oversight

Alert Memorandum - State Educational Agencies' Implementation of Federal Cash Management Requirements under the American Recovery and Reinvestment Act

Published by the Department of Education, Office of Inspector General on 2009-10-21.

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
    State Educational Agencies’ Implementation of Federal
          Cash Management Requirements under the
          American Recovery and Reinvestment Act

                   Alert Memorandum




ED-OIG/L09J0007                             October 2009
                             UNITED STATES DEPARTMENT OF EDUCATION
                                  OFFICE OF INSPECTOR GENERAL

                                                                             AUDIT SERVICES



                                            October 21, 2009


ALERT MEMORANDUM


To:             Thomas Skelly
                Acting Chief Financial Officer
                Office of the Chief Financial Officer

                Phil Maestri
                Director
                Risk Management Service

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

Subject:        State Educational Agencies’ Implementation of Federal Cash Management
                Requirements under the American Recovery and Reinvestment Act
                Control Number ED-OIG/L09J0007

The purpose of this memorandum is to bring to your attention two issues of concern related to
State educational agencies’ (SEAs’) management of the flow of American Recovery and
Reinvestment Act (ARRA) funds to local educational agencies (LEAs). Ongoing OIG audits in
seven States and Puerto Rico have identified a number of instances where SEA cash management
systems (1) disburse ARRA funds without adequate information on whether LEAs are ready to
spend the funds and (2) do not ensure LEAs remit interest earned on ARRA funds received in
advance of LEA needs, or both. One of the key principles of ARRA is to distribute the funding
quickly to save and create jobs and promote economic activity. However, ARRA funding should
not be distributed to LEAs until the funds are needed to pay ARRA-authorized expenses. If
funding is distributed in advance of when it is needed, SEAs should ensure that LEAs minimize
the time between receipt and disbursement of the funds and remit interest earned on the advanced
funds in a timely manner.

We recently reported on cash management issues and the need for U.S. Department of Education
(Department) guidance based on audits we conducted in California during 2007 and 2008. 1 Our
current ARRA audits have shown that these issues are not limited to California. We have
identified cash management concerns with respect to ARRA funds passed through to LEAs in five
of the seven States being audited, as summarized in Table 1.

1
 Local Education Agency Requirement to Remit Interest Earned on Federal Cash Advanced by State Educational
Agencies (Alert Memorandum, ED-OIG/L09I0013, July 14, 2009); California Department of Education Advances of
Federal Funding to Local Educational Agencies (Audit Report, ED-OIG/A09H0020, March 9, 2009); Los Angeles
Unified School District’s Procedures for Calculating and Remitting Interest Earned on Federal Cash Advances
(Audit Report, ED-OIG/A09H0019, December 2, 2008).
Alert Memorandum
ED-OIG/L09J0007                                                                                     Page 2 of 10

    Table 1. States in Which OIG Identified Cash Management Issues Under ARRA
                         Issue                       CA     IL      IN    NY                   PA      Total
    Minimizing Time: SEA method for disbursing
    ARRA funds needs to ensure that LEAs receive the          •       •        •        •       •         5
    funds when needed to pay program costs.
    Interest Remittance: SEA needs to strengthen
    controls to ensure that LEAs remit interest earned
    on ARRA cash balances promptly and at least               •       •        •        •       •         5
    quarterly.

    Note: The OIG is currently conducting ARRA audits in seven States—the five States identified
    above, Tennessee, and Texas—as well as in Puerto Rico. Identification of a State with the described
    cash management issues is based on audit work completed as of mid-August.


The applicable cash management requirements are addressed in the Uniform Administrative
Requirements for Grants and Cooperative Agreements to State and Local Governments
(34 C.F.R. Part 80):

      •   34 C.F.R. § 80.21 prescribes the basic standard and the methods under which grantees will
          make payments to subgrantees. The basic standard is that the “[m]ethods and procedures
          for payment shall minimize the time elapsing between the transfer of funds and
          disbursement by the grantee or subgrantee . . . .” Grantees and subgrantees shall be paid in
          advance if they maintain or demonstrate the willingness and ability to maintain procedures
          to minimize the time between receipt and disbursement of the funds to pay program costs.
          Reimbursement is the preferred disbursement method when the requirements for advancing
          funds are not met.

      •   34 C.F.R. § 80.21(i) requires that “. . . [G]rantees and subgrantees shall promptly, but at
          least quarterly, remit interest earned on advances to the Federal agency. The grantee or
          subgrantee may keep interest amounts up to $100 per year for administrative expenses.”

The Department reinforced these cash management requirements in the ARRA-specific guidance it
issued in April 2009. In particular, the guidance addresses funds made available under ARRA for
three programs included in our State audits: (1) Title I, Part A of the Elementary and Secondary
Education Act (Title I); (2) section 611, Part B of the Individuals with Disabilities Education Act
(IDEA); and (3) Title XIV of Division A of the ARRA, State Fiscal Stabilization Fund (SFSF). 2
In addition to the guidance, Risk Management Service (RMS) and the Office of the Chief
Financial Officer (OCFO) have worked in consultation with departmental program offices and the
Office of the General Counsel (OGC) to provide technical assistance to State and local agencies in
the area of cash management. For example, cash management issues were considered during risk
analyses to identify States needing additional technical assistance to ensure ARRA funds are spent
appropriately. Additionally, cash management was a topic of one of a series of web conferences
2
 Department guidance for the three programs are titled: (1) Funds Under Title I, Part A of the Elementary and
Secondary Education Act of 1965 Made Available under The American Recovery and Reinvestment Act of 2009;
(2) Funds for Part B of the Individuals with Disabilities Education Act Made Available under The American Recovery
and Reinvestment Act of 2009; and (3) Guidance on the State Fiscal Stabilization Fund Program.
Alert Memorandum
ED-OIG/L09J0007                                                                                     Page 3 of 10

the Department is conducting to assist grantees and subgrantees, such as SEAs and LEAs, in
managing grants under ARRA.


    SEAs Should Ensure LEAs Receive ARRA Funds When Needed to Pay Program Costs

To minimize the time between an LEA’s receipt and disbursement of Federal funds, the SEA’s
method for disbursing the funds should ensure that LEAs receive ARRA funds when needed to pay
program costs—that is, not too early and not too late.

Funds Should Not Be Disbursed Too Early

In five of the seven States currently being audited, SEAs are or will be advancing ARRA funds to
LEAs without adequate information on whether LEAs are ready to spend the funds. As a result,
LEAs may be receiving ARRA funds too early, which increases the borrowing costs of the U.S.
Treasury and increases the risk that ARRA funds may be misused. We identified concerns about
the SEAs’ disbursement methods that could result in LEAs receiving ARRA funds too early in the
following States:

        California. The SEA disbursed most of its Title I and SFSF ARRA funds to LEAs without
        any information about whether the LEAs needed the funds at the time of disbursement. 3
        Between late May and early July, the State drew down over $4 billion for disbursement to
        LEAs and other sub-recipients. This amount represents about 80 percent of the Title I and
        86 percent of the SFSF ARRA funds the Department had awarded to California as of early
        August. Our work at three LEAs in California showed that, while they received most of
        their Title I and SFSF ARRA funds in June and early July, the LEAs had yet to spend any
        of the funds at the time of our visits in late July. The LEAs were still planning how they
        will use the funds, which includes needing to first negotiate with the teachers union for new
        teacher positions, or seeking technical assistance from the Department on allowable use of
        Title I funds. One of the three LEAs reviewed plans to spend half of its SFSF funds during
        school year 2009-10 and the other half the following year. This timeframe is more than a
        year after receiving the funds.

        Illinois. The SEA is disbursing Title I and IDEA ARRA funds to LEAs on a monthly basis
        in increments that represent the monthly cash needs set by each LEA in its grant
        application. However, the SEA will assess LEAs’ funding needs only on a quarterly basis.
        Under this approach, LEAs may not have a need for all the funds for the months within a
        quarter, which was the case in one LEA reviewed. Moreover, the SEA disbursed SFSF
        funds to replace State education funding to LEAs with no procedures in place to determine
        whether the LEAs needed the funds at the time. At two LEAs visited, we found that
        information would not be available to assess their need for SFSF funds because the LEAs
        do not track spending of the State funds and, thus, do not track SFSF expenditures either.

        Indiana. Similar to Illinois, the SEA is disbursing Title I and IDEA ARRA funds to LEAs
        on a monthly basis, but in increments representing one-twelfth of each LEA’s total

3
  In California, the SEA is disbursing IDEA ARRA funds to LEAs in quarterly installments based on information on
the amount of funds LEAs have spent to date.
Alert Memorandum
ED-OIG/L09J0007                                                                                 Page 4 of 10

        allocation, with the option for LEAs to change the level of funding, if needed. Like
        Illinois, the SEA will assess LEAs’ funding needs only on a quarterly basis. To replace a
        shortfall in State education funding, the SEA distributed SFSF funds to LEAs for the month
        of June without first assessing LEAs’ cash needs. In early June, the SEA had drawn and
        disbursed $536 million in SFSF funds to LEAs. Our work at three LEAs showed that they
        had yet to spend any of the funds at the time of our visits in July and August. The SEA
        does not have procedures in place to assess LEAs’ cash needs before disbursing SFSF
        funds, but officials stated they will use quarterly reports in the future.

        New York. Although LEAs had not received ARRA funds as of early August, the SEA
        plans to use existing procedures for disbursing Title I, IDEA, and SFSF ARRA funds to
        LEAs. Under those procedures, LEAs are allowed to request an advance of up to
        90 percent of its grant budget to the extent that the request includes actual expenditures to
        date plus anticipated expenditures for the next month. Although this approach enables the
        LEA to request funds to meet its near-term needs, the SEA does not have procedures in
        place to determine whether the funds are actually needed at that time.

        Pennsylvania. Similar to Indiana, the SEA plans to advance ARRA funds to LEAs on a
        monthly basis in increments representing one-twelfth of each LEA’s total allocation, and
        will assess LEAs’ cash needs only on a quarterly basis. The State had not drawn down any
        Title I, IDEA, or SFSF ARRA funds as of mid-August.

LEA officials provided several explanations for not spending the ARRA funds immediately upon
receipt. One reason is due to the uncertainty about allowable uses of funds. Another reason cited
is that LEAs anticipate possible future budget cuts and are waiting to determine whether SFSF
funds will be needed to pay expenses normally paid with State or local funding.

It is important that SEAs do not draw and disburse ARRA funds before LEAs actually need the
funds. As we have previously reported (ED-OIG/A09H0020), the U.S. Treasury incurs additional
borrowing costs when an SEA draws and disburses Federal funds to LEAs in advance of their
immediate cash needs. Because of the Federal deficit, the U.S. Treasury must borrow the cash
needed to fund Federal programs and, as a result, incurs interest costs. Federal program funds
drawn too early by an SEA results in additional Federal borrowing costs that would not have been
incurred if the SEA had disbursed the funds at the time needed by LEAs to pay program costs.

It is also important that funds are not drawn prematurely because the funds may be more
susceptible to misuse when held in local accounts for extended periods. Past OIG work has
identified instances involving non-ARRA funds where internal controls were weak, by-passed, or
nonexistent, and LEA officials were able to commit improper and illegal acts that resulted in
millions of dollars in misspent funds. 4 As shown in the Attachment, only a handful of States have
drawn down significant amounts of Title I, IDEA, and SFSF ARRA funds as of August 28.
Hence, the Department has the opportunity to further reinforce the cash management requirements
and remind States to ensure that ARRA funds are needed before disbursing to LEAs.


4
 Fiscal Issues Reported in ED-OIG Work Related to LEAs and SEAs (Management Information Report,
ED-OIG/X05J0005, July 21, 2009); An OIG Perspective on Improving Accountability and Integrity in ESEA
Programs (ED-OIG/S09H0007, October 16, 2007).
Alert Memorandum
ED-OIG/L09J0007                                                                          Page 5 of 10

Funds Should Not Be Disbursed Too Late

In addition to ensuring that LEAs do not receive ARRA funds too early, SEAs should also ensure
that LEAs do not receive these funds too late. In the remaining two States where we are
conducting ARRA audits, the SEAs generally reimburse LEAs for Federal expenditures instead of
advancing Federal funds. Our ongoing work in these States has not addressed whether LEAs are
receiving ARRA funds too late to meet program needs or the rationale for the SEAs using
reimbursement as the disbursement method. Nevertheless, it is important that SEAs’ methods for
disbursing ARRA funds ensure that LEAs do not receive the funds too late to pay program costs.

Our prior cash management audit in California (ED-OIG/A09H0020) found that LEAs used other
available cash resources to pay Federal program costs when LEAs did not receive Federal funds
timely. However, when an LEA has to temporarily use other cash resources to pay Federal
program costs, the amount of cash available to the LEA for other educational purposes is
decreased, which could put additional fiscal pressure on the LEA. In addition, the use of other
non-Federal cash resources causes a lost opportunity for the LEA to earn interest because the cash
is no longer available for investment.

As shown in the Attachment, most States have drawn down little or no Title I, IDEA, or SFSF
ARRA funds. State officials have told us that delays in drawing down ARRA funds are caused by
State budgetary requirements, such as the need for the State legislature to enact supplemental
appropriations for ARRA funding, or administrative processes, such as the need to approve
program and funding applications. States may have also delayed ARRA draws because LEAs do
not need the funds while on summer break. However, States should ensure that LEAs are not
harmed as a result of delays in drawing down ARRA funds and that funding is disbursed in time to
meet ARRA goals, including the goal of saving and creating jobs.


      SEAs Should Ensure that LEAs Calculate and Remit Interest Earnings Promptly

In five of the seven States currently being audited, the SEA does not have a process in place for
LEAs to remit interest earned from Federal cash advances, has not instructed LEAs to remit
interest promptly and at least quarterly, or does not sufficiently monitor LEAs’ compliance with
the interest requirement. As a result, LEAs may be retaining interest that should be returned to the
U.S. Treasury. We identified concerns with SEA controls for ensuring LEAs remit interest in a
timely manner in the following States:

       California. We previously reported that the SEA relied on LEAs to self-report and remit
       interest earned on non-ARRA cash balances. Additionally, the LEAs we reviewed were
       calculating interest incorrectly or not at all. In response to a draft of our March 2009 audit
       report (ED-OIG/A09H0020), the SEA issued guidance to LEAs on calculating and
       remitting interest earned on Federal funds. However, we noted in the final report that the
       guidance did not sufficiently address appropriate methodologies for calculating interest.
       As of August, the SEA had not issued more detailed guidance but was beginning to pilot
       procedures to monitor LEA compliance with the interest requirement for both ARRA and
       non-ARRA funds.
Alert Memorandum
ED-OIG/L09J0007                                                                       Page 6 of 10

       Illinois. The SEA has not modified existing procedures for non-ARRA funds and will
       calculate and remit LEAs’ interest earnings annually rather than at least quarterly as
       required by Federal regulation. Moreover, the SEA has not calculated interest earnings
       correctly. Our work in one LEA found that it also calculated interest incorrectly and the
       interest earnings it calculated differed from the SEA’s because they each used different
       interest rates.

       Indiana. The SEA does not have a mechanism to determine interest due from LEAs or to
       return LEAs’ interest earnings to the Department.

       New York. The SEA relies on LEAs to comply with Federal interest requirements and has
       not established a process to ensure that LEA interest earnings are returned to the
       Department.

       Pennsylvania. The SEA does not have an effective process in place to ensure that LEAs
       calculate and remit interest promptly. Instead, the SEA relies on independent public
       accountants to test LEA compliance with the interest remittance requirement during the
       annual single audit. This approach will not assure that LEAs comply with the interest
       requirement until well after the LEAs have received ARRA funding.

In our recent alert memorandum (ED-OIG/L09I0013), we encouraged the Department’s OCFO to
issue guidance to SEAs and LEAs to (1) help ensure that LEAs accurately calculate and promptly
remit interest earnings and (2) reinforce SEA responsibility for ensuring LEA compliance with the
cash management requirements. The need for such guidance has only become more evident as we
have performed cash management work in additional States under ARRA. As articulated in the
alert memorandum, the guidance should instruct LEAs on the appropriate methodology for
calculating interest earnings and emphasize the need for interest to be remitted promptly and at
least quarterly.


                                        Recommendation

1.1    We recommend that the Chief Financial Officer and the Director of Risk Management
       Service examine the most effective methods to address the issues concerning cash
       management and provide appropriate technical assistance and guidance to States and
       LEAs. The methods could include (1) technical assistance to States that have drawn down
       significant amounts of ARRA funding to ensure LEAs are minimizing the time between
       receipt and disbursement of ARRA funds; (2) additional webinars and guidance for SEAs
       and LEAs to reinforce the cash management requirements applicable to LEAs;
       (3) dissemination of information on challenges and best practices related to cash
       management; and (4) as suggested in our previous alert memorandum on LEA interest
       calculations and remittance (ED-OIG/L09I0013), issuance of fiscal guidance for SEAs and
       LEAs on appropriate methodologies for calculating interest earned on Federal cash
       advances to LEAs.
Alert Memorandum
ED-OIG/L09J0007                                                                       Page 7 of 10

Department Response

A preliminary copy of this memorandum was provided to the Department for comment. We
discussed the results of our review and recommendations with Department officials from OCFO,
RMS, Office of Elementary and Secondary Education (OESE), Office of Special Education and
Rehabilitation Services (OSERS), and OGC, on September 22, 2009. The officials stated that the
information in the alert memorandum was helpful to the Department in considering a number of
issues regarding cash management and ARRA. The Department recognizes cash management as
an important issue and has taken steps to address it under ARRA. The officials commented that
ensuring LEAs can minimize the time between receipt and disbursement of Federal funds will
require long-term solutions in some States. Based on the discussion, we consolidated our original
three recommendations into one modified recommendation. The Department officials concurred
with the modified recommendation.

Corrective actions proposed (resolution phase) and implemented (closure phase) by your office(s)
will be monitored and tracked through the Department’s Audit Accountability and Resolution
Tracking System (AARTS). For further information, please contact me at 202-245-7041.

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 therein is not subject to
exemptions in the Freedom of Information Act (5 U.S.C. § 552).

Attachment

Electronic cc:

Thelma Meléndez de Santa Ana, Assistant Secretary, OESE
Zollie Stevenson, Director, OESE-Student Achievement and School Accountability Programs
Joseph Conaty, Director, OESE-Academic Improvement and Teacher Quality Programs
Andrew Pepin, Delegated the Authority to Perform the Functions of the Assistant Secretary,
    OSERS
Patty Guard, Acting Director, OSERS-Office of Special Education Programs
Phil Rosenfelt, Deputy General Counsel, OGC
Abigail Cornish, Audit Liaison Officer, OCFO
Tina Otter, Audit Liaison Officer, RMS
Alert Memorandum
ED-OIG/L09J0007                                                                    Page 8 of 10

                                         Attachment

Table 2 lists the percentage of Title I, IDEA, and SFSF ARRA funds drawn down by each State, as
of the week ended August 28, 2009. We summarized the percentages based on information on
total obligations and outlays included in the Department’s weekly ARRA Cumulative Percent
Drawdown Report.

Table 2. ARRA Drawdowns by State
State                                     Title I ARRA     IDEA ARRA        SFSF (a)
AK-ALASKA                                          0.00%         0.00%          0.00%
AL-ALABAMA                                         0.06%         0.06%          0.00%
AR-ARKANSAS                                        8.70%         6.89%          6.42%
AS-AMERICAN SAMOA                                                0.00%
AZ-ARIZONA                                       1.15%           0.09%          20.76%
CA-CALIFORNIA                                   80.06%          42.47%          94.34%
CO-COLORADO                                      0.50%           5.44%          32.38%
CT-CONNECTICUT                                   0.00%           0.15%           0.00%
DC-DISTRICT OF COLUMBIA                          0.00%           0.00%           0.00%
DE-DELAWARE                                      0.00%           0.19%           0.00%
FL-FLORIDA                                       7.36%          12.33%           1.22%
GA-GEORGIA                                       0.25%           0.10%          27.08%
GU-GUAM                                                          0.00%
HI-HAWAII                                       16.84%         100.00%           0.00%
IA-IOWA                                         31.50%          40.00%          22.45%
ID-IDAHO                                         0.00%           0.32%           0.02%
IL-ILLINOIS                                      0.21%           0.60%          81.85%
IN-INDIANA                                      33.16%          43.71%          66.28%
KS-KANSAS                                       11.60%           0.00%          18.47%
KY-KENTUCKY                                      2.96%           5.31%           0.00%
LA-LOUISIANA                                     0.00%           0.00%           0.00%
MA-MASSACHUSETTS                                 1.85%           4.44%          56.76%
MD-MARYLAND                                      0.00%           0.08%           2.49%
ME-MAINE                                         4.10%           6.60%          24.28%
MI-MICHIGAN                                      0.00%           2.67%          49.35%
MN-MINNESOTA                                     0.00%           0.00%           0.97%
MO-MISSOURI                                      0.00%           0.00%           5.55%
MP-NORTHERN MARIANA ISLANDS                                      1.58%
MS-MISSISSIPPI                                    0.00%          0.00%           4.78%
MT-MONTANA                                        0.00%          0.93%           0.12%
NC-NORTH CAROLINA                                 4.83%         13.43%          34.08%
ND-NORTH DAKOTA                                   0.01%          4.45%           0.00%
NE-NEBRASKA                                       2.58%          1.67%           0.61%
NH-NEW HAMPSHIRE                                  0.00%          0.00%           0.00%
Alert Memorandum
ED-OIG/L09J0007                                                                        Page 9 of 10

Table 2. ARRA Drawdowns by State
State                                      Title I ARRA     IDEA ARRA          SFSF (a)
NJ-NEW JERSEY                                       0.00%         0.00%           16.70%
NM-NEW MEXICO                                       0.00%         0.00%            0.00%
NV-NEVADA                                           0.00%         0.00%           48.23%
NY-NEW YORK                                         0.00%         0.00%            2.26%
OH-OHIO                                             0.26%         0.33%            4.68%
OK-OKLAHOMA                                        99.95%        99.96%            4.43%
OR-OREGON                                           0.00%         6.50%           34.10%
PA-PENNSYLVANIA                                     0.00%         0.00%
PR-PUERTO RICO                                      0.00%         0.00%               8.44%
RI-RHODE ISLAND                                     0.00%         0.00%              44.11%
SC-SOUTH CAROLINA                                  25.12%         0.60%               0.00%
SD-SOUTH DAKOTA                                     5.01%         0.13%              42.51%
TN-TENNESSEE                                        2.87%         3.16%               3.17%
TX-TEXAS                                            0.51%         0.46%               0.00%
UT-UTAH                                             0.57%         5.42%              67.24%
VA-VIRGINIA                                         0.19%         0.28%              12.46%
VI-VIRGIN ISLANDS                                                 0.00%
VT-VERMONT                                         0.00%          0.00%               0.00%
WA-WASHINGTON                                      0.00%          0.00%              58.41%
WI-WISCONSIN                                       0.00%          0.34%              86.26%
WV-WEST VIRGINIA                                   0.08%          0.02%               0.00%
WY-WYOMING                                         0.00%          0.00%               0.00%
(a) SFSF percentages include both SFSF-Education Stabilization and SFSF-Government
    Services grants.
Alert Memorandum
ED-OIG/L09J0007                                                                      Page 10 of 10




                Anyone knowing of fraud, waste, or abuse involving
                 U.S. Department of Education funds or programs
             should call, write, or e-mail the Office of Inspector General.

                                        Call toll-free:
                                 The Inspector General Hotline
                              1-800-MISUSED (1-800-647-8733)

                                           Or write:
                                   Inspector General Hotline
                                 U.S. Department of Education
                                  Office of Inspector General
                                 400 Maryland Avenue, S.W.
                                    Washington, DC 20202

                                           Or e-mail:
                                       oig.hotline@ed.gov

               Your report may be made anonymously or in confidence.

           For information on identity theft prevention for students and schools,
             visit the Office of Inspector General Identity Theft Web site at:
                                   www.ed.gov/misused



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

                                            www.ed.gov