Education
                                                               FOREWORD
The United States Department of Education’s (the Department’s) Agency Financial Report (AFR) for fiscal year
(FY) 2009 provides an overview of the Department’s financial performance and results to provide Congress, the
President and the American people detailed information about our stewardship over the financial resources
entrusted to us. Additionally, the report provides information about our performance as an organization, our
achievements and initiatives and our challenges.

The AFR is the first in a series of reports required under the Office of Management and Budget’s Pilot Program
for Alternative Approaches to Performance and Accountability Reporting. This is the first year that the
Department has participated in this voluntary program in an effort to strengthen its annual reporting documents
and to present more streamlined and timely information to clarify the relationship between performance,
budgetary resources and financial reporting. The Department intends to provide a more meaningful, transparent
and easily understood analysis of accountability over its resources. The report provides readers with an overview
of the Department’s highest priorities, as well as our strengths and challenges.

The Department’s FY 2009 pilot annual reporting includes the following three components:


 Agency Financial Report (AFR) [available November 2009]

 The AFR, the following report, is organized into three major sections:

 •     The Management’s Discussion and Analysis section provides executive-level information on the Department’s history,
       mission, organization, key activities, analysis of financial statements, systems, controls and legal compliance,
       accomplishments for the fiscal year and management and performance challenges facing the Department.

 •     The Financial Details section provides a Message From the Chief Financial Officer, consolidated and combined financial
       statements, the Department’s notes to the financial statements and the Report of the Independent Auditors.

 •     The Other Accompanying Information section provides Improper Payments Information Act reporting details and other
       statutory reporting requirements.



 Annual Performance Report (APR)                                             FY 2009 Summary of Performance and Financial
 [available February 2010]                                                   Information [available February 2010]

 The APR will be produced in conjunction with the                            This document will provide an integrated overview of
 FY 2011 President’s Budget Request and will provide                         performance and financial information that integrate the
 the detailed performance information and descriptions of                    AFR and the APR into a user-friendly consolidated format.
 results by each key performance measure.



 This report meets the following legislated reporting requirements:
      •    Federal Managers’ Financial Integrity Act of 1982 (FMFIA) requires a report on the status of internal controls and the agency’s most
           serious problems.
      •    Government Performance and Results Act of 1993 (GPRA) guides the agency’s strategic planning and annual planning and reporting.
      •    Federal Financial Management Improvement Act of 1996 (FFMIA) requires an assessment of the agency’s financial systems for
           adherence to governmentwide requirements.
      •    Government Management Reform Act of 1994 (GMRA) requires agency audited financial statements.
      •    Reports Consolidation Act of 2000 (RCA) requires the consolidated reporting of performance, financial and related information.
      •    Improper Payments Information Act of 2002 (IPIA) requires reporting on agency efforts to identify and reduce erroneous payments.




                                All three reports will be available on the Department’s Web site at
                                    http://www.ed.gov/about/overview/focus/performance.html

FY 2009 Agency Financial Report—U.S. Department of Education
“Reforming public education is not just a moral obligation. It is an . . .
economic imperative. It is the foundation of a strong future and a strong
society.”

                                                                —Secretary Duncan




                                          FY 2009 Agency Financial Report—U.S. Department of Education
                                                                 MESSAGE FROM THE SECRETARY




                                   Message From the Secretary
November 16, 2009

This year has been the most active in the 30-year history
of the U.S. Department of Education (the Department).
With challenges faced by school districts, institutions of
higher education and students of all ages, we have
mobilized as a nation to provide stability for the present
and incentives for improvement in the future.

As a Department, we have broadened and deepened our
commitment to the Department’s stated mission: to
promote achievement and preparation for global
competitiveness by fostering educational excellence and
ensuring equal access, using goals and measures that
reflect the importance of early childhood, K-12 and higher
education.

The report focuses on achievement and access; putting performance first; ensuring
responsible implementation of the American Recovery and Reinvestment Act of 2009,
commonly known as the Recovery Act or ARRA; and bringing the government into a new
time of transparency, technology and innovation. The Recovery Act provides $98.2 billion in
education funding and college grants and tuition tax credits.

Achievements:

•    We report weekly on Recovery Act spending, by state and program, and make these
     reports available on our Web site.

•    The Department has accelerated Recovery Act spending by advancing its internal
     deadlines to award $11.37 billion to states one month early to help save jobs and drive
     reform.

•    President Obama joined us at the Department on July 24, 2009, to announce Race to
     the Top—a national competition for states to lead the way in school reforms, backed by
     historic levels of financial support.

•    The Department continues to ensure that eligible students are able to obtain student
     loans despite the challenges in the credit market.

•    For the eighth consecutive year, the Department has earned a clean opinion from
     independent auditors on its financial statements; and for the seventh consecutive year,
     no material weaknesses were identified.

•    Since the “Listening and Learning Tour Online” went live on May 11, hundreds of
     comments have been made regarding the four reforms outlined in the Recovery Act,
     college graduation, teacher evaluations and early childhood. Comments are posted at:
     http://www.edgovblogs.org/duncan/topic/join-the-conversation/.




FY 2009 Agency Financial Report—U.S. Department of Education                                   iii
MESSAGE FROM THE SECRETARY




Future Initiatives:

•     Simplifying the Free Application for Federal Student Aid (FAFSA).

•     Working to ensure we have an efficient and effective student aid delivery process.

Challenges:

•     Ongoing efforts to strengthen and improve controls over information and technology
      processes.

•     Managing Recovery Act spending and continuing recipient and sub-recipient reporting.

•     Addressing time lags in collection and reporting of performance data, which are mostly
      collected from the states.

This report includes information and assurances about the Department’s financial
management systems and management controls required by the Federal Managers’
Financial Integrity Act of 1982. These systems and controls provide reasonable assurance
that the objectives of this Act have been met. For further discussion, please see the
Management’s Assurances section of the Management’s Discussion and Analysis on pages
42-43 of this report.

This year, the Department is participating in an Office of Management and Budget pilot
program discussed in the Foreword of this document. Our performance data are
fundamentally complete and reliable and will be reported in the Annual Performance Report
in February.

Sincerely,

/s/

Arne Duncan




iv                                                    FY 2009 Agency Financial Report—U.S. Department of Education
                                                         CONTENTS
Message From the Secretary................................................................................................ iii

Management’s Discussion and Analysis
Our Mission And History ........................................................................................................ 2
Who We Serve: Our Public Benefit ........................................................................................ 2
Who We Are: Our Organization and Workforce ..................................................................... 3
Linking Taxpayer Dollars to Performance Results: Accountability Through the
    Integration of Results With Investment ............................................................................ 5
How We Validate Our Data .................................................................................................... 7
Our Accomplishments and Ongoing Initiatives for FY 2009 .................................................. 9
A Strategic Framework for Education Reform ..................................................................... 20
The Department’s Strategic Plan ......................................................................................... 21
Overview of Performance for FY 2009................................................................................. 22
Financial Highlights .............................................................................................................. 27
Memorandum From the Office of Inspector General ........................................................... 33
Office of Inspector General’s Management Challenges for Fiscal Year 2010 ..................... 34
Management’s Assurances.................................................................................................. 42

Financial Details
Message From the Chief Financial Officer ........................................................................... 46
Financial Summary .............................................................................................................. 47
Principal Financial Statements............................................................................................. 48
Notes to Principal Financial Statements .............................................................................. 53
Required Supplementary Information .................................................................................. 97
Required Supplementary Stewardship Information ............................................................. 98

Report of the Independent Auditors....................................................................................... 103

Other Accompanying Information
Improper Payments Information Act Reporting Details ...................................................... 124
Summary of Financial Statement Audit and Management Assurances ............................. 134

Appendix
Appendix: Selected Department Web Links ...................................................................... 136




FY 2009 Agency Financial Report—U.S. Department of Education                                                                        v
“. . . the truest measure of a society’s worth is whether it offers all of our
children the opportunity to go where they want to go, do what they want
to do and fulfill their dreams. This is the promise of education . . . . This is
the American promise.”
                                                         —Secretary Duncan




                                             FY 2009 Agency Financial Report—U.S. Department of Education
                                  Management’s
                                           Discussion
                                                               and
                                                 Analysis




FY 2009 Agency Financial Report—U.S. Department of Education
MANAGEMENT’S DISCUSSION AND ANALYSIS




                        OUR MISSION AND HISTORY
Mission. The U.S. Department of Education’s (the Department’s) mission is to promote
student achievement and preparation for global competitiveness by fostering educational
excellence and ensuring equal access.

History. The federal government recognized that furthering education is a national priority
in 1867, creating a federal education agency to collect and report statistical data. The
Department, established as a cabinet-level agency in 1979, celebrated its 30th anniversary
during FY 2009. Today the federal role has grown to include federal support for education,
including student financial aid, supporting education research and providing information on
what works to teachers, education policymakers and parents. For a chronology of education
legislation, go to: http://nces.ed.gov/pubs2009/2009020_4.pdf.

The Department is committed to ensuring students develop the skills they need to succeed
in school, college and the workforce, while recognizing the primary role of states and school
districts in providing a high-quality education, employing highly qualified teachers and
administrators and establishing challenging content and achievement standards. The
Department is also setting high expectations for its own employees and working to improve
management practices, ensure fiscal integrity and develop a culture of high performance.

                WHO WE SERVE: OUR PUBLIC BENEFIT
Every American has a stake in the nation’s educational success. The Department’s Web
site and print resources focus on our primary customers—

Students—See more on Departmental services to students at
http://www.ed.gov/students/landing.jhtml.

Teachers—See more details on Departmental services for teachers at
http://www.ed.gov/teachers/landing.jhtml.

Parents—See more details on Departmental services for parents at
http://www.ed.gov/parents/landing.jhtml.

State and Local Educational Agencies—For a list of state agencies, see
http://www.ed.gov/about/contacts/state/index.html?src=gu.

Administrators—Principals, superintendents and other administrators are at the center of
school reform and accountability efforts. See more details at
http://www.ed.gov/admins/landing.jhtml.

Postsecondary Students and Institutions—The Department provides assistance through
programs such as the Federal Pell Grant Program, the Federal Family Education Loan
(FFEL) Program, the William D. Ford Federal Direct Loan Program, the Federal Perkins
Loan Program and the Federal Work-Study Program, authorized under Title IV of the
Higher Education Act of 1965, as amended (HEA). See more details on student financial
aid at http://www.ed.gov/finaid/landing.jhtml?src=rt.




2                                                    FY 2009 Agency Financial Report—U.S. Department of Education
                                                                                  MANAGEMENT’S DISCUSSION AND ANALYSIS




       WHO WE ARE: OUR ORGANIZATION AND WORKFORCE

Department of Education Workforce Makeup

Department of Education Workforce Composition as of September 26, 2009

•    Total Workforce = 4,225
•    3,852 Permanent Employees
•    373 Temporary Employees
•    62 percent (2,634) Female
•    38 percent (1,591) Male

Department of Education Permanent Workforce by Ethnicity and Gender as of
September 26, 2009

                                                               American Indian/
                                                                Alaska Native
                                                                    Males          American Indian/
                                                     Asian                          Alaska Native
                                                    Females         0.3%
                                           Asian                     (10)             Females
                                           Males     3.0%                               0.4%
                                           1.7%      (114)                               (16)
                                            (67)

                                                                                                      White
                                                                                                      Males
                                                                                                      24.2%
                                                                                                      (931)
                       Black
                     Females
                      28.2%
                      (1,088)




                         Black
                         Males
                                                                                                        White
                         8.4%
                                                                                                      Females
                         (323)
                                                                                                       28.8%
                                                                                                       (1,110)
                                Hispanic
                                Females
                                  2.7%
                                  (103)                                  Native Hawaiian/
                                                                         Pacific Islander
                                                             Two or
                                Hispanic                                     Females
                                                           More Races
                                 Males          Two or                         0.1%
                                                             Males
                                  1.8%        More Races                        (2)
                                                              0.1%
                                  (71)         Females
                                                               (2)
                                                 0.4%
                                                 (15)



NOTE: Numbers may not add to 100 percent due to rounding.

Source: Annual Equal Employment Opportunity Status Report: An Equal Employment Opportunity Management
Directive (MD) 715 Requirement for the Period covering October 1, 2008 Through September 26, 2009.




FY 2009 Agency Financial Report—U.S. Department of Education                                                         3
MANAGEMENT’S DISCUSSION AND ANALYSIS




              Department of Education Coordinating Structure FY 2009




For additional information about the principal components of the Department of Education,
please go to: http://www.ed.gov/about/offices/list/index.html?src=ln.


4                                                  FY 2009 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS




 LINKING TAXPAYER DOLLARS TO PERFORMANCE RESULTS:
ACCOUNTABILITY THROUGH THE INTEGRATION OF RESULTS
                 WITH INVESTMENT
Our emphasis on sound financial practices, performance results and program accountability
reflects a strong desire to use taxpayers’ dollars as effectively as possible. The Department
strives to tie the performance of our programs with budget requests and to strengthen the
link between financial investments and program quality.

In order to tie performance to budget submissions, federal agencies are required to identify
a number of high-priority performance goals to further the administration’s agenda for
building a high-performing government and identify strategies and a means to achieve
them. The draft goals are expected to be completed in FY 2010.

Linking Program Performance With Budget Submissions

The Department participates closely with the Performance Improvement Council (PIC) to
establish guidelines and metrics to more closely align program and management
performance with Budget requests. The Office of Management and Budget established the
PIC in FY 2007 under Executive Order 13450: Improving Government Program
Performance as a tool to spend taxpayers’ dollars more effectively and with greater
accountability.

The PIC is composed of senior staff from each federal agency who are responsible for
coordinating areas of performance management activities, such as ensuring that data from
annual performance plans and reports are used in agency budget justifications. Collectively,
the PIC is tasked with establishing program performance standards and evaluation criteria,
exchanging information among agencies, coordinating and monitoring performance
assessments, keeping the public informed, obtaining advice from stakeholders and making
policy recommendations.

Additionally, GPRA requires agencies to develop annual program performance plans that
include challenging performance metrics that can be used to judge the effectiveness of
each program. Programs deemed ineffective or that are not delivering results based on
established performance measures are reviewed for inclusion in the Department’s annual
budget submission to Congress.

To further our commitment to provide more effective oversight for our fiscal resources, the
Department has identified a senior manager for performance management systems in the
Office of the Deputy Secretary to oversee the furtherance of accountability for results for
both our strategic priorities and our internal management processes. In addition, the
administration has appointed a Deputy Assistant Secretary for Performance Improvement—
a position housed in the Department’s Office of Management.

Performance Evaluations Improve Accountability

Each year, the Department publishes evaluations of selected programs to further
demonstrate accountability for the taxpayers’ investment in education spending. These
evaluations serve to identify best practices as well as programs that cannot demonstrate
accountability for results, as well as to inform senior management about programs in need

FY 2009 Agency Financial Report—U.S. Department of Education                                      5
MANAGEMENT’S DISCUSSION AND ANALYSIS




of additional support. The Department uses evaluations to identify programs that should be
eliminated from the budget or recommended for reduced funding. The Department also
uses evaluations to support budget requests for increases in program funds. Several offices
in the Department have the responsibility for designing and implementing evaluations of
program and management activities and operations. Those offices include the Institute of
Education Sciences (IES) and the Office of Planning, Evaluation and Policy Development
(OPEPD). Additionally, the Department’s Office of Inspector General (OIG) and the
Government Accountability Office (GAO) audits and reports provide guidance and feedback
on improvements in management and program operations. Finally, the Department
provides guidance to grant recipients on developing evaluations based on scientifically
rigorous evidence. More detail is available at:
http://ies.ed.gov/ncee/pubs/evidence_based/evidence_based.asp.

Ensuring Accountability and Oversight of Recovery Act Funds

The Risk Management Service (RMS), in the Office of the Secretary, is responsible for
Departmentwide grants policy related to identifying and working with high-risk grantees to
minimize risk to federal funds that may adversely affect the advancement of the
Department’s priority goals.

In FY 2009 RMS took a two-phased approach to providing technical assistance to states
receiving Recovery Act funds. The first phase targets states that received the most
Recovery Act money and were identified as having fiscal and programmatic concerns. RMS
is coordinating the provision of technical assistance to states based on basic federal grants
in fiscal management requirements, such as cash management, internal controls,
procurement, allowable activities, data quality and sub-recipient monitoring. In its second
phase, RMS has developed a regular series of Recovery Act technical assistance Web
conferences to enhance the ongoing provision of oversight and technical assistance to
grantees receiving Recovery Act funds to ensure that they are held accountable to the
taxpayer and that these and other Department grant funds are spent appropriately.

Cost Saving Measures Underway at the Department

A major priority of the new administration is to ensure that federal agencies control costs
and conduct their internal lines of business to be as effective and efficient with the use of
the taxpayers’ dollar as possible. The Department has undertaken measures to evaluate
and implement administrative cost-saving opportunities that have already realized
immediate savings and costs avoided, as well as longer-term plans that will realize
additional savings in years to come. The Department has identified a number of cost saving
measures that include equipment consolidation, reduction in contract and travel costs,
eliminating extraneous office space and consolidating teleconferencing facilities and
conference spaces. Additional cost-saving measures are under review for FY 2010.




6                                                    FY 2009 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS




                                  HOW WE VALIDATE OUR DATA
The Government Performance and Results Act of 1993 (GPRA) requires federal
departments and agencies to clearly describe the goals and objectives of their programs,
identify resources and actions needed to accomplish goals and objectives, develop a
means of measuring progress made and report regularly on achievement. The goals of the
act include improving program effectiveness by promoting a focus on results, service quality
and customer satisfaction; improving congressional decision making by providing objective
information on achieving statutory objectives; and focusing on the relative effectiveness and
efficiency of federal programs and spending.

Consolidating Data Collections Through EDFacts

Complete, accurate and reliable data are essential for effective decision-making. Given the
requirements of the Elementary and Secondary Education Act of 1965 (ESEA), as
amended, accuracy of state and local educational agency performance data is crucial to
funding decisions and management actions are taken on the basis of this performance
information.

The mandatory regulation requires states to electronically submit data to the Education
Data Exchange Network Submission System (EDENS), a centralized, Internet-based
system of elementary and secondary education data (K-12) from 52 state education
agencies. Data are available for state and local education agencies. School data include
demographics, program participation, implementation and outcomes.

EDFacts became the mandatory system for states to electronically report their K–12
education data to the Department starting in school year (SY) 2008–09. The EDFacts
system enabled the consolidation of historically separate data collection efforts, and the
increased amount of data in EDFacts allows for even greater data collection efficiencies.
The Department is using the EDFacts Metadata and Process System to collect each state’s
plan for transitioning from reporting using five racial and ethnic categories to using seven.
For SY 2008–09, the collection was optional; if a state has not entered a plan, it was
assumed that five categories were used for the school year.

By using the Education Data Exchange Network Submission System and EDFacts
Metadata and Process System together, EDFacts is able to reduce the reporting burden for
states by eliminating redundant data requests for multiple data collections. This approach
also provides program offices with the ability to retire paper-based collections and improve
data quality by relying solely on electronic reporting methods. In the future, the EDFacts
initiative will employ similar strategies to increase the efficiency of data acquisition methods
across the Department.

The Validation and Verification of Performance Data

OMB Circular A-11, Part 6, section 230.5, Assessing the completeness and reliability of
performance data, requires each agency to design a procedure for verifying and validating
data that it makes public in its annual performance plans and reports.




FY 2009 Agency Financial Report—U.S. Department of Education                                      7
MANAGEMENT’S DISCUSSION AND ANALYSIS




Additionally, GPRA prescribes the means to verify and validate measured values. Finally,
the Reports Consolidation Act of 2000 requires that the transmittal letter included in annual
performance reports contains an assessment by the agency head of the completeness and
reliability of the performance data included in its plans and reports.

In response, the Department has developed a guidance document to assist principal offices
responsible for reporting data on strategic and program performance measures to address
issues of data integrity and credibility. The guidance provides a framework for validating
and verifying performance data before it is collected and reported and is used to evaluate
data prior to publication for review by the public. Additionally, the Department has
developed a worksheet for each program office to use to identify the validity of the data for
their unique program performance measures.

The Department’s data validation criteria require that program goals and measures are:

    •   appropriate to the mission of the organization and that measured performance has a
        direct relation to the goal;
    •   realistic and measurable, achievable in the time frame established and challenging
        in their targets;
    •   understandable to the lay person and terminology is adequately defined; and
    •   used in decision-making about the effectiveness of the program and its benefit to
        the public.

For more information on the guidance and its implementation and to review the worksheet,
go to http://www.ed.gov/about/reports/annual/index.html.

The Institute of Education Sciences Data Quality Initiative

The Data Quality Initiative of the Department’s Institute of Education Sciences, begun in
2006, is designed to improve the Department’s program performance data and reporting in
support of the goals of GPRA. Technical assistance is being provided to approximately 30
Department grant programs.

Activities for Department program offices include reviewing grantee evaluation plans and
reports; developing annual performance reporting forms; analyzing grantee annual
performance data; and developing briefings and workshops focused on evaluation
strategies. In 2008 and 2009, the initiative was expanded to include programs covering a
wide range of elementary and secondary education topics and populations. See
http://ies.ed.gov/ncee/projects/evaluation/assistance_data.asp for more details.


The National Forum on Education Statistics

The National Forum on Education Statistics, sponsored by the Department’s National
Center for Education Statistics, is a voluntary, participative and cooperative federal-state-
local body with a mission to develop and recommend strategies for building an education
data system that will support local, state and national efforts to improve public and private
education throughout the United States. See more details at
http://nces.ed.gov/forum/data_quality.asp.



8                                                     FY 2009 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS




         OUR ACCOMPLISHMENTS AND ONGOING INITIATIVES
                         FOR FY 2009

The American Recovery and Reinvestment Act of 2009

Overview

The Recovery Act was signed into law by President Barack Obama on February 17, 2009.
It is an unprecedented effort to jumpstart our economy, create or save millions of jobs and
put a down payment on addressing long-neglected challenges so that our country can
thrive in the 21st century. To see how Recovery Act funds are helping your state, visit
http://www.ed.gov/policy/gen/leg/recovery/state-fact-sheets/index.html.

The Recovery Act invests heavily in education.
                                                                     Recovery Act Successes
     •     The act included a total of $98.2 billion to
           the Department for supplemental                     Orange County Public Schools,
           appropriations for reforms to strengthen                          Florida
           elementary, secondary and higher
           education, including money to stabilize state   As part of the Recovery Act’s efforts to
           education budgets and to encourage states       impact education across the country,
           to:                                             Florida has felt the impact of more than
               o make improvements in teacher              $3.1 billion in education funds. This
                   effectiveness and ensure that all       includes nearly $2 billion in State Fiscal
                                                           Stabilization Funds that has kept more
                   schools have highly qualified
                                                           than 25,000 teachers and staff in
                   teachers;                               Florida’s classrooms and maintained
               o make progress toward college and          other essential services, over
                   career-ready standards and rigorous     $335 million to provide special
                   assessments that will improve both      education and related services to
                   teaching and learning;                  children with disabilities under the
               o improve achievement in low-               Individuals with Disabilities Act (IDEA)
                   performing schools, through             and $245 million to Title I schools.
                   intensive support and effective
                   interventions; and                      Orange County Public Schools, the 11th
                                                           largest school district in the nation and
               o gather information to improve
                                                           encompassing all of Orlando’s public
                   student learning, teacher               schools, says they have preserved
                   performance and college and career      more than 1,600 teachers, nurses,
                   readiness through enhanced data         counselors, tutors and other essential
                   systems.                                staff due to $132 million from the
     •     The act provides competitive funds to spur      Recovery Act.
           innovation and chart ambitious reform to
           close the achievement gap.
     •     The act addresses college affordability and improves access to higher education.
     •     The act includes early learning programs, including child care and programs for
           children with special needs.




FY 2009 Agency Financial Report—U.S. Department of Education                                        9
MANAGEMENT’S DISCUSSION AND ANALYSIS




Department Programs Receiving Recovery Act Funding

Race to the Top
                                                           Recovery Act Successes
The $4.35 billion Race to the Top Fund
is the largest ever federal competitive      Richmond County School District, North Carolina
investment in school reform. It will
                                             With the decline in state revenues in North Carolina,
reward states for past
                                             the Richmond County School District will lose over
accomplishments and create incentives        $3 million in support for education programs, staffing,
for future improvements. The funding         professional development and other critical needs.
criteria that the Department proposes        The cuts threaten to diminish district efforts to pursue
to use will challenge states to create       new academic models that have proven reform
comprehensive strategies for                 results. Even with recent state budget action,
addressing the four central areas of         resource projections are on the decline.
reform that will drive school
improvement:                                 How Recovery Act Funds Are Being Used: Budget
                                             reductions at the state level caused the district to
                                             face a loss of 40 positions across the system from
     •   adopting internationally
                                             teachers to support staff. The local educational
         benchmarked standards and           agency’s share of Recovery Act funds will permit the
         assessments that prepare            superintendent to restore a share, but not all, of
         students for success in college     these positions critical to the teaching, learning and
         and in the workplace;               support functions of the districts and its schools.
     •   recruiting, developing, retaining
         and rewarding effective             The one-time increase in Individuals With Disabilities
         teachers and principals;            Education Act (IDEA) funds is permitting the district
     •   building data systems that          to implement new teaching and learning strategies
                                             for students with special needs that will accelerate
         measure student success and
                                             efforts to attain grade-level performance and
         inform teachers and principals      academic achievement.
         how best to improve their
         practices; and                      The one-time increase in Title I funds permits the
     •   turning around our lowest-          district to invest in new strategies that promote a
         performing schools.                 districtwide commitment to creating and sustaining
                                             professional learning communities. This long-range
To read more about the Race to the           effort was in serious jeopardy of being curtailed with
Top Fund, visit                              the loss of funds due to the downturn in the state
http://www.ed.gov/programs/racetothet        economy.
op/factsheet.html.
                                             Recovery Act funds will also be used in part to
                                             secure a state-of-the-art library facility that will be
Investing in Innovation                      used by all district students and include access to
                                             updated technology for teaching and learning, self-
To be eligible for this $650 million         directed learning and after-school programs. Without
competitive grant program, local             these funds, consideration of these improvements in
educational agencies (LEAs), including       education resources would not be possible.
charter school LEAs, and nonprofit
organizations working in collaboration
with one or more LEAs or a consortium of schools must have made progress in raising
student achievement, significantly closing the achievement gap and made progress in other
areas. For more information, see http://www.ed.gov/programs/innovation/factsheet.html.




10                                                     FY 2009 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS




Teacher Incentive Fund

The $200 million Teacher Incentive Fund supports state and district efforts to develop and
implement performance-based teacher and principal compensation systems in high-need
schools, primarily through grants to school districts and consortia of school districts. Under
the compensation systems in place in virtually all school districts, teacher salaries increase
based on a teacher collecting graduate credit for additional study, increasing number of
years on the job or moving out of the classroom into an administrative position. These pay
systems often place high-poverty schools at a disadvantage in recruiting effective teachers.
The Teacher Incentive Fund supports a variety of performance-based teacher and principal
compensation systems that reward teachers and principals for increases in student
achievement and boost the number of effective instructors teaching in hard-to-staff subjects
and in high-need schools. For more information, see
http://www.ed.gov/programs/teacherincentive/factsheet.html.

Teacher Quality Partnership

The $100 million Teacher Quality Partnership program is designed to improve the quality of
new teachers by creating partnerships among high-need school districts and schools or
high-need early childhood education program. These partnerships create model teacher
preparation programs at the pre-baccalaureate level. For more information, see
http://www.ed.gov/programs/tqpartnership/index.html

State Longitudinal Data Systems

This $250 million Recovery Act program provides grants to states to design, develop and
implement statewide longitudinal data systems to capture, analyze and use student data
from preschool to high school, college and the workforce. The Recovery Act requires that
the data systems have the capacity to link preschool, K–12 and postsecondary education
as well as workforce data. To receive State Fiscal Stabilization Funds, a state must provide
an assurance that it will establish a longitudinal data system that includes the 12 elements
described in the America Creating Opportunities to Meaningfully Promote Excellence in
Technology, Education and Science Act (or the America COMPETES Act). For more
information, see http://www.ed.gov/programs/slds/factsheet.html.

Title I School Improvement Grants

Title I School Improvement Grants provide states and school districts funds to leverage
change and turn around Title I schools identified for improvement, corrective action or
restructuring. Authorized under ESEA in 2002, the program did not receive funding until
FY 2007. The current $3 billion provides an unprecedented opportunity for states and
school districts to implement significant reforms to transform their chronically lowest-
achieving schools.

Under ESEA, states and school districts are required to restructure Title I schools that fail to
make adequate yearly progress for five years. Reports indicate that the least rigorous
interventions allowable have shown little success in turning around these chronically low-
achieving schools, and that the program should be better targeted on the very lowest-
performing schools. For more information, see
http://www.ed.gov/programs/sif/factsheet.html.


FY 2009 Agency Financial Report—U.S. Department of Education                                     11
MANAGEMENT’S DISCUSSION AND ANALYSIS




State Educational Technology Grants

The primary goal of the $650 million Educational Technology Grants program is to improve
student academic achievement through the use of technology in schools. It is also designed
to help ensure that every student is technologically literate by the end of eighth grade and
to encourage the effective integration of technology with teacher training and curriculum
development. For more information, see http://www.ed.gov/programs/edtech/factsheet.html.

The Recovery Act programs provide an unprecedented opportunity for states, districts and
schools to use innovative strategies to enhance instruction, facilitate teaching and learning
and improve student achievement. They will enable districts to acquire new and emerging
technologies, create state-of-the-art learning environments and offer new training and more
support for teachers so that students acquire the range of skills they will need to compete in
a global economy.

State Fiscal Stabilization Fund

The State Fiscal Stabilization Fund (SFSF) provides a total of approximately $48 billion
directly to governors to help save jobs and drive education reform. The Department is
awarding SFSF funds in two phases. In Phase I, states submitted applications for
approximately $35.4 billion; in Phase II, states are applying for the remainder of about
$12.6 billion.

In Phase I applications, state governors were required to assure that their states would take
action and make progress in four areas of education reform:

     •   adopting internationally benchmarked standards and assessments that prepare
         students for success in college and the workplace;
     •   recruiting, developing, rewarding and retaining effective teachers and principals;
     •   building data systems that measure student success and inform teachers and
         principals how they can improve their practices; and
     •   turning around our lowest-performing schools.

In Phase II applications, governors are required to provide data in each of these four areas
of reform. States would not need to demonstrate progress on the indicators in order to get
funds; instead, states would ensure that the information is in place so that parents, teachers
and policymakers know where our schools and students stand. If a state cannot provide the
data, it would be required to submit a plan for ensuring that this information will be publicly
reported as soon as possible. For more information, see
http://www.ed.gov/programs/statestabilization/applicant.html and
http://www.ed.gov/programs/statestabilization/factsheet.html.

School Modernization

Funds from the SFSF under the Recovery Act may be used for modernization, renovation
or repair of public school facilities and institutions of higher education facilities. The School
Construction Tax Credits may be used for the construction, rehabilitation or repair of a
public school facility or for the acquisition of land on which such a facility is to be
constructed. For more details, visit
http://www.ed.gov/policy/gen/leg/recovery/modernization/index.html.


12                                                      FY 2009 Agency Financial Report—U.S. Department of Education
                                                                         MANAGEMENT’S DISCUSSION AND ANALYSIS




Title I, Part A Recovery Act Funds for Grants to Local Educational Agencies

The Recovery Act provides significant new funding for programs under Title I, Part A of
ESEA. Specifically, the Recovery Act provides $10 billion in additional FY 2009 Title I,
Part A funds to LEAs for schools that have high concentrations of students from families
that live in poverty to help improve teaching and learning for students most at risk of failing
to meet state academic achievement standards. These funds create an unprecedented
opportunity for educators to implement innovative strategies in Title I schools that improve
education for at-risk students and close the achievement gaps. The additional resources
will enable local educational agencies to serve more students beyond the approximately
20 million currently served and boost the quality of teaching and learning. Final allocations
of Title I, Part A Recovery Act funds to each state and local educational agency are
available at http://www.ed.gov/about/overview/budget/statetables/index.html

Individuals with Disabilities Education Act (IDEA), Parts B and C

                                                          The Recovery Act appropriates significant new
“We’re here today to talk about                           funding for programs under Parts B and C of the
keeping teachers in the classroom—                        IDEA. Part B of the IDEA provides funds to state and
where they belong. The ultimate                           local educational agencies to help them ensure that
foundation for our nation’s future is a
                                                          children with disabilities—including children aged 3
well-educated child. And every day,
the Recovery Act is helping                               through 5—have access to a free, appropriate public
educators, parents and students work                      education to meet each child’s unique needs and
together to build the best possible                       prepare him or her for further education, employment
foundation for the 21st century.”                         and independent living.
           —Vice President Joe Biden
                                        Part C of the IDEA provides funds to each state lead
agency designated by the state’s governor to implement statewide systems of coordinated,
comprehensive, multidisciplinary interagency programs and make early intervention
services available to infants and toddlers with disabilities and their families.

The IDEA funds under the Recovery Act will provide an unprecedented opportunity for
states, local educational agencies and early intervention service providers to implement
innovative strategies to improve outcomes for infants, toddlers, children and youths with
disabilities. Under the Recovery Act, the IDEA funds are provided under three authorities:
$11.3 billion is available under Part B Grants to States, $400 million under Part B Preschool
Grants and $500 million under Part C Grants for Infants and Families. Information about
each state’s allocation is available at
http://www.ed.gov/about/overview/budget/statetables/index.html.

Vocational Rehabilitation State Grants

The Recovery Act appropriates significant new funding for the Vocational Rehabilitation
(VR) State Grants program, authorized under Title I of the Rehabilitation Act of 1973, as
amended (Rehabilitation Act). The VR State Grants program provides grants to states to
help individuals with disabilities—especially those individuals with the most significant
disabilities—prepare for, obtain and maintain employment.

The Recovery Act provides an unprecedented opportunity for states and vocational
rehabilitation agencies to implement innovative strategies to improve employment


FY 2009 Agency Financial Report—U.S. Department of Education                                                13
MANAGEMENT’S DISCUSSION AND ANALYSIS




outcomes for individuals with disabilities. Under the Recovery Act, $540 million is provided
for the VR State Grants program. Information about each state’s formula allocation is
available at http://www.ed.gov/about/overview/budget/statetables/index.html.

Independent Living Services and Centers for Independent Living

The Recovery Act appropriates significant new funding for the Independent Living (IL)
programs authorized under Title VII, Chapter 1, Part B and Part C and Chapter 2 of the
Rehabilitation Act and for the Centers for Independent Living Program authorized under
Title VII, Chapter 1, Part C of the Rehabilitation Act.

The Independent Living programs support services to individuals with significant disabilities
and older individuals who are blind. Under the Recovery Act, $52 million is provided under
separate authorities. Information about each state’s formula allocation under these
authorities is available at http://www.ed.gov/about/overview/budget/statetables/index.html.

The Centers for Independent Living Program supports nonprofit, consumer-controlled,
community-based, cross-disability, nonresidential centers for independent living centers
that provide an array of independent living services to individuals with significant disabilities.
Under the Recovery Act, $87.5 million is provided under the program authority. Information
about each state’s allocation under the program is available at
http://www.ed.gov/about/overview/budget/statetables/index.html.

McKinney-Vento Homeless Assistance

The Recovery Act provides $70 million under the McKinney-Vento Education for Homeless
Children and Youth program, which is authorized under Title VII-B of the McKinney-Vento
Homeless Assistance Act. The McKinney-Vento Recovery Act funds are a one-time source
of funds that supplement the McKinney-Vento funds made available under the regular
FY 2009 appropriation. These additional resources will assist states and local educational
agencies in addressing the educational and related needs of some of the most vulnerable
members of our society—homeless children and youth—during a time of economic crisis in
the United States. For more information, see
http://www.ed.gov/programs/homelessarra/index.html.

Impact Aid

The Recovery Act appropriated $100 million in new funding for Impact Aid under section
8007 of Title VIII of ESEA. After reserving 1 percent of the appropriation for management
and oversight, the Department awarded $39.6 million to 179 local educational agencies that
are eligible as a result of their enrollment of certain numbers and types of federally
connected children for whom they receive funds under section 8003 of the Impact Aid
Program (Basic Support Payments).

Payments are made based on the number of eligible federally connected children in
average daily attendance who are dependents of members of the uniformed services and
children living on Indian lands. For more information, see
http://www.ed.gov/policy/gen/leg/recovery/factsheet/impactaid.html.




14                                                     FY 2009 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS




Student Financial Assistance

The Recovery Act appropriated $16.5 billion for Federal Pell Grants and Federal Work
Study. These additional funds were part of the national effort to increase the affordability of
postsecondary education for needy students.

New Initiatives in Federal Student Aid

In 2008, amid unprecedented disruptions in the private credit markets, the Department
developed and successfully implemented an aggressive plan to ensure uninterrupted
access to federal student loans. This plan included the use of new statutory authority to
purchase FFEL loans, providing lenders with the liquidity needed to make new loans, the
expansion of the Department’s capacity to originate and service loans under the William D.
Ford Federal Direct Student Loan Program and the strengthening of the FFEL Lender of
Last Resort program. As a result of these efforts, which were continued in 2009, students
and families were able to obtain over $84 billion in loans for the 2008–2009 school year
smoothly and without significant disruption.

Beginning in August 2008, the Department implemented a number of programs authorized
under the Ensuring Continued Access to Student Loans Act of 2008 (ECASLA) to ensure
credit market disruptions did not deny eligible students and parents access to federal
student loans for the 2008–2009 academic year. The ECASLA authority, which originally
expired on September 30, 2009, was subsequently extended through September 30, 2010,
to continue to ensure unfettered access to loans through the 2009–2010 academic year.
Programs authorized under ECASLA are summarized below.

Loan Participation and Loan Purchase Programs. Under these programs, lenders may
access capital to make new loans either by selling eligible FFEL loans directly to the
Department or by selling the Department participation interests in eligible FFEL loans.
Lenders that sell loans or participation interests in loans must represent to the Department
that they will continue to participate in the FFEL Program and that when funds become
reasonably available from private sources on affordable terms, they will make new loans or
acquire new loans made by other lenders. Participation interests on loans made for the
2008–2009 academic year had to have been redeemed, with interest, by lenders no later
than October 15, 2009, either in cash or by selling the underlying loans to the Department;
for loans made for academic year 2009–2010, the deadline for redemption is September
30, 2010. Through September 2009, the Department directly purchased over 5 million loans
valued at approximately $24 billion. Through September 2009, the Department acquired
more than $41 billion in participation interests in FFEL Program loans.

Short-Term Loan Purchase Program. From December 2008 through March 2009, the
Short-Term Loan Purchase Program purchased eligible loans made for the 2007–2008
academic year. Under this program, the Department purchased 280,000 loans worth
roughly $1 billion.

Asset-Backed Commercial Paper Conduit Program. The Asset-Backed Commercial
Paper Conduit Program was developed to provide additional liquidity to support new
lending. Under this program, which began operations mid 2009, the Department entered
into forward purchase commitments with a conduit. The conduit issues commercial paper
backed by qualifying student loans made between October 1, 2003 and September 30,



FY 2009 Agency Financial Report—U.S. Department of Education                                     15
MANAGEMENT’S DISCUSSION AND ANALYSIS




2009. If the conduit is unable to retire this paper as it matures, the Department commits to
provide the needed funds by purchasing the underlying student loans.

Lender of Last Resort. The Higher Education Act of
1965 requires guaranty agencies (GAs) to make loans as              “Time and again, when we
a Lender of Last Resort to those students who are unable            placed our bet for the future on
to obtain FFEL loans from conventional FFEL lending                 education, we have prospered as
                                                                    a result—by tapping the
sources. GAs may arrange for a conventional FFEL
                                                                    incredible innovative and
lender to make Lender of Last Resort loans or may make              generative potential of a skilled
loans directly with their own resources. The Department             American workforce . . . . That’s
may advance funds to a GA to make lender of last resort             why, at the start of my
loans if that GA cannot arrange for such lending by                 administration, I set a goal for
another party and lacks other resources sufficient to               America: by 2020, this nation will
make the needed loans. The Department will require that             once again have the highest
any federal advances be deposited in the GA’s Federal               proportion of college graduates
Fund and that loans made from those funds be assigned               in the world.”
to the Department promptly after they are disbursed. The
                                                                                       —President Obama
Department has not made federal advances for Lender of
Last Resort loans in FY 2009 and none are currently
anticipated for FY 2010.

Making College Affordable and Accessible

Today’s new initiatives complement President Obama’s existing agenda for higher
education. At this time of economic hardship and uncertainty, the administration’s agenda
will build the country’s capacity, innovation and confidence to drive the nation to first place
in the highly skilled workforce crucial for success in the 21st century. These initiatives
include:

     •   Expanding Pell Grants and College Tax Credits: The Recovery Act increased
         Pell Grants to $5,350 and created the $2,500 American Opportunity Tax Credit for
         four years of college tuition.
     •   Reforming the Student Loan Program to Save Billions: The administration has
         proposed to replace guaranteed loans with Direct Loans, which are originated and
         serviced by private-sector companies selected through a competitive process and
         paid based upon performance. Direct Loans have essentially the same terms for
         students and are more reliable and efficient.
     •   Helping Unemployed Workers Get New Skills: President Obama has expanded
         opportunities for unemployed workers to go to community colleges and learn new
         skills. The Department has clarified that these workers should not be denied student
         aid based upon incomes they no longer earn, and the Department of Labor is
         working with states to allow workers to keep their unemployment benefits while
         receiving education and training.
     •   Expanding the Perkins Loan Program: The low-cost Perkins Loan Program is an
         important option for students who need to borrow more than what is allowed under
         the larger Stafford Loan Program. The administration will expand it from $1 billion
         per year to $6 billion per year.
     •   Helping Families Save for College: The President’s Middle Class Task Force has
         directed the Department of the Treasury to investigate improvements to savings
         plans to help families save for college more effectively and efficiently.


16                                                     FY 2009 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS




TEACH Grant Program. Authorized by the College Cost Reduction and Access Act of
2007 (CCRAA), the Teacher Education Assistance for College and Higher Education
(TEACH) Grant Program offers grants of up to $4,000 to students agreeing to teach math,
science or other specialized subjects in a high-poverty school for at least four years within
eight years of their graduation. If students fail to fulfill the service requirements, grants turn
into Unsubsidized Stafford Loans, with interest accrued from the time of the grant award.

Because the grants turn into loans when the service obligations are not satisfied, budget
and accounting treatment for TEACH Grants is consistent with the Federal Credit Reform
Act of 1990. Subsidy costs reflecting the net present value of grant costs less the expected
future loan payments are recorded in the TEACH Grant Program Account. In FY 2009, the
Department disbursed approximately 15,000 grants for almost $44 million under TEACH.

Streamlining Student Financial Aid

The President has challenged the nation to once again have the highest percentage of
college graduates in the world; to do that we need to send a clear message to both young
people and adults that college is within their reach. More than a million students fail to apply
for aid because of the application’s complexity. The Department is simplifying the financial
aid process by modernizing the online application, seeking legislation that will eliminate
unnecessary questions and creating an easy process for students to use tax data to apply.

By developing a more user-friendly FAFSA that will make it easier to apply for college
financial aid and increase postsecondary enrollment, particularly among low- and middle-
income students, the Department is providing instant estimates of Pell Grant and student
loan eligibility, easier navigability and seamless retrieval of tax information. See
http://www.fafsa.ed.gov/ for more information.

Help for Those Burdened by Student Loan Debt

Through the College Cost Reduction and Access Act of 2007, Congress created the Public
Service Loan Forgiveness Program. The program is designed to encourage young people
to serve the public by working for federal, state or local governments, nonprofits or other
public employers. Under this program, people with student loans can have their debts
erased after 10 years of public service. Borrowers may qualify for forgiveness of the
remaining balance due on their eligible federal student loans after they have made
120 payments under certain repayment plans while employed full-time by public service
employers.

Another program that will help graduates with their student debt is the Income-Based
Repayment Plan. This plan will cap the amount of the monthly federal loan payments at an
amount determined by income and family size. The Department has developed an online
calculator located on its student aid site to assist potential borrowers in determining their
eligibility and to estimate if they would benefit from the plan. For more information, visit
http://studentaid.ed.gov/PORTALSWebApp/students/english/index.jsp.




FY 2009 Agency Financial Report—U.S. Department of Education                                     17
MANAGEMENT’S DISCUSSION AND ANALYSIS




Management Improvement

Customer Satisfaction With the Department of Education

The Department strives to provide the most effective services to grantees and organizations
that require support, assistance or information from the Department. Each year, the
Department conducts an extensive survey of satisfaction of selected grantees and
organizations. The survey is based on the American Customer Satisfaction Index, which is
the national indicator of customer evaluations of the quality of goods and services and is
the only uniform, cross-industry/government measure of customer satisfaction. The index is
based on a scale of 100 points with a weighted average. Over a 5-year period, the
Department has worked hard to provide its customers with levels of support that include
quality of published guidance and documents, including online resources, effectiveness in
the use of technology to deliver services, responsiveness and knowledge of Department
staff and the provision of timely and quality technical assistance. In FY 2009, the
Department achieved a five-point increase in customer satisfaction over the past two years.
The Department saw significant increases in all drivers of customer satisfaction. For the full
report, visit http://www.ed.gov/about/reports/annual/gss/index.html.



                                Customer Satisfaction Index 2005–2009

                                                                                           68 
                                                                                  65
             Customer Satisfaction                                          63
                                                                          62
                                                                            63


                                                                                                       73 
                                                                                                 70 
         How satisfied are you with 
                                                                                          68 
         ED’s products and services 
                                                                                        67
                                                                                            69 
                                                                                      66
        How well ED’s products and                                           63
                                                                        61
        services meet expectations 
                                                                      60
                                                                        61
                                                                                 64
                                                                   59
        How well ED compares with 
                                                                 58
        ideal products and services                            57
                                                               57


                                            2009   2008      2007        2006          2005




18                                                        FY 2009 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS




The Organizational Assessment

The Department’s Organizational Assessment (OA) is the Departmentwide performance
management system, developed in response to the requirements of Executive Order
13450, Improving Government Program Performance, as well as the Office of Personnel
Management’s requirement that each federal agency evaluate its principal offices on an
annual basis. The OA operates at the principal office level and is designed to integrate and
align all of the Department’s performance management elements, including the Strategic
Plan, the Secretary’s annual goals and priorities, the priorities of the principal offices and
other requirements of law. The OA provides a framework for communicating goals and
priorities to employees and for aligning employee performance plans with the objectives of
Department and principal offices.

During FY 2009, the Department made significant changes to improve the transparency
and accountability within its OA Initiative. These changes resulted in reducing the overall
number of measures within the frameworks to better focus the Department’s resources on
mission-critical goals and priorities. As a result, OA leadership challenged Chief
Management Officers to set ambitious goals for their Principal Operating Components. As a
result, a number of steps have been implemented to ensure that the overall framework and
scoring system were more rigorous in FY 2009. The goal of these changes is to improve
the Department’s overall performance.




FY 2009 Agency Financial Report—U.S. Department of Education                                     19
MANAGEMENT’S DISCUSSION AND ANALYSIS




         A STRATEGIC FRAMEWORK FOR EDUCATION REFORM
The administration has identified four goals for education reform. These goals are to
improve standards and assessments, improve teacher and principal quality, build data
systems that inform educators’ decisions and turn around low-performing schools.

     •   Adopt rigorous standards and assessments that prepare students for success in
         college and the workforce.

     •   Recruit and retain effective teachers, especially in classrooms where they’re needed
         most.

     •   Build data systems to track student achievement and teacher effectiveness.

     •   Turn around low-performing schools.

States must demonstrate a commitment to advancing education reform in these areas and
agree to inform the Department of their progress to receive funding from the $48.6 billion
available under the American Recovery and Reinvestment Act’s (Recovery Act) State
Fiscal Stabilization Fund (SFSF). State applications for funding are evaluated based on
their assurances on these four areas of reform.



                    Adopt Rigorous Standards

               Recruit and Retain Effective Teachers


                                                                                             Improved Academic
        Focus on                   Reform and          Restore America’s
                                                                                              Achievement and
     Early Childhood             Invest in K–12          Leadership in
                                                                                                 Economic
       Education                   Education           Higher Education
                                                                                               Competitiveness


                        Build Data Systems

               Turn Around Low-Performing Schools




20                                                     FY 2009 Agency Financial Report—U.S. Department of Education
                                                                                 MANAGEMENT’S DISCUSSION AND ANALYSIS




                          THE DEPARTMENT’S STRATEGIC PLAN
The Department reports on measures defined by the Department’s Strategic Plan for Fiscal
Years 2007–2012 under the provisions of the Government Performance and Results Act of
1993 (GPRA). The Department is in the process of developing a new Strategic Plan for
Fiscal Years 2010-2015, which will replace the current plan.



                                                                    Mission
                             Promote student achievement and preparation for global competitiveness
                                 by fostering educational excellence and ensuring equal access




                                                                                 Ensure the
       Improve student                                                          accessibility,
    achievement, with a                                                       affordability and
                                        Increase the academic                                                   Management Goal:
     focus on bringing                                                    accountability of higher
                                        achievement of all high                                               Cross-Goal Strategy on
    all students to grade                                                   education and better
                                           school students                                                        Management
    level in reading and                                                   prepare students and
    mathematics by 2014                                                    adults for employment
                                                                             and future learning

                                                                                                               Maintain and strengthen
                                         Increase the proportion of           Increase success in and
  Improve student achievement                                                                                   financial integrity and
                                       high school students taking a            completion of quality
           in reading                                                                                          management and internal
                                            rigorous curriculum               postsecondary education
                                                                                                                       controls


                                                                                                                Improve the strategic
                                             Promote advanced              Deliver student financial aid
  Improve student achievement                                                                                    management of the
                                      proficiency in mathematics and         to students and parents
        in mathematics                                                                                             Department’s
                                          science for all students          effectively and efficiently
                                                                                                                   human capital


                                                                            Prepare adult learners and            Achieve budget and
                                       Increase proficiency in critical   individuals with disabilities for   performance integration to
     Improve teacher quality
                                             foreign languages            higher education, employment          link funding decisions
                                                                               and productive lives                    to results



    Promote safe, disciplined
     and drug-free learning
         environments
                                                                                                                    Legend

                                                                                                                  Goals

    Increase information and                                                                                      Objectives
       options for parents




      Increase high school
         completion rate




  Transform education into an
     evidence-based field




FY 2009 Agency Financial Report—U.S. Department of Education                                                                      21
MANAGEMENT’S DISCUSSION AND ANALYSIS




             OVERVIEW OF PERFORMANCE FOR FY 2009

The Department’s Strategic Planning Process

The Department’s strategic planning process sets high expectations for America’s schools,
students and for the Department. It streamlines Department goals and measures while
stressing continuity. This is the process by which we ensure successful performance and
management outcomes.




Challenges Linking the Program Performance to Funding
Expenditures

Linking performance results, expenditures and budget for Department programs is
complicated because more than 99 percent of the Department’s funding is disbursed
through grants and loans in which only a portion of a given fiscal year’s appropriation is
available to state, school, organization or student recipients during the fiscal year in which
the funds are appropriated. The remainder is available at or near the end of the
appropriation year or in a subsequent year.

Funds for competitive grant programs are generally available when appropriations are
passed by Congress. However, the processes required for conducting grant competitions
often result in the award of grants near the end of the fiscal year with funding available to
grantees for future fiscal years.

Therefore, program results cannot be attributed solely to the actions taken related to
FY 2009 funds but to a combination of funds from across several fiscal years. Furthermore,
the results of some education programs may not be apparent for several years after the
funds are expended.

There are 81 key performance measures that support the Department’s mission and
strategic goals under its current Strategic Plan. Most data for FY 2009 will be available
during FY 2010. These measures will be reported on in detail in the Department’s Annual
Performance Report (APR), which will be submitted to Congress with the President’s
Budget Justification for FY 2011.




22                                                    FY 2009 Agency Financial Report—U.S. Department of Education
                                                                              MANAGEMENT’S DISCUSSION AND ANALYSIS




GOAL 1: Improve Student Achievement, With A Focus On Bringing
All Students To Grade Level In Reading And Mathematics By 2014

Our Public Benefit

In education, the bottom line is student learning. The Elementary and Secondary Education
Act of 1965 (ESEA) revolutionized federal support for elementary and secondary education
by establishing a national commitment to bring all children up to grade level in reading and
mathematics and holding schools, districts and states accountable for making annual
progress toward that goal. The ESEA promotes effective action to turn around schools that
consistently fail to educate their students to high standards and provides students enrolled
in those schools better choices and options.

Because student achievement depends on the efforts of well-prepared teachers, the
Department is working with state educational agencies to devise and implement appropriate
strategies for ensuring that teachers become highly qualified.

Also, teaching and learning to high standards require that our nation’s schools be safe and
drug free. The Department promotes practices that create safe, secure and healthy school
climates.

Parents are children’s first and most important teachers. The Department promotes
parental involvement in their children’s schools, and encourages states and communities to
provide information on additional options to parents.

The Department has developed the following objectives in support of Goal 1. Additionally,
the Department has identified 37 key strategic performance measures for this goal.

Strategic Objectives:                                                                 Goal 1 Resources
                                                                                      ($ in thousands)
     •     Improve student achievement in                      $80,000,000

           reading                                             $70,000,000
                                                                                                             $67,943,500

     •     Improve student achievement in                      $60,000,000
           mathematics
     •
                                                               $50,000,000
           Improve teacher quality                                                                                         $37,539,509
                                                                                         $38,303,687
     •     Promote safe, disciplined and                       $40,000,000

                                                                                                                                         ARRA
           drug-free learning environments                     $30,000,000

     •     Increase information and options                    $20,000,000                                                               Non‐ARRA
           for parents                                         $10,000,000
     •     Increase high school completion
                                                                       $0
           rate                                                              FY 2010 (President's Request)     FY 2009 (Actual)
     •     Transform education into an
           evidence-based field

Strategies that support the Department in meeting its strategic objectives for Goal 1 include:

     •     assisting states and school districts in turning around low performing schools;
     •     collecting and disseminating student information;
     •     assisting states to ensure that their teachers are highly qualified;



FY 2009 Agency Financial Report—U.S. Department of Education                                                                               23
MANAGEMENT’S DISCUSSION AND ANALYSIS




     •   encouraging districts to reform teacher compensation systems to reward their most
         effective teachers and to create incentives to attract their best teachers;
     •   identifying and disseminating information about the most effective practices that
         create a safe, disciplined and drug free school climate;
     •   supporting high-quality charter schools; and
     •   improving the high school completion rate.

GOAL 2: Increase the Academic Achievement of All High School
Students

Our Public Benefit

To better equip our students to compete in the global economy, the Department
encourages states to adopt high school course work and programs of study that prepare all
students for a postsecondary credential and facilitate a seamless transition from high
school to college or the workforce. The Department will continue to enhance and promote
achievement in mathematics, science and critical foreign languages through incentives for
teachers to teach advanced courses, thus providing opportunities for students to be well
prepared for postsecondary education or the workforce following high school. The
Department encourages increased access to, and participation in, Advanced Placement
(AP) or International Baccalaureate (IB) classes by low-income and other disadvantaged
students. To offer challenging courses, schools must have qualified teachers to teach them.
The Department promotes efforts to increase the number of teachers who have the
academic content knowledge needed to teach advanced classes.

The Department will pursue the following objectives in support of Goal 2. Additionally, the
Department has identified 11 key strategic performance measures for this goal.

Strategic Objectives:                                                         Goal 2 Resources
                                                                              ($ in thousands)
     •   Increase the proportion of high              $3,000,000

         school students taking a rigorous                                    $2,641,888

         curriculum                                   $2,500,000

     •   Promote advanced proficiency in
                                                      $2,000,000
         mathematics and science for all
         students
     •
                                                      $1,500,000
         Increase proficiency in critical                                                                  $1,280,830       ARRA

         foreign languages                                                                        $900,000                  Non‐ARRA
                                                      $1,000,000


Strategies that support the Department in
                                                       $500,000
achieving its objectives for Goal 2 include:
                                                             $0
     • increasing access to AP courses                   FY 2010 (President's Request) FY 2009 (Actual)
        nationwide;
     • increasing the number of teachers qualified to teach AP and IB classes; and
     • supporting projects expanding offerings and participation in advanced mathematics
        and science classes.




24                                                           FY 2009 Agency Financial Report—U.S. Department of Education
                                                                                   MANAGEMENT’S DISCUSSION AND ANALYSIS




GOAL 3: Ensure the Accessibility, Affordability and Accountability
of Higher Education and Better Prepare Students and Adults for
Employment and Future Learning

Our Public Benefit

America’s institutions of higher education have long been engines of innovation, helping the
nation to achieve a level of economic prosperity experienced by few other countries
throughout history. The dynamics of rapid technological change over time have required
greater levels of education to sustain the global competitiveness of the American economy.
As a result, an increasing proportion of Americans have enrolled in and completed a
program of postsecondary education in order to secure high-quality employment in
competitive industries.

Financial aid must be made available to students in a more simplified manner and be more
focused on students with the greatest financial need. Furthermore, adult education and
vocational rehabilitation programs must provide increasingly effective services to improve
the skills and employment prospects of those they serve.

The Department will pursue the following objectives in support of Goal 3. Additionally, the
Department has identified 20 key strategic performance measures for this goal.


Strategic Objectives:                                                                       Goal 3 Resources
                                                                                            ($ in thousands)
     •     Increase success in and                             $35,000,000
           completion of quality                                                                             $29,306,500
                                                               $30,000,000
           postsecondary education
     •     Deliver student financial aid                       $25,000,000
                                                                                          $24,387,676

           to students and parents
                                                               $20,000,000
           effectively and efficiently
     •     Prepare adult learners and                          $15,000,000
                                                                                                                                             ARRA
                                                                                                                                             Non‐ARRA
           individuals with disabilities
                                                               $10,000,000
           for higher education,
           employment and productive                            $5,000,000
                                                                                                                           $2,142,842
           lives                                                                 $831,000
                                                                       $0
                                                                             FY 2010 (President's Request)     FY 2009 (Actual)
Strategies that support the
objectives of Goal 3 include:

     •     maintaining high levels of college enrollment and persistence, while increasing the
           affordability of and accessibility to higher education through effective college
           preparation and grant, loan and campus-based aid programs;
     •     promoting and disseminating information regarding promising practices in
           community colleges;
     •     strengthening the accountability of postsecondary education institutions through
           accreditation, evaluation and monitoring;
     •     creating an efficient and integrated student financial aid delivery system;
     •     reducing the cost of administering federal student aid programs;



FY 2009 Agency Financial Report—U.S. Department of Education                                                                            25
MANAGEMENT’S DISCUSSION AND ANALYSIS




     •   improving federal student aid products and services to provide better customer
         service; and
     •   strengthening technical assistance to state vocational rehabilitation agencies
         through improved use of data, dissemination of information and solidified
         partnerships.

Cross-Goal Strategy on Management

Our Public Benefit

The Department carries out its mission and attains results for its goals through a
commitment to excellent management practices. Through strong leadership, fiscal
responsibility and strategic deployment of human capital, the Department ensures that all
Americans have access to quality programs and benefit from successful outcomes.

The Department will pursue the following objectives in support of the cross-goal
management strategy. Additionally, the Department has identified 13 key strategic
performance measures for this goal.
                                                       Cross-Goal Resources
Strategic Objectives:                                     ($ in thousands)

     •   Maintain and strengthen            $1,600,000
                                                                      $1,489,979
         financial integrity and            $1,400,000                                             $1,338,249

         management and internal
                                            $1,200,000
         controls
     •   Improve the strategic              $1,000,000

         management of the                   $800,000
                                                                                                                 ARRA
         Department’s human capital                                                                              Non‐ARRA
                                             $600,000
     •   Achieve budget and
         performance integration to          $400,000

         link funding decisions to           $200,000
                                                                                         $88,000
         results
                                                   $0
                                                         FY 2010 (President's Request)    FY 2009 (Actual)
Strategies that support the
achievement of this strategic objective include:

     •   implementing risk mitigation activities to strengthen internal control and the quality of
         information used by managers;
     •   improving formula and discretionary grant management processes;
     •   improving compliance with information security requirements;
     •   fostering leadership and accountability;
     •   improving the Department’s hiring process;
     •   holding people and programs accountable for budget and performance integration;
     •   improving performance measurement and data collection; and
     •   using performance information to inform program management and performance.




26                                                             FY 2009 Agency Financial Report—U.S. Department of Education
                                                                            MANAGEMENT’S DISCUSSION AND ANALYSIS




                                         FINANCIAL HIGHLIGHTS
The Department consistently produces accurate and timely financial information that is
used by management to inform decision-making and drive results in key areas of operation.
For the eighth consecutive year, we achieved an unqualified (clean) opinion from
independent auditors on the annual financial statements. Since 2003, the auditors have
found no material weaknesses in the Department’s internal control over financial reporting.
In accordance with the Office of Management and Budget’s (OMB) Circular No. A-123,
Management’s Responsibility for Internal Control, the Department continues to test and
evaluate findings and risk determinations uncovered in management’s internal control
assessment.

American Recovery and Reinvestment Act of 2009

The Recovery Act provides $98.2 billion in additional funding to the Department. A
significant portion of Recovery Act funding, $53.6 billion, is for the State Fiscal Stabilization
Fund whose purpose is to minimize and avoid reductions in education and other essential
services and to promote reform. The remaining funds will be used for currently authorized
federal education activities. These activities include Impact Aid, Higher Education, Institute
of Education Sciences, Student Aid Administration, Student Financial Assistance,
Innovation and Improvement, Special Education, Rehabilitative Services and Disability
Research, Education for the Disadvantaged, Office of Inspector General and School
Improvement Programs.

This significant increase in funding is evident from a comparison of the Department’s
financial statements as of September 30, 2009, and September 30, 2008. The increases in
Fund Balance with Treasury and Net Position were 77 percent and 193 percent,
respectively, which are due to effects of the Recovery Act funding.

                   Fund Balance with Treasury                                             Net Position
            $180,000                               $168,032                 $140,000                        $127,060 
            $160,000                                                        $120,000
            $140,000
 Millions




                                                                            $100,000
            $120,000
                                                                 Millions




                           $94,899 
            $100,000                                                        $80,000
             $80,000                                                        $60,000
                                                                                          $43,336 
             $60,000
                                                                            $40,000
             $40,000
             $20,000                                                        $20,000
                  $0                                                             $0
                        September 2008          September 2009                         September 2008    September 2009




FY 2009 Agency Financial Report—U.S. Department of Education                                                            27
MANAGEMENT’S DISCUSSION AND ANALYSIS




Sources of Funds

The Department
managed a budget
in excess of                         FY 2009 Department of Education's Budget
$140.5 billion during
                                                  Administrative
FY 2009, of which             Postsecondary         Expenses
68 percent                      Grants and            < 1%
supported                          Loan
                              Administration
elementary and                Program Costs
secondary education                25%
grant programs.
                                                                                        Elementary
                                                                                           and
Postsecondary                        Research,                                          Secondary
                                   Improvement,                                           Grants
education grants                        and                                                68%
and administration of              Rehabilitation
student financial                     Grants
                                        7%
assistance
accounted for
25 percent, including loan programs costs that helped almost 13 million students and their
parents to better afford higher education during FY 2009. An additional 7 percent went
toward programs and grants encompassing research, development and dissemination, as
well as vocational rehabilitation services. Administrative expenditures were less than
1 percent of the Department’s appropriations.

Nearly all of the Department’s non-administrative appropriations support three primary lines
of business: grants, guaranteed loans and direct loans. The original principal balances of
the Federal Family Education Loan (FFEL) Program and Federal Direct Student Loan
Program loans, which compose a large share of federal student financial assistance, are
funded by commercial banks and borrowings from the Treasury, respectively.

The Department’s four largest grant programs are SFSF, Title I grants for elementary and
secondary education, Pell Grants for postsecondary financial aid and Special Education
Grants to States under the Individuals with Disabilities Education Act. In addition, this was
the first full year of the Teacher Education Assistance for College and Higher Education
(TEACH) Grant Program. This program awards annual grants to students who agree to
teach in a high-need subject area in a public or private elementary or secondary school that
serves low-income students.

The FFEL Program ensures that the loan capital for approximately 2,900 private lenders is
available to students and their families. Through loan guarantees issued by 35 active state
and private nonprofit Guaranty Agencies, backed by federal reinsurance provided by the
Department, the FFEL Program protects lenders against losses from borrower default. As
of the end of September 2009, the total principal balance of outstanding guaranteed loans
held by lenders was approximately $457 billion. The government’s estimated maximum
exposure for defaulted loans was approximately $445 billion.

The Ensuring Continued Access to Student Loans Act of 2008 (ECASLA) amended the
FFEL Program to authorize the secretary to purchase or enter into forward commitments to
purchase FFEL loans. The Department has implemented three activities under this


28                                                    FY 2009 Agency Financial Report—U.S. Department of Education
                                                                     MANAGEMENT’S DISCUSSION AND ANALYSIS




temporary loan purchase authority. These activities are: (1) loan purchase commitments
under which the Department agrees to purchase loans directly from FFEL lenders; (2) loan
participation interest purchases in which the Department purchases participation interests in
FFEL loans; and (3) an Asset-Backed Commercial Paper (ABCP) Conduit program in which
the Department enters into a forward commitment to purchase FFEL loans from a student
loan-backed conduit, as needed, to allow the conduit to repay short-term liquidity loans
used to re-finance maturing commercial paper.

The William D. Ford Federal Direct Student Loan Program, created by the Student Loan
Reform Act of 1993, provides an alternative method for delivering assistance to students.
This program uses Treasury funds to provide loan capital directly to eligible undergraduate
and graduate students and their parents through participating schools. These schools then
disburse loan funds to students. As of September 30, 2009, the value of the Department’s
direct loan portfolio was $152.8 billion.

Financial Position

The Department’s financial statements are prepared in accordance with established federal
accounting standards and are audited by the independent accounting firm of Ernst &
Young, LLP. Financial statements and footnotes for FY 2009 appear on pages 48-96. An
analysis of the principal financial statements follows.

Balance Sheet.
The Balance Sheet
presents, as of a specific                                     Assets and Liabilities
point in time, the recorded
value of assets and                  $450,000                      $405,945 
liabilities retained or              $400,000
managed by the                       $350,000
                                                                          $278,885 
Department. The difference           $300,000
                                                 Millions




                                                 $231,573 
between assets and                   $250,000
                                                        $188,237                     Assets
liabilities represents the net       $200,000
position of the Department.          $150,000                                        Liabilities
The Balance Sheet                    $100,000
displayed on page 48
                                      $50,000
reflects total assets of
                                           $0
$406 billion, a 75 percent
increase over FY 2008.                           September 2008    September 2009
The majority of this
increase is due to both the
American Recovery and Reinvestment Act and to ECASLA. Credit Program Receivables
increased by $99.5 billion, a 74 percent increase over FY 2008. This increase is largely due
to an increase in direct loan disbursements, and activity related to loan purchase
commitments and loan participation purchases under the Federal Family Education Loan
(FFEL) program. The majority of this loan portfolio is principal and interest owed by
students on direct loans. The remaining balance is related to defaulted guaranteed loans
purchased from lenders under terms of the FFEL Program and to loan purchase
commitments and loan participation purchases under the FFEL Program. The net portfolio
for direct loans increased by over $42.9 billion due to increased direct loan disbursements.
FFEL Program loans increased by $56.4 billion during FY 2009, due primarily to loan


FY 2009 Agency Financial Report—U.S. Department of Education                                           29
MANAGEMENT’S DISCUSSION AND ANALYSIS




volume and activity related to loan purchase commitments and loan participation
purchases. The Fund Balance with Treasury increased by $73.1 billion, a 77 percent
increase from FY 2008. The vast majority of this increase is due to the Recovery Act.

Total Liabilities for the Department increased by $90.6 billion, a 48 percent increase over
FY 2008. The increase is primarily due to the fact that borrowing increased for the Direct
Loan Program and to provide funds for the loan purchase commitments and loan
participation purchases activities under the FFEL Program. Liabilities for Loan Guarantees
for the FFEL Program decreased $22.8 billion, a 53 percent decrease due primarily to
subsidy transfers, re-estimates and modifications. These liabilities present the estimated
costs, on a present-value basis, of the net long-term cash outflows due to loan defaults and
interest subsidies net of offsetting fees.

The Department’s Net Position as of September 30, 2009 was $127.1 billion, an
$83.8 billion increase over the $43.3 billion Net Position as of September 30, 2008. This
193 percent increase was largely due to the Recovery Act.

Statement of Net Cost.
The Statement of Net                        Total Net Cost of Operation
Cost presents the                   $70,000
                                                   $64,817 
components of the
                                    $60,000
Department’s net cost,
which is the gross cost             $50,000
                                                                         $44,161 
incurred less any
                              Millions




                                    $40,000
revenues earned from
the Department’s                    $30,000

activities. The                     $20,000
Department’s total
                                    $10,000
program net costs, as
reflected on the                         $0
Statement of Net Cost,                         September 2008        September 2009

page 49, were
$44.2 billion, a 32 percent decrease from September 30, 2008. This change largely reflects
the effects of both the $2.6 billion downward modification and the $21.7 billion downward
re-estimate in the guarantee loan portion of the FFEL Program, and the $5.2 billion
downward re-estimate for Direct Loans.

The Statement of Net Cost is presented to be consistent with the Department’s strategic
goals. As required by the Government Performance and Results Act of 1993, each of the
Department’s Reporting Organizations has been aligned with the major goals presented in
the Department’s Strategic Plan 2007–2012.




30                                                   FY 2009 Agency Financial Report—U.S. Department of Education
                                                                           MANAGEMENT’S DISCUSSION AND ANALYSIS




                                                                 Reporting
                  Net Cost Program                             Organizations/                  Strategic Goal
                                                                  Groups

                                                               • Federal Student
                                                                 Aid                 3 Ensure the accessibility,
   Ensure Accessibility, Affordability and                     • Office of             affordability and accountability of
   Accountability of Higher Education and Career                 Postsecondary         higher education, and better
   and Technical Advancement                                     Education             prepare students and adults for
                                                               • Office of             employment and future learning
                                                                 Vocational and
                                                                 Adult Education


                                                               • Office of
                                                                 Elementary and
                                                                 Secondary
                                                                                     1 Improve student achievement, with
                                                                 Education
                                                                                       the focus on bringing all students
                                                               • Office of English
   Promote Academic Achievement in Elementary                                          to grade level in reading and
                                                                 Language
   and Secondary Schools                                                               mathematics by 2014
                                                                 Acquisition
                                                               • Office of Safe
                                                                                     2 Increase the academic
                                                                 and Drug-Free
                                                                                       achievement of all high school
                                                                 Schools
                                                                                       students
                                                               • Hurricane
                                                                 Education
                                                                 Recovery


                                                               • Institute of        1 Improve student achievement, with
                                                                 Education             the focus on bringing all students
   Transformation of Education                                   Sciences              to grade level in reading and
                                                               • Office of             mathematics by 2014
                                                                 Innovation and
                                                                 Improvement




                                                               • Office of Special     Cuts across Strategic Goals 1, 2
   Special Education                                             Education and         and 3
                                                                 Rehabilitative
                                                                 Services


                                                                                       Cuts across Strategic Goals 1, 2
   American Recovery and Reinvestment Act                      • Recovery Act
                                                                                       and 3


Strategic Goals 1, 2 and 3 are sharply defined directives that guide reporting organizations
to carry out the Department’s vision and programmatic mission, and the net cost programs
can be specifically associated with these three strategic goals. The Department has a
Cross-Goal Strategy on Management, which is considered a high-level premise on which
the Department establishes its foundation for the three goals. As a result, we do not assign
specific programs to the Cross-Goal Strategy for presentation in the Statement of Net Cost.




FY 2009 Agency Financial Report—U.S. Department of Education                                                            31
MANAGEMENT’S DISCUSSION AND ANALYSIS




Statement of Budgetary Resources. This statement provides information about the
provision of budgetary resources and their status as of the end of the reporting period. The
statement displayed on page 51 shows that the Department had $437.8 billion in total
budgetary resources for the 12 months ended September 30, 2009. These budgetary
resources were composed of $170.1 billion in appropriated budgetary resources and
$267.7 billion in non-budgetary credit reform resources, which primarily consist of borrowing
authority for the loan programs. Of the $46.6 billion that remained unobligated at year end,
$12.1 billion represents funding provided in advance for activities in future periods that were
not available at year end. These funds will become available in following fiscal years.



Limitations of Financial Statements

Management has prepared the accompanying financial statements to report the financial
position and operational results for the U.S. Department of Education for FY 2009 and
FY 2008 pursuant to the requirements of Title 31 of the United States code, section
3515(b).

While these statements have been prepared from the books and records of the Department
in accordance with generally accepted accounting principles for federal entities and the
formats prescribed by OMB, these statements are in addition to the financial reports used to
monitor and control budgetary resources, which are prepared from the same books and
records.

The statements should be read with the realization that they are a component of the U.S.
Government, a sovereign entity. One implication of this is that the liabilities presented
herein cannot be liquidated without the enactment of appropriations, and ongoing
operations are subject to the enactment of future appropriations.




32                                                    FY 2009 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS




  MEMORANDUM FROM THE OFFICE OF INSPECTOR GENERAL




FY 2009 Agency Financial Report—U.S. Department of Education                                     33
MANAGEMENT’S DISCUSSION AND ANALYSIS




         OFFICE OF INSPECTOR GENERAL’S MANAGEMENT
              CHALLENGES FOR FISCAL YEAR 2010
The Office of Inspector General (OIG) works to promote efficiency, effectiveness and
integrity in the programs and operations of the U.S. Department of Education (Department).
Through our audits, inspections, investigations and other reviews, we continue to identify
areas of concern within the Department’s programs and operations and recommend actions
the Department should take to address these weaknesses.

The Reports Consolidation Act of 2000 requires OIG annually to identify and summarize the
top management challenges facing the Department and provide information on the
Department’s progress in addressing those challenges. In recent years, we have focused
our Management Challenges reports on six operational areas that our work identified as
most vulnerable to waste, fraud and abuse: (1) student financial assistance programs; (2)
information technology (IT) security and management; (3) grantee monitoring and
oversight; (4) grant and contract awards, performance and monitoring; (5) data reliability;
and (6) human resources. While our previous Management Challenges reports have noted
some progress by the Department in addressing these challenges, with passage of the
American Recovery and Reinvestment Act of 2009 (Recovery Act) and the Ensuring
Continued Access to Student Loans Act of 2008 (ECASLA), there is an immediate need for
the Department to increase its efforts to ensure that Federal education programs are
operating effectively, efficiently and as required by statute. It is with that goal in mind that
we focus this report on three overall challenges that impact virtually every operational
aspect of the Department: (1) the Recovery Act; (2) student financial assistance
programs/ECASLA; and (3) information security and management.

The Department has voiced its commitment to tackling these challenges and addressing
the underlying problem of internal controls. “Internal controls” are plans, methods and
procedures an entity employs to provide reasonable assurance that it meets its goals and
achieves its objectives while minimizing operational problems and risks. By establishing
effective internal controls, the Department can be an effective steward of the billions of
taxpayer dollars supporting its programs and operations. America’s students and taxpayers
deserve nothing less.

Challenge: Implementing the Recovery Act

The Recovery Act was signed into law on February 17, 2009, and includes approximately
$98.2 billion in new funding for federal education programs and operations. This includes
funding for programs within the Elementary and Secondary Education Act of 1965, as
amended (ESEA); the Higher Education Act of 1965, as amended (HEA); the Individuals
with Disabilities Education Act of 2004, as amended; and the Rehabilitation Act of 1973.
With 55 state and territorial educational agencies, more than 16,000 school districts and
thousands of schools, colleges and universities potentially eligible to receive these funds,
the Department faces a formidable challenge in ensuring that Recovery Act funds reach the
intended recipients and achieve the desired results. To do so, the Department must: (1)
provide effective oversight and monitoring of its grantees and subrecipients; (2) ensure that
the information reported to the Department and by the Department is accurate and reliable;
and (3) make certain it has knowledgeable staff on board to successfully carry out and
manage its programs and operations. While our specific Recovery Act work is underway,



34                                                    FY 2009 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS




previous OIG audits, inspections and investigations have uncovered problems in these
three areas, making each a significant challenge for the Department.

Grantee and Subrecipient Oversight and Monitoring

Ineffective monitoring and oversight can have a significant impact on a grantee’s ability to
meet statutory requirements and ensure critical education funds reach the intended
recipients. Recent OIG audits, inspections and investigations have uncovered problems
with program control and oversight of a number of grantees, almost all of which are eligible
to receive Recovery Act funds. Further complicating this issue is the requirement that
grantees receiving Recovery Act funds closely monitor subrecipients’ use of and account
for the funds. Our previous audit and investigation work identified a number of weaknesses
in grantee oversight and monitoring of its subrecipients. For example, some state
educational agencies’ (SEA) subrecipient monitoring efforts lacked a fiscal oversight
component, while other SEAs were found to conduct on-site program monitoring of
subrecipients infrequently. Other grantees were found to rely too heavily on local
educational agency single audits, which often times are too late for early detection of
inappropriate use of funds. In addition, preliminary Recovery Act work has shown that some
grantees are relying on existing monitoring procedures that do not appear adequate to
ensure their subrecipients use of and accounting for Recovery Act funds appropriately, and
do not cover new program funding, including dollars from the Recovery Act’s State Fiscal
Stabilization Fund. These factors make it a challenge for the Department to ensure that
adequate and timely monitoring of Recovery Act funds is taking place at both the SEA and
subrecipient levels.

The Department’s Progress. The Department has expressed its commitment to improving
oversight of its grantees and subrecipients. As an example, the Department has been
working closely with the Michigan Department of Education and Detroit Public Schools to
aggressively address significant financial and performance problems which left the school
system on the verge of collapse. The Department’s plan includes provisions for a
structurally balanced budget, accountability and systemic controls and deficit elimination.
With regard to the Recovery Act, the Department has issued a number of policy guidance
documents and fact sheets to assist grantees in implementing Recovery Act programs. It is
also developing a technical assistance plan and training curricula for grantees that will
include administrative requirements for implementation of federal grants and will convey the
importance of complying with those requirements. The Department also intends to conduct
outreach efforts, such as conferences, workshops and Webinars, to provide additional
technical assistance to Recovery Act grantees.

Data Reliability

The Department, its grantees and subrecipients must have controls in place and effectively
operate to ensure that accurate, reliable data is reported. This is particularly important with
regard to Recovery Act funds, as recipients must submit regular reports detailing the
projects and activities funded with those dollars. They are also required to submit quarterly
reports, which include new data elements that must be submitted within 10 days of the
close of each fiscal quarter. Our preliminary Recovery Act work has determined that some
SEAs are planning to use existing data systems to collect, compile and report Recovery Act
data, but had not yet modified their systems to reflect new reporting requirements. Also,
some SEAs expressed concern that they had not received adequate guidance, or that their


FY 2009 Agency Financial Report—U.S. Department of Education                                     35
MANAGEMENT’S DISCUSSION AND ANALYSIS




states might not have enough staff and funding resources to meet all of the new reporting
requirements and timelines. In addition, the Recovery Act requires that all fund recipients
register in the Central Contractor Registration database, which means the Department must
ensure that all of these recipients are registered in time to meet reporting requirements. As
previous OIG work has identified issues of noncompliance with data collection and reporting
requirements, it will be a challenge for the Department to ensure that data received from
Recovery Act fund recipients is accurate, reliable and complete.

The Department’s Progress. The Department has collected data and has developed a
risk-assessment model for technical assistance that will allow its staff to provide more
guidance to states and other grantees that are at increased risk for problems. Department
staff has also been using conference calls with states to provide targeted technical
assistance to meet each state’s specific needs. The Department established a Metrics and
Monitoring Team that is charged with ensuring transparency, accountability and oversight of
Recovery Act dollars. The team meets weekly to coordinate oversight efforts and develop
new reports that are required for posting on the Recovery.gov Web site.

Human Resources

Like most federal agencies, the Department will see a significant percentage of its
workforce eligible for retirement in 2010. Compounding the situation is the immediate
demand for staff to address the requirements of the Recovery Act. Prior OIG work in the
area of grants monitoring has shown that staff handled a large number of grants and were
not able to closely monitor all necessary activities. Human resources is a challenge that the
Department must immediately address, as current staff will be further stretched to monitor
the unprecedented levels of new funding available to state and local governments and
other entities under the Recovery Act.

The Department’s Progress. The Department has devoted significant resources to
implement requirements related to the Recovery Act. Teams have been formed to issue
guidance and provide technical assistance and outreach on various topics to ensure
Recovery Act fund recipients are aware of their responsibilities, all at a time when a number
of critical positions have not yet been filled due to the change in administration. While
efforts to date have been significant, Department staff may not be able to maintain the
current pace without additional resources as its Recovery Act efforts move from
implementation to monitoring.

Challenge: Student Financial Assistance Programs/ECASLA

The federal student financial assistance programs involve more than 6,200 postsecondary
institutions, more than 2,900 lenders, 35 guaranty agencies and many third party servicers.
In 1998 and in response to the growing complexity, increased demand and the likelihood for
waste, fraud and abuse associated with the student financial assistance programs,
Congress established a Performance Based Organization (PBO) in the Department to
manage and administer the student financial assistance programs authorized under Title IV
of the HEA. In the decade since becoming the PBO, the Federal Student Aid (FSA) office’s
responsibilities have increased as the programs have grown substantially. In 2009, FSA
disbursed $18.4 billion in Pell Grants averaging approximately $2,973 to 6.2 million
students. In fulfilling its program responsibilities, FSA directly manages or oversees almost
$622 billion in outstanding loans, representing over 111 million student loans to more than


36                                                   FY 2009 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS




32 million borrowers. Further, with the significant disruptions in the credit markets, in early
2008, lenders in the Federal Family Education Loan (FFEL) Program expressed concerns
that there would be insufficient private capital to fund FFEL loans to meet the demands of
Stafford and PLUS loan borrowers. To address these concerns, Congress passed the
ECASLA, which provided the Department with the authority to purchase or enter into
forward commitments to purchase student loans from lenders to ensure that loans are
available for all students. Colleges and universities also expanded participation in the
William D. Ford Federal Direct Loan (Direct Loan) program due to uncertainty over FFEL
availability. Prior to 2008, the Direct Loan program has accounted for about 20 percent of
new student loan volume. However, the Direct Loan program’s new loan volume is
expected to increase to about 60 percent for the 2009–2010 academic year, and the
administration has proposed a transition to 100 percent direct lending for the 2010–2011
academic year.

In order to fulfill all of its responsibilities as a PBO, as well as sufficiently administer the Title
IV and ECASLA programs, FSA must: (1) have a system of effective internal controls in
place; (2) provide sufficient oversight and monitoring of Title IV program participants;
(3) provide effective contract monitoring to ensure that it receives quality goods and
services from its vendors; and (4) make certain it has knowledgeable staff on board to
successfully carry out and manage its programs and operations. Our specific ECASLA-
related work is ongoing, but previous OIG efforts found that FSA does not have sufficient
capacity or resources necessary to provide effective oversight for all aspects of the student
financial assistance programs, leaving programs vulnerable to waste, fraud and abuse.

Internal Controls

Establishing effective internal controls has long been a challenge for Federal Student Aid,
and three recent OIG reports show that problems in this area continue. First, an OIG audit
that sought to determine whether FSA was meeting its responsibilities as a PBO in three
key areas found that FSA had not done so, and as a result, the Congress, the Secretary
and the public have not been clearly informed about FSA’s progress toward achieving its
purposes as a PBO or whether it has reduced its program costs since becoming a PBO
more than a decade ago. Second, an OIG review of FSA’s oversight of GAs, lenders and
loan servicers found that improvements were needed in each of the five areas of internal
control: control environment, risk assessment, information and communications, control
activities and monitoring. This was a follow-up report to a 2006 audit that contained similar
findings, many of which had not been fully addressed. Third, OIG performed an inspection
of FSA’s Enterprise Risk Management Group, an effort initiated by FSA in 2006 with the
goal of developing risk assessments and providing a more strategic view of future risks.
The OIG inspection found that FSA had not fully implemented enterprise risk management,
leaving its programs vulnerable to waste, fraud and abuse. Based on these findings, the
passage of ECASLA and the expansion of the Direct Loan Program, it is vital that FSA
leaders take on this challenge and implement effective internal controls.

The Department’s Progress. FSA has agreed to improve the management of its
programs. It is restructuring and improving its chief compliance officer organization for the
oversight of the FFEL Program. FSA is also in the process of implementing the authorities
provided by ECASLA for the Loan Participation/Purchase programs, and establishing
internal controls to provide for accountability and monitoring and ensure compliance with
the requirements of the law.


FY 2009 Agency Financial Report—U.S. Department of Education                                        37
MANAGEMENT’S DISCUSSION AND ANALYSIS




Participant Oversight and Monitoring

FSA has always faced a significant challenge in conducting effective monitoring and
oversight of the thousands of entities participating in its programs. Recent OIG efforts have
revealed cases of lenders violating the inducement provision of the HEA or overbilling the
Department for loans under the 9.5 percent special allowance payment (SAP); guaranty
agencies that did not comply with HEA requirements regarding the Federal Fund and
Operating Fund; and schools that did not comply with Title IV requirements for institutional
and program eligibility, the 90-10 rule and other criteria. With ECASLA, the need for FSA to
conduct effective oversight and monitoring has only intensified. FSA estimated that about
75 percent of FFEL new loan volume for the 2008–2009 academic year would be financed
through ECASLA programs, and significant increases in student loan volume were
expected in the Direct Loan program. FSA must make improvements in oversight and
monitoring to ensure that the entities participating in the federal student financial assistance
programs are adhering to statutory, regulatory and program requirements. Still another
challenge facing both FSA and schools participating in the Title IV programs involves
identity verification of students receiving federal student financial assistance. FSA does not
yet require schools to verify the identity of students receiving aid, which leaves the
programs vulnerable to identity theft and other fraudulent schemes, particularly distance
education programs.

The Department’s Progress. FSA has agreed to develop and implement consistent
oversight procedures of the entities participating in the federal student financial assistance
programs. As an example, in response to our audit work on 9.5 percent SAP, the
Department has required all lenders wishing to bill at the 9.5 percent SAP rate to undergo
audits to determine the eligibility of loans for payments at the 9.5 percent rate. With
ECASLA, FSA has conducted outreach efforts to inform industry participants of ECASLA-
related programs and operations, and developed testing and certification requirements for
industry participants with the advice of OIG. Additionally, FSA has executed Lender of Last
Resort Agreements with 30 guaranty agencies. To increase the capacity of the Direct Loan
Program, FSA has expanded the capacity of the Common Origination and Disbursement
system used to originate Direct Loans. To handle the increased need for servicing Direct
Loans and loans purchased under the ECASLA-related programs, FSA contracted with four
additional entities to service loans. In addition, as part of its corrective action to the
recommendations made in our 2007 inspection report on guaranty agency compliance with
the establishment of a Federal Fund and Operating Fund at each agency, FSA contracted
for program reviews at 22 guaranty agencies. FSA hired contractors to carry out these
efforts. These program reviews identified more than $33 million in potential recoveries to
the Federal Fund. Finally, FSA is aware of the issues involving identity verification of
students receiving federal student financial assistance and may discuss the issue at its next
negotiated rulemaking session.

Contract Awards, Monitoring and Performance

In 2005, the Secretary of Education delegated authority to the Chief Operating Officer in
FSA to procure property and services in the performance of functions managed by FSA as
a PBO. Since that time, more than 50 percent of the contracts entered into and paid by the
Department are done so by and through FSA. A 2007 audit by OIG found that FSA’s
contract monitoring process did not always ensure contractors adhered to contract
requirements and FSA received the products and services intended. We found that FSA


38                                                    FY 2009 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS




staff did not always ensure appropriate review and approval of invoices, appropriately
communicate acceptance/rejection of deliverables, issue modifications for contract changes
and appropriately issue or sign necessary appointment letters. This occurred because of
resource limitations and because FSA staff was not always familiar with applicable policies
and procedures. FSA must expand its oversight and monitoring to new contractors, such as
the four new contractors hired to service loans.

The Department’s Progress. In 2008 FSA hired consultants to review its acquisition
processes and make recommendations for improvement. In addition, FSA revised its
Contracting Officer’s Representative Training Program to incorporate more stringent
certification, training and recordkeeping requirements.

Human Resources

Due to the complexities of the student financial assistance programs, FSA personnel must
have the necessary skills and training for effective program monitoring and oversight.
During the course of our 2007 inspection report on guaranty agency compliance with the
establishment of the Federal and the Operating Funds, Department officials acknowledged
that FSA did not have sufficient staff with the qualifications and knowledge needed to
monitor guaranty agencies, lenders and other participants. Further, our 2009 audit of FSA’s
oversight of guaranty agencies, lenders and loan servicers noted that staff resources were
not sufficient to adequately provide oversight of those participants, and core competencies
had not been developed to ensure proper qualifications for staff conducting program
reviews. We also found that FSA staff did not complete adequate training related to their
duties. FSA must take the steps necessary to ensure it has knowledgeable staff so it has
the capacity to successfully carry out the student financial assistance programs.

The Department’s Progress. To address the human resource weaknesses identified in
recent OIG audit and inspection reports, FSA has contracted for services, including
program reviews. In addition, FSA agreed with OIG recommendations that it ensure that its
staff have the requisite knowledge to sufficiently evaluate programs; that it dedicate
sufficient staff resources to provide oversight of the FFEL program; and that it develop core
competencies and implement mandatory training for responsible staff.

Challenge: Information Security and Management

The Federal Information Security Management Act (FISMA) requires each federal agency
to develop, document and implement an agencywide program to provide information
security and develop a comprehensive framework to protect the government’s information,
operations and assets. To ensure the adequacy and effectiveness of information security
controls, Igs conduct annual independent evaluations of the agencies’ information security
programs and report the results to the Office of Management and Budget. OIG work
conducted since 2004 has revealed numerous system security internal control weaknesses,
all of which increase the risk for inappropriate disclosure or unauthorized use of sensitive
and personally identifiable information (PII). The Department’s challenges in the area of IT
security and management involve the Recovery Act; oversight and monitoring of its
multimillion-dollar IT contracts; addressing cybersecurity threats; and administering its IT
capital investment portfolio. It is vital that the Department addresses these challenges to
ensure that its IT and information security projects are appropriately managed so they meet
their technical and functional goals on time and on budget.


FY 2009 Agency Financial Report—U.S. Department of Education                                     39
MANAGEMENT’S DISCUSSION AND ANALYSIS




Recovery Act Funds

Through the Recovery Act, an additional $98.2 billion will flow through the Department’s
systems. These systems must simultaneously administer and process transactions for the
Recovery Act as well as existing programs. As a result, it is essential that the Department
implement and maintain appropriate systems security controls over IT assets used to
administer Recovery Act funds.

The Department’s Progress. The Department has agreed to improve its managerial,
operational and technical security controls to adequately protect its data. While we are
currently conducting work related to the Recovery Act, previous FISMA-related reports
identified critical risks and vulnerabilities in the Department’s systems. Our findings have
provided management with key recommendations for tightening of security awareness and
incident handling, ensuring adequate maintenance of the Department’s systems and
damage assessment.

Contract Awards, Monitoring and Performance

In 2007, the Department awarded a 10-year, nearly $500 million contract to a single vendor
to acquire IT network services and improve all services provided to the Department
customers and to lower costs to the Department through IT integration. While OIG is
currently reviewing this contract, previous OIG work revealed that improvement was
needed in the Department’s IT contract management. A 2007 OIG audit of the previous IT
network services contract revealed a number of weaknesses, including that the Department
did not provide effective performance incentives or disincentives to allow for timely
enforcement of an acceptable level of performance, and that contract modifications were
not fully evaluated to consider whether a reduction in cost was appropriate for the reduced
level of effort required by the contractor to meet acceptable levels of performance. We also
found that the Department’s controls did not ensure the contractor provided the quality and
services required by the contract. As a result, the Department paid for a quality or level of
services it did not receive.

The Department’s Progress. The Department agreed to take action on a number of the
recommendations made in our 2007 IT audit, which included: ensuring that future
performance-based contracts include appropriate incentives and disincentives to motivate
contractor performance; providing a correlation between performance and payments to the
contractor; and assuring minimum quality levels for all critical services. It also agreed to
require contractors to provide the Department with alternatives to address unsatisfactory
contractor performance and allow for execution of option years for achievement of
satisfactory performance levels if such continuation is in the best interest of the
Department. The Department also agreed to develop and implement an internal contract-
deliverables tracking system.

Ongoing Cybersecurity Threats

The nature of the ongoing cybersecurity threat has shifted. Historically the threat was from
the outside “hacker” conducting attacks to compromise systems for bragging rights or use
of resources. Now the primary threat is from criminal elements, including organized crime
and even terrorist organizations. The threat vector most commonly used by these parties is
to influence regular users to go to malicious Web sites or open malicious files and


40                                                   FY 2009 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS




compromise the computer. The consequences of security incidents from these threats can
include disclosure of sensitive information and PII, lost staff hours, damaged or altered
records, extensive financial damage and the loss of the public’s confidence in its
government.

The Department’s Progress. The Department is making progress in establishing policies
to protect sensitive information and PII and has implemented enhanced security monitoring
to protect users’ computers within the Department’s network. More needs to be done,
however, to reduce the threats posed by external business partners who have remote
access to Department systems. For example, while the Department is working hard to
implement two-factor authentication within the Department’s network, little progress has
been made on strengthening remote access from business partners.

IT Capital Investment Portfolio

The Department’s IT capital investment portfolio for FY 2009 was $656.9 million and for
FY 2010 is expected to be $920.8 million, with many resource-intensive projects pending. It
is critical that the Department have a sound IT investment management control process
that can ensure that technology investments are appropriately evaluated, selected, justified
and supported. This oversight and monitoring process must address IT investments as an
agency-wide portfolio.

The Department’s Progress. The Department has recently strengthened the IT capital
investment program by expanding membership of two of its review groups, the Investment
Review Board and the Planning and Investment Review Working Group. The Department
continues its efforts to strengthen individual business cases and to map proposed
investments to an agencywide enterprise architecture strategy.




FY 2009 Agency Financial Report—U.S. Department of Education                                     41
MANAGEMENT’S DISCUSSION AND ANALYSIS




                        MANAGEMENT’S ASSURANCES

Federal Managers’ Financial Integrity Act

As required under the Federal Managers’ Financial Integrity Act of 1982 (FMFIA), the
Department reviewed its management-control system. The objectives of the management-
control system are to provide reasonable assurance that the following occur:

•    Obligations and costs are in compliance with applicable laws.
•    Assets are safeguarded against waste, loss, unauthorized use or misappropriation.
•    The revenues and expenditures applicable to agency operations are properly recorded
     and accounted for to permit the preparation of accounts and reliable financial and
     statistical reports and maintain accountability over assets.
•    Programs are efficiently and effectively carried out in accordance with applicable laws
     and management policy.

Managers throughout the Department are responsible for ensuring that effective controls
are implemented in their areas of responsibility. Individual assurance statements from
senior management serve as a primary basis for the Department’s assurance that
management controls are adequate. The assurance statement provided on page 43 is the
result of our annual assessment and is based upon each senior officer’s evaluation of
controls.

Department organizations that identify material deficiencies are required to submit plans for
correcting the cited weaknesses. These corrective action plans, combined with the
individual assurance statements, provide the framework for continual monitoring and
improving of the Department’s management controls.

Material Weakness Reported in FY 2008 Resolved. Corrective actions have been
implemented to resolve the “Information Technology (IT) Security” material weakness
reported in the FY 2008 Performance and Accountability Report. The Office of the Chief
Information Officer implemented corrective actions in response to OIG audits and reviews
of IT security. These actions have led to a significant improvement in IT security internal
controls.

Inherent Limitations on the Effectiveness of Controls. Department management does
not expect that our disclosure on controls over financial reporting will prevent all errors and
all fraud. A control system, no matter how well conceived and operated, can provide only
reasonable—not absolute—assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are resource
constraints. The benefits of the controls must be considered relative to their associated
cost. Because of the inherent limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected.

Federal Financial Management Improvement Act

The Secretary has determined that the Department is in compliance with the Federal
Financial Management Improvement Act of 1996 (FFMIA), although the auditors have
identified instances in which the Department’s financial management systems did not
substantially comply with the act.



42                                                    FY 2009 Agency Financial Report—U.S. Department of Education
                                                                     MANAGEMENT’S DISCUSSION AND ANALYSIS




The Department is cognizant of its auditor’s concerns relating to instances of
noncompliance with FFMIA as noted in the Compliance with Laws and Regulations Report
located on pages 118-120 of this report. The Department continues to strengthen and
improve its financial management systems.

The FFMIA requires that agencies’ financial management systems provide reliable financial
data in accordance with generally accepted accounting principles and standards. Under
FFMIA, the financial management systems substantially comply with the three following
requirements under FFMIA—federal financial management system requirements,
applicable federal accounting standards and the use of the U.S. Government Standard
General Ledger at the transaction level.

             FEDERAL MANAGERS’ FINANCIAL INTEGRITY ACT


        Management for the Department of Education is responsible for establishing
        and maintaining effective internal control and financial management systems
        that meet the intent and objectives of the Federal Managers’ Financial Integrity
        Act of 1982 (FMFIA). The Department conducted its assessment of the
        effectiveness of internal control over the effectiveness and efficiency of
        operations and compliance with applicable laws and regulations in accordance
        with the Office of Management and Budget Circular No. A-123, Management’s
        Responsibility for Internal Control. Based on the results of this evaluation, the
        Department of Education can provide reasonable assurance that its internal
        control over the effectiveness and efficiency of operations and compliance with
        applicable laws and regulations as of September 30, 2009, was operating
        effectively and no material weaknesses were found in the design or operations
        of the internal controls.

        In addition, the Department conducted an assessment of the effectiveness of
        internal control over financial reporting, which includes safeguarding of assets
        and compliance with applicable laws and regulations, in accordance with the
        requirements of Appendix A of the Office of Management and Budget’s Circular
        No. A-123. In accordance with the results of this assessment, the Department of
        Education can provide reasonable assurance that its internal control over
        financial reporting as of June 30, 2009, was operating effectively and that no
        material weaknesses were found in the design or operation of the internal
        control over financial reporting.



                                                               /s/

                                                        Arne Duncan
                                                      November 16, 2009




FY 2009 Agency Financial Report—U.S. Department of Education                                           43
MANAGEMENT’S DISCUSSION AND ANALYSIS




44                                     FY 2009 Agency Financial Report—U.S. Department of Education
                                                Financial
                                                     Details




  “Improving education is not just a moral obligation of society. It’s not
  just an economic imperative. It’s the civil rights issue of our
  generation—the only sure path out of poverty and the only way to
  achieve the vision of equality spelled out by our founders.”
                                                        —Secretary Duncan




FY 2009 Agency Financial Report—U.S. Department of Education
FINANCIAL DETAILS
MESSAGE FROM THE CHIEF FINANCIAL OFFICER


                    Message From the Chief Financial Officer
The Department of Education continued its high standard of
financial management and reporting during FY 2009. The
Department’s excellence in financial management has been a
joint effort of its managers, employees and business partners.
In FY 2009, we:

•     Successfully implemented financial reporting requirements
      for the Recovery Act. The Department prepares detailed
      Recovery Act related financial information that is
      submitted and posted to Recovery.gov on a weekly basis;

•     Continued to successfully implement new loan access
      initiatives to ensure accessibility of federal student loans
      to eligible students and parents;

•     Received an unqualified opinion on the principal financial
      statements for the eighth consecutive year, continuing a clear pattern of financial
      accountability;

•     Continued to have no material weaknesses identified by our auditors as part of our Report
      on Internal Control for the seventh consecutive year; and

•     Continued to provide reasonable assurance of the Department’s internal controls.

In FY 2009, the Department also took steps to address two significant deficiencies identified in
the FY 2008 “Report on Internal Controls,” credit reform and information system controls.
Regarding credit reform, the Department improved student loan reporting and analysis by
amending and expanding the analytical tools used for the loan estimation process to
accommodate the ECASLA programs. Additionally, the Department examined deferment,
forbearance and default rates as part of ongoing cohort analysis, and conducted sensitivity
analysis to show the impact of variations in major assumptions on the loan estimation process.

Regarding information system controls, the Department continued to address security and
control weaknesses. The Department established an Enterprise Corrective Action Process
(ECAP) to assess security vulnerabilities, conduct root cause analysis and establish
remediation efforts. Additionally, the Department standardized vulnerability scanning, security
controls, testing criteria and server configuration procedures.

During FY 2009, the Department assessed the effectiveness of its internal controls over
financial reporting. This review was based on the requirements of OMB Circular A-123
(Appendix A), Management’s Responsibility for Internal Control. We are pleased to report that
the Department can give an unqualified statement of assurance on its internal control over
financial reporting. This examination provided a valuable opportunity to review and improve
internal controls and ensure integrity in financial management and reporting.

/s/

Thomas P. Skelly
Delegated to Perform Functions of Chief Financial Officer
November 16, 2009



46                                                           FY 2009 Agency Financial Report—U.S. Department of Education
                                                                                                                  FINANCIAL DETAILS



                                                      Financial Summary
                                                                 Dollars in Millions



                                                               Balance Sheet
                                                               % Change
                                                               2009/2008        FY 2009         FY 2008         FY 2007         FY 2006
 Fund Balance with Treasury                                      +77%          $ 168,032    $     94,899    $     97,532    $    107,053
 Credit Program Receivables                                      +74%            234,254         134,725         115,904         106,728
 Other                                                           +88%              3,659            1,949           1,202            640
Total Assets                                                                     405,945         231,573         214,638         214,421

 Debt                                                            +83%             235,385        128,668         104,287         105,677
 Liabilities for Loan Guarantees                                 -53%              20,543         43,322          50,874          52,453
 Other                                                           +41%              22,957         16,247           9,896           9,481
 Total Liabilities                                                                278,885        188,237         165,057         167,611

 Unexpended Appropriations                                      +157%            127,269          49,506          52,047          51,812
 Cumulative Results of Operations                                -97%               (209)         (6,170)         (2,466)         (5,002)
 Total Net Position                                                              127,060          43,336          49,581          46,810
Total Liabilities and Net Position                                             $ 405,945    $    231,573    $    214,638    $    214,421




                                                       Statement of Net Cost
                                                               % Change
                                                               2009/2008        FY 2009     FY 2008          FY 2007         FY 2006
 Gross Cost                                                      -25%          $ 55,412     $ 74,034        $  72,316       $ 104,699
 Earned Revenue                                                  +22%            (11,251)      (9,217)          (8,032)         (7,870)
Total Net Cost of Operations                                                   $ 44,161     $ 64,817        $ 64,284        $ 96,829

Net Cost Based on the Department's Strategic Plan 2007-2012 FY 2009                             FY 2008
 Goal 1 Improve student achievement, with a focus on bringing all
        students to grade level in reading and mathematics by
        2014                                                        $ 49,357                $     37,045
 Goal 2 Increase the academic achievement of all high school
        students                                                       2,299                       2,112
 Goal 3 Ensure the accessibility, affordability, and accountability
        of higher education, and better prepare students and
        adults for employment and future learning                     (8,060)                     25,094
 Cross-
 goal Strategy on Management                                             565                         566
Total Net Cost of Operations                                                   $ 44,161     $     64,817




FY 2009 Agency Financial Report—U.S. Department of Education                                                                       47
FINANCIAL DETAILS
PRINCIPAL FINANCIAL STATEMENTS

                                     United States Department of Education
                                          Consolidated Balance Sheet
                                            As of September 30, 2009 and 2008
                                                       (Dollars in Millions)



                                                                                                  FY 2009                      FY 2008
Assets:
 Intragovernmental:
     Fund Balance with Treasury (Note 3)                                                     $         168,032            $          94,899
     Accounts Receivable (Note 4)                                                                                                         2
     Other Intragovernmental Assets (Note 8)                                                               141                           95
 Total Intragovernmental                                                                               168,173                       94,996

 Cash and Other Monetary Assets (Note 5)                                                                 2,414                       1,663
 Accounts Receivable, Net (Note 4)                                                                         520                         100
 Credit Program Receivables, Net (Note 6)                                                              234,254                     134,725
 General Property, Plant and Equipment, Net (Note 7)                                                        38                          52
 Other Assets (Note 8)                                                                                     546                          37

Total Assets (Note 2)                                                                        $         405,945            $        231,573


Liabilities:
 Intragovernmental:
     Accounts Payable                                                                                                     $              8
     Debt (Note 9)                                                                           $         235,385                     128,668
     Guaranty Agency Federal and Restricted Funds Due to Treasury (Note 5)                               2,414                       1,663
     Payable to Treasury (Note 6)                                                                        3,569                       3,766
     Other Intragovernmental Liabilities (Note 10)                                                      11,503                       7,124
 Total Intragovernmental                                                                               252,871                     141,229

 Accounts Payable                                                                                        1,919                        1,296
 Accrued Grant Liability (Note 11)                                                                       2,962                        2,245
 Liabilities for Loan Guarantees (Note 6)                                                               20,543                       43,322
 Other Liabilities (Note 10)                                                                               590                          145

Total Liabilities                                                                            $         278,885            $        188,237

 Commitments and Contingencies (Note 20)

Net Position:
 Unexpended Appropriations
    Earmarked Funds (Note 19)
    Other Funds                                                                              $         127,269            $          49,506
 Cumulative Results of Operations
    Earmarked Funds (Note 19)                                                                                 8                          17
    Other Funds                                                                                            (217)                     (6,187)

Total Net Position (Note 12)                                                                 $         127,060            $          43,336

Total Liabilities and Net Position                                                           $         405,945            $        231,573




The accompanying notes are an integral part of these statements.



48                                                                             FY 2009 Agency Financial Report—U.S. Department of Education
                                                                                                     FINANCIAL DETAILS
                                                                                       PRINCIPAL FINANCIAL STATEMENTS

                                            United States Department of Education
                                             Consolidated Statement of Net Cost
                                       For the Years Ended September 30, 2009 and 2008
                                                               (Dollars in Millions)



                                                                                              FY 2009            FY 2008
Program Costs

      Ensure Accessibility, Affordability, and Accountability of Higher Education
      and Career and Technical Advancement
         Gross Costs                                                                      $       (6,344)    $       33,090
         Less: Earned Revenue                                                                     11,107              9,082
         Net Program Costs                                                                       (17,451)            24,008

      Total Program Costs                                                                 $      (17,451)    $       24,008


      Promote Academic Achievement in Elementary and Secondary Schools
         Gross Costs                                                                      $       23,239     $       23,490
         Less: Earned Revenue                                                                         89                 86
         Net Program Costs                                                                        23,150             23,404

      Total Program Costs                                                                 $       23,150     $       23,404


      Transformation of Education
         Gross Costs                                                                      $        1,667     $           1,569
         Less: Earned Revenue                                                                         35                    32
         Net Program Costs                                                                         1,632                 1,537

      Total Program Costs                                                                 $        1,632     $           1,537


      Special Education
         Gross Costs                                                                      $       15,232     $       15,885
         Less: Earned Revenue                                                                         20                 17
         Net Program Costs                                                                        15,212             15,868

      Total Program Costs                                                                 $       15,212     $       15,868


      American Recovery and Reinvestment Act
        Gross Costs                                                                       $       21,618
        Less: Earned Revenue
        Net Program Costs                                                                         21,618

      Total Program Costs                                                                 $       21,618     $              0


Net Cost of Operations (Notes 13 & 16)                                                    $       44,161     $       64,817




The accompanying notes are an integral part of these statements.




FY 2009 Agency Financial Report—U.S. Department of Education                                                        49
FINANCIAL DETAILS



                                   United States Department of Education
                              Consolidated Statement of Changes in Net Position
                                  For the Years Ended September 30, 2009 and 2008
                                                        (Dollars in Millions)


                                                                  FY 2009                                           FY 2008
                                                        Cumulative                                        Cumulative
                                                        Results of      Unexpended                        Results of      Unexpended
                                                        Operations     Appropriations                     Operations     Appropriations


Beginning Balances
     Earmarked Funds                                $               17                                $               39
     All Other Funds                                $           (6,187) $              49,506         $           (2,505) $                52,047

Budgetary Financing Sources:
  Appropriations Received
     Earmarked Funds
     All Other Funds                                                        $         164,927                                $             72,991
  Appropriations Transferred - in/out
     Earmarked Funds
     All Other Funds                                                                          1
  Other Adjustments (rescissions, etc)
     Earmarked Funds
     All Other Funds                                $                  2                  (302)       $                (6)                 (2,202)
  Appropriations Used
     Earmarked Funds
     All Other Funds                                             86,863               (86,863)                   73,330                (73,330)
  Nonexpenditure Financing Sources-Transfers-Out
     Earmarked Funds
     All Other Funds                                                (18)                                            (208)

Other Financing Sources:
  Imputed Financing from Costs Absorbed by Others
     Earmarked Funds
     All Other Funds                                                 32                                               29
  Others
     Earmarked Funds
     All Other Funds                                           (36,757)                                         (12,032)

Total Financing Sources
     Earmarked Funds
     All Other Funds                                $          50,122       $          77,763         $          61,113      $             (2,541)

Net Cost of Operations
     Earmarked Funds                                $               (9)                               $             (22)
     All Other Funds                                $          (44,152)                               $         (64,795)

Net Change
     Earmarked Funds                                $               (9)                               $              (22)
     All Other Funds                                $            5,970 $               77,763         $           (3,682) $            (2,541)

Ending Balances (Note 12)
     Earmarked Funds                                $                 8                               $               17
     All Other Funds                                $              (217) $             127,269        $           (6,187) $                49,506



The accompanying notes are an integral part of these statements.


50                                                                          FY 2009 Agency Financial Report—U.S. Department of Education
                                                                                                           FINANCIAL DETAILS
                                                                                             PRINCIPAL FINANCIAL STATEMENTS


                                        United States Department of Education
                                      Combined Statement of Budgetary Resources
                                      For the Years Ended September 30, 2009 and 2008
                                                               (Dollars in Millions)
                                                                                  FY 2009                        FY 2008
                                                                                    Non-Budgetary                  Non-Budgetary
                                                                                     Credit Reform                  Credit Reform
                                                                                       Financing                      Financing
                                                                         Budgetary     Accounts          Budgetary    Accounts
Budgetary Resources:
Unobligated balance, brought forward, October 1                          $      4,307    $    26,847     $    5,272     $    37,111
Recoveries of prior year Unpaid Obligations                                     1,012          8,038          2,097           3,115
Budgetary Authority:
    Appropriations                                                           164,934             132         73,002             153
    Borrowing Authority (Note 15)                                                            200,265                         57,743
    Spending authority from offsetting collections (gross):
      Earned
         Collected                                                              1,701         45,536          1,751          33,570
         Change in Receivables from Federal Sources                                 1             (3)            (1)               0
       Change in unfilled customer orders
         Advance Received                                                        4                  0             4                0
         Without advance from Federal Sources                                    1                10               0               0
Subtotal                                                                 $ 166,641       $   245,940     $   74,756     $    91,466
Temporarily not available pursuant to Public Law                              (887)                 0              0               0
Permanently not available                                                     (980)          (13,141)        (2,980)        (16,844)
Total Budgetary Resources (Note 15)                                      $ 170,093       $   267,684     $   79,145     $   114,848

Status of Budgetary Resources:
Obligations incurred: (Note 15)
    Direct                                                               $ 133,398       $   257,690     $   74,742     $    88,001
    Reimbursable                                                                94                (0)            96              (0)
    Subtotal                                                             $ 133,492       $   257,690     $   74,838     $    88,001
Unobligated Balances:
    Apportioned                                                          $  33,263       $       474     $    1,540     $       396
    Subtotal                                                             $  33,263       $       474     $    1,540     $       396
Unobligated Balance not available                                            3,338             9,520          2,767          26,451
Total Status of Budgetary Resources                                      $ 170,093       $   267,684     $   79,145     $   114,848

Change in Obligated Balance:
Obligated balance, net:
    Unpaid obligations, brought forward, October 1                       $     49,875    $    41,440     $   50,712     $    14,734
    Uncollected customer payments from Federal Sources,
    brought forward, October 1                                                    (2)              (0)            (3)            (0)
    Total, unpaid obligated balance, brought forward, net                $    49,873     $     41,440    $    50,709    $    14,734
Obligations Incurred, net (+/-)                                              133,492          257,690         74,838         88,001
Gross Outlays                                                                (86,867)        (157,295)       (73,578)       (58,180)
Recoveries of prior year unpaid obligations, actual                           (1,012)          (8,038)        (2,097)        (3,115)
Change in uncollected customer payments from Federal
Sources (+/-)                                                                      (2)            (7)             1              (0)
                                                                         $     95,484    $   133,790     $    49,873    $    41,440
Obligated Balance, net, end of period:
    Unpaid Obligations                                                   $    95,488     $   133,797     $   49,875     $    41,440
    Uncollected customer payments from Federal Sources                            (4)             (7)             (2)            (0)
Total, unpaid obligated balance, net, end of period                      $    95,484     $   133,790     $    49,873    $    41,440

Net Outlays:
    Gross Outlays                                          $ 86,867                      $   157,295     $   73,578     $    58,180
    Offsetting collections                                     (1,705)                       (45,536)        (1,755)        (33,570)
    Distributed Offsetting receipts                           (31,763)                                         (103)         (5,750)
Net Outlays (Note 15)                                      $ 53,399                      $   111,759     $   71,720     $    18,860
The accompanying notes are an integral part of these statements.


FY 2009 Agency Financial Report—U.S. Department of Education                                                                 51
FINANCIAL DETAILS




52                  FY 2009 Agency Financial Report—U.S. Department of Education
                                                                                FINANCIAL DETAILS




              Notes to the Principal Financial Statements
          For the Years Ended September 30, 2009 and 2008


Note 1.           Summary of Significant Accounting Policies
Reporting Entity
The U.S. Department of Education (the Department), a Cabinet-level agency of the Executive
Branch of the U.S. Government, was established by the Congress under the Department of
Education Organization Act (Public Law 96-88), which became effective on May 4, 1980. The
Department is responsible, through the execution of its congressionally enacted budget, for
administering direct loans, guaranteed loans and grant programs.
The Department administers the William D. Ford Federal Direct Loan (Direct Loan) Program,
the Federal Family Education Loan (FFEL) Program, the Federal Pell Grant (Pell Grant)
Program and the campus-based student aid programs to help students finance the costs of
higher education. The Direct Loan Program, added to the Higher Education Act of 1965 (HEA)
in 1993 by the Student Loan Reform Act of 1993, enables the Department to make loans
directly to eligible undergraduate and graduate students and their parents through participating
schools. The FFEL Program, initially authorized by the HEA, operates through state and private
nonprofit guaranty agencies to provide loan guarantees and interest subsidies on loans made
by private lenders to eligible students. Under these programs, the loans are made to individuals
who meet statutorily set eligibility criteria and attend eligible institutions of higher education—
public or private two- and four-year institutions, graduate schools and vocational training
schools. Students and their parents, based on eligibility criteria, receive loans regardless of
income or credit rating. Student borrowers who demonstrate financial need also receive federal
interest subsidies.
The Ensuring Continued Access to Student Loans Act of 2008 (ECASLA) amended the FFEL
Program to authorize the Secretary to purchase or enter into forward commitments to purchase
FFEL loans. This temporary loan purchase authority was to expire on September 30, 2009;
however, Public Law (P.L.) 110-350 extended the authority through September 30, 2010. The
Department has implemented three activities under this temporary loan purchase authority.
These activities are: (1) loan purchase commitments under which the Department purchases
loans directly from FFEL lenders; (2) loan participation purchases in which the Department
purchases participation interests in FFEL loans; and (3) an Asset-Backed Commercial Paper
(ABCP) Conduit in which the Department enters into a forward commitment to purchase FFEL
loans from a conduit, as needed, to allow the conduit to repay short-term liquidity loans used to
re-finance maturing commercial paper.
The Teacher Education Assistance for College and Higher Education Grant (TEACH) Program
was implemented beginning July 1, 2008. This program, added to the HEA by the College Cost
Reduction and Access Act (CCRAA), awards annual grants to students who agree to teach in a
high-need subject area in a public or private elementary or secondary school that serves low-
income students.
The Federal Pell Grant Program provides need-based grants to low-income undergraduate and
certain post-baccalaureate students to promote access to postsecondary education.
Additionally, the Department administers numerous other grant programs and facilities loan
programs. Grant programs include grants to state and local entities for elementary and

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FINANCIAL DETAILS
NOTES TO PRINCIPAL FINANCIAL STATEMENTS
secondary education; special education and rehabilitative services; educational research and
improvement; and grants for needs of the disadvantaged. Through the facilities loan programs,
the Department administers low-interest loans to institutions of higher education for the
construction and renovation of facilities.
The American Recovery and Reinvestment Act of 2009 (Recovery Act), enacted on February
17, 2009 as P.L. 111-5, provides funding to the Department for improving schools, raising
students’ achievement, driving reform and producing better results for children and young
people for the long term health of the nation. Approximately 55 percent of the Department’s
Recovery Act funding was appropriated for the creation of a new State Fiscal Stabilization Fund
with the goal to stabilize state and local government budgets to avoid reductions in education
and other essential public services while driving education reform. The Department was tasked
with promptly disbursing these funds through a variety of existing and new grant programs,
while ensuring the transparency and accountability of every dollar spent.
The Department is organized into 10 reporting organizations that administer the loan and grant
programs. The financial reporting structure of the Department presents operations based on five
major reporting groups. The reporting organizations and the major reporting groups are shown
below.
Reporting Organizations
     Federal Student Aid (FSA)                        Institute of Education Sciences (IES)
     Office of Elementary and Secondary               Office of English Language Acquisition
      Education (OESE)                                  (OELA)
    Office of Special Education and                   Office of Safe and Drug-Free Schools
      Rehabilitative Services (OSERS)                   (OSDFS)
    Office of Vocational and Adult                    Office of Innovation and Improvement
      Education (OVAE)                                  (OII)
    Office of Postsecondary Education                 Office of Management (OM)
      (OPE)
Major Reporting Groups
        Federal Student Aid                           Office of Special Education and
        Office of Elementary and Secondary             Rehabilitative Services
         Education                                     Other
        American Recovery and
         Reinvestment Act (ARRA)

The FSA, IES, OESE, OII and OSERS reporting organizations are responsible for the
administration of Recovery Act funds; however, activities for Recovery Act funds are reported
under the “American Recovery and Reinvestment Act” major reporting group. (See Notes 11, 13
and 18) The major reporting group “Other” includes the IES, OELA, OII, OM, OPE, OSDFS
and OVAE reporting organizations and Hurricane Education Recovery (HR) activities. (See
Notes 11, 13 and 19)

Basis of Accounting and Presentation
These financial statements have been prepared to report the financial position, net cost of
operations, changes in net position and budgetary resources of the Department, as required by
the Chief Financial Officers Act of 1990 and the Government Management Reform Act of 1994.
The financial statements were prepared from the books and records of the Department, in
accordance with accounting principles generally accepted in the United States of America for

54                                                      FY 2009 Agency Financial Report—U.S. Department of Education
                                                                                      FINANCIAL DETAILS
                                                               NOTES TO PRINCIPAL FINANCIAL STATEMENTS


federal entities, issued by the Federal Accounting Standards Advisory Board (FASAB), and the
Office of Management and Budget (OMB) Circular No. A-136, Financial Reporting
Requirements, as revised June 2009. These financial statements are different from the financial
reports prepared by the Department pursuant to OMB directives that are used to monitor and
control the Department’s use of budgetary resources.
The Department’s financial statements should be read with the realization that they are for a
component of the U.S. Government, a sovereign entity. One implication of this is that the
liabilities cannot be liquidated without legislation providing resources and legal authority to do
so.
The accounting structure of federal agencies is designed to reflect both accrual and budgetary
accounting transactions. Under the accrual method of accounting, revenues are recognized
when earned, and expenses are recognized when a liability is incurred, without regard to receipt
or payment of cash. Budgetary accounting facilitates compliance with legal constraints and
controls over the use of federal funds.
Intradepartmental transactions and balances have been eliminated from the consolidated
financial statements.
Use of Estimates
The preparation of the financial statements in accordance with accounting principles generally
accepted in the United States of America requires management to make assumptions and
estimates that directly affect the amounts reported in the financial statements. Actual results
may differ from those estimates.
The Federal Credit Reform Act of 1990 (Credit Reform Act) underlies the proprietary and
budgetary accounting treatment of direct and guaranteed loans. The long-term cost to the
government for direct loans or loan guarantees, other than for general administration of the
programs, is referred to as “subsidy cost.” Under the Credit Reform Act, subsidy costs for loans
obligated beginning in FY 1992 are estimated at the net present value of projected lifetime costs
in the year the loan is obligated. Subsidy costs are re-estimated annually.
Estimates for credit program receivables and liabilities contain assumptions that have a
significant impact on the financial statements. The primary components of this assumption set
include, but are not limited to, collections (including loan consolidations), repayments, default
rates, prevailing interest rates and loan volume. Actual loan volume, interest rates, cash flows
and other critical components used in the estimation process may differ significantly from the
assumptions made at the time the financial statements are prepared. Minor adjustments to any
of these components may create significant changes to the estimate.
The Department estimates all future cash flows associated with the Direct Loan, FFEL and
TEACH Programs. Projected cash flows are used to develop subsidy estimates. Subsidy cost
can be positive or negative; negative subsidies occur when expected program inflows of cash
(e.g., repayments and fees) exceed expected outflows. Subsidy cost is recorded as the initial
amount of the loan guarantee liability when guarantees are made or as a valuation allowance to
government-owned loans and interest receivable (i.e., direct and defaulted guaranteed loans).
The Department uses a computerized cash flow projection Student Loan Model to calculate
subsidy estimates for the Direct Loan, FFEL and TEACH Programs. Each year, the Department
re-evaluates the estimation methods related to changing conditions. The Department uses a
probabilistic technique to forecast interest rates based on different methods to establish the
relationship between an event’s occurrence and the magnitude of its probability. The
Department’s approach estimates interest rates under numerous scenarios and then bases

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FINANCIAL DETAILS
NOTES TO PRINCIPAL FINANCIAL STATEMENTS


interest rates on the average interest rates weighted by the assumed probability of each
scenario occurring. Probabilistic methodology facilitates the modeling of the Department’s
unique loan programs.
For each program, cash flows are projected over the life of the loans, aggregated by loan type,
cohort year and risk category. The loan’s cohort year represents the year a direct loan was
obligated or a loan was guaranteed, regardless of the timing of disbursements. Risk categories
include two-year colleges, freshmen and sophomores at four-year colleges, juniors and seniors
at four-year colleges, graduate schools and proprietary (for-profit) schools.
Estimates reflected in these statements were prepared using assumptions developed for the FY
2010 Mid-Session Review, a government-wide exercise required annually by OMB. These
estimates are based on the most current information available to the Department at the time the
financial statements were prepared. Assumptions and their impact are updated after the Mid-
Session Review to account for significant subsequent changes in activity. Management has a
process to review these estimates in the context of subsequent changes in activity and
assumptions, and to reflect the impact of changes, as appropriate.
The Department recognizes that cash flow projections and the sensitivity of changes in
assumptions can have a significant impact on estimates. Management has attempted to
mitigate fluctuations in the estimates by using trend analysis to project future cash flows.
Changes in assumptions could significantly affect the amounts reflected in these financial
statements. For example, a minimal change in the projected long-term interest rate charged to
borrowers could change the current subsidy re-estimate by a significant amount. (See Note 6)
Budget Authority
Budget authority is the authorization provided by law for the Department to incur financial
obligations that will result in outlays. The Department’s budgetary resources include (1)
unobligated balances of resources from prior years, (2) recoveries of prior-year obligations and
(3) new resources, which include appropriations, authority to borrow from the U.S. Department
of the Treasury (Treasury) and spending authority from collections.
Unobligated balances associated with resources expiring at the end of the fiscal year remain
available for five years after expiration only for upward adjustments of prior year obligations,
after which they are canceled and may not be used. Unobligated balances of resources that
have not expired at year-end are available for new obligations placed against them, as well as
upward adjustments of prior year obligations.
Authority to borrow from Treasury provides most of the funding for disbursements made under
the Direct Loan Program, the TEACH Program and activities under the temporary loan purchase
authority. Subsidy and administrative costs of the programs are funded by appropriations.
Budgetary resources from collections are used primarily to repay the Department’s debt to
Treasury. Major sources of collections include (1) principal and interest collections from
borrowers, (2) related fees and (3) interest from Treasury on balances in certain credit financing
accounts that make and administer loans and loan guarantees.
Borrowing authority is an indefinite budgetary resource authorized under the Credit Reform Act.
This resource, when realized, finances the unsubsidized portion of the Direct Loan Program, the
TEACH Program and activities under the temporary loan purchase authority. In addition,
borrowing authority is requested in advance of expected collections to cover negative subsidy
cost. Treasury prescribes the terms and conditions of borrowing authority and lends to the credit
financing account amounts as appropriate. Amounts borrowed, but not yet disbursed, are
included in uninvested funds and earn interest. Treasury uses the same weighted average
interest rates for both the interest charged on borrowed funds and the interest earned on
56                                                        FY 2009 Agency Financial Report—U.S. Department of Education
                                                                                      FINANCIAL DETAILS
                                                               NOTES TO PRINCIPAL FINANCIAL STATEMENTS


uninvested funds. The Department may carry forward borrowing authority to future fiscal years
provided that cohorts are disbursing loans. All borrowings from Treasury are effective on
October 1 of the current fiscal year, regardless of when the Department borrowed the funds,
except for amounts borrowed to make annual interest payments.
Assets
Assets are classified as either entity or non-entity assets. Entity assets are those that the
Department has authority to use for its operations. Non-entity assets are those held by the
Department but not available for use in its operations. The Department combines its entity and
non-entity assets on the Balance Sheet and discloses its non-entity assets in the notes. (See
Note 2)
Fund Balance with Treasury
The Fund Balance with Treasury includes general, revolving, trust, special and other funds
available to pay current liabilities and finance authorized purchases, as well as funds restricted
until future appropriations are received. Treasury processes cash receipts and cash
disbursements for the Department. The Department’s records are reconciled with those of
Treasury.
A portion of the general funds is funded in advance by multi-year appropriations for obligations
anticipated during the current and future fiscal years. Revolving funds conduct continuing cycles
of business-like activity and do not require annual appropriations. Their fund balance is derived
from borrowings, as well as collections from the public and other federal agencies. Trust funds
generally consist of donations for the hurricane relief activities. Other funds, which are non-
budgetary, primarily consist of deposit and receipt funds and clearing accounts.
Available unobligated balances represent amounts that are apportioned for obligation in the
current fiscal year. Unavailable unobligated balances represent amounts that are not
apportioned for obligation during the current fiscal year and expired appropriations no longer
available to incur new obligations. Obligated balances not yet disbursed include undelivered
orders and unpaid expended authority.
The Fund Balance with Treasury also includes funds received for grants during FY 2009, which
are statutorily not available for obligation until FY 2010. Since this is a deferral made in law, it
reduces total budgetary resources during FY 2009. (See Notes 3 and 12)
Accounts Receivable
Accounts Receivable are amounts due to the Department from the public and other federal
agencies. Receivables from the public result from overpayments to recipients of grants and
other financial assistance programs, and disputed costs resulting from audits of educational
assistance programs. Amounts due from federal agencies result from reimbursable agreements
entered into by the Department with other agencies to provide various goods and services.
Accounts receivable are reduced to net realizable value by an allowance for uncollectible
amounts. The estimate of an allowance for loss on uncollectible accounts is based on the
Department’s experience in the collection of receivables and an analysis of the outstanding
balances. (See Note 4)
Cash and Other Monetary Assets
Cash and Other Monetary Assets consist of guaranty agency reserves that represent the federal
government’s interest in the net assets of state and nonprofit FFEL Program guaranty agencies.
Guaranty agency reserves are classified as non-entity assets with the public (See Notes 2
and 5) and are offset by a corresponding liability due to Treasury. Guaranty agency reserves

FY 2009 Agency Financial Report—U.S. Department of Education                                         57
FINANCIAL DETAILS
NOTES TO PRINCIPAL FINANCIAL STATEMENTS


include initial federal start-up funds, receipts of federal reinsurance payments, insurance
premiums, guaranty agency share of collections on defaulted loans, investment income,
administrative cost allowances and other assets.
Section 422A of the HEA required FFEL guaranty agencies to establish a Federal Student Loan
Reserve Fund (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 funds, are the property of the United States and reflected in the Budget of the United
States Government. However, such ownership by the federal government is independent of the
actual control of the assets. Payments to the Department from guaranty agency Federal Funds,
which increase Fund Balance with Treasury, are remitted to Treasury.
The Department disburses funds to a guaranty agency; a guaranty agency, through its Federal
Fund, pays lender claims and default aversion fees. The Operating Fund is the property of the
guaranty agency except for amounts an agency borrows from the Federal Fund (as authorized
under Section 422A of the HEA). The Operating Fund is used by the guaranty agency to fulfill
responsibilities that include repaying money borrowed from the Federal Fund, and performing
default aversion and collection activities.
Credit Program Receivables and Liabilities for Loan Guarantees
The financial statements reflect the Department’s estimate of the long-term cost of direct and
guaranteed loans in accordance with the Credit Reform Act. Loans and interest receivable are
valued at their gross amounts less an allowance for the present value of amounts not expected
to be recovered and thus having to be subsidized—called “allowance for subsidy.” The
difference is the present value of the cash flows to and from the Department that are expected
from the receivables over their projected lives. Similarly, liabilities for loan guarantees are
valued at the present value of the cash outflows from the Department less the present value of
related inflows. The estimated present value of net long-term cash outflows of the Department
for subsidized costs is net of recoveries, interest supplements and offsetting fees. The
Department records all credit program loans and loan guarantees at their present values.
Credit program receivables for activities under the temporary loan purchase authority include
the present value of future cash flows related to the participation agreements or purchased
loans. Subsidy is transferred, which may be prior to purchasing loans, and is recognized as
subsidy expense in the Statement of Net Cost. The cash flows of these authorities also include
inflows and outflows associated with the underlying or purchased loans and other related
activities including any positive or negative subsidy transfers.
Components of subsidy costs for loans and guarantees include defaults (net of recoveries),
contractual payments to third-party private loan collectors who receive a set percentage of
amounts collected, and, as an offset, origination and other fees collected. For direct loans, the
difference between interest rates incurred by the Department on its borrowings from Treasury
and interest rates charged to target groups is also subsidized (or may provide an offset to
subsidy if the Department’s rate is less). The corresponding interest subsidy in loan guarantee
programs is the payment of interest supplements to third-party lenders in order to pay down the
interest rates on loans made by those lenders. Subsidy costs are recognized when direct loans
or guaranteed loans are disbursed to borrowers and re-estimated each year. (See Note 6)
General Property, Plant and Equipment
The Department capitalizes single items of property and equipment with a cost of $50,000 or
more that have an estimated useful life greater than two years. Additionally, the Department
capitalizes bulk purchases of property and equipment with an aggregate cost of $500,000 or
more. A bulk purchase is defined as the purchase of like items related to a specific project or the
58                                                        FY 2009 Agency Financial Report—U.S. Department of Education
                                                                                                     FINANCIAL DETAILS
                                                                              NOTES TO PRINCIPAL FINANCIAL STATEMENTS


purchase of like items occurring within the same fiscal year that have an estimated useful life
greater than two years. Property and equipment are depreciated over their estimated useful
lives using the straight-line method of depreciation. Internal Use Software meeting the above
cost and useful life criteria is also capitalized. Internal Use Software is either purchased off the
shelf, internally developed or contractor developed solely to meet the Department’s needs. (See
Note 7)
The Department adopted the following useful lives for its major classes of depreciable property
and equipment:
                                          Depreciable Property and Equipment
                                                                 (In Years)

                                                   Major Class                                         Useful Life
       Information Technology, Internal Use Software and Telecommunications Equipment                      3
       Furniture and Fixtures                                                                              5



Other Assets
Other assets include assets not reported separately on the balance sheet. The Department’s
other intragovernmental assets primarily consist of advance payments to federal agencies as
part of interagency agreements for various goods and services. The Department’s other assets
(with the public) consist of payments made to grant recipients in advance of their expenditures
and in-process disbursements for the FFEL Program. (See Note 8)

Liabilities
Liabilities represent actual and estimated amounts to be paid as a result of transactions or
events that have already occurred. However, no liabilities can be paid by the Department
without budget authority. Liabilities for which an appropriation has not been enacted are
classified as liabilities not covered by budgetary resources, and there is no certainty that an
appropriation will be enacted. The government, acting in its sovereign capacity, can abrogate
liabilities that arise from activities other than contracts. FFEL Program and Direct Loan Program
liabilities are entitlements covered by permanent indefinite budget authority. (See Note 10)
Debt
The Department borrows to provide funding for the Direct Loan Program, the TEACH Program
and activities under the temporary loan purchase authority. The liability to Treasury from
borrowings represents unpaid principal at year-end. The Department repays the principal based
on available fund balances. Interest on the debt is calculated at fiscal year-end using rates set
by Treasury, with such rates generally fixed based on the rate for 10-year Treasury securities. In
addition, the Federal Financing Bank (FFB) holds bonds issued by a designated bonding
authority, on behalf of the Department, for the Historically Black Colleges and Universities
Capital Financing Program. The Department reports the corresponding liability for full payment
of principal and accrued interest on bonds as a payable to the FFB. (See Note 9)
Accrued Grant Liability
Disbursements of grant funds are recognized as expenses at the time of disbursement.
However, some grant recipients incur expenditures prior to initiating a request for disbursement
based on the nature of the expenditures. A liability is accrued by the Department for
expenditures incurred by grantees prior to their receiving grant funds to cover the expenditures.
The amount is estimated using statistical sampling. (See Note 11)
FY 2009 Agency Financial Report—U.S. Department of Education                                                         59
FINANCIAL DETAILS
NOTES TO PRINCIPAL FINANCIAL STATEMENTS


Net Position
Net position consists of unexpended appropriations and cumulative results of operations.
Unexpended appropriations include undelivered orders and unobligated balances, except for
federal credit financing and liquidating funds, and trust funds. Cumulative results of operations
represent the net difference since inception between (1) expenses and (2) revenues and
financing sources. (See Note 12)
Earmarked Funds
Earmarked funds are recorded as specially identified resources, often supplemented by other
financing sources, which remain available over time. These funds are required by statute to be
used for designated recipients. The Department’s earmarked funds are primarily related to the
2005 Hurricane Relief efforts. (See Note 19)
Personnel Compensation and Other Employee Benefits
Annual, Sick and Other Leave. The liability for annual leave, compensatory time off and other
vested 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. (See Note 10) Sick
leave and other types of non-vested leave are expensed as taken.
Retirement Plans and Other Retirement Benefits. Employees participate in either the Civil
Service Retirement System (CSRS), a defined benefit plan or in the Federal Employees
Retirement System (FERS), a defined benefit and contribution plan. For CSRS employees, the
Department contributes a fixed percentage of pay.
FERS consists of Social Security, a basic annuity plan and the Thrift Savings Plan. The
Department and the employee contribute to Social Security and the basic annuity plan at rates
prescribed by law. In addition, the Department is required to contribute to the Thrift Savings
Plan a minimum of 1 percent per year of the basic pay of employees covered by this system
and to match voluntary employee contributions up to 3 percent of the employee’s basic pay, and
one-half of contributions between 3 percent and 5 percent of basic pay. For FERS employees,
the Department also contributes the employer’s share of Medicare.
Contributions for CSRS, FERS and other retirement benefits are insufficient to fully fund the
programs and are subsidized by the Office of Personnel Management (OPM). The Department
imputes its share of the OPM subsidy, using cost factors provided by OPM, and reports the full
cost of the programs related to its employees.
Federal Employees’ Compensation Act. The Federal Employees’ Compensation Act (FECA)
provides income and medical cost protection to covered federal civilian employees injured on
the job, to employees who have incurred work-related occupational diseases and to
beneficiaries of employees whose deaths are attributable to job-related injuries or occupational
diseases. The FECA Program is administered by the U.S. Department of Labor (DOL), which
pays valid claims and subsequently seeks reimbursement from the Department for these paid
claims.
The FECA liability consists of two components. The first component is based on actual claims
paid and recognized by the Department as a liability. Generally, the Department reimburses
DOL within two to three years once funds are appropriated. The second component is the
estimated liability for future benefit payments based on unforeseen events such as death,
disability, medical and miscellaneous costs as determined by DOL annually. (See Note 10)


60                                                        FY 2009 Agency Financial Report—U.S. Department of Education
                                                                                      FINANCIAL DETAILS
                                                               NOTES TO PRINCIPAL FINANCIAL STATEMENTS


Intragovernmental Transactions
The Department’s financial activities interact with and are dependent upon the financial activities
of the centralized management functions of the federal government. Due to financial regulation
and management control by OMB and Treasury, operations may not be conducted and financial
positions may not be reported as they would if the Department were a separate, unrelated
entity.
Allocation Transfers
Allocation transfers are legal delegations by one department of its authority to obligate budget
authority and outlay funds to another department. Treasury provides a separate child fund
account as a subset of the parent fund account for cost accumulation and reporting purposes.
All allocation transfers of balances are credited to this account, and subsequent obligations and
outlays incurred by the child are charged to this allocation account as the child executes the
delegated activity on behalf of the parent entity.
The Department (the child entity) was a party to allocation transfers with the Appalachian
Regional Commission (the parent entity). All financial activity related to these allocation
transfers was reported in the financial statements of the Appalachian Regional Commission,
from which the underlying legislative authority, appropriations and budget apportionments were
derived. During FY 2008, the Department returned all unused funds to the Appalachian
Regional Commission.




FY 2009 Agency Financial Report—U.S. Department of Education                                         61
FINANCIAL DETAILS
NOTES TO PRINCIPAL FINANCIAL STATEMENTS


Note 2.      Non-Entity Assets
As of September 30, 2009 and 2008, non-entity assets consisted of the following:
                                              Non-Entity Assets
                                                 (Dollars in Millions)

                                                                                     2009                          2008
       Non-Entity Assets
         Intragovernmental
            Fund Balance with Treasury                                        $               45           $                28
              Total Intragovernmental                                                         45                            28
          With the Public
            Cash and Other Monetary Assets                                                2,414                         1,663
            Accounts Receivable, Net                                                         16                            20
            Credit Program Receivables, Net                                                 184                           186
               Total With the Public                                                      2,614                        1,869
       Total Non-Entity Assets                                                            2,659                        1,897
       Entity Assets                                                                    403,286                      229,676
       Total Assets                                                           $         405,945            $         231,573


Non-entity intragovernmental assets primarily consist of deposit fund balances. Non-entity
assets with the public primarily consist of guaranty agency reserves and Perkins Program Loan
Receivables. (See Notes 5 and 6)

Note 3.      Fund Balance with Treasury
The Fund Balance with Treasury, by fund type, as of September 30, 2009 and 2008, consisted
of the following:
                                               Fund Balances
                                                 (Dollars in Millions)

                                                                                      2009                         2008

       General Funds                                                           $        130,533                $        52,487
       Revolving Funds                                                                   37,431                        42,357
       Trust Funds                                                                              9                            18
       Special Funds                                                                           14                             9
       Other Funds                                                                             45                            28

       Fund Balance with Treasury                                              $        168,032                $       94,899




62                                                                       FY 2009 Agency Financial Report—U.S. Department of Education
                                                                                                          FINANCIAL DETAILS
                                                                                   NOTES TO PRINCIPAL FINANCIAL STATEMENTS


The Status of Fund Balance with Treasury, as of September 30, 2009 and 2008, consisted of
the following:

                                              Status of Fund Balance with Treasury
                                                                   (Dollars in Millions)

                                                                                                   2009                         2008

           Unobligated Balance
             Available                                                                     $              33,737       $               1,936
             Unavailable                                                                                  10,444                    27,555
           Obligated Balance, Not Yet Disbursed                                                       122,919                       65,380
           Authority Temporarily Precluded from Obligation                                                  887                            -
           Non-Budgetary Fund Balance with Treasury                                                          45                          28

           Fund Balance with Treasury                                                      $          168,032          $            94,899



Note 4.           Accounts Receivable

Accounts Receivable, as of September 30, 2009 and 2008, consisted of the following:
                                                             Accounts Receivable
                                                                   (Dollars in Millions)

                                                                                                    2009
                                                                 Gross
                                                               Receivables                         Allowance               Net Receivables

           Intragovernmental                             $                     -               $                   -   $                   -
           With the Public                                                  693                              (173)                       520

           Accounts Receivable                           $                  693                $            (173)      $                 520


                                                                                                     2008
                                                                 Gross
                                                               Receivables                         Allowance               Net Receivables

           Intragovernmental                             $                     2               $                   -   $                     2
           With the Public                                                  278                              (178)                       100

           Accounts Receivable                           $                  280                $             (178)     $                 102




FY 2009 Agency Financial Report—U.S. Department of Education                                                                                     63
FINANCIAL DETAILS
NOTES TO PRINCIPAL FINANCIAL STATEMENTS


Note 5. Cash and Other Monetary Assets
Cash and Other Monetary Assets consist of reserves held in the FFEL Guaranty Agency
Federal Funds. Changes in the valuation of the Federal Fund increase or decrease the
Department’s Cash and Other Monetary Assets with a corresponding change in the Payable to
Treasury. The table below presents Cash and Other Monetary Assets for the years ended
September 30, 2009 and 2008.
                                     Cash and Other Monetary Assets
                                                   (Dollars in Millions)

                                                                                            2009                         2008
       Beginning Balance, Cash and Other Monetary Assets                               $           1,663         $          1,103
         Valuation Increase in Guaranty Agency Federal Funds                                        751                         722

         Less: Collections from Guaranty Agency Federal Funds
              Excess Collections                                                                       -                        162
              Collections Remitted to Treasury                                                         -                        162

       Ending Balance, Cash and Other Monetary Assets                                  $           2,414             $      1,663


The $751 million net increase in the Federal Fund in FY 2009 reflects the impact of guaranty
agencies’ ongoing operations. During FY 2008, $162 million was remitted to the Department by
a guaranty agency whose agreement with the Department requires the agency to remit funds in
excess of agreed-upon working capital levels. Remitted funds were returned to Treasury.

Note 6. Credit Programs for Higher Education
William D. Ford Federal Direct Loan Program. The federal government makes loans directly
to students and parents through participating institutions of higher education under the William
D. Ford Federal Direct Loan program, referred to as the Direct Loan Program. Direct loans are
originated and serviced through contracts with private vendors.
The Department disbursed approximately $37.6 billion in Direct Loans to eligible borrowers in
FY 2009 and approximately $21.1 billion in FY 2008. Loans typically are disbursed in multiple
installments over an academic period; as a result, loan disbursements for an origination cohort
year often cross fiscal years. Half of all loan volume is obligated in the fourth quarter of a fiscal
year. Regardless of the fiscal year in which they occur, disbursements are tracked by cohort as
determined by the date of obligation rather than disbursement.
Approximately 7 percent of Direct Loan obligations made in an individual fiscal year are never
disbursed. Loan obligations are established at a summary level based on estimates of schools’
receipt of aid applications. The loan obligation may occur before a student has been accepted
by a school or begins classes. For Direct Loans obligated in the 2009 cohort, an estimated
$2.8 billion will never be disbursed. Eligible schools may originate direct loans through a cash
advance from the Department or by advancing their own funds in anticipation of reimbursement
from the Department.
The Department accrues interest receivable and records interest revenue on performing Direct
Loans and, given the Department’s substantial collection rates, on defaulted Direct Loans.
Federal Family Education Loan Program. Prior to FY 2008, the FFEL Program included only
private lender loans to students and parents insured against default by the federal government.
In FY 2008, the Department began administering activities under the temporary loan purchase
authority by purchasing FFEL loans and participation interests in those directly from lenders. As

64                                                                         FY 2009 Agency Financial Report—U.S. Department of Education
                                                                                      FINANCIAL DETAILS
                                                               NOTES TO PRINCIPAL FINANCIAL STATEMENTS


a result, the FFEL Program also includes approximately $52 billion and $5.1 billion in direct
federal assets as of September 30, 2009 and 2008, respectively.
Beginning with FFEL loans first disbursed on or after October 1, 1993, FFEL lender financial
institutions became responsible for 2 percent of the cost of each default. Guaranty agencies
also began paying a portion of the cost (in most cases, 5 percent) of each defaulted loan from
their Federal Fund, which consists of Federal resources held in trust by the agency. FFEL
lenders receive statutorily set federal interest and special allowance subsidies. Guaranty
agencies receive fee payments as set by statute. In most cases, loan terms and conditions
under the Direct Loan and FFEL Programs are identical.
ECASLA gave the Department temporary authority to purchase FFEL loans and interest in
those loans. This authority was to expire on September 30, 2009; however, P.L. 110-350
extended the authority through September 30, 2010. The Department has implemented three
activities under this authority: loan purchase commitments; purchases of loan participation
interests; and a put, or forward purchase commitment, with an ABCP Conduit. A credit program
receivable is established for loans and participation interests in loans purchased through these
activities.
Under the loan purchase commitment activity, lenders have the option to sell directly to the
Department fully disbursed loans originated for academic years 2007-08, 2008-09 or 2009-10.
As of September 30, 2009, only loans originated for the 2009-10 academic year remain eligible
for future purchase.
In loan participation transactions, lenders transfer to a custodian FFEL loans originated in
academic years 2008-09 or 2009-10 on which at least one disbursement has been made. The
custodian issues participation certificates to the lender that convey a participation interest in the
loans. The lender sells the participation interest in the loans to the Department at the par value
of these loans. The Department remits the proceeds through the custodian to the lenders.
Participation interests earn a yield payable from the lender to the Department at the rate of the
91-day commercial paper rate plus 50 basis points and reset quarterly. Funds to redeem these
loans from the Department's participation interest may be obtained by selling the underlying
loans to the Department or by other means.
The terms of these two purchase activities permit lenders to sell loans and participation interests
in loans to the Department and require them to redeem the participated loans. Lenders must
commit to redeem the certificates and sell loans by September 30; the Department must finalize
all related transactions by October 15. As of September 30, 2009, the Department had
$26.6 billion in Notices of Intent to Sell from lenders in the purchase commitment and loan
participation purchase activities.
During FY 2009, the Department, Treasury and OMB established the terms on which the
Department would support an ABCP Conduit to provide liquidity to the student loan market. An
ABCP Conduit under this activity issues short-term commercial paper to investors; this paper is
backed by student loans pledged to the conduit. The conduit uses the proceeds of sales of its
commercial paper to acquire from lenders interests in student loans. Lenders must use a portion
of conduit payments to make new loans. Though the intent is for the conduit to meet demands
on maturing paper by reissuing commercial paper, the Department, using its ECASLA authority,
will purchase loans from the conduit as needed to ensure the conduit will be able to meet the
demands on its paper if it is unable to refinance maturing commercial paper. The Department
will purchase those pledged loans that become more than 210 days delinquent. The conduit has
sold to the Department approximately $50 million of these delinquent loans as of September 30,
2009, recorded as credit program receivables. Under the terms of the Put Agreement with the
conduit, the Department may also purchase pledged loans at the date that is 45 days prior to

FY 2009 Agency Financial Report—U.S. Department of Education                                         65
FINANCIAL DETAILS
NOTES TO PRINCIPAL FINANCIAL STATEMENTS


the Put Agreement expiration on January 19, 2014. As required by the Credit Reform Act, all
cash flows to and from the Government resulting from its transactions with the ABCP Conduit
are recorded in a non-budgetary credit financing account. Amounts in this account are a means
of financing and are not included in the budget totals. Loans originated in academic years 2004-
05 through 2007-08 are eligible to be purchased through the ABCP Conduit activity.
As of September 30, 2009, the Department has $70 billion in obligations to cover any buyer-of-
last-resort activities and potential purchases of the underlying student loans under the ABCP
Conduit authority. These obligations are covered by available borrowing authority. In addition,
the Department has estimated approximately $4 billion in negative subsidy. The conduit, a
separate legal entity, has approximately $30 billion in commercial paper outstanding.
The estimated FFEL liability for loan guarantees is reported as the present value of estimated
net cash outflows. Defaulted FFEL loans are reported net of an allowance for subsidy computed
using net present value methodology, including defaults, collections and loan cancellations. The
same methodology is used to estimate the allowance on Direct Loan receivables.
The Department guaranteed $80.4 billion and $67.9 billion in gross non-consolidation loans to
FFEL recipients during FY 2009 and FY 2008, respectively. In 2009, lenders disbursed
$62.7 billion in FFEL loans from the 2008 and 2009 cohorts; in 2008, $68.8 billion were
disbursed from the 2007 and 2008 cohorts. As of September 30, 2009 and 2008, total principal
balances outstanding of guaranteed loans held by lenders were approximately $457 billion and
$415 billion, respectively. As of September 30, 2009 and 2008, the estimated maximum
government exposure on outstanding guaranteed loans held by lenders was approximately
$445 billion and $405 billion, respectively. Of the insured amount, the Department would pay a
smaller amount to the guaranty agencies, based on the appropriate reinsurance rates, which
range from 100 to 95 percent. Any remaining insurance not paid as reinsurance would be paid
to lenders by the guaranty agencies from their Federal Fund. Payments by guaranty agencies
do not reduce government exposure because they are made from the Federal Fund
administered by the agencies but owned by the federal government.
Approximately 15 percent of guaranteed loan commitments made in an individual fiscal year are
never disbursed due to the nature of the loan commitment process. For guaranteed loans
committed in the 2009 cohort, an estimated $12.5 billion will never be disbursed.
Guaranteed loans that default are initially turned over to guaranty agencies for collection, and
interest receivable is accrued and recorded on the loans as the collection rate is substantial.
After approximately four years, defaulted guaranteed loans not in repayment are turned over to
the Department for collection. Accrued interest on the subrogated loan is calculated, but only
realized upon collection.
Federal Perkins Loan Program. The Federal Perkins Loan Program is a campus-based
program providing financial assistance to eligible postsecondary school students. In some
statutorily defined cases, funds are provided to reimburse schools for loan cancellations. For
defaulted loans assigned to the Department, collections of principal, interest and fees, net of
amounts paid by the Department to cover contract collection costs, are transferred to Treasury
annually.
TEACH Program. Beginning July 1, 2008, the Department awards annual grants up to $4,000
to eligible undergraduate and graduate students agreeing to serve as full-time mathematics,
science, foreign language, bilingual education, special education or reading teachers at high-
need schools for four years within eight years of graduation. For students failing to fulfill the
service requirement, grants are converted to Direct Unsubsidized Stafford Loans. Because


66                                                        FY 2009 Agency Financial Report—U.S. Department of Education
                                                                                      FINANCIAL DETAILS
                                                               NOTES TO PRINCIPAL FINANCIAL STATEMENTS


grants could be converted to loans, for budget and accounting purposes the program is
operated under the requirements of the Credit Reform Act.
Facilities Loan Programs. The Department administers the College Housing and Academic
Facilities Loan Program, the College Housing Loan Program and the Higher Education Facilities
Loan Program. From 1952 to 1993, these programs provided low-interest financing to
institutions of higher education for the construction, reconstruction and renovation of housing,
academic and other educational facilities.
The Department also administers the Historically Black Colleges and Universities (HBCU)
Capital Financing Program. Since 1992, this program has given HBCUs access to financing for
the repair, renovation and, in exceptional circumstances, the construction or acquisition of
facilities, equipment and infrastructure through federally insured bonds. The Department has
authorized a designated bonding authority to make the loans to eligible institutions, charge
interest and collect principal and interest payments. In compliance with statute, the bonding
authority maintains an escrow account to pay the principal and interest on bonds for loans in
default.
In FY 2006, Congress passed the Emergency Supplemental Appropriations Act for Defense, the
Global War on Terror, and Hurricane Recovery (P.L. 109-234). Section 2601 of this Act created
a new sub-program within the HBCU Capital Financing Program under the HEA to provide loans
on advantageous terms to HBCUs affected by Hurricanes Rita and Katrina. Under this sub-
program, the interest rate charged on loans is capped at 1 percent, fees associated with the
program are less than fees for the rest of the program, and institutions are not required to
participate in the program’s pooled escrow account. In addition, principal and interest payments
on loans already made to affected HBCUs can be deferred for up to 3 years, with the
Department making any payments that come due during this period. The statute gives the
Department authority to make loans under the new sub-program in excess of the overall
program loan caps. The Department has made four loans under the new sub-program and has
assumed one default and no recoveries in making initial subsidy estimates. Based on these
forecast assumptions and the expected cash flows for the new sub-program, the estimated
subsidy rate for the sub-program is 76 percent. The current subsidy estimate for the sub-
program is $304 million on a loan volume of $400 million.
Loan Consolidations
Borrowers may prepay existing loans without penalty through a new consolidation loan. Under
the Credit Reform Act and requirements provided by OMB Circular No. A-11, Preparation,
Submission, and Execution of the Budget, the retirement of Direct Loans being consolidated is
considered a receipt of principal and interest. This receipt is offset by the disbursement related
to the newly created consolidation loan. Underlying direct or guaranteed loans, performing or
nonperforming, are paid off in their original cohort; new consolidation loans are originated in the
cohort in which the new consolidated loan was obligated. Consolidation activity is taken into
consideration in establishing subsidy rates for defaults and other cash flows. The cost of new
consolidations is included in subsidy expense for the current-year cohort; the effect of
prepayments on existing loans could contribute to re-estimates of prior cohort costs. The loan
liability and net receivables include estimates of future prepayments of existing loans through
consolidations; they do not reflect costs associated with anticipated future consolidation loans.
Direct Loan Program consolidations increased from $5.8 billion to $12.5 billion reversing the
previous declining consolidation trend. FFEL to FFEL Loan consolidations continue, but at a
rate that did not significantly influence FFEL re-estimated subsidy cost; performing FFEL to
FFEL consolidations would not affect the Department’s actual costs. FFEL to Direct Loan


FY 2009 Agency Financial Report—U.S. Department of Education                                         67
FINANCIAL DETAILS
NOTES TO PRINCIPAL FINANCIAL STATEMENTS


consolidations are part of the $12.5 billion recorded. Direct loan consolidation activity into the
FFEL Program is insignificant.
Modification of Subsidy Cost
The recorded subsidy cost of a loan is based on a set of assumed future cash flows.
Government actions that change these assumed future cash flows change subsidy cost and are
recorded as loan modifications. Loan modifications are recognized under the same accounting
principle as subsidy re-estimates. Modification adjustment transfers are required to adjust for
the difference between current discount rates used to calculate modification costs and the
discount rates used to calculate cohort interest expense and revenue. Separate amounts are
calculated for modification costs and modification adjustment transfers.
FY 2009 Modification. ECASLA and its subsequent extension contained provisions authorizing
the Secretary to purchase certain categories of outstanding FFEL loans. Two programs were
implemented under ECASLA during FY 2008 and FY 2009, both for loans from academic years
2008-09 and 2009-10: 1) a standard put program in which the Department purchases loans
directly from lenders, and 2) a loan participation purchase program, under which the
Department purchases participation interests in loans that holders must redeem and which they
may do by sale to the Department of the underlying loans. In FY 2009, the standard put
program was expanded to allow the sale of loans originated for the 2007-08 academic year. In
FY 2009, the Department also implemented the ABCP Conduit program under which the
Department issued a five-year commitment to purchase from the conduit loans it acquires from
lenders. This program allows lenders to secure private financing from the conduit at favorable
rates. The Department’s purchase commitment to the ABCP Conduit applies to loans acquired
by the conduit and made from October 2003 through academic year 2008-09. Additionally, in
response to disruptions in the commercial paper market, the Secretary used authority to
approve a temporary change in the basis for calculating special allowance payments to and
from loan holders for the first quarter of FY 2009.
The net effect of changes related to loan modifications executed in FY 2009 was a downward
cost of $2.6 billion in the FFEL Program with a corresponding effect on the Liability for Loan
Guarantees. Of this amount, $526 million related to the standard loan put authority for award
year 2007-08, $778 million related to the ABCP Conduit authority and $1.3 billion related to the
temporary change in the special allowance payment basis. The FFEL Program also recognized
a net modification adjustment transfer loss of $130 million.
FY 2008 Modification. The CCRAA included a number of provisions affecting the cost of
existing loans. New income-based repayment and public service loan forgiveness programs
were created; income-based repayment is available to existing FFEL and Direct Loan
borrowers, while public service loan forgiveness is available to existing Direct Loan borrowers.
(Existing FFEL borrowers may consolidate into Direct Loans to obtain the benefit.) The Act also
made retroactive changes to loan deferment provisions for certain military personnel.
The Act also eliminated the provision under which FFEL lenders designated as “exceptional
performers” received a higher insurance rate on defaulted loans, reduced FFEL guaranty
agencies’ account maintenance fees and lowered the percentage guaranty agencies may retain
on collections of certain defaulted loans.
Loan modification savings of $2.5 billion were recorded in the FFEL Program and $4.1 billion in
modification costs were recorded in the Direct Loan Program. The FFEL Program also
recognized a net modification adjustment transfer saving of $30 million and the Direct Loan
Program recognized a net savings of $9 million.


68                                                         FY 2009 Agency Financial Report—U.S. Department of Education
                                                                                                   FINANCIAL DETAILS
                                                                            NOTES TO PRINCIPAL FINANCIAL STATEMENTS


Credit Program Receivables
Credit Program Receivables as of September 30, 2009 and 2008, consisted of the following:
                                                     Credit Program Receivables
                                                               (Dollars in Millions)


                                                                                               2009               2008
           Direct Loan Program Loan Receivables, Net                                       $     152,771      $     109,850
           FFEL Program
             FFEL Guaranteed Loan Program, Net (Pre-1992)                                             3,480              3,591
             FFEL Program (Post-1991):
                FFEL Guaranteed Loan Program, Net                                                 20,399             15,624
                Temporary Loan Purchase Authority:
                   Loan Purchase Commitment, Net                                                  17,032                   64
                   Loan Participation Purchase, Net                                               39,996                 5,230
                   ABCP Conduit, Net                                                                    47                   -
           Federal Perkins Program Loan Receivables, Net                                               184                186
           TEACH Program Receivables, Net                                                               50                  1
           Facilities Loan Programs Loan Receivables, Net                                              295                179

           Credit Program Receivables, Net                                                 $     234,254      $     134,725


William D. Ford Federal Direct Loan Program. The following schedule summarizes the
principal and related interest receivables, net of the allowance for subsidy.
                                         Direct Loan Program Loan Receivables, Net
                                                               (Dollars in Millions)

                                                                                               2009               2008
           Principal Receivable                                                        $        149,437       $     117,610
           Interest Receivable                                                                    7,370                  5,983
           Receivables                                                                          156,807             123,593
             Less: Allowance for Subsidy                                                          4,036              13,743

           Direct Loan Program Loan Receivables, Net                                   $        152,771       $     109,850


Of the $156.8 billion in receivables as of September 30, 2009, $11.5 billion in loan principal was
in default, compared to $10.3 billion a year earlier. Defaulted Direct Loans are held in the
Department’s Business Operations Default Division.




FY 2009 Agency Financial Report—U.S. Department of Education                                                                     69
FINANCIAL DETAILS
NOTES TO PRINCIPAL FINANCIAL STATEMENTS


Federal Family Education Loan Program. The following schedule summarizes the principal
and related interest receivables, net of the allowance for subsidy.
                                   FFEL Program Loan Receivables, Net
                                                (Dollars in Millions)

                                                                                        2009                       2008


       FFEL Guaranteed Loan Program (Pre-1992)
       Principal Receivable                                                      $           7,100           $          7,587
       Interest Receivable                                                                     223                        182
       Receivables                                                                           7,323                      7,769
          Less: Allowance for Subsidy                                                        3,843                      4,178
       FFEL Guaranteed Loan Program Receivables, Net (Pre-1992)                              3,480                      3,591

       FFEL Program (Post-1991)

       Principal Receivable
         FFEL Guaranteed Loan Program                                                       22,403                     17,641
         Temporary Loan Purchase Authority:
            Loan Purchase Commitment                                                        14,293                         59
            Loan Participation Purchase                                                     37,020                      5,036
            ABCP Conduit                                                                        50                          -

       Interest Receivable
          FFEL Guaranteed Loan Program                                                       2,305                      2,143
          Temporary Loan Purchase Authority:
            Loan Purchase Commitment                                                           379                          -
            Loan Participation Purchase                                                        259                         11
            ABCP Conduit                                                                         2                          -
       Receivables                                                                          76,711                     24,890

       Less: Allowance for Subsidy
         FFEL Guaranteed Loan Program                                                        4,309                      4,160
         Temporary Loan Purchase Authority:
           Loan Purchase Commitment                                                         (2,360)                         (5)
           Loan Participation Purchase                                                      (2,717)                       (183)
           ABCP Conduit                                                                          5                           -

       FFEL Guaranteed Loan Program, Net                                                    20,399                     15,624
       Temporary Loan Purchase Authority:
         Loan Purchase Commitment, Net                                                      17,032                         64
         Loan Participation Purchase, Net                                                   39,996                      5,230
         ABCP Conduit, Net                                                                      47                          -

       FFEL Program Loan Receivables, Net                                        $          80,954           $         24,509


All loans and participation interests in loans purchased by the Department under the temporary
loan purchase authority are federal assets; the loan receivable represents all outstanding loans
and participation interests. Loan participation interests were first purchased by the Department
in August 2008. Approximately $9 billion in participation interests were redeemed in FY 2009 by
selling the underlying loans to the Department. No participation interests were redeemed in FY
2008.

70                                                                      FY 2009 Agency Financial Report—U.S. Department of Education
                                                                                                   FINANCIAL DETAILS
                                                                            NOTES TO PRINCIPAL FINANCIAL STATEMENTS


Federal Perkins Loan Program. At September 30, 2009 and 2008, loans receivable, net of an
allowance for loss, were $184 million and $186 million, respectively. These loans are valued at
historical cost.
TEACH Program. At September 30, 2009 and 2008, loans receivable, net of an allowance for
subsidy, were $50 million and $1 million, respectively.
Facilities Loan Programs
                                         Facilities Loan Programs Loan Receivables
                                                               (Dollars in Millions)


                                                                                           2009             2008
           Principal Receivable                                                        $          651   $          553
           Interest Receivable                                                                      9                6
           Receivables                                                                            660              559
             Less: Allowance for Subsidy                                                          365              380

           Facilities Loan Programs Loan Receivables, Net                              $          295   $          179




FY 2009 Agency Financial Report—U.S. Department of Education                                                             71
FINANCIAL DETAILS
NOTES TO PRINCIPAL FINANCIAL STATEMENTS


Reconciliation of Allowance for Subsidy and Liability for Loan Guarantees
William D. Ford Federal Direct Loan Program. The following schedule provides a
reconciliation between the beginning and ending balances of the allowance for subsidy for the
Direct Loan Program:
                       Direct Loan Program Reconciliation of Allowance for Subsidy
                                                              (Dollars in Millions)

                                                                                                 2009                          2008
       Beginning Balance, Allowance for Subsidy                                          $            13,743            $             8,245
       Components of Subsidy Transfers
         Interest Rate Differential                                                                     (7,785)                       (1,540)
         Defaults, Net of Recoveries                                                                     1,070                           454
         Fees                                                                                             (551)                         (487)
         Other                                                                                           2,863                         1,498
       Current Year Subsidy Transfers                                                                   (4,403)                          (75)
       Components of Subsidy Re-estimates
         Interest Rate Re-estimates1                                                                      (322)                          222
         Technical and Default Re-estimates                                                             (4,878)                          946
       Subsidy Re-estimates                                                                             (5,200)                        1,168
       Components of Loan Modifications
         Loan Modification Costs                                                                             -                         4,143
         Modification Adjustment Transfers                                                                   -                            (9)

       Loan Modifications                                                                                    -                         4,134
       Activity
         Fee Collections                                                                                  628                            482
         Loan Cancellations2                                                                             (432)                          (240)
         Subsidy Allowance Amortization                                                                    40                            456
         Other                                                                                           (340)                          (427)
       Total Activity                                                                                    (104)                           271

       Ending Balance, Allowance for Subsidy                                             $              4,036           $            13,743

          1
              The interest rate re-estimate relates to subsidy associated with establishing a fixed rate for the
              Department’s borrowing from Treasury.
          2
              Loan cancellations include write-offs of loans because the primary borrower died, became disabled or
              declared bankruptcy.




72                                                                                    FY 2009 Agency Financial Report—U.S. Department of Education
                                                                                                       FINANCIAL DETAILS
                                                                                NOTES TO PRINCIPAL FINANCIAL STATEMENTS


Federal Family Education Loan Program. The following schedule provides a reconciliation
between the beginning and ending balances of the liability for loan guarantee for the insurance
portion of the FFEL Program:

                        FFEL Program Reconciliation of Liabilities for Loan Guarantees
                                                                 (Dollars in Millions)

                                                                                                   2009                     2008
           Beginning Balance, FFEL Financing Accounts Liability for
           Loan Guarantees                                                                  $          43,185          $           50,731
           Components of Subsidy Transfers
             Interest Supplement Costs                                                                    (632)                     1,212
             Defaults, Net of Recoveries                                                                   494                         43
             Fees                                                                                       (3,495)                      (449)
             Other1                                                                                      2,108                        436
           Current Year Subsidy Transfers                                                              (1,525)                      1,242
           Components of Subsidy Re-estimates
             Interest Rate Re-estimates                                                                    (147)                     (700)
             Technical and Default Re-estimates                                                       (21,542)                       (760)
           Subsidy Re-estimates                                                                        (21,689)                    (1,460)
           Components of Loan Modifications
             Loan Modification Costs                                                                    (2,641)                    (2,464)
             Modification Adjustment Transfers                                                             130                        (30)
           Loan Modifications                                                                           (2,511)                    (2,494)
           Activity
             Interest Supplement Payments                                                               (5,389)                    (8,744)
             Claim Payments                                                                             (8,634)                    (8,029)
             Fee Collections                                                                             4,115                      4,107
             Interest on Liability Balance                                                                 337                      1,372
             Other2                                                                                    12,559                       6,460
           Total Activity                                                                                 2,988                    (4,834)
           Ending Balance, FFEL Financing Account Liability for Loan
           Guarantees                                                                                  20,448                      43,185
           FFEL Liquidating Account Liability for Loan Guarantees                                           95                       137
           Liabilities for Loan Guarantees                                                  $          20,543          $           43,322

                1
                    Subsidy primarily associated with debt collections and loan cancellations due to death, disability and
                    bankruptcy.
                2
                    Activity primarily associated with the transfer of subsidy for defaults; loan consolidation activity;
                    negative special allowance payments; and loan cancellations due to death, disability and
                    bankruptcy.



Financing Account Interest Expense and Interest Revenue
The Department borrows from Treasury to fund the unsubsidized portion of lending activities.
The Department calculates and pays Treasury interest on its borrowing at the end of each year.
During the year, interest is earned on outstanding direct loans, outstanding FFEL loans
purchased by the Department, participation interests and the Fund Balance with Treasury.
Subsidy amortization is calculated, in accordance with Statement of Federal Financial
Accounting Standards No. 2, Accounting for Direct Loans and Loan Guarantees, as the
difference between interest revenue and interest expense. For direct loans, the allowance for


FY 2009 Agency Financial Report—U.S. Department of Education                                                                                 73
FINANCIAL DETAILS
NOTES TO PRINCIPAL FINANCIAL STATEMENTS


subsidy is adjusted with the offset to interest revenue. For guaranteed loans, the liability for loan
guarantees is adjusted with the offset to interest expense.
William D. Ford Federal Direct Loan Program. The following schedule summarizes the Direct
Loan financing account interest expense and interest revenue:
                                               Direct Loan Program
                                                     (Dollars in Millions)

                                                                                        2009                         2008
          Interest Expense on Treasury Borrowing                               $               7,094          $              6,190
       Interest Expense                                                        $               7,094          $              6,190


          Interest Revenue from the Public                                     $               5,669          $              5,277
          Amortization of Subsidy                                                                (40)                         (456)
          Interest Revenue on Uninvested Funds                                                 1,465                         1,369
       Interest Revenue                                                        $               7,094          $              6,190


Payable to Treasury
Payable to Treasury for the years ended September 30, 2009 and 2008, consisted of the
following:
                                              Payable to Treasury
                                                    (Dollars in Millions)

                                                                                          2009                       2008
       Future Liquidating Account Collections, Beginning Balance                    $           3,766          $             4,108
         Valuation of Pre-1992 Loan Liability and Allowance                                       465                           250
         Capital Transfers to Treasury                                                           (662)                         (592)
       Future Liquidating Account Collections, Ending Balance                                   3,569                        3,766
       Payable to Treasury                                                          $           3,569          $             3,766


The liquidating account, based on available fund balance, periodically transfers Fund Balance to
Treasury’s account.




74                                                                           FY 2009 Agency Financial Report—U.S. Department of Education
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                                                                            NOTES TO PRINCIPAL FINANCIAL STATEMENTS


Subsidy Expense

William D. Ford Federal Direct Loan Program

                                             Direct Loan Program Subsidy Expense
                                                               (Dollars in Millions)

                                                                                           2009             2008
           Components of Current Year Subsidy Transfers
             Interest Rate Differential                                                $      (7,785)   $          (1,540)
             Defaults, Net of Recoveries                                                       1,070                  454
             Fees                                                                               (551)                (487)
             Other                                                                             2,863                1,498
           Current Year Subsidy Transfers                                                     (4,403)                (75)
             Subsidy Re-estimates                                                             (5,200)              1,168
             Loan Modification Costs                                                               -               4,143
           Direct Loan Subsidy Expense                                                 $      (9,603)   $          5,236




For 2009 re-estimated subsidy cost, Direct Loan subsidy cost was decreased by $5.2 billion.
Changes in the assumption for income-based repayments decreased subsidy cost by
$3.7 billion. Rising default rates increased subsidy cost by $374 million, interest rate changes
increased costs by $350 million, and changes in deferments and forbearance rates increased
costs by $313 million. Other assumption updates produced offsetting costs with the remainder
attributable to interest on the re-estimate. The subsidy rate is sensitive to interest rate
fluctuations, for example, a 1 percent increase in projected borrower base rates would reduce
projected Direct Loan subsidy cost by $455 million.
In the 2008 re-estimates, Direct Loan subsidy cost was increased by $1.2 billion. Changes in
interest rates increased subsidy cost by $859 million, updated data on teacher loan forgiveness
led to an additional increase of $481 million, and rising default rates increased subsidy cost by
$194 million. These increases were partially offset by decreases due to reduced prepayments of
$(606) million and changes in the rate at which loans enter repayment of $(261) million. The
subsidy rate is sensitive to interest rate fluctuations. For example, a 1 percent increase in
projected borrower base rates would reduce projected Direct Loan subsidy cost by $465 million.




FY 2009 Agency Financial Report—U.S. Department of Education                                                                 75
FINANCIAL DETAILS
NOTES TO PRINCIPAL FINANCIAL STATEMENTS


Federal Family Education Loan Program
                                     FFEL Program Subsidy Expense
                                                (Dollars in Millions)

                                                                                       2009                      2008
       FFEL Guaranteed Loan Program
         Components of Current Year Subsidy Transfers
           Interest Supplement Costs                                             $            (632)          $          1,212
           Defaults, Net of Recoveries                                                        494                          43
           Fees                                                                             (3,495)                      (449)
           Other                                                                            2,108                         436
         Current Year Subsidy Transfers                                                     (1,525)                      1,242
           Subsidy Re-estimates                                                            (21,689)                     (1,460)
           Loan Modification Costs                                                          (2,641)                     (2,464)
       FFEL Guaranteed Loan Program Subsidy Expense                                        (25,855)                     (2,682)

       Temporary Loan Purchase Authority
       Loan Purchase Commitment
         Components of Current Year Subsidy Transfers
           Interest Supplement Costs                                                        (3,157)                          (9)
           Defaults, Net of Recoveries                                                        102                             -
           Fees                                                                               268                             2
           Other                                                                            1,179                             5
         Current Year Subsidy Transfers                                                     (1,608)                          (2)
           Subsidy Re-estimates                                                               (245)                           -
       Loan Purchase Commitment Subsidy Expense                                             (1,853)                          (2)


       Loan Participation Purchase
         Components of Current Year Subsidy Transfers
           Interest Supplement Costs                                                        (2,976)                       (292)
           Defaults, Net of Recoveries                                                        (108)                          5
           Fees                                                                               (811)                       (476)
           Other                                                                              735                          595
         Current Year Subsidy Transfers                                                     (3,160)                       (168)
           Subsidy Re-estimates                                                               930                            -
       Loan Participation Purchase Subsidy Expense                                          (2,230)                       (168)

       ABCP Conduit
         Components of Current Year Subsidy Transfers
           Interest Supplement Costs                                                              (6)                         -
           Defaults, Net of Recoveries                                                             1                          -
           Fees                                                                                   (3)                         -
           Other                                                                                   6                          -
       ABCP Conduit Subsidy Expense                                                               (2)                         -


       FFEL Program Subsidy Expense                                              $         (29,940)          $          (2,852)


For 2009 re-estimated subsidy cost, FFEL Guaranteed subsidy cost was decreased by
$21.7 billion. Interest rate changes related to updated economic assumptions accounted for
approximately $18 billion in decreased subsidy cost. A $1.5 billion increase in subsidy cost

76                                                                      FY 2009 Agency Financial Report—U.S. Department of Education
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                                                                            NOTES TO PRINCIPAL FINANCIAL STATEMENTS


related to changes in deferment and forbearance rates was offset by other changes in
assumptions such as $966 million decreased cost for changes in repayment rates; loan volume
changes produced a decreased subsidy cost of $790 million. Other assumption updates
produced offsetting costs with the remainder attributable to interest on the re-estimate. The
subsidy rate is sensitive to interest rate fluctuations, for example, a 1 percent increase in
borrower interest rates and the guaranteed yield for lenders would increase projected FFEL
costs by $16.4 billion.
In the 2008 re-estimates, FFEL subsidy cost was decreased by $1.5 billion. Changes in interest
rate forecasts decreased subsidy cost by $8.7 billion. This decrease was partially offset by
increases of $4.4 billion due to reduced prepayments, $2.5 billion due to changes in projected
guaranty agency retention of collections on defaulted loans, and $1.3 billion due to greater use
of teacher loan forgiveness benefits. The subsidy rate is sensitive to interest rate fluctuations.
For example, a 1 percent increase in borrower interest rates and the guaranteed yield for
lenders would increase projected FFEL costs by $16.3 billion.
Subsidy Rates
The subsidy rates applicable to the 2009 loan cohort year follow:
                                                     Subsidy Rates—Cohort 2009
                                                                  Interest
                                                                Differential/
                                                               Supplements      Defaults    Fees     Other     Total

           Direct Loan Program                                   (24.82%)        2.90%     (1.42%)   8.38%    (14.96%)
           TEACH Program                                         (15.44%)        0.56%     (0.00%)   11.24%   (3.64%)
           FFEL Program (Post-1991):
             Guaranteed Loan Program                              (2.47%)        0.24%     (2.12%)   1.36%    (2.99%)
             Temporary Loan Purchase Authority:
               Loan Purchase Commitment                          (28.35%)        0.98%      2.33%    10.01%   (15.03%)
               Loan Participation Purchase                       (23.98%)        0.97%      0.94%    10.34%   (11.73%)
               ABCP Conduit                                       (6.92%)        0.00%     (5.30%)   6.78%     (5.44%)


The subsidy rate represents the subsidy expense of the program in relation to the obligations or
commitments made during the fiscal year. The subsidy expense for new direct or guaranteed
loans reported in the current year relate to disbursements of loans from both current and prior
years’ cohorts. Subsidy expense is recognized when the Department disburses direct loans or
third-party lenders disburse guaranteed loans. The subsidy expense reported in the current year
also includes modifications and re-estimates. The subsidy rates shown above, which reflect
aggregate negative subsidy in the FY 2009 cohort, cannot be applied to direct or guaranteed
loans disbursed during the current reporting year to yield the subsidy expense, nor are these
rates applicable to the portfolio as a whole.
The costs of the Department’s student loan programs, especially the Direct Loan Program, are
highly sensitive to changes in actual and forecasted interest rates. The formulas for determining
program interest rates are established by statute; the existing loan portfolio has a mixture of
borrower and lender rate formulas. Interest rate projections are based on probabilistic interest
rate scenario inputs developed and provided by OMB.




FY 2009 Agency Financial Report—U.S. Department of Education                                                             77
FINANCIAL DETAILS
NOTES TO PRINCIPAL FINANCIAL STATEMENTS


Administrative Expenses
Administrative Expense for the years ended September 30, 2009 and 2008, consisted of the
following:
                                           Administrative Expense
                                                    (Dollars in Millions)

                                                     2009                                                  2008
                                      Direct Loan                  FFEL                    Direct Loan                  FFEL
                                       Program                   Program                    Program                   Program
     Operating Expense                 $        458             $           269                $        343         $          222
     Other Expense                               23                         13                           14                       9

     Administrative Expenses           $        481             $           282                $        357         $          231



Note 7. General Property, Plant and Equipment
General Property, Plant and Equipment, as of September 30, 2009 and 2008, consisted of the
following:
                                  General Property, Plant and Equipment
                                                        (Dollars in Millions)

                                                                                              2009
                                                                                           Accumulated                   Net Asset
                                                                    Cost                   Depreciation                   Value

       Information Technology, Internal Use Software
       and Telecommunications Equipment                    $                160            $           (122)         $                38
       Furniture and Fixtures                                                    3                        (3)                          -
       General Property,
       Plant and Equipment                                 $                163            $           (125)         $                38


                                                                                               2008
                                                                                            Accumulated                  Net Asset
                                                                    Cost                    Depreciation                  Value

       Information Technology, Internal Use Software
       and Telecommunications Equipment                     $               152            $           (100)         $                52
       Furniture and Fixtures                                                     3                       (3)                          -
       General Property,
       Plant and Equipment                                  $               155            $           (103)         $                52


The majority of the asset costs relate to financial management systems and other information
technology and communications improvements.
Leases
The Department leases information technology and telecommunications equipment as part of a
contractor-owned contractor-operated services contract. Lease payments associated with the
equipment are classified as operating leases and as such are expensed as incurred. The non-
cancelable lease term is one year, with the Department holding the right to extend the lease
term by exercising additional one-year options.


78                                                                              FY 2009 Agency Financial Report—U.S. Department of Education
                                                                                                   FINANCIAL DETAILS
                                                                            NOTES TO PRINCIPAL FINANCIAL STATEMENTS


The Department leases office space from the General Services Administration (GSA). The lease
contracts with GSA for privately and publicly owned buildings are operating leases. Future lease
payments are not accrued as liabilities, but expensed as incurred. Estimated future minimum
lease payments for the privately owned buildings are presented below.
                                                                  Leases
                                                               (Dollars in Millions)

                                 2009                                                                         2008


           Fiscal Year                   Lease Payment                                      Fiscal Year               Lease Payment
           2010                      $                44                                    2009                     $            47
           2011                                       48                                    2010                                  50
           2012                                       53                                    2011                                  54
           2013                                       55                                    2012                                  61
           2014                                       58                                    2013                                  70
           After 2014                                 60                                    After 2013                            72

           Total                     $                   318                                Total                    $             354


Note 8. Other Assets
Other Intragovernmental Assets primarily consist of advance payments to the Department of
Interior's Bureau of Indian Education under terms of an interagency agreement. Other
Intragovernmental Assets were $141 million and $95 million as of September 30, 2009 and
2008, respectively
Other Assets With the Public consist of payments made to grant recipients in advance of their
expenditures and in-process invoices for interest benefits and special allowances for the FFEL
Program. Other Assets With the Public were $546 million and $37 million as of September 30,
2009 and 2008, respectively.
Note 9. Debt
Debt as of September 30, 2009 and 2008, consisted of the following:
                                                                      Debt
                                                                 (Dollars in Millions)

                                                                                               2009
                                                  Beginning       Accrued                    New                                 Ending
                                                   Balance        Interest                 Borrowing      Repayments             Balance
           Treasury Debt
           Direct Loan Program                   $ 117,419       $           -         $       47,179     $    (10,380)      $    154,218
           FFEL Program
             Guaranteed Loan Program                       -               12                   1,462                 -             1,474
             Loan Purchase Commitment                     69                -                  24,811               (3)            24,877
             Loan Participation Purchase              10,754                -                  43,223                 -            53,977
             ABCP Conduit                                  -                -                     250               (6)               244
           TEACH Program                                  14                -                      56                (2)               68
           Facilities Loan Program                        75                -                       -                (4)               71
           Total Treasury Debt                       128,331               12                 116,981          (10,395)           234,929
           Debt to the FFB
           HBCU                                        337                  4                     120               (5)               456
           Total Debt to the FFB                       337                  4                     120               (5)               456
           Total                                 $ 128,668       $         16          $      117,101     $    (10,400)      $    235,385



FY 2009 Agency Financial Report—U.S. Department of Education                                                                             79
FINANCIAL DETAILS
NOTES TO PRINCIPAL FINANCIAL STATEMENTS



                                                        Debt
                                                   (Dollars in Millions)

                                                                               2008
                                       Beginning    Accrued                  New                                       Ending
                                        Balance     Interest               Borrowing          Repayments               Balance
       Treasury Debt
       Direct Loan Program             $ 103,893   $           -       $       28,172        $      (14,646)       $    117,419
       FFEL Program
         Guaranteed Loan Program               -               -                    -                      -                  -
         Loan Purchase Commitment              -               -                   69                       -                69
         Loan Participation Purchase           -               -               10,754                      -             10,754
         ABCP Conduit                          -               -                    -                       -                 -
       TEACH Program                           -               -                   26                    (12)                14
       Facilities Loan Program                81               -                    -                     (6)                75
       Total Treasury Debt               103,974               -               39,021               (14,664)            128,331
       Debt to the FFB
       HBCU                                  313               -                   28                    (4)                337
       Total Debt to the FFB                 313               -                   28                    (4)                337
       Total                           $ 104,287   $           -       $       39,049        $      (14,668)       $    128,668



The amount available for repayments on borrowings to Treasury is derived from many factors.
For instance, beginning of the year cash balances, collections and new borrowings have an
impact on the cash available to repay Treasury. Cash is also held to cover future liabilities, such
as contract collection costs and disbursements in transit.




80                                                                    FY 2009 Agency Financial Report—U.S. Department of Education
                                                                                                     FINANCIAL DETAILS
                                                                              NOTES TO PRINCIPAL FINANCIAL STATEMENTS



Note 10. Other Liabilities
Other liabilities include current and non-current liabilities. The non-current liabilities primarily
relate to the student loan receivables of the Federal Perkins Loan Program, which when
collected will be returned to the General Fund of Treasury.
The current liabilities covered by budgetary resources primarily consist of negative subsidy
transfers and downward subsidy re-estimates, which when executed will be paid to Treasury.
Other Liabilities as of September 30, 2009 and 2008 consisted of the following:

                                                               Other Liabilities
                                                                 (Dollars in Millions)

                                                                                  2009                                       2008
                                                                   Intragovern-              With the       Intragovern-            With the
                                                                      mental                 Public            mental                Public

           Liabilities Covered by Budgetary Resources
             Current
                Advances From Others                               $            96       $          -       $       91          $           -
                Employer Contributions and Payroll Taxes                         4                  -                4                      -
                Liability for Deposit Funds                                     (5)                52               (7)                    35
                Accrued Payroll and Benefits                                     -                 21                -                     19
                Deferred Revenue                                                 -                467                -                     42
                Liabilities in Miscellaneous Receipt
                Accounts                                                  11,221                        -         6,847                         -
           Total Other Liabilities Covered by Budgetary
           Resources                                                      11,316                  540             6,935                    96

           Liabilities Not Covered by Budgetary
           Resources
             Current
                Accrued Unfunded Annual Leave                                     -                34        $           -      $          33
             Non-current
                Accrued Unfunded FECA Liability                                  3                      -             3                         -
                Liabilities in Miscellaneous Receipt
                Accounts                                                      184                   -              186                      -
                Accrued FECA Actuarial Liability                                -                  16                -                     16
           Total Other Liabilities Not Covered by
           Budgetary Resources                                                187                  50              189                     49

           Other Liabilities                                       $      11,503         $        590       $    7,124          $         145



Liabilities Not Covered by Budgetary Resources
Liabilities not covered by budgetary resources include liabilities for which congressional action is
needed before budgetary resources can be provided. Although future appropriations to fund
these liabilities are likely, it is not certain that appropriations will be enacted to fund these
liabilities. Liabilities not covered by budgetary resources totaled $237 million and $238 million as
of September 30, 2009 and 2008, respectively.
As of September 30, 2009 and 2008, liabilities on the Balance Sheet totaled $278.9 billion and
$188.2 billion respectively. Of this amount, liabilities covered by budgetary resources totaled
$278.7 billion as of September 30, 2009, and $188.0 billion as of September 30, 2008.




FY 2009 Agency Financial Report—U.S. Department of Education                                                                                        81
FINANCIAL DETAILS
NOTES TO PRINCIPAL FINANCIAL STATEMENTS


Note 11. Accrued Grant Liability
The accrued grant liability by major reporting groups as of September 30, 2009 and 2008
consisted of the following:
                                             Accrued Grant Liability
                                                     (Dollars in Millions)

                                                                                         2009                          2008
       FSA                                                                       $              1,295          $                862
       OESE                                                                                       265                           557
       OSERS                                                                                      263                           512
       ARRA                                                                                       860                               -
       Other                                                                                      279                           314

       Accrued Grant Liability                                                   $              2,962          $               2,245


Note 12. Net Position
Unexpended appropriations as of September 30, 2009 and 2008, consisted of the following:
                                           Unexpended Appropriations
                                                     (Dollars in Millions)

                                                                                          2009                         2008
       Unobligated Balances
         Available                                                                   $           33,243        $               1,526
         Not Available                                                                             770                          815
       Undelivered Orders, end of period                                                         92,369                       47,165
       Authority Temporarily Precluded from Obligation                                             887                              -

       Unexpended Appropriations                                                     $          127,269        $              49,506


The Cumulative Results of Operations - Earmarked Funds of $8 million as of September 30,
2009, and $17 million as of September 30, 2008, represent donations from foreign
governments, international entities and individuals to support Hurricane Katrina relief and
recovery efforts that have not yet been used. (See Note 19)
The Cumulative Results of Operations - Other Funds of $(217) million as of September 30,
2009, and $(6,187) million as of September 30, 2008, consists mostly of unfunded upward
subsidy re-estimates, other unfunded expenses, and net investments of capitalized assets.




82                                                                           FY 2009 Agency Financial Report—U.S. Department of Education
                                                                                             FINANCIAL DETAILS
                                                                      NOTES TO PRINCIPAL FINANCIAL STATEMENTS


Note 13. Intragovernmental Cost and Exchange Revenue by Program
As required by the Government Performance and Results Act of 1993, each of the Department’s
Reporting Organizations has been aligned with the major goals presented in the Department’s
Strategic Plan 2007—2012.
                                                                 Reporting
                                                               Organizations/
                          Net Cost Program                        Groups                      Strategic Goal

                                                                    FSA         3. Ensure the accessibility, affordability,
         Ensure Accessibility, Affordability, and
                                                                   OPE             and accountability of higher education,
         Accountability of Higher Education and Career
                                                                   OVAE            and better prepare students and adults
         and Technical Advancement
                                                                                   for employment and future learning


         Promote Academic Achievement in Elementary               OESE          1. Improve student achievement, with the
         and Secondary Schools                                    OELA             focus on bringing all students to grade
                                                                  OSDFS            level in reading and mathematics by
                                                                   HR              2014

                                                                                2. Increase the academic achievement of
                                                                                   all high school students


         Transformation of Education                                IES         1. Improve student achievement, with the
                                                                     OII           focus on bringing all students to grade
                                                                                   level in reading and mathematics by
                                                                                   2014


         Special Education                                        OSERS           Cuts across Strategic Goals 1, 2 and 3


         American Recovery and Reinvestment Act                    ARRA           Cuts across Strategic Goals 1, 2 and 3



Strategic Goals 1, 2 and 3 are sharply defined directives that guide the Department’s reporting
organizations to carry out the vision and programmatic mission, and the net cost programs can
be specifically associated with these three strategic goals. The Department has a Cross-Goal
Strategy on Management, which is considered a high-level premise on which the Department
establishes its foundation for the three goals. As a result, we do not assign specific programs to
the Cross-Goal Strategy for presentation in the Statement of Net Cost.
The goals of the Recovery Act are consistent with the Department’s current Strategic Goals and
programs. For reporting purposes, a new American Recovery and Reinvestment Act net cost
program has been created.
The following table presents the gross cost and exchange revenue by program for the
Department for September 30, 2009 and 2008. Gross costs and earned revenue are classified
as intragovernmental (exchange transactions between the Department and other entities within
the federal government) or with the public (exchange transactions between the Department and
non-federal entities).




FY 2009 Agency Financial Report—U.S. Department of Education                                                                  83
FINANCIAL DETAILS
NOTES TO PRINCIPAL FINANCIAL STATEMENTS


Gross Cost and Exchange Revenue by Program
Gross Cost and Exchange Revenue by Program, as of September 30, 2009 and 2008,
consisted of the following:
                           Gross Cost and Exchange Revenue by Program
                                                  (Dollars in Millions)

                                                                                       2009

                                                FSA           OESE             OSERS          ARRA         Other         Total


      Ensure Accessibility, Affordability, and Accountability of Higher Education and Career and Technical
      Advancement
       Intragovernmental Gross Cost             $10,079    $        - $       - $       - $      80 $10,159
       Public Gross Cost                         (21,141)           -         -         -     4,638  (16,503)
         Total Gross Program Costs               (11,062)           -         -         -     4,718    (6,344)
       Intragovernmental Earned Revenue            4,644            -         -         -         3     4,647
       Public Earned Revenue                       6,435            -         -         -        25     6,460
         Total Program Earned Revenue             11,079            -         -         -        28   11,107
      Total Program Cost                         (22,141)           -         -         -     4,690  (17,451)

      Promote Academic Achievement in Elementary and Secondary Schools
       Intragovernmental Gross Cost               -       180         -                              -          16           196
       Public Gross Cost                          -    21,472          -                             -       1,571        23,043
         Total Gross Program Costs                -    21,652         -                              -       1,587        23,239
       Intragovernmental Earned Revenue           -         -         -                              -          70            70
       Public Earned Revenue                      -        15          -                             -           4            19
         Total Program Earned Revenue             -        15          -                             -          74            89
      Total Program Cost                          -    21,637          -                             -       1,513        23,150

      Transformation of Education
        Intragovernmental Gross Cost                    -                 -              -           -          88            88
        Public Gross Cost                               -                 -              -           -       1,579         1,579
          Total Gross Program Costs                     -                 -              -           -       1,667         1,667
        Intragovernmental Earned Revenue                -                 -              -           -           1             1
        Public Earned Revenue                           -                 -              -           -          34            34
          Total Program Earned Revenue                  -                 -              -           -          35            35
      Total Program Cost                                -                 -              -           -       1,632         1,632

      Special Education
       Intragovernmental Gross Cost                     -                 -          44              -             -          44
       Public Gross Cost                                -                 -      15,188              -             -      15,188
         Total Gross Program Costs                      -                 -      15,232              -             -      15,232
       Intragovernmental Earned Revenue                 -                 -           2              -             -           2
       Public Earned Revenue                            -                 -          18              -             -          18
         Total Program Earned Revenue                   -                 -          20              -             -          20
      Total Program Cost                                -                 -      15,212              -             -      15,212

      American Recovery and Reinvestment Act
       Intragovernmental Gross Cost                     -                 -              -          -              -           -
       Public Gross Cost                                -                 -              -     21,618              -      21,618
         Total Gross Program Costs                      -                 -              -     21,618              -      21,618
       Intragovernmental Earned Revenue                 -                 -              -          -              -           -
       Public Earned Revenue                            -                 -              -          -              -           -
         Total Program Earned Revenue                   -                 -              -          -              -           -
      Total Program Cost                                -                 -              -     21,618              -      21,618


      Net Cost of Operations                  $(22,141)      $ 21,637          $ 15,212       $21,618       $7,835      $ 44,161




84                                                                        FY 2009 Agency Financial Report—U.S. Department of Education
                                                                                                       FINANCIAL DETAILS
                                                                                NOTES TO PRINCIPAL FINANCIAL STATEMENTS


                                     Gross Cost and Exchange Revenue by Program
                                                                   (Dollars in Millions)

                                                                                                2008

                                                                 FSA         OESE          OSERS       ARRA       Other        Total


           Ensure Accessibility, Affordability, and Accountability of Higher Education and Career and Technical
           Advancement
            Intragovernmental Gross Cost            $ 6,903    $        - $       - $       -   $     82 $ 6,985
            Public Gross Cost                         21,885            -         -         -      4,220    26,105
              Total Gross Program Costs               28,788            -         -         -      4,302    33,090
            Intragovernmental Earned Revenue           4,128           -          -         -         19     4,147
            Public Earned Revenue                      4,901            -         -         -         34     4,935
              Total Program Earned Revenue             9,029            -         -         -         53     9,082
           Total Program Cost                         19,759            -         -         -      4,249    24,008

           Promote Academic Achievement in Elementary and Secondary Schools
            Intragovernmental Gross Cost              -       135         -                                   -        16          151
            Public Gross Cost                         -    21,659         -                                   -     1,680       23,339
              Total Gross Program Costs               -    21,794         -                                   -     1,696       23,490
            Intragovernmental Earned Revenue          -         -         -                                   -        70           70
            Public Earned Revenue                     -        12         -                                   -         4           16
              Total Program Earned Revenue            -        12         -                                   -        74           86
           Total Program Cost                         -    21,782         -                                   -     1,622       23,404

           Transformation of Education
             Intragovernmental Gross Cost                              -               -           -          -        80           80
             Public Gross Cost                                         -               -           -          -     1,489        1,489
               Total Gross Program Costs                               -               -           -          -     1,569        1,569
             Intragovernmental Earned Revenue                          -               -           -          -         2            2
             Public Earned Revenue                                     -               -           -          -        30           30
               Total Program Earned Revenue                            -               -           -          -        32           32
           Total Program Cost                                          -               -           -          -     1,537        1,537

           Special Education
            Intragovernmental Gross Cost                               -               -        42            -           -         42
            Public Gross Cost                                          -               -    15,843            -           -     15,843
              Total Gross Program Costs                                -               -    15,885            -           -     15,885
            Intragovernmental Earned Revenue                           -               -         2            -           -          2
            Public Earned Revenue                                      -               -        15            -           -         15
              Total Program Earned Revenue                             -               -        17            -           -         17
           Total Program Cost                                          -               -    15,868            -           -     15,868

           American Recovery and Reinvestment Act
            Intragovernmental Gross Cost                               -               -           -          -           -            -
            Public Gross Cost                                          -               -           -          -           -            -
              Total Gross Program Costs                                -               -           -          -           -            -
            Intragovernmental Earned Revenue                           -               -           -          -           -            -
            Public Earned Revenue                                      -               -           -          -           -            -
              Total Program Earned Revenue                             -               -           -          -           -            -
           Total Program Cost                                          -               -           -          -           -            -

           Net Cost of Operations                              $ 19,759    $ 21,782        $15,868     $      -   $ 7,408     $ 64,817




FY 2009 Agency Financial Report—U.S. Department of Education                                                                               85
FINANCIAL DETAILS
NOTES TO PRINCIPAL FINANCIAL STATEMENTS


Note 14. Interest Expense and Interest Revenue
As of September 30, 2009 and 2008, interest expense and interest revenue by program
consisted of the following:
                                 Interest Expense and Interest Revenue
                                                  (Dollars in Millions)
                                                                                    2009
                                                     Expenses                                            Revenue
                                                       Non-                                                Non-
                                        Federal                           Total            Federal                       Total
                                                      federal                                             federal


      Direct Loan Program               $ 7,094       $          -        $ 7,094              $ 1,465   $ 5,629       $ 7,094
      FFEL Program
        Guaranteed Loan Program               32             337              369                 369            -          369
        Loan Purchase Commitment             861               -              861                 563          298          861
        Loan Participation Purchase        1,876               -            1,876               1,410          466        1,876
        ABCP Conduit                           6               -                6                   5            1            6
      TEACH Program                            2               -                2                   1            1            2
      Other Programs                          17               -               17                   2           36           38

      Total                            $   9,888      $      337          $10,225          $ 3,815        $ 6,431      $10,246


                                                                                    2008
                                                     Expenses                                            Revenue
                                                       Non-                                                Non-
                                        Federal                           Total            Federal                       Total
                                                      federal                                             federal

      Direct Loan Program              $   6,190      $          -        $ 6,190          $    1,369    $ 4,821       $ 6,190
      FFEL Program
        Guaranteed Loan Program               -            1,372            1,372               1,372            -        1,372
        Loan Purchase Commitment              3                -                3                   3            -            3
        Loan Participation Purchase         492                -              492                 465           27          492
        ABCP Conduit                          -                -                -                   -            -            -
      TEACH Program                           1                -                1                   1            -            1
      Other Programs                         23                -               23                  17           57           74

      Total                            $   6,709      $ 1,372             $ 8,081          $    3,227     $ 4,905      $ 8,132


Federal interest expense is recognized on the Department’s outstanding debt. Non-federal
interest revenue is earned on the individual loans and participation interests in FFEL loans.
Federal interest revenue is earned on the uninvested fund balance with Treasury.

Note 15. Statement of Budgetary Resources
The Statement of Budgetary Resources (SBR) compares budgetary resources with the status of
those resources. As of September 30, 2009, budgetary resources were $437,777 million and
net outlays were $165,158 million. As of September 30, 2008, budgetary resources were
$193,993 million and net outlays were $90,580 million.
Permanent Indefinite Budget Authority
The Direct Loan, FFEL and TEACH Programs have permanent indefinite budget authority
through legislation. Part D of the William D. Ford Federal Direct Loan Program and Part B of the


86                                                                        FY 2009 Agency Financial Report—U.S. Department of Education
                                                                                                   FINANCIAL DETAILS
                                                                            NOTES TO PRINCIPAL FINANCIAL STATEMENTS


Federal Family Education Loan Program, pursuant to the HEA, pertain to the existence,
purpose and availability of this permanent indefinite budget authority.
Reauthorization of Legislation
Funds for most Department programs are authorized, by statute, to be appropriated for a
specified number of years, with an automatic one-year extension available under Section 422 of
the General Education Provisions Act. Congress may continue to appropriate funds after the
expiration of the statutory authorization period, effectively reauthorizing the program through the
appropriations process. The current Budget of the United States Government presumes all
programs continue per congressional budgeting rules.
Obligations Incurred by Apportionment Type and Category
Obligations incurred by apportionment type and category, as of September 30, 2009 and 2008,
consisted of the following:
                            Obligations Incurred by Apportionment Type and Category
                                                               (Dollars in Millions)

                                                                                           2009            2008
           Direct:
             Category A                                                                $       1,385   $        1,285
             Category B                                                                      389,623          161,452
             Exempt from Apportionment                                                            80                6
                                                                                             391,088          162,743
           Reimbursable:
             Category A                                                                            -               -
             Category B                                                                            -               -
             Exempt from Apportionment                                                            94              96
                                                                                                  94              96

           Obligations Incurred                                                        $     391,182   $     162,839


Obligations incurred can be either direct or reimbursable. Reimbursable obligations are those
financed by offsetting collections received in return for goods and services provided, while all
other obligations are direct. Category A apportionments are those resources that can be
obligated without restriction on the purpose of the obligation, other than to be in compliance with
legislation underlying programs for which the resources were made available. Category B
apportionments are restricted by purpose for which obligations can be incurred. In addition,
some resources are available without apportionment by OMB.




FY 2009 Agency Financial Report—U.S. Department of Education                                                            87
FINANCIAL DETAILS
NOTES TO PRINCIPAL FINANCIAL STATEMENTS


Unused Borrowing Authority
Unused borrowing authority, as of September 30, 2009 and 2008, consisted of the following:
                                     Unused Borrowing Authority
                                                (Dollars in Millions)
                                                                                    2009                          2008
       Beginning Balance, Unused Borrowing Authority                        $            25,930               $         9,223
       Current Year Borrowing Authority                                                 200,265                        57,743
       Funds Drawn From Treasury                                                       (117,101)                      (39,049)
       Borrowing Authority Withdrawn                                                     (2,739)                       (1,987)

       Ending Balance, Unused Borrowing Authority                           $          106,355             $           25,930


The Department is given authority to draw funds from Treasury to finance the Direct Loan
Program, the TEACH Program and activities under the temporary loan purchase authority.
Unused Borrowing Authority is a budgetary resource and is available to support obligations. The
Department periodically reviews its borrowing authority balances in relation to its obligations and
may cancel unused amounts.
Undelivered Orders at the End of the Period
Undelivered orders, as of September 30, 2009 and 2008, consisted of the following:
                                           Undelivered Orders
                                                (Dollars in Millions)

                                                                                   2009                           2008
       Budgetary                                                           $             92,035           $              47,211
       Non-Budgetary                                                                    132,500                          40,621

       Undelivered Orders (Unpaid)                                         $            224,535           $              87,832


Undelivered orders at the end of the period, as presented above, will differ from the undelivered
orders included in the Net Position, Unexpended Appropriations. Undelivered orders for trust
funds, reimbursable agreements and federal credit financing and liquidating funds are not
funded through appropriations and are not included in Net Position. (See Note 12)
Distributed Offsetting Receipts
The majority of the Distributed Offsetting Receipts line item on the SBR represents amounts
paid from the Direct Loan Program and FFEL Program financing accounts to general fund
receipt accounts for downward re-estimates and negative subsidies. In FY 2008 and prior, the
Department reported these collections as non-budgetary on the SBR. Beginning FY 2009, the
Department reclassified these collections as budgetary on the SBR. Although practice varies,
this change was made to better align the Department’s presentation of its credit activities with
guidance provided by OMB and Treasury.
Explanation of Differences Between the Statement of Budgetary Resources and the
Budget of the United States Government
The FY 2011 Budget of the United States Government (President’s Budget) presenting the
actual amounts for the year ended September 30, 2009, has not been published as of the issue
date of these financial statements. The FY 2011 President’s Budget is scheduled for release in
February 2010. A reconciliation of the FY 2008 SBR to FY 2010 President’s Budget (FY 2008
actual amounts) for budgetary resources, obligations incurred, distributed offsetting receipts and
net outlays is presented below.
88                                                                      FY 2009 Agency Financial Report—U.S. Department of Education
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                                                                              NOTES TO PRINCIPAL FINANCIAL STATEMENTS


                                       SBR to Budget of the United States Government
                                                                   (Dollars in Millions)
                                                                                                   Distributed
                                                               Budgetary           Obligations     Offsetting         Net
                                                               Resources            Incurred        Receipts         Outlays

           Combined Statement of Budgetary
           Resources                                           $ 193,993            $ 162,839      $    5,853    $    90,580
             Expired Funds                                        (1,737)                  (951)            -              -
             Amounts included in the President’s
             Budget                                                9,947                   9,947            -              -
             Funds excluded from President’s
             Budget and Rounding                                      (2)                      -            -              5
             Distributed Offsetting Receipts                             -                     -            -          5,853
           Budget of the United States
           Government                                          $ 202,201            $ 171,835      $    5,853    $    96,438


The President’s Budget includes a public enterprise fund that reflects the gross obligations by
the FFEL Program for the estimated activity of the consolidated Federal Funds of the guaranty
agencies. Ownership by the federal government is independent of the actual control of the
assets. Since the actual operation of the Federal Fund is independent from the Department’s
direct control, budgetary resources and obligations are estimated and disclosed in the
President’s Budget to approximate the gross activities of the combined Federal Funds. Amounts
reported on the FY 2008 SBR for the Federal Fund are compiled through combining all guaranty
agencies’ annual reports to determine a net valuation amount for the Federal Fund.




FY 2009 Agency Financial Report—U.S. Department of Education                                                                   89
FINANCIAL DETAILS
NOTES TO PRINCIPAL FINANCIAL STATEMENTS


Note 16.               Reconciliation of Net Cost of Operations to Budget
The Reconciliation of Net Cost of Operations (proprietary) to Budget provides information on
how budgetary resources obligated during the period relate to the net cost of operations. The
schedule presented in this note reconciles budgetary resources with the net cost of operations
by (1) removing resources that do not fund net cost of operations and (2) including components
of net cost of operations that did not generate or use resources during the year.
Components Requiring or Generating Resources in Future Periods primarily result from subsidy
re-estimates that will be executed in future periods. The Reconciliation of Net Cost of
Operations to Budget as of September 30, 2009 and 2008, are presented below:

                                 Reconciliation of Net Cost of Operations to Budget
                                                                     (Dollars in Millions)

 Resources Used to Finance Activities                                                                             2009                     2008
     Obligations Incurred                                                                                    $     (391,182)          $     (162,839)
     Spending Authority from Offsetting Collections and Recoveries                                                   56,300                   40,536
     Offsetting Receipts                                                                                             31,763                    5,853
     Imputed Financing from Costs Absorbed by Others                                                                    (32)                     (29)
 Total Resources Used to Finance Activities                                                                        (303,151)                (116,479)
 Resources Used to Finance Items Not Part of Net Cost of Operations
   Change in Budgetary Resources Obligated for Goods, Services and Benefits Ordered but Not
   Yet Provided (+/-)                                                                                              (137,170)                 (25,553)
   Resources that Fund Expenses Recognized in Prior Period                                                            1,091                   (1,111)
   Credit Program Collections which Increase/Decrease Liabilities for Loan Guarantees, or Credit
   Program Receivables, Net including Allowances for Subsidy                                                         39,495                   29,763
   Resources Used to Finance the Acquisition of Fixed Assets, or Increase/Decrease Liabilities for
   Loan Guarantees or Credit Program Receivables, Net in the Current or Prior Period                               (147,800)                 (51,742)
 Total Resources Used to Finance Items Not Part of the Net Cost of Operations                                      (244,384)                 (48,643)
 Components Not Requiring or Generating Resources
   Depreciation and Amortization                                                                                         325                      (456)
   Other (+/-)                                                                                                           448                       290
 Total Components of the Net Cost of Operations that Will Not Require or Generate
 Resources                                                                                                               773                      (166)
 Components Requiring or Generating Resources in Future Periods
   Increase in Annual Leave Liability                                                                                     -                       (6)
   Upward/Downward Re-estimates of Credit Subsidy Expense                                                            10,883                      513
   Increase in Exchange Revenue Receivable from the Public                                                            2,957                    2,607
   Other (+/-)                                                                                                           (7)                      71
 Total Components of the Net Cost of Operations that Will Require or Generate Resources in
 Future Periods                                                                                                      13,833                    3,185
 Net Cost of Operations                                                                                      $      (44,161)          $      (64,817)




90                                                                                           FY 2009 Agency Financial Report—U.S. Department of Education
                                                                                                       FINANCIAL DETAILS
                                                                                NOTES TO PRINCIPAL FINANCIAL STATEMENTS


Note 17.             Incidental Custodial Collections
The Department administers certain activities associated with the collection of non-exchange
revenues. The Department collects these amounts in a custodial capacity and transfers the
amounts collected to the General Fund of the Treasury at the end of each fiscal year. These
collections primarily consist of penalties on accounts receivable and are considered incidental to
the primary mission of the Department. During FY 2009 and FY 2008, the Department collected
$1.0 million and $1.4 million, respectively, in custodial revenues.
Note 18.             American Recovery and Reinvestment Act of 2009
The Recovery Act included total funding of $98,238 million to the Department. For FY 2009,
$97,407 million was provided in supplemental appropriations for job preservation and state and
local fiscal stabilization. An additional $831 million will be made available in FY 2010. This one-
time investment was made available for use in saving jobs, supporting states and local school
districts, and advancing reforms and improvements in the education of our nation’s early
learning, K-12 and postsecondary students. As of September 30, 2009, there were
$67,635 million in obligations and $21,003 million in outlays.

                                   American Recovery and Reinvestment Act of 2009
                                                                   (Dollars in Millions)


                                                                       Appropriations                 Obligations             Outlays
           State Fiscal Stabilization Fund                              $      53,600             $        35,429         $       12,433
           Student Financial Assistance*                                       16,483                        8,697                 6,904
           Education for the Disadvantaged                                     13,000                        9,936                   804
           Special Education                                                   12,200                      12,200                    791
           School Improvement Programs                                            720                          711                     7
           Rehabilitation Services and Disability Research                        680                          591                    22
           Institute of Education Sciences                                        250                            -                     -
           Innovation & Improvement                                               200                            1                     -
           Impact Aid                                                             100                           40                    40
           Higher Education                                                       100                            -                     -
           Student Aid Administration                                              60                           29                     1
           Office of Inspector General                                             14                            1                     1
           Total                                                       $           97,407         $        67,635         $       21,003
           *$831 million will be made available in FY 2010, resulting in total Recovery Act funding of $98,238 million.


State Fiscal Stabilization Fund. The State Fiscal Stabilization Fund (SFSF) program is a new
one-time appropriation of $53,600 million. Of this amount, the Department may award governors
approximately $48,600 million by formula in exchange for a commitment to advance essential
education reforms to benefit students from early learning through postsecondary education,
increasing teacher effectiveness and ensuring an equitable distribution of qualified teachers,
and turning around the lowest-performing schools. The Department may award the remaining
$5,000 million competitively under the Race to the Top and Investing in Innovation programs. As
of September 30, 2009, the SFSF consisted of the following:




FY 2009 Agency Financial Report—U.S. Department of Education                                                                               91
FINANCIAL DETAILS
NOTES TO PRINCIPAL FINANCIAL STATEMENTS


                                          State Fiscal Stabilization Fund
                                                       (Dollars in Millions)


                                                           Appropriations                     Obligations                Outlays


       SFSF Formula Grants:                                 $          48,600
          Education State Grants                                                          $         26,979           $          9,961
          Government Services Grants                                                                 8,447                      2,469
          Administration and Oversight                                                                   3                          3
       Total SFSF Formula Grants                                       48,600                       35,429                     12,433

       Investing in Innovation and Race to the Top:                      5,000
          Investing in Innovation Fund                                                                     -                          -
          Race to the Top Incentive Grants                                                                 -                          -
       Total Investing in Innovation and Race to the
       Top                                                              5,000                            -                          -
       Total                                                 $         53,600             $         35,429           $         12,433


Student Financial Assistance. The Recovery Act continues the Department’s goal of making
college affordable by providing $16,483 million for student financial assistance programs. This
funding included $15,640 million in additional Pell Grant authority for low and middle-income
undergraduate students and an additional $643 million to increase the per grant amount by
$490 to $5,350 per year. Also, $200 million was made available in the federal work study
program for grants to eligible students to help finance their education through part-time
employment. As of September 30, 2009, Recovery Act funding for student financial assistance
consisted of the following:
                                           Student Financial Assistance
                                                       (Dollars in Millions)


                                                           Appropriations                   Obligations                Outlays
       Federal Pell Grants                                 $       15,640                 $        7,854             $      6,300
       Mandatory Add-on to Pell Grant                                 643                            643                      549
       Federal Work Study Grants                                      200                            200                       55
       Total                                               $       16,483                 $        8,697             $      6,904


Education for the Disadvantaged. The Recovery Act provided $10,000 million in additional
funding for Title I, Part A of the Elementary and Secondary Education Act of 1965 (Title I). This
funding provides grants to local educational agencies for schools that have high concentrations
of students from families that live in poverty in order to help improve teaching and learning. The
Recovery Act also provided $3,000 million for Title I school improvement grants. As of
September 30, 2009, Recovery Act funding for education for the disadvantaged consisted of the
following:
                                         Education for the Disadvantaged
                                                       (Dollars in Millions)


                                                           Appropriations                   Obligations                Outlays
       Title I Targeted/ Finance Incentive Grants           $      10,000                 $        9,936             $        804
       School Improvement Grants                                    3,000                              -                        -
       Total                                                $      13,000                 $        9,936             $        804



92                                                                             FY 2009 Agency Financial Report—U.S. Department of Education
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                                                                               NOTES TO PRINCIPAL FINANCIAL STATEMENTS


Special Education. The Recovery Act appropriated additional funding for programs under Parts
B and C of the Individuals with Disabilities Education Act (IDEA). This funding was provided
under three authorities: $11,300 million for Part B grants to states; $400 million for Part B
preschool grants; and $500 million for Part C grants for infants and families. This funding
provides opportunities for states, local educational agencies and early intervention service
providers to implement innovative strategies to improve outcomes for infants, toddlers, children
and youths with disabilities while stimulating the economy. As of September 30, 2009, Recovery
Act funding for special education consisted of the following:
                                                               Special Education
                                                                  (Dollars in Millions)


                                                                      Appropriations            Obligations       Outlays
           IDEA Part B Grants to States                               $           11,300    $        11,300   $         729
           IDEA Part B Preschool Grants                                              400                400              18
           IDEA Part C Grants for Infants and Families                               500                500              44
           Total                                                      $           12,200    $        12,200   $         791


School Improvement Programs. The Recovery Act provided additional funding for school
improvement programs. The $650 million in Enhancing Education through Technology funding
can be used for a range of technology-related activities, including hardware purchases and
professional development for teachers. An additional $70 million was provided through the
Education for Homeless Children and Youths program for services that help homeless children
to enroll in, attend, and succeed in school. As of September 30, 2009, Recovery Act funding for
school improvement programs consisted of the following:
                                                   School Improvement Programs
                                                                  (Dollars in Millions)


                                                                      Appropriations            Obligations       Outlays
           Enhancing Education through Technology                     $               650   $           641   $             1
           Education for Homeless Children and Youths                                  70                70                 6
           Total                                                      $               720   $           711   $             7


Rehabilitation Services and Disability Research. The Recovery Act appropriated
$680 million for the support of rehabilitation services and disability research. Of this amount,
$540 million in funding was made available to assist states in operating comprehensive,
coordinated, effective and efficient programs of vocational rehabilitation. The remaining amount
provides support to states to improve and expand independent living services to individuals with
significant disabilities, including $88 million for independent living centers, $34 million for
services for older blind individuals, and $18 million for state grants. As of September 30, 2009,
Recovery Act funding for rehabilitation services and disability research consisted of the
following:




FY 2009 Agency Financial Report—U.S. Department of Education                                                                    93
FINANCIAL DETAILS
NOTES TO PRINCIPAL FINANCIAL STATEMENTS


                              Rehabilitation Services and Disability Research
                                               (Dollars in Millions)


                                                   Appropriations                   Obligations                  Outlays
       Vocational Rehabilitation                   $          540                 $          539             $              21
       Independent Living Centers                              88                              -                             -
       Services for Older Blind Individuals                    34                             34                             -
       State Grants                                            18                             18                             1
       Total                                       $          680                 $          591             $              22


Institute of Education Sciences. The Recovery Act provided $250 million in funding to enable
state educational agencies to design, develop and implement statewide, longitudinal data
systems. Of this amount, up to $5 million may be used for state data coordinators and awards to
public or private organizations to improve data coordination. As of September 30, 2009, there
were $0 in obligations and outlays.
Innovation and Improvement. The Recovery Act provided $200 million in additional funding to
innovation and improvement programs for competitive grants to develop and implement
performance-based teacher and principal compensation systems in high-need schools. As of
September 30, 2009, there were $1 million in obligations and $0 in outlays.
Impact Aid. The Recovery Act provided new funding for impact aid under section 8007 of Title
VIII of the Elementary and Secondary Education Act of 1965. As of September 30, 2009,
Recovery Act funding for impact aid consisted of the following:
                                                Impact Aid
                                               (Dollars in Millions)


                                                   Appropriations                   Obligations                  Outlays
       Section 8007(a) Formula Grants              $           40                 $           40             $              40
       Section 8007(b) Competitive Grants                      60                              -                             -
       Total                                       $          100                 $           40             $              40


Higher Education. The Recovery Act appropriated $100 million to the Teacher Quality
Partnership program. This program aims to improve student achievement and teacher quality in
high-need schools and early childhood education programs by improving teacher preparation
and professional development activities, holding teacher preparation programs accountable for
preparing effective teachers, and recruiting highly qualified individuals into the teaching
workforce. As of September 30, 2009, there were $0 in obligations and outlays.
Student Aid Administration. The Recovery Act funding provided $60 million towards
increasing the number of Title IV student loan servicing vehicles and improving operational
performance to collect and deliver loan and grant data between program participants and the
system. As of September 30, 2009, there were $29 million in obligations and $1 million in
outlays.
Office of Inspector General. The Recovery Act appropriated $14 million for salaries and
expenses necessary for Office of Inspector General oversight and audit of Recovery Act
programs, grants and projects. As of September 30, 2009, there were $1 million in obligations
and $1 million in outlays.




94                                                                     FY 2009 Agency Financial Report—U.S. Department of Education
                                                                                      FINANCIAL DETAILS
                                                               NOTES TO PRINCIPAL FINANCIAL STATEMENTS


Note 19.             2005 Hurricane Relief
The Hurricane Education Recovery Act (P.L. 109-148, Division B, Title IV), enacted on
December 30, 2005, and the U.S. Troop Readiness, Veterans’ Care, Katrina Recovery, and Iraq
Accountability Appropriations Act, 2007, appropriated funds to the Department to provide
needed assistance to reopen schools and help educate the 370,000 students affected by
Hurricanes Katrina and Rita. As of September 30, 2009, $1,945 million has been appropriated
to the Department, of which $1,941 million has been obligated to assist local educational
agencies and non-public schools, and $1,818 million has been expended. As of September
30, 2008, $1,945 million has been appropriated to the Department, of which $1,942 million has
been obligated to assist local educational agencies and non-public schools, and $1,748 million
has been expended.
Earmarked Funds Donated for Hurricane Relief
In the aftermath of Hurricane Katrina, a number of foreign governments, international entities
and individuals made donations of financial assistance to the U.S. Government to support
Katrina relief and recovery efforts. These donations were received by the U.S. Department of
State as an intermediary. Subsequently, $61 million was transferred to the Department to
finance educational initiatives in Louisiana and Mississippi under a Memorandum of
Understanding issued in March 2006. As of September 30, 2009, $61 million has been obligated
from the earmarked funds to assist in the relief and recovery efforts and $53 million has been
expended. As of September 30, 2008, $61 million has been obligated from the earmarked funds
to assist in the relief and recovery efforts and $44 million has been expended.
Note 20.           Contingencies
Guaranty Agencies
The Department can assist guaranty agencies experiencing financial difficulties by various
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 cannot be
estimated with sufficient reliability.
Federal Perkins Loan Program Reserve Funds
The Federal Perkins Loan Program is a campus-based program providing financial assistance
to eligible postsecondary school students. In fiscal year 2009, the Department provided funding
of 82.4 percent of the capital used to make loans to eligible students through participating
schools at 5 percent interest. The schools provided the remaining 17.6 percent of program
funding. For the latest academic year ended June 30, 2009, approximately 494 thousand loans
were made, totaling approximately $954.8 million at 1,607 institutions, averaging $1,934 per
loan. The Department’s share of the Federal Perkins Loan Program was approximately $6.5
billion as of June 30, 2009.
In FY 2008, the Department provided funding of 83.01 percent of the capital used to make loans
to eligible students through participating schools at 5 percent interest. The schools provided the
remaining 16.99 percent of program funding. For the academic year ended June 30, 2008,
approximately 648 thousand loans were made, totaling approximately $1.4 billion at 1,625
institutions, averaging $2,121 per loan. The Department’s share of the Federal Perkins Loan
Program was approximately $6.5 billion as of June 30, 2008.
Federal Perkins Loan Program borrowers who meet statutory eligibility requirements—such as
service as a teacher in low-income areas, as a Peace Corps or VISTA volunteer, in the military
or in law enforcement, in nursing, or in family services—may receive partial loan forgiveness for

FY 2009 Agency Financial Report—U.S. Department of Education                                         95
FINANCIAL DETAILS
NOTES TO PRINCIPAL FINANCIAL STATEMENTS


each year of qualifying service. In these circumstances, a contingency is deemed to exist. The
Department may be required to compensate Federal Perkins Loan Program institutions for the
cost of the partial loan forgiveness.
Litigation and Other Claims
The Department is involved in various lawsuits incidental to its operations. In the opinion of
management, the ultimate resolution of pending litigation will not have a material effect on the
Department’s financial position.
Other Matters
Some portion of the current-year financial assistance expenses (grants) may include funded
recipient expenditures that are 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 position.




96                                                        FY 2009 Agency Financial Report—U.S. Department of Education
                                                                                                                                                                               United States Department of Education
FY 2009 Agency Financial Report—U.S. Department of Education




                                                                                                                                                                            Combining Statement of Budgetary Resources
                                                                                                                                                                              For the Year Ended September 30, 2009
                                                                                                                                                                                                                 Dollars in Millions

                                                                                                                                                                                                                          Office of Elementary and Secondary         Office of Special Education &                 American Recovery and
                                                                                                                                                      Combined                          Federal Student Aid                            Education                         Rehabilitive Services                       Reinvestment Act                                          Other

                                                                                                                                                        Non-Budgetary                                 Non-Budgetary                          Non-Budgetary                               Non-Budgetary                            Non-Budgetary                               Non-Budgetary
                                                                                                                                                        Credit Reform                                 Credit Reform                          Credit Reform                               Credit Reform                            Credit Reform                               Credit Reform
                                                                                                                                                          Financing                                     Financing                              Financing                                   Financing                                Financing                                   Financing
                                                                                                                                      Budgetary           Accounts                  Budgetary           Accounts            Budgetary          Accounts              Budgetary             Accounts              Budgetary          Accounts              Budgetary             Accounts

                                                               Budgetary Resources:
                                                               Unobligated balance, brought forward, October 1                   $         4,307        $         26,847        $        3,620        $       26,517 $                 366                   0 $              56                         0                                        0 $            265          $         330
                                                               Recoveries of prior year Unpaid Obligations                                 1,012                   8,038                   398                 8,035                   455                   0                28                         0                                        0              131                      3
                                                               Budgetary Authority:
                                                                     Appropriations                                                      164,934                     132                25,417                  130              19,357                      0            14,442                         0 $         97,407                       0            8,311                      2
                                                                     Borrowing Authority (Note 15)                                                               200,265                                    200,214                                          0                                           0                    0                   0                       0              51
                                                                     Spending authority from offsetting collections (gross):                                                                                                                                 0                                           0                    0                   0                       0
                                                                        Earned                                                                                                                                                                               0                                           0                    0                   0                       0
                                                                            Collected                                                      1,701                  45,536                 1,569                45,512                    9                    0                   2                       0                    0                   0              121                     24
                                                                            Change in Receivables from Federal Sources                         1                       (3)                       0                 (3)                                       0                       0                   0                    0                   0                1
                                                                         Change in unfilled customer orders                                                                                                                                                  0                       0                   0                    0                   0
                                                                            Advance Received                                                      4                         0                    0                    0                                      0                       0                   0                    0                   0                   4
                                                                            Without advance from Federal Sources                                  1                    10                        0                    0                                      0                       0                   0                    0                   0                   1                  10
                                                                    Subtotal                                                     $       166,641        $        245,940        $       26,986        $     245,853 $            19,366                          $        14,444                             $       97,407                           $        8,438          $          87
                                                               Temporarily not available pursuant to Public Law                             (887)                        0                 (887)                    0                                                                                                                                                                       0
                                                               Permanently not available                                                    (980)                 (13,141)                 (688)             (13,130)               (160)                                    (22)                                                                               (110)                   (11)

                                                               Total Budgetary Resources (Note 15)                               $       170,093        $        267,684        $         29,429      $     267,275 $             20,027     $            0      $        14,506         $           0       $       97,407       $           0       $        8,724          $         409


                                                               Status of Budgetary Resources:
                                                               Obligations incurred: (Note 15)
                                                                     Direct                                                      $       133,398        $        257,690        $       23,770        $     257,585 $             19,237                         $        14,444                             $       67,635                           $        8,312          $         105
                                                                     Reimbursable                                                             94                                                                                                                               2                                                                                  92
                                                                     Subtotal                                                    $       133,492        $        257,690        $       23,770        $     257,585 $             19,237                         $       14,446                              $       67,635                           $        8,404          $         105
                                                               Unobligated Balances:
                                                                     Apportioned                                                  $       33,263        $             474                2,559        $          474 $                 736                       $            14                             $       29,759                           $          195                      (0)




                                                                                                                                                                                                                                                                                                                                                                                                 REQUIRED SUPPLEMENTARY INFORMATION
                                                                     Subtotal                                                     $       33,263        $             474                2,559        $          474 $                 736                       $            14                             $       29,759                           $          195
                                                               Unobligated Balance not available                                           3,338                    9,520                3,100                 9,216                    54                                    46                                         13                                      125          $         304

                                                               Total Status of Budgetary Resources                                $      170,093        $        267,684        $       29,429        $     267,275 $            20,027      $           (0) $           14,506          $           (0) $           97,407       $          (0) $             8,724          $         409


                                                               Change in Obligated Balance:
                                                               Obligated balance, net:
                                                                     Unpaid obligations, brought forward, October 1              $        49,875        $         41,440        $       12,927        $       41,157 $           17,779                          $         9,095                                                                      $       10,074          $         283
                                                                     Uncollected customer payments from Federal Sources,
                                                                     brought forward, October 1                                                 (2)                                             (0)                                                                            (1)                                                                                 (1)
                                                                     Total, unpaid obligated balance, brought forward, net        $        49,873       $          41,440       $        12,927       $       41,157 $            17,779                         $         9,094                                                                      $       10,073          $         283
                                                               Obligation Incurred, net (+/-)                                            133,492                  257,690                23,770              257,585              19,237                                  14,446                             $        67,635                                    8,404                   105
                                                               Gross Outlays                                                              (86,867)               (157,295)              (20,390)            (157,132)            (21,856)                                (15,345)                                    (21,003)                                  (8,273)                 (163)
                                                               Recoveries of prior year unpaid obligations, actual                          (1,012)                 (8,038)                (398)               (8,035)              (455)                                     (28)                                                                               (131)                    (3)




                                                                                                                                                                                                                                                                                                                                                                                                                   FINANCIAL DETAILS
                                                               Change in uncollected customer payments from Federal Sources (+/-)               (2)                     (7)                   (0)                   3                                                                                                                                               (2)                  (10)

                                                                                                                                  $        95,484        $       133,790        $       15,909              133,578 $             14,705     $           (0) $             8,167         $           (0) $           46,632       $          (0) $            10,071          $         212
                                                               Obligated Balance, net, end of period:
                                                                     Unpaid Obligations                                          $        95,488        $        133,797 $              15,909        $     133,575 $            14,705                          $         8,168                             $       46,632                           $       10,074          $         222
                                                                     Uncollected customer payments from Federal Sources                        (4)                     (7)                                        3                                                            (1)                                                                                 (3)                   (10)

                                                               Total, unpaid obligated balance, net, end of period                $        95,484       $        133,790        $       15,909        $     133,578 $            14,705      $           (0) $             8,167         $           (0) $           46,632       $          (0) $            10,071          $         212


                                                               Net Outlays:
                                                                     Gross Outlays                                               $         86,867       $        157,295 $               20,390       $     157,132 $            21,856                          $        15,345                             $       21,003                           $        8,273          $         163
                                                                     Offsetting collections                                                 (1,705)               (45,536)                (1,569)            (45,512)                 (9)                                      (2)                                        (0)                                   (125)                    (24)
                                                                     Distributed Offsetting receipts                                      (31,763)                                      (31,646)                   (0)                                                         (0)                                        (0)                                   (117)                      (0)
97




                                                               Net Outlays (Note 15)                                             $        53,399        $        111,759 $              (12,825)      $     111,620 $            21,847      $           (0) $            15,343         $           (0) $           21,003       $          (0) $             8,031          $         139
FINANCIAL DETAILS




 REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION

Stewardship Expenses

In the Department of Education, discretionary spending constitutes the majority of the
budget and includes nearly all programs, the notable exceptions being student loans and
rehabilitative services. Although 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.

Education in the United States is primarily a state and local responsibility. States,
communities and 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. It is estimated that roughly $1.125 trillion will be
spent nationwide on education at all levels for the school year 2009-2010, with Department
of Education expenditures, as well as loans and other aid made available as a result of the
Department’s student financial aid programs. The Department’s FY 2009 appropriations of
more than $140.5 billion represent about 4 percent of the federal government’s $4.0 trillion
FY 2009 budget. The significant increase over the Department’s FY 2008 appropriations
reported last year is due to the American Recovery and Reinvestment Act of 2009
(Recovery Act).

The American Recovery and Reinvestment Act of 2009

The Recovery Act, enacted on February 17, 2009, provided $98.2 billion to the Department
for improving schools, raising students’ achievement, driving reform and producing better
results for children and young people for the long term health of the nation. Approximately
55 percent of the Department’s Recovery Act funding was appropriated for the creation of a
new State Fiscal Stabilization Fund with the goal to stabilize state and local government
budgets to avoid reductions in education and other essential public services while driving
education reform. The Department was tasked with promptly disbursing these funds
through a variety of existing and new grant programs, while ensuring the transparency and
accountability of every dollar spent.

Investment in Human Capital

Office of Federal Student Aid. The Office of Federal Student Aid administers need-based
financial assistance programs for students pursuing postsecondary education and makes
available federal grants, direct loans, guaranteed loans and work-study funding to eligible
undergraduate and graduate students. See more detail at:
http://www.ed.gov/about/offices/list/fsa/index.html?src=oc




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                                                                                             FINANCIAL DETAILS
                                                               REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION


Office of 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 the reform, strategic investment and innovation in
preschool, elementary and secondary education. Financial assistance programs support
services for children in high-poverty schools, institutions for neglected and delinquent
children, homeless children, certain Native American children, children of migrant families
and children who live on or whose parents work on federal property. Funding is also
provided to increase the academic achievement of students by ensuring that all teachers
are highly qualified. See more detail at:
http://www.ed.gov/about/offices/list/oese/index.html?src=oc

Office of Special Education and Rehabilitative Services. The Office of Special
Education and Rehabilitative Services supports state and local programs that assist in
educating children, youth and adults with special needs to increase their level of
employment, productivity, independence and integration into the community. Funding is
also provided for research to improve the quality of their lives. See more detail at:
http://www.ed.gov/about/offices/list/osers/index.html?src=oc

Office of Safe and Drug-Free Schools. The Office of Safe and Drug-Free Schools
supports efforts to create safe and violence-free schools, respond to crises, prevent drug
and alcohol abuse, ensure the health and well-being of students and teach students good
citizenship and character. Grants emphasize coordinated, collaborative responses to
develop and maintain safe, disciplined and drug-free learning environments. See more
detail at: http://www.ed.gov/about/offices/list/osdfs/index.html?src=oc

Office of Innovation and Improvement. The Office of Innovation and Improvement makes
strategic investments in educational practices through grants to states, schools and
community and nonprofit organizations. The office leads the movement for greater parental
options such as charter schools. The office also supports special grants designed to raise
student achievement by improving teachers’ knowledge and understanding of and
appreciation for traditional U.S. history. See more detail at:
http://www.ed.gov/about/offices/list/oii/index.html?src=oc

Institute of Education Sciences. Established by the Education Sciences Reform Act of
2002, the Institute of Education Sciences is the research arm of the Department of
Education. Its mission is to expand knowledge and provide information on the condition of
education, practices that improve academic achievement and the effectiveness of federal
and other education programs. Its goal is the transformation of education into an evidence-
based field in which decision makers routinely seek out the best available research and
data before adopting programs or practices that will affect significant numbers of students.
See more detail at: http://www.ed.gov/about/offices/list/ies/index.html?src=oc

Office of English Language Acquisition. The Office of English Language Acquisition
directs programs designed to enable students with limited English proficiency to become
proficient in English and meet state academic content and student achievement standards.
Enhanced instructional opportunities are provided to children and youths of Native
American, Alaska Native, Native Hawaiian, Pacific Islander and immigrant backgrounds
who are limited English proficient. Grants pay the federal share of the cost of model
programs for the establishment, improvement or expansion of foreign language study in
elementary and secondary schools. See more detail at:
http://www.ed.gov/about/offices/list/oela/index.html?src=oc



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FINANCIAL DETAILS
REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION


Office of Vocational and Adult Education. The Office of Vocational and Adult Education
provides leadership, technical assistance and funding for adult education and career and
technical education to state and local agencies to help students improve their literacy skills
and prepare them for postsecondary education and careers through strong high school
programs and career and technical education. The office ensures the equal access of
minorities, women, individuals with disabilities and disadvantaged persons to career and
technical education and adult education and ensures that career and technical education
students are held to the same challenging academic content and academic achievement
standards established by the state under the Elementary and Secondary Education Act of
1965. Funding is also provided to promote identification and dissemination of effective
practices in raising student achievement in high schools, community colleges and adult
education programs and support targeted research investments. See more detail at:
http://www.ed.gov/about/offices/list/ovae/index.html?src=oc

Office of Postsecondary Education. The Office of Postsecondary Education provides
grants to colleges and universities, as well as to non-profit organizations to: promote
reform, innovation and improvement in postsecondary education; increase access to and
completion of postsecondary education by disadvantaged students; strengthen the capacity
of colleges and universities that serve a high percentage of minority and disadvantaged
students; and improve teacher and student development resources. The international
programs promote international education and foreign language studies and research. The
office administers the accrediting agency recognition process and coordinates activities with
states that affect institutional participation in federal financial assistance programs.
See more detail at: http://www.ed.gov/about/offices/list/ope/index.html?src=oc




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                                                                                               FINANCIAL DETAILS
                                                                 REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION



                                            Summary of Human Capital Expenses

(Dollars in Millions)                                          2009            2008          2007           2006               2005
Federal Student Aid Expense
 Direct Loan Subsidy1                               $     (9,603)        $     5,236   $     (499)    $     6,655     $     5,211
 FFEL Program Subsidy1                                   (29,940)            (2,852)         4,884         28,062           9,863
 Grant Programs                                            17,302            17,464         15,092         15,447          15,070
 Salaries and Administrative                                  186                189           173            172             164
   Subtotal                                              (22,055)            20,037         19,650         50,336          30,308
Other Departmental
 Elementary and Secondary Education                       21,443             21,583         21,199         21,710          22,940
 Special Education and Rehabilitative
 Services                                                 15,075             15,730         15,402         15,215          13,995
 American Recovery and Reinvestment                       21,616
 Other Departmental Programs                               7,150              4,911          5,109          5,353              6,067
 Salaries and Administrative                                 472                491            467            467                486
   Subtotal                                               65,756             42,715         42,177         42,745          43,488
                Grand Total                          $    43,701         $   62,752     $   61,827    $    93,081     $    73,796

    1
        A reduction of 30 percent in human capital costs from FY 2008 to FY 2009 is due to downward re-estimates and
        negative subsidies in the Direct Loan and FFEL programs.




Program Outcomes

Education is the stepping stone to
                                                                        Unemployment Rate by Educational Level
higher living standards for
American citizens, and it is vital to                      16%                                                   No High
                                                           14%                                                   School
national economic growth.                                  12%                                                   Degree
However, education’s contribution                          10%
is more than increased                                      8%                                                   High School
                                                            6%                                                   Degree
productivity and incomes.                                   4%
Education improves health,                                  2%
promotes social change and                                  0%                                                   College
                                                                                                                 Degree
opens doors to a better future for                                    2004 2005 2006 2007 2008 2009
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. 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 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



FY 2009 Agency Financial Report—U.S. Department of Education                                                                    101
FINANCIAL DETAILS
REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION


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.

Unemployment Rate. Individuals with lower levels of educational attainment are more
likely to be unemployed than those who had higher levels of educational attainment. The
August 2009 unemployment rate for adults (25 years old and over) who had not completed
high school was 15.0 percent, compared with 10.8 percent for those with four years of high
school and 4.9 percent for those with a bachelor’s degree or higher. Younger people with
only high school diplomas tended to have higher unemployment rates than adults 25 and
over with similar levels of education.

Annual Income. As of July 2009, the annualized median income for adults (25 years old
and over) varied considerably by education level. Men with a high school diploma earned
$37,128, compared with $69,524 for men with a college degree. Women with a high school
diploma earned $28,600, compared with $50,596 for women with a college degree. Men
and women with college degrees earned 81 percent more than men and women with high
school diplomas. These returns of investing in education directly translate into the
advancement of the American economy as a whole.




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                                                     Report
                                                       of the
               Independent Auditors




FY 2009 Agency Financial Report—U.S. Department of Education
REPORT OF THE INDEPENDENT AUDITORS
AUDIT TRANSMITTAL




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                                                               REPORT OF THE INDEPENDENT AUDITORS
                                                                                     AUDIT OPINION




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REPORT OF THE INDEPENDENT AUDITORS
AUDIT OPINION




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                                                               REPORT OF THE INDEPENDENT AUDITORS
                                                                      REPORT ON INTERNAL CONTROL




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REPORT OF THE INDEPENDENT AUDITORS
REPORT ON INTERNAL CONTROL




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                                                               REPORT OF THE INDEPENDENT AUDITORS
                                                                      REPORT ON INTERNAL CONTROL




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REPORT OF THE INDEPENDENT AUDITORS
REPORT ON INTERNAL CONTROL




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                                                                      REPORT ON INTERNAL CONTROL




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REPORT ON INTERNAL CONTROL




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                                                                      REPORT ON INTERNAL CONTROL




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REPORT ON INTERNAL CONTROL




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                                                                      REPORT ON INTERNAL CONTROL




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REPORT ON INTERNAL CONTROL




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                                                                      REPORT ON INTERNAL CONTROL




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REPORT OF THE INDEPENDENT AUDITORS
REPORT ON COMPLIANCE WITH LAWS AND REGULATIONS




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                                                                           REPORT OF THE INDEPENDENT AUDITORS
                                                               REPORT ON COMPLIANCE WITH LAWS AND REGULATIONS




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REPORT OF THE INDEPENDENT AUDITORS
REPORT ON COMPLIANCE WITH LAWS AND REGULATIONS




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                                                                   REPORT OF THE INDEPENDENT AUDITORS
                                                               DEPARTMENT RESPONSE TO AUDITOR REPORT




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REPORT OF THE INDEPENDENT AUDITORS




122                                  FY 2009 Agency Financial Report—U.S. Department of Education
                                                     OTHER
                             ACCOMPANYING
                                 INFORMATION




FY 2009 Agency Financial Report—U.S. Department of Education
OTHER ACCOMPANYING INFORMATION




      IMPROPER PAYMENTS INFORMATION ACT REPORTING
                        DETAILS
The Improper Payments Information Act of 2002 (IPIA) (Public Law 107-300) and the Office
of Management and Budget’s (OMB) Circular A-123, Appendix C, Requirements for
Effective Measurement and Remediation of Improper Payments, define requirements to
reduce improper/erroneous payments made by the federal government. OMB also has
established specific reporting requirements for agencies with programs that possess a
significant risk of erroneous payments and for reporting on the results of recovery auditing
activities. Agencies are required to annually review and assess all programs and activities
to identify those susceptible to significant improper payments. The guidance in OMB
Circular A-123, Appendix C, defines a significant improper payment as those in any
particular program that exceed both 2.5 percent of program payments and $10 million
annually. For each program identified as susceptible and determined to be at risk, agencies
are required to report to the President and the Congress the annual amount of estimated
improper payments, along with steps taken and actions planned to reduce them.

The Department has divided its improper payment activities into the following segments:
Student Financial Assistance Programs, ESEA, Title I Program, Other Grant Programs, and
Recovery Auditing.

Student Financial Assistance Programs

Risk Assessment

As required by the IPIA, The Department inventoried its programs during FY 2009 and
reviewed program payments made during FY 2008 (the most recent complete fiscal year
available) to assess the risk of improper payments. The review identified and then focused
on the following key programs: Academic Competitiveness Grant (ACG) Program, William
D. Ford Federal Direct Loan (Direct Loan) Program, Federal Family Education Loan (FFEL)
Program, Federal Pell Grant (Pell Grant) Program, and the National Science and
Mathematics Access to Retain Talent (SMART) Grant Program.

In addition to the A-123 guidance, the criteria for determining susceptible risk within the
programs were defined as follows:



Programs with annual outlays that exceed $200 million or programs that were previously
required to report improper payment information under OMB Circular A-11, Budget
Submission, former Section 57.2 1 .




1
  The four original programs identified in OMB Circular A–11, Section 57, were Student Financial Assistance
(now Federal Student Aid), ESEA, Title I, Special Education Grants to States, and Vocational Rehabilitation
Grants to States. Subsequently, after further review of the program risk, OMB removed Special Education
Grants to States and Vocational Rehabilitation Grants to States from the list. OMB considers Section 57
programs susceptible to significant improper payments regardless of the established thresholds. OMB Circular
A-136 also applies.



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                                                                               OTHER ACCOMPANYING INFORMATION
                                                           IMPROPER PAYMENTS INFORMATION ACT REPORTING DETAILS


Risk-Susceptible Programs

The Title IV programs that were deemed to be potentially susceptible to the risk of
significant improper payments based on OMB criteria described above include ACG, Direct
Loan, FFEL, Pell Grant and SMART. We have reassessed the Federal Supplemental
Educational Opportunity Grant and Federal Work-Study Programs and have determined
that, due to low volume and relatively low eligibility requirements, they are not risk
susceptible.

As data becomes available, the Teacher Education Assistance for College and Higher
Education (TEACH) Grant Program will be assessed. It is anticipated that the first
assessment will take place in FY 2011.

In FY 2008, the lack of liquidity in financial markets impacted the ability of FFEL lenders
and secondary markets to find cost-effective financing. As a result, Congress passed the
Ensuring Continued Access to Student Loans Act of 2008 (ECASLA), which was signed by
the President on May 8, 2008. This gave the Department authority to purchase FFEL loans
from lenders to ensure liquidity in the FFEL. The following three programs were developed
under the ECASLA mandate:

•    Loan Purchase Commitment Program.

•    Loan Participation Purchase Program.

•    Asset-Backed Commercial Paper (ABCP) Conduit Program.

Federal Student Aid has determined that each of these is potentially a risk-susceptible
program. A risk assessment for each of these programs will be completed during FY 2010.

ACG Program. A risk assessment was completed for the ACG Program in FY 2009.
Assessment of the risk of improper payments in the ACG based upon audit findings was
accomplished by evaluating the results of annual audits required of schools participating in
the Federal Student Aid Programs. Information on all audits was queried from the
Postsecondary Education Participants System (PEPS), the management information
system for all schools participating in the Federal Student Aid Programs. Audit deficiencies
resulting in liabilities due to a specific ACG Program violation or due to a violation of
regulations applicable to all programs were isolated. The liability amount for each deficiency
applicable to the ACG was calculated and totaled and then compared with total funding.
The overall improper payment rate, based on this risk analysis, was .0045 percent. Since
this rate is below the threshold for reporting on improper payments, no further information
on the ACG Program is included herein.

Direct Loan Program. A risk assessment was completed for the Direct Loan Program in
FY 2009. There were no changes to the sampling process from prior years. The overall
improper payment rate, based on this risk analysis, was 0.38 percent. Since this rate is
below the threshold for reporting on improper payments, no further information on the Direct
Loan Program is included herein.

FFEL Program. An ongoing risk assessment is in process for FFEL. See Footnote (1) under
Federal Student Aid Improper Payment Reporting Summary.




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Pell Grant Program. A risk assessment was completed for Pell Grant Program in FY 2009.
There were no changes to the sampling process from prior years. The overall improper
payment rate, based on this risk analysis, was 3.5 percent.

SMART Program. Assessment of the risk of improper payments in the SMART Program
based upon audit findings was accomplished by evaluating the results of annual audits
required of schools participating in the Federal Student Aid Programs. Information on all
audits was queried from the PEPS, the management information system for all schools
participating in the Federal Student Aid Programs. Audit deficiencies resulting in liabilities
due to a specific SMART Program violation or due to a violation of regulations applicable to
all programs were isolated. The liability amount for each deficiency applicable to the
SMART Program was calculated and totaled and then compared with total funding. The
overall improper payment rate, based on this risk analysis, was .00001 percent. Since this
rate is below the threshold for reporting on improper payments, no further information on
the SMART Program is included herein.

Statistical Sampling

The size and complexity of the student aid programs make it difficult to consistently define
“improper” payments. The legislation and OMB guidance use the broad definition: “Any
payment that should not have been made or that was made in an incorrect amount under
statutory, contractual, administrative, or other legally applicable requirement.” Federal
Student Aid has a wide array of programs, each with unique objectives, eligibility
requirements, and payment methods. Consequently, each program has its own universe (or
multiple universes) of payments that must be identified, assessed for risk, and, if
appropriate, statistically sampled to determine the extent of improper payments.

FFEL Program. In FY 2009, the Department worked with OMB to target their improper
payment risk analysis using data mining techniques to identify potential improper payments,
with particular focus on special allowance payments (SAP) to lenders. In recent years, SAP
has been among the largest categories of payments to lenders or guarantors. However, the
College Cost Reduction Act of 2007 reduced SAP rates and, combined with a historically
low interest rate environment, has resulted in SAP amounts due to the Department
beginning in FY 2007. This substantial decline, coupled with a significant increase in the
Direct Loan Program versus FFEL and the proposed move to 100 percent Direct Loans at
the end of FY 2010, have resulted in an improving risk profile related to the potential for
FFEL improper payments. The agreed-upon IPIA targeted SAP analysis discussed above
began in the fourth quarter of FY 2009 and is expected to be completed by the end of the
second quarter of FY 2010. In addition to the substantial SAP decline, there is a major
impact from the new ECASLA loan participation and loan purchase processes that needs to
be evaluated with regard to the effect on payments to lenders.

Because the Department conducted a risk analysis in FY 2009 focused on identifying
sources of potential improper payments, the Department will not be reporting an error rate
for the FFEL program in the 2009 AFR. Rather, the Department plans to use information
gained from its analysis to establish a new error measurement methodology in FY 2010 that
could be used for future reporting purposes.

Pell Grant Program. The Department conducts studies with the IRS using FAFSA data.
Data provided by the IRS study are used to estimate improper payments for the Pell Grant
Program. The methodology for the Pell Grant Program did not change in FY 2009, and



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additional details about the study can be found in the 2008 PAR under the statistical
sampling section.

Corrective Actions

FFEL Program. In addition to the payment data analyses mentioned above, Federal
Student Aid has a number of existing internal controls integrated into its systems and
activities. Program reviews, independent audits and Inspector General audits of guaranty
agencies, lenders, and servicers are some of its key management oversight controls. Other
control mechanisms include the following:

•    System Edits—the system used by guaranty agencies, lenders, and servicers to submit
     bills and remit payments includes “hard” and “soft” edits to prevent erroneous
     information from being entered into the system and prevent potential erroneous
     payments. The edits look at a variety of factors (e.g., code combinations, reported
     amounts etc.) to determine either reasonableness or validity of the data. The hard edits
     require correction before proceeding with payment processing. The soft edits alert the
     user and Federal Student Aid to potential errors.

•    Reasonability Analysis—Data reported by guaranty agencies to the National Student
     Loan Data System are used to determine payment amounts for account maintenance
     and loan issuance processing fees. Federal Student Aid also performs trend analysis of
     previous payments to guaranty agencies and lenders as a means of evaluating
     reasonableness of changes in payment activity and payment levels.

•    Focused Monitoring and Analysis—Federal Student Aid targets specific areas of FFEL
     payment processing that are at an increased risk for improper payments as areas of
     focus for increased monitoring and oversight. In FY 2009, Federal Student Aid
     completed a series of audits of guaranty agencies’ establishment of the federal and
     operating funds in 1998 in response to an OIG recommendation. Those audits are in
     the resolution process.

Pell Grant Program. A new IRS data retrieval process is scheduled to be implemented as
a pilot on January 24, 2010. The new process will be added to the 2009-2010 FAFSA on
the Web (FOTW) application. Eligible FOTW applicants and their parents will be presented
a link in the financial section of the online application giving them the option to go to an IRS
site, review their 2008 income information, and automatically transfer income information
into the appropriate fields on the FAFSA. This process, for those who elect to use it, has the
potential to significantly reduce errors on the FAFSA and thus reduce improper payments in
all Federal Student Aid Programs. If successful, this data retrieval and transfer process will
be implemented for the 2010–11 application year, once IRS data becomes available
sometime in the summer of 2010. Federal Student Aid is also using the IRS statistical study
in which financial data from a random sample of FAFSA submissions are compared with
financial data reported to the IRS in annual income tax filings to identify new solutions for
preventing improper payments.




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Federal Student Aid Improper Payment Reporting Summary

The following table presents the improper payments outlook for the primary Federal Student
Aid programs.

                                                         ($ in millions)
                    FY 2009 Actual          FY 2010 Estimated       FY 2011 Estimated              FY 2012 Estimated            FY 2013 Estimated

Program      Outlays     IP    IP $      Outlays   IP      IP $   Outlays       IP      IP $    Outlays     IP      IP $    Outlays        IP %    IP $
                         %                         %                            %                           %

       (1)      -         -          -      -       -       -        -           -       -          -        -       -          -           -       -
FFEL

     (2)     16,281      3.5   570       28,820    3.5   1,009    32,301       3.5    1,131      34,236    3.5    1,198      35,422        3.5    1,240
Pell
Grant




(1)
  Since the Department is completing the ongoing risk assessment for FFEL in lieu of a
measurement, no error rate will be presented for FFEL in this year’s Agency Financial
Report. This work will include an examination of the error rate methodology followed by
development of a new plan and measurement. In addition, the methodology will need to be
expanded in the future to reflect the ECASLA initiatives.
(2)
  The source of FY 2009 Pell outlays reflects total expenditures from FMSS. The 3.5 IP
percent used for 2010-2013 is based on discussions held with OMB during FY 2007 and FY
2008. The 3.5 percent rate is being used since it is a more current target than the targets
previously identified in the Federal Student Aid 2006 – 2010 Five-Year Plan.

Note: The final Pell error rate for FY 2008 was 3.69 percent. This 3.69 percent rate was
reported as “preliminary” in the FY 2008 Performance and Accountability Report; however,
it did not change.

Recovery Efforts

For Pell, recovery is achieved through assessments made during program reviews and
compliance reviews. Pell also makes recoveries when overpayments to students are
assigned to Federal Student Aid for collection. Pell recoveries for the period 2004 through
September 30, 2009 are presented in the following table.




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                                                      Pell Recoveries
                                                    (Dollars in Millions)
  FY 2004 $               FY 2005 $              FY 2006 $      FY 2007 $          FY 2008 $       FY 2009 $
    10.2                    11.2                   13.6            14.2              10.8             6.6

Statutory and Regulatory Barriers

There are currently no identified barriers which may limit Federal Student Aid’s corrective
actions in reducing improper payments and actions taken by the agency to mitigate the
barriers’ effects. The Department previously reported in its PAR that provisions in the
Internal Revenue Code precluded it from data-matching with regard to grants made by the
Department. Legislation to amend the Internal Revenue Code to allow data-matching
capabilities has not been enacted, but through administrative changes, the Department and
the U.S. Department of the Treasury implemented a process to verify students' (and their
parents') income, tax and certain household information appearing on their tax return that
they provide as part of the application for federal student aid. This initiative was cited in the
“Journal of Government Financial Management” and recognized as the type of proactive
approach that is vital to addressing the root causes of improper payments.

ESEA, Title I Program

The Department performed a risk assessment of the Elementary and Secondary Education
Act of 1965 Title I Program, Grants to Local Educational and Agencies, during FY 2009.
The assessment, based on FY 2007 single audit data (the most recent available), yielded
an estimated improper payment rate of 0.23 percent or $29 million. This confirms previously
reported data indicating that the risk of improper payments under current statutory
requirements is very low. To validate the assessment data, the Department conducts on-
site monitoring reviews on a three-year review cycle that encompass all states and
territories receiving Title I funds. There were no findings in the monitoring reviews with
questioned costs that contradicted the data in the risk assessment.

The Department is continuing to review and monitor for data quality. A key element of the
monitoring process involves the wide use of the number of children who qualify for free and
reduced-price meals to determine an individual school’s Title I eligibility and allocation by
local educational agencies. The Title I statute authorizes local educational agencies to use
these data, provided under the U.S. Department of Agriculture’s national School Lunch
Program, for this purpose. In many districts these data are the only indicator of poverty
available at the individual school level.

The U.S. Department of Agriculture is working with states and localities to improve program
integrity, within the existing statutory and regulatory framework, through enhanced
monitoring and auditing. The U.S. Department of Agriculture is also working with the
Department and other federal agencies that have programs that make use of these data to
explore long-term policy options.

Risk Assessment for Other Grant Programs

The Department’s approach to the risk assessment process for non-Federal Student Aid
grant programs was to develop a methodology to produce statistically valid measures that



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could be applied uniformly across the Department’s programs. The intent was to use the
same methodology across all non-Federal Student Aid grant programs to establish a level
of quality control for all programs and, at the same time, produce a cost-effective measure.
The Department deemed it cost effective to utilize the results of the thousands of single
audits already being conducted by independent auditors on grant recipients.

In FY 2007, the Department worked with the Department of Energy’s Oak Ridge National
Laboratory to perform data mining on information available in the Federal Audit
Clearinghouse’s Single Audit Database, the Department’s Grant Administration and
Payment System, and the Department’s Audit Accountability and Resolution Tracking
System to assess the risk of improper payments in its remaining grant programs. To
conduct the risk assessment screening, Oak Ridge National Laboratory augmented the
Audit Accountability and Resolution Tracking System database with imputed values for the
likely questioned costs for grants that were not audited. The imputed and real questioned
costs could then be tabulated to provide a reasonable upper-bound estimate of the rate of
erroneous payments for each of the functional programs of interest.

If the computed upper-bound percentage was below 2.5 percent, then the actual value
would be lower than 2.5 percent. If the computed upper-bound percentage was greater
than 2.5 percent, then the actual value may be greater or less than 2.5 percent, but the
Department would need additional information to determine the appropriate estimate.

The most striking result of the analysis was the generally low rate of questioned costs. The
key finding of this analysis was that for the most recent year for which data were available
(FY 2005), none of the functional programs exceed the threshold value of 2.5 percent.
Consequently, none of the programs would be labeled as susceptible to significant
erroneous payments.

In accordance with OMB Circular A-123, Appendix C, programs deemed low risk only
require a risk assessment every three years unless a program experiences a significant
change in legislation and/or a significant increase in funding level. Since the Oak Ridge
National Laboratory risk assessments have not indicated any significant risk of improper
payments, the Department did not task Oak Ridge National Laboratory to perform the risk
assessment for FY 2009. However, the Department is taking the following actions to further
improve its monitoring efforts.

Migrant Education Grants to States. The Review of the Migrant Education Program
(MEP) focused on the Office of Migrant Education’s (OME’s) monitoring of child eligibility
under Title I, Part C, of the ESEA. On December 4, 2007, the Office of Inspector General
(OIG) sent an audit closeout memorandum to the Assistant Secretary for Elementary and
Secondary Education (OESE), informing her that OIG terminated its audit of the MEP at
OME. OIG decided to terminate its audit based on “. . . ongoing changes to Department
monitoring, and proposed changes to the migrant law. . .” The memorandum points out,
however, that the termination of OIG’s review “. . . does not preclude the Department of
Education from taking action concerning any aspect of the entities reviewed.” Five external
audit reports had relevancy to the MEP eligibility issue. Four of the reports have been either
resolved or closed.

In June 2009, staff from the Internal Controls Evaluation Group (ICEG) met with personnel
from OME to discuss the ramifications of discontinuing tracking the Federal Managers’
Financial Integrity Act (FMFIA) deficiencies in relation to OIG’s internal audit of the MEP.



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Due to the termination of the audit, and after conferring with OME personnel, ICEG
concluded there would be no justification for continuing to track the FMFIA deficiencies in
this audit. Therefore, OESE need not report these internal control deficiencies in its
FY 2009 FMFIA annual certification.

Risk Management Service. The goal of the Risk Management Service in the Office of the
Secretary is to identify and take effective action to manage and mitigate risks in the area of
grants management that may adversely affect the advancement of the Department’s
mission. To achieve this objective, the Risk Management Service develops and coordinates
a Departmentwide risk management strategy and coordinates and supports consistent,
high-quality management of formula and discretionary grants Departmentwide.

The office focuses on identifying potential high-risk grantees before problems begin to
occur. Program office and Risk Management Service staff members provide assistance to
those grantees regarding their grants and financial management practices to help
strengthen the grantees’ management of federal funds. In the case of grantees identified as
high risk, resources are directed toward solving and managing issues of misuse, abuse, or
waste of federal funds. The Risk Management Service has developed a Decision Support
System that analyzes available information on grants and grantees, and makes this
information available to support decisions on where the Department should deploy
resources for oversight and technical assistance. The Decision Support System will
continue to develop and expand over the next few years. This year, in response to the risk
associated with the large amount of grant funding made available by the American
Recovery and Reinvestment Act of 2009, the Risk Management Service is also leading
Departmentwide technical assistance to the recipients of the largest amount of funds under
the Act. Finally, the office also provides customer service in the form of training and
responses to inquiries on policy interpretations to grantees, grant applicants, and program
offices awarding and monitoring grants.

Managing Risk in Discretionary Grants. In FY 2009, the Department managed more than
10,000 discretionary grant awards. Due to the vast legislative differentiation and the
complexity of the Department’s grant award programs, ensuring that program staff are fully
aware of potentially detrimental issues relating to individual grantees is a significant
challenge. Program offices designate specific grants as high risk in accordance with
Departmental regulations. The Department uses the Grants High-Risk Module housed
within the Department’s Grant Administration and Payment System, to track grants and
grantees that are designated high risk. Program office staff are required to review and
certify their awareness of the high-risk status of applicable grantees before making awards.

Manager Accountability. The Department categorized OMB Circular A-133 single audit
findings to provide feedback to program managers regarding the frequency and type of
findings within their programs. This assists managers in tailoring their program monitoring
efforts to the type of findings that most frequently occur. Additionally, post-audit follow-up
courses have been developed to associate audit corrective actions with monitoring to
minimize future risk and audit findings. Managerial compliance with monitoring procedures
is reviewed and tested during the assurance process under OMB Circular A-123,
Management’s Responsibility for Internal Control.

Planned Corrective Actions. In addition to the actions previously outlined under the
Student Financial Assistance Programs and ESEA, Title I Program sections, the
Department will periodically update any corrective action plans based on the results of the



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initiatives outlined above. The Department will record and maintain corrective action plans
as required, which will include due dates, process owners and task completion dates.

Information Systems and Infrastructure. The Department has submitted budget requests
of $250,000 for FY 2010 and FY 2011 for information system infrastructure improvements.
A portion of the funds will be used to continue the refinement of the Oak Ridge National
Laboratory data mining effort. It is also anticipated that the Department will incur costs
related to mitigation activities.

American Recovery and Reinvestment Act (Recovery Act) Programs. For FY 2009 and
FY 2010, the Recovery Act supplemented the Department of Education’s appropriations by
$98.2 billion. The law created the new $48.6 billion State Fiscal Stabilization Fund grant
program. The Recovery Act also supplemented existing programs, including ESEA Title I
and IDEA Part B and Part C, nearly doubling the funds available for some major grant
programs at the Department. Immediately following the enactment of Recovery Act, the
Department conducted a systematic assessment of the risks presented by the law and
concluded that recipient expenditures under all Recovery Act grants should be monitored
because of the high level of funding. Further, the Department concluded that the State
Fiscal Stabilization Fund program should receive a particularly high level of oversight
because the program is both new and funded at an extremely high level.

The Department has established an elevated level of oversight for Recovery Act grants in
order to avoid improper payments. Monitoring for potential excessive draws against these
grants began immediately after the Department made the funds available to grantees. The
Department quickly automated this process so that the finance system automatically
notifies the Federal program officer any time a grantee requests payment of a large sum or
a large proportion of a grant. The program officer then contacts the grantee to ensure the
payment is in compliance with program rules and federal financial assistance management
requirements. The program officer approves the large payment requests before they are
processed.

The Department has also automated the review of the expenditure and activities data that
recipients are reporting into FederalReporting.gov under the requirements of Recovery Act
Section 1512. The staff across the Department is reviewing exception reports for
inconsistencies between expenditures reported by recipients and the information in the
Department’s finance system. The staff is also reviewing the reports to gauge the
reasonableness of reported expenditures and the relationship of prime recipient draws on
their grants to the amount expended by their subrecipients, to monitor for cash
management issues.

Recovery Auditing Progress

To effectively address the risk of improper administrative payments, the Department
continued a recovery auditing initiative to review contract payments. The Department
performed a review of payments based on a statistical sample of FY 2008 payment
transactions. No improper payments were indicated in the review. The Department’s
purchase and travel card programs remain subject to monthly reviews and reconciliations to
identify potential misuse or abuse.




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                                                     Recovery Auditing Summary
                                                            (in millions)

 Agency            Amount           Actual       Amounts        Amounts    Amounts       Amounts    Cumulative    Cumulative
Component         Subject to       Amount        Identified    Recovered   Identified   Recovered    Amounts       Amounts
                   Review         Reviewed          for           CY          for          PYs       Identified   Recovered
                    for CY           and         Recovery                  Recovery                     for       (CY + PYs)
                  Reporting       Reported          CY                        PYs                    Recovery
                                     CY                                                             (CY + PYs)

      All           $1,569          $29.3             $0         N/A         $0.3         $0.1         $0.3         $0.1




Summary

The Department is continuing its efforts to comply with the IPIA. Although there are still
challenges to overcome, the Department is committed to ensuring the integrity of its
programs.

The Department is focused on identifying and managing the risk of improper payments and
mitigating the risk with adequate control activities. In FY 2010, we will continue to work with
OMB and the Inspector General to explore additional opportunities for identifying and
reducing potential improper payments and to ensure compliance with the IPIA.




FY 2009 Agency Financial Report—U.S. Department of Education                                                        133
OTHER ACCOMPANYING INFORMATION




         SUMMARY OF FINANCIAL STATEMENT AUDIT AND
                 MANAGEMENT ASSURANCES
The following tables provide a summarized report on the Department’s financial statement
audit and its management assurances. For more details the auditor’s report can be found
on pages 103–122 and the Department’s Management assurances on pages 42–43.

                                  Summary of Financial Statement Audit

 Audit Opinion                                                     Unqualified
 Restatement                                                           No
                                   Beginning                                                                Ending
 Material Weaknesses                                 New            Resolved         Consolidated
                                    Balance                                                                 Balance
 Total Material Weaknesses             0               0                0                   0                   0
                                  Summary of Management Assurances

 Effectiveness of Internal Control over Financial Reporting - Federal Managers’ Financial Integrity Act
                                               (FMFIA) 2

 Statement of Assurance                                            Unqualified
                                   Beginning                                                                Ending
 Material Weaknesses                                 New            Resolved         Reassessed
                                    Balance                                                                 Balance
 Total Material Weaknesses          0               0               0                0                0
 The Department had no material weaknesses in the design or operation of the internal control over financial
 reporting.
                     Effectiveness of Internal Control over Operations - FMFIA 2

 Statement of Assurance                                            Unqualified
                                   Beginning                                                                Ending
 Material Weaknesses                                 New            Resolved         Reassessed
                                    Balance                                                                 Balance
 Information Technology
                                       1                                 1                                      0
 Security
 Total Material Weaknesses             1               0                1                   0                   0
                 Conformance with Financial Management System Requirements - FMFIA 4

                                      The Department systems conform to financial management system
 Statement of Assurance
                                                              requirements.
                                   Beginning                                                                Ending
 Non-Conformance                                     New            Resolved         Reassessed
                                    Balance                                                                 Balance
 Total Non-Conformance                 0               0                0                   0                   0
                    Compliance with Federal Financial Management Improvement Act

                                                           Agency                                 Auditor
 Overall Substantial Compliance                              Yes                                     No
 1. System Requirements                                      Yes                                     No
 2. Federal Accounting Standards                             Yes                                    Yes
 3. United States Standard General Ledger
                                                             Yes                                    Yes
      at Transaction Level




134                                                            FY 2009 Agency Financial Report—U.S. Department of Education
                                           APPENDIX




FY 2009 Agency Financial Report—U.S. Department of Education
APPENDIX




            APPENDIX: SELECTED DEPARTMENT WEB LINKS

The American Recovery and Reinvestment Act

•     Important Recovery Act Reference Sites
      ¾   Recovery.Gov
      ¾   Department Updates
      ¾   Department Weekly and Communication Reports
      ¾   Department Recovery Act Program Plans
      ¾   Department FY 2010 Detailed Budget and Budget Requests
      ¾   American Recovery and Reinvestment Act of 2009: Frequently Asked Questions


Department Evaluation Studies

The Department designs evaluation studies to produce rigorous scientific evidence on the
effectiveness of education programs and practices.

http://ies.ed.gov/ncee/projects/evaluation/index.asp

http://www.ed.gov/about/offices/list/opepd/ppss/reports.html


Performance Data

EDFacts is a Department initiative to put performance data at the center of policy,
management and budget decisions for all K-12 educational programs.

http://www.ed.gov/about/inits/ed/edfacts/index.html


Projections of Education Statistics to 2018

For the 50 states and the District of Columbia, the tables, figures and text contain data on
projections of public elementary and secondary enrollment and public high school
graduates to the year 2018. The report includes a methodology section describing models
and assumptions used to develop national and state-level projections.

http://nces.ed.gov/pubsearch/pubsinfo.asp?pubid=2009062

Discretionary Grant Programs for FY 2009–2010

This site lists Department grant competitions previously announced, as well as those
planned for later announcement, for new awards organized according to the Department's
principal program offices.

http://www.ed.gov/fund/grant/find/edlite-forecast.html




136                                                    FY 2009 Agency Financial Report—U.S. Department of Education
                                                                                    APPENDIX
                                                               SELECTED DEPARTMENT WEB LINKS


Information Policy, E-Gov and Information Technology

The Office of Management and Budget (OMB) ensures that agency reports, rules,
testimony, procurement, financial management, information, regulatory policies and
proposed legislation are consistent with the President's Budget and with Administration
policies.

http://www.whitehouse.gov/omb/inforeg/infopoltech.html

Research and Statistics

The Education Sciences Reform Act of 2002 established the Institute of Education
Sciences (IES) within the Department to provide research, evaluation and statistics to our
nation’s education system.

http://ies.ed.gov/

National Assessment of Educational Progress

The National Assessment of Educational Progress assesses samples of students in
grades 4, 8 and 12 in various academic subjects. Results of the assessments are reported
for the nation and states in terms of achievement levels—basic, proficient and advanced.

http://nationsreportcard.gov/

Government Accountability Office

The GAO supports Congress in meeting its constitutional responsibilities and helps improve
the performance and accountability of the federal government for the benefit of the
American people.

http://www.gao.gov/docsearch/agency.php

Office of Inspector General

The OIG has four primary business functions: audit, investigation, cyber security and
evaluation and inspection.

http://www.ed.gov/about/offices/list/oig/index.html

For a list of recent reports, go to:

http://www.ed.gov/about/offices/list/oig/areports.html




FY 2009 Agency Financial Report—U.S. Department of Education                              137
OUR MISSION IS TO PROMOTE STUDENT ACHIEVEMENT AND PREPARATION FOR
 GLOBAL COMPETITIVENESS BY FOSTERING EDUCATIONAL EXCELLENCE AND
                     ENSURING EQUAL ACCESS.

                        WWW.ED.GOV