oversight

Financial Statement Audits - Fiscal Years 2011 and 2010 - U.S. Department of Education

Published by the Department of Education, Office of Inspector General on 2011-11-15.

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 the functions and duties of Chief Financial Officer



November 15, 2011

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., 2011.

This report is available on the Department’s Web site at: http://www.ed.gov/about/reports/annual/index.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.

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 2011 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 2011 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) 2011 provides to Congress, the President, and the American people an overview of the Department’s
financial performance and results and detailed information about our stewardship over the financial resources
entrusted to us. Additionally, the report provides information about our performance as an organization, our
accomplishments and initiatives, and our challenges as required by the Office of Management and Budget’s
Circulars A-11 and A-136.

The AFR is the first of three reports required under the Office of Management and Budget’s Program for
Alternative Approaches to Performance and Accountability Reporting. This is the third year that the
Department has participated in this voluntary program. The Department is participating in this alternative
approach in an effort to strengthen its annual reporting documents and to present more streamlined and timely
information. The Department’s goal is 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
strengths and challenges.

The Department’s FY 2011 annual reporting includes the following three documents:

  Agency Financial Report (AFR) [available November 15, 2011]

  The AFR 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 reporting details and other statutory reporting
        requirements.


  Annual Performance Report (APR)                                           Summary of Performance and Financial Information
  [available February 2012]                                                 [available February 2012]

  The APR is produced in conjunction with the FY 2013                       This document provides an integrated overview of
  President’s Budget Request and provides more detailed                     performance and financial information that consolidates
  performance information and analysis of performance                       the AFR and the APR into a user-friendly format.
  results.


  This report meets the following statutory 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.
  •     GPRA Modernization Act of 2010 guides the agency’s strategic planning and annual planning and reporting.
  •     Government Management Reform Act of 1994 (GMRA) requires audited financial statements from the agency.
  •     Federal Financial Management Improvement Act of 1996 (FFMIA) requires an assessment of the agency’s financial systems for
        adherence to governmentwide requirements.
  •     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.
  •     Improper Payments Elimination and Recovery Act of 2010 (IPERA), which amends the Improper Payments Information Act of 2002.




                        All three annual reports will be available on the Department’s Web site at
                                http://www.ed.gov/about/overview/focus/performance.html.
FY 2011 Agency Financial Report—U.S. Department of Education
                         Message From the Secretary
                                  November 15, 2011

                                  I am pleased to present the Department’s Fiscal Year (FY)
                                  2011 Agency Financial Report. This is the first of three
                                  integrated reporting components that are included in the
                                  alternative approach to the Performance and
                                  Accountability Report (PAR). The remaining two reports,
                                  the FY 2011 Annual Performance Report and the FY 2011
                                  Summary of Performance and Financial Information, will
                                  be released in February 2012.

                                  The financial and performance data presented in this
                                  report are complete and reliable, and provide an accurate
                                  and transparent accounting of the Department’s financial
                                  situation and performance results. The report includes
                                  information and assurances about the Department’s
financial management systems and controls as required by the Federal Managers’
Financial Integrity Act of 1982. I am pleased to report that for the tenth consecutive year,
the Department has earned a clean opinion from independent auditors on its financial
statements and that for the ninth consecutive year, no material weaknesses were identified.

We are continuing to monitor our progress in areas of concern that could hinder efficiency,
effectiveness, and integrity in our programs and operations, and to identify actions needed
to address any deficiencies. Going forward into FY 2012, our Office of Inspector General
has identified four challenges that the Department will work to address: improper
payments, information technology security, oversight and monitoring, and data quality and
reporting.

This financial report reflects that the Department continues to be an effective steward of
taxpayer dollars that provide critical support to states and districts as they continue the
difficult work of education reform. Education is the key to our long-term economic
prosperity. Especially in areas related to science, technology, and math, we must ensure
that all children and adults in America receive a world-class education, as the country that
out-educates us today will outcompete us tomorrow. Over the past two and a half years,
our country has undertaken a collective effort to reform our schools, work that is inextricably
linked to the future of our nation’s economy. As a result, we have seen more progress in
reform in the past two years than in the previous two decades.

•    45 states have adopted a common set of college- and career-ready standards.
•    45 states are working together to create the next generation of assessments that will
     track students’ growth toward college and career readiness.
•    More than a thousand school districts are taking on the hard work of turning around
     their lowest-performing schools.
•    Across the country, labor and management are working together to use the collective
     bargaining process to support reform and student success.




ii                                                    FY 2011 Agency Financial Report—U.S. Department of Education
                                                                  MESSAGE FROM THE SECRETARY




Education is more than an economic issue—it is the civil rights issue of our generation. To
close the achievement gap, we must also close the opportunity gap for all Americans.
From improving access to and the effectiveness of early learning programs; to reforming
elementary and secondary education; to making higher education more accessible,
effective, and meaningful; to working to attract more talented people to the teaching
profession, we have made an unprecedented federal commitment to education. But it must
be a national effort. I am proud that our Department has played a significant role in
supporting these important reforms that are spreading throughout the country.

•     Through Race to the Top, states are creating the next generation of reforms. We are
      seeing progress in the 12 states that won grants, as well as states that did not win an
      award.
•     Through Investing in Innovation, 49 projects are developing and implementing
      breakthrough ideas that will accelerate student learning.
•     In Promise Neighborhoods, community groups are creating comprehensive plans to
      fight poverty by putting a high-quality public school at the center of their work.

The role of the Department of Education is to support state and local districts as they lead
reforms that improve instruction and increase student achievement, which is why the
President recently announced that we will be offering states and districts relief from the No
Child Left Behind Act (NCLB). NCLB benefited the education system by expanding the
standards and accountability movement and by exposing achievement gaps that
challenged schools to focus on the achievement of all children. But for all that NCLB got
right, states and local school districts are buckling under the law’s mandates, and too many
schools are destined to fail. This is why, to help states, districts, and schools that are ready
to move forward with education reform, the Administration is providing relief from NCLB in
exchange for a real commitment to undertake change. The purpose is not to give states
and districts a reprieve from accountability, but rather to unleash energy to improve our
schools at the local level even as Congress continues to work to reform the law.

A period of unprecedented education reform is no time to be laying off scores of teachers
and early childhood educators. Already, financially pinched school districts are reducing
class time, shortening the school calendar, cutting after-school programs and early
childhood education, and reducing top-notch arts and music instruction. This is why the
President has proposed the American Jobs Act, which includes $30 billion in investments
for repairing and modernizing schools and community colleges. It will also support states
and districts to protect up to 280,000 educators’ jobs. The path to prosperity is to invest
wisely in schools, remembering that children get only one chance at an education.

This financial report reflects the Department’s work to make a positive contribution to what
must become an “all-hands-on-deck” approach among communities across America—
involving local leaders, educators, families, and the students themselves—to building the
best-educated workforce and citizenry in the world.

Sincerely,

/s/

Arne Duncan



FY 2011 Agency Financial Report—U.S. Department of Education                                    iii
iv   FY 2011 Agency Financial Report—U.S. Department of Education
                                                           Contents
Message From the Secretary ............................................................................................... ii

Management’s Discussion and Analysis
Mission and Organizational Structure .................................................................................. 2
Department of Education Financial Highlights ..................................................................... 4
Federal Loan Programs ...................................................................................................... 5
The American Recovery and Reinvestment Act of 2009 (Recovery Act) and
    Education Jobs Fund..................................................................................................... 6
Ongoing Initiatives for the Department ................................................................................ 7
Performance Highlights ....................................................................................................... 9
FY 2011 Selected Programs by Goal ................................................................................ 16
Financial Highlights ........................................................................................................... 27
Limitations of the Financial Statements ............................................................................. 30
Office of Inspector General’s Management Challenges for FY 2012 Highlights ................. 31
Management’s Assurances ............................................................................................... 32
Financial Management Systems Strategy ......................................................................... 34

Financial Details
Message From the Chief Financial Officer ........................................................................ 36
Principal Financial Statements .......................................................................................... 37
Notes to Principal Financial Statements ............................................................................ 41
Required Supplementary Information ................................................................................ 82
Required Supplementary Stewardship Information............................................................ 83

Report of the Independent Auditors .............................................................................. 87

Other Accompanying Information
Improper Payments Reporting Details ............................................................................. 106
Summary of Financial Statement Audit and Management Assurances............................ 119
Memorandum From the Office of Inspector General........................................................ 120
Office of Inspector General’s Management Challenges for Fiscal Year 2012 Executive
    Summary ................................................................................................................... 121


Appendices
Appendix A: Education Resources of the Department ..................................................... 126
Appendix B: Selected Department Web Links ................................................................. 128
Appendix C: Glossary of Acronyms and Abbreviations .................................................... 130




FY 2011 Agency Financial Report—U.S. Department of Education                                                                      v
vi   FY 2011 Agency Financial Report—U.S. Department of Education
    Management’s
Discussion and Analysis
MANAGEMENT’S DISCUSSION AND ANALYSIS


                    Mission and Organizational Structure

                                        Our 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. In 1867, the federal government recognized that furthering education was a national
priority, and created a federal education agency to collect and report statistical data. The
Department was established as a cabinet-level agency in 1979.



Our Public Benefit. In the nation, the Department is committed to ensuring that 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. Internally, 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.



What We Do. The Department engages in four major types of activities: establishing policies
related to federal education funding and administering distribution of funds and monitoring their
use; providing oversight on data collection and research on America’s schools; identifying major
issues in education and focusing national attention on them; and enforcing federal laws
prohibiting discrimination in programs that receive federal funds.



Who We Serve. During school year (SY) 2011–12, America’s schools and colleges are serving
larger numbers of students as the population increases and enrollment rates rise. As of the fall
of 2011, more than 49.4 million students attend public elementary and secondary schools. Of
these, 34.9 million are in pre-school through 8th grade; 14.5 million are in grades 9 through 12.

As of data published in early September 2011, expenditures for public elementary and
secondary schools will be about $525 billion for SY 2011–12, excluding capital and interest. The
national average current expenditure per student is projected for SY 2011–12 at $10,591, the
same as actual expenditures in SY 2008−09. In fall 2011, a record 19.7 million students are
expected to attend the nation’s 2-year and 4-year colleges and universities, an increase of
about 4.4 million since fall 2000.




2                                                        FY 2011 Agency Financial Report—U.S. Department of Education
                                                                                                                 Our Organization in FY 2011
FY 2011 Agency Financial Report—U.S. Department of Education




                                                               The Required Supplementary Stewardship Information section of this report contains summary information about offices within the
                                                               Department. Follow the link for more detail on how the Department is organized and the roles of the different offices, or view an
                                                               interactive chart of current positions.




                                                                                                                                                                                                   MANAGEMENT’S DISCUSSION AND ANALYSIS
    3
MANAGEMENT’S DISCUSSION AND ANALYSIS


             Department of Education Financial Highlights
The table below summarizes trend information concerning components of the Department’s
financial condition. The Consolidated Balance Sheet presents a snapshot of our financial
condition as of September 30, 2011, compared to FY 2010, and displays assets, liabilities, and
net position. Another component of the Department’s financial picture is the Consolidated
Statement of Net Cost. Each of these components is discussed in further detail in this section
and in the Financial Details section of this report.




4                                                       FY 2011 Agency Financial Report—U.S. Department of Education
                                                                                   MANAGEMENT’S DISCUSSION AND ANALYSIS


                                              Federal Loan Programs
In FY 2011, the Department made $116.1 billion in net student loans for postsecondary
education to 11.5 million recipients. The SAFRA Act, which was included in the Health Care and
Education Reconciliation Act of 2010 and became effective July 1, 2010, provided that no
Federal Family Education Loan (FFEL) loans would be originated after June 30, 2010. As a
result, there was a greater volume of direct loans in FY 2011. The transition from the FFEL
Program to the William D. Ford Federal Direct Loan (Direct Loan) Program resulted in a
44 percent increase in Direct Loan Program disbursements for FY 2011.

Under the FFEL Program, students and parents obtained federal loans through lenders.
Guaranty agencies insured these loans, which were, in turn, reinsured by the federal
government. Although the passage of the SAFRA Act ended the origination of new FFEL
Program loans as of July 1, 2010, lenders and guaranty agencies continue to service and collect
outstanding FFEL Program loans.

The Federal Perkins Loan Program is one of three campus-based programs through which the
Department provides loan funds directly to eligible institutions. Funds provided through this
program enable the eligible institutions to offer low-interest loans to students based on need.

Key trends and conditions for the financial aid environment include:

•     the rising cost of attendance for postsecondary education,
•     a decline in availability of nonfederal sources of postsecondary education funding, and
•     an increased role of the federal government in providing funding for postsecondary
      education.

For additional information on key trends and conditions for the financial aid environment and
more on Federal Student Aid, see the Department’s Federal Student Aid FY 2011 Annual
Reports.




                                                            2011                  2010
    Loan Programs (dollars in millions)                 Aid Disbursed        Aid Disbursed                       Percent
                                                         to Students          to Students        Difference     Difference

Federal Direct Loan Program                              $     116,098   $          80,559   $        35,539         44%

Federal Family Education Loan Program                               0               19,909           (19,909)      (100)%

Federal Perkins Loan Program                                      971                1,042               (71)        (7)%

Subtotal Loans                         $                       117,069   $         101,510   $        15,559        15%
SOURCE: Fiscal Year 2012 Budget Summary




FY 2011 Agency Financial Report—U.S. Department of Education                                                                 5
MANAGEMENT’S DISCUSSION AND ANALYSIS


          The American Recovery and Reinvestment Act of 2009
                (Recovery Act) and Education Jobs Fund
The Recovery Act, enacted on February 17, 2009 as Public Law 111-5, provided 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. Public Law
111-226, enacted on August 10, 2010, created the Education Jobs Fund, which provided
funding to the Department to assist in saving and creating jobs for the 2010–11 school year. As
of September 30, 2011, all of the $97 billion Recovery Act and $10 billion Education Jobs Fund
monies have been fully obligated. Of those totals, 89.5 percent and 62.9 percent have been
disbursed, respectively.

                             Recovery Act Funding Summary (dollars in billions)
                                              As of 9/30/11
                            $60.0
                                        $48.6
                                                $48.6
                                                        $47.8




                            $50.0



                            $40.0



                            $30.0
                                                                $16.5
                                                                        $16.5
                                                                                $16.5




                            $20.0
                                                                                        $12.2
                                                                                                $12.2
                                                                                                        $11.3




                                                                                                                                          $10.1
                                                                                                                                                  $10.1
                                                                                                                   $10.0
                                                                                                                           $10.0
                                                                                                                                   $9.3


                            $10.0



                             $0.0                                                                                                                         $2.3
                                       State Fiscal    Student Financial    IDEA Funds                          TITLE I (Formula)            Other *
                                    Stabilization Fund     Assistance
                                        (Formula)
                                                    Total Apportioned    Total Obligated                         Total Disbursed
                                                    $97.4                $97.4                                   $87.2


* The Other category includes funds for Impact Aid, Rehabilitative Services & Disability Research, School Improvement Programs, Higher
Education, Investing in Innovation, Race to the Top, Institute of Education Sciences, the Teacher Incentive Fund, Student Aid Administration,
School Improvement Grants, and Office of Inspector General.




6                                                                                                                FY 2011 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


                            Ongoing Initiatives for the Department
Recent actions by President Obama’s Administration addressed two important challenges
facing the nation during FY 2011, creating implementation challenges for FY 2012. The actions
will:

•    provide steps to increase college affordability by making it easier to manage student loan
     debt (October 25, 2011); and
•    provide state educational agencies and local educational agencies with flexibility regarding
     specific requirements of the Elementary and Secondary Education Act of 1965 (ESEA), as
     amended, in exchange for rigorous and comprehensive state-developed plans designed to
     improve educational outcomes for all students, close achievement gaps, increase equity,
     and improve the quality of instruction (September 23, 2011).

In FY 2012, the Department will focus on implementation of these actions, as well as awarding
grants under the Race to the Top-Early Learning Challenge, expanding an initiative to identify
and learn from top-performing teacher preparation programs, and addressing a wide range of
challenges with initiatives that focus on meeting National Outcome Goals and Department
Strategic Goals (See Performance Highlights).

Loan Defaults

On September 12, 2011, the Department released the most recently available student default
rates. The official FY 2009 national student loan cohort default rate has risen to 8.8 percent, up
from 7.0 percent in FY 2008. The cohort default rates increased for all sectors: from 6.0 percent
to 7.2 percent for public institutions, from 4.0 percent to 4.6 percent for private nonprofit
institutions, and from 11.6 percent to 15.0 percent at for-profit schools.

The rates represent a snapshot in time, with the FY 2009 cohort consisting of borrowers whose
first loan repayments came due between October 1, 2008, and September 30, 2009, and who
defaulted before September 30, 2010. More than 3.6 million borrowers from 5,900 schools
entered repayment during this window of time, and more than 320,000 defaulted. Those
borrowers who defaulted after the two-year period are not counted as defaulters in this data set.

“These hard economic times have made it even more difficult for student borrowers to repay
their loans, and that’s why implementing education reforms and protecting the maximum Pell
grant is more important than ever,” said U.S. Secretary of Education Arne Duncan. “We need to
ensure that all students are able to access and enroll in quality programs that prepare them for
well-paying jobs so they can enter the workforce and compete in our global marketplace.”

ESEA Flexibility Authority

To support local and state education reform across the nation, the Department is assisting state
and local educational agencies in obtaining waivers from certain provisions of the Elementary
and Secondary Education Act (ESEA), as amended.

Under this flexibility authority, states can request waivers from specific mandates if they are
making progress in transitioning students, teachers, and schools to a system aligned with
college- and career-ready standards for all students, developing differentiated accountability
systems, and undertaking reforms to support effective classroom instruction and school
leadership.



FY 2011 Agency Financial Report—U.S. Department of Education                                         7
MANAGEMENT’S DISCUSSION AND ANALYSIS


ESEA flexibility focuses on supporting state and local reform efforts in three critical areas:

•   transitioning to college- and career-ready standards and assessments;
•   developing systems of differentiated recognition, accountability, and support; and
•   evaluating teacher and principal effectiveness.

A state may request flexibility through waivers of several specific provisions, most notably:

•   Flexibility regarding the 2013–14 timeline for achieving 100 percent proficiency in reading
    and mathematics by establishing ambitious but achievable goals and supporting academic
    improvement efforts.
•   Flexibility regarding district and school improvement and accountability requirements that
    may over-identify schools as “failing” and enables the state to provide targeted interventions
    to the schools and districts that are the lowest performing and have the largest achievement
    gaps.
•   Flexibility in the use of federal education funds that enables states to use several federal
    funding streams that best meet their unique needs.

To receive flexibility through these waivers, a state must develop a rigorous and comprehensive
plan addressing three critical areas:

•   A state must have adopted college- and career-ready standards in reading/language arts
    and mathematics and transition its schools and districts to those standards by administering
    statewide assessments.
•   A state must develop systems of differentiated recognition, accountability, and support that
    give credit for progress towards college- and career-readiness by recognizing and rewarding
    the highest achieving schools that serve low income students and implement rigorous
    interventions to turn around the lowest-performing schools.
•   A state must evaluate and support teacher and principal effectiveness by setting guidelines
    for teacher and principal evaluation and support systems using multiple measures including
    student progress over time.




8                                                          FY 2011 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


                                              Performance Highlights




GPRA Modernization Act of 2010

On January 4, 2011, President Obama signed into law the GPRA Modernization Act of 2010.
The Act improves on the original Government Performance and Results Act of 1993 (GPRA)
and modernizes the federal government’s performance management framework. The GPRA
Modernization Act of 2010 builds on the performance management approach championed by
President Obama to improve the effectiveness and efficiency of government by requiring that
agency leaders set clear, ambitious goals for a number of outcome-focused and management
priorities; federal agencies measure, analyze, and communicate performance information to
identify successful practices; and agency leaders conduct in-depth performance reviews at least
quarterly to identify progress on their priorities.

National Outcome Goals

The National Outcome Goals include the improvements in student achievement needed at
every level of education to achieve the President’s 2020 goal of once again having the highest
proportion of college graduates in the world. Improving these outcomes will require a concerted
effort from all stakeholders in the education system. These goals include outcomes in key
areas:

•    postsecondary education, career and technical education, and adult education,
•    elementary and secondary education,
•    early learning, and
•    equity.

Department Strategic Goals

To meet the National Outcome Goals, changes are needed in how education is delivered. In
President Obama’s first address to Congress, he challenged America to meet an ambitious goal
for education that by 2020, America will once again have the highest proportion of college
graduates in the world. Investing in education means investing in America’s future and is vital
for maintaining our long-term economic security. The nation must work to ensure that all
children and adults in America receive a world-class education that will prepare them to
succeed in college and careers. The President’s goal is the starting point for the work of the
Department as described in its FY 2011–2014 draft Strategic Plan. Reaching the President’s



FY 2011 Agency Financial Report—U.S. Department of Education                                      9
MANAGEMENT’S DISCUSSION AND ANALYSIS


goal will require comprehensive education reforms from cradle to career, beginning with children
at birth, supporting them through postsecondary education, and helping them succeed as
lifelong learners who can adapt to the constant changes in the technology-driven workplaces of
the global economy. The draft Strategic Plan provides:

•    A new emphasis on the importance of early learning.
•    A commitment to ensuring that all students graduate from high school prepared to succeed
     in college and careers.
•    An imperative for the Department to ensure that students have the support and information
     that they need to enter postsecondary education and earn a certificate, degree, or other
     credential.

The Department’s draft Strategic Plan serves as a starting point from which to align the
Department’s yearly budget requests and statutory requirements with the Department’s
operational imperatives, and is the foundation for establishing overall long-term priorities and
developing performance goals and measures by which the Department can gauge achievement
of its stated outcomes. The plan is developed in collaboration with Congress, state and local
partners, and other stakeholders.

Goal 1: Postsecondary Education, Career and Technical Education, and Adult Education.
Increase college access, quality, and completion by improving higher education and lifelong
learning opportunities for youth and adults.

Goal 2: Elementary and Secondary Education. Prepare all students for college and career by
improving the elementary and secondary education system’s ability to consistently deliver
excellent classroom instruction and supportive services.

Goal 3: Early Learning. Improve the health, social-emotional, and cognitive outcomes for all
children from birth through third grade, so that all children, particularly those with high needs,
are on track for graduating from high school college- and career-ready.

Goal 4: Equity. Ensure equitable educational opportunities for all students regardless of race,
ethnicity, national origin, age, sex, disability, language, and socioeconomic status.

Goal 5: Continuous Improvement of the U.S. Education System. Enhance the education
system’s ability to continuously improve through better and more widespread use of data,
research and evaluation, transparency, innovation, and technology.

Goal 6. U.S. Department of Education Capacity. Improve the organizational capacities of the
Department to implement this Strategic Plan.

Department Priority Goals

The Department has identified a limited number of Priority Goals that will be a particular focus
over the coming years. These Priority Goals reflect the Department’s cradle-to-career education
strategy, and will help concentrate efforts on the importance of teaching and learning at all
levels of the education system. The Department’s Priority Goals are designed for success by
the end of the term of this strategic plan. The Department set initial Priority Goals in the
FY 2011 Budget, and is in the process of developing updated Priority Goals to accompany the
FY 2013 Budget. To review the Department’s initial Priority Goals, please visit our website.




10                                                         FY 2011 Agency Financial Report—U.S. Department of Education
                                                                        MANAGEMENT’S DISCUSSION AND ANALYSIS


  Challenges Linking Program Performance to Funding

  Linking performance results, expenditures, and budget for Department programs is complicated.
  Most of the Department’s funding is disbursed through grants and loans. 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 2011
  funds but to a combination of funds from across several fiscal years, as well as state and local
  investments, and to many external factors, including economic conditions. Furthermore, the
  results of some education programs may not be apparent for many years after the funds are
  expended. In addition, results may be due to the effects of multiple programs.

  Selected Performance Measures for FY 2011

  The performance measures in this table represent a subset of the performance measures that
  are being developed in support of the strategic goals in the Department’s FY 2011–2014 draft
  Strategic Plan. The Department will be reporting on the full set of performance measures in the
  FY 2011 Annual Performance Report that will be released in conjunction with the President’s
  FY 2013 Budget submission in February 2012. The measures included in this table reflect at a
  high level, student achievement data, Department management improvement initiatives, college
  and career initiatives, and state program activities to improve education in their respective
  states. The information in the cells includes the approximate dates by which data will be
  available in those cases where the data were not available while this report was being prepared.

                                                                 2007   2008     2009       2010       2011
              Performance Measure

               Student Achievement
Students who graduate from high school                           74%    75%       76%     May 2012     TBD

Adult education students obtaining a high                        56%    58%       47%       54%        TBD
school credential
4th grade students at or above Proficient on                     33%    N/A       33%        N/A       34%
the National Assessment of Educational
Progress (NAEP) in reading
4th grade students at or above Proficient on                     39%    N/A       39%        N/A       40%
the NAEP in mathematics
8th grade students at or above Proficient on                     31%    N/A       32%        N/A       34%
the NAEP in reading
8th grade students at or above Proficient on                     32%    N/A       34%        N/A       35%
the NAEP in mathematics




  FY 2011 Agency Financial Report—U.S. Department of Education                                            11
  MANAGEMENT’S DISCUSSION AND ANALYSIS


                                                     2007         2008             2009             2010              2011
           Performance Measure

          Department Management
Department's rank in the report on the Best           28            No             27                30               Nov.
Places to Work (BPTW) in the Federal               out of 30     rankings       out of 30         out of 32           2011
Government                                         agencies       done in       agencies          agencies
                                                                   2008.
Positive responses that the Department                N/A          58%              54%              54%              58%
receives on the Talent Management measure
in the Federal Viewpoint Survey
Positive responses that the Department               49%           52%              50%              52%              53%
receives on the Performance Culture measure
in the Federal Viewpoint Survey
States and other grantees reporting                Customer      CSI: 65          CSI: 68          CSI: 72          CSI: 72
satisfaction with support provided by the         Satisfaction
Department                                           Index
                                                   (CSI): 63
Department's programs and initiatives that are        N/A          N/A              N/A               10               13
evaluated using methods that include those
consistent with What Works Clearinghouse
Standards for evidence of effectiveness
               Postsecondary
Enrollments in undergraduate science,                 N/A          N/A              N/A          1,541,704        1,580,036
technology, engineering, and mathematics
(STEM) credential/degree programs
25- to 34-year-olds who attain an associate's        40%           42%              41%              42%             March
degree or higher                                                                                                     2012
Students who complete a bachelor's degree            57%           57%              57%             Feb.             TBD
within 6 years                                                                                      2012
Students who complete an associate's degree          31%           31%              32%             Feb.              TBD
or certificate within 3 years                                                                       2012
Individuals completing and filing the Free            N/A          N/A              N/A              N/A              57%
Application for Federal Student Aid form
(FAFSA) who come from low-income
households
Individuals completing and filing the FAFSA           N/A          N/A              N/A              N/A             3.80%
who are non-traditional students (25 years and
above with no college degree)

               State Activities
States that have published a plan for improving       N/A          N/A              N/A           18 states        19 states
postsecondary access, quality, and completion
leading to careers and positive civic
engagement
States that have published a plan for pathways        N/A          N/A              N/A           24 states        27 states
for school completers to careers
States with adopted internationally                   N/A          N/A              N/A           30 states        44 states
benchmarked college- and career-ready                                                               + DC           + DC and
standards                                                                                                          the USVI
   NOTE: N/A Refers to data either not collected or reported.




  12                                                             FY 2011 Agency Financial Report—U.S. Department of Education
                                                                        MANAGEMENT’S DISCUSSION AND ANALYSIS


Data Resources of the Department: The Education Dashboard

In FY 2011, the Department took significant steps toward enhancing its ability to provide more
timely and consistent information to the public by improving its use of education data through a
variety of electronic formats.

The Department continues to implement and enhance a data dashboard that contains high-level
indicators, ranging from student participation in early learning through completion of
postsecondary education, as well as indicators on teachers and leaders and equity. The
Department will continuously update the dashboard’s data and improve upon its analytic tools.

In FY 2011, the Department also introduced a new electronic feature that maps educational
performance across states in the U.S. The State of the States in Education shows the
10 highest and lowest performing states (based on 2009 data) on basic indicators of educational
performance. Disparities in educational performance highlight that state and local governments
have a major impact on student outcomes and the rigor of state standards.

Indicators focus on key education outcomes, including those shown below.

         Percentage of Public High School-
                                                                       Percentage of 3- and 4-Year-Olds
          Level Teachers With a Major in
                                                                            Enrolled in Preschool
            Their Main Assignment Area

 100%                                                           100%
                    83.6%                      81.1%
   80%                                                           80%

   60%                                                           60%
                                                                             46.0%              48.2%
   40%                                                           40%

   20%                                                           20%

    0%                                                            0%
                  2003–04                    2007–08                        2005–07            2006–08


NOTE: Teachers include traditional public school and           SOURCE: U.S. Department of Commerce, Census
public charter school teachers who taught                      Bureau, 2005–07 and 2006–08 American Community
departmentalized classes to students in any of grades          Survey (ACS) 3-year Public Use Microdata Sample
10–12, or grade 9 and no grade lower. "Major in main           (PUMS) data.
assignment" includes all teachers, regardless of
whether the major was earned within or outside a
department, college, or school of education. Majors in
main assignment are credited if they were earned at
the bachelor's degree level or higher.
SOURCE: U.S. Department of Education, National
Center for Education Statistics, Schools and Staffing
Survey (SASS), “Public School Teacher Data File,”
2003–04 and 2007–08.




FY 2011 Agency Financial Report—U.S. Department of Education                                                 13
MANAGEMENT’S DISCUSSION AND ANALYSIS



             Percentage of Freshmen                           Percentage of Bachelor's Degrees
           Graduating From High School                        Awarded in Science, Technology,
                  Within 4 Years                               Engineering, and Mathematics

 100%                                                 100%
               73.9%              74.9%
     80%                                               80%

     60%                                               60%

     40%                                               40%
                                                                        25.6%                      24.2%
     20%                                               20%

     0%                                                 0%
              2006–07            2007–08                               1998–99                    2008–09


SOURCE: U.S. Department of Education, National       SOURCE: U.S. Department of Education, National
Center for Education Statistics, “NCES Common Core   Center for Education Statistics, 1998–99 and 2008–09
of Data State Dropout and Completion Data File,”     Integrated Postsecondary Education Data System,
2006–07 and 2007–08 school years.                    “Completions Survey” (IPEDS-C:99) and Fall 2009.




The indicators chosen for the dashboard are select factors that shed light on our nation’s
educational progress and support the goal that, by 2020, the United States will once again have
the highest proportion of college graduates in the world. Meeting this goal is vital to the nation’s
long-term economic security and to preparing young people and adults to be active citizens.

Reaching the 2020 goal will require comprehensive education reforms from cradle to career,
beginning with children at birth, supporting them through high school graduation and
postsecondary education, and helping them to succeed as lifelong learners who can adapt to
the constant changes in the demands of the global economy.

In addition to data provided on the dashboard, data.ed.gov provides links to the Department’s
various data sources, including: the Institute of Education Sciences’ National Center for
Education Statistics, ED Facts, the Federal Student Aid Data Center, and ED Data Express.




14                                                           FY 2011 Agency Financial Report—U.S. Department of Education
                                                                                      MANAGEMENT’S DISCUSSION AND ANALYSIS


National Outcome Goals




Notes:
Data for college attainment reflect the percentage of 25-34-year-olds who attain an associate’s degree or higher. Data for college completion
reflect the percentage of students who complete a bachelor’s degree within 6 years or an associate’s degree or certificate within 3 years.
Graduation rates presented are for school years (e.g., FY 2009 provides data for school year 2008–09).
NAEP data reflect “at proficient or above” performance.
Sources:
College Attainment: U.S. Census Bureau, Current Population Survey (http://www.census.gov/hhes/socdemo/education/
data/cps/index.html).
College Completion: U.S. Department of Education, National Center for Education Statistics, Integrated Postsecondary Education Data
System (IPEDS) Graduation Rate Survey. (http://nces.ed.gov/ipeds/). 2003 Data: “Enrollment in Postsecondary Institutions, Fall 2003;
Graduation Rates, 1997 and 2000 Cohorts; and Financial Statistics, Fiscal Year 2003,” Table 7 (http://nces.ed.gov/pubs2005/2005177.pdf)
and “Enrollment in Postsecondary Institutions, Fall 2003; Graduation Rates, 1997 and 2000 Cohorts; and Financial Statistics, Fiscal Year
2003,” Table 8 (http://nces.ed.gov/pubs2005/2005177.pdf). 2004 Data: “Enrollment in Postsecondary Institutions, Fall 2004; Graduation
Rates, 1998 and 2001 Cohorts; and Financial Statistics, Fiscal Year 2004,” Table 5 (http://nces.ed.gov/pubs2006/2006155.pdf). 2005 Data:
“Enrollment in Postsecondary Institutions, Fall 2005; Graduation Rates, 1999 and 2002 Cohorts; and Financial Statistics, Fiscal Year 2005,”
Table 5 (http://nces.ed.gov/pubs2007/2007154.pdf). 2006 Data: “Enrollment in Postsecondary Institutions, Fall 2006; Graduation Rates, 2000
and 2003 Cohorts; and Financial Statistics, Fiscal Year 2006,” Table 5 (http://nces.ed.gov/pubs2008/2008173.pdf). 2007 Data: “Enrollment in
Postsecondary Institutions, Fall 2007; Graduation Rates, 2001 and 2004 Cohorts; and Financial Statistics, Fiscal Year 2007,” Table 5
(http://nces.ed.gov/pubs2009/2009155.pdf). 2008 Data: “Enrollment in Postsecondary Institutions, Fall 2008; Graduation Rates, 2002 and
2005 Cohorts; and Financial Statistics, Fiscal Year 2008,” Table 5 (http://nces.ed.gov/pubs2010/2010152rev.pdf). 2009 Data: “Enrollment in
Postsecondary Institutions, Fall 2009; Graduation Rates, 2003 & 2006 Cohorts; and Financial Statistics, Fiscal Year 2009,” Table 7
(http://nces.ed.gov/pubs2011/2011230.pdf).
Adult Ed. Students Obtaining H.S. Credential: http://wdcrobcolp01.ed.gov/CFAPPS/OVAE/NRS/reports/index.cfm (requires login).
High School Graduation: U.S. Department of Education, National Center for Education Statistics, Common Core of Data
(http://nces.ed.gov/ccd/pdf/Insdr07gen1a.pdf, http://nces.ed.gov/ccd/pdf/Insdr06gen1a.pdf, http://nces.ed.gov/ccd/pdf/ sdr051bgen.pdf,
http://nces.ed.gov/pubs2009/dropout07/tables/table_13.asp, and http://nces.ed.gov/pubs2006/2006606rev.pdf). Data are collected annually.
Averaged freshman graduation rate is a Common Core of Data measure that provides an estimate of the percentage of high school students
who graduate on time by dividing the number of graduates with regular diplomas by the size of the incoming class four years earlier.
NAEP Math and Reading: National Assessment of Educational Progress (Math: http://nationsreportcard.gov/math_2011/math_2011_report/
pages/graphs/fig_b.asp and http://nationsreportcard.gov/math_2011/math_2011_report/pages/graphs/fig_c.asp. Reading:
http://nationsreportcard.gov/reading_2011/reading_2011_report/pages/graphs/fig_b.asp and
http://nationsreportcard.gov/reading_2011/reading_2011_report/pages/graphs/fig_c.asp).



FY 2011 Agency Financial Report—U.S. Department of Education                                                                              15
MANAGEMENT’S DISCUSSION AND ANALYSIS


                      FY 2011 Selected Programs by Goal
In FY 2011, the Department continued a number of programs and initiated several new ones
designed to be a cradle-to-career agenda to support states and districts as they reform their
schools and make college more affordable for students. This agenda is designed around key
principles, including:

•    creating early learning systems that align resources to get the nation’s youngest children
     ready for kindergarten;
•    raising standards so they actually prepare students for success in college and careers;
•    improving the quality of teaching in the classroom by improving the preparation, professional
     development, and evaluation of teachers and principals; and
•    turning around persistently low-performing schools that have been failing students for
     decades or even generations.

A summary of the larger and more impactful programs, organized by draft strategic goal,
follows.

Goal 1: Postsecondary Education, Career and Technical Education,
and Adult Education

     Increase college access, quality, and completion by improving higher education and
                     lifelong learning opportunities for youth and adults.

In 2011, the Department continued to support President Obama’s three-prong strategy (access,
quality, and completion) for achieving the 2020 goal of America once again having the highest
proportion of college graduates in the world.

Gaining Early Awareness and Readiness for Undergraduate Programs (GEAR UP) is a
discretionary grant program designed to increase the number of low-income students who are
prepared to enter and succeed in postsecondary education. GEAR UP provides six- and seven-
year grants to states and partnerships to provide services at high-poverty middle and high
schools. GEAR UP grantees serve an entire cohort of students beginning no later than the
seventh grade and follow the cohort through high school. Grantees may choose to continue to
serve students into their first year of college. GEAR UP funds are also used to provide college
scholarships to low-income students. In FY 2011, the Department awarded:

•    19 new awards for more than $77.3 million,
•    15 non-competing continuation grants totaling $44.6 million,
•    47 new partnership award for $100.1 million,
•    and 73 non-competing continuation partnership grants ($78.8 million).

There is a priority in the awarding of the grants, going to the applicants that agree to implement
college- and career-ready standards, enable more data-based decision making, and aim to turn
around persistently lowest achieving schools.
The William D. Ford Federal Direct Loan Program (Direct Loan) lends funds directly to students
and parents through participating schools. Created in 1993, this program is funded by



16                                                         FY 2011 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


borrowings from the U.S. Department of the Treasury, as well as an appropriation for subsidy
costs.

The Federal Pell Grant Program (Pell Grant) helps ensure financial access to postsecondary
education by providing grant aid to low-income and middle-income undergraduate students. Pell
Grants vary according to the financial circumstances of students and their families. For the
2010–11 award year, the Department disbursed approximately $37 billion in Pell Grants
averaging approximately $4,115 to nearly 9 million students. The maximum Pell Grant award
was $5,550 for the 2010–11 award year and remains $5,550 for the 2011–12 award year.

The Federal TRIO Programs (TRIO) provides Federal outreach and student services programs
designed to identify and provide services for individuals from disadvantaged backgrounds. TRIO
includes eight programs targeted to serve and assist low-income individuals, first-generation
college students, and individuals with disabilities to progress through the academic pipeline from
middle school to postbaccalaureate programs. TRIO also includes a training program for
directors and staff of TRIO projects. The Full-Year Continuing Appropriations Act, 2011 (P.L.
112-10), provided $826.5 million for TRIO programs in fiscal year FY 2011. In addition, there
was $57 million in mandatory appropriations for Upward Bound.

Career and Technical Education, and Adult Education programs include initiatives for literacy
and community colleges.

In September 2011, the Department collaborated with the Department of Labor in Labor’s award
of nearly $500 million in grants to community colleges for targeted training and workforce
development to help economically dislocated workers who are changing careers. The grants
support partnerships between community colleges and employers to develop programs that
provide pathways to good jobs, including instructional programs that meet specific needs. This
installment is the first in a $2 billion, four-year investment designed in combination with the
American Jobs Act of 2011 to provide additional support for hiring and re-employment services
to increase opportunities for the unemployed.

Carl D. Perkins Career and Technical Education Act of 2006 provides funds to state educational
agencies to support programs that assist students to acquire academic and technical skills and
be prepared for high-skill, high-wage, or high-demand occupations in the global economy.

In addition, the Department administers formula grant funds to states for adult education and
literacy programs. States distribute funds to local eligible entities to provide adult education and
literacy services that provide educational opportunities below the postsecondary level for adults,
16 years of age and older, who are not currently enrolled in school, lack a high school diploma,
or lack the basic skills to function effectively in the workplace and in their daily lives.

Goal 2: Elementary and Secondary Education

 Prepare all students for college and career by improving the elementary and secondary
  education system’s ability to consistently deliver excellent classroom instruction and
                                   supportive services

Race to the Top

In FY 2011, Congress appropriated $700 million for the Race to the Top initiative and authorized
a specific early learning initiative. In response, on May 25, 2011, the Department announced
plans for $200 million in state-level grants to support nine finalists that did not win grants in the



FY 2011 Agency Financial Report—U.S. Department of Education                                       17
MANAGEMENT’S DISCUSSION AND ANALYSIS


first two rounds of Race to the Top. The states─ Arizona, California, Colorado, Illinois,
Kentucky, Louisiana, New Jersey, Pennsylvania, and South Carolina─may seek grants ranging
from $10 million to $50 million, depending on population and the final number of grants.

To provide ongoing feedback to teachers during the course of the school year, measure annual
student growth, and move beyond narrowly focused bubble tests, the Department awarded two
groups of states grants to develop a new generation of tests. The tests will assess students’
knowledge of mathematics and English language arts from third grade through high school.

Teacher Incentive Fund

The Department’s Teacher Incentive Fund (TIF) has provided grants to states, rural and urban
school districts, and nonprofit organizations to develop and implement performance-based
teacher and principal compensation systems in high-need schools.

The Department did not conduct a competition in FY 2011, but supported the 2010 grantees
with significant technical assistance. The Department is reviewing the program requirements
and lessons learned from the current grantees to help inform its plans for a new competition in
FY 2012.

The TIF seeks to strengthen the education profession by rewarding excellence, attracting
teachers and principals to high-need schools, and providing all teachers and principals with the
feedback and support they need to succeed.

School Improvement Grants

In conjunction with Title I funds for school improvement, School Improvement Grants are used
to improve student achievement in Title I schools identified for improvement, corrective action,
or restructuring so as to enable those schools to make adequate yearly progress and exit
improvement status.

Investing in Innovation Fund

The purpose of this program is to provide competitive grants to applicants with a record of
improving student achievement and attainment in order to expand the implementation of, and
investment in, innovative practices that are demonstrated to have an impact on improving
student achievement or student growth, closing achievement gaps, decreasing dropout rates,
increasing high school graduation rates, or increasing college enrollment and completion rates.

On June 3, 2011, the Department kicked off the 2011 Investing in Innovation (i3) grant
competition to continue support for evidence-based practices in education. This second round of
i3 makes $150 million available to local educational agencies (LEAs) and nonprofit
organizations in partnership with LEAs or consortia of schools. Grants will be available within
the same three categories as in round one:

•    up to $25 million each for scale-up grants to applicants with the strongest evidence and
     track record of success;
•    up to $15 million each for validation grants to verify effectiveness of programs with moderate
     levels of evidence; and
•    up to $3 million each for development grants to support new, high-potential practices whose
     impact should be studied further.



18                                                         FY 2011 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


Grant recipients will be required to secure private sector matching funds of five percent,
10 percent, or 15 percent, respectively.

Three absolute priorities remain from last year’s grant competition: supporting effective teachers
and principals, implementing high standards and quality assessments, and turning around
persistently low-performing schools. For this year’s competition, the Department has included
two new absolute priorities focusing on achievement and high school graduation rates in rural
schools and promoting science, technology, engineering, and math education. All applicants
must address one of these five areas. In addition, competitive preference will be given to
applications that demonstrate support for improving early learning outcomes, increasing college
access and success, addressing the unique needs of students with disabilities and limited
English proficient students, or improving productivity or technology.

Promise Neighborhoods

Promise Neighborhoods, established under the legislative authority of the Fund for the
Improvement of Education, provides funding to support eligible entities, including nonprofit
organizations, which may include faith-based nonprofit organizations, institutions of higher
education, and Indian tribes.

On July 6, 2011, the Department released the application for the next phase of the Promise
Neighborhoods program, including a second round of planning grants and new implementation
grants, totaling $30 million. Non-profit organizations, institutions of higher education, and Indian
tribes are all eligible to apply for funds to develop or execute plans that will improve educational
and developmental outcomes for students in distressed neighborhoods. The Department
expects to award four to six implementation grants with an estimated grant award of $4 million
to $6 million. Grantees will receive annual grants over a period of three to five years, with total
awards ranging from $12 million to $30 million. Remaining 2011 funding will go toward 10 new
one-year planning grants with an estimated grant award of $500,000.

The purpose of Promise Neighborhoods is to significantly improve the educational and
developmental outcomes of children and youth in the nation’s most distressed communities, and
to transform those communities by—identifying and increasing the capacity of eligible entities
that are focused on achieving results for children and youth throughout an entire neighborhood;
building a complete continuum of cradle-to-career solutions of both educational programs and
family and community supports, with great schools at the center; integrating programs and
breaking down agency “silos” so that solutions are implemented effectively and efficiently across
agencies; developing the local infrastructure of systems and resources needed to sustain and
scale up proven, effective solutions across the broader region beyond the initial neighborhood;
and learning about the overall impact of the Promise Neighborhoods program and about the
relationship between particular strategies in Promise Neighborhoods and student outcomes,
including through a rigorous evaluation of the program.

In FY 2011, the Promise Neighborhoods program awarded one-year grants to support the
development of a plan to implement a Promise Neighborhood that includes the core features
described above. At the conclusion of the planning grant period, grantees should have a
feasible plan to implement a continuum of solutions that will significantly improve results for
children in the community being served.




FY 2011 Agency Financial Report—U.S. Department of Education                                       19
MANAGEMENT’S DISCUSSION AND ANALYSIS


Goal 3: Early Learning

 Improve the health, social-emotional, and cognitive outcomes for all children from birth
 through third grade, so that all children, particularly those with high needs, are on track
               for graduating from high school college- and career- ready.

Inter-Governmental Cooperation

The Department prioritizes improving the health, social, emotional, and educational outcomes
for young children from birth through 3rd grade by enhancing the quality of early learning
programs, and increasing the access to high-quality early learning programs─especially for
young children at risk for school failure. The Department’s role in promoting early learning is
significant and includes: administering several early learning programs; collaborating and
coordinating early learning programs, research, and technical assistance with the U.S.
Department of Health and Human Services; encouraging states and local districts to target
resources for early learning; promoting state and local education agency partnerships with other
early learning agencies and programs in the state or community; conducting research on early
learning through the Institute of Education Sciences (IES); funding technical assistance on early
learning topics, including early literacy and social and emotional development; and supporting
the development of state longitudinal data systems that include early learning programs.

Race to the Top-Early Learning Challenge

The Race to the Top-Early Learning Challenge (RTT-ELC) will provide $500 million in state
competitive grants to improve early learning and development programs. The goal of the RTT-
ELC is to better prepare more children with high needs for kindergarten, because children from
birth to age five, including those from low-income families, need a strong foundation for
success.

RTT-ELC will focus on five key areas of reform:

•    Establishing Successful State Systems by building on the state’s existing strengths,
     ambitiously moving forward the state’s early learning and development agenda, and
     carefully coordinating programs across agencies to ensure consistency and sustainability
     beyond the grant;
•    Defining High-Quality, Accountable Programs by creating a common tiered quality rating
     and improvement system that is used across the state to evaluate and improve program
     performance and to inform families about program quality;
•    Promoting Early Learning and Development Outcomes for Children to develop common
     standards within the state and assessments that measure child outcomes, address
     behavioral and health needs, as well as inform, engage, and support families;
•    Supporting A Great Early Childhood Education Workforce by providing professional
     development, career advancement opportunities, appropriate compensation, and a common
     set of standards for workforce knowledge and competencies; and
•    Measuring Outcomes and Progress so that data can be used to inform early learning
     instruction and services and to assess whether children are entering kindergarten ready to
     succeed in elementary school.
The RTT-ELC program is jointly administered with the Department of Health and Human
Services.


20                                                       FY 2011 Agency Financial Report—U.S. Department of Education
                                                                                                 MANAGEMENT’S DISCUSSION AND ANALYSIS


Goal 4: Equity

 Ensure equitable educational opportunities for all students regardless of race, ethnicity,
        national origin, age, sex, disability, language, and socioeconomic status.

Office for Civil Rights

The Department of Education enforces federal civil rights laws that prohibit discrimination on the
basis of race, color, national origin, sex, disability and age, in our nation’s schools primarily in
educational institutions that receive federal funds from the Department. In addition, the
Department ensures that the Boy Scouts of America and other designated youth groups have
equal access to meet in elementary and secondary schools that receive funds through the
Department. The Office for Civil Rights (OCR), a law enforcement agency within the
Department, performs the Department’s civil rights enforcement responsibilities in a variety of
ways including: investigating complaints alleging discrimination; conducting compliance reviews
in educational institutions to determine if they are in compliance with the laws; and providing
technical assistance to educational institutions on how to comply with the law and parents and
students on their rights under the law. The Department also issues regulations on civil rights
laws, develops policy guidance interpreting the laws, and distributes the information broadly.

In FY 2011, OCR received a record total of 7,841 complaints alleging discrimination, a
13 percent increase in complaint receipts over the previous fiscal year and resolved
7,434 complaints, some of which were received the previous year. As shown in the chart below,
close to half of the complaints received by the Department allege discrimination due to disability.
To augment the issues addressed through complaint processing, OCR implemented a proactive
docket of compliance activities that included initiating 37 proactive compliance reviews and
73 proactive technical assistance activities. In addition, OCR developed policy guidance,
including investigative guidance, to address discrimination against students on the basis of race,
color, national origin, sex and disability. OCR’s law enforcement work supports progress on the
Department’s efforts to address equity.

                                           FY 2011 Discrimination Complaint Receipts by Jurisdiction
                                                                7,841 Receipts


                                                                 Race/             Other*
                                                            National Origin      (843) 11%
                                                            Discrimination
                                                             (1,104) 14%

                                                                                                Multiple
                                                                                             Jurisdictions
                                               Sex Discrimination                             (1,145) 14%
                                                   (1,096) 14%



                                                                        Disability
                                                                    Section 504/Title II
                                                                       (3,507) 45%




* This category reflects new complaint receipts for which jurisdiction has not yet been determined. It also includes complaint
  receipts under the Boy Scouts of America Equal Access Act and those with issues over which OCR has no jurisdiction.
Source: Office for Civil Rights Case Management System




FY 2011 Agency Financial Report—U.S. Department of Education                                                                       21
MANAGEMENT’S DISCUSSION AND ANALYSIS


Goal 5: Continuous Improvement of the U.S. Education System

Enhance the education system’s ability to continuously improve through better and more
    widespread use of data, research and evaluation, transparency, innovation, and
                                      technology.

Widespread Use of Data

Data Strategy Team. The Data Strategy Team (DST) was organized in August 2010 to address
the issue of inconsistent and uncoordinated data strategies among the various principal offices
within the Department. The mission of the DST is to coordinate the Department’s public-facing
data initiatives by building cohesiveness in internal processes and data policies and by
improving transparency in all matters surrounding the Department’s collection of data. The DST
supports states’ use of education data through data websites and technical assistance to
grantees. Specifically, the DST will find best practices for the use and promotion of data policy.

The DST is an open group, available to all those within the Department who wish to participate.
The goal of meetings is to increase communication and awareness of data-related projects
across the Department. Nearly every principal office has an official representative who
participates in the larger DST meetings, and there are approximately 100 DST members.

There are currently four active workgroups for the DST to address the following topics: Data
Dashboard, Data Inventory, Open Government, and Data Release. The Data Dashboard group
is planning for the transition of the Dashboard.Ed.Gov website from its current version 1.0,
launched in January, 2011, to an intermediate update, and on to an eventual version 2.0 with
significantly improved features. Members of the Data Inventory group have begun the
challenging task of defining what are “data” across the Department and also have made initial
steps in cataloging the Department’s data holdings. Responding to initiatives from the White
House and OMB, the Open Government group is helping the Department navigate the
requirements for transparency and openness mandated for all federal agencies. Finally, the
newest group, Data Release, is designing a coordination process to improve the way that the
Department releases data and data-based reporting to the public, while balancing the need to
protect privacy and confidentiality.

Mapping State Standards. In FY 2011, the Department released a report comparing the
relative rigor of state proficiency standards in reading and mathematics using the National
Assessment of Educational Progress (NAEP) scale as a common yardstick. Each individual
state develops its own state assessments in reading and math and sets its own proficiency
standard. As a result, states vary widely in the standards they set for students. By using NAEP
as a benchmark, it was possible to compare state proficiency standards.

Uniform Graduation Rate. In FY 2011, states will begin reporting high school graduation rates
for the 2010-11 school year using a more rigorous four-year adjusted cohort, as developed by
the nation’s governors in 2005. Since data reporting requirements were first implemented under
No Child Left Behind, states have calculated graduation rates using varying methods, creating
inconsistent data from one state to the next. The transition to a uniform high school graduation
rate requires all states to report the number of students who graduate in four years with a
standard high school diploma, divided by the number of students who entered high school four
years earlier, and accounting for student transfers in and out of school. The Department
anticipates that the more rigorous method will result in lower reported graduation rates, but it will
reflect a more accurate calculation of how many U.S. students complete high school on time.



22                                                         FY 2011 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


Version 2.0 ED Data Express. During FY 2011, the Department launched an interactive
website to make more accurate and timely K-12 education data available to the public. The new
version provides the public with more dynamic tools to interact with the data, such as a mapping
feature that allows users to view the data displayed on a map of the United States; a trend line
tool, which displays a data element graphed across multiple school years; and a conditional
analysis tool, which allows users to view one data element based on conditions set by another
data element.

The site currently includes data from the Department’s EDFacts data system, Consolidated
State Performance Reports (CSPR), State Accountability Workbooks, and the National Center
for Education Statistics (NCES), the College Board, and the Department’s Budget Service
office. In addition, the site has improved documentation and added the ability to share
information from the site using social networking tools, such as Facebook or Twitter.

The Department’s Evaluation Initiative

In May 2010, the Department launched a new agency-wide evaluation planning process to
better align its investments in knowledge building with the Department’s strategic plan and its
budget and policy priorities and to support appropriate resource allocation. The process—led
jointly by the Department’s Office of Planning, Evaluation and Policy Development (OPEPD)
and the Institute of Education Sciences—was developed to identify the Department’s key
priorities for evaluations that can provide reliable measures of the impacts of programs, policies,
and strategies, as well as for a range of research and evaluation activities that build knowledge
important to inform policy and practice more broadly (e.g., performance measurement, grantee
evaluation, and support).

This planning process includes regular discussions with program and policy offices within the
Department and reviews of existing research and recent and ongoing evaluation investments in
the Department. While the planning process is informed by the knowledge generated through
the Department’s investments in long term programs of research, it focuses on knowledge
building activities initiated and carried out by the Department.

In FY 2011, the Department developed and approved a set of priority research questions which
will help shape its future investments in knowledge building. Planning for FY 2011 investments
was completed this spring and planning for FY 2012 is underway, although final decisions are
contingent on appropriations action. The evaluation planning process consists of the evaluation
planning team meeting with the Department’s policy and program offices and based on their
input, developing recommendations for the evaluation activities the Department will support.

Each office is asked to identify its highest priority research questions, as well as any program-
specific research questions they would like addressed in that year and beyond. The evaluation
planning team’s recommendations are designed to ensure that the evaluation activities
supported annually by the Department, as a whole and to the extent possible, respond to those
research questions identified as highest priority to the policy and program offices. Program
offices are given the opportunity to raise any concerns they have with the evaluation planning
team’s recommendations.

The Department plans to engage annually in a similar strategic planning process for
investments in knowledge building.




FY 2011 Agency Financial Report—U.S. Department of Education                                     23
MANAGEMENT’S DISCUSSION AND ANALYSIS


Goal 6: U.S. Department of Education Capacity

Improve the organizational capacities of the Department to implement this Strategic Plan.

Department Decision Support System Tool for Grant Risk Management
For both FY 2011 and FY 2012, the Department has placed a high priority on using data to
continuously improve its grant-making processes. To that end, the Department’s Risk
Management Service (RMS) developed the Decision Support System Entity Risk Review
(support review).

The support review is a data analysis tool
that has been developed in collaboration
with leadership and staff from various
Principal Offices. The support review
facilitates program officers’ access to risk-
related information and consolidates
disparate data sources into one report.

The support review (example summary
page shown above) provides financial,
administrative, and internal controls data
about grantees. Specifically, the support review includes data from: Dun & Bradstreet, the
grants management system (G5), the Federal Audit Clearinghouse, and the Adverse
Accreditation Actions list distributed by OPE. The Administrative Risk Score represents previous
compliance history with the Department and is comprised mainly of data elements from the
Department’s grant management system (G5).

The Financial Risk Score presents an overview of the applicant’s management of its finances
using data elements related to its payments activities and credit scores. The Internal Controls
Risk Score is based on the entities A-133 audit finding data. Each data element has an
associated point value—the higher the score, the greater the potential risk that may require the
application of risk mitigation strategies.

To make the summary page more user-friendly, the scores are color-coded such that green
indicates low potential risk, yellow indicates an elevated potential risk, and salmon indicates a
significant potential risk. When used in conjunction with other relevant programmatic
information, the support review results in informed monitoring and decision-making, and
highlights potential areas of risk.

RMS piloted the support review during FY 2011, making reviews available upon request by the
program office. The pilot included four program offices: Office of Elementary and Secondary
Education, Office of Innovation and Improvement, Office of Special Education and Rehabilitative
Services, and Office of Postsecondary Education.

As of August 2011, RMS has delivered more than 150 review reports to both pilot and non-pilot
programs and collected user feedback to assess the efficacy of the review reports. This
feedback will be used to enhance and refine the tool for the upcoming FY 2012 release.

As a result of the FY 2011 pilot, RMS identified new ways to promote data-driven decision
making in the grants management process. For FY 2012 and beyond, the long-term goal for the
use of the support review is to formalize and streamline the processes the Department uses to:



24                                                        FY 2011 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


identify areas of potential risk in the Department’s grant portfolio; determine when grant
conditions could be used to mitigate risk; encourage consistent treatment of grantees across
program offices; and develop appropriate monitoring, technical assistance, and oversight plans
as a part of grants management.

Customer Satisfaction with the Department of Education

For FY 2011, the Department significantly expanded its external survey of customer satisfaction
with its products and services. The survey began seven years ago in response to a key metric in
the Department’s Strategic Plan. In FY 2010, metrics of customer satisfaction, both internal and
external, were added to the Department’s Organizational Performance Review, which contains
metrics for a variety of assessments of principal office strategic and organizational performance
and the survey was expanded to include 15 programs.

This year, in response to the President’s April 27, 2011, Executive Order 13571 Streamlining
Service Delivery and Improving Customer Service, the Department expanded its survey to
include 45 programs with a future goal of surveying 20 percent of Department programs
representing the top 80 percent of program dollars.

The survey uses the American Customer Satisfaction Index (ACSI). The ACSI is the national
indicator of customer evaluations of the quality of goods and services. It is the only uniform
benchmarking measure of customer satisfaction across agencies and private industry.

The ACSI allows benchmarking between federal agencies and provides information unique to
each agency on how activities that interface with the public affect the satisfaction of its
customers. The ACSI is a weighted average of three questions that measure: overall
satisfaction, satisfaction compared to expectations, and satisfaction compared to an ideal
organization.

Additionally, each principal office in the Department surveys their stakeholders on the effective
use of technology, clarity and organization of documents, staff knowledge, responsiveness,
collaboration with other Department offices, provision of technical assistance, and ease of
accessing online resources.

In FY 2011, there was no change in satisfaction from the previous year—72 points on a
100-point scale. The Department is now six points above the federal government average of 65.
Staff scores were up two points, while technology and online resources were down two points
from FY 2010. Complaints remained at one percent. Below is a comparison of the results of
major Department programs from FY 2010 and FY 2011.

To review the complete results of the FY 2011 survey and previous surveys:
http://www2.ed.gov/about/reports/annual/gss/index.html




FY 2011 Agency Financial Report—U.S. Department of Education                                        25
MANAGEMENT’S DISCUSSION AND ANALYSIS


                 Satisfaction With Major Department Programs, FY 2010 and FY 2011


            OESE - Indian Education Formula Grants to Local                                                                 79
                          Education Agencies                                                                                79


     OVAE - Adult Education and Family Literacy to the State                                                                78
                     Directors of Adult Ed                                                                             75


               OESE - Rural Education Achievement Program                                                                  77
               (REAP)/Rural and Low Income School Program                                                             72


          OESE - Smaller Learning Communities/Fund for the                                                             74
                     Improvement of Education                                                                               79


       OVAE - Carl D. Perkins Career & Technical Education                                                             74
      Program to the State Directors of Career & Technical Ed                                                         73


                                                                                                                      73
               OESE - Improving Teacher Quality State Grants
                                                                                                                  71


                                                                                                                      72
                            OESE - School Improvement Fund
                                                                                                                       74


          OESE - Payments for Federally Connected Children                                                            72
                           (Section 8003)                                                                             73


            OESE - Title I, Part A - Improving Basic Programs                                                     70
               Operated by Local Educational Agencies                                                                 73


 OESE - English Language Acquisition State Grants/Title III                                                      68
               State Formula Grant Program                                                                       69


                                                                                                             67
       OSERS - Lead Agency Early Intervention Coordinators
                                                                                                            65


                                                                                                            64
     OESE - Migrant Education Program (MEP) -- Title I, Part C
                                                                                                                 69


                                                                                                       59
                OSERS - State Directors of Special Education
                                                                                                            65


                                                                                                       58
                              OESE - Teacher Incentive Fund
                                                                                                                  70


                                                                                                  54
                        OESE - State Fiscal Stabilization Fund
                                                                                                             66



                                                         2011    2010




26                                                                      FY 2011 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
tenth consecutive year, the Department 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 OMB’s 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.

Financial Position

The Department’s financial statements are prepared in accordance with established federal
accounting standards, as promulgated by the Federal Accounting Standards Advisory Board
(FASAB), and are audited by the independent accounting firm of Ernst & Young, LLP. The
Office of Inspector General (OIG) provides audit oversight. Financial statements and footnotes
for FY 2011 appear on pages 37–86. An analysis of the principal financial statements follows.

Balance Sheet.
The Balance Sheet
presents, as of a
specific point in
time, the recorded
value of assets and
liabilities retained or
managed by the
Department. The
difference between
assets and liabilities
represents the net
position of the
Department. The
Balance Sheet
displayed on page
37 reflects total
assets of
$647 billion, a 28 percent increase over FY 2010. The vast majority of this increase is due to
Credit Program Receivables, which increased by $162.6 billion, a 44 percent increase over
FY 2010. This increase is largely the result of Direct Loan disbursements, net of borrower
principal and interest collections, which increased the net portfolio for Direct Loans by
$153.2 billion. The volume of Direct Loans greatly increased this year because of the transition
from the Federal Family Education Loan program (FFEL) to the Direct Loan program. The Fund
Balance with Treasury decreased by $18.2 billion, a 14 percent decrease from FY 2010. This
decrease is largely due to Recovery Act and Education Jobs Fund disbursements during
FY 2011.

Total liabilities for the Department increased by $161.9 billion, a 39 percent increase over
FY 2010. The increase is the result of current year borrowing for the Direct Loan and FFEL
Programs that provided funding for Direct Loan disbursements and FFEL Program downward
re-estimates. This current year borrowing, net of repayments, resulted in a $172.8 billion


FY 2011 Agency Financial Report—U.S. Department of Education                                         27
MANAGEMENT’S DISCUSSION AND ANALYSIS


increase in Debt. Liabilities for Loan Guarantees for the FFEL Program decreased by
$4.5 billion, a 31 percent decrease that is primarily due to FY 2011 subsidy re-estimates.

The Department’s Net Position as of September 30, 2011, was $68.6 billion, a $19.0 billion
decrease from FY 2010. This decrease is largely due to Recovery Act and Education Jobs Fund
disbursements during this time period.

Statement of Net
Cost. The
Statement of Net
Cost presents the
components of
the Department’s
net cost, which is
the gross cost
incurred less any
revenues earned
from the
Department’s
activities. The
Department’s
total program net
costs, as
reflected on the
Statement of Net
Cost, page 38,
were $69.5 billion
for the period
ended September 30, 2011, a 30 percent decrease from the prior year. This decrease is largely
the result of a $27.1 billion decrease in Direct Loan program subsidy related costs and a
$16.1 billion decrease in Recovery Act and Education Jobs Fund disbursements. The reduction
in Direct Loan program subsidy related costs reflects an increase in negative subsidy transfers
and re-estimated subsidy costs. This represents an overall decrease in net costs.

As required by the GPRA Modernization Act of 2010, each of the Department’s reporting groups
and major program offices have been aligned with the goals presented in the Department’s draft
Strategic Plan 2011–2014.

                                       Reporting Group/
      Net Cost Program                                                            Draft Strategic Goal
                                        Program Office
Increase College Access,               Federal Student Aid                1. Increase college access,
Quality, and Completion                                                      quality, and completion by
                                Office of Postsecondary Education            improving higher education
                                                                             and lifelong learning
                                  Office of Vocational and Adult             opportunities for youth and
                                             Education                       adults.




28                                                           FY 2011 Agency Financial Report—U.S. Department of Education
                                                                                   MANAGEMENT’S DISCUSSION AND ANALYSIS



                                                           Reporting Group/
         Net Cost Program                                                                     Draft Strategic Goal
                                                            Program Office
Improve Preparation for College                        Office of Elementary and          2. Prepare all students for
and Career from Birth Through                           Secondary Education                 college and career by
12th Grade, Especially for                                                                  improving the elementary
Children with High Needs                            Office of Safe and Drug-Free            and secondary education
                                                               Schools                      system’s ability to
                                                                                            consistently deliver excellent
                                                   Hurricane Education Recovery             classroom instruction and
                                                                                            supportive services.
                                                                                         3. Improve the health, social-
                                                                                            emotional, and cognitive
                                                                                            outcomes for all children
                                                                                            from birth through third
                                                                                            grade, so that all children,
                                                                                            particularly those with high
                                                                                            needs, are on track for
                                                                                            graduating from high school
                                                                                            college- and career-ready.
Ensure Equitable Educational                         Office of English Language          4. Ensure equitable educational
Opportunities for All Students                                Acquisition                   opportunities for all students
                                                                                            regardless of race, ethnicity,
                                                         Office for Civil Rights            national origin, age, sex,
                                                                                            disability, language, and
                                                  Office of Special Education and           socioeconomic status.
                                                       Rehabilitative Services
Enhance the Education                             Institute of Education Sciences        5. Enhance the education
System’s Ability to Continuously                                                            system’s ability to
Improve                                                Office of Innovation and             continuously improve
                                                             Improvement                    through better and more
                                                                                            widespread use of data,
                                                                                            research and evaluation,
                                                                                            transparency, innovation and
                                                                                            technology
American Recovery and                                  American Recovery and
Reinvestment Act and                                     Reinvestment Act                   Cuts across draft Strategic
Education Jobs Fund                                                                         Goals 1–5
                                                         Education Jobs Fund


Draft Strategic Plan Goals 1-5 are sharply defined directives that guide the Department’s
program offices to carry out the vision and programmatic mission, and the net cost programs
can be specifically associated with these five draft strategic goals. The Department also has a
cross-cutting draft Strategic Plan Goal 6, U.S. Department of Education Capacity, which focuses
on improving the organizational capacities of the Department to implement the draft Strategic
Plan. As a result, the Department do not assign specific programs to draft Strategic Plan Goal 6
for presentation in the Statement of Net Cost.

The goals of the Recovery Act and Education Jobs Fund are consistent with the Department’s
current draft Strategic Plan goals and programs.

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 40 shows that the Department had $366.4 billion in total budgetary resources


FY 2011 Agency Financial Report—U.S. Department of Education                                                              29
MANAGEMENT’S DISCUSSION AND ANALYSIS


for the period ended September 30, 2011. These budgetary resources were composed of
$103.5 billion in appropriated budgetary resources and $262.9 billion in non-budgetary credit
reform resources that primarily consist of borrowing authority for the loan programs. Of the
$20.8 billion that remained unobligated for the period ended September 30, 2011, $16.6 billion
represents funding provided in advance for activities in future periods that were not available at
year end. These funds will become available during the next, or future, fiscal years.

                   Limitations of the 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 2011 and FY 2010,
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. The implications of this are that the liabilities presented herein
cannot be liquidated without the enactment of appropriations, and that ongoing operations are
subject to the enactment of future appropriations.




30                                                        FY 2011 Agency Financial Report—U.S. Department of Education
                                                               MANAGEMENT’S DISCUSSION AND ANALYSIS


Office of Inspector General’s (OIG) Management Challenges for
                  Fiscal Year 2012 Highlights
The Office of Inspector General (OIG) works to promote efficiency, effectiveness, and integrity
in the programs and operations of the Department. Through its audits, inspections,
investigations, and other reviews, OIG continues 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 to identify and
summarize the most significant management challenges facing the Department each year.

Last year we presented four management challenges: implementation of new
programs/statutory changes, oversight and monitoring, data quality and reporting, and
information technology security. All of the prior management challenges remain challenges for
FY 2012. The first FY 2011 challenge, implementation of new programs/statutory changes,
which incorporated aspects of the Recovery Act, and the Ensuring Continued Access to Student
Loans Act of 2008, has been incorporated into the oversight and monitoring challenge. In
addition, we have added a new challenge related to improper payments. The FY 2012
management challenges are:

•    Improper Payments,
•    Information Technology Security,
•    Oversight and Monitoring, and
•    Data Quality and Reporting.

The Executive Summary of Management Challenges for FY 2012 is included in the Other
Accompanying Information section of this report and the full report is published by the
Department’s Office of Inspector General. To view the full report, go to:
http://www2.ed.gov/about/offices/list/oig/managementchallenges.html.




FY 2011 Agency Financial Report—U.S. Department of Education                                     31
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 internal control system. Internal controls are an integral component of
an organization’s management that provide reasonable assurance that the following objectives
are being achieved:

•    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 internal
controls are implemented in their areas of responsibility. Individual assurance statements from
senior management serve as the primary basis for the Department’s assurance that the controls
are adequate. The assurance statement provided on page 33 is the result of our annual
assessment and is based upon each senior officer’s evaluation of controls.

Offices within the Department that identify material weaknesses 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 the
Department’s 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 only provide 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. The instances of noncompliance generally relate to user access issues, e.g. the timely
removal of access for terminated employees, inconsistent maintenance of access approval
documentation, revalidation of user rights not consistently performed, password configuration
not in compliance with Department policy, lack of monitoring of the activities of administrators,
etc. The Department will continue its efforts to address security and control weaknesses with an
emphasis on addressing the root cause of the security or control weakness uniformly across the
organization. The goal of this action is to decrease the likelihood of similar weaknesses being
identified in future audit assessments.


32                                                          FY 2011 Agency Financial Report—U.S. Department of Education
                                                                              MANAGEMENT’S DISCUSSION AND ANALYSIS


The Department continues to meet the criteria for achieving compliance because the
Department has demonstrated that the deficiencies do not have an impact on the following:

•    Financial statements, both annual and quarterly preparations, and other required financial
     and budget reports are prepared using information generated by the Financial Management
     Support System (FMSS).
•    Reliable and timely financial information for managing current operation is provided by the
     financial management system. Financial information is available both via online and
     standard reports to provide for financial analysis and support decision making. Reporting is
     in compliance with OMB guidance.
•    The Financial Management Support System operations and procedures remain consistent
     with Federal accounting standards and comply with the U.S. Government Standard General
     Ledger guidance at a transactional level.

                         Federal Managers’ Financial Integrity Act

        Management at 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 OMB 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 and financial management systems as of
        September 30, 2011, 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, 2011, 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 15, 2011




FY 2011 Agency Financial Report—U.S. Department of Education                                                    33
MANAGEMENT’S DISCUSSION AND ANALYSIS


                  Financial Management Systems Strategy
The Department’s FMSS is designated a mission-critical system of the Department that
provides department-wide core financial management services. These services include funds
control, budget planning, general ledger, administrative payments, accounts receivable;
financial management system and access controls; financial system reports, including financial
statements, FACTS, SF224, etc. The Department expects to continue on its improvements in
the following performance outcomes from this initiative: continued control over and
accountability of Department financial management services including, financial management
system controls and practices, including cross-validation rules that prevent erroneous
accounting transactions from being processed; financial system reporting capabilities that
continued the ability to respond quickly to internal and external financial information inquiries.
Additional outcomes are continued tight integration and streamlining with the Office of Federal
Student Aid and business processes; reduced manual reconciliation efforts for the Financial
Management Operations Group within the Office of the Chief Financial Officer; reduction of
errors and improved funds control; better data sharing and centralized data edits and controls
that could otherwise get out of synchronization between the FMSS and its feeder systems; and
budget planning that integrates with the general ledger.

Currently, the FMSS resides on an Oracle database and uses the Oracle 11.5.10 (11i) version
of the software. The Oracle system has operated successfully for the Department since its
implementation in January 2002. Since this time, the Department has met all of its financial
management performance measures, which include receiving unqualified financial statement
audit opinions for each year since implementation, system availability rates of better than 99%
of the scheduled time and closing periods within three days of the end of the month.

Oracle has recently issued Release 12 of its software. This version has passed the necessary
testing and is federally compliant for financial management. The Department has completed an
analysis on the change between the 11i and Release 12 versions of the software to determine
the benefits and level of effort to implement the new version. Based on the outcome of this
analysis the Department has decided to delay migration to Release 12 until 2015. The
Department will develop an implementation plan during 2013. Implementation activities will
begin during 2014 and will be completed by October 2015. These timeframes are subject to
change based on funding levels and other priorities. The FMSS is in compliance with FFMIA,
Federal Accounting Standards Advisory Board, U. S. Government Standard General Ledger,
and Financial Systems Integration Office guidelines for financial management systems. No
remediation actions are necessary.




34                                                        FY 2011 Agency Financial Report—U.S. Department of Education
Financial Details
FINANCIAL DETAILS



                 Message From the Chief Financial Officer
The Department of Education continued its high standard of
financial management and reporting during FY 2011. The
Department’s excellence in financial management has been a
joint effort of its managers, employees, and business
partners. In FY 2011, we:

•     Continued to implement initiatives to ensure accessibility
      of federal student loans to eligible students and parents;
•     Received an unqualified opinion on the principal financial
      statements for the tenth consecutive year, continuing a
      clear pattern of financial accountability; and
•     Continued to have no material weaknesses identified by
      our auditors as part of their Report on Internal Control.

In FY 2011, the Department also took steps to address the
two remaining significant deficiencies identified in the “Report on Internal Controls” for
FY 2010: credit reform and information systems.

The Department continued to improve communication around its credit reform programs by
holding monthly credit reform work group meetings among senior managers to review
assumptions and procedures. A team from Budget Service and the Chief Financial Officer
also completed a comprehensive cohort analysis for both the Direct Loan and Federal
Family Education Loan programs to identify and reconcile any differences in estimated cash
flows and general ledger entries. The cohort analysis was requested by our external
auditors as a tool to validate the credit reform estimates.

Steps on information systems included continued efforts to improve security and controls.
For example, the Department is transforming its Information Assurance and Cyber Security
Program, including undertaking a full vulnerability assessment of the EDUCATE and Virtual
Data Center IT environments and employing a new continuous monitoring program to
automate the Federal Information Security Management Act of 2002 (FISMA) reporting tool.
The Department has also expanded the scope and functionality of the Education Computer
Incident Response Center to provide improved oversight of information technology
operations and security and to leverage additional and more efficient security functionality.

During FY 2011, the Department also 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 the functions and duties of Chief Financial Officer
November 15, 2011




36                                                     FY 2011 Agency Financial Report—U.S. Department of Education
                                                                                                  FINANCIAL DETAILS
                                                                                       PRINCIPAL FINANCIAL STATEMENTS



                                          United States Department of Education
                                               Consolidated Balance Sheet
                                                As of September 30, 2011 and 2010
                                                               (Dollars in Millions)



                                                                                               FY 2011             FY 2010
Assets:
  Intragovernmental:
      Fund Balance with Treasury (Note 3)                                                  $      114,085     $       132,259
      Accounts Receivable (Note 4)                                                                                          1
      Other Intragovernmental Assets (Note 8)                                                          50                 102
  Total Intragovernmental                                                                         114,135             132,362

 Cash and Other Monetary Assets (Note 5)                                                            1,664               2,965
 Accounts Receivable, Net (Note 4)                                                                    138                 239
 Credit Program Receivables, Net (Note 6)                                                         530,491             367,904
 General Property, Plant and Equipment, Net (Note 7)                                                   16                  28
 Other Assets (Note 8)                                                                                 98                 166
Total Assets (Note 2)                                                                      $      646,542     $       503,664


Liabilities:
  Intragovernmental:
      Accounts Payable                                                                     $           34      $            1
      Debt (Note 9)                                                                               547,108             374,335
      Guaranty Agency Federal and Restricted Funds Due to Treasury (Note 5)                         1,664               2,965
      Payable to Treasury (Note 6)                                                                  3,890               2,424
      Other Intragovernmental Liabilities (Note 10)                                                 6,843              12,958
  Total Intragovernmental                                                                         559,539             392,683

 Accounts Payable                                                                                   4,248               4,810
 Accrued Grant Liability (Note 11)                                                                  3,928               3,744
 Liabilities for Loan Guarantees (Note 6)                                                          10,025              14,479
 Other Liabilities (Note 10)                                                                          217                 346
Total Liabilities                                                                          $      577,957     $       416,062

  Commitments and Contingencies (Note 21)

Net Position:
  Unexpended Appropriations
     Other Funds                                                                           $       71,729     $          94,371
  Cumulative Results of Operations
     Earmarked Funds (Note 20)                                                                          4                     4
     Other Funds                                                                                   (3,148)               (6,773)

Total Net Position (Note 12)                                                               $       68,585     $          87,602

Total Liabilities and Net Position                                                         $      646,542     $       503,664




The accompanying notes are an integral part of these statements.




FY 2011 Agency Financial Report—U.S. Department of Education                                                        37
FINANCIAL DETAILS
PRINCIPAL FINANCIAL STATEMENTS



                                  United States Department of Education
                                   Consolidated Statement of Net Cost
                              For the Years Ended September 30, 2011 and 2010
                                                    (Dollars in Millions)



                                                                                               FY 2011                     FY 2010
Program Costs

     Increase College Access, Quality, and Completion
         Gross Costs                                                                      $          21,785           $         32,504
         Less: Earned Revenue                                                                        20,252                     17,116
         Net Program Costs                                                                            1,533                     15,388

     Total Program Costs                                                                  $            1,533           $        15,388


     Improve Preparation for College and Career from Birth Through
     12th Grade, Especially for Children with High Needs
        Gross Costs                                                                       $          21,910            $        22,522
        Less: Earned Revenue                                                                             83                         96
        Net Program Costs                                                                            21,827                     22,426

     Total Program Costs                                                                  $          21,827            $        22,426


     Ensure Equitable Educational Opportunities for All Students
        Gross Costs                                                                       $          16,409           $         16,163
        Less: Earned Revenue                                                                             23                         26
        Net Program Costs                                                                            16,386                     16,137

     Total Program Costs                                                                  $          16,386           $         16,137


     Enhance the Education System’s Ability to Continuously Improve
        Gross Costs                                                                       $            1,841           $         1,685
        Less: Earned Revenue                                                                              39                        41
        Net Program Costs                                                                              1,802                     1,644

     Total Program Costs                                                                  $            1,802           $         1,644


     American Recovery and Reinvestment Act and Education Jobs Fund
       Gross Costs                                                                        $          27,965            $        44,079
       Less: Earned Revenue
       Net Program Costs                                                                             27,965                     44,079

     Total Program Costs                                                                  $          27,965            $        44,079


Net Cost of Operations (Notes 13 &16)                                                     $          69,513            $        99,674




The accompanying notes are an integral part of these statements.




38                                                               FY 2011 Agency Financial Report—U.S. Department of Education
                                                                                                               FINANCIAL DETAILS
                                                                                                 PRINCIPAL FINANCIAL STATEMENTS

                                      United States Department of Education
                                 Consolidated Statement of Changes in Net Position
                                      For the Years Ended September 30, 2011 and 2010
                                                                   (Dollars in Millions)


                                                                            FY 2011                                 FY 2010
                                                                   Cumulative                              Cumulative
                                                                   Results of     Unexpended               Results of     Unexpended
                                                                   Operations    Appropriations            Operations    Appropriations


Beginning Balances
      Earmarked Funds                                          $                4                      $              8
      All Other Funds                                          $           (6,773) $        94,371     $           (217) $         127,269
Budgetary Financing Sources:
  Appropriations Received
     Earmarked Funds
     All Other Funds                                                                   $    94,398                             $    92,900
  Other Adjustments (rescissions, etc)
     Earmarked Funds                                           $                  1
     All Other Funds                                                             (2)         (1,051)   $            (2)              (1,292)
  Appropriations Used
     Earmarked Funds
     All Other Funds                                                      115,989          (115,989)            124,506            (124,506)
  Nonexchange Revenue
     Earmarked Funds
     All Other Funds                                                              3                                 12
  Donations and Forfeitures of Cash and Cash
  Equivalents
     Earmarked Funds                                                              1
     All Other Funds
  Nonexpenditure Financing Sources
  Transfers-Out
     Earmarked Funds
     All Other Funds                                                           (24)                                 (19)
Other Financing Sources:
  Imputed Financing from Costs Absorbed by
  Others
     Earmarked Funds
     All Other Funds                       $                                    38                     $            30
  Others
     Earmarked Funds
     All Other Funds                                                     (42,868)                               (31,413)
Total Financing Sources
      Earmarked Funds                                          $               2
      All Other Funds                                                     73,136       $   (22,642)    $        93,114     $       (32,898)
Net Cost of Operations
      Earmarked Funds                                          $              (2)                      $             (4)
      All Other Funds                                                    (69,511)                               (99,670)
Net Change
      Earmarked Funds                                                                                  $             (4)
      All Other Funds                                          $             3,625 $       (22,642)              (6,556) $         (32,898)
Ending Balances (Note 12)
      Earmarked Funds                                          $                4                      $              4
      All Other Funds                                          $           (3,148)     $     71,729    $         (6,773)   $         94,371



The accompanying notes are an integral part of these statements.


FY 2011 Agency Financial Report—U.S. Department of Education                                                                          39
FINANCIAL DETAILS
PRINCIPAL FINANCIAL STATEMENTS

                                   United States Department of Education
                                 Combined Statement of Budgetary Resources
                                  For the Years Ended September 30, 2011 and 2010
                                                          (Dollars in Millions)


                                                                             FY 2011                                   FY 2010
                                                                               Non-Budgetary                             Non-Budgetary
                                                                                Credit Reform                             Credit Reform
                                                                                  Financing                                 Financing
                                                                    Budgetary     Accounts                     Budgetary    Accounts
Budgetary Resources:
Unobligated balance, brought forward, October 1                     $      6,526            $     15,654       $    36,601         $       9,994
Recoveries of prior year Unpaid Obligations                                1,575                  12,203             1,077                 4,436
Budgetary Authority:
    Appropriations                                                        94,967                      2             96,823                    2
    Borrowing Authority (Note 15)                                                               211,980                                 183,079
    Spending authority from offsetting collections (gross):
      Earned
         Collected                                                         1,825                  53,169              1,613              51,979
         Change in Receivables from Federal Sources                                                                      (2)                  3
       Change in unfilled customer orders
         Advance Received                                                     (7)                      0                                       0
         Without advance from Federal Sources                                  4                     13                                       4
Subtotal                                                            $     96,789            $   265,164        $  98,434            $   235,067
Temporarily not available pursuant to Public Law                                                       0            (561)                      0
Permanently not available                                              (1,396)                  (30,134)          (5,204)               (17,355)
Total Budgetary Resources (Note 15)                                 $ 103,494               $   262,887        $ 130,347            $   232,142

Status of Budgetary Resources:
Obligations incurred: (Note 15)
    Direct                                                          $     97,980            $   247,485        $ 123,731            $   216,488
    Reimbursable                                                              80                     (0)              90                     (0)
Unobligated Balances:
    Apportioned                                                      $  3,036               $       634        $   2,351           $      1,433
Unobligated Balance not available                                       2,398                    14,768            4,175                 14,221
Total Status of Budgetary Resources                                 $ 103,494               $   262,887        $ 130,347            $   232,142

Change in Obligated Balance:
Obligated balance, net:
    Unpaid obligations, brought forward, October 1                  $     94,693            $   150,831        $    95,488          $   133,797
    Uncollected customer payments from Federal Sources,
    brought forward, October 1                                                (2)                    (14)                (4)                  (7)
    Total, unpaid obligated balance, brought forward, net           $     94,691            $    150,817       $     95,484         $    133,790
Obligations Incurred, net (+/-)                                           98,060                 247,485            123,821              216,488
Gross Outlays                                                           (118,494)               (221,724)          (123,539)            (195,018)
Recoveries of prior year unpaid obligations, actual                       (1,575)                (12,203)            (1,077)              (4,436)
Change in uncollected customer payments from Federal
Sources (+/-)                                                                     (4)                 (13)                  2                    (7)
Obligated Balance, net, end of period:
    Unpaid Obligations                                              $     72,684            $   164,389        $    94,693          $   150,831
    Uncollected customer payments from Federal Sources                        (6)                   (27)                (2)                 (14)
Total, Unpaid Obligated Balance, Net, End of Period                 $     72,678            $   164,362        $    94,691          $   150,817

Net Outlays:
    Gross Outlays                                                   $ 118,494               $   221,724        $ 123,539            $   195,018
    Offsetting collections                                             (1,818)                  (53,169)          (1,613)               (51,979)
    Distributed Offsetting receipts                                   (50,289)                                   (29,046)
Net Outlays (Note 15)                                               $ 66,387                $   168,555        $ 92,880             $   143,039


The accompanying notes are an integral part of these statements.



40                                                                                FY 2011 Agency Financial Report—U.S. Department of Education
                                                                                FINANCIAL DETAILS



               Notes to the Principal Financial Statements
           For the Years Ended September 30, 2011 and 2010

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 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, authorizes the Department to make loans directly to
eligible undergraduate and graduate students and their parents through participating
schools. Under this program, 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
while the students are in school or in a deferment period.
The FFEL Program, 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. The SAFRA Act, which was included in the Health Care
and Education Reconciliation Act of 2010 and became effective July 1, 2010, provided that
no new FFEL loans would be made after June 30, 2010.
The Ensuring Continued Access to Student Loans Act of 2008 (ECASLA) authorized 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
implemented three activities under this temporary loan purchase authority. These activities
are: (1) loan purchase commitments; (2) loan participation purchases; and (3) an Asset-
Backed Commercial Paper (ABCP) Conduit.
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
secondary education; special education and rehabilitative services grants; grants to support
institutions of higher education; educational research and improvement grants; grants to
assist low-income and first-generation college students prepare for and transition into
college; grants to improve our global awareness and competitiveness; and fellowships for
college and graduate students. Through the facilities loan programs, the Department
administers low-interest loans to institutions of higher education for the construction and
renovation of facilities.




FY 2011 Agency Financial Report—U.S. Department of Education                                    41
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS

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, 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 American Recovery and Reinvestment Act of 2009 (Recovery Act), enacted on
February 17, 2009 as Public Law 111-5, provided 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 of stabilizing 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.
Public Law 111-226, enacted on August 10, 2010, created the Education Jobs Fund, which
provided funding to the Department to assist in saving and creating jobs for the 2010-11
school year. The Department was authorized to disburse these funds promptly to states
through formula grants, while ensuring transparency and accountability overall.
Reporting Groups
The financial reporting structure of the Department presents operations based on five
reporting groups that administer the loan and grant programs. The reporting groups are
shown below.
•    Federal Student Aid (FSA)                   •   Office of Special Education and
•    Office of Elementary and Secondary              Rehabilitative Services (OSERS)
     Education (OESE)                            •   Other
•    American Recovery and Reinvestment
     Act and Education Jobs Fund (RA/JF)
The “Other” reporting group consists of the Office of Vocational and Adult Education
(OVAE), Office of Postsecondary Education (OPE), Institute of Education Sciences (IES),
Office of English Language Acquisition (OELA), Office of Safe and Drug-Free Schools
(OSDFS), Office of Innovation and Improvement (OII), Office of Management, Office for
Civil Rights (OCR), and Hurricane Education Recovery (HR) activities. (See Notes 11, 13,
and 20)
FSA, IES, OESE, OII, and OSERS are responsible for the administration of Recovery Act
funds. OESE is responsible for administration of the Education Jobs Fund. Recovery Act
and Education Jobs Fund activities are reported under the RA/JF reporting group. (See
Notes 11, 13, 18, 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 federal entities, issued by the Federal Accounting Standards Advisory
Board, and the Office of Management and Budget (OMB) Circular No. A-136, Financial



42                                                   FY 2011 Agency Financial Report—U.S. Department of Education
                                                                                          FINANCIAL DETAILS
                                                               NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS

Reporting Requirements, as revised October 2011. 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 fiscal year (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 and the amounts recorded.
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 for 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



FY 2011 Agency Financial Report—U.S. Department of Education                                             43
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS

probability. The Department’s approach estimates interest rates under numerous scenarios
and then bases 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 loan was
obligated or 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 financial statements were prepared using assumptions
developed for the FY 2012 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
unobligated balances of resources from prior years; recoveries of prior-year obligations;
and 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, the Historically Black Colleges and
Universities (HBCU) Capital Financing 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 principal and interest
collections from borrowers, related fees, and interest from Treasury on balances in 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, activities under the temporary loan purchase authority, and
the HBCU Capital Financing Program. In addition, borrowing authority is requested in



44                                                   FY 2011 Agency Financial Report—U.S. Department of Education
                                                                                          FINANCIAL DETAILS
                                                               NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS

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
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 the 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 2010,
which were statutorily not available for obligation until the following fiscal year. Because this
is a deferral made in law, it reduces total budgetary resources. (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)



FY 2011 Agency Financial Report—U.S. Department of Education                                             45
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


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 Federal Fund assets of state and nonprofit FFEL
Program guaranty agencies. Guaranty agency Federal Fund 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 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.
Sections 422A and 422B 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 the
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 and 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 between the gross amount and the allowance for subsidy 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



46                                                    FY 2011 Agency Financial Report—U.S. Department of Education
                                                                                                   FINANCIAL DETAILS
                                                                        NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS

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 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 of interest benefits and special
allowance payments 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)




FY 2011 Agency Financial Report—U.S. Department of Education                                                        47
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


Accounts Payable
Accounts Payable include amounts owed by the Department for goods and services
received from other entities and scheduled payments transmitted but not yet processed.
The Department’s accounts payable primarily consist of in-process grant and loan
disbursements to the public.
Debt
The Department borrows to provide funding for the Direct Loan, FFEL, and TEACH
Programs. 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 HBCU 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)
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 20)
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 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



48                                                   FY 2011 Agency Financial Report—U.S. Department of Education
                                                                                          FINANCIAL DETAILS
                                                               NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS

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, match voluntary employee contributions up to 3 percent of the employee’s
basic pay, and match one-half of contributions between 3 percent and 5 percent of the
employee’s 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 fund the
programs fully 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, employees who have incurred work-related occupational diseases, and
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)
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.
Reclassifications
Certain reclassifications were made to the FY 2010 financial statements and notes to
conform to the current year presentation. These changes had no effect on total assets,
liabilities, net position, net cost of operations, or budgetary resources. The FY 2010
Statement of Net Cost and related note were reclassified to align with the strategic goals
presented in the Department’s draft Strategic Plan 2011-2014. (See Note 13) Additional
reclassifications were made within the FFEL Program Receivables, Net section of Note 6,
Credit Programs for Higher Education, and within Note 16, Reconciliation of Budgetary
Obligations to Net Cost of Operations.
Additional Comparative Information
In FY 2011, the Department’s notes to the financial statements include disclosure of the
components of Distributed Offsetting Receipts. FY 2010 information is presented for
comparative purposes. (See Note 15)




FY 2011 Agency Financial Report—U.S. Department of Education                                             49
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


Note 2. Non-Entity Assets
As of September 30, 2011 and 2010, non-entity assets consisted of the following:
                                            Non-Entity Assets
                                               (Dollars in Millions)

                                                                               2011                          2010
       Non-Entity Assets
         Intragovernmental:
            Fund Balance with Treasury                                 $                70           $                93
             Total Intragovernmental                                                    70                            93
         With the Public:
          Cash and Other Monetary Assets                                            1,664                         2,965
          Accounts Receivable, Net                                                     34                            21
          Credit Program Receivables, Net                                             215                           183
             Total With the Public                                                  1,913                         3,169
       Total Non-Entity Assets                                                      1,983                        3,262
       Entity Assets                                                              644,559                      500,402
       Total Assets                                                     $         646,542            $         503,664


Non-entity intragovernmental assets primarily consist of deposit fund and clearing account
balances. Non-entity assets with the public primarily consist of guaranty agency reserves
and Federal 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, 2011 and 2010,
consisted of the following:
                                             Fund Balances
                                               (Dollars in Millions)

                                                                                2011                         2010

       General Funds                                                       $       76,432                $       98,792
       Revolving Funds                                                             37,562                       33,351
       Trust Funds                                                                       4                             5
       Special Funds                                                                    17                            18
       Other Funds                                                                      70                            93

       Fund Balance with Treasury                                          $     114,085                 $     132,259




50                                                          FY 2011 Agency Financial Report—U.S. Department of Education
                                                                                                     FINANCIAL DETAILS
                                                                          NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS

The Status of Fund Balance with Treasury, as of September 30, 2011 and 2010, consisted
of the following:
                                              Status of Fund Balance with Treasury
                                                                   (Dollars in Millions)

                                                                                                   2011                         2010

           Unobligated Balance:
              Available                                                                    $              3,670        $               3,784
              Unavailable                                                                              15,502                      15,431
           Obligated Balance, Not Yet Disbursed                                                        94,843                     112,390
           Authority Temporarily Precluded from Obligation                                                     -                        561
           Non-Budgetary Fund Balance with Treasury                                                          70                          93

           Fund Balance with Treasury                                                      $          114,085          $          132,259




Note 4. Accounts Receivable
Accounts Receivable, as of September 30, 2011 and 2010, consisted of the following:
                                                             Accounts Receivable
                                                                   (Dollars in Millions)

                                                                                                    2011
                                                                 Gross
                                                               Receivables                         Allowance               Net Receivables

           Intragovernmental                             $                    -                $                -      $                      -
           With the Public                                                322                               (184)                       138

           Accounts Receivable                           $                322                  $            (184)      $                138



                                                                                                     2010
                                                                 Gross
                                                               Receivables                         Allowance               Net Receivables

           Intragovernmental                             $                   1                 $                   -   $                  1
           With the Public                                                416                               (177)                       239

           Accounts Receivable                           $                417                  $            (177)      $                240




FY 2011 Agency Financial Report—U.S. Department of Education                                                                             51
FINANCIAL DETAILS
NOTES TO THE 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 Guaranty
Agency Federal and Restricted Funds Due to Treasury. The table below presents Cash and
Other Monetary Assets for the years ended September 30, 2011 and 2010.
                                     Cash and Other Monetary Assets
                                                   (Dollars in Millions)

                                                                                        2011                      2010
       Beginning Balance, Cash and Other Monetary Assets                         $          2,965           $         2,414
         Increase/(Decrease) in Guaranty Agency Federal Funds, net                        (1,301)                        989
         Less: Excess Collections Remitted by Guaranty Agencies                                  -                       438

       Ending Balance, Cash and Other Monetary Assets                            $          1,664           $         2,965


The $1.3 billion net decrease in the Federal Fund in FY 2011 represents the change in the
estimated value of net assets held in the FFEL guaranty agency Federal Funds. This
decrease reflects the impact of guaranty agencies’ operations and a refinement the
Department made to the process for estimating the valuation of the Federal Fund.


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 $133 billion in Direct Loans to eligible borrowers
in FY 2011 and approximately $75 billion in FY 2010. 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. The substantial increase in Direct Loan Program disbursements during FY
2011 resulted from the increased use of the Direct Loan Program in accordance with the
changes made by the SAFRA Act.
Approximately 9 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 before the student begins classes. For Direct Loans obligated
in the 2011 cohort, an estimated $14.5 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.
Federal Family Education Loan Program. In FY 2008, the Department began
administering activities under temporary loan purchase authority. ECASLA gave the
Department temporary authority to purchase FFEL loans and participation interests in those
loans. This authority was to expire on September 30, 2009; however, Public Law 110-350
extended the authority through September 30, 2010. The Department implemented three



52                                                              FY 2011 Agency Financial Report—U.S. Department of Education
                                                                                          FINANCIAL DETAILS
                                                               NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS

activities under this authority: loan purchase commitments; purchases of loan participation
interests; and a put, or forward purchase commitment, with an ABCP Conduit. Credit
Program Receivables are established for loans and participation interests in loans acquired
through these activities.
Under the loan purchase commitment activity, lenders had the option to sell directly to the
Department fully disbursed loans originated for academic years 2007-08, 2008-09, or 2009-
10. In loan participation transactions, lenders transferred to a custodian FFEL loans
originated in academic years 2008-09 or 2009-10 on which at least one disbursement had
been made. The custodian issued participation certificates to the lenders, which conveyed a
participation interest in the loans. The lenders sold the participation interest in the loans to
the Department at the par value of these loans. The Department remitted the proceeds
through the custodian to the lenders. Participation interests earned a yield payable from the
lenders 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 were obtained by selling the underlying loans to the Department or by
other means. Lenders committed to redeem the participation certificates and sell loans by
September 30, 2010; the Department finalized these transactions by October 15, 2010.
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 issues short-term commercial paper to investors; this paper is backed by
student loans pledged to the conduit. The conduit used the proceeds of sales of its
commercial paper to acquire from lenders interests in student loans. Lenders must have
used 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 purchases those pledged loans that become more than
210 days delinquent. The conduit has sold to the Department approximately $1.2 billion of
these delinquent loans as of September 30, 2011. Under the terms of the Put Agreement
with the conduit, the Department may purchase pledged loans 45 days prior to 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 budget totals. Loans originated in academic years
2004-05 through 2007-08, and pledged to the conduit prior to July 1, 2010, are eligible to
be purchased through the ABCP Conduit.
As of September 30, 2011, the Department has $72.6 billion in obligations to cover any
buyer-of-last-resort activities and potential purchases of underlying student loans under the
ABCP Conduit. These obligations are supported by available borrowing authority. The
conduit, a separate legal entity, has approximately $41.5 billion in commercial paper
outstanding.
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.




FY 2011 Agency Financial Report—U.S. Department of Education                                             53
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS

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.
Under the provisions of the SAFRA Act, no new loans were made under the FFEL Program
after June 30, 2010. This legislation effectively required a transition for new loans from
guaranteed student loans to full direct lending through the Department under the Direct
Loan Program. Federal guarantees on FFEL Program loans and commitments remain in
effect for loans made before July 1, 2010 until the loan is sold to the Department through an
ECASLA program, consolidated into a direct loan, or otherwise satisfied, discharged, or
cancelled.
As a result of the SAFRA Act, the Department did not guarantee any loans in FY 2011. The
Department guaranteed $24 billion in gross non-consolidation loans to FFEL recipients
during FY 2010. As of September 30, 2011 and 2010, total principal balances outstanding
of guaranteed loans held by lenders were approximately $328 billion and $390 billion,
respectively. As of September 30, 2011 and 2010, the estimated maximum government
exposure on outstanding guaranteed loans held by lenders was approximately $321 billion
and $382 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.
Guaranteed loans that default are initially turned over to guaranty agencies for collection. In
most cases, after approximately four years, defaulted guaranteed loans not in repayment
are turned over to the Department for collection.
Federal Perkins Loan Program. The Federal Perkins Loan Program is a campus-based
program that provides low-interest loans 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. The Department awards annual grants up to $4,000 to eligible
undergraduate and graduate students who agree 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 grants can be converted to direct loans, for budget and accounting purposes the
program is operated under 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



54                                                     FY 2011 Agency Financial Report—U.S. Department of Education
                                                                                          FINANCIAL DETAILS
                                                               NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS

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 (Public Law 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 82.19
percent. The current subsidy estimate for the sub-program is $327 million on a loan volume
of $398 million.
Loan Consolidations
Student and parent 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,
consolidation 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 $17 billion during FY 2010 to $24 billion
during FY 2011. Under credit reform accounting, the subsidy costs of new consolidation
loans are not reflected until the future fiscal year in which they are disbursed. The effect of
the early payoff of the existing loans—those being consolidated—is recognized in the future
projected cash flows of the past cohort year in which the loans were originated. FFEL to
Direct Loan consolidations are part of the $24 billion.




FY 2011 Agency Financial Report—U.S. Department of Education                                             55
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS



Credit Program Receivables
Credit Program Receivables, as of September 30, 2011 and 2010, consisted of the
following:
                                       Credit Program Receivables, Net
                                                    (Dollars in Millions)


                                                                                         2011                      2010
       Direct Loan Program Loan Receivables, Net                                     $    381,454            $      228,208
       FFEL Program
         FFEL Guaranteed Loan Program, Net (Pre-1992)                                        3,675                     2,419
         FFEL Program (Post-1991):
           FFEL Guaranteed Loan Program, Net                                               28,627                    24,030
           Temporary Loan Purchase Authority:
              Loan Purchase Commitment, Net                                                42,116                    42,279
              Loan Participation Purchase, Net                                             72,682                    69,686
              ABCP Conduit, Net                                                                 943                       468
       Federal Perkins Program Loan Receivables, Net                                            215                       183
       TEACH Program Receivables, Net                                                           253                       137
       Facilities Loan Programs Loan Receivables, Net                                           526                       494

       Credit Program Receivables, Net                                               $    530,491            $      367,904


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)

                                                                                         2011                      2010
       Principal Receivable                                                      $       341,822             $      220,522
       Interest Receivable                                                                14,286                       9,655
       Receivables                                                                       356,108                    230,177
         Less: Allowance for Subsidy                                                     (25,346)                      1,969

       Direct Loan Program Loan Receivables, Net                                 $       381,454             $      228,208


Of the $356.1 billion in receivables, as of September 30, 2011, $16.1 billion in loan principal
was in default, compared to $14.0 billion a year earlier.




56                                                               FY 2011 Agency Financial Report—U.S. Department of Education
                                                                                                 FINANCIAL DETAILS
                                                                      NOTES TO THE 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 Receivables, Net
                                                               (Dollars in Millions)

                                                                                           2011            2010

           FFEL Guaranteed Loan Program (Pre-1992)
           Principal Receivable                                                        $     6,228     $      6,681
           Interest Receivable                                                               4,034            3,849
           Receivables                                                                      10,262           10,530
              Less: Allowance for Subsidy                                                    6,587            8,111
           FFEL Guaranteed Loan Program, Net (Pre-1992)                                      3,675            2,419

           FFEL Program (Post-1991)
           FFEL Guaranteed Loan Program:
             Principal Receivable                                                           29,790           26,358
             Interest Receivable                                                             4,236            4,049
             Receivables                                                                    34,026           30,407
                Less: Allowance for Subsidy                                                  5,399            6,377
           FFEL Guaranteed Loan Program, Net                                                28,627           24,030


           Temporary Loan Purchase Authority:
              Loan Purchase Commitment:
                Principal Receivable                                                        35,822           36,623
                Interest Receivable                                                           1,879            1,400
                Receivables                                                                 37,701           38,023
                   Less: Allowance for Subsidy                                              (4,415)          (4,256)
              Loan Purchase Commitment, Net                                                 42,116           42,279
              Loan Participation Purchase:
                Principal Receivable                                                        61,125           62,931
                Interest Receivable                                                           2,993            1,665
                Receivables                                                                 64,118           64,596
                   Less: Allowance for Subsidy                                              (8,564)          (5,090)
              Loan Participation Purchase, Net                                              72,682           69,686
              ABCP Conduit:
                Principal Receivable                                                         1,121                544
                Interest Receivable                                                             55                 26
                Receivables                                                                  1,176                570
                   Less: Allowance for Subsidy                                                 233                102
              ABCP Conduit, Net                                                                943                468

           FFEL Program Receivables, Net                                               $   148,043     $    138,882


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.




FY 2011 Agency Financial Report—U.S. Department of Education                                                      57
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS

Federal Perkins Loan Program. As of September 30, 2011 and 2010, loan receivables,
net of an allowance for loss, were $215 million and $183 million, respectively. These loans
are valued at historical cost.

TEACH Program. As of September 30, 2011 and 2010, loan receivables, net of an
allowance for subsidy, were $253 million and $137 million, respectively.
Facilities Loan Programs
                                    Facilities Loan Programs Loan Receivables
                                                             (Dollars in Millions)

                                                                                                 2011                       2010
       Principal Receivable                                                               $             932           $            785
       Interest Receivable                                                                                7                          9
       Receivables                                                                                      939                        794
         Less: Allowance for Subsidy/Loss                                                               413                        300

       Facilities Loan Programs Loan Receivables, Net                                     $             526           $            494



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)

                                                                                              2011                        2010
       Beginning Balance, Allowance for Subsidy                                      $           1,969            $             4,036
       Components of Subsidy Transfers
         Interest Rate Differential                                                            (26,898)                      (11,708)
         Defaults, Net of Recoveries                                                              2,342                         1,307
         Fees                                                                                   (1,739)                       (1,067)
         Other                                                                                    9,264                         5,158
       Current Year Subsidy Transfers                                                          (17,031)                       (6,310)
       Components of Subsidy Re-estimates
         Interest Rate Re-estimates1                                                            (8,084)                         3,547
         Technical and Default Re-estimates                                                     (3,515)                         1,196
       Subsidy Re-estimates                                                                    (11,599)                         4,743
       Activity
         Fee Collections                                                                         1,623                          1,056
         Loan Cancellations2                                                                     (964)                          (388)
         Subsidy Allowance Amortization                                                          1,638                          (500)
         Other                                                                                   (982)                          (668)
       Total Activity                                                                            1,315                           (500)

       Ending Balance, Allowance for Subsidy                                         $         (25,346)           $             1,969
          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.




58                                                                        FY 2011 Agency Financial Report—U.S. Department of Education
                                                                                                    FINANCIAL DETAILS
                                                                         NOTES TO THE 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
guarantees for the insurance portion of the FFEL Program:
                          FFEL Program Reconciliation of Liabilities for Loan Guarantees
                                                                  (Dollars in Millions)

                                                                                                 2011                        2010
           Beginning Balance, FFEL Financing Account Liability for
           Loan Guarantees                                                                $          14,407          $         20,448
           Components of Subsidy Transfers
             Interest Supplement Costs                                                                     -                     (733)
             Defaults, Net of Recoveries                                                                   -                       212
             Fees                                                                                          -                     (960)
             Other1                                                                                        -                       878
           Current Year Subsidy Transfers                                                                  -                     (603)
           Components of Subsidy Re-estimates
             Interest Rate Re-estimates                                                                 (1)                         59
             Technical and Default Re-estimates                                                    (11,220)                   (12,727)
           Subsidy Re-estimates                                                                    (11,221)                   (12,668)
           Activity
             Interest Supplement Payments                                                           (2,453)                    (3,881)
             Claim Payments                                                                         (9,707)                    (8,987)
             Fee Collections                                                                          2,600                      3,736
             Interest on Liability Balance                                                            (867)                      (152)
             Other2                                                                                 17,225                     16,514
           Total Activity                                                                             6,798                      7,230

           Ending Balance, FFEL Financing Account Liability for Loan
           Guarantees                                                                                 9,984                    14,407
           FFEL Liquidating Account Liability for Loan Guarantees                                        41                        72
           Liabilities for Loan Guarantees                                                $          10,025          $         14,479
               1
                   Subsidy primarily associated with debt collections and loan cancellations due to death, disability, and
                   bankruptcy.
               2
                   Activity primarily associated with negative special allowance payments; also composed of the transfer of
                   subsidy for defaults; loan consolidation activity; and loan cancellations due to death, disability, and bankruptcy.




FY 2011 Agency Financial Report—U.S. Department of Education                                                                        59
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS

The following schedules provide reconciliations between the beginning and ending
balances of the allowance for subsidy for the Loan Purchase Commitment component and
the Loan Participation Purchase component of the FFEL Program. These FFEL
components are accounted for using credit reform accounting methodology and affect credit
program receivables accordingly.
              Loan Purchase Commitment Reconciliation of Allowance for Subsidy
                                                  (Dollars in Millions)

                                                                                2011                           2010
       Beginning Balance, Allowance for Subsidy                           $         (4,256)            $           (2,360)
       Components of Subsidy Transfers
         Interest Costs                                                                     -                      (4,548)
         Defaults, Net of Recoveries                                                        -                          178
         Fees                                                                               -                          520
         Other                                                                              -                        1,647
       Current Year Subsidy Transfers                                                       -                      (2,203)
       Components of Subsidy Re-estimates
         Interest Rate Re-estimates                                                    (518)                         1,299
         Technical and Default Re-estimates                                            (323)                           438
       Subsidy Re-estimates                                                            (841)                         1,737
       Activity
         Fee Disbursements                                                              (31)                          (644)
         Subsidy Allowance Amortization                                                 381                           (314)
         Direct Asset Activities and Other                                              332                           (472)
       Total Activity                                                                   682                        (1,430)

       Ending Balance, Allowance for Subsidy                              $         (4,415)            $           (4,256)



              Loan Participation Purchase Reconciliation of Allowance for Subsidy
                                                  (Dollars in Millions)

                                                                                2011                           2010
       Beginning Balance, Allowance for Subsidy                           $         (5,090)            $           (2,717)
       Components of Subsidy Transfers
         Interest Costs                                                                     -                      (3,662)
         Defaults, Net of Recoveries                                                        -                          254
         Fees                                                                               -                        (693)
         Other                                                                              -                        2,194
       Current Year Subsidy Transfers                                                       -                      (1,907)
       Components of Subsidy Re-estimates
         Interest Rate Re-estimates                                                 (1,495)                          2,621
         Technical and Default Re-estimates                                         (2,569)                        (1,321)
       Subsidy Re-estimates                                                         (4,064)                          1,300
       Activity
         Fee Disbursements                                                             (655)                          (837)
         Subsidy Allowance Amortization                                                  635                          (673)
         Direct Asset Activities and Other                                               610                          (256)
       Total Activity                                                                   590                        (1,766)

       Ending Balance, Allowance for Subsidy                              $         (8,564)            $           (5,090)




60                                                             FY 2011 Agency Financial Report—U.S. Department of Education
                                                                                                     FINANCIAL DETAILS
                                                                          NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS

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, and Fund Balance with Treasury.
The Department accrues interest receivable and records interest revenue on performing
Direct Loans and FFEL loans purchased by the Department. Interest receivable is accrued
on defaulted guaranteed loans, with an offset to the allowance for subsidy. The Department
does not record interest revenue on defaulted guaranteed loans.
Subsidy amortization is calculated as the difference between interest revenue and interest
expense. For direct loans, the allowance for 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 for the years ended
September 30, 2011 and 2010:
                                                           Direct Loan Program
                                                                   (Dollars in Millions)

                                                                                                   2011                 2010
              Interest Expense on Treasury Borrowing                                       $           14,321   $           10,514
           Interest Expense                                                                $           14,321   $           10,514


              Interest Revenue from the Public                                             $          12,466    $            7,352
              Amortization of Subsidy                                                                 (1,638)                  500
              Interest Revenue on Uninvested Funds                                                      3,493                2,662
           Interest Revenue                                                                $          14,321    $           10,514



Payable to Treasury
Payable to Treasury, for the years ended September 30, 2011 and 2010, consisted of the
following:
                                                               Payable to Treasury
                                                                   (Dollars in Millions)

                                                                                                     2011               2010
           Future Liquidating Account Collections, Beginning Balance                           $        2,424       $       3,569
              Valuation of Pre-1992 Loan Liability and Allowance                                        1,787                  (717)
              Capital Transfers to Treasury                                                             (325)                  (428)
           Future Liquidating Account Collections, Ending Balance                                       3,886               2,424
              Other                                                                                         4                        -
           Payable to Treasury                                                                 $        3,890       $       2,424




FY 2011 Agency Financial Report—U.S. Department of Education                                                                    61
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


Subsidy Expense
William D. Ford Federal Direct Loan Program
                                Direct Loan Program Subsidy Expense
                                                (Dollars in Millions)

                                                                                  2011                        2010
       Components of Current Year Subsidy Transfers
         Interest Rate Differential                                         $      (26,898)             $       (11,708)
         Defaults, Net of Recoveries                                                  2,342                        1,307
         Fees                                                                       (1,739)                      (1,067)
         Other                                                                        9,264                        5,158
       Current Year Subsidy Transfers                                              (17,031)                      (6,310)
         Subsidy Re-estimates                                                      (11,599)                        4,743

       Direct Loan Subsidy Expense                                          $      (28,630)             $        (1,567)


William D. Ford Federal Direct Loan re-estimated subsidy cost was adjusted downward by
$11.6 billion in FY 2011. Costs decreased $5.7 billion due to updated economic
assumptions, including probabilistic estimating, discount rates, and weighted consolidation
loan interest rates. The availability of new information allowed Direct Loan death, disability,
and bankruptcy rates to be estimated directly rather than having to use the FFEL rates,
reducing cost by $1.5 billion. The decrease in costs is due to lower bankruptcy rates used in
formulating the estimate for Direct Loans. Court action usually prevents discharges of Direct
student loans. Costs decreased by $1.0 billion due to updated actual activity indicating
slightly lower rates of prepayments, resulting in higher interest earnings from borrowers.
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 $1.1 billion. Re-estimated costs only include those cohorts that are
90 percent disbursed; cohort years 1994-2010.
William D. Ford Federal Direct Loan re-estimated subsidy cost increased $4.7 billion in
FY 2010. The majority of this increase was related to discount rate changes increasing
costs by $2.2 billion. Changes in assumptions for income-based repayments and public
service loan forgiveness increased subsidy cost by $611 million. Rising default rates
increased subsidy cost $226 million. Changes in other interest components, probabilistic
methodology for estimating, and an uptick in consolidated weighted rates increased costs
by $887 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 $662 million. Re-estimated costs only include
those cohorts that are 90 percent disbursed; cohort years 1994–2009.




62                                                           FY 2011 Agency Financial Report—U.S. Department of Education
                                                                                                 FINANCIAL DETAILS
                                                                      NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS

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

                                                                                           2011            2010
           FFEL Guaranteed Loan Program
             Components of Current Year Subsidy Transfers
               Interest Supplement Costs                                               $          -    $       (733)
               Defaults, Net of Recoveries                                                        -              212
               Fees                                                                               -            (960)
               Other                                                                              -              878
             Current Year Subsidy Transfers                                                       -            (603)
               Subsidy Re-estimates                                                        (11,221)         (12,668)
           FFEL Guaranteed Loan Program Subsidy Expense                                    (11,221)         (13,271)

           Temporary Loan Purchase Authority
           Loan Purchase Commitment
             Components of Current Year Subsidy Transfers
               Interest Costs                                                                     -          (4,548)
               Defaults, Net of Recoveries                                                        -              178
               Fees                                                                               -              520
               Other                                                                              -            1,647
             Current Year Subsidy Transfers                                                       -          (2,203)
               Subsidy Re-estimates                                                           (841)            1,737
           Loan Purchase Commitment Subsidy Expense                                           (841)            (466)

           Loan Participation Purchase
             Components of Current Year Subsidy Transfers
               Interest Costs                                                                     -          (3,662)
               Defaults, Net of Recoveries                                                        -              254
               Fees                                                                               -            (693)
               Other                                                                              -            2,194
             Current Year Subsidy Transfers                                                       -          (1,907)
               Subsidy Re-estimates                                                         (4,064)            1,300
           Loan Participation Purchase Subsidy Expense                                      (4,064)            (607)

           FFEL Program Subsidy Expense                                                $   (16,126)    $    (14,344)


FFEL Guaranteed subsidy cost was adjusted downward $11.2 billion in FY 2011. Costs
decreased $5.5 billion due to updated economic assumptions, including probabilistic
deterministic rates, which reflected historically low commercial paper rates, resulting in
substantially higher negative special allowance payments than were previously projected.
Costs decreased $2.0 billion due to multiple assumption changes affecting the Guaranteed
ECASLA cash flows. 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 $13.4 billion. Re-
estimated costs only include those cohorts that are 90 percent disbursed; cohort years
1992-2010.




FY 2011 Agency Financial Report—U.S. Department of Education                                                      63
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS

FFEL Guaranteed re-estimated subsidy cost decreased $12.7 billion in FY 2010. The
change in consolidated weighted rates decreased subsidy cost $6.6 billion. Interest rates
and probabilistic methodology for estimating decreased subsidy costs $3.7 billion. ECASLA
and other volume adjustments decreased subsidy cost $1.7 billion. Loan deferment
increases produced an increase in subsidy cost of $1 billion. 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 $17 billion. Re-estimated costs only include those cohorts that are 90 percent
disbursed; cohort years 1992–2009.

Subsidy Rates
The subsidy rates applicable to the 2011 loan cohort year follow:
                                      Subsidy Rates—Cohort 2011
                                                    Interest
                                                  Differential/
                                                 Supplements               Defaults          Fees           Other           Total

         Direct Loan Program                       (20.55%)                 1.69%          (1.22%)         6.18%        (13.90%)
         TEACH Program                               4.29%                  0.52%           0.00%          7.92%         12.73%


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 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. The subsidy expense reported in the current year includes re-estimates. The
subsidy rates shown above, which reflect aggregate negative subsidy in the FY 2011
cohort, cannot be applied to direct 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.
Administrative Expenses
Administrative Expenses, for the years ended September 30, 2011 and 2010, consisted of
the following:
                                    Administrative Expenses
                                             (Dollars in Millions)

                                              2011                                                  2010
                               Direct Loan                  FFEL                    Direct Loan                 FFEL
                                Program                   Program                    Program                  Program
     Operating Expense          $      661                 $         388             $        536            $       314
     Other Expense                      30                            18                       22                     13

     Administrative Expenses    $      691                 $         406             $        558            $       327




64                                                                   FY 2011 Agency Financial Report—U.S. Department of Education
                                                                                                 FINANCIAL DETAILS
                                                                      NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


Note 7. General Property, Plant, and Equipment
General Property, Plant, and Equipment, as of September 30, 2011 and 2010, consisted of
the following:
                                            General Property, Plant, and Equipment
                                                               (Dollars in Millions)

                                                                                                      2011
                                                                                                   Accumulated               Net Asset
                                                                          Cost                     Depreciation               Value

           Information Technology, Internal Use Software,
           and Telecommunications Equipment                       $              176           $          (160)          $          16
           Furniture and Fixtures                                                      3                    (3)                          -

           General Property, Plant, and Equipment                 $              179           $          (163)          $          16


                                                                                                      2010
                                                                                                   Accumulated               Net Asset
                                                                          Cost                     Depreciation               Value

           Information Technology, Internal Use Software,
           and Telecommunications Equipment                       $              172           $          (144)          $          28
           Furniture and Fixtures                                                      3                    (3)                          -

           General Property, Plant, and Equipment                 $              175           $          (147)          $          28


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.
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)

                                 2011                                                                         2010


           FY                          Lease Payment                                       FY                         Lease Payment
           2012                        $          38                                       2011                      $           48
           2013                                   44                                       2012                                 48
           2014                                   45                                       2013                                 45
           2015                                   53                                       2014                                 47
           2016                                   55                                       2015                                 54
           After 2016                             57                                       After 2015                           56

           Total                      $                292                                 Total                     $             298




FY 2011 Agency Financial Report—U.S. Department of Education                                                                        65
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


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 $50 million and $102 million as of September 30, 2011 and
2010, 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 $98 million and $166 million as of
September 30, 2011 and 2010, respectively.
Note 9. Debt
Debt, as of September 30, 2011 and 2010, consisted of the following:
                                                         Debt
                                                   (Dollars in Millions)

                                                                               2011
                                       Beginning    Accrued                  New                                      Ending
                                        Balance     Interest               Borrowing          Repayments              Balance
      Treasury Debt
      Direct Loan Program              $ 237,190     $          -          $   167,071         $   (11,887)          $ 392,374
      FFEL Program
         Guaranteed Loan Program          10,730                -               18,754                    -              29,484
         Loan Purchase Commitment         45,205                -                1,394              (2,740)              43,859
         Loan Participation Purchase      79,577                -                5,352              (5,627)              79,302
         ABCP Conduit                        804                -                  250                 (90)                 964
      TEACH Program                          150                -                  133                  (2)                 281
      Facilities Loan Program                 61                -                    -                  (3)                  58
      Total Treasury Debt                373,717                -              192,954             (20,349)             546,322
      Debt to the FFB
      HBCU                                   618               1                   176                  (9)                786
      Total Debt to the FFB                  618               1                   176                  (9)                786
      Total                            $ 374,335     $         1           $   193,130         $   (20,358)          $ 547,108



                                                                               2010
                                       Beginning    Accrued                  New                                      Ending
                                        Balance     Interest               Borrowing          Repayments              Balance
      Treasury Debt
      Direct Loan Program              $ 154,218     $          -          $    91,192         $     (8,220)         $ 237,190
      FFEL Program
         Guaranteed Loan Program           1,474                -                9,285                 (29)              10,730
         Loan Purchase Commitment         24,877                -               21,744              (1,416)              45,205
         Loan Participation Purchase      53,977                -               32,206              (6,606)              79,577
         ABCP Conduit                        244                -                  650                 (90)                 804
      TEACH Program                           68                -                   98                 (16)                 150
      Facilities Loan Program                 71                -                    -                 (10)                  61
      Total Treasury Debt                234,929                -              155,175             (16,387)             373,717
      Debt to the FFB
      HBCU                                  456                2                  171                    (11)                 618
      Total Debt to the FFB                  456               2                   171                 (11)                618
      Total                            $ 235,385     $         2           $   155,346         $   (16,398)          $ 374,335




66                                                             FY 2011 Agency Financial Report—U.S. Department of Education
                                                                                                       FINANCIAL DETAILS
                                                                            NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS

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.
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 downward
subsidy re-estimates, which when executed will be paid to Treasury.
Other Liabilities, as of September 30, 2011 and 2010, consisted of the following:
                                                               Other Liabilities
                                                                 (Dollars in Millions)

                                                                                2011                              2010
                                                                      Intragovern-   With the          Intragovern-    With the
                                                                         mental       Public              mental       Public
    Liabilities Covered by Budgetary Resources
      Current
        Advances From Others                                           $            89       $     -   $        96    $           -
        Employer Contributions and Payroll Taxes                                     6             -             5                -
        Liability for Deposit Funds and Clearing
          Accounts                                                                 (4)           71              8            86
        Accrued Payroll and Benefits                                                 -           28              -            25
        Deferred Revenue                                                             -           62              -           182
        Liabilities in Miscellaneous Receipt Accounts                           6,533             -         12,663             -
    Total Other Liabilities Covered by
    Budgetary Resources                                                         6,624            161        12,772           293


    Liabilities Not Covered by Budgetary Resources
      Current
        Accrued Unfunded Annual Leave                                                    -        38             -               37
      Non-Current
        Accrued Unfunded FECA Liability                                              4            -              3                -
        Liabilities in Miscellaneous Receipt Accounts                              215            -            183                -
        Accrued FECA Actuarial Liability                                             -           18              -               16
    Total Other Liabilities Not Covered by
    Budgetary Resources                                                            219           56            186               53

    Other Liabilities                                                  $        6,843        $   217   $    12,958    $      346


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 $275
million and $239 million as of September 30, 2011 and 2010, respectively.
As of September 30, 2011 and 2010, liabilities on the Balance Sheet totaled $578.0 billion
and $416.1 billion, respectively. Of this amount, liabilities covered by budgetary resources
totaled $577.7 billion as of September 30, 2011, and $415.9 billion as of September 30,
2010.



FY 2011 Agency Financial Report—U.S. Department of Education                                                                67
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


Note 11. Accrued Grant Liability
The accrued grant liability by major reporting groups, as of September 30, 2011 and 2010,
consisted of the following:
                                             Accrued Grant Liability
                                                     (Dollars in Millions)

                                                                                     2011                         2010
       FSA                                                                   $              3,036          $              2,016
       OESE                                                                                   124                           281
       OSERS                                                                                  259                           182
       RA/JF                                                                                  235                         1,070
       Other                                                                                  274                           195

       Accrued Grant Liability                                               $              3,928          $              3,744


Note 12. Net Position
Unexpended appropriations, as of September 30, 2011 and 2010, consisted of the
following:
                                          Unexpended Appropriations
                                                     (Dollars in Millions)

                                                                                      2011                         2010
       Unobligated Balances
         Available                                                               $           2,936         $              2,323
         Not Available                                                                         594                        1,181
       Undelivered Orders                                                                   68,199                       90,306
       Authority Temporarily Precluded from Obligation                                              -                       561

       Unexpended Appropriations                                                 $          71,729         $             94,371


The Cumulative Results of Operations - Earmarked Funds of $4 million, as of September
30, 2011 and 2010, 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 20)
The Cumulative Results of Operations - Other Funds of $(3,148) million as of September
30, 2011, and $(6,773) million as of September 30, 2010, consists mostly of unfunded
upward subsidy re-estimates, other unfunded expenses, and net investments of capitalized
assets.




68                                                                FY 2011 Agency Financial Report—U.S. Department of Education
                                                                                                FINANCIAL DETAILS
                                                                     NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


Note 13. Intragovernmental Cost and Exchange Revenue by Program
As required by the GPRA Modernization Act of 2010, each of the Department’s reporting
groups and major program offices have been aligned with the goals presented in the
Department’s draft Strategic Plan 2011–2014.

                                                               Reporting Group/
                       Net Cost Program                         Program Office               Draft Strategic Goal

                                                                                  1. Increase college access, quality, and
                                                                     FSA
         Increase College Access, Quality, and                                       completion by improving higher
                                                                    OPE
         Completion                                                                  education and lifelong learning
                                                                    OVAE
                                                                                     opportunities for youth and adults.


                                                                                  2. Prepare all students for college and
                                                                                     career by improving the elementary and
                                                                                     secondary education system’s ability to
                                                                                     consistently deliver excellent classroom
                                                                                     instruction and supportive services.
         Improve Preparation for College and Career                OESE
         from Birth Through 12th Grade, Especially                 OSDFS
                                                                                  3. Improve the health, social-emotional,
         for Children with High Needs                               HR
                                                                                    and cognitive outcomes for all children
                                                                                    from birth through third grade, so that
                                                                                    all children, particularly those with high
                                                                                    needs, are on track for graduating from
                                                                                    high school college- and career-ready.


                                                                                  4. Ensure equitable educational
                                                                    OELA            opportunities for all students regardless
         Ensure Equitable Educational Opportunities
                                                                    OCR             of race, ethnicity, national origin, age,
         for All Students
                                                                   OSERS            sex, disability, language, and
                                                                                    socioeconomic status.


                                                                                  5. Enhance the education system’s ability
                                                                                    to continuously improve through better
         Enhance the Education System’s Ability to                   IES
                                                                                    and more widespread use of data,
         Continuously Improve                                         OII
                                                                                    research and evaluation, transparency,
                                                                                    innovation, and technology.

         American Recovery and Reinvestment Act
                                                                    RA/JF           Cuts across draft Strategic Goals 1-5
         and Education Jobs Fund


Draft Strategic Plan Goals 1–5 are sharply defined directives that guide the Department’s
program offices to carry out the vision and programmatic mission, and the net cost
programs can be specifically associated with these five draft strategic goals. The
Department also has a cross-cutting draft Strategic Plan Goal 6, U.S. Department of
Education Capacity, which focuses on improving the organizational capacities of the
Department to implement the draft Strategic Plan. As a result, the Department does not
assign specific programs to draft Strategic Plan Goal 6 for presentation in the Statement of
Net Cost.
The goals of the Recovery Act and Education Jobs Fund are consistent with the
Department’s current draft strategic goals and programs. For reporting purposes, a net cost
program called American Recovery and Reinvestment Act and Education Jobs Fund has
been created.




FY 2011 Agency Financial Report—U.S. Department of Education                                                               69
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS

The following tables present the gross cost and exchange revenue by program for the
Department for September 30, 2011 and 2010. 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).
                           Gross Cost and Exchange Revenue by Program
                                                   (Dollars in Millions)

                                                                                       2011

                                                 FSA           OESE            OSERS          RA/JF       Other         Total


       Increase College Access, Quality, and Completion
         Intragovernmental Gross Cost          $ 20,247       $            -   $        -     $       -    $      77   $ 20,324
         Public Gross Cost                       (3,435)                   -            -             -        4,896      1,461
            Total Gross Program Costs            16,812                    -            -             -        4,973     21,785
         Intragovernmental Earned Revenue          5,304                   -            -             -           17      5,321
         Public Earned Revenue                   14,908                    -            -             -           23     14,931
            Total Program Earned Revenue         20,212                    -            -             -           40     20,252
       Total Program Cost                        (3,400)                   -            -             -        4,933      1,533

       Improve Preparation for College and Career from Birth Through 12th Grade, Especially for Children with
       High Needs
         Intragovernmental Gross Cost                 -        201          -        -           9        210
         Public Gross Cost                            -     21,172          -        -         528     21,700
            Total Gross Program Costs                 -     21,373          -        -         537     21,910
         Intragovernmental Earned Revenue             -          -          -        -          64         64
         Public Earned Revenue                        -         16          -        -           3         19
            Total Program Earned Revenue              -         16          -        -          67         83
       Total Program Cost                             -     21,357          -        -         470     21,827

       Ensure Equitable Educational Opportunities for All Students
         Intragovernmental Gross Cost                  -          -                    43             -          32         75
         Public Gross Cost                             -          -                15,463             -         871     16,334
            Total Gross Program Costs                  -          -                15,506             -         903     16,409
         Intragovernmental Earned Revenue              -          -                     2             -           -          2
         Public Earned Revenue                         -          -                    19             -           2         21
            Total Program Earned Revenue               -          -                    21             -           2         23
       Total Program Cost                              -          -                15,485             -         901     16,386

       Enhance the Education System’s Ability to Continuously Improve
         Intragovernmental Gross Cost                 -         -                       -             -           68         68
         Public Gross Cost                            -         -                       -             -        1,773      1,773
            Total Gross Program Costs                 -         -                       -             -        1,841      1,841
         Intragovernmental Earned Revenue             -         -                       -             -            2          2
         Public Earned Revenue                        -         -                       -             -           37         37
            Total Program Earned Revenue              -         -                       -             -           39         39
       Total Program Cost                             -         -                       -             -        1,802      1,802

       American Recovery and Reinvestment Act and Education Jobs Fund
         Intragovernmental Gross Cost              -          -                         -          60              -        60
         Public Gross Cost                         -          -                         -      27,905              -    27,905
            Total Gross Program Costs              -          -                         -      27,965              -    27,965
         Intragovernmental Earned Revenue          -          -                         -           -              -         -
         Public Earned Revenue                     -          -                         -           -              -         -
            Total Program Earned Revenue           -          -                         -           -              -         -
       Total Program Cost                          -          -                         -      27,965              -    27,965

       Net Cost of Operations                  $ (3,400)      $ 21,357         $ 15,485       $27,965     $ 8,106      $ 69,513




70                                                                FY 2011 Agency Financial Report—U.S. Department of Education
                                                                                                      FINANCIAL DETAILS
                                                                           NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS



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

                                                                                                   2010

                                                                FSA           OESE         OSERS          RA/JF       Other        Total


           Increase College Access, Quality, and Completion
             Intragovernmental Gross Cost         $ 16,286  $                          -   $        -     $       -   $      73   $ 16,359
             Public Gross Cost                      11,542                             -            -             -       4,603     16,145
                Total Gross Program Costs           27,828                             -            -             -       4,676     32,504
             Intragovernmental Earned Revenue        5,862                             -            -             -          12      5,874
             Public Earned Revenue                  11,209                             -            -             -          33     11,242
                Total Program Earned Revenue        17,071                             -            -             -          45     17,116
           Total Program Cost                       10,757                             -            -             -       4,631     15,388

           Improve Preparation for College and Career from Birth Through 12th Grade, Especially for Children with
           High Needs
             Intragovernmental Gross Cost                -        136          -         -          12        148
             Public Gross Cost                           -     21,649          -         -        725      22,374
                Total Gross Program Costs                -     21,785          -         -        737      22,522
             Intragovernmental Earned Revenue            -           -         -         -          72         72
             Public Earned Revenue                       -         20          -         -           4         24
                Total Program Earned Revenue             -         20          -         -          76         96
           Total Program Cost                            -     21,765          -         -        661      22,426

           Ensure Equitable Educational Opportunities for All Students
             Intragovernmental Gross Cost                -           -                             37             -         28         65
             Public Gross Cost                           -           -                         15,327             -        771     16,098
                Total Gross Program Costs                -           -                         15,364             -        799     16,163
             Intragovernmental Earned Revenue            -           -                              2             -          -          2
             Public Earned Revenue                       -           -                             22             -          2         24
                Total Program Earned Revenue             -           -                             24             -          2         26
           Total Program Cost                            -           -                         15,340             -        797     16,137

           Enhance the Education System’s Ability to Continuously Improve
             Intragovernmental Gross Cost                              -               -            -             -          73        73
             Public Gross Cost                                         -               -            -             -       1,612     1,612
                Total Gross Program Costs                              -               -            -             -       1,685     1,685
             Intragovernmental Earned Revenue                          -               -            -             -           3         3
             Public Earned Revenue                                     -               -            -             -          38        38
                Total Program Earned Revenue                           -               -            -             -          41        41
           Total Program Cost                                          -               -            -             -       1,644     1,644

           American Recovery and Reinvestment Act and Education Jobs Fund
             Intragovernmental Gross Cost             -          -                                  -          89             -        89
             Public Gross Cost                        -          -                                  -      43,990             -    43,990
                Total Gross Program Costs             -          -                                  -      44,079             -    44,079
             Intragovernmental Earned Revenue         -          -                                  -           -             -         -
             Public Earned Revenue                    -          -                                  -           -             -         -
                Total Program Earned Revenue          -          -                                  -           -             -         -
           Total Program Cost                         -          -                                  -      44,079             -    44,079

           Net Cost of Operations                              $ 10,757     $ 21,765       $ 15,340       $44,079     $ 7,733     $ 99,674




FY 2011 Agency Financial Report—U.S. Department of Education                                                                         71
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


Note 14. Interest Expense and Interest Revenue
For FY 2011 and FY 2010, interest expense and interest revenue by program consisted of
the following:
                                  Interest Expense and Interest Revenue
                                                   (Dollars in Millions)
                                                                                     2011
                                                      Expenses                                          Revenue
                                                        Non-                                              Non-
                                         Federal                           Total            Federal                   Total
                                                       federal                                           federal


      Direct Loan Program               $ 14,321       $          -        $14,321          $   3,493   $ 10,828     $14,321
      FFEL Program
         Guaranteed Loan Program           1,331            (867)              464               464           -          464
         Loan Purchase Commitment          1,552                -            1,552                77       1,475        1,552
         Loan Participation Purchase       2,916                -            2,916               385       2,531        2,916
         ABCP Conduit                         48                -               48                18          30           48
      TEACH Program                            9                -                9                 3           6            9
      Other Programs                          20                -               20                17          37           54

      Total                             $ 20,197       $    (867)          $19,330          $   4,457   $ 14,907     $19,364


                                                                                     2010
                                                      Expenses                                          Revenue
                                                        Non-                                              Non-
                                         Federal                           Total            Federal                   Total
                                                       federal                                           federal

      Direct Loan Program               $ 10,514       $          -        $10,514          $   2,662   $ 7,852      $10,514
      FFEL Program
         Guaranteed Loan Program             474            (152)              322                322          -          322
         Loan Purchase Commitment          1,771                -            1,771                631      1,140        1,771
         Loan Participation Purchase       3,397                -            3,397              1,222      2,175        3,397
         ABCP Conduit                         41                -               41                 29         12           41
      TEACH Program                            7                -                7                  3          4            7
      Other Programs                          18                -               18                 12         37           49

      Total                             $ 16,222       $    (152)          $16,070          $ 4,881     $ 11,220     $16,101


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.




72                                                               FY 2011 Agency Financial Report—U.S. Department of Education
                                                                                                 FINANCIAL DETAILS
                                                                      NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


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, 2011, budgetary resources were $366,381
million and net outlays were $234,942 million. As of September 30, 2010, budgetary
resources were $362,489 million and net outlays were $235,919 million.
Permanent Indefinite Budget Authority
The Direct Loan, FFEL, and TEACH Programs have permanent indefinite budget authority
through legislation. Parts B and D of the HEA (for the FFEL Program and Direct Loan
Program, respectively) 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, 2011 and
2010, consisted of the following:
                            Obligations Incurred by Apportionment Type and Category
                                                               (Dollars in Millions)

                                                                                           2011            2010
           Direct:
              Category A                                                               $         649   $       1,547
              Category B                                                                     342,649         338,668
              Exempt from Apportionment                                                        2,167               4
                                                                                             345,465         340,219
           Reimbursable:
             Exempt from Apportionment                                                            80                   90
                                                                                                  80                   90

           Obligations Incurred                                                        $     345,545   $     340,309


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 2011 Agency Financial Report—U.S. Department of Education                                                      73
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


Unused Borrowing Authority
Unused borrowing authority, as of September 30, 2011 and 2010, consisted of the
following:
                                          Unused Borrowing Authority
                                                  (Dollars in Millions)
                                                                                 2011                           2010
       Beginning Balance, Unused Borrowing Authority                      $           133,120           $           106,355
       Current Year Borrowing Authority                                               211,980                       183,079
       Funds Drawn From Treasury                                                    (193,130)                     (155,346)
       Borrowing Authority Withdrawn                                                   (9,776)                        (968)
       Ending Balance, Unused Borrowing Authority                         $           142,194           $           133,120


The Department is given authority to draw funds from Treasury to finance the Direct Loan,
FFEL, and TEACH Programs. 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, 2011 and 2010, consisted of the following:
                                              Undelivered Orders
                                                  (Dollars in Millions)

                                                                                 2011                          2010
       Budgetary                                                          $            68,223          $             90,281
       Non-Budgetary                                                                  161,016                       147,260
       Undelivered Orders (Unpaid)                                        $           229,239          $            237,541


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. Distributed Offsetting
Receipts, for the years ended September 30, 2011 and 2010, consisted of the following:
                                         Distributed Offsetting Receipts
                                                  (Dollars in Millions)

                                                                                 2011                          2010
       Negative Subsidies and Downward Re-estimates:
         FFEL Program                                                     $             24,670         $              16,389
         Direct Loan Program                                                            25,502                        12,375
         Facilities Loan Programs                                                           23                            92
         TEACH Program                                                                       6                             1
         Subtotal                                                                       50,201                        28,857
       Other                                                                                88                           189
       Distributed Offsetting Receipts                                    $             50,289         $               29,046




74                                                             FY 2011 Agency Financial Report—U.S. Department of Education
                                                                                                     FINANCIAL DETAILS
                                                                          NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS



Explanation of Differences Between the Statement of Budgetary Resources and the
Budget of the United States Government
The FY 2013 Budget of the United States Government (President’s Budget), which
presents the actual amounts for the year ended September 30, 2011, has not been
published as of the issue date of these financial statements. The FY 2013 President’s
Budget is scheduled for release in February 2012. A reconciliation of the FY 2010 SBR to
the FY 2012 President’s Budget (FY 2010 actual amounts) for budgetary resources,
obligations incurred, distributed offsetting receipts, and net outlays is presented below.
                                     SBR to Budget of the United States Government
                                                                   (Dollars in Millions)
                                                                                                     Distributed
                                                               Budgetary             Obligations     Offsetting
                                                               Resources              Incurred        Receipts     Net Outlays

           Combined Statement of Budgetary
           Resources                                           $   362,489           $     340,309   $   29,046    $   235,919
              Expired Funds                                         (1,387)                  (679)             -              -
              Amounts Included in the President’s
              Budget                                                11,593                  11,593             -              -
             Funds Excluded from President’s
             Budget and Rounding                                        (85)                    2              3           (2)
           Budget of the United States
           Government*                                         $   372,610           $     351,225   $   29,049    $   235,917

           *Amounts obtained from the Appendix, Budget of the United States Government, FY 2012.



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. Because 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 2010 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 2011 Agency Financial Report—U.S. Department of Education                                                             75
 FINANCIAL DETAILS
 NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


 Note 16. Reconciliation of Budgetary Obligations to Net Cost of
 Operations
 The Reconciliation of Budgetary Obligations to Net Cost of Operations provides information
 on how budgetary resources obligated during the period relate to 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.
 The Reconciliation of Budgetary Obligations to Net Cost of Operations, as of September 30,
 2011 and 2010, are presented below:
             Reconciliation of Budgetary Obligations to Net Cost of Operations
                                                  (Dollars in Millions)

                                                                                                  2011                     2010
Resources Used to Finance Activities:
  Obligations Incurred                                                                       $      345,545           $      340,309
  Spending Authority from Offsetting Collections and Recoveries                                     (68,782)                 (59,110)
  Offsetting Receipts                                                                               (50,289)                 (29,046)
    Net Budgetary Resources Obligated                                                               226,474                  252,153

  Imputed Financing from Costs Absorbed by Others                                                         38                       30
  Other Financing Sources                                                                           (42,868)                 (31,413)
    Net Other Resources                                                                             (42,830)                 (31,383)

  Net Resources Used to Finance Activities                                                          183,644                  220,770

Less: Resources Used or Generated for Items Not Part of the Net Cost of Operations:
  Increase/(Decrease) in Budgetary Resources Obligated but Not Yet Provided          (8,933)                                   13,755
  Resources that Fund Subsidy Re-estimates Accrued in Prior Period                   (5,785)                                 (10,883)
  Credit Program Collections                                                       (43,451)                                  (43,466)
  Acquisition of Fixed Assets                                                              4                                       12
  Acquisition of Net Credit Program Assets or Liquidation of Liabilities for Loan
  Guarantees                                                                        201,658                                  179,895
  Resources from Non-Entity Activity                                               (42,856)                                  (31,483)
    Net Resources That Do Not Finance the Net Cost of Operations                    100,637                                  107,830

Net Resources Used to Finance the Net Cost of Operations                                              83,007                 112,940

Components of the Net Cost of Operations That Will Not Require or Generate Resources in the Current Period:
  Depreciation                                                                         16                  22
  Subsidy Amortization and Interest on the Liability for Loan Guarantees           1,823              (1,627)
  Other                                                                                  -                  -
    Total Components Not Requiring or Generating Resources                         1,839              (1,605)

  Increase in Annual Leave Liability                                                                       1                        3
  Accrued Re-estimates of Credit Subsidy Expense                                                     (3,329)                  (5,785)
  Increase in Exchange Revenue Receivable from the Public                                           (12,008)                  (5,877)
  Accrued Interest with Treasury                                                                           1                        4
  Other                                                                                                    2                      (6)
     Total Components Requiring or Generating Resources in Future
     Periods                                                                                        (15,333)                 (11,661)
  Total Components That Will Not Require or Generate Resources in the
  Current Period                                                                                    (13,494)                 (13,266)

Net Cost of Operations                                                                       $        69,513          $        99,674




 76                                                                       FY 2011 Agency Financial Report—U.S. Department of Education
                                                                                          FINANCIAL DETAILS
                                                               NOTES TO THE 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 2011 and FY
2010, the Department collected $1.3 million and $0.6 million, respectively, in custodial
revenues.


Note 18. American Recovery and Reinvestment Act of 2009
The Recovery Act provided $97,407 million to the Department in supplemental
appropriations for job preservation and state and local fiscal stabilization. This investment
was made available for use in saving jobs, supporting states and local school districts, and
advancing reforms and improvements in the education of the nation’s children and youth
from early learning programs through postsecondary education.
The Recovery Act created the State Fiscal Stabilization Fund (SFSF), a new program in
which the Department awards grants to governors to help save jobs and drive education
reform. The majority of SFSF funding was provided for two types of formula grants:
Education State Grants and Government Services Grants. These awards are made by
formula in exchange for a commitment to advance essential education reforms to benefit
children and youth from early learning through postsecondary education, increasing teacher
effectiveness and ensuring an equitable distribution of qualified teachers, and turning
around the lowest-performing schools. There are also two competitive programs within the
SFSF: Race to the Top and Investing in Innovation. Race to the Top grants are being
awarded to states that are leading the way with ambitious, yet achievable, plans for
implementing coherent, compelling, and comprehensive education reform. Investing in
Innovation awards will support the development, validation, and expansion of approaches
with demonstrated effectiveness at improving student achievement.
Recovery Act funding was also provided for several of the Department’s key programs,
including Student Financial Assistance, Education for the Disadvantaged, Special
Education, School Improvement Programs, Rehabilitation Services and Disability Research,
Institute of Education Sciences, Innovation and Improvement, Impact Aid, and Teacher
Quality Partnerships. In addition, Recovery Act funding was provided for Student Aid
Administration and to the Office of Inspector General.




FY 2011 Agency Financial Report—U.S. Department of Education                                             77
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS

The status of Recovery Act funding, as of September 30, 2011 and 2010, are presented
below:
                            American Recovery and Reinvestment Act of 2009
                                                          (Dollars in Millions)

                                                                         Cumulative Totals as of September 30, 2011

                                                                  Appropriations             Obligations                Outlays
       State Fiscal Stabilization Fund:
         SFSF Formula Grants                                       $          48,600         $      48,600          $        47,806
         Investing in Innovation and Race to the Top                           5,000                 5,000                      338
         Subtotal                                                             53,600                53,600                   48,144

       Student Financial Assistance:
         Federal Pell Grants                                                  15,640                15,640                   15,618
         Mandatory Add-on Pell Grants                                            643                   643                      643
         Federal Work Study Grants                                               200                   200                      200
         Subtotal                                                             16,483                16,483                   16,461

       Education for the Disadvantaged:
         Title I Targeted/ Finance Incentive Grants                           10,000                10,000                     9,276
         School Improvement Grants                                             3,000                 3,000                       595
         Subtotal                                                             13,000                13,000                     9,871

       Special Education:
         IDEA Part B Grants to States                                         11,300                11,300                   10,494
         IDEA Part B Preschool Grants                                            400                   400                      352
         IDEA Part C Grants for Infants and Families                             500                   500                      429
         Subtotal                                                             12,200                12,200                   11,275

       School Improvement Programs:
         Enhancing Education through Technology                                   650                   650                      520
         Education for Homeless Children and Youths                                70                    70                       61
         Subtotal                                                                 720                   720                      581

       Rehabilitation Services and Disability Research:
         Vocational Rehabilitation                                                540                   540                      504
         Independent Living Centers                                                88                    88                       34
         Services for Older Blind Individuals                                      34                    34                       29
         State Grants                                                              18                    18                       16
         Subtotal                                                                 680                   680                      583

       Institute of Education Sciences                                            250                   250                       33
       Innovation and Improvement                                                 200                   200                       60

       Impact Aid:
         Section 8007(a) Formula Grants                                            40                    40                       40
         Section 8007(b) Competitive Grants                                        60                    60                       40
         Subtotal                                                                 100                   100                       80

       Higher Education                                                           100                   100                       17
       Student Aid Administration                                                  60                    60                       60
       Office of Inspector General                                                 14                     9                        9
       Total                                                       $          97,407         $      97,402          $        87,174




78                                                                     FY 2011 Agency Financial Report—U.S. Department of Education
                                                                                                 FINANCIAL DETAILS
                                                                      NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS



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

                                                                              Cumulative Totals as of September 30, 2010

                                                                       Appropriations         Obligations           Outlays
           State Fiscal Stabilization Fund:
             SFSF Formula Grants                                        $          48,600    $       48,600     $       35,709
             Investing in Innovation and Race to the Top                            5,000             5,000                  8
             Subtotal                                                              53,600            53,600             35,717

           Student Financial Assistance:
             Federal Pell Grants                                                   15,640            15,640             14,950
             Mandatory Add-on Pell Grants*                                            643               643                643
             Federal Work Study Grants                                                200               200                199
             Subtotal                                                              16,483            16,483             15,792

           Education for the Disadvantaged:
             Title I Targeted/ Finance Incentive Grants                            10,000            10,000              5,089
             School Improvement Grants                                              3,000             3,000                 44
             Subtotal                                                              13,000            13,000              5,133

           Special Education:
             IDEA Part B Grants to States                                          11,300            11,300              5,660
             IDEA Part B Preschool Grants                                             400               400                167
             IDEA Part C Grants for Infants and Families                              500               500                253
              Subtotal                                                             12,200            12,200              6,080

           School Improvement Programs:
             Enhancing Education through Technology                                    650             650                    218
             Education for Homeless Children and Youths                                 70              70                     35
             Subtotal                                                                  720             720                    253

           Rehabilitation Services and Disability Research:
             Vocational Rehabilitation                                                 540             540                    230
             Independent Living Centers                                                 88              88                     10
             Services for Older Blind Individuals                                       34              34                     11
             State Grants                                                               18              18                      7
             Subtotal                                                                  680             680                    258

           Institute of Education Sciences                                             250             250                     2
           Innovation and Improvement                                                  200             200                    23

           Impact Aid:
             Section 8007(a) Formula Grants                                            40               40                    40
             Section 8007(b) Competitive Grants                                        60               60                     6
              Subtotal                                                                 100             100                    46

           Higher Education                                                           100               100                  2
           Student Aid Administration                                                  60                60                 52
           Office of Inspector General                                                 14                 3                  3
           Total                                                        $          97,407        $   97,396         $   63,361

           * An additional $831 million provided by the Recovery Act was to be made available during FY 2010; however, this
             funding was repealed by the Health Care and Education Reconciliation Act of 2010, effective July 1, 2010.




FY 2011 Agency Financial Report—U.S. Department of Education                                                               79
FINANCIAL DETAILS
NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS


Note 19. Education Jobs Fund
Public Law 111-226, enacted on August 10, 2010, created an Education Jobs Fund, which
allows the Department to provide assistance in saving and creating education jobs. This
investment of $10 billion was made available to states through formula grants for use in the
2010-11 school year for teachers and other employees of the nation’s children and youth
from early learning programs through secondary education. As of September 30, 2011,
$10,000 million has been obligated and $6,287 million has been expended to support
states and local school districts in their effort to save jobs. As of September 30, 2010,
$9,007 million had been obligated and $1,232 million had been expended.


Note 20. 2005 Hurricane Relief
The Hurricane Education Recovery Act (Public Law 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 $1,945 million to the
Department to provide needed assistance to reopen schools and help educate the
estimated 370,000 students affected by Hurricanes Katrina and Rita. As of September 30,
2011, $1,875 million has been expended and $24 million remains available for future
expenditure. During FY 2011, the Department returned to the Treasury $46 million that had
reached the end of the period of availability. As of September 30, 2010, $1,845 million had
been expended and $100 million remained available for future expenditure.
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, 2011,
$61 million has been obligated from the earmarked funds to assist in the relief and recovery
efforts, and $57 million has been expended. As of September 30, 2010, $61 million had
been obligated and $57 million had been expended.


Note 21. 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 that provides financial
assistance to eligible postsecondary school students. In FY 2011, the Department provided
funding of 82.6 percent of the capital used to make loans to eligible students through
participating schools at 5 percent interest. The schools provided the remaining 17.4 percent
of program funding. For the latest academic year ended June 30, 2011, approximately 459
thousand loans were made, totaling approximately $853.9 million at 1,505 institutions,




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                                                               NOTES TO THE PRINCIPAL FINANCIAL STATEMENTS

averaging $1,859 per loan. The Department’s share of the Federal Perkins Loan Program
was approximately $6.6 billion as of June 30, 2011.
In FY 2010, the Department provided funding of 82.5 percent of the capital used to make
loans to eligible students through participating schools at 5 percent interest. The schools
provided the remaining 17.5 percent of program funding. For the academic year ended
June 30, 2010, approximately 441 thousand loans were made, totaling approximately
$816.4 million at 1,540 institutions, averaging $1,852 per loan. The Department’s share of
the Federal Perkins Loan Program was approximately $6.6 billion as of June 30, 2010.
Federal Perkins Loan Program borrowers who meet statutory eligibility requirements—such
as those who provide service as teachers in low-income areas or as Peace Corps or
AmeriCorps VISTA volunteers, as well as those who serve in the military, law enforcement,
nursing, or family services—may receive partial loan forgiveness for 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.




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    82




                                                                                                                                                                                                                                                                                                                                                                                                      REQUIRED SUPPLEMENTARY INFORMATION
                                                                                                                                                                                                                                                                                                                                                                                                      FINANCIAL DETAILS
                                                                                                                                                                       Combining Statement of Budgetary Resources
                                                                                                                                                                         For the Year Ended September 30, 2011
                                                                                                                                                                                                          Dollars in Millions

                                                                                                                                                                                                                                                                                                                 American Recovery and
                                                                                                                                                                                                                Office of Elementary and Secondary           Office of Special Education and                 Reinvestment Act and Education
                                                                                                                                           Combined                            Federal Student Aid                           Education                            Rehabilitive Services                                Jobs Fund                                               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                $         6,526     $        15,654      $        4,174        $        15,409 $              877                      0 $                  47                         0   $             1,004                         0 $            424            $         245
                                                               Recoveries of prior year Unpaid Obligations                              1,575              12,203                 942                 12,192                409                      0                    43                         0                    43                         0              138                       11
                                                               Budgetary Authority:
                                                                Appropriations                                                        94,967                    2              48,532                                   21,577                       0               16,257                          0                                               0            8,601                        2
                                                                Borrowing Authority (Note 15)                                                             211,980                                    211,802                                         0                                               0                           0                   0                     0                 178
                                                                Contract Authority
                                                                Spending authority from offsetting collections (gross):                                                                                                                              0                                               0                           0                   0                     0
                                                                  Earned                                                                                                                                                                             0                                               0                           0                   0                     0
                                                                     Collected                                                          1,825              53,169               1,719                 53,011                    3                    0                       2                       0                           0                   0              101                      158
                                                                  Change in unfilled customer orders                                                                                                                                                 0                           0                   0                           0                   0
                                                                     Advance Receieved                                                     (7)                                                                                                                               1                                                                                        (8)
                                                                     Without advance from Federal Sources                                  4                    13                      0                  1                                         0                                               0                           0                   0                4                        12
                                                                Subtotal                                                  $           96,789       $      265,164      $       50,251            $   264,814 $          21,580      $           0        $           16,260          $           0       $                   0       $           0       $        8,698            $          350
                                                               Permanently not available                                               (1,396)             (30,134)             (1,057)               (30,122)            (116)                                          (51)                                                                                      (172)                       (12)

                                                               Total Budgetary Resources (Note 15)                        $          103,494       $      262,887      $        54,310       $       262,293 $          22,750      $           0        $           16,299          $           0       $             1,047         $           0       $        9,088            $         594

                                                               Status of Budgetary Resources:
                                                               Obligations incurred: (Note 15)
                                                                Direct                                                        $       97,980       $      247,485      $       50,895        $       247,289 $          22,099                           $           16,165                                  $         1,042                             $        7,779            $          196
                                                                Reimbursable                                                              80                                                                                                                              2                                                                                          78
                                                               Unobligated Balances:
                                                                Apportioned                                                             3,036                 634               1,214                    512                610                                           79                                                 2                                    1,131                      122
                                                               Unobligated Balance not available                                        2,398              14,768               2,201                 14,492                 41                                           53                                                 3                                      100                      276
FY 2011 Agency Financial Report—U.S. Department of Education




                                                               Total Status of Budgetary Resources                        $          103,494       $      262,887      $       54,310        $       262,293 $          22,750      $           (0) $                16,299          $          (0)          $         1,047         $          (0) $             9,088            $         594

                                                               Change in Obligated Balance:
                                                               Obligated balance, net:
                                                                 Unpaid obligations, brought forward, October 1           $           94,693       $      150,831      $       17,893        $       150,605 $          15,338                           $            9,137                              $           41,810                              $       10,515            $          226
                                                                 Uncollected customer payments from Federal Sources,
                                                               brought forward, October 1                                                   (2)                (14)                    (0)               (4)                                                                                                                                                        (2)                       (10)
                                                                Total, unpaid obligated balance, brought forward, net $                94,691      $       150,817     $        17,893       $        150,601 $          15,338     $               0 $                9,137         $               0 $              41,810         $               0 $         10,513            $          216
                                                               Obligation Incurred, net (+/-)                                          98,060              247,485              50,895                247,289            22,099                                       16,167                                           1,042                                       7,857                      196
                                                               Gross Outlays                                                         (118,494)            (221,724)            (44,628)              (221,506)          (21,341)                                     (15,294)                                        (28,868)                                    (8,363)                     (218)
                                                               Recoveries of prior year unpaid obligations, actual                      (1,575)             (12,203)              (942)                (12,192)            (409)                                          (43)                                           (43)                                      (138)                       (11)
                                                               Change in uncollected customer payments from Federal
                                                               Sources (+/-)                                                                (4)                (13)                    (0)                (1)                                                                                                                                                        (4)                      (12)
                                                               Obligated Balance, net, end of period:
                                                                Unpaid Obligations                                    $               72,684          $   164,389 $            23,218        $       164,196 $          15,687                           $            9,967                              $           13,941                                  $    9,871            $         193
                                                                Uncollected customer payments from Federal Sources                         (6)                 (27)                                        (5)                                                                                                                                                        (6)                     (22)

                                                               Total, unpaid obligated balance, net, end of
                                                               period                                       $                          72,678      $      164,362      $       23,218        $       164,191 $          15,687      $          (0)           $        9,967          $          (0) $                13,941          $          (0)      $        9,865            $         171

                                                               Net Outlays:
                                                                 Gross Outlays                                            $          118,494       $      221,724 $             44,628       $       221,506 $          21,341                           $           15,294                              $           28,868                              $        8,363            $           218
                                                                 Offsetting collections                                                (1,818)             (53,169)              (1,719)              (53,011)               (3)                                          (3)                                             (0)                                        (93)                     (158)
                                                                 Distributed Offsetting receipts                                      (50,289)                                 (50,197)                     (0)                                                           (0)                                             (0)                                        (92)                  (0(128))

                                                               Net Outlays (Note 15)                                      $           66,387       $      168,555 $             (7,288)      $       168,495 $          21,338      $           (0) $                15,291          $          (0) $                28,868          $          (0) $             8,178                $       60
                                                                             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. In addition, most of
the governmental funding for education in the United States comes from State and local
governments.

Investment in Human Capital

The Department of Education invests in human capital through its grant and loan programs,
research, leadership, and technical assistance.

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.

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 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 also is
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 also
is 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. Effective on
September 26, 2011 the Office of Safe and Drug-Free Schools and its programs were



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FINANCIAL DETAILS
REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION

moved into a new Office of Safe and Healthy Students within the Office of Elementary
and Secondary Education. This change will provide new opportunities for staff from Office
of Elementary and Secondary Education and Office of Safe and Drug-Free Schools to work
together to improve school environments and support children’s learning, health, and well­
being. 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 academic 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. See more detail at:
http://www.ed.gov/about/offices/list/oela/index.html?src=oc.

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 nonprofit 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



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                                                                 REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION

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.



                                            Summary of Human Capital Expenses

(Dollars in Millions)                                          2011          2010           2009          2008         2007
Federal Student Aid Expense
 Direct Loan Subsidy                                $ (28,630)        $    (1,567)   $    (9,603)   $    5,236    $    (499)
 Federal Family Education Loan
                                                         (16,126)         (14,344)       (29,940)       (2,852)        4,884
 Program Subsidy
 Grant Programs                                           39,008           26,799         17,302        17,464        15,092
 Salaries and Administrative                                    193           208            186           189          173
   Subtotal                                               (5,555)          11,096        (22,055)       20,037        19,650
Other Departmental
 Elementary and Secondary Education                       21,195           21,608         21,443        21,583        21,199
 Special Education and Rehabilitative                     15,357           15,227         15,075        15,730        15,402
 Services
 American Recovery and Reinvestment
                                                          27,945           44,019         21,616
 and Education Jobs Fund
 Other Departmental Programs                               7,341            7,067          7,150         4,911         5,109
 Salaries and Administrative                                    504           502            472           491          467
   Subtotal                                               72,342           88,423         65,756        42,715        42,177
                Grand Total                          $    66,787      $    99,519    $    43,701    $   62,752    $   61,827




Program
Outcomes

Education is the stepping
stone to higher living
standards for American
citizens, and it is vital to
national economic
growth. However,
education can lead to
more than increased
productivity and incomes.
Education can help
improve health, promote
social change, and open
                                           Source: Bureau of Labor Statistics (Dept of Labor) Economic
doors to a better future
                                           News Release, Table A-4:
for children and adults.                   http://www.bls.gov/news.release/empsit.t04.htm




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FINANCIAL DETAILS
REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION

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
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
September 2011 unemployment rate for adults (25 years old and over) who had not
completed high school was 14 percent, compared with 9.7 percent for those with four years
of high school and 4.2 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 September 2011, the annualized median income for adults
(25 years old and over) varied considerably by education level. Men with a high school
diploma earned $37,492, compared with $68,328 for men with a college degree. Women
with a high school diploma earned $28,964, compared with $51,376 for women with a
college degree. Men and women with college degrees earned 77 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

REPORT OF THE INDEPENDENT AUDITORS
AUDIT TRANSMITTAL




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                                                                                     AUDIT OPINION




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AUDIT OPINION




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                                                                      REPORT ON INTERNAL CONTROL




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                                                                           REPORT OF THE INDEPENDENT AUDITORS
                                                               REPORT ON COMPLIANCE W ITH LAWS AND REGULATIONS




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REPORT ON COMPLIANCE W ITH LAWS AND REGULATIONS




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    Other
Accompanying
 Information
OTHER ACCOMPANYING INFORMATION




                  Improper Payments Reporting Details
The Improper Payments Elimination and Recovery Act of 2010 (IPERA) (Public Law
111-204), which amends 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 payments made by the federal government. OMB also
has established specific reporting requirements for agencies with programs that possess a
significant risk of improper 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 or that exceed $100 million. For each program identified as susceptible to
significant improper payments 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, Part A Program; Other Grant
Programs; and Recovery Auditing.

Student Financial Assistance Programs

Risk Assessment

As required by the IPERA, Federal Student Aid (FSA) inventoried its programs during
FY 2011 and, for each program, assessed the risk of improper payments. See the table
below for the Grant, Loan, and Work-Study Programs identified.

                                          Programs
      Grant Programs
      Federal Pell Grant
      Academic Competitiveness Grant (ACG)
      National Science and Mathematics Access to Retain Talent Grant (SMART)
      The Teacher Education Assistance for College and Higher Education Grant (TEACH)
      Federal Supplemental Educational Opportunity Grant (FSEOG)
      Leveraging Educational Assistance Partnership (LEAP)/Special Leveraging
      Educational Assistance Partnership (SLEAP)
      Iraq and Afghanistan Service Grant (IASG)
      Loan Programs
      Federal Perkins Loan Program
      Federal Direct Loan Program
      Federal Family Education Loan Program (FFEL)
      Work - Study Programs
      Federal Work - Study Program




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                                                                   OTHER ACCOMPANYING INFORMATION
                                                               IMPROPER PAYMENTS REPORTING DETAILS


For each program, risk assessment meetings were held with program owners, key
personnel, and other designees to discuss the following ten risk factors to determine
susceptible risk within the programs: Volume of Payments; Prior Improper Payments
Reporting Results; Newness of Program or Transactions; Complexity of Program or
Transactions; Level of Manual Intervention; Changes in Program Funding Authorities,
Practices, or Procedures; History of Audit Issues; Human Capital Management; Nature of
Program Recipients; and Management Oversight.

A risk rating was assigned to each factor based on risk factor criteria established and
consensus from the participants in the meetings. Weighted percentages were assigned to
each risk factor rating based on probability of an improper payment. An overall risk score
was then computed for each program, calculated by the average of the sum of the weighted
scores for each risk factor and overall rating scale.

In addition to the A-123 guidance, another criteria for determining susceptible risk within the
programs were programs that were previously required to report improper payment
information under OMB Circular A-11, Budget Submission, former Section 57.2. 1

The Direct Loan, FFEL, and Pell Grant Programs were identified as risk susceptible to
improper payments, and are described in the next section. The ACG, SMART, TEACH,
FSEOG, LEAP/SLEAP, and IASG Grant Programs, Perkins Loan Program, and the Federal
Work-Study Program were deemed to be low-risk programs.

•    The ACG and SMART programs are budgeted together and had a five-year life, which
     will end with the academic school year 2010–2011.

•    For TEACH Grants in FY 2011, approximately 45,000 grants were disbursed for almost
     $125 million, which is relatively low in volume and dollar amount.

•    For the LEAP/SLEAP Grant Program 2010–11 award year, approximately $162 million
     in grants were disbursed to approximately 162,000 students. The 2010–2011 award
     year was the last award year in which states will be able to apply for SLEAP funding.

•    The IASG Program began in the 2010–2011 award year, and is very small with
     approximately $181,995 in total awards and 37 recipients.

•    The Federal Perkins Loan Program and Work-Study Programs are campus-based
     programs and funds are provided directly to eligible institutions. These programs had a
     larger number of awards and disbursement amounts, but resulted in a low risk rating for
     improper payments.

No further information on these low risk programs is included herein.


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.




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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 Pell Grant
Direct Loan, and FFEL.

Pell Grant Program. The Pell Grant Program includes the drawdown of funds by schools
and the disbursement of aid from the school to the student; year-end closeout and the
return of unsubstantiated funds; return to Title IV collections from schools; and collections
on overpayments from recipients.

An estimated improper payment rate calculation was completed for the Pell Grant Program
in FY 2011. There were no changes to the sampling process from prior years. The overall
improper payment rate, based on this analysis, was 2.72 percent.

In FY 2011, OMB designated Pell a “high-priority” program per Executive Order 13520 and
OMB Circular A-123, Appendix C (as updated by OMB Memo M-10-13), because estimated
FY 2010 Pell improper payments of $1,005 million exceeded the OMB FY 2010 high-priority
program threshold of $750 million. The Department is coordinating with OMB to establish
and execute a plan to implement all applicable high priority program requirements. These
include, in FY 2011, the designation of accountable officials, the establishment of
supplemental measures, and new reporting on program measures on
PaymentAccuracy.gov.

Direct Loan Program. The Direct Loan Program includes the drawdown of funds by
schools, the origination of a loan and disbursement of funds from the school to the student
(or their account); consolidations; servicing of the loan and collections from borrowers; and
return to Title IV collections from schools.

An estimated improper payment rate calculation was completed for the Direct Loan
Program in FY 2011. There were no changes to the sampling process from prior years. The
overall improper payment rate, based on this analysis, was 0.22 percent.

FFEL Program. During FY 2011, the FFEL Program made no new loan originations.
FY 2011 payment types and cash flows associated with loans originated in prior years (i.e.,
the existing FFEL portfolio) include: Special Allowance (SAP), Interest Benefits, Lender
Fees, Origination Fees, Consolidation Loan Rebate Fees, Reinsurance, Account
Maintenance Fee, and Loan Processing and Issuance Fees.

Starting with 2008, the FFEL program also included the Loan Purchase Commitment
Program, Loan Participation Purchase Program, and the Asset Backed Commercial Paper
(ABCP) Conduit Program authorized in the Ensuring Continued Access to Student Loans
Act (ECASLA). The Loan Purchase Commitment Program and Loan Participation Purchase
Program ended on 10/15/2010. The Conduit Program is scheduled to end in 2014. These
programs resulted in the purchase of significant volumes and amounts of FFEL loans from
2008 to 2010. The on-going servicing of these FFEL loans acquired through ECASLA is a
part of the FFEL Program.

Beginning in FY 2009 and ending in FY 2010, Federal Student Aid initiated FFEL SAP risk
analyses in lieu of a measurement. As described in the Department’s FY 2010 Agency
Financial Report (AFR), these analyses did not yield any result that could help inform


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decisions on improper payment measurement and were suspended. Accordingly, Federal
Student Aid did not use these risk analyses to calculate an FY 2011 error rate and no
estimate of FY 2011 improper payments is provided.

Estimation Methodology

The size and complexity of the student aid programs make it difficult to consistently identify
“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.

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 did not change in FY 2011 and additional
details about the study can be found in the FY 2009 AFR, under Corrective Actions
(http://www2.ed.gov/about/reports/annual/2009report/5-otherinfo.pdf).

Direct Loan Program. For the Direct Loan program, the estimation methodology considers
the risk for each payment type within the program, and for each component, an
independent error rate is determined, via sample or other process, so as to calculate an
aggregate error rate.

The estimated improper payment rate for FY 2011 is 0.22 percent in the aggregate.
Consistent with prior years, this percentage estimate is well below the historical threshold
for risk susceptible programs of 2.5 percent. The FY 2011 estimated improper payment
amount at $264 million, however, exceeds the new IPERA reporting threshold for risk
susceptible programs effective this year of $100 million.

Historically, and in FY 2011, a significant percentage of the program’s total outlays come
from the origination and disbursement front end of the loan life cycle. In FY 2011,
approximately 90 percent of the $116.1 billion in total outlays are from loan disbursements.
Because of strong controls within the Common Origination and Disbursement system and
supporting processes, and other factors, there is low risk of improper payment for these
payment types and an estimated error rate of approximately $8 million or less than
0.01 percent. In FY 2011, approximately 10 percent of total program outlays are related to
consolidations. Due to the nature of consolidations and timing of payments, we expect to
see a small percentage of over and under payments annually, with some portion of the
over/under payments having been caused by error, and most being attributable to the fact
that loan consolidations are not performed with a date-certain settlement date. In FY 2011,
the error rate estimate for consolidations is approximately $253 million or 2.1 percent. Last,
a negligible percentage of total outlays (i.e., less than 0.1 percent in FY 2011) is composed
of servicing and collection refunds. These too have a small expected percentage of over
and under payments annually, mostly composed of cancellations. The FY 2011 error rate
for refunds, on average, was approximately $3 million or 2.6 percent.




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FFEL Program. Prior year risk analyses that were undertaken in lieu of a measurement did
not yield any result that could help inform decisions on improper payment estimation.
Accordingly, FSA did not use these risk analyses to calculate a FY 2011 error rate and no
estimate of FY 2011 improper payments is provided. Federal Student Aid is in the process
of assessing the feasibility of new assessment methodologies and is developing a
comprehensive plan for implementation in FY 2012 to develop an estimate of FFEL
improper payments to be reported in the FY 2012 AFR.

In FY 2009, Federal Student Aid worked with OMB to target their improper payment
analysis using data mining techniques to identify potential improper payments, with
particular focus on SAP to lenders. In past years, SAP has been among the largest
categories of payments to lenders. 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 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.

Root Causes and Corrective Actions

Pell Grant Program. Departmental analysis found that the inaccuracy of self-reported
financial income on the Free Application for Federal Student Aid (FAFSA) was the most
significant root cause of potential Pell improper payments. This root cause is considered a
verification category error, as defined by OMB Circular A-123. As a result, one of the key
actions aimed at addressing the issue has been the establishment of a data exchange
process with the Internal Revenue Service (IRS). FSA in conjunction with the IRS
implemented a pilot version of the IRS Data Retrieval Tool (IRS DRT) on January 28, 2010,
for the remaining six months of the 2009–10 application cycle. The tool enables Title IV
student aid applicants and, as needed, parents of applicants, to transfer certain tax return
information from an IRS Web site directly to their online FAFSA.

The IRS DRT was made available to students for ten months in the 2010–11 cycle
becoming available in September of 2010. For the 2011–12 cycle, the availability of the IRS
DRT was aligned more closely with the beginning of the FAFSA cycle, becoming available
on January 30, immediately after the IRS began processing tax returns for the year. For the
2011–12 cycle, 3,427,891 students and parents transferred their tax data from the IRS to
the FAFSA using the IRS DRT. This usage represents approximately 21.2 percent of the
16,205,543 FAFSAs submitted for the 2011–12 academic year between January 30, 2011
through September 04 2011.

Another key action of note in addressing the inaccuracies on the FAFSA, are the changes
in verification regulations. Verification is the process required by the Department that
schools conduct to confirm specific information reported on the FAFSA by the applicant.
Previously, the Department required postsecondary educational institutions to verify key
items on up to 30 percent of their students’ FAFSA forms, focusing on those individuals that
qualify for Pell Grants. Beginning with the 2012–13 cycle, schools will be required to verify
all applicants selected for verification.

Both actions contribute to fewer instances of inaccurate financial information and
subsequently, reduce improper payments. FSA will continue to explore ways to facilitate the


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detection of error, based on the results of the FAFSA/IRS Data Statistical Study.
Additionally, FSA continues to simplify the application process and promote the real-time
use of the IRS DRT. These enhancements, coupled with improved error detection, should
allow FSA to further reduce improper payments.

Direct Loan Program. The root causes for improper payments within the Direct Loan
program vary by payment type, and are considered administrative category errors, as
defined by OMB Circular A-123, Appendix C. As noted in the preceding section, most of the
Direct Loan estimated improper payment amount relates to the consolidation process.
Departmental analysis has found that the most significant root cause for consolidation
payoff errors is erroneous manual processing of information received from borrowers and
lenders. Examples are manual errors of data entry, inclusion of student loans that the
borrower desired to exclude, or failure to cancel a consolidation upon the borrower’s
request. Given that the loan consolidation process does not make payoffs on a prearranged
date certain, an improper payment (for example to buy one loan too many) has the same
characteristics as an overpayment (for example a borrower made a payment the day before
consolidation). In either case, the lender is required to return the funds to the Direct Loan
Consolidation program. The program conducts sampling of returned funds so as to
determine the root cause, and conduct continuous process improvement.

FSA has a number of existing internal controls integrated into its Direct Loan systems and
activities to prevent and detect errors and continually evaluates how to improve these
controls. These include:

•    System Edits and data matches—The front end student eligibility and origination and
     disbursement systems include edits and data matches with external data sources to
     prevent erroneous information from being entered into the system and prevent potential
     improper payments.

•    Certification—In the Loan Consolidation Program, the key control is FSA’s usage of
     lender certified loan balances and FSA’s ability to compare borrower and lender
     provided information to the National Student Loan Data System (NSLDS) data set. A
     recent enhancement completed in March 2011 has been to lengthen the time between
     borrower final notice and lender payment so as to give the borrower additional time to
     respond in the event of the rare erroneous data. Another recent enhancement
     completed in December 2010 was the automation of a computer interface between
     COD and the FSA federal loan servicers. The result of this action was to reduce the
     potential for human error. The prior process used the Treasury’s IPAC system for inter-
     governmental funds transfers, and usage of that system involved manual transaction
     processing, subject to error.

•    Servicer Oversight—Management and oversight of Title IV Additional Servicers
     includes: process monitoring, financial data reconciliations, NSLDS reporting,
     operational and finance meetings and oversight activities, program compliance reviews,
     SAS70/SSAE16 assessments of servicer controls performed by independent public
     accountants (IPAs), and A-123A assessments of internal controls over financial
     reporting performed by FSA.

FFEL Program. Past experiences with managing the FFEL program have shown that the
highest risk areas with the potential to lead to improper payments reside in the accurate



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and timely reporting of borrower status to calculate interest benefits and SAP. These are
considered administrative category errors, as defined by OMB Circular A-123.

FSA 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 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 improper
      payments. The hard edits require correction before proceeding with payment
      processing. The soft edits alert the user and FSA to potential errors. FSA reviews these
      warnings prior to approval of payment.

•     Reasonability Analysis—Data reported by guaranty agencies to the NSLDS are used to
      determine payment amounts for account maintenance and loan issuance processing
      fees. FSA 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—FSA 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, FSA completed a series of reviews of
      guaranty agencies’ establishment of the federal and operating funds in 1998 in
      response to an Office of Inspector General (OIG) recommendation. Those reviews and
      resulting corrective actions have been completed.

Federal Student Aid Improper Payment Reporting Summary

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

                   Federal Student Aid Improper Payment Reduction Outlook
                                         ($ in millions)
                         (1,2)                             (3)                   (4,5,6)
                     Pell                      Direct Loan                  FFEL
Year         Outlays   IP %     IP $    Outlays      IP %      IP $ Outlays    IP %                                 IP $
               $                            $                          $
FY 2010       32,215      3.12      1,005     99,428       0.30         298          94,875            N/A          N/A
                                        (7)                                 (8)
FY 2011       36,515      2.72      993       116,098      0.22        255           42,616            N/A          N/A
FY 2012       37,090      2.72      1,009     190,266      0.22         419          15,561            N/A          N/A
FY 2013       38,505      2.72      1,047     207,179      0.22         456          14,619            N/A          N/A
FY 2014       35,199      2.72       957      220,474      0.22         485          14,517            N/A          N/A
1)
 The source of FY 2010 Pell outlays is the FY 2010 AFR. The source of FY 2011 estimated Pell outlays is
supporting documentation for the FY 2012 President’s Budget request. The source of the FY 2012–14
estimated Pell outlays is the Mid-Session Review update to the FY 2012 President’s Budget Request.

2)
  The chart above uses a preliminary Pell improper payment (IP) percentage for FY 2011. The improper
payment amount is considered an estimate because the Pell rate is preliminary. The FY 2011 IP percentage is
scheduled to be finalized after issuance of the Department’s AFR. The final Pell error rate for FY 2010 was



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3.12 percent. This 3.12 percent rate was reported as “preliminary” in the FY 2010 AFR; however, it did not
change.

3)
 The source of FY 2010 Direct Loan outlays is the FY 2012 President’s Budget request. The source of FY 2011
estimated Direct Loan outlays is supporting documentation for the FY 2012 President’s Budget request. The
source of the FY 2012–14 estimated Direct Loan outlays is the Mid-Session Review update to the FY 2012
President’s Budget Request.

4)
  As noted in the preceding “Estimation Methodology” section, FSA will continue to work with OMB in FY 2012
to develop improper payment estimation methodology for the FFEL program. Accordingly, improper payment
estimates for the FFEL program are not provided.

5)
 The source for the FY 2010 FFEL outlays is FY2012 President’s Budget request. The source for the FY 2011
FFEL outlays is the supporting documentation for the FY 2012 President’s Budget request. The source for the
FY 2012–14 estimated outlays is the Mid-Session Review update to the FY 2012 President’s Budget request.

6)
  The annual Guaranty Agency Financial report provides information on transfers from the Federal Fund to
Operating Fund for default aversion fees that are received in the winter of the current fiscal year for prior fiscal
year activity. The amount of FY 2010 default aversion fees transferred from the Federal Fund was $166 million
(non-cash transaction) and is not included in the FY 2011 outlay number. The FY 2011 default aversion fee will
not be available until approximately the second quarter of the next fiscal year (FY 2012) and is not included in
the FY 2011 outlays.

7)
 The FY 2011 Pell overaward improper payment rate estimate is 1.84 percent or $672 million and the
underaward improper payment rate estimate is 0.88 percent or $321 million.
8)
  The FY 2011 Direct Loan overpayment improper payment rate estimate is 0.19 percent or $220 million and
the underpayment improper payment rate estimate is 0.03 percent or $35 million.

The final FY 2010 improper payment rate estimate for Pell of 3.12 percent was lower than
the FY 2010 reduction target of 3.5 percent as reported in the FY 2009 AFR. The
preliminary FY 2011 improper payment rate estimate for Pell of 2.72 percent was lower
than the FY 2011 reduction target of 3.3 percent as reported in the FY 2010 AFR. The
target Pell 2.72 IP percentage used for 2012–2014 is base-lined from the FY 2011
preliminary estimate. Analysis of the FY 2011 data will be performed through early 2012 to
determine whether the decrease from prior years is statistically significant, and if so, what
caused it (e.g., ongoing efforts to expand and improve IRS DRT usage and recipient
verification).

FY 2011 is the base year IP measurement for Direct Loan. No reduction targets were
reported in the FY 2009 or FY 2010 AFRs. The target Direct Loan 0.22 IP percentage used
for 2012–2014 is base-lined from the FY 2011 estimate.

Internal Control, Human Capital, Information Systems and Infrastructure

Federal Student Aid has the internal controls, human capital, and information systems and
other infrastructure it needs in order to reduce improper payments to the levels the agency
has targeted.

Manager Accountability

The Federal Student Aid offices, managers, and staff responsible for these programs are
accountable for establishing and maintaining sufficient internal controls, including a control
environment that prevents improper payments from being made, and promptly detects and



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recovers any improper payments that may occur. Offices and managers are held
accountable through a variety of mechanisms and controls, including annual performance
measures aligned to the strategic plan, organizational performance review criteria, and
individual annual performance appraisal criteria. Federal Student Aid contractors are held
accountable through various contract management and oversight activities and functions,
control assessments, and audits. All relevant Federal Student Aid key controls are
assessed annually for design and operating effectiveness to support management’s FMFIA
and A-123A assurance statements.

Important controls to prevent and detect improper payments are administered at the school
level. For example, schools are responsible and held accountable for recipient verification
for need based aid. Federal Student Aid certifies a school’s eligibility for participation in Title
IV programs, conducts periodic program reviews of schools to verify compliance, and
evaluates school financial statement and compliance audits to ensure any potential
compliance issues or control weaknesses are resolved.

Statutory and Regulatory Barriers

There are currently no identified barriers which may limit Federal Student Aid’s corrective
actions in reducing improper payments.

Elementary and Secondary Education Act of 1965, Title I, Part A
Program

The Department performed a risk assessment of the Elementary and Secondary Education
Act of 1965 Title I Grants to Local Educational Agencies, during FY 2011. The assessment,
based on FY 2010 audit data (the most recent available), yielded an estimated improper
payment rate of 0.05 percent. This is consistent with previously reported data indicating that
Title I does not meet the statutory threshold for susceptibility to improper payments.

The risk assessment was conducted by analyzing the questioned costs reflected in A-133
single audits and OIG audits for both grant recipients and sub-recipients. Questioned costs
were identified in 91 of the total 10,455 Title I audits included in the review. Only 33 of these
91 audits included questioned costs greater than 2.5 percent of expenditures.

Questioned costs are a reasonable, upper-bound estimate of improper payments. Some
questioned costs are not sustained during the audit resolution process and, as such, are
not considered improper; however, additional improper payments, to a lesser extent, are
identified during audit resolution. We also note that questioned costs may not include all
questionable payments to a recipient given that audits generally review only a small sample
of transactions. Yet this is difficult to estimate given that most individual audit findings
cannot be projected with statistical confidence to 100 percent of an entity’s payments.

The Department’s assessment of these factors and estimate of improper payments result in
the conclusion that Title I is not susceptible to significant improper payments. All previous
risk assessments have similarly indicated there is not a significant risk of improper
payments in the Title I program. Recoveries of improper payments in Title I are discussed in
the next section. The following table presents an estimate of the improper payment outlook
for Title I. No reduction targets are proposed since the Department’s risk assessments have
not identified Title I as a program susceptible to significant improper payments. This table is



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presented because Title I was previously required to report improper payments under
Section 57 of OMB Circular A-11 (2002).

                                     Title I Improper Payment Reduction Outlook
                                                       ($ in millions)
                                                     (1)                                          (2)
                                          Outlays $                    IP %                   IP $
FY 2010                                       18,141                    .04                    7.3
FY 2011                                       17,926                    .05                    9.0
FY 2012                                       14,825                    .05                    7.4
FY 2013                                       14,487                    .05                    7.2
FY 2014                                       14,492                    .05                    7.2
1)
  The sources of Title I outlays are FACTS II reports and the FY 2012 President’s Budget request. These
include ARRA outlays.
2)
 The estimated amount of improper payments has been increased from the amount reported in the FY 2010
AFR due to the inclusion of ARRA totals.

Other Grant Programs

Risk Assessments

The Department’s approach to the risk assessment process for other non-Federal Student
Aid grant programs is the same as for Title I. The intent is 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. Risk assessments
for programs other than Title I are conducted on a three-year cycle. None of these
programs were deemed susceptible to significant improper payments in the most recent risk
assessment included in the FY 2010 Agency Financial Report. Despite this determination,
the Department is concerned about the risk of improper payments in grant programs,
especially at the sub-recipient level and for programs for which audits have identified higher
rates of questioned costs. The Department is working to identify root causes of improper
grantee expenditures to improve grant monitoring and technical assistance to reduce
improper payments.

Recovery Auditing

IPERA requires agencies to conduct recovery audits for programs that expend one million
dollars or more annually if conducting such audits would be cost-effective.

Contract Payment Recapture Audits. The Department’s findings from payment recapture
audits of contracts have been consistently insignificant. For FY 2004–2006, the Department
hired an independent CPA firm to conduct payment recapture audits for the Department’s
contracts and purchase orders, which total approximately $1.5 billion annually. Due to the
amount the firm recovered, which is less than one percent (.0025 percent) for the entire
contract period, the Department decided not to continue the work for FY 2007. Therefore,
the Department has been conducting payment recapture audits of contracts since FY 2007
as part of the A-123 review process. The findings from these reviews have consistently
demonstrated the low risk of improper payments in contracts.

The following chart presents the results of the Department’s contract payment recapture
auditing program.




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                         Contract Payment Recapture Audit Reporting
                                         ($ in millions)
       Amount Subject to Review for Current Year (2011) Reporting                         $1,571
       Actual Amount Reviewed and Reported (2011)                                          $20.6
       Amounts Identified for Recovery (2011)                                                 $0
       Amounts Recovered (2011)                                                               $0
       % of Amount Recovered out of Amount Identified (2011)                                  NA
       Amount Outstanding (2011)                                                              $0
       % of Amount Outstanding out of Amount Identified (2011)                                NA
       Amount Determined Not to be Collectable (2011)                                         $0
       % Amount Determined Not to be Collectable out of Amount                                NA
       Identified (2011)
       Amounts Identified for Recovery Prior Years (2004–2010)                                  $0
       Amounts Recovered (2004–2010)                                                            $0
       Cumulative Amounts Identified for Recovery (2004–2011)                                   $0
       Cumulative Amounts Recovered (2004–2011)                                                 $0
       Cumulative Amounts Outstanding (2004–2011)                                               $0
       Cumulative Amounts Determined Not to be Collectable (2004–                               $0
       2011)

The Department has not established formal recovery targets for contract payments given
the consistently insignificant findings. Since FY 2004, the Department’s audits have found
no improper payments for recovery, and there are no outstanding overpayments to report.
Should future contract payments be identified for recovery, the Department will establish
recovery targets, taking into consideration the nature of the overpayments and any potential
barriers to recovering funds.

Federal Student Aid Post-Award Audits. Audits and reviews of Title IV program
participants identify potential improper payments within these programs and assess
liabilities that are recovered through the Department’s accounts receivable process and are
included in the chart below. Federal Student Aid will continue to explore recovery audit
methods, as defined by IPERA, during fiscal year 2012 and determine if they are cost
beneficial.

For the Pell Grant Program, recoveries also occur when overpayments to students are
assigned to Federal Student Aid for collection. Pell amounts recovered through student
Debt Collection were approximately $8.7 million in FY 2011, $6.7 million in FY 2010, and
$81.5 million cumulative from FY 2011 to FY 2004. While all programs may have student
debts transferred to debt collection, the categorization of resulting collections as an
improper payment recovery is unique to Pell. Unlike loans, Pell grant payments transferred
to debt collection commonly indicate a potential improper payment at time of disbursement.

Overpayments Recaptured Outside of Payment Recapture Audits. The Department
works with grantees to resolve amounts identified in A-133 Single Audits, OIG Audits and
Department conducted Program Reviews as potential improper payments. The Department
published a Request for Information (RFI) on February 17, 2011, to seek information from
potential contractors to conduct more formal recovery audits in accordance with IPERA.
The results of the RFI and an analysis of Department audit recoveries suggest that grant
payment recapture audits would not be cost-effective.




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The Department is exploring the possibility of leveraging IPERA to create incentives for
State governments that administer Education-funded programs to conduct payment
recapture audits to identify and recover overpayments, payments for ineligible goods or
services, excess interest earned on advances, and other improper payments. In 2005, the
Department’s OIG noted that, for programs where the funds are substantially passed-
through the state, in general there is a lower risk of improper payments at the state level
than at the local level where the services are delivered. Under OMB Circular A-133 and
other Federal grants management requirements, states are responsible for conducting
programmatic and fiscal monitoring of sub-grantees at the local level. States are also
responsible for addressing most Single Audit findings pertaining to sub-grantees. The
Department will provide additional details as our plans progress.

The following chart provides estimates of the amounts identified and recovered through
A-133 Single Audits, OIG Audits, and Program Reviews.

               Overpayments Recaptured Outside of Payment Recapture Audits
                                      ($ in millions)
    Agency        Amount     Amount     Amount        Amount   Cumulative  Cumulative
    Source       Identified Recovered  Identified   Recovered    Amount     Amount
                (FY 2011) (FY 2011)* (FY 2010)       (FY2010)*  Identified Recovered
                                                               (FY 2010-   (FY 2010-
                                                                  2011)      2011)
  Single Audit     28.7        4.2        16.9          9.3        45.6       13.5
    Reports
   OIG Audit       13.5        3.4         .5            .6        14.0        4.0
    Reports
   Program         38.3        9.8        21.0          7.1        59.3       16.9
   Reviews
*Includes all amounts recovered during the year, not just the recoveries of amounts identified during the year.

Manager Accountability. Program staff must assess grantee risk and determine whether
new or continuing grants should include “special conditions” (including grantees designated
“high-risk” pursuant to EDGAR at 34 CFR §80.12). Program staffs work with the
Department’s Risk Management Service (RMS) to use the Decision Support System (DSS)
to assess grantee risk and assist in the determination of special conditions for grant
awards. DSS is a suite of software tools and support services used to perform risk analysis
and reveal to the Department information that can be used to effectively administer grants.
Appropriate uses of the information are to inform the work of (1) identifying fiscal or
performance risks with ED’s applicants or grant recipients; (2) determining if special
conditions are needed for the award; and (3) developing risk-based monitoring and
technical assistance plans. For more information on DSS see page 22 in the Management
Discussion Analysis section of this report.

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.

Information Systems and Infrastructure. The Department recently acquired continuous
monitoring software to help detect anomalies and potential issues in agency financial data
prior to payment, staff follow-up when anomalies are identified, aggressively investigate




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OTHER ACCOMPANYING INFORMATION
IMPROPER PAYMENTS REPORTING DETAILS


root causes of improper payments when they do occur, and develop corrective action plans
to address the systemic weaknesses. This new technological tool will be used to examine
payment records and identify challenges such as duplicate payments, payments for
services not rendered, overpayments, and fictitious vendors before payments are actually
made. This software will allow the Department to shift our focus from traditional
retrospective/detective activities to proactive/preventive activities, thereby assisting the
Department in reducing the risk of improper payments.

Statutory and Regulatory Barriers. The high burden of proof in the requirements of the
General Education Provisions Act (GEPA) is a significant reason why the Department
generally recovers a small percentage of the original questioned costs in audits. The GEPA,
20 U.S.C. 31 Subchapter IV § 1234a, requires the Department to establish a prima facie
case for the recovery of funds, including an analysis reflecting the value of services
obtained. In accordance with 20 U.S.C. 31 Subchapter IV § 1234b, any amount returned
must be proportionate to the extent of harm the violation caused to an identifiable Federal
interest.

Summary

The Department is enhancing its efforts for identifying and reducing the potential for
improper payments to comply with the IPERA. 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 2012, we will continue to work with
OMB and the OIG to explore additional opportunities for identifying and reducing potential
improper payments and to ensure compliance with the IPERA.




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                                                                                       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 87–104 and the Department’s management assurances on pages 32–33.

                                   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        Consolidated      Reassessed
                                           Balance                                                                    Balance

 Total Material Weaknesses                      0              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        Consolidated      Reassessed
                                           Balance                                                                    Balance

 Total Material Weaknesses                      0              0         0                0                0               0


               Conformance with Financial Management System Requirements—FMFIA 4
Statement of Assurance: The Department systems conform to financial management system requirements.
                                          Beginning                                                                   Ending
 Non-Conformance                                           New     Resolved        Consolidated      Reassessed
                                           Balance                                                                    Balance

 Total Non-Conformance                          0              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




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OTHER ACCOMPANYING INFORMATION




120                              FY 2011 Agency Financial Report—U.S. Department of Education
                                                               OTHER ACCOMPANYING INFORMATION




 Office of Inspector General’s (OIG) Management Challenges
                      for Fiscal Year 2012
                      Executive Summary
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 the OIG to identify and report annually on the most serious management
challenges the Department faces. The Government Performance and Results
Modernization Act of 2010 requires the Department to include in its agency performance
plan information on its planned actions, including performance goals, indicators, and
milestones, to address these challenges.

Last year we presented four management challenges: implementation of new
programs/statutory changes, oversight and monitoring, data quality and reporting, and
information technology security. All of the prior management challenges remain challenges
for FY 2012. The first FY 2011 challenge, implementation of new programs/statutory
changes, which incorporated aspects of the American Recovery and Reinvestment Act of
2009 (Recovery Act), and the Ensuring Continued Access to Student Loans Act of 2008,
has been incorporated into the oversight and monitoring challenge. In addition, we have
added a new challenge related to improper payments.

The FY 2012 management challenges are:

(1) Improper Payments,

(2) Information Technology Security,

(3) Oversight and Monitoring, and

(4) Data Quality and Reporting.

Improper Payments. A significant challenge for management in FY 2012 is the prevention,
identification, and recapturing of improper payments. Across the Federal Government,
agencies reported an estimated $125.4 billion in improper payments for FY 2010. The
Department estimated that it had more than $1 billion in improper payments in the Pell
Grant program alone in FY 2010. The Department, as well as other agencies, must be able
to ensure that the billions of dollars entrusted to it are reaching the intended recipients. The
President has established an aggressive goal to reduce government-wide improper
payments by $50 billion by FY 2012. To meet these goals, various pieces of legislation
were enacted and implementing guidance was issued. The Department will be challenged
to take actions to meet all the new requirements, and to intensify its efforts to prevent,
identify, and recapture improper payments.

Information Technology Security. The Department collects, processes, and stores a
large amount of personally identifiable information regarding employees, students, and
other program participants. OIG has identified repeated problems in Information
Technology (IT) security and noted increasing threats and vulnerabilities to Department



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OTHER ACCOMPANYING INFORMATION
OFFICE OF INSPECTOR GENERAL’S MANAGEMENT CHALLENGES FOR FY 2012


systems and data. For the last several years, OIG’s IT audits and Investigative Program
Advisory Reports have identified management, operational, and technical security controls
that need improvement to adequately protect the confidentiality, integrity, and availability of
Department systems and data. We have identified security weaknesses in the incident
handling process and procedures, personnel security controls, and configuration
management. Compromise of the Department’s data would cause substantial harm and
embarrassment to the Department and could lead to identity theft or other fraudulent use of
the information.

Oversight and Monitoring. Effective oversight and monitoring of the Department’s
programs and operations are critical to ensure that funds are used for the purposes
intended, programs are achieving goals and objectives, and the Department is obtaining the
products and level of services for which it has contracted. This is a significant responsibility
for the Department given the numbers of different entities and programs requiring
monitoring and oversight, the amount of funding that flows through the Department, and the
impact that ineffective monitoring could have on the students and taxpayers. Five areas are
included in this management challenge—student financial assistance (SFA) program
participants, distance education, Recovery Act programs, grantees, and contractors.

•     Student Financial Assistance Program Participants. The Department must provide
      effective oversight and monitoring of participants in the SFA programs under Title IV of
      the Higher Education Act of 1965 as amended to ensure that the programs are not
      subject to fraud, waste, abuse, and mismanagement. Under the President’s budget, the
      Department expects to provide more than $189 billion in grants, loans, and work-study
      assistance for these programs in FY 2012. An estimated 15.9 million students and their
      families will rely on the SFA programs to help fund their postsecondary educations.
      Participants in the SFA programs include postsecondary institutions, lenders, guaranty
      agencies, and third-party servicers. Our work has identified weaknesses in the
      Department’s oversight and monitoring of these participants. The Department has taken
      corrective actions to address many of the recommendations contained in our prior
      reports. However, the Department needs to continue to assess and improve its
      oversight and monitoring of program participants and take effective actions when
      problems are identified.

•     Distance Education. Distance education refers to courses or programs offered through
      telecommunication, such as through Internet connection with a postsecondary
      institution. The flexibility offered is popular with students pursuing education on a non-
      traditional schedule. Many institutions offer distance education programs as a way to
      increase their enrollment. Management of distance education programs presents a
      challenge for the Department and school officials because of limited or no physical
      contact to verify the student’s identity or attendance. OIG audit work has found that for
      distance education programs, schools face a challenge in determining when a student
      attends, withdraws from school, or drops a course. Attendance is critical because it is
      used to determine the student’s eligibility for Federal student aid and to calculate the
      return of funds if the student withdraws or drops out. Our investigative work has also
      identified numerous instances of fraud involving distance education programs. These
      cases involved the exploitation of vulnerabilities in distance education programs to
      fraudulently obtain Federal student aid. Also, some requirements for residential
      programs do not translate clearly for distance education programs, and guidance is not
      available to address these issues. The Department needs to develop requirements



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                                       OFFICE OF INSPECTOR GENERAL’S MANAGEMENT CHALLENGES FOR FY 2012


     specific to distance education and to increase its oversight of schools providing
     programs through distance education.

•    Recovery Act Programs. The Recovery Act provided significant additional funding to
     help improve the economy and enhance education reforms. This included funding for
     new educational programs and existing programs. Over the last year, the challenge for
     the Department has moved from implementing the programs to monitoring the
     programs to ensure that program funds are expended for the purposes intended and
     that the goals and objectives of the programs are being met. In FY 2012, the
     Department will also be providing oversight of the winding down of the programs and
     funding provided. The OIG and the Government Accountability Office have conducted
     significant amounts of work at the Department, State agencies, and local educational
     agencies (LEAs). This work identified a number of control weaknesses related to the
     use of funds, cash management, subrecipient monitoring, and impacts on maintaining
     levels of funding for education programs. We made recommendations to improve
     implementation and monitoring of Recovery Act programs. The Department has taken
     proactive measures to coordinate the effective implementation and oversight of the
     Recovery Act and to provide technical assistance to recipients. Additional oversight and
     monitoring could enhance the Department’s ability to ensure that Federal funds are
     effectively managed and that deficiencies noted in audits and other reviews are
     corrected timely. The Department must continue to provide guidance and assistance to
     recipients on these programs, identify and obtain additional resources for program
     monitoring, and take timely corrective actions to address issues noted in audits and
     other reviews.

•    Grantees. Effective monitoring and oversight are essential to ensure that grantees
     meet grant requirements and achieve program goals and objectives. In addition to our
     work on Recovery Act programs, our work on other grant programs has identified a
     number of weaknesses in grantee oversight and monitoring. We have identified
     pervasive fiscal control weaknesses at a number of grantees, weaknesses in a grant
     payback program, as well as fraud committed by LEA and charter school officials. The
     Department is responsible for monitoring the activities of grantees to ensure compliance
     with applicable Federal requirements and that performance goals are being achieved.
     The Department has taken corrective actions to address many of the recommendations
     contained in our reports. However, the Department needs to continue to assess and
     improve its oversight and monitoring of grantees and take effective actions when issues
     are identified.

•    Contractors. The Department relies heavily on contractor support to accomplish its
     mission and to ensure the effective operations of its many systems and activities. The
     current value of the Department’s active contracts is nearly $5.4 billion. Once a contract
     is awarded, the Department must effectively monitor performance to ensure that it
     receives the quality and quantity of products or services for which it is paying. OIG
     reports have included numerous deficiencies in the area of contract monitoring, and we
     have made recommendations for corrective action. The Department has taken action to
     address many of the issues noted. A critical issue hampering significant improvement,
     however, is the shortage of appropriately qualified staff to adequately monitor contractor
     performance. A concerted effort is needed to develop and implement an aggressive
     human capital plan to address this issue.




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OTHER ACCOMPANYING INFORMATION
OFFICE OF INSPECTOR GENERAL’S MANAGEMENT CHALLENGES FOR FY 2012


•     Data Quality and Reporting. The Department, its grantees, and its subrecipients must
      have controls in place and effectively operating to ensure that accurate, reliable data
      are reported. Data are used by the Department to make funding decisions, evaluate
      program performance, and support a number of management decisions. State
      education agencies (SEAs) annually collect data from LEAs and report various program
      data to the Department. The Recovery Act places a heavy emphasis on accountability
      and transparency, including reporting requirements related to the awarding and use of
      funds. All recipients and subrecipients are mandated to provide information about their
      awards on a publicly available Web site authorized by the statute. The new reporting
      requirements required Federal, State, and local agencies to develop the systems and
      infrastructure quickly to collect and report the required information. The Department
      must educate recipients about the reporting requirements, assess the quality of the
      reported information, and use the collected information effectively to monitor and
      oversee Recovery Act programs and performance. Our work has identified a variety of
      weaknesses in the quality of reported data and recommended improvements at the
      SEA and LEA level, as well as actions the Department can take to clarify requirements
      and provide additional guidance. Establishing more consistent definitions for data terms
      will enhance reporting accuracy and comparability. For Recovery Act programs, our
      work noted weaknesses in controls over data quality and reporting, both externally at
      SEAs and LEAs, and internally at the Department. Ensuring that accurate and complete
      data are reported is critical to achieving the transparency goals of the Recovery Act, as
      well as supporting effective management decisions.

The FY 2012 Management Challenges report is published by the Department’s Office of
Inspector General. To view the full report, go to:
http://www2.ed.gov/about/offices/list/oig/managementchallenges.html.




124                                                    FY 2011 Agency Financial Report—U.S. Department of Education
Appendices
APPENDICES




      Appendix A: Education Resources of the Department

Education Dashboard

The Department supports a data dashboard that contains high-level indicators, ranging
from student participation in early learning through completion of postsecondary education,
as well as indicators on teachers and leaders and equity. The Department will regularly
update the dashboard’s data and enhance tools. http://dashboard.ed.gov/

College Cost Lists

The Department provides college affordability and transparency lists under the Higher
Education Opportunity Act of 2008. Each list is broken out into nine different sectors, to
allow students to compare costs at similar types of institutions, including career and
technical programs. http://collegecost.ed.gov/catc/

College Preparation Checklist

This Departmental tool gives prospective college students step-by-step instructions on how
to prepare academically and financially for education beyond high school. Each section is
split into subsections for students and parents, explaining what needs to be done and which
publications or websites might be useful to them. https://fafsa.ed.gov

Additional resources within the checklist assist students in finding scholarships and grants.

http://studentaid.ed.gov/students/publications/checklist/main.html

http://studentaid.ed.gov/students/publications/checklist/MoreSourcesOfStudentAid.html

Resources for Adult Education

The Department, through the Perkins Collaborative Resource Network, offers resources
and tools for the development and implementation of comprehensive career guidance
programs. This includes guides for students, parents, teachers, counselors, and
administrators across relevant topics, such as planning and exploring careers, selecting
institutions, finances, and guidance evaluation. This source is an example of
interdepartmental cooperation between the Department and the U.S. Department of Labor.
http://cte.ed.gov/nationalinitiatives/gandctools.cfm?&pass_dis=1

Federal Resources for Educational Excellence

Federal Resources for Educational Excellence (FREE) provides easily accessible
resources in a wide gamut of subjects for educators. The tool breaks resources into
categories, ranging from art and music to science and mathematics. It also offers a wide
variety of primary documents, photos, and videos. In addition, FREE allows educators to
follow via Twitter, a social network, which facilitates the sharing of ideas. This tool acts as a
depository of ideas and resources for educators to help them supplement their lessons.
http://free.ed.gov/




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                                                                                          APPENDICES
                                                               EDUCATION RESOURCES OF THE DEPARTMENT


College Completion Toolkit

The College Completion Toolkit provides information that governors and other state leaders
can use to help colleges in their state increase student completion rates. It highlights key
strategies and offers models to learn from, as well as other useful resources.

http://www.ed.gov/sites/default/files/cc-toolkit.pdf

Practice Guides for Educators

The Department offers guides that help educators address everyday challenges they face
in their classrooms and schools. Developed by a panel of nationally recognized experts,
practice guides consist of actionable recommendations, strategies for overcoming potential
roadblocks, and an indication of the strength of evidence supporting each recommendation.
The guides themselves are subjected to rigorous external peer review. Users can sort by
subject area, academic level, and intended audience to find the most recent, relevant, and
useful guides. http://ies.ed.gov/ncee/wwc/aboutus.aspx

Doing What Works: Research Based Educational Practices

The purposes of this tool are to provide a convenient and easy way for educators to find
research proven teaching methods and to translate research-based practices into practical
applications in the classroom. The site is easy to navigate and offers useful tools for
teachers to practice skills in key subject areas. http://dww.ed.gov/

TEACH

The Department’s TEACH campaign is designed to raise awareness of the teaching
profession and to get a new generation of teachers to join the ones who are already making
a difference in the classroom. The website provides valuable tools for educators around the
country: from advice on building a career in teaching to connecting teachers to employers.
Another component of TEACH is creating a network of teachers and mentors. Teachers
can sign up to receive news and updates from TEACH. The purpose is for users to connect
and share opportunities. http://www.teach.gov/




FY 2011 Agency Financial Report—U.S. Department of Education                                     127
APPENDICES




             Appendix B: Selected Department Web Links
The American Recovery and Reinvestment Act

•     Important Recovery Act Reference Sites
       Recovery.Gov

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

Condition of Education and Digest of Education Statistics

The Condition of Education is a congressionally mandated annual report that summarizes
developments and trends in education using the latest available statistics. The report
presents statistical indicators containing text, figures, and from early childhood learning
through graduate-level education.

http://nces.ed.gov/programs/coe/

The primary purpose of the Digest of Education Statistics is to provide a compilation of
statistical information covering the broad field of American education from pre-kindergarten
through graduate school. The Digest includes a selection of data from many sources, both
government and private, and draws especially on the results of surveys and activities
carried out by the National Center for Education Statistics.

http://nces.ed.gov/programs/digest/

Projections of Education Statistics to 2019

For the 50 states and the District of Columbia, the tables, figures, and text in this report
contain data on projections of public elementary and secondary enrollment and public high
school graduates to the year 2019. The report includes a methodology section that
describes the models and assumptions used to develop national and state-level projections.

http://nces.ed.gov/programs/projections/projections2019/




128                                                    FY 2011 Agency Financial Report—U.S. Department of Education
                                                                                 APPENDICES
                                                               SELECTED DEPARTMENT W EB LINKS


Discretionary Grant Programs for FY 2010–2011

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

Open Government Initiative

The Department’s Open Government Initiative is designed to improve the way the
Department shares information, learns from others, and collaborates to develop the best
solutions for America's students.

http://www2.ed.gov/about/open.html

Research and Statistics

The Education Sciences Reform Act of 2002 established the Institute of Education
Sciences within the Department to provide research, evaluation, and statistics to the
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 Government Accountability Office 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 Office of Inspector General 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 2011 Agency Financial Report—U.S. Department of Education                                 129
APPENDICES




       Appendix C: Glossary of Acronyms and Abbreviations
ABCP         Asset-Backed Commercial Paper

ACG          Academic Competitiveness Grant

ACSI         American Customer Satisfaction Index

AFR          Agency Financial Report

AGI          Adjusted Gross Income

APR          Annual Performance Report

ARRA         American Recovery and Reinvestment Act of 2009 (Recovery Act)

ATA          Assistive Technology Act of 2004

CAROI        Cooperative Audit Resolution and Oversight Initiative

CCRAA        College Cost Reduction and Access Act of 2007

CFAAA        Compact of Free Association Amendments Act of 2003

CFO          Chief Financial Officer

CFDA         Catalog of Federal Domestic Assistance

COO          Chief Operating Officer

CRA          Civil Rights Act of 1964

CSPR         Consolidated State Performance Report

CSRS         Civil Service Retirement System

CTEA         Carl D. Perkins Career and Technical Education Act of 2006

ECASLA       Ensuring Continued Access to Student Loans Act of 2008

EDA          Education of the Deaf Act of 1986

EDEN         Education Data Exchange Network

EFC          Expected Family Contribution

EMAPS        EDFacts Metadata and Process System

ESEA         Elementary and Secondary Education Act of 1965

ESRA         Education Sciences Reform Act of 2002

ESS          EDEN Submission System

FAFSA        Free Application for Federal Student Aid



130                                                 FY 2011 Agency Financial Report—U.S. Department of Education
                                                                                          APPENDICES
                                                               GLOSSARY OF ACRONYMS AND ABBREVIATIONS


FASAB              Federal Accounting Standards Advisory Board

FECA               Federal Employees’ Compensation Act

FERS               Federal Employees Retirement System

FFB                Federal Financing Bank

FFEL               Federal Family Education Loan

FFMIA              Federal Financial Management Improvement Act of 1996

FISMA              Federal Information Security Management Act of 2002

FMFIA              Federal Managers’ Financial Integrity Act of 1982

FOTW               FAFSA on the Web

FREE               Federal Resources for Educational Excellence

FSA                Federal Student Aid

FY                 Fiscal Year

G5                 Grants Management System

GA                 Guaranty Agency

GAPS               Grant Administration and Payment System

GPRA               Government Performance and Results Act of 1993

GPRAMA             GPRA Modernization Act of 2010

GSA                General Services Administration

HBCUs              Historically Black Colleges and Universities

HC                 Human Capital

HCERA              Health Care and Education Reconciliation Act of 2010

HCMS               Human Capital Management Staff

HEA                Higher Education Act of 1965

HPPG               High Priority Performance Goals (Priority Goals)

HR                 Human Resources

IDEA               Individuals with Disabilities Education Act

IES                Institute of Education Sciences

IP                 Improper Payments




FY 2011 Agency Financial Report—U.S. Department of Education                                      131
APPENDICES
GLOSSARY OF ACRONYMS AND ABBREVIATIONS


IPERA       Improper Payments Elimination and Recovery Act

IPIA        Improper Payments Information Act of 2002

IRS         Internal Revenue Service

i3          Investing in Innovation fund

IT          Information Technology

IUS         Internal Use Software

IV&V        Independent Verification and Validation

LEA         Local Educational Agency

LLR         Lender of Last Resort

MD&A        Management’s Discussion and Analysis

MECEA       Mutual Educational and Cultural Exchange Act of 1961

NAEP        National Assessment of Educational Progress

NCLB        No Child Left Behind Act of 2001

NLA         National Literacy Act of 1991

OCR         Office for Civil Rights

OECD        Organization for Economic Cooperation and Development

OELA        Office of English Language Acquisition

OESE        Office of Elementary and Secondary Education

OIG         Office of Inspector General

OII         Office of Innovation and Improvement

OM          Office of Management

OMB         Office of Management and Budget

OPE         Office of Postsecondary Education

OPEPD       Office of Planning, Evaluation, and Policy Development

OPM         Office of Personnel Management

OSDFS       Office of Safe and Drug-Free Schools

OSERS       Office of Special Education and Rehabilitative Services

OVAE        Office of Vocational and Adult Education




132                                                   FY 2011 Agency Financial Report—U.S. Department of Education
                                                                                          APPENDICES
                                                               GLOSSARY OF ACRONYMS AND ABBREVIATIONS


PAR                Performance and Accountability Report

PARCC              Partnership for Assessment of Readiness for College and Careers

PBO                Performance-Based Organization

PIC                Performance Improvement Council

PII                Personally Identifiable Information

PIO                Performance Improvement Officer

PIRLS              Progress in International Reading Literacy Study

PLUS               Parent Loans for Undergraduate Students

RA/JF              American Recovery and Reinvestment Act of 2009 (Recovery Act)/Education
                   Jobs Fund

RMS                Risk Management Service

RTT-ELC            Race to the Top-Early Learning Challenge

SAFRA              SAFRA Act

SAP                Special Allowance Payment

SBAC               SMARTER Balanced Assessment Consortium

SEA                State Educational Agency

SFSF               State Fiscal Stabilization Fund

SIG                School Improvement Grant

SOF                Statement of Financing

STEM               Science, Technology, Engineering, and Mathematics

SY                 School Year

TASSIE             Title I Accountability Systems and School Improvement Efforts

TIF                Teacher Incentive Funds

TIMSS              Trends in International Mathematics and Science Study

USC                United States Code

VPS                Visual Performance Suite

VR                 Vocational Rehabilitation

WWC                What Works Clearinghouse




FY 2011 Agency Financial Report—U.S. Department of Education                                      133
OUR MISSION IS TO PROMOTE STUDENT ACHIEVEMENT AND PREPARATION FOR
 GLOBAL COMPETITIVENESS BY FOSTERING EDUCATIONAL EXCELLENCE AND
                     ENSURING EQUAL ACCESS.

                       WWW.ED.GOV