oversight

Federal Student Aid's Performance as a Performance-Based Organization.

Published by the Department of Education, Office of Inspector General on 2008-12-11.

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

Federal Student Aid’s Performance as a Performance-Based

                       Organization


                                 FINAL AUDIT REPORT





                                    ED-OIG/A19H0008

                                     December 2008




Our mission is to promote the                          U.S Department of Education
efficiency, effectiveness, and                         Office of Inspector General
integrity of the Department's                          Washington, DC
programs and operations.
                        NOTICE
Statements that managerial practices need improvements, as well as other
conclusions and recommendations in this report represent the opinions of the
Office of Inspector General. Determinations of corrective action to be taken
will be made by the appropriate Department of Education officials.

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

                                                                                                       THE INSPECTOR GENERAL

                                                        December 11, 2008

Memorandum
TO:	                 Kent D. Talbert
                     Delegated Responsibilities of the Under Secretary


FROM:	               Jerry G. Bridges /s/
                     Acting Inspector General

SUBJECT:	 Final Audit Report
          Federal Student Aid’s Performance as a Performance-Based Organization
          Control Number ED-OIG/A19H0008

Attached is the subject final audit report that covers the results of our review of Federal Student Aid’s
(FSA) performance as a performance-based organization. We received FSA’s comments and its
corrective action plan for each of the recommendations in our draft report.

Corrective actions proposed (resolution phase) and implemented (closure phase) by your office will be
monitored and tracked through the Department’s Audit Accountability and Resolution Tracking System
(AARTS). Department policy requires that you develop a final corrective action plan (CAP) for our
review in the automated system within 30 days of the issuance of this report. The CAP should set forth
the specific action items, and targeted completion dates, necessary to implement final corrective actions
on the findings and recommendations contained in this final audit report.

In accordance with the Inspector General Act of 1978, as amended, the Office of Inspector General
is required to report to Congress twice a year on the audits that remain unresolved after six months
from the date of issuance.

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

We appreciate the cooperation given us during this review. If you have any questions, please call
Michele Weaver-Dugan at (202) 245-6941.


Enclosure

cc:	      James Manning, Acting Chief Operating Officer, FSA
          Marge White, Audit Liaison Officer (ALO), Internal Audits, FSA
          Phil Link, Director, Executive Secretariat


 The Department of Education’s mission is to promote student achievement and preparation for global competitiveness by fostering educational
                                                   excellence and ensuring equal access.
                                              TABLE OF CONTENTS


                                                                                                                                 Page

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


BACKGROUND ............................................................................................................................3


AUDIT RESULTS .........................................................................................................................4


       FINDING NO. 1 – FSA Did Not Always Fulfill Its Planning and

                       Reporting Responsibilities...................................................................4


       FINDING NO. 2 – FSA’s Progress in Integrating Its Student Financial

                       Assistance Systems Is Significantly Hindered .................................10


       FINDING NO. 3 – FSA’s Progress Towards the Reduction of Program 

                       Administration Costs is Uncertain ...................................................13


OBJECTIVE, SCOPE, AND METHODOLOGY ....................................................................20


ATTACHMENT                          FSA Response to Draft Report

Final Report
ED-OIG/A19H0008                                                                         Page 1 of 21


                                 EXECUTIVE SUMMARY



The objective of our audit was to determine if Federal Student Aid (FSA) is meeting its
responsibilities under Title I, Part D of the Higher Education Act (HEA), as amended, related to
planning and reporting, systems integration, and cost reduction. In response to the growing
complexity, increasing demand, and the likelihood for fraud, waste, and abuse associated with
student financial assistance programs, Congress amended the HEA in 1998 to create a
performance-based organization (PBO) to manage and administer student financial assistance
programs authorized under Title IV of the HEA. As the designated PBO, FSA operates without
the constraints of certain rules and regulations for the purpose of achieving specific measurable
goals and objectives.

With regard to the scope of our audit, we found FSA is not meeting its responsibilities under
Title I, Part D of the HEA. We found that FSA has not completely fulfilled its planning and
reporting responsibilities, as required, and its planning and reporting processes are not always
effective or efficient. Specifically, FSA did not issue its first Five-Year Performance Plan (Five-
Year Plan) until 2004 and did not prepare one in 2005. We found none of the strategic
objectives to be measurable or quantifiable in FSA’s Fiscal Year (FY) 2004-2008 plan. In
comparing the Five-Year Plans to the Annual Performance Plans (Annual Plans), we found a
weak correlation between the documents and found it difficult to determine what action items
from the Annual Plans were necessary for FSA to achieve its Five-Year Plan goals. We also
found FSA’s FY 2004 to 2006 Annual Performance Reports (Annual Reports) did not always
provide required information, including: 1) clear information on how FSA met the Five-Year
Plan goals; 2) performance requirements under the Government Performance and Results Act of
1993 (GPRA); 3) evaluation ratings of the Chief Operating Officer (COO) and senior managers,
including bonus amounts; and 4) recommendations for legislative and regulatory changes. As a
result, FSA has not clearly informed Congress, the Secretary, or the public about its progress
toward achieving its purposes as established by the HEA.

We also found FSA’s progress in integrating its student financial assistance systems is
significantly hindered. We found the development of two out of three major systems integration
initiatives, which FSA planned to complete by 2008, have been canceled. FSA expects to release
only the first of two phases of the third initiative in 2008. Due to the failure of its system
integration efforts, FSA has been unable to realize the expected benefits of the initiatives and has
hindered its progress in meeting the requirements of the HEA.

In addition, we found FSA’s progress towards the reduction of program administration costs is
uncertain. Specifically, we found FSA did not establish measurable strategic goals in the area of
cost reduction until its FY 2006 Five-Year Plan, and these measures will not be reported on until
FY 2008. We also found anticipated cost savings from three of four major system initiatives
identified in FY 2004-2006 Annual Reports are not expected until FY 2008 and beyond.
Further, we found the scope of work for two of the four system initiatives was significantly
reduced and separate acquisitions of unknown cost are planned to complete these initiatives. The
transition of the third initiative has been delayed, causing FSA to incur unexpected costs. Due to
the limitations noted, it is difficult to determine FSA’s progress in reducing its costs. As a result,
Final Report
ED-OIG/A19H0008                                                                     Page 2 of 21

Congress, the Secretary, and the public cannot determine if FSA has reduced its program costs
since becoming a PBO in 1998.

To correct the weaknesses identified, we recommended that the Under Secretary ensure the
Acting COO takes action to, among other things:

   •	 Implement controls to ensure Five-Year Plans include measurable and quantifiable
      strategic objectives, Annual Plans correlate with Five-Year Plans, and Annual Reports
      clearly convey the extent of meeting specific goals and objectives;
   •	 Ensure staff responsible for planning and reporting on FSA’s performance are familiar
      with GPRA requirements;
   •	 Provide the most recently available rating and bonus information for the COO and each
      of the senior managers in the Annual Reports;
   •	 Identify recommendations for legislative and regulatory changes in each Annual Report;
   •	 Establish procedures and controls to ensure the feasibility of major system integration
      efforts;
   •	 Report savings from major system initiatives to facilitate tracking of planned savings to
      actual savings; and
   •	 Include appropriate transition clauses in all future contracts to avoid unnecessary

      transition costs.


In its response to the draft audit report, FSA stated, in general, it agreed with many of the
comments in the report, and provided a corrective action plan to address each of the
recommendations. FSA noted disagreement with Finding 1, generally concurred with Finding 2,
and provided comments but did not specifically state whether or not it concurred with Finding 3.
The comments are summarized at the end of each finding. No changes were made to the report
as a result of FSA’s response. The full text of FSA’s response is included as an Attachment to
this report.
Final Report
ED-OIG/A19H0008                                                                      Page 3 of 21


                                      BACKGROUND



Federal Student Aid (FSA) manages and administers student financial assistance programs
authorized under Title IV of the Higher Education Act (HEA), as amended. These programs
include the William D. Ford Federal Direct Loan Program, the Federal Family Education Loan
Program (FFEL), the Federal Pell Grant Program, and campus-based programs. In response to
the growing complexity, increasing demand, and the likelihood for fraud, waste, and abuse
associated with the student financial assistance programs, Congress amended the HEA in 1998 to
create a performance-based organization (PBO) to manage and administer student financial
assistance programs authorized under Title IV of the HEA. As the designated PBO, FSA
operates without the constraints of certain rules and regulations for the purpose of achieving
specific measurable goals and objectives.

As defined in Title I, Part D of the HEA, the purposes of FSA as a PBO are to:

•	 improve service to students and other participants in the student financial assistance
   programs;
•	 reduce the costs of administering the programs;
•	 increase the accountability of responsible officials;
•	 provide greater flexibility in management of operational functions;
•	 integrate information systems;
•	 implement an open, common, integrated delivery system; and
•	 develop and maintain a system that contains complete, accurate, and timely data to insure
   program integrity.

The HEA also requires the appointment of a Chief Operating Officer (COO), establishment of a
fair and equitable system for measuring staff performance, and development of annual
performance agreements for the COO and other senior managers. In exchange for increased
accountability, the legislation allows for the payment of performance bonuses to the COO and
senior managers, the hiring of an unlimited number of senior managers, and the appointment of
up to 25 excepted service personnel to administer the functions of the PBO.

FSA’s enabling legislation requires several annual reporting requirements to inform Congress
and the public of the progress that FSA is making toward achieving its intended purposes and
goals. The COO and Secretary must (1) agree on and publicly release each year a five-year
performance plan that includes measurable goals and objectives as well as the action steps
necessary to achieve a modernized student financial assistance delivery system, and (2) provide
an annual report to Congress that describes the results achieved relative to the PBO’s goals and
objectives.
Final Report
ED-OIG/A19H0008                                                                                 Page 4 of 21


                                         AUDIT RESULTS



With regard to the scope of our audit, we found FSA is not meeting its responsibilities under
Title I, Part D of the HEA, as amended. Specifically, we found: (1) FSA has not always fulfilled
its planning and reporting responsibilities, (2) FSA’s progress in integrating its student financial
assistance systems is significantly hindered, and (3) FSA’s progress towards the reduction of
program administration costs is uncertain. As a result, FSA has not clearly informed Congress,
the Secretary, or the public about its progress toward achieving its purposes as established by
law; FSA has been unable to realize benefits associated with systems integration and has
hindered its progress in meeting related requirements; and Congress, the Secretary, and the
public cannot determine if FSA has reduced its program administration costs since becoming a
PBO in 1998.

In its response to the draft audit report, FSA stated, in general, it agreed with many of the
comments in the report, and provided a corrective action plan to address each of the
recommendations. FSA noted disagreement with Finding 1, generally concurred with Finding 2,
and provided comments but did not specifically state whether or not it concurred with Finding 3.
The comments are summarized at the end of each finding. No changes were made to the report
as a result of FSA’s response. The full text of FSA’s response is included as an Attachment to
this report.


FINDING NO. 1 –	 FSA Did Not Always Fulfill Its Planning and Reporting
                 Responsibilities

FSA needs to improve its planning and reporting of PBO activities. We determined that FSA has
not completely fulfilled its planning and reporting responsibilities under Title I, Part D of the
HEA, and its planning and reporting processes are not always effective or efficient.

Five-Year Performance Plans

The HEA requires FSA to develop a Five-Year Performance Plan (Five-Year Plan) annually.
Although established as a PBO in 1998, FSA did not issue its first Five-Year Plan until 2004. 1
Our review of the Fiscal Year (FY) 2004-2008 plan noted it contained five strategic objectives
outlining FSA’s general goals over the term of the plan. It also contained tactical goals which
offered descriptive procedures for obtaining the strategic objectives. However, similar to what
the Government Accountability Office (GAO) reported in October 2004, 2 we found none of the
strategic objectives to be measurable or quantifiable. We also found 14 of the 38 (37 percent)
tactical goals to be immeasurable, and none of the tactical goals was directly linked to specific
strategic objectives.


1
 FSA prepared a draft Five-Year Plan for FY 2000-2004 dated November 30, 1999.

2
 GAO, Office of Federal Student Aid: Better Strategic and Human Capital Planning Would Help Sustain 

Management Progress, GAO-05-31, October 2004.

Final Report
ED-OIG/A19H0008                                                                      Page 5 of 21

We noted FSA did not prepare a Five-Year Plan in FY 2005, as required. Our review of FSA’s
2006-2010 plan noted some improvements from FY 2004, as tactical goals were linked to
specific strategic objectives, and performance standards were established that would enable FSA
to measure its success in achieving identified goals.

Annual Performance Plans

Although not required by the HEA, FSA also develops an Annual Performance Plan (Annual
Plan), which provides a more detailed discussion of procedures to complete the goals identified
in the Five-Year Plan. FSA officials stated the Annual Plan essentially “gives birth” to the
Annual Report, and also feeds into the Five-Year Plan. FSA officials stated that everything FSA
does comes from the Annual Plan, and these items should tie back to the Five-Year Plan. The
Annual Plan includes the project number, responsible area, responsible general managers, why
FSA is doing the project, how FSA will know it was successful in completing the project
(success measure), and the target completion date.

In comparing the Five-Year Plans to the Annual Plans, we noted a weak correlation between
documents. The Annual Plans from FYs 2004 through 2006 provided action items for the
strategic objectives identified in the 2004 Five-Year Plan. Because the 2004 Five-Year Plan did
not identify which tactical goals related to the strategic objectives, we found it difficult to
determine what action items from the Annual Plans were necessary for FSA to achieve its
tactical goals. We found a stronger correlation between FSA’s 2006 Five-Year Plan and the FY
2006 Annual Plan because the Five-Year Plan linked its short-term tactical goals to its specific
long-term strategic objectives.

Annual Performance Reports

FSA is also required by the HEA to prepare an Annual Performance Report (Annual Report).
We reviewed FSA’s Annual Reports for FYs 2004 to 2006 and found the reports did not always
meet the requirements of the HEA. Specifically, we noted the reports did not provide:

       •	 Clear information that conveyed to what extent the PBO met Five-Year Plan goals and
          objectives; 3
       •	 Performance requirements applicable to the PBO under the Government Performance
          and Results Act of 1993 (GPRA);
       •	 Evaluation ratings of the performance of the COO and senior managers, including the
          amounts of the bonus compensation awarded to these individuals; and
       •	 Recommendations for legislative and regulatory changes.

We also noted the Annual Report format changed each year, making it difficult to follow
progress from one year to the next, and that statements made in the reports tended to be broad in
nature, making it difficult to determine exactly where FSA was in achieving its goals.

According to FSA officials, the Annual Report discusses progress made and goals accomplished
with regard to the Annual Plan. However, we noted accomplishments mentioned in the reports
did not always correlate to stated quantitative success measures or goals that were identified in

3
    Only the FY 2006 report included this information.
Final Report
ED-OIG/A19H0008                                                                                     Page 6 of 21

the related Annual Plan and/or Five-Year Plan. Only 60 percent of FY 2004 accomplishments
related to systems integration and cost reduction were found to correlate with the FY 2004
Annual Plan and/or related Five-Year Plan, and 88 percent of accomplishments in the FY 2005
Annual Report were found to correlate with related plans. Ninety-six percent of FY 2006
Annual Report accomplishments were found to correlate with the respective Annual Plan and/or
Five-Year Plan.

Conversely, we noted that not many action items and success measures per the Annual Plan were
included in the Annual Report. We judgmentally selected 47 out of 274 action items (17
percent) with 100 out of 315 associated success measures (32 percent), as relating to systems
integration and cost reduction, from FY 2004-2006 Annual Plans and traced them to the
corresponding Annual Report. Only 3 of 14 selected action items (21 percent) and 3 of 24
selected success measures (13 percent) were included in FY 2004; 10 of 25 selected action items
(40 percent) and 18 of 55 selected success measures (33 percent) were reported in the FY 2006
Annual Report. 4

We also reviewed documentation available to support accomplishments noted in the Annual
Reports related to systems integration and cost reduction efforts. FSA could not initially support
24 of 38 (63 percent) accomplishments in the FY 2004-2006 reports. In response to our request,
FSA provided additional documentation that supported 16 additional accomplishments.
Ultimately, we were not provided with information to support 8 of the 38 (21 percent)
accomplishments.

We found that items noted as being canceled and items that were not successfully completed
were not mentioned in the reports. In general, the FY 2004 and 2006 reports tended not to note
any problems that had been encountered.

Section 141 (c)(1) of the HEA, as amended, states,

        (A) In general- Each year, the Secretary and Chief Operating Officer shall agree on, and
            make available to the public, a performance plan for the PBO for the succeeding 5
            years that establishes measurable goals and objectives for the organization.

Section 141 (c)(2) of the HEA states,

        Each year, the Chief Operating Officer shall prepare and submit to Congress, through the
        Secretary, an annual report on the performance of the PBO, including an evaluation of the
        extent to which the PBO met the goals and objectives contained in the 5-year
        performance plan…. The annual report shall include the following…:

                 (B) Financial and performance requirements applicable to the PBO under the
                 Chief Financial Officer Act of 1990 and the Government Performance and
                 Results Act of 1993…

4
  The FY 2005 Annual Report included an appendix to the report entitled, “FY 2005 Tactical Accomplishments,”
which listed action items in a manner that attempted to approximate the details of the FY 2005 Annual Plan. It
reported items that were considered completed and those that were outstanding, allowing the reader to more easily
track progress associated with FSA’s plans.
Final Report
ED-OIG/A19H0008                                                                         Page 7 of 21

               (D) The evaluation rating of the performance of the Chief Operating Officer and
               senior managers…including the amounts of bonus compensation awarded to these
               individuals.
               (E) Recommendations for legislative and regulatory changes to improve service to
               students and their families, and to improve program efficiency and integrity….

Section 1116 of the Government Performance and Results Act of 1993 requires an annual
performance report and states,

 (d) Each report shall­

        (1) review the success of achieving the performance goals of the fiscal year;

        (2) evaluate the performance plan for the current fiscal year relative to the
         performance achieved toward the performance goals in the fiscal year covered
         by the report;

        (3) explain and describe, where a performance goal has not been met…

               (A) why the goal was not met;

               (B) those plans and schedules for achieving the established performance
                   goal; and

               (C) if the performance goal is impractical or infeasible, why that is the
                   case and what action is recommended….

FSA management cited timing and a lack of resources as reasons for not preparing a Five-Year
Plan for FY 2005.

Regarding Annual Report GPRA requirements, FSA management stated that the FY 2006
Annual Report contained the status of certain projects, and referred readers to the Annual
Performance Plan Report, posted on a website at www.federalstudentaid.ed.gov, for additional
information. Management was not entirely familiar with the GPRA requirement on reporting on
canceled initiatives, but stated that such data is made available to the public. We reviewed this
website and found that an Annual Performance Plan Report was not provided. In addition, FY
2006 was the first time performance standards and measurable baselines were established,
making it difficult for FSA to meet GPRA reporting requirements in prior years.

Information to be included in the Annual Reports was determined by FSA’s Executive
Management Team (EMT), which consisted of the COO and senior management officials.
We noted that highlights from the Annual Report also served as the COO’s accomplishment
statement and justification for the COO’s bonus, as well as the justification for Secretarial
approval of senior official bonuses.

FSA management stated the decision not to include individual evaluation ratings and bonuses
awarded in the Annual Reports was made by FSA’s COO. We noted that the COO never
actually received a rating of record, just a bonus. Therefore, FSA would not be able to include
Final Report
ED-OIG/A19H0008                                                                         Page 8 of 21

an evaluation rating for her. We also noted that FSA could find the evaluations for only 3 out of
12 of its EMT members for FY 2005, and there was confusion determining exactly who was on
the EMT in any given year, all of which could make it difficult to include as required in the
Annual Report.

Regarding recommendations for legislative and regulatory changes, FSA officials stated that
FSA is an advisory body when it comes to policy. FSA’s Policy Liaison and Implementation
office is in constant communication with the Office of Postsecondary Education (OPE), which
handles policy matters. However, we happened to note that in at least one report prior to FY
2004, FSA had included recommendations that it was making to OPE.

As a result of the issues noted above, FSA has not clearly or fully informed Congress, the
Secretary, or the public about its progress toward achieving its purposes as established by the
HEA. Policymaking, spending decisions and program oversight are handicapped by a lack of
disclosure. To the extent the Secretary relied upon information presented in the Annual Reports,
he/she may not have had complete information upon which to base the COO and senior official
bonus decisions.

For example, we noted that serious problems with systems integration efforts were not disclosed
in the FY 2005 Annual Report. The report gave no indication that anything was wrong with the
ADvance effort, even though a cure notice had been issued to the contractor at the end of the
fiscal year due to serious performance concerns. The only thing noted in the report was that the
ADvance contract had been awarded during the year. FSA’s FY 2005 report included a section
on possible future effects of existing events and conditions, where performance problems could
have been noted and observations made that the difficulties encountered could cause a delay on
integration efforts. In fact, only four months later, the development portion of the ADvance
initiative was canceled.

The FY 2005 Annual Report simply noted that the Common Services for Borrowers (CSB)
initiative continued to be implemented, and that the implementation plans established in the
Annual Plan were 99.8% complete, even though the attached chart noted that two of the seven
planned activities had been canceled – migration of the Direct Loan Servicing System and
retirement of the Direct Loan Consolidation System – and one item was carried over to the FY
2007 performance plan. Nothing was mentioned about the problems encountered during the year
that led to FSA modifying its go-live date in April 2005.

The FY 2006 Annual Report again mentioned nothing about the problems on the ADvance
contract. The narrative noted that FSA continued to identify requirements, and the table of
benchmarks noted targets were not met for ADvance, but did not provide any specifics as to
why, other than there was a change in acquisition strategy. Continued design of CSB was noted,
along with a statement in the table that the target was not met due to delays in meeting
established timelines. However, the brief explanations provided do not appear to adequately
explain the reasons for delays in meeting established targets.

While the information presented in these reports was not necessarily untrue, it was misleading
and did not fully disclose the status of the major integration efforts. As a result, when the
integration efforts subsequently failed, it was likely a surprise to outside parties. Without full
Final Report
ED-OIG/A19H0008                                                                      Page 9 of 21

disclosure in accordance with GPRA requirements, information presented can be misleading and
not provide for appropriate accountability.

Subsequent to the completion of our fieldwork, FSA issued its FY 2007 Annual Report. Our
limited review of the report noted some improvements over prior reports. Specifically, we noted
a more consistent reporting format, recently available information on performance ratings and
bonuses, and topic areas for legislative and regulatory changes.

Recommendations

We recommend that the Under Secretary ensure the Acting COO takes action to:

1.1	   Effectively utilize resources by reissuing the same Five-Year Plan annually when no
       significant changes are necessary, and include an addendum noting changes from the
       previous year’s Five-Year Plan.

1.2	   Implement controls to ensure Five-Year Performance Plans include strategic objectives
       that are measurable and quantifiable, with goals linked to specific objectives, Annual
       Performance Plans correlate with Five Year Performance Plans, and Annual Performance
       Reports clearly convey the extent of meeting specific goals and objectives, as required.

1.3	   Include a section in the Annual Report on major obstacles faced during the fiscal year,
       along with a list of significant activities that have been canceled. Explain why each of
       these activities was canceled and the plans/schedule for completing them in the future.

1.4	   Implement a consistent reporting format to afford readers with a means to easily track
       progress from year to year.

1.5	   Ensure staff responsible for planning and reporting on FSA’s performance are familiar
       with GPRA requirements.

1.6	   Provide the most recently available information related to individual performance ratings
       and bonuses for the COO and each of the senior managers in the Annual Reports.

1.7	   Identify recommendations for legislative and regulatory changes in each Annual Report,
       or indicate that there are none.

In addition, we recommend that the Under Secretary:

1.8	   Ensure the COO receives an actual rating of record, based upon the overall PBO
       performance.

FSA Comments

While FSA acknowledged that the development of a comprehensive strategic and tactical
planning, tracking, and reporting structure for FSA has been evolutionary, FSA disagreed that it
was not meeting its responsibilities as outlined under the PBO legislation. FSA stated it has
worked with OIG [Office of Inspector General] to continually refine both the Five-Year Plan and
Final Report
ED-OIG/A19H0008                                                                               Page 10 of 21

the Annual Report. FSA also stated that OIG has reviewed and ultimately approved every Five-
Year Plan and Annual Report produced during the time in question. In addition, since 2005,
FSA stated every accomplishment listed in the Management’s Discussion and Analysis [MD&A]
section of the Annual Report was audited, verified and approved by an OIG auditor and
extensive supporting documentation was provided to support every accomplishment.

OIG Response

FSA is correct that OIG reviewed and commented on FSA’s Five-Year Plan and Annual Reports
as part of the Department’s Executive Secretariat Document Clearance process. However, OIG
did not approve the plans and reports in that process. OIG did meet and discuss with FSA how
FSA could address OIG comments, but the decision to incorporate or respond to OIG comments,
as well as responsibility for the contents of the plans and reports, remained with the Department.
Several of the issues noted in the finding were identified by OIG as part of the review and
comment process. As stated in the finding, OIG continues to believe FSA reports do not meet all
of the requirements of the HEA.

In addition, the OIG contractor that audited FSA’s consolidated and combined financial
statements did not audit and verify FSA’s accomplishments in the Annual Reports included in
our review. As noted in the Report of Independent Auditors included in FSA’s FY 2005 and
2006 Annual Reports, the audits were conducted for the purpose of forming an opinion on the
basic financial statements taken as a whole. The information presented in the MD&A is not a
required part of the basic financial statements, but is supplementary information required by the
Office of Management and Budget. Certain limited procedures were performed on this
information, consisting primarily of inquiries of management regarding the methods of
measurement and presentation of information. However, the information was not audited and no
opinion was expressed on it.


FINDING NO. 2 –	 FSA’s Progress in Integrating Its Student Financial Assistance
                 Systems Is Significantly Hindered

Since 2004, FSA has not made significant progress in completing activities designed to integrate
its student financial assistance systems. In October 2004, GAO reported that while FSA
continued to take actions toward better integrating systems supporting its student financial
assistance programs, FSA remained several years from operating in a fully integrated
information systems environment. GAO noted FSA had begun three major systems integration
initiatives, which it planned to complete by 2008. We found FSA has since canceled the
development portions of two of the major systems integration initiatives, CSB and ADvance, 5
and expects to release only the first of two phases of the Integrated Partner Management (IPM)
initiative in 2008.




5
 This effort commenced in FY 2004 as the Front End Business Integration (FEBI) initiative. FEBI was renamed
ADvance in March 2005, with the overall goal unchanged.
Final Report
ED-OIG/A19H0008                                                                     Page 11 of 21

System integration is an important purpose for FSA’s creation as a PBO. Section 141 (a)(2) of
the HEA, as amended, states the purposes of the PBO are…

       (E)     to integrate the information systems supporting the Federal student financial
               assistance programs;
       (F)     to implement an open, common, integrated system for the delivery of student
               financial assistance under Title IV….

ADvance

The ADvance initiative was intended to support the end-to-end needs of the customer by
bringing together the front-end operations of the student aid process. ADvance was to align
FSA’s business processes with its strategic objectives, and ultimately re-engineer the front-end
student aid application processes, disbursement processes, funds management, and customer
service functions into a single integrated business solution. The ADvance contract was awarded
on February 1, 2005, and FSA officials described it as two-fold. The first portion of the contract
was to keep the following legacy systems supporting front-end operations running: Central
Processing System, Common Origination and Disbursement, Public Inquiry Call Center,
Editorial Services, Ombudsman Support, Ombudsman Case Tracking System, and Student Aid
Internet Gateway. The second portion of the contract dealt with development and planning
efforts to integrate the legacy systems under a unified platform.

In September 2005, seven months after contract award, FSA formally documented concerns in a
cure notice and cited contractor performance which it believed endangered the satisfactory start
up of the ADvance solution. On February 1, 2006, FSA and the contractor bilaterally agreed to
modify the contract to, among other things: 1) accept existing development related work
products “as is;” and 2) stop development work and related efforts under the contract if an
ongoing effort to negotiate a separate agreement to restart all or part of this work was not
reached by April 12, 2006. FSA officials stated that no separate agreement was reached, and on
April 13, 2006, the decision to halt development work was formalized. According to FSA
officials, this divided the contract so the contractor’s primary responsibility was with the
continued operations of the legacy systems. As a result, FSA canceled items from its FY 2006
Annual Performance Plan to implement the ADvance solution, which required identifying
resources to support transition, completing the detailed business requirements and high-level
design, and developing the detailed implementation approach. Currently, the legacy systems are
running as seven independent systems, six of which had already been under the operation of the
ADvance contractor. The ADvance contract, as modified, expires January 31, 2015, if all option
years are exercised.

FSA officials stated they were meeting with the contractor approximately three times per week
and saw little to no progress being made to integrate the systems. As a result, FSA began to
question whether the systems could be integrated with the contractor in place. After the cure
notice was issued, the contractor responded and admitted there had been delay in the
development effort, but claimed that any delay was excusable. In its response, the contractor
asserted the fault for any delay lay primarily with FSA and admitted only minimal responsibility
for the lack of progress. Due to FSA’s concerns with the contractor’s response, including the
lack of accountability, the decision was made to cancel further development work.
Final Report
ED-OIG/A19H0008                                                                       Page 12 of 21

CSB

Through the CSB initiative, FSA planned to improve and simplify back-end services related to
the management of student aid obligations by combining the borrower-related functions of Direct
Loan Servicing, Loan Consolidation, Conditional Disability Discharge Tracking, and Debt
Management Collection into a single integrated solution. The CSB contract was awarded on
November 20, 2003, to develop a vehicle that fulfilled core business objectives in areas such as
data management, payment and transaction processing, and delinquency and program
management.

As with ADvance, difficulties were experienced with the effort to achieve the envisioned
integrated end-state system. FSA officials stated a modification to the CSB contract was
executed on April 29, 2005, because of performance concerns, which in part established go-live
dates for various phase releases and penalties for missing these dates. Further difficulties
towards the achievement of the desired end state ultimately resulted in a contract modification on
May 29, 2007, which formalized a “De-scoping Settlement Agreement.” This modification
descoped all uncompleted CSB transition software development work and stated the contractor
had no further contractual obligation with respect to the CSB end-state system other than current
production systems and business operations. To date, these four legacy systems have been
consolidated under one vendor, but remain as four independent systems. The CSB contract, as
modified, expires November 19, 2013, if all option years are exercised.

FSA officials stated that the prime contractor for the CSB initiative had difficulties managing its
subcontractors, which included the contractors for the legacy systems being integrated, due to
differences in distinct business cultures. They stated the contractor failed to meet delivery dates
and fell behind schedule, which they believed was due to both a lack of coordinated effort
between the prime and subcontractors and a failure to understand the complexities of the
software lifecycle development process. FSA officials also noted the implementation schedule
was aggressive, and had the contractor proposed (and FSA accepted) a more realistic timeline,
the initiative might have worked. In addition, FSA officials said the contractor accused FSA of
providing inadequate guidance on system requirements.

IPM

IPM is intended to integrate common functions within the partner management business systems
in order to provide a streamlined and consolidated solution to managing partner interactions and
support the delivery of Title IV funds from both a cost and customer satisfaction perspective.
FSA plans to address some of the deficiencies in its current stove-piped system architecture,
characterized by multiple partner entry points, redundant data entry, redundant data storage, and
excessive file exchange activities by replacing the following legacy systems: Application for
Approval to Participate in Federal Student Financial Aid Programs, eZ-Audit, Electronic
Records Management, Postsecondary Education Participants System, and the Participation
Management portion of the Student Aid Internet Gateway. Expected benefits include operational
efficiencies and overall cost savings. FSA anticipated receiving funding for this initiative in
2005 and implementing the entire initiative in 2008. However, the funding was not received
until 2006, delaying full implementation until 2009.
Final Report
ED-OIG/A19H0008                                                                       Page 13 of 21

With the CSB and ADvance initiatives, FSA expected to streamline, consolidate, and reengineer
common functions to deliver significant improvements in managing student aid obligations from
both a cost and borrower satisfaction perspective. Due to the failure of its integration efforts,
FSA has been unable to realize these benefits and has hindered its progress in meeting the
requirements of the HEA.

Subsequent to canceling two of its major integration efforts, FSA developed the Enterprise
Development Support Services (EDSS) Model to use a more in-depth approach to analyze FSA’s
business vision and needs, and determine how best to achieve those needs. Under EDSS, FSA
intends to move away from a “single vendor” environment by “pre-qualifying” vendors for tasks
within service categories, such as development and operations and maintenance support. FSA
plans to award indefinite delivery/indefinite quantity contracts to pre-qualified vendors based
around the defined functional segments of work.

The former FSA Chief Information Officer (CIO) stated that one lesson learned from the CSB
and ADvance initiatives was that FSA did not obtain the best services in each of the many
service categories using a single procurement. She affirmed that although EDSS differs
contractually from the previous initiatives, the primary business objective remains the same –
creating a seamless experience for the customer on both the front-end and back-end. The former
FSA CIO added the visions for CSB and ADvance are still intact at the enterprise level, but the
technical strategy has changed. Furthermore, she said the integration of the legacy systems will
depend on the quality of the systems themselves and it is likely some new systems will be built.

Recommendations

We recommend that the Under Secretary ensure the Acting COO takes action to:

2.1	   Establish procedures and controls to ensure the feasibility of major system integration
       efforts, as well as offerors’ proposed technical solutions.

2.2	   Engage industry consultants, when necessary, to assist in the above noted processes.

FSA Comments

FSA generally concurred with the finding and provided a corrective action plan for each of the
recommendations.


FINDING NO. 3 – FSA’s Progress Towards the Reduction of Program
                Administration Costs is Uncertain

Several factors have hindered the ability to measure FSA’s progress towards the reduction of
costs of administering its programs. Due to limitations noted with earlier efforts to establish cost
reduction metrics, FSA will not have measurable results to report until FY 2008. In addition,
anticipated cost savings from three of four major system initiatives identified in FY 2004 – FY
2006 annual reports are not expected until FY 2008 and beyond. FSA does not plan to report on
individual progress towards anticipated cost reductions by initiative, limiting the ability to
determine whether planned savings were actually achieved. Further, our review noted the scope
Final Report
ED-OIG/A19H0008                                                                       Page 14 of 21

of work for two of the four system initiatives was significantly reduced and separate acquisitions
of unknown cost are now planned to complete these initiatives. The transition of the third
initiative has been delayed, causing FSA to incur unexpected costs.

Section 141 (a)(2)(B) of the HEA, as amended, establishes the reduction of program
administration costs as a purpose of the PBO.

Cost Reduction Strategic Goals

In October 2004, GAO noted that while FSA had developed a cost model that had addressed
previously noted problems and limitations, the model was still not fully functional. As a result,
GAO concluded that FSA was still unable to demonstrate that it reduced the cost of
administering its programs. Our review noted that FSA’s Five-Year Plan for FY 2004-2008 did
not establish measurable goals in the area of cost reduction. FSA did not complete a Five-Year
Plan for FY 2005-2009, as such no measurable strategic goals were established. FSA did
establish measurable strategic goals in the area of cost reduction in its FY 2006-2010 Five-Year
plan. However, within this plan there are no specific cost reduction success measures that will
be reported on until FY 2008.

FSA’s Five-Year Plan for FY 2006-2010 included four cost reduction performance measures.
As shown in Table 1 below, the FY 2006 success measure was baseline development, with
measurable unit cost reduction standards established for FY 2008 and FY 2010.

              Table 1 – Cost Reduction Performance Measures and Related Standards

          Performance Measure         FY 2006 Standard    FY 2008 Standard   FY 2010 Standard
       Reduce electronic FAFSA 6
                                       Develop Baseline    20% Reduction      25% Reduction
       direct unit costs
       Reduce origination and
       disbursement direct unit        Develop Baseline    10% Reduction      15% Reduction
       costs
       Reduce direct loan servicing
                                       Develop Baseline    12% Reduction      12% Reduction
       direct unit costs
       Reduce collections direct
                                       Develop Baseline    14% Reduction      14% Reduction
       unit costs

FSA first reported on specific program administration unit costs in its FY 2006 Annual Report.
This report identified baseline unit costs in each of the four areas from Table 1 above. We noted
that FSA reported these unit baselines as FY 2006 actual results when the related data was from
FY 2005 operations. In addition, while the FFEL program is FSA’s largest program, there is no
related cost reduction measure identified for FFEL.

Cost Reductions from System Initiatives

FSA’s Annual Reports from FY 2004 through FY 2006 identified four significant system
initiatives with anticipated cost reductions of almost $1.7 billion. As shown in Table 2, three of
the four initiatives are not expected to begin realizing cost reductions until FY 2008 or beyond.

6
    Free Application for Federal Student Aid
Final Report
ED-OIG/A19H0008                                                                                     Page 15 of 21

Two of the four acquisitions have recently experienced significant reductions in scope and
additional acquisitions are being planned to meet the original system integration objectives.
Another initiative has experienced significant delays in transitioning to a new contractor and has
caused FSA to incur unexpected costs. We also noted that while anticipated cost reductions from
these initiatives were reported separately in FSA’s Annual Reports, FSA does not plan to report
on progress towards actual cost reductions by initiative. Any reductions in cost will be reflected
through the unit costs associated with the four performance measures identified above.

                            Table 2 – Initiatives With Reported Cost Reductions

              Initiatives              Reported Anticipated        Anticipated Cost        Unanticipated Scope
                                        Cost Reductions (in        Reductions Begin        Reduction or Delay in
                                             millions)                                       Implementation
    Advance                                             $500            FY 2009                    Yes
    CSB                                                $1,000           FY 2004                    Yes
    IPM                                                    $5           FY 2008                    No
    Virtual Data Center (VDC)                           $150            FY 2008                    Yes
    Total                                              $1,655

Additional details relating to the initiatives, as pertaining to anticipated cost reductions, are
presented below.

      ADvance

      The ADvance initiative was intended to support the end-to-end needs of the customer by
      bringing together the front-end operations of the student aid process. In its FY 2005 Annual
      Report, FSA estimated the initiative would save $500 million over the life of the contract.
      Implementation of this initiative was planned for FY 2008. Documentation supporting the
      anticipated savings showed that cost savings were not expected to be realized until contract
      year four (February 2008 – January 2009). Anticipated savings were calculated through
      establishment of baseline estimates for contract costs for the continued operation of various
      front-end legacy systems under the prior system of contracts in comparison to estimated
      ADvance contract costs. FSA officials stated that since the contract was reduced in scope,
      they were no longer actively tracking actual ADvance costs and comparing them to
      anticipated costs of continued operation of the legacy systems under the prior method.

      Contract awards related to the integration portion of the ADvance contract are estimated to
      be made in late June 2008. 7 The maximum cumulative dollar ceiling value of all contracts to
      be awarded is $300,000,000.

      CSB

      The CSB initiative was intended to consolidate back-end systems for Direct Loan Servicing,
      Consolidation, and Collections into a single integrated solution. In its FY 2004 Annual
      Report, FSA estimated the initiative would save over $1 billion over the life of the contract,
      with implementation originally planned to begin in FY 2005. Anticipated savings were
      calculated through establishment of baseline estimates for contract and other costs associated

7
    Five indefinite delivery indefinite quantity (IDIQ) contracts were subsequently awarded on September 25, 2008.
Final Report
ED-OIG/A19H0008                                                                                Page 16 of 21

    with the continued operation of various back-end legacy systems in comparison to estimated
    contract and other costs associated with the operation under the CSB contractor.

    FSA officials indicated that although the integration effort was de-scoped, they continued to
    compare actual costs incurred under CSB to estimated costs under prior contracts. FSA
    officials believed they would fully realize the anticipated savings due to the reduced costs of
    the CSB contract to continue operation of the legacy systems when compared to the
    estimated costs under the prior contracts.

    Contract awards related to the integration portion of the CSB contract are estimated to be
    made in late June 2008. The maximum cumulative dollar ceiling value of all contracts to be
    awarded is $300,000,000. 8

    IPM

    IPM is intended to modernize and replace legacy systems associated with management
    functions such as enrollment, eligibility, and oversight. In its FY 2006 Annual Report, FSA
    estimated the initiative would save $5.4 million over the life of the contract. The estimate of
    cost reduction included factors such as cost benefits from retiring legacy systems and work
    hour reductions from the increased automation of operational processes. Cost reductions
    were not expected to be realized until implementation of the first phase, scheduled for 2008.

    VDC

    The VDC includes computer systems that support and operate the delivery of Title IV student
    aid. It operates as a hub connecting several data and processing centers into a single
    servicing operation. The VDC contract was recompeted and awarded to a new contractor on
    September 1, 2006. In its FY 2006 Annual Report, FSA stated the new VDC contract would
    save $150 million over the contract term. The cost reduction estimate was based on a
    forward projection of current VDC contract prices compared to the terms of the new VDC
    contract. Cost reductions were not expected to be realized until contract period 2 during FY
    2008. FSA officials stated they planned to track actual costs under the new contract and
    compare them to anticipated costs under the prior agreements once the transition period
    ended and the new contractor was responsible for operation and maintenance.

    We found the transition of the VDC has been delayed. FSA officials stated the transition of
    the VDC to the incoming contractor was expected to be completed by September 30, 2007.
    However, due to delays, the VDC transition did not occur until June 22, 2008. Overall, we
    determined FSA has incurred additional costs of approximately $22.2 million as a result of
    the delayed transition and parallel operations of both contractors’ facilities, and could incur
    up to an additional $15.4 million in costs associated with an extension to the incumbent
    contract.

FSA officials indicated several factors contributed to delays in establishing and reporting
measurable cost reduction strategic goals and measures. These factors included concerns raised

8
 These are the same awards as noted under the ADvance initiative. Five IDIQ contracts were subsequently awarded
on September 25, 2008.
Final Report
ED-OIG/A19H0008                                                                                     Page 17 of 21

by GAO relating to FSA’s initial efforts in FY 1998 to develop unit cost measures which led to a
revision in its approach. 9 FSA officials stated that the current activity based cost model was
implemented in FY 2004 in response to these concerns, and time was required for FSA
operational components to review the reported costs and related metrics prior to concurring and
including them in FSA’s strategic plans. FSA officials also stated it was likely that actual unit
cost data reported will be from the previous year, as the current year data will not yet be final at
the time the annual reports are prepared. With regard to the lack of an apparent cost reduction
goal for the FFEL program, FSA indicated the primary driver for measures to include in the
Five-Year Plan was the inclusion of measures that closely mapped with the information systems
where FSA was making its largest investments. FSA noted that a majority of its costs were
accounted for in the four outputs chosen. FSA also stated its preferred goal was to look at the
reduction of costs globally as opposed to on a project-by-project basis.

FSA’s progress in recognizing cost reductions associated with significant systems initiatives has
been hampered for several reasons. 10 FSA officials stated several factors contributed to the
delays and additional costs associated with the VDC transition. First, officials said a high speed
data transfer solution was proposed by the incoming contractor and accepted by FSA, but the
incumbent contractor found it to be unacceptable because the solution imposed a risk to its
production environment. As a result, the incumbent contractor created an alternative transfer
solution, requiring additional equipment to be purchased.

FSA officials stated additional software licenses were needed in order to operate the software at
both contractors’ facilities. Since the licenses were in the incumbent contractor’s name only and
not meant for distribution elsewhere, permission was required from the software vendors. The
officials said FSA needed to obtain 27 dual-license agreements. Some vendors negotiated the
dual-usage licenses at no-cost, but others saw it as an opportunity to generate revenue.

In addition, the officials said the transition clause in the incumbent contract was general and did
not require the contractor to transition easily. One official said approximately one-month after
the contract award, the incumbent contractor began evading FSA.

FSA officials said as a result of delays created by the issues noted above, the incoming
contractor proposed to move FSA’s mainframes in mid-November 2007, but that date was too
close to the testing in preparation of the FAFSA peak processing season. The officials said if the
mainframes were transitioned during mid-November, FSA would not be able to adequately test
the results of the move and the risk of error would be too great. FSA officials stated as a result,
the mainframes could not begin to transition until after FAFSA peak processing, which ends in
late February or early March 2008. These delays created the need for a contract extension with
the incumbent contractor, and a request for equitable adjustment from the new contractor to
cover unanticipated costs.

The former FSA CIO said FSA was very conservative with the projected $150 million savings
from the VDC recompete. She said while the savings may be lower than what was previously
9
  GAO-02-255, Federal Student Aid – Additional Management Improvements Would Clarify Strategic Direction and 

Enhance Accountability, April 2002.

10
   Information related to reasons for delays in recognizing initial planned cost savings associated with the ADvance 

and CSB initiatives is noted in Finding No. 2.

Final Report
ED-OIG/A19H0008                                                                       Page 18 of 21

expected, FSA will still realize cost savings because the savings will come from the long-term
operations and maintenance costs with the incoming contractor.

Overall, due to the limitations noted, it is difficult to determine FSA’s progress in reducing its
costs. Data that can be compared to recently established baselines will not be reported until FY
2008, measures that FSA has selected to report out on may not adequately reflect costs
associated with all of the major programs administered by FSA, and cost reductions associated
with major system initiatives may not be recognized due to significant modifications to plans
associated with the original savings projections. In addition, FSA’s plans to include cost
reductions associated with individual system initiatives only in overall unit cost measures will
likely make it difficult to determine whether any of the planned savings were actually
recognized. Congress, the Secretary, and the public cannot determine if FSA has reduced its
program costs since becoming a PBO in 1998.

Recommendations

We recommend that the Under Secretary ensure the Acting COO takes action to:

3.1	   Include a cost reduction measure in FSA’s strategic plans and annual reports that
       adequately captures administration costs associated with the FFEL program.

3.2	   Include a disclosure in FSA’s annual reports that clearly explains the actual reported unit
       costs are the prior year’s costs.

3.3	   Report savings from major system initiatives on an aggregate and individual basis to
       facilitate tracking of planned savings to actual savings.

3.4	   Include appropriate transition clauses in all future contracts to ensure the timely
       cooperation of incumbent contractors and avoid unnecessary transition costs.

FSA Comments

FSA did not state whether it concurred with the finding, but provided a corrective action plan for
each of the recommendations. FSA stated the measurement of cost reduction takes time, and that
it is incorrect to infer from this that cost reductions are not being achieved. FSA also stated that
while it acknowledges that changes have been made to the CSB, Advance, IPM, and VDC
contracts, changes in contract scope do not necessarily result in the loss of projected cost
reductions.

With regard to the FFEL program, FSA stated it is not appropriate to expect FSA to exert
influence over the cost of this program nor is it reasonable to judge FSA based on reductions in
the cost of this program. The primary costs to the government are lender and guaranty agency
subsidies, which can be reduced only through changes to the authorizing legislation and the
regulations. FSA stated that because of this, the administrative costs of the FFEL program are
generally limited to eligibility determination and oversight and monitoring of FFEL participants,
and as a result, on a unit cost basis, these costs are relatively minor in comparison to the
administrative costs of other programs. FSA also stated that while it will identify a FFEL cost
standard, in its opinion, a more important standard to measure is FSA’s performance in
Final Report
ED-OIG/A19H0008                                                                     Page 19 of 21

conducting oversight of these program participants. FSA said it is currently identifying possible
standards to address this need and will incorporate them in its next update to the Five-Year Plan.

OIG Response

In the finding, OIG did not conclude that cost reductions are not being achieved or that changes
in contract scope would result in the loss of projected cost reductions. OIG noted several factors
have hindered the ability to measure FSA’s progress towards the reduction of costs of
administering its programs. These include the cost reduction measures that FSA selected to
report out on may not adequately reflect costs associated with all of the major programs
administered by FSA, and the anticipated cost reductions associated with major system
initiatives may not be recognized due to significant modifications to plans associated with the
original savings projections. In addition, FSA’s plans to include reductions associated with
individual system initiatives only in overall unit cost measures will likely make it difficult to
determine whether any of the planned savings were actually recognized. Due to these
limitations, OIG concluded it was difficult to determine FSA’s progress in reducing its program
administration costs.

OIG is aware that the primary costs of the FFEL program are the subsidy payments made to
lenders and guaranty agencies to originate, guarantee and service loans, and OIG never stated or
implied that FSA should exert influence on the statutory definition of those costs. OIG also
recognizes that part of FSA’s administrative costs of the FFEL program are for eligibility
determination and oversight and monitoring. However, there are other significant administrative
contract costs for information technology systems necessary for FSA to operate the FFEL
program. The administrative costs of the contracts are under FSA’s control. For example, FSA
incurs costs for the Lender Reporting System (LARS), Guaranty Agency Financial Reporting
(Form 2000), and the National Student Loan Data System (NSLDS). These systems are critical
for the financial management operation of the FFEL program, such as collecting information on
outstanding amounts, types, and statuses of loans, and for processing payments to lenders and
guaranty agencies.

OIG does not agree that oversight standards are sufficient as a primary response to the HEA’s
mandate to reduce administrative costs. The mandate in Section 141 (a)(2)(B) of the HEA does
not exclude the FFEL program. FSA needs to fully identify the FFEL program’s administrative
costs and plan efforts to reduce those costs. To improve program integrity, OIG fully supports
FSA’s intent to identify and develop standards to measure performance in conducting oversight
of FFEL program participants, and incorporate them in the next update of its Five-Year Plan to
supplement administrative cost reduction standards for the FFEL program.
Final Report
ED-OIG/A19H0008                                                                     Page 20 of 21


                  OBJECTIVE, SCOPE, AND METHODOLOGY



The objective of our audit was to determine if FSA is meeting its responsibilities under Title I,
Part D of the HEA, as amended, related to planning and reporting, systems integration, and cost
reduction. To accomplish our objective, we gained an understanding of internal control
applicable to FSA’s responsibilities under the HEA. We reviewed applicable laws and
regulations, policies and procedures, and GAO Standards for Internal Control in the Federal
Government. We reviewed GAO audit reports and OIG inspection reports that discussed FSA’s
performance as a PBO. We performed an analysis of information from Annual Performance
Plans, Five-Year Performance Plans, and Annual Performance Reports for FYs 2004 through
2006. We also performed a limited review of the FY 2007 Annual Performance Report.

Planning and Reporting Processes

We conducted interviews with FSA officials to gain an understanding of the planning and
reporting processes required under the HEA. We reviewed all accomplishments identified in FY
2004-2006 Annual Reports as relating to systems integration or cost reduction and traced them to
the corresponding Annual Plan. We also reviewed documentation provided by FSA staff to
support completion of these projects. We judgmentally selected 47 out of 274 action items (17
percent) with 100 out of 315 associated success measures (32 percent) as relating to systems
integration and cost reduction from FY 2004-2006 Annual Plans and traced them to the
corresponding Annual Report. Further, we reviewed performance agreements for the COO and
senior managers on the EMT, including annual ratings and awarded bonuses.

We relied on computer-processed data maintained in the Project Performance Measurement
System (PPMS) representing the completion status of projects from the FY 2004 to 2006 Annual
Plans. We verified the accuracy of the reported completion status from PPMS against supporting
documentation provided. Based on our testing, we determined the data was sufficiently reliable
for the purpose of our audit.

Systems Integration

Our review included an analysis of data relating to FSA’s systems integration strategic objective
from FY 2004 through 2006. We held discussions with FSA management and staff responsible
for the ADvance, CSB, and IPM initiatives regarding integration efforts and accomplishments.
We also reviewed contract file documentation for the ADvance, CSB, and IPM initiatives.

Cost Reduction

We held discussions with FSA management and staff knowledgeable about the activity-based
costing system and development of FSA’s unit cost baselines. In addition, we held discussions
with FSA staff regarding statements of cost savings for the ADvance, CSB, IPM, and VDC
initiatives in the FYs 2005 and 2006 Annual Performance Reports. We also reviewed
documentation of the cost savings for these four systems initiatives.
Final Report
ED-OIG/A19H0008                                                                 Page 21 of 21

The fieldwork for our audit was conducted at Department offices in Washington, DC, during the
period March 2007 through January 2008. We held an exit conference with FSA management
and staff on April 23, 2008. Our audit was performed in accordance with generally accepted
government auditing standards appropriate to the scope of the review described above.
                                                                             Attachment




                                                                          SEP 18 a:JOO
Ms. Michele Weaver-Dugan, Director
Operat ions lntcmal Audit Team
U.S. Department of Education
Office of '-nspeclor General
400 Maryland Avenue, SW
Washi ngton, DC 20202-1510

RE:     Audit Control Number ED-OIG/A 19H0008

Dear Ms. Weaver-Dugan:

Thank you for providing us the opportunity to rev iew and respond to your Draft Audit
Report entitled " Federal Student Aid's Per[onnance as a Perfonnancc-Based
Organization." The Under Secretary has asked me to respond on her behalf.

In general, while Federal Student Aid agrees with many ofthc comments and looks
forward to working with yo ur office to implement a corrective action plan, the report fails
to recognize these issues:

   • 	 The development ora comprehensive strategic and tactica l planning and reporting
       structure for Federal Student Aid has evolved over the past fou r years. Today, a
       comprehensive collection of processes and programs, some mandated and several
       that arc not, provide management with an effective in fraslructure to manage the
       organi zation's planning and reporting responsibilities;
   • 	 While Federal Student Aid has reevaluated components of its integration strategy,
       its Target State Vision remains the same and progress cont inues on our multi-year
       sequencing plan to bring us closer to t~at integrated vision; and
   • 	 From the development of processes to measure unit costs to the identification of
       appropriate standards to accurate ly gauge meaningful cost contro l to the
       compi lation of sufficient rcsults necessary to compare cost movcment, the
       measurement of cost reduction takes time. However, it is incorrect to infer from
       this that cost reductions are not being achicved. In addition, changcs to contract
       scope do not necessarily result in the loss of projected cost reductions.

In the discussion that fo llows, we have addressed some of your comments and specific
concerns.




                               830 First St N.E.. Washington . DC 20202
                                  www.FcdcralStudcntAid.ed .gov
                                          l-HOO-4-FED -AID

      fEDERAL STUDENT AID ::i)ll!J-START HERE. GO FURTHER
Finding No.1

While we acknowledge that the development of a comprehensive strategic and tactical
plaIUling, tracking and reporti ng structure for Federal Student Aid has been evo lutionary,
we disagree that Federal Student Aid is not meeting its responsibilities as outlined under
the PBO legislation. Federal Student Aid has worked with your office to continually
refine both the Five-Year Plan and the Annual Report. While there may be differences in
interpretations of how and what constitutes compliance with the legislation (such as the
utility of including short-term tactical plans or performance standards in a long-term
strategy document or how to report senior management compensation), your office has
reviewed and ultimately approved every Five- Year Plan and Annual Report produced
during the time in question.

The result is a process that we beli eve is successfu l and by your own admission has
improved. In fact, in removing the student financial assistance programs from their High
Risk List, the GAO reported in 2005 that "Education has demonstrated a strong
commitment to addressing risks; developed and implemented corrective action plans;
and, through its annual planning and reporting processes, monitored the effectiveness and
sustainability of its corrective measures."

More important ly, Federal Student Aid has worked to develop complemcntary planning
and reporting processes to augmenl apparent gaps in the mandated procedures. Our
perfomlance management initiatives are widc-ranging and influence every aspect of our
business. Today, Federal Student Aid produces a comprehensive suite of strategic and
tactical planning, tracking and reporting processes that are used by senior-level
management as well as rank-and-file emp loyees for budgeting, planning, monitoring,
control and rcporting.

The Five-Year Plan outlines Federal Student Aid's strategic direction and provides long­
tenn guidance in achieving organizational objectives. The Five-Year Plan ali gns with
Fedcral Student Aid's annual, tactical business-level planning, tracking and
implementation processes including the Annual Perfomlance Plan.

Federal Student Aid's Annual Per fo rma nce Plan establishes specific tactical initiatives
to achieve organizational strategic objectives outlined in the Five-Year P lan. Ti melines,
mi lestones and status arc reported in the AIUlual Perfonnance Plan and evaluated on a
monthly basis to ensure their alignment with current business needs, the allocation of
resources and capital, policy considerations, and statutory and regu latory requirements.

The Annual Report provides the mechanism for reporting the organization's annual
performance results, including the organizat ion's audited financial statements, a summary
of the organization's progress in meeting tactical goals established in the Annual
Perfonnance Plan and detai led results of the organ ization's success in meeting




                                             2

pcrfonnance standards established in the Five-Year Plan. These documents- the Five­
Year Plan, the Annual Perfonnance Plan and the Annual Report- fonn the foundation of
Federal Student Aid's strategic planning, tactical implementation and reporting
processes.

Federal Student Aid also produces weekly and monthly project plaIll1ing and reporting
activities detailing the scope, schedule, cost, quality and overall status of key initiatives.
Fcderal Student Aid's budget management process and our unit-cost model provide cost
identification, control and management. Federal Student Aid also tracks and reports
entcrprise-wide operational, human capital and perfonnanee metries through a series of
dashboard tracking reports .

In addition to annual planning and reporting, Federal Student Aid's perfonnance
management is supported by several teams throughout the enterprise that help us to meet
our five core objectives. The groups described below each play an integral part in
ensuring Federal Student Aid performs effectively and efficiently.

           •   Project Management Office

       The Project Management Office, established in FY 2003, is a central point of
       oversight for identified projects. Through the Project Management Office, we
       integrate project activities within Federal Student Aid, linking them to strategic
       objectives, priorities and available resources. It supports project managers by
       establishing enterprise project management standards of practice, advising on
       systems integration strategy, sharing information across projects during the full
       life cycle of the projects through our Enterprise Change Management (ECM)
       Group and providing relevant reports and data to management.

           •   Enterprise Risk Management

       Federal Student Aid has also established an Enterprise Risk Management (ERM)
       function to provide strategic direction in assessing, monitoring and managing risk
       across the organization. The ERM Group is responsible for development and
       implementation of an enterprise risk management program at Federal Student
       Aid. This program provides a strategic view of downstream risk potentials and
       enables senior management to better anticipate, analyze and manage risks
       inherent in the federal student financial assistance programs and develop
       strategies to address these risks. The ERM Group also perfonns internal reviews,
       conducts risk assessmcnts and provides internal audit tracking and resolution
       services for the organization.

This collection of processes and programs provide management with an effective
infrastructure to manage the organization's strategic and tactical planning and reporting
functions. While we continually strive to improve the alignment between these planning,




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tracking and reporting functions, we believe they fulfill Federal Student Aid's
responsibility for planning and reportin g ofPBO activities and complies with Title 1, Part
D of the HEA. as amended.

The fo llowing discussion addresses some of the specific comments under Finding No. I:

   • 	 We acknowledge that it took too long to establish Federal Student Aid's first
       offic ial Five-Year Plan. However, we also agree with you in questioning the
       value to the organization and the taxpaycr of updating a Fivc-Year Plan on an
       annual basis. Pcr your suggestion, we attempted, albeit unsuccessfully, to change
       the requirement when Congress recently reauthorized the Higher Education Act.
       We concur with your suggestion to reissue the document during those years when
       there are no updates to report.
   • 	 You noted and we acknowledge the 2004 Five-Year Plan and the 2004 and 2005
       Annual Reports failed to inc lude several key components such as tactical goals,
       goals that were linked to strategic objectives, performance standards and the
       organization's results in meeting those standards, and a "weak correlation"
       between the Five-Year Plan and the corresponding Annual Plans. Howcver we
       believe, and j udging by your acknowledgement of improvements, many of these
       issues were satisfactorily addressed with revisions identified by both your office
       and ou rs and incorporated into the 2006 Five-Year Plan, the 2006 and 2007
       Annual Plans and the 2006 and 2007 Annual Reports.
   • 	 You noted that "not many action items and success measures per the Annual Plan
       were included in the Annual Report." Whilc this is true, Federal Student Aid
       maintains a different interpretation of the co rrelation between these two
       documents. The Annual Plan spells out in specific detail (over 300 line items in
       FY 2008) the actual projects to be accomplished during the year and the
       organization's progress in completing those projects. While the Annual Report
       references the Annual Plan for specific progress made by the organization in
       completing the stated action items, the Annual Report is presented in summary
       form providing a high-level overview of the organization's progress in achieving
       thc objectives outlined in the Five-Year Plan and the corresponding action items
       from the Annual Performance Plan.
   • 	 In 2005, Federal Student Aid combined two redundant annual reporting
       requirements combini ng the Annual Report and the Annual Performance and
       Accountability Report into a single document satisfyin g both requiremen ts. The
       result was that the Annual Report was now subject to the Department's annual
       financial audit. As a result, every accomplishment listed in the Management's
       Discussion and Analysis section of the Annual Report was audited, verified and
       approved by you r auditor. As part of this process, extensive support ing
       documentation was supplied to your auditor fo r every accomplishment listed in
       the Management's Discussion and Analysis section of the Annual Report. We are
       happy to provide this information to your office as well in the future.




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Finding No.2

Federal Student Aid generally concurs with your finding regarding the three integration
efforts referenced in the audit, Common Services for Borrowers (CSB), Advance and
Tntegrated Partner Management (IPM). However, while some of our integration
initiati ves have been revised~ Federal Student Aid's overall target state vision for system
and process integration remains unchanged and we continue to develop and support
efforts to achieve it.

Through CSB, Advance and IPM, we were successful in reducing many of the operating
costs of our legacy operations. (See our response to Finding 3 below for additional
details). However, what we discovered was that large contracts requiring multiple
business capabilities, and supporting a comp lex and mu lti-faceted business process, do
not provide Federal Student Aid the best solution providers from the marketplace. In
addition, the lack of post-award competition led to price, quality and innovation issues
preventing Federal Student Aid from being able to quickly transition services, potentially
putting our business at risk.

In order to increase the competitive environment, increase our product quality, and
reduce the ri sk ofa single point offailure, Federal Student Aid decided to adopt a
strategy where mu lti-vendor contract vehicles for core business capabilities will replace
single large contracts. In addition, large contracts for system development will be
replaced with smaller task orders for component-based development. For example,
Federal Student Aid now plans to develop the functions of Advance in several
components and under several separate task orders, thereby reducing risk and increasing
overall competition and quality.

In addition, we believe it is important to note that the concept of integration has changed
since the inception of the PBO in 1998 . At that time, integration generally aimed at
consolidating sets of business functions onto a single platform whenever practical. Since
that time, concepts of integration have evolved with the introduction of Web services,
serv ice-oriented architecture and other technological advances.

Federal Student Aid has not confined its integration strategy to devclopment efforts
aimed at consolidating computer systems. Federal Student Aid understands system
integrat ion to encompass infrastructure, business application development and supporting
processes. Our inteb'Tation efforts today extend far beyond the office of Chief Infonnation
Officer and require the redeployment of physical, human and financial assets to support
enterprise integration efforts. Federal Student Aid has made progress towards
integTat ion of all support systems and activities required to deliver the Title TV programs.
This undcrstanding of integration aligns with the changes in o rganizational planning,
business modeling and technological advancements established over the last decade.

During the coming years, Federal Student Aid will continue to pursue system and
business process integration measures that will lower our overall costs whilc improving
program integrity and system security, as well as the quality and accessibility of our



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products and services. As we pursue integration initiatives, we wi ll conti nuous ly
reevaluate ex isting strategies, as necessary, and explore new and innovative approaches
and technology to hclp us achieve our goals. Projects such as Advance and CSB will
continue forward, but with different development and contracting strategies that will
allow Federal Studen t Aid to incrementall y enable functions with new techno logy rather
than perform on ly large-scale system rep lacemcnts. It is important to reiterate that whi le
Federal Student Aid has reevaluated components of its strategy to achieve its integration
efforts, its Target State Vision remai ns the same and progress continues on our multi-year
sequencing plan by focusing on major initiatives and activities that bring us closer to that
vision.

Finding No.3

From the development of processes to measure unit costs to the identificat ion of
appropriate standards to accurately gauge meaningful cost control to the compilation of
sufficient results necessary to compare cost movement, the measurement of cost
reduction takes time. However, it is incorrect to infer from this that cost reductions are
not being achieved. In addition, changes to contract scope do not neccssarily result in
the loss of projected cost reductions.

While your omce correctly noted that performance standards published in the FY 2006­
20 I 0 Five-Year Plan only provide targets identified for FY 2006, 2008 and 2010, it is
incorrect to interpret this to mean that no cost reductions will occur or be reported until
2008. On the contrary, actual results indicate that cost reductions have been reali zed and
are published annually in the Annual Report. In fact, Federal Student Aid reported (in
the FY 2007 Annual Report) unit cost reductions that, in every case but one, were lower
than the baseline. in the one case where unit costs rose, (the unit cost of servici ng a
Direct Loan borrower), the increase was attributcd to a decrease in servicing volume. We
anticipate unit costs for this standard will be reduced dramatically this year and for the
foreseeable future due to the significant increase in Direct Loan vol ume.

With regard to cost reductions from systems initiatives, we acknowl edge that changes
have been made to the contracts in question (CSS, Advance, !PM and VDC). However,
changes in contract scope do not necessarily result in the loss of projected cost
reductions. For example, in 2007, Federal Student Aid changed the scope of the CSB
contract. This change did not impact the Department's original cost reduction estimates
and, in fact, resulted in even greater savings. More importantly, this change did not in
any way impact service levels to students. Changes to the Advance, IPM and the VDC
contracts will also result in savings to the Department, although in some cases they may
be less than originally projected.

With regard to the Federal Family Education Loan (FFEL) Program, it is not appropri ate
to expect Federal Student Aid to exert influence over the cost of this program nor is it
reasonable to judge fede ral Student Aid based on reductions in the cost of th is program.
Federal Student Aid has very little influence over FFEL costs. In fact, operational and
programmatic costs are borne primarily by private entities such as lenders, serv icers and



                                             6

guaranty agencies. The primary costs to the government are lender and guaranty agency
subsidies, which can only be reduced through changes to the authorizing legisl ation and
the regulations. Because of this, the administrative costs of the FFEt program are
generally limited to eligibiliiy determination and oversight and monitoring ofFFEL
participants. As a result, on a unit cost basis, these costs are relatively minor in
comparison to the administrative costs of some of our other programs such as the Direct
Loan Program. While we will identify a FFEL cost standard, in our opinion, a more
important standard to measure is Federal Student Aid's perfonnance in conducting
oversight of these program participants. We are currently identifying possible standards
to address this nced and will incorporate them in our next update to the Five-Year Plan.

Finally, because of the time it takes to calculate annual unit costs coupled with
Congressionally mandated deadlines for submission of the Annual Report, we are Wlablc
to report current year unit costs. While we regret our original reporting of these costs
may have been misinterpreted by some, beginning with the FY 2007 Annual Report, we
have begun clearly footnoting the years being reported.

Enclosed is a corrective action plan addressing each of your findings and
recommendations. Thank you for providing us the opportunity to respond to your report
and we look fonvard to working with your office to implement these changes.

                                            Best regards,



                                           Lawrence A. Warder
                                           Acting Chief Operating Officer
                                           Federal Student Aid




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