oversight

California Department of Education's Administration of LEAs' Special Education Maintenance of Effort Compliance Requirement

Published by the Department of Education, Office of Inspector General on 2013-05-20.

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

                                               UNITED STATES DEPARTMENT OF EDUCATION
                                                                    OFFICE OF INSPECTOR GENERAL

                                                                                                                                          Audit Services



                                                                     May 20, 2013


FINAL ALERT MEMORANDUM


To: 	                   Michael Yudin
                        Acting Assistant Secretary
                        Office of Special Education and Rehabilitative Services

From: 	                 Patrick J. Howard Is/
                        Assistant Inspector General for Audit

Subject: 	              California Department of Education's Administration of LEAs ' Special Education
                        Maintenance of Effort Compliance Requirement
                        Control Number ED-OIG/L09N0004


The purpose of this final alert memorandum is to highlight an issue of concern related to the California
Department of Education's (CDE) administration of the special education maintenance of effort (MOE)
compliance requirements applicable to local educational agencies (LEAs). These requirements are
contained in the Individuals with Disabilities Education Act (IDEA), as amended. During our audit of
LEAs' use of the IDEA MOE flexibility provision due to supplemental funds received under the
American Recovery and Reinvestment Act of2009, we determined that CDE is instructing LEAs to use
local special education expenditure information from an improper year to demonstrate compliance with
the LEA MOE requirement in certain circumstances. 1

What Federal requirements apply to LEA MOE?
According to IDEA§ 613(a)(2)(A), an LEA receiving IDEA funds must meet an annual MOE
requirement to show that it has maintained the proper level of funding for educating children with
disabilities. Specifically, an LEA must not use funds provided under Part B of the IDEA to reduce the
amount of local funds the LEA spends on educating children with disabilities below the level of
spending for the preceding fiscal year. This requirement is restated in U.S. Department of Education
(Department) regulations under Title 34 of the Code of Federal Regulations, Section 300.203(a)
(34 C.F.R. § 300.203(a)). Under its oversight responsibilities, a State educational agency (SEA) must
determine whether each LEA complied with the annual MOE requirement. Consistent with Department
guidance,2 LEAs demonstrate compliance with this annual MOE requirement by spending, in total or per

1
  In California, LEAs receive State funding for special education programs in addition to funds from local sources. However,
the issue of concern described in this alert memorandum refers only to the expenditure of funds obtained from local sources.
2
  U.S. Department of Education, Office of Special Education and Rehabilitative Services guidance, "Funds for Part B of the
Individuals with Disabilities Education Act Made Available Under The American Recovery and Reinvestment Act of2009,"
April2009 and revised September 9, 2010.

    The Department of Education 's mission is to promote student achievement and preparation for global competitiveness by fostering educational excellence
                                                                  and ensuring equal access.
Final Alert Memorandum
ED-0I G/L09N 0004                                                                                2 of 14

capita (per student with disability), an equal or greater amount of local, or State and local, funds in each
subsequent year. That is, LEAs may use any one of the following four options for demonstrating
compliance with the MOE requirement:

    1. 	 The LEA's total amount of local-only funds spent on educating children with disabilities is
         equal to or greater than the total amount of local-only funds spent on educating children with
         disabilities in the preceding year.

   2. 	 The LEA's amount oflocal-only funds spent per capita is equal to or greater than the amount
        of local-only funds spent per capita in the preceding year.

   3. 	 The LEA's total amount of combined State and local funds spent on educating children with
        disabilities is equal to or greater than the amount of combined State and local funds spent on
        educating children with disabilities in the preceding year.

   4. 	 The LEA's amount of combined State and local funds spent per capita is equal to or greater
        than the amount of combined State and local funds spent per capita in the preceding year.

IDEA§§ 613(a)(2)(B) and 613(a)(2)(C), and Department regulations at 34 C.F.R. §§ 300.204 and
300.205, provide limited exceptions and adjustments that allow an LEA to reduce its local, or State and
local, special education spending and remain in compliance with the MOE requirement. The exceptions
that might allow an LEA to reduce spending from one fiscal year to the next are ( 1) if special education
personnel leave voluntarily, (2) if fewer children with disabilities enroll, (3) if the LEA no longer needs
to provide exceptionally costly special education services to a child with a disability (for example, if the
child leaves the school district), and (4) if costly expenditures for long-term purchases have ended. An
adjustment to the MOE requirement, known as "MOE flexibility," permits an LEA to reduce the level of
local, or State and local, expenditures for special education programs and related services by up to
50 percent of any increase in their annual IDEA, Part B grant allocation if the SEA determines that the
LEA has met the requirements of IDEA, which include providing a free and appropriate public
education to all district students with disabilities.

If an LEA does not meet the MOE compliance requirement and cannot justify its actual spending
reduction under the exception or adjustment provisions, the SEA must pay the Department the
difference between the amount of funds the LEA spent and the amount it should have spent educating
children with disabilities, using funds for which accountability to the Federal Government is not
required.

In addition to LEAs demonstrating that they have met the annual MOE compliance requirement based
on the amount of funds actually spent in relation to the amount spent in the preceding year, LEAs must
also demonstrate that they have met an annual MOE eligibility requirement to receive IDEA funds.
According to 34 C.F.R. § 300.203(b)(l), for an LEA to be considered eligible to receive IDEA funds in
a given fiscal year, an SEA must determine that the LEA has budgeted at least the same amount for
educating students with disabilities (total or per capita) from either local or combined State and local
sources as the LEA spent from the same source for the most recent prior year for which information is
available. Additionally, 34 C.F.R. § 300.203(b)(2) states that, when establishing eligibility based on a
comparison of local-only funds, the comparison should be made between the amount of local funds the
LEA budgets for educating children with disabilities to the amount it spent for that purpose from local
funds in the most recent fiscal year for which the LEA was determined eligible based on local-only
Final Alert Memorandum
ED-OIG/L09N0004                                                                          Page 3 of 14

funds using the standard in § 300.203(b )(1 ). Therefore, to determine whether an LEA is eligible to
receive IDEA for the upcoming year, the SEA compares the LEA's amount of budgeted funds to actual
expenditures in a year that may not be the preceding fiscal year.

In its response to our draft alert memorandum, the Department stated that it has always interpreted the
LEA eligibility standard in 34 C.F.R. § 300.203(b) to also apply to the compliance standard. Further,
the Department stated that according to 34 C.F.R. § 300.203(b)(2), an LEA would use the same
comparison year for the compliance standard as it used to meet the eligibility standard. The Department
stated that an LEA would, using this application ofthe standar~, compare local-only special education
expenditures for the year to local-only special education expenditures from the most recent fiscal year
for which information is available and the LEA met MOE based on local-only funds. However, the
Department's position is not currently ref1ected in the Department's regulations or guidance. The
Department also acknowledged that given the f1uctuations in State and local funds, this position may not
always result in the comparison year being the year in which the LEA spent the highest amount of local
funds.

What is CDE doing that raises concern?
During our review we identified two instances in which CDE allowed LEAs to use the amount of
local-only funds spent on special education programs and services from an improper year to demonstrate
that they had met the MOE compliance requirement for fiscal year (FY) 2009-2010. Specifically, CDE
allowed these LEAs to demonstrate MOE compliance by comparing their FY 2009-2010 local-only
special education expenditures to FY 2006-2007 local-only expenditures instead of their preceding
year's local-only expenditures. The LEAs used FY 2006-2007 as the comparison year for meeting
FY 2009-2010 MOE because ofthe instruction in CDE's "Special Education MOE- Actual Versus
Actual Comparison" template (MOE Comparison Template). The MOE Comparison Template
instructed LEAs, under circumstances where an LEA could not demonstrate MOE compliance based on
prior year's local-only or combined State. and local special education expenditures, to compare
local-only expenditures to the most recent fiscal year when the LEA met MOE compliance based on
local-only expenditures. CDE's MOE Comparison Template further provided that if an LEA had not
previously based MOE compliance on local-only expenditures, it could use a base year as early as
2006-2007 to demonstrate MOE compliance. LEAs enter their MOE data in CDE's MOE Comparison
Template and then submit the completed template as a report (MOE Comparison Report).

As shown in the table below, neither Anaheim City School District (Anaheim) or Vacaville Unified
School District (Vacaville) met the FY 2009-2010 MOE requirement using local-only, or combined
State and local, expenditures in total or per capita when compared to the preceding year
(FY 2008-2009). The fourth column, "FY 2009-2010 Increase or (Decrease)," shows that regardless of
which of the four options the LEAs used to calculate their MOE compliance, they spent less in FY
2009-20 I 0 than they spent in the preceding year.
Final Alert Memorandum
ED-OIG/L09N0004

               ' I Ed
T a bl e: S•pecta  1  ucatwn E1 xpen d'Iture   c ompanson              ·.
                                                 FY 2009-2010                             FY 2009~2010
                                                   Increase or                             Increase or
 LEA Name     FY 2009-2010     FY 2008-2009        (Decrease)     FY 2006-2007             (Decrease} ·-
 Total Amount of Local-Only Funds Spent on Special Education Programs
 Anaheim          $13,292,770        $14,556,865       ($1 ,264,095)        $9,550,740     $3,742,030
 Vacaville         $9,613,666        $11,655,760       ($2,042,094)         $7,971,841     $1,641,825
 Local-Only Funds Spent Per Capita on Special Education Programs
 Anaheim             $6,007             $7,731              ($1,724)          $4,361            $1,646
 Vacaville           $6,911             $7,924              ($1,013)          $5,423            $1,488
 Total Amount of Combined State and Local Funds Spent on Special Education Progr·ams
 Anaheim          $23,751,357        $25,214,694       ($1,463,337)            (a)        Not applicable
 Vacaville        $11,922,681        $13,055,713       ($1,133,032)             (a)       Not applicable
 Combined State and Local Funds Spent Per Capita on Special Education Programs
 Anaheim            $10,733            $13,391              ($2,658)            (a)       Not applicable
 Vacaville           $8,571             $8,875              ($304)              (a)       Not applicable
 Source: MOE Comparison Reports. We did not audit the repotied amounts to expenditure detail.

 (a) CDE did not provide an option for LEAs to use a year other than the immediate prior year to meet the
 MOE requirement with combined State and local ex~enditures in total or per capita.

Despite this decrease in spending from the preceding year, CDE allowed the two LEAs to demonstrate 

that they complied with the MOE requirement by comparing local-only expenditures in FY 2009-2010 

to local-only expenditures in the 2006-2007 base year. However, use of such a base year is not 

authorized in IDEA or current Department regulations or guidance. Neither LEA represented on the 

MOE Comparison Reports submitted to CDE that they were reducing special education expenditures 

under the exception provision in IDEA§ 613(a)(2)(B) or the flexibility provision in IDEA 

§ 613(a)(2)(C). Because the two LEAs reduced the amount of local funds spent educating children with 

disabilities below the level of spending for the preceding fiscal year and the reductions were not the 

result of authorized MOE exceptions or flexibility, they did not comply with the MOE requirement in 

IDEA. 


Because CDE's FY 2009-2010 MOE Comparison Template states that LEAs that had not previously 

met the MOE compliance requirement with local-only expenditures may use a base year as early as 

FY 2006-2007, it is possible that additional LEAs in California incorrectly represented that they ·

complied with the FY 2009--2010 special education MOE compliance requirement by also using an 

improper base year. Furthermore, LEAs may have incorrectly represented that they met the MOE 

compliance requirement in other fiscal years. We noted that CDE's FY 2010-2011 MOE Comparison 

Template similarly states that LEAs that had not previously met the MOE compliance requirement based 

on local-only expenditures may also use a base year as early as FY 2006-2007. 


What are the actual or potential adverse effects of' using an improper base year? 

The two LEAs we discuss in this alert memorandum (Anaheim and Vacaville) spent less than they 

should have on special education programs in FY 2009-2010, but they were not penalized for doing so 

because CDE improperly allowed them to maintain this lower level of spending. 

Final Alert Memorandum
ED-OIG/L09N0004                                                                                             5 of 14

The reduced special education spending that CDE improperly allowed may have adverse impacts on
LEAs' special education programs in subsequent fiscal years because LEAs may maintain this incorrect
spending level as their base level to determine future years' expenditure levels. For example, if
Anaheim set its local-only special education expenditure base level in FY 2010-2011 at $13,292,770,
the amount that CDE improperly allowed as Anaheim's MOE in FY 2009--2010 as shown in the table
above, it could have spent at least $1,264,095 less than it should have for special education programs
and services in FY 2010-2011. 3 Further, unless Anaheim needed or chose to increase special education
spending in the future, it could continue to underspend in subsequent fiscal years because it was
improperly allowed to reduce spending in FY 2009-2010.

The improper spending reductions taken by LEAs in California could also have fiscal implications for
CDE or the LEAs. According to Federal regulations, if an LEA does not meet the annual MOE
requirement, the SEA must pay the Department, from funds for which accountability to the Federal
Government is not required, the difference between the amount it spent and the amount it should have
spent educating children with disabilities.


RECOMMENDATIONS

We recommend that the Acting Assistant Secretary of the Office of Special Education and
Rehabilitative Services-­

    1. 	 Revise the Department's regulations as needed and clarify guidance concerning the LEA MOE
         requirement to ensure that LEAs are not permitted to reduce the amount of local funds spent on
         educating children with disabilities below the level of spending for the preceding fiscal year, as
         required by the IDEA.

    2. 	 Instruct CDE to immediately modify its LEA MOE Comparison Template so that LEAs can no
         longer demonstrate whether they have met the MOE compliance requirement based on local-only
         funds from an improper fiscal year. In addition, CDE should be instructed to notify all LEAs
         that they can no longer use the improper base year option on the MOE Comparison Reports.

    3. 	 To the extent that LEA expenditure records are available, instruct CDE to identify all instances
         in which LEAs used an improper year to meet the MOE compliance requirement based on
         local-only funds and require these LEAs to revise their MOE Comparison Reports using the
         proper comparison year. LEAs should first identify the correct MOE base level that should have
         been used to determine MOE compliance and then recalculate MOE compliance for subsequent
         years using the correct MOE base. CDE should reassess the LEAs' compliance with the MOE
         requirement after the LEAs have revised their MOE Comparison Reports.

    4. 	 Determine the amount that CDE is required to remit to the Department as a result of LEAs in
         California using an improper base year to meet the actual MOE compliance requirement and
         determine whether a monetary recovery is warranted.




3
 We did not obtain Anaheim's or Vacaville's special education MOE actual versus actual comparison reports for
FY 2010-20 II or later because it was beyond the scope of our MOE flexibility audit.
Final Alert Memorandum
ED-OIG/L09N0004                                                                           Page 6 of 14

Office of Special Education and Rehabilitative Services Comments

We provided a draft ofthis alert memorandum to the Office of Special Education and Rehabilitative
Services (OSERS) for comment. In its response dated February 28, 2013, OSERS partially agreed with
the concern presented in our draft alert memorandum. OSERS stated that it shares our concern that
CDE allowed LEAs that had not previously based MOE compliance on local-only expenditures to use a
base year as early as 2006-2007 to determine compliance with the MOE requirement. OSERS noted
that the regulation at 34 C.F.R. § 300.203 does not explicitly cover the situation where an LEA has
never met MOE compliance based on local-only expenditures. Under these circumstances, OSERS
believes that it is more appropriate to interpret the regulation to mean that the comparison year to be
used is the immediate prior year, not another fiscal year that the State selects. However, OSERS also
stated that it does not believe it was unreasonable for CDE to use a comparison year other than the
immediate prior year. OSERS agreed that CDE's application of this standard allowed the two LEAs
discussed in the alert memorandum to demonstrate MOE compliance in FY 2009-2010 by comparing
the amount of local-only funds spent that year with the comparable amount spent in FY 2006-2007
(comparison year), even though the amount spent that year was less than the amount spent in FY 2008­
2009 (preceding year).

OSERS did not agree with our position that CDE endorsed an improper base year for determining MOE
compliance. OSERS stated that it has always interpreted the MOE eligibility standard at 34 C.F.R.
§ 300.203(b) as the basis for determining MOE compliance. According to OSERS, using the standard at
34 C.F.R. § 300.203(b) as the basis for determining MOE compliance provides clarity to LEAs because
the comparison year for both the eligibility and compliance standards is the same.

OSERS also stated that using the eligibility standard at 34 C.F.R. § 300.203(b) as the basis for
determining MOE compliance will ensure that LEAs will not reduce their expenditures for educating
children with disabilities while also providing LEAs with flexibility in how they calculate MOE.
OSERS stated that it believes that the "assumption underlying the literal language of the regulation was
that it would lead to comparisons of local effort to the most recent fiscal year in which the LEA
expended the highest amount of local funds." However, OSERS acknowledges that there may be no
single approach that always results in the comparison year being the year that the LEA spent the highest
amount of local funds.

OSERS did not specifically state whether it concurs with any of the recommendations in our draft aleti
memorandum but does not believe that a recovery of funds is warranted because the regulation and
guidance are not specific to the situation addressed in the draft alert memorandum. OSERS proposed
that it instead further analyze the California situation and offer technical assistance to CDE. OSERS
also noted that it is currently seeking to clarify regulatory requirements associated with LEA MOE
requirements and is analyzing proposed regulatory changes.

We have included the full text of OSERS' comments as an attachment to this memorandum.


Office of Inspector General Response

After considering the Department's comments to our draft alert memorandum, the Office oflnspector
General maintains its position that the LEAs did not comply with the IDEA's MOE requirement that
they not reduce the amount of local funds spent on educating children with disabilities below the level of
spending for the preceding fiscal year. OSERS' application of the eligibility standard in 34 C.F.R.
Final Alert Memorandum
ED-OIG/L09N0004                                                                        Page 7 of 14

§ 300.203(b) could create a situation in which LEAs are able to reduce their funding commitment to
special education programs even though this action would not be permitted under IDEA. This could
occur not only when an LEA uses an improper base year to demonstrate compliance with the MOE
requirement, as was the case with Anaheim and Vacaville, but also when an LEA demonstrates
compliance alternately based on local-only and combined state and local funds over multiple years such
that local-only and combined state and local spending is decreased over time.

OSERS' own guidance and policy memoranda have consistently stated that for an LEA to meet the
MOE compliance requirement, it must spend, from year to year, at least the same amount that it spent in
the previous year. For example, OSEP Memorandum 10-5, December 2, 2009, states "[t]he LEA
standard at 34 CFR § 300.203(b) requires that an LEA ... expend, from year to year, at least the same
amount that it expended in the previous year. The comparison, for LEA MOE compliance, is
expenditures from year to year." We did not identify any OSERS guidance or policy memoranda that
permitted LEAs to use a comparison year other than the preceding year to demonstrate compliance with
the MOE requirement. As a result, most States, LEAs, non-Federal auditors, and others may be unaware
that the Department would permit LEAs to use a comparison year other than the preceding year to meet
the MOE compliance requirement with local-only funds.

CDE's instructions for LEA compliance with MOE requirements were not consistent with IDEA,
current Department regulations and guidance, or the Department's position that the LEA eligibility
standard in 34 C.F.R. § 300.203(b) should be used to determine whether an LEA has complied with the
annual MOE requirement. CDE's template instructs an LEA to demonstrate MOE compliance based on
the prior year's combined State and local or local-only special education expenditures. If an LEA
cannot demonstrate MOE compliance based on the prior year's combined State and local or local-only
special education expenditures, then it has the option to compare local-only expenditures to the most
recent fiscal year when the LEA met MOE compliance based on local-only expenditures. Further, if an
LEA had not previously based MOE compliance on local-only expenditures, it can use a base year as
early as 2006-2007 to demonstrate MOE compliance.

Other SEAs that were included in our audit of LEAs' use ofthe IDEA MOE f1exibility provision due to
supplemental funds received under the Recovery Act interpreted the LEA special education MOE
compliance requirement to mean that LEAs had to demonstrate that they had spent at least as much as
they had spent in the preceding year to comply with the requirement. For example, the Texas Education
Agency's Web site described the four options for demonstrating compliance described earlier in this
memorandum and stated that the comparison year was the "precedihg fiscal year."

After reviewing OSERS' response, we modified this alert memorandum as follows:
   • 	 added information about the compliance requirement to a paragraph on page 1,
   • 	 added further discussion on page 2 regarding IDEA compliance and eligibility requirements,
   • 	 revised a paragraph on page 4 to further explain that CDE's instructions for LEA MOE 

        compliance were inconsistent with Federal requirements, and 

   • 	 added RecommendatiOn 1 to address the Department's application of the eligibility standard in
        34 C.F.R. § 300.203(b) to the IDEA MOE compliance requirement.
Final Alert Memorandum
ED-0I G/L09N 0004                                                                      Page 8 of 14

Administrative Matters
We conducted the work for this alert memorandum in accordance with the Office of Inspector General
quality standards for alert memoranda.

Corrective actions proposed (resolution phase) and implemented (closure phase) by the Office of Special
Education and Rehabilitative Services will be monitored and tracked through the Department's Audit
Accountability and Resolution Tracking System.

This alert memorandum will be made available to members of the press and the 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 Raymond Hendren, Regional Inspector General for Audit,
Sacramento Audit Region at (916) 930-2399.


Electronic cc: Melody Musgrove, Director, Office of Special Education Programs
               Ruth Ryder, Deputy Director, Office of Special Education Programs
               Anthony White, Audit Liaison Officer, Office of Special Education Programs


Attachment
Final Alert Memorandum
ED-OIG/L09N0004                                                                            Page 9 of 14



                                                Attachment



                                 UNITED STATES DEPARTMENT OF EDUCATION 

                         OFFICE OF SPECIAL EDUCATION AND REHABILITATIVE SERVICES 





    To:                  Ray Hendren
                         Richard Rasa

    From:                Michael Yudin Is/
                         Acting Assistant Secretary, Office of Special Education and Rehabilitative
                         Services (OSERS)

    Subject:             Draft Alert Memorandum, California Department of Education's Administration
                         of Local Educational Agencies' (LEAs') Special Education Maintenance of Effort
                         (MOE) Compliance, Control Number ED-OIG/L09N0004

    We appreciate the work of the Office oflnspector General (OIG) related to the California
    Department ofEducation's (CDE's) administration of local educational agencies' (LEAs')
    compliance with the LEA maintenance of effort (MOE) provision in Part B of the Individuals with
    Disabilities Education Act (IDEA). The LEA MOE provision is important because it requires
    LEAs to maintain their level of financial support for the education of children with disabilities so
    that they can meet their obligation to provide the special education and related services that children
    with disabilities need to receive a free appropriate public education.

    During an audit of LEAs' use of the IDEA MOE flexibility provision due to supplemental funds
    received under the American Recovery and Reinvestment Act of2009 (ARRA), the OIG
    determined that "CDE is instructing LEAs to use local special education expenditure information
    from an improper year to demonstrate compliance with the LEA MOE requirement in certain
    circumstances." The OIG is proposing to issue an Alert Memorandum to highlight its concern and
    provided the U.S. Department of Education (Department) a copy of the Draft Alert Memorandum
    (Draft Memo). You have requested our comments on the Draft Memo. As outlined below, we
    appreciate this situation being brought to our attention, but we have some concerns with the
    analysis in the Draft Memo related to the comparison year (which OIG sometimes refers to as the
    "base year") an LEA must use if it demonstrates compliance with the MOE requirement based on
    local funds only.

    OIG Findings in Draft Alert Memorandum

    The OIG found during its review that in two instances CDE allowed LEAs to use the amount of
    local only funds spent on special education and related services from an improper year to
    demonstrate that they had met the MOE compliance requirement for fiscal year (FY) 2009-2010.
    The OIG stated that specifically, CDE allowed these LEAs to demonstrate MOE compliance by
Final Alert Memorandum
ED-OIG/L09N0004                                                                                      Page 10 of 14

        comparing their FY 2009-2010 local-only special education expenditures to FY 2006-2007 local­
        only expenditures, instead of their prior year's local-only expenditure, as the OIG believes is
        required by IDEA.

        According to the information in the Draft Memo, CDE's MOE Comparison Template (Template)
        permitted LEAs to first determine if they could demonstrate MOE compliance based on the prior
        year's local-only or combined State and local expenditures. Second, if an LEA could not
        demonstrate MOE compliance based on that standard, CDE's Template instructed LEAs to
        compare local-only expenditures to the most recent fiscal year when the LEA met MOE compliance
        based on local-only expenditures. Third, CDE's Template further provided that if an LEA had not
        previously based MOE compliance on local-only expenditures, it could use a base year as early as
        2006-2007 to demonstrate MOE compliance. The OIG indicates that by providing an MOE
        Comparison Template to LEAs that included the option for LEAs to compare local-only
        expenditures to a year other than the immediate prior year, CDE endorsed an improper base year for
        determining LEA MOE compliance that conflicted with the requirements of IDEA. The analysis
        below explains why we have concerns with the first and third steps in CDE's Template. However,
        our analysis also explains why the OIG's conclusion, that MOE determinations based on local
        funds only must be made on the basis of prior year expenditures by an LEA, is not fully accurate

        Current Statutory and Regulatory LEA MOE Provision

        Under section 613(a)(2)(A)(iii) of the IDEA, except as provided in section 613(a)(2)(B) and (C),
        Part B funds provided to an LEA must not be used to reduce the level of expenditures for the
        education of children with disabilities made by the LEA from local funds below the level of those
        expenditures for the preceding fiscal year.

       Under 34 CFR §300.203(a), except as provided in 34 CFR §§300.204 and 300.205, funds provided
       to an LEA under Part B of the Act must not be used to reduce the level of expenditures for the
       education of children with disabilities made by the LEA from local funds below the level of those
       expenditures for the preceding fiscal year. Under 34 CFR §300.203(b)(l), except as provided in
       paragraph (b)(2), the State educational agency (SEA) must determine that an LEA complies with
       paragraph (a) for purposes of establishing an LEA's eligibility for an award for a fiscal year, if the
       LEA budgets, for the education of children with disabilities, at least the same total or per capita
       amount from either local funds only or a combination of State and local funds, as the LEA spent for
       that purpose from the same source for the most recent prior year for which there is information
       available. Under 34 CFR §300.203(b)(2), an LEA that relies on local funds for any fiscal year must
       ensure that the amount of local funds it budgets for the education of children with disabilities in that
       year is at least the same, either in total or per capita, as the amount it spent for that purpose in the
       most recent fiscal year for which information is available and local funds only were used tq
       establish the LEA's compliance with the MOE requirement. (Emphasis added)

       Guidance in OSERS' April 2009 Guidance on Funds for Part B of the IDEA Made A vail able under
       ARIZA 1

       As noted in the Draft Memo, OSERS stated in response to question H-6 of the ARIZA Guidance on
       the LEA MOE requirement that, if an LEA relies on a combination of State and local funds or local

1
    The April2009 ARRA Guidance was revised on April 13,2009, July I, 2009, and September 9, 2009.
Final Alert Memorandum
ED-OIG/L09N0004                                                                              Pagellofl4
           ------------------------------------------------------
    funds only to meet the MOE requirement, the comparison year is the prior year. This provided
    some basic guidance that was likely to apply to many LEAs.

    HistQry of LEA MOE in the IDEA
    Prior to 1997, IDEA included a requirement that LEAs use IDEA Part B funds to supplement, not
    supplant, State and local funds. The Department's IDEA Part I3 regulations in effect prior to 1999
    required LEAs to meet the supplement not supplant requirement by expending at least the same
    amount of the total amount of State and local funds expended the prior year for the education of
    children with disabilities. This was consistent with legislative history indicating that the intent of
    the supplement not supplant provision was that "[Federal] funds do not reduce the level of
    expenditures made by States or local educational agencies in the previous fiscal year." S. Con f.
    Rep. 94-455 (1975).

    In 1997, IDEA was amended to include the requirement in section 613(a)(2)(A)(iii), that LEAs
    must not use Part B funds, except as provided in subparagraphs (B) and (C), to reduce the level of
    expenditures for the education of children with disabilities made by the LEA from local funds
    below the level of those expenditures for the preceding fiscal year. The legislative history of the
    IDEA Amendments of 1997 indicates that Congress included a specific LEA MOE requirement for
    the first time in order to address LEA concerns that they not be required to increase expenditures
    from local funds if the amount of State funds were reduced. In other words, LEAs wanted to have
    the option of meeting MOE through local funds only. See Sen. Rep. 105-17 (1997) and H. Rep.
    105-95 (1997). See also Comments and Analysis to 1999 Regulations, 64 Fed. Reg. 12405, 12571
    (March 12, 1999).

    In response to the proposed regulation in the Notice of Proposed Rulemaking (NPRM)
    implementing the new LEA MOE provision in the IDEA Amendments of 1997, which addressed
    local funds only, some commenters expressed concern that the proposed regulation would mean
    that even in years when State legislatures increased State appropriations to offset financial
    expenditures of LEAs, those funds could not be included in making determinations as to whether
    the MOE provision had been met. The Department acknowledged in the analysis and comment
    section of the 1999 final Part B regulations that:

    "if a State assumes more responsibility for funding these services, such as when a State increases
    the State share of funding fer special education to reduce the fiscal burden on local government, an
    LEA may not need to continue to put the same amount of local funds toward expenditures for
    special education and related services in order to demonstrate that it is not using IDEA funds to
    replace prior expenditures from local funds."

    See Comments and Analysis to 1999 Regulations, 64 Fed. Reg. 12405, 12571 (March 12, 1999).
    In response to these comments, the final regulation on local MOE was changed to permit LEAs to
    meet MOE by expending the required amount of local funds only, or a combination of State and
    local funds, for the education of children with disabilities. The final regulation also included the
    provision at issue in this draft memorandum, that if an LEA relies on local funds only for any fiscal
    year, the LEA must ensure that the amount of local funds it budgets for the education of children
    with disabilities in that year is at least the same, either on a total or per capita basis, as the amount
    of local funds it spent for that purpose in the most recent fiscal year for which information is
    available and the LEA established its compliance with 34 CFR §300.203 using local funds only.
    The basic MOE requirement did not change in the IDEA Improvement Act of 2004.
Final Alert Memorandum
ED-OIG/L09N0004                                                                                        Page 12 of 14

     Analysis of LEA Current MOE Regulation and Issues Raised in OIG Draft Memo

     The regulation in 34 CPR §300.203 includes both a standard to be used as a part of determining an
     LEA's eligibility for an IDEA Part B subgrant (eligibility standard) and a separate standard for
     determining whether an LEA in fact spent as much local or State and local funds as required on the
     education of children with disabilities (compliance standard). While 34 CPR §300.203(b) only
     addresses the eligibility standard, the Department has always interpreted the standard set out in 34
     CPR §300.203(b) to also apply to the compliance standard. The preamble of the NPRM
     implementing the IDEA Improvement Act of2004 states that the standard for determining whether
     an LEA is complying with the LEA MOE requirement would be in proposed 34 CPR §300.203(b).
     See 70 Fed. Reg. 35782, 35795 (June 21, 2005). Therefore, the Department interprets 34 CPR
     §300.203(b)(l) as permitting LEAs to use the total or per capita amount of local funds only, or a
     combination of State and local funds, when calculating MOE for the purpose of meeting the
     compliance standard, as well as the eligibility standard. This interpretation ensures that LEAs will
     not reduce their level of expenditures for the education of children with disabilities, while giving
     LEAs the flexibility to calculate MOE based on one of four methods-local only, per capita; local
     only, total amount; State and local, per capita; and State and local, total amount. The Department
     also interprets the provision in 34 CPR §300.203(b)(2) to apply to the compliance standard. This
     interpretation provides clarity for LEAs because the comparison year for the eligibility standard is
     the same as the comparison year for the compliance standard.

     Our first concern is with step one of CDE's Template, which permits an LEA to demonstrate
     compliance with the MOE requirement by comparing the amount of local-only expenditures for the
     education of children with disabilities to the amount of local-only expenditures in the prior year.
     While the immediate prior year is the comparison year that applies when an LEA demonstrates
     compliance based on a combination of State and local funds, the immediate prior year is not the
     comparison year that applies when an LEA is relying on local funds only to establish compliance.
     We recognize that the ARRA guidance put an emphasis on using the prior year as the comparison
     year, even when an LEA relies on local funds only. However, the regulation in 34 CPR
     §300.203(b )(2) specifies that the comparison year that applies when an LEA demonstrates
     compliance based on local funds only is the most recent fiscal year for which information is
     available and local funds only were used to establish the LEA's compliance with the MOE
     requirement. The specific language of the regulation is what applies to all situations and governs in
     this situation. Therefore, we do not agree with the OIG's statement that "by providing an MOE
     Comparison Template to LEAs that included the option for LEAs to compare local-only
     expenditures to a year other than the immediate prior year, CDE endorsed an improper base year for
     determining LEA MOE compliance that conflicted with the requirements ofiDEA."

     We interpret the provision in 34 CPR §300.203(b)(2) to mean that if an LEA relies on local funds
     only to establish eligibility or compliance, the proper comparison year is the most recent fiscal year
     for which information is available and the LEA met MOE based on local funds only, even if the
     LEA also met the MOE compliance standard based on State and local funds? The comparison year

2
 The Department does not interpret the regulation to mean that the comparison year is the most recent fiscal year the LEA
actually established its compliance with MOE based on local funds only, because that interpretation would make it very
difficult for an LEA to determine the proper comparison year to use in order to meet the MOE requirement. An LEA often
provides expenditure information to a State ;md may not know on what basis the State determined that the LEA met MOE for
a particular flscal year.
Final Alert Memorandum
ED-0 IG/L09N 0004                                                                                          13 of 14

        includes not only a year in which the LEA met only the local only test; but also a year in which the
        LEA met both the State and local test and the local only test. Even in a year in which an LEA
        meets MOE based on both tests, the LEA could have established compliance on the basis oflocal
        funds only, which is consistent with the literal language of the regulation. We believe that the
        assumption underlying the literal language of the regulation was that it would lead to comparisons
        of local effort to the most recent fiscal year in which the LEA expended the highest amount of local
        funds. However, given the fluctuations in State and local funds, there may be no one approach that
        would always result in the comparison year being the year in which the LEA expended the highest
        amount of local funds.

        This interpretation is also consistent with the purpose of the MOE provision, because it prevents an
        LEA from using, as a comparison year, a year in wh~ch the LEA met the compliance standard based
        on local funds only (and not State and local funds) and in an intervening year increased the amount
        of local funds expended and met the compliance standard based on local funds and State and local
        funds. For example, in year one an LEA met MOE based on local funds. In year two, the LEA
        increased the amount of local funds it expended and met MOE based on local funds and, because
        State funding also increased, it also met MOE based on State and local funds. In year three, the
        LEA meets MOE based on local funds only by spending the amount of local funds it expended in
        year two; it cannot use year one as a comparison year, because the amount of local funds expended
        in that year was less than the amount of local funds expended in year two.

       We share OIG's concern with the third step ofCDE's Template, which permits an LEA that had not
       previously based MOE compliance on local-only expenditures to use a base year as early as 2006­
       2007 to demonstrate MOE compliance. It is not clear from the information provided why CDE
       chose 2006-2007; it may have been the last year the State had what it considered to be reliable data
       on local funds. (CDE's application of this standard permitted the two LEAs identified in the Draft
       Memo to demonstrate compliance with the MOE requirement in FY 2009-2010 by comparing the
       amount of local funds they spent in FY 2006··2007, which was less than the amount of local funds
       they spent in FY 2008-2009.) The regulation in 34 CFR §300.203 does not explicitly address the
       situation where an LEA has never demonstrated compliance based on local funds only. However,
       both the statutory and regulatory LEA MOE provisions set out two comparison years for the
       purposes of LEA MOE compliance: the immediate prior year; or if the LEA relies on local funds
       only, the last year the LEA met MOE Lased on local funds only. Therefore, if an LEA has never
       met MOE based on local funds only, 3 we believe the better interpretation of the regulation is that
       the comparison year is the immediate prior year, rather than a fiscal year that the State selects.

       Response to Recommendations

       OIG Recommendations

       OIG is recommending that OSERS: (1) instruct CDE to: immediately modify its LEA MOE
       Comparison Template so that LEAs can no longer demonstrate whether they have met the MOE
       compliance requirement based on local-only funds from an improper fiscal year; (2) instruct CDE
       to identify all instances in which LEAs used an improper year to meet the MOE compliance
       standard based on local-only funds and require these LEAs to revise their MOE Comparison


3
    As noted above, prior to the enactment ofthe IDEA Amendments of 1997, there is was no LEA MOE requirement.
Final Alert Memorandum
ED-OIG/L09N0004                                                                            Page 14 of 14

    Reports using the proper year's data; and (3) determine whether the Department should seek a fiscal
    recovery.

    OSERS' Response to the three OIG Recommendations

    The LEA MOE regulation in 34 CFR §300.203 is a complex requirement and the Department has
    not issued guidance on the comparison year that applies when an LEA relies on local funds only to
    establish eligibility and compliance. As explained above, we interpret the provision in 34 CFR
    §300.203(b )(2) to mean that if an LEA relies on local funds only to establish eligibility or
    compliance, the proper comparison year is the most recent fiscal year for which information is
    available and the LEA met MOE based on local funds only, even if the LEA also met the MOE
    compliance standard based on State and local funds. The specific circumstance raised in the draft
    memo, the proper comparison year if an LEA has never demonstrated compliance based on local
    funds only, is not addressed specifically in the regulation. While we agree that the better
    interpretation of the regulation may be to require an LEA in that circumstance to use the immediate
    prior year as the comparison year, it arguably was not unreasonable for CDE to use a year other
    than the immediate prior year.

    Because the regulation and guidance is not specific on all aspects of a situation like this, we do not
    believe that a recovery of funds would be appropriate at this time. As you know, the Department is
    currently seeking to regulate to clarify the LEA MOE provision in 34 CFR §300.203 and currently
    is conducting additional data analysis with respect to the proposed regulatory changes. The audit
    work that you have done will assist us as we identify all of the circumstances that will need to be
    addressed to clarify the LEA MOE standard. We will also do further analysis of the California
    situation, and offer to provide further technical assistance to the State educational agency.
    Therefore, while we very much appreciate the work you have done and the way in which you
    brought this to our attention, and share some of your concerns, it is our view that the draft
    recommendations should be modified appropriately, and the Department should continue its work
    on providing further guidance in this area, and provide technical assistance to California, and if
    necessary, other States on the comparison year that applies when an LEA relies on local funds only
    to establish eligibility and compliance.

    Please let us know if you have questions or want to discuss this matter.