oversight

Alert Memorandum - Potential Consequences of the Maintenance of Effort Requirements under the ARRA State Fiscal Stabilization Fund.

Published by the Department of Education, Office of Inspector General on 2009-09-30.

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

          U.S. Department of Education
           Office of Inspector General

   American Recovery and
   Reinvestment Act of 2009
Potential Consequences of the Maintenance of Effort Requirements
 under the American Recovery and Reinvestment Act State Fiscal
                       Stabilization Fund

                      Alert Memorandum




ED-OIG/L03J0011                            September 2009
                                  UNITED STATES DEPARTMENT OF EDUCATION
                                                   OFFICE OF INSPECTOR GENERAL

                                                                                                        Audit Services



                                                           September 30, 2009
ALERT MEMORANDUM


To:             Thelma Melendez de Santa Ana
                Assistant Secretary
                Office of Elementary and Secondary Education

From:           Keith West /s/
                Assistant Inspector General for Audit

Subject:        Potential Consequences of the Maintenance of Effort Requirements under the ARRA
                State Fiscal Stabilization Fund
                Control Number ED-OIG/L03J0011


The purpose of this alert memorandum is to highlight an issue of concern related to States’
administration of the State Fiscal Stabilization Fund (SFSF) as part of the American Recovery and
Reinvestment Act of 2009 (ARRA). The flexibility inherent in the maintenance of effort (MOE)
requirements may be resulting in States reducing funding for public education. The consequence of this
could adversely impact the achievement of the education reform objectives of the SFSF program. This
came to our attention through our ARRA audit work and from complaints received through the Office of
Inspector General (OIG) Hotline. 1

We recommend that the U.S. Department of Education (Department) take action to address these
potential consequences. The Department should track State funding for public education to determine
the impact that the SFSF MOE requirements are having on levels of State support for public education.
The Department should also use these data to ensure that States are complying with the MOE assurances
made in their SFSF Phase I applications.


                                     Maintenance of Effort Requirements

In accordance with the requirements in the ARRA, States must submit an application that includes a
number of assurances in order to receive the first portion of their SFSF allocation. One assurance is that
the State will maintain its support for elementary and secondary education, as well as public institutions
of higher education (IHEs), at least at the level of such support for fiscal year (FY) 2006. States may
also request a waiver from the MOE requirement if they meet certain criteria. 2 In addition to the MOE
requirement, the ARRA stipulates that each State must first use the Education portion of its SFSF


1
  The OIG Hotline is a toll-free telephone number (1-800-MISUSED) and email box (oig.hotline@ed.gov) where individuals
can report potential instances of fraud, waste, or abuse relating to Department programs.
2
  The percentage of the State’s total revenues expended on education must be greater than or equal to the percentage
expended in the fiscal year preceding the year for which the waiver is being requested.
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ED-OIG/L03J0011

allocation 3 to (1) restore State support for elementary and secondary education in FYs 2009, 2010, and
2011 to the greater of the FY 2008 or 2009 level and (2) restore State support for public IHEs in
FYs 2009, 2010, and 2011 to the greater of the FY 2008 or 2009 level.

Another set of assurances that each State must provide in its application addresses the education reform
objectives of the SFSF program. States must pledge that they will use the SFSF funds to advance the
following education reforms:

        1. increase teacher effectiveness and address inequities in the equitable distribution of highly
           qualified teachers,
        2. implement statewide data systems that track pre-K-through-career progress and foster
           continuous improvement,
        3. make progress towards rigorous standards and high-quality assessments, and
        4. provide intensive support and effective interventions to struggling schools.

On July 29, 2009, the Department posted the proposed requirements, definitions, and approval criteria
for Phase II of the SFSF program in the Federal Register. These requirements focus on the four
education reform assurances. However, none of the proposed indicators or descriptors will ensure that
States are complying with their MOE assurances in their Phase I application or address how levels of
State funding are affecting States’ progress toward the education reform objectives.


                             Potential Consequences of the MOE Requirements

The MOE assurances provide flexibility for States in various budget situations. A State facing a large
deficit can avoid reductions in total education funding while a State with a stronger budget situation can
increase total education spending to work toward the education reforms. However, we concluded that
this flexibility may be resulting in a reduction in some States’ funding for public education.

Some States’ budget proposals would reduce State support for public education back to the
FY 2006 levels and replace the State funds with their SFSF allocation to free up State resources for non-
education budget items. Depending on the level of State resources, this could reduce the percentage of
the State’s revenue spent on public education. Although this reduction may be allowable under the law,
it may adversely impact the achievement of the education reforms of the SFSF program.


                     Examples of the Consequences of the SFSF MOE Requirements

The following examples were obtained from ongoing work being conducted by the OIG in Pennsylvania
and from our research relating to Connecticut and Massachusetts. These examples demonstrate how the
SFSF MOE requirements are impacting these States’ education budget decisions.




3
 The SFSF consists of the Education Stabilization Fund, which is 81.8 percent of the allocation, and the Government
Services Fund, which is 18.2 percent of the allocation. (Public Law 111–5 § 14002)
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Connecticut

The Governor of Connecticut released her proposed FY 2010 through FY 2011 biannual budget on
February 4, 2009. This budget proposed flat funding for the State’s primary K-12 funding formula at
$1.889 billion in FYs 2009, 2010, and 2011. These figures represent 10.3 percent, 10.02 percent, and
9.67 percent of the State’s total appropriations in each of the respective FYs. After passage of the
ARRA, the Governor submitted Connecticut’s SFSF application to the Department on June 2, 2009. In
the application, she reduced State funding for public education to the minimum amount of funding
necessary to meet the MOE requirement, funding Connecticut’s primary K-12 funding formula at $1.62
billion. This is the same funding as Connecticut’s FY 2006 level of effort. Based on the State
legislature’s budget proposal from April 2009, the $1.62 billion will amount to 8.62 percent of the
State’s total FY 2010 appropriations ($18.794 billion) and 8.34 percent for FY 2011 ($19.42 billion).
The application states that Connecticut plans to use SFSF funds to fill in the budget gap created by the
reduction in State resources. The Table and Figure below further illustrate a proposed disproportionate
reduction in education funding for both FY 2010 and FY 2011 (i.e. the State’s primary elementary and
secondary funding formula is being reduced by more than 14 percent while the total State budget is
being reduced by less than one percent).

Table – Proposed Connecticut Budget Reductions for State Education and Total
       Appropriations
                                                     FY 2010                                    FY 2011
    Propos ed Appropriations           State Education Total Appropriations       State Education Total Appropriations
Before ARRA                           $ 1,889,182,288 $ 18,846,580,428           $ 1,889,182,288 $ 19,532,652,321
After ARRA*                           $ 1,619,662,393 $ 18,793,965,968           $ 1,619,662,393 $ 19,419,771,867
Budge t Change                        $ (269,519,895) $       (52,614,460)       $ (269,519,895) $      (112,880,454)
Percent Change                                -14.27%              -0.28%                -14.27%              -0.58%
*State Education data are from the Governor’s SFSF application while the Total Appropriations data are from the State
legislature’s April budget proposal.

                                                         Figure
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Pennsylvania

In the Commonwealth of Pennsylvania, the Governor and the State legislature, at the time of this
memorandum, were in budget discussions over State support for public education. The Governor’s
office proposed using Pennsylvania’s SFSF allocation to increase the State’s basic education subsidy 4
by $418 million in FY 2010 and $735 million in FY 2011. The State legislature proposed reducing State
support for education and using the SFSF funds to maintain the FY 2010 and FY 2011 basic education
subsidy at the FY 2009 level. Pennsylvania currently has a $753 million rainy-day fund. The
Governor’s proposal would use $250 million of this money in FY 2009 and $375 million in FY 2010 to
help close the gap between revenue and expenses. The State legislature’s proposal does not use the
rainy-day fund. On June 18, 2009, the U.S. Secretary of Education, in a letter to the Governor of
Pennsylvania, noted that States’ education budget decision could impact future funding opportunities.
The letter states that, “If a State has disproportionately reduced its education budget and/or if a State has
done nothing more than backfill budget holes with these dollars when the State had other resources
available to it, such as a rainy-day fund, the State’s competitive position to receive Race to the Top
funds and/or other competitive grants may be negatively impacted.” As of September 10, 2009, the
differences between the budget proposals had not been resolved.

Massachusetts

The Commonwealth of Massachusetts website shows that the Governor’s original budget proposal for
FY 2009 included a $223.2 million increase to the State’s primary K-12 funding formula, Chapter 70
education aid. 5 In October of 2008, the Governor announced reductions to the State budget to address
revenue shortfalls, but Chapter 70 funding was unaffected. In January of 2009, the Governor proposed
more reductions for FY 2009, but Chapter 70 funding remained intact. In May of 2009, after the
passage of the ARRA, the Governor announced a plan to reduce the FY 2009 Chapter 70 appropriation
by $412 million and use $412 million from the State’s SFSF allocation to fill this gap. This plan was
implemented through a reduction in the State’s June 30, 2009, Chapter 70 local aid payments as well as
instructions for school officials to identify eligible expenses previously charged to the general fund and
to initiate journal entries to charge them to the Federal SFSF grant.

In the Governor’s SFSF application, signed on May 20, 2009, Massachusetts applied for a waiver of the
MOE requirements for public IHEs in FY 2010 and FY 2011, asserting that the State will be unable to
fund public IHEs at the FY 2006 level. In order to meet the requirements for the MOE waiver, a State
must show that it is spending at least as much State money on education, as a percentage of total
revenues, as it did in the previous year. Massachusetts is able to meet this requirement because of its
$412 million reduction in the FY 2009 Chapter 70 appropriations, which reduced the percentage of State
revenue spent on public education in FY 2009. This reduction in State funding was replaced with SFSF
funds. The reduction also allowed Massachusetts to reduce State support for public IHEs below the
FY 2006 level for FYs 2010 and 2011 while maintaining the percentage of State revenue spent on public
education at least at the FY 2009 level.




4
 Pennsylvania’s basic education subsidy is the State’s primary fund for basic elementary and secondary education costs.
5
 The Chapter 70 program is the major program of State aid to public elementary and secondary schools in Massachusetts. In
addition to providing State aid to support school operations, it also establishes minimum spending requirements for each
school district and minimum requirements for each municipality's share of school costs.
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ED-OIG/L03J0011

Potential Consequences in Other States

The OIG Hotline has received complaints from several States relating to this issue through August 3,
2009. 6 Although we have not performed follow-up research on all of the complaints, they may indicate
that the issue could affect additional States, and therefore, could be having a larger impact on the
education reforms.


                                                    Recommendations

Our audit work and research indicates that the flexibility permitted in the SFSF MOE requirements may
be leading to a reduction in State support for public education. Reducing State funding for education
and replacing it with SFSF funds, rather than using SFSF to increase support for education, could
adversely affect the achievement of the education reform objectives of the program.

In order to address this, we recommend the Department:

      1. Implement a process to track State support for elementary and secondary education as well as for
         public institutions of higher education, as defined in State SFSF applications, to determine the
         extent to which State funding on public education is being reduced.

      2. Establish and implement a process to ensure that States have met the MOE requirements and
         assurances prior to awarding additional SFSF funding.



Office of Elementary and Secondary Education (OESE) Response

A preliminary copy of this memorandum was provided to OESE for comment. In its response, OESE
stated that as the Department began implementing the SFSF program, it became aware that the statutory
provision allowing States to comply with the MOE requirements in ARRA by reducing the amount of
fiscal support for public education to the FY 2006 level could potentially result in States reducing the
amount of such support in FYs 2009 through 2011. The Department took steps to discourage States
from reducing such support. For example, in the proposed application requirements for the Race to the
Top program, States would be required to show whether and to what extent the percentage of the State’s
total revenues were used to support public education for FY 2009 as compared to FY 2008.

OESE also stated that it believes that the recommendations in our alert memorandum are reasonable and
would further assist in addressing the concerns expressed in the memorandum.

OESE’s response is included in its entirety as an Attachment to this memorandum.




6
    All of the OIG Hotline complaints were referred to the Department.
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ED-OIG/L03J0011



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).

Alert memoranda issued by the Office of Inspector General will be made available to members of the
press and general public to the extent information contained in the memorandum is not subject to
exemptions in the Freedom of Information Act (5 U.S.C. § 552).

For further information, please contact Bernard Tadley, Regional Inspector General for Audit, at (215)
656-6279.



Attachment




Electronic cc: Joseph Conaty, Director, Academic Improvement and Teacher Quality Programs
               Joanne Weiss, Director, Race to the Top Fund
               Phil Maestri, Director, Risk Management Services
               Phil Rosenfelt, Deputy General Counsel, Office of General Counsel
               Delores Warner, Audit Liaison Officer, Office of Elementary and Secondary
                      Education
Alert Memorandum                Page 7 of 8
ED-OIG/L03J0011

                   ATTACHMENT
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ED-OIG/L03J0011




                        Anyone knowing of fraud, waste, or abuse involving
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                     should call, write, or e-mail the Office of Inspector General.

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