oversight

Disadvantaged Students: Fiscal Oversight of Title I Could Be Improved

Published by the Government Accountability Office on 2003-02-28.

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

                United States General Accounting Office

GAO             Report to Congressional Requesters




February 2003
                DISADVANTAGED
                STUDENTS
                Fiscal Oversight of
                Title I Could Be
                Improved




GAO-03-377
                                               February 2003


                                               DISADVANTAGED STUDENTS

                                               Fiscal Oversight of Title I Could Be
Highlights of GAO-03-377, a report to          Improved
Congressional Requesters




New resources for education come               In the states we visited, state program officials used three tools—the states’
at a time when states are struggling           annual financial reports, the single audit process, and limited program
to address budget shortfalls. Two              monitoring—to oversee Title I’s fiscal accountability requirements. While
provisions in Title I—maintenance              program officials had little difficulty in applying the MOE provision because
of effort (MOE) and supplement                 it involves a straightforward calculation, state and local program officials
not supplant (SNS)—are designed
to limit the extent to which federal
                                               and auditors we spoke with cited a number of factors that made it difficult to
funds could be used to replace                 enforce the SNS provision under certain circumstances. One of the
state and local resources. To assess           challenges auditors faced was determining whether a school district would
the quality of oversight of these              have removed its own funds from a program and allocated them elsewhere
provisions, GAO determined                     even if federal funds had not been available—an action that is allowable.
(1) how 6 states—Arizona,                      Another challenge was applying the SNS provision in circumstances where it
California, Florida, Indiana,                  is difficult to track federal dollars such as in schoolwide programs—where
Louisiana, and Massachusetts—                  all funds are pooled—or in districts undergoing significant districtwide
conducted oversight of the MOE                 reforms—where comparisons to previous budgets are problematic. While
and SNS provisions and what                    some auditors struggled to apply the SNS provision to the particular
factors affected their ability to do           circumstance of districts and schools, program officials relied primarily on
so; (2) what efforts were made by
the U.S. Department of Education
                                               the results of the single audits without being aware of some of these audit’s
to enforce MOE and SNS; and (3) in             limitations. For example, some officials did not understand that not all
the 6 states, what changes have                districts, programs, or transactions may be covered by the audit. While
occurred in the federal share of               program monitoring adds a degree of depth to the efforts to oversee the SNS
education funding from school year             provision, most of the states in GAO’s review conducted only limited
1999-2000 to 2000-2001.                        program monitoring.

                                               We identified three key efforts Education made to guide, monitor, and
                                               enforce the fiscal accountability provisions, but each had limitations. First,
To more effectively focus audit                Education provided guidance and technical assistance to state and local
resources, Congress should                     education agencies and auditors on how to interpret and apply Title I’s fiscal
consider eliminating the SNS
                                               accountability requirements. Despite the availability of this guidance, many
requirement for schoolwide
programs—where it is                           of the auditors and program officials we spoke with expressed confusion
unworkable—and increase the                    regarding the application of these provisions to their particular
MOE requirement. In addition,                  circumstances, such as schoolwide programs. Second, Education conducted
GAO recommends that the                        program monitoring of select state and local education programs each year;
Secretary of Education enhance                 however, coverage was limited. Third, Education reviewed the audit reports
technical assistance and training              conducted under the Single Audit Act. However, Education’s Office of
efforts to ensure better oversight of          Inspector General and GAO have criticized the review and audit follow up
Title I’s fiscal requirements and              process.
more effective use of the single
audit process.                                 Few changes occurred in the federal/state/local fiscal partnership in
                                               financing education services between school year 1999-2000 and 2000-2001.
                                               It is too soon to tell how recent increases in federal funds and state and local
                                               fiscal pressures will affect funding for education and the federal share.
www.gao.gov/cgi-bin/getrpt?GAO-03-377.

To view the full report, including the scope
and methodology, click on the link above.
For more information, contact Marnie Shaul
on (202) 512-7215 or Paul Posner on (202)
512-9573.
Contents


Letter                                                                                     1
               Results in Brief                                                            3
               Background                                                                  5
               States Used Multiple Tools to Enforce the Fiscal Accountability
                  Provisions, but Relied Primarily on the Single Audit Process to
                  Enforce SNS                                                            10
               Education’s Key Efforts to Enforce Fiscal Accountability
                  Provisions Have Limitations                                            18
               Little Change in Federal Share from School Years 1999-2000 to
                  2000-2001                                                              22
               Conclusions                                                               24
               Matters for Congressional Consideration                                   26
               Recommendations for Executive Action                                      26
               Agency Comments                                                           26

Appendix I     Scope and Methodology                                                      29



Appendix II    Comments from the Department of Education                                  31



Appendix III   GAO Contacts and Staff Acknowledgments                                     34
               GAO Contacts                                                              34
               Acknowledgments                                                           34

Appendix IV    Related GAO Products
                                                                                          35
               Education                                                                 35
               Single Audit                                                              35
               Intergovernmental Relations                                               36


Tables
               Table 1: Fiscal Accountability under Different Program Delivery
                        Frameworks                                                       13
               Table 2: Education Spending in Six States, School Year 1999-2000          24




               Page i                                      GAO-03-377 Disadvantaged Students
Figures
          Figure 1: Level at Which Fiscal Requirements Are Enforced                                  7
          Figure 2: Changes in the Shares of Total Funding for Education
                   Services in Six States between SY 1999-2000 and 2000-
                   2001                                                                             22
          Figure 3: Federal Share of SEA Operations in Six States (SY 2000-
                   2001)                                                                            23




          Abbreviations

          AFM       Achievement Focused Monitoring
          ESEA      Elementary and Secondary Education Act
          FTE       full-time equivalent
          LEA       local education agency
          MOE       maintenance of effort
          NCLB      No Child Left Behind Act
          OIG       Office of Inspector General
          OMB       Office of Management and Budget
          SEA       state education agency
          SNS       supplement not supplant
          SY        school year
          USD       Unified School District



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          Page ii                                              GAO-03-377 Disadvantaged Students
United States General Accounting Office
Washington, DC 20548




                                   February 28, 2003

                                   The Honorable Edward M. Kennedy
                                   Ranking Minority Member
                                   Committee on Health, Education, Labor, and Pensions
                                   United States Senate

                                   The Honorable George Miller
                                   Ranking Member
                                   Committee on Education and the Workforce
                                   House of Representatives

                                   On January 8, 2002, the President signed the No Child Left Behind Act
                                   (NCLB) of 2001 into law. NCLB amends the Elementary and Secondary
                                   Education Act (ESEA) of 1965 and reauthorizes many federal aid
                                   programs for elementary and secondary education. ESEA’s Title I program
                                   is the largest federal elementary and secondary education program,
                                   providing about $10.4 billion to benefit 11 million low-income and
                                   disadvantaged students in about 45,000 schools nationwide in 2002. Title I
                                   funds are distributed by formula from the federal government to state
                                   education agencies (SEA), which then pass through most of these funds to
                                   their local education agencies (LEA). LEAs use these funds to operate two
                                   types of Title I programs—targeted assistance programs, which target
                                   funds only to qualified low-income children who meet Title I eligibility
                                   requirements, and schoolwide programs, which pool funds to help all
                                   students in a school improve their performance.

                                   Under NCLB, federal funds for elementary and secondary education have
                                   grown substantially; for example, Title I grew 30 percent from $8 billion in
                                   1999 to $10.4 billion in 2002. These new resources for federal education
                                   programs come at the same time that states and school districts face
                                   difficult funding choices as they struggle to address budget shortfalls
                                   resulting from economic downturns and other requirements, (i.e.,
                                   homeland security.) These shortfalls heighten the risk that state and
                                   school district officials will use federal resources to replace their own
                                   funds. Two provisions in the act limit the extent to which states and LEAs
                                   can do that. First, a maintenance of effort (MOE) provision requires that
                                   an LEA maintain at least 90 percent of its aggregate state and local
                                   education expenditures or its per student expenditures for the preceding
                                   year as a condition for receiving any federal Title I grant funds; this
                                   provision limits the amount of fiscal relief a grantee can achieve by


                                   Page 1                                      GAO-03-377 Disadvantaged Students
    substituting federal funds for its own by requiring local education agencies
    to sustain their own funding levels for education programs in the
    aggregate. Second, a supplement-not-supplant (SNS) provision requires
    grant recipients to use federal funds to supplement the amount of funds
    that would, in the absence of such federal funds, be made available from
    nonfederal sources; this provision limits substitution of federal funds for
    state/local funds at the school—or program—level by preventing LEA’s
    from reallocating funds for specific activities. Some have raised concerns
    about whether these provisions are adequately enforced either by the
    Department of Education, which is responsible for monitoring the SEAs,
    or the SEAs, which are responsible for monitoring LEAs.

    Federal grant management policies require SEAs to take the responsibility
    for ensuring that their LEAs comply with federal laws and regulations.
    States must

•   identify to the LEAs all applicable compliance requirements,
•   monitor LEA activities to provide reasonable assurance that the LEA is in
    compliance with federal requirements, and
•   ensure required audits are performed and require that LEAs take prompt
    corrective action on any audit findings.

    Federal grant recipients that spend more than $300,000 in federal awards
    in any given year must undertake a single audit as required under the
    Single Audit Act (Single Audit Act), as amended. Many grant recipients
    spend funds from a number of federal programs, and the single audit
    focuses audit resources on a federal grant recipient’s internal controls
    which covers an entity’s process over its operations and financial
    reporting. In addressing compliance issues, the single audit reviews only
    selected provisions of laws and regulations that have a direct and material
    effect governing selected federal awards. This is in contrast to the more
    detailed transactional auditing that was conducted under program-specific
    audits.

    To better assess the adequacy of oversight of the fiscal accountability
    provisions, you asked us to determine (1) how selected states ensure
    compliance with both the MOE and the SNS provisions and what factors
    affect their ability to do so; (2) what efforts were made by Education to
    enforce these provisions and what limitations, if any, did these efforts
    have; and (3) in selected states what changes occurred between school
    year 1999-2000 and 2000-2001 in the federal share of education
    expenditures and, in 2000-2001, what share of the SEA operating
    expenditures were financed with federal funds.



    Page 2                                      GAO-03-377 Disadvantaged Students
                   As agreed, we focused on six states1 and six local school districts.2 We
                   reviewed guidance on the fiscal accountability provisions developed by
                   the SEAs, and we reviewed both SEA and LEA budgets and financial
                   statements for school year 1999-2000 and 2000-2001. We interviewed state
                   and local program officials, school district administrators, and their
                   auditors about their roles and responsibilities for enforcing the fiscal
                   accountability provisions and reviewed the auditors’ workpapers. We
                   interviewed officials at Education and reviewed Education’s guidance and
                   regulations on these two fiscal accountability provisions. We also asked
                   finance officers from the six SEAs to provide us with comparable
                   information on total funding for education and the federal share of
                   resources used to finance the SEA’s operating costs. We conducted our
                   work between July 2002 and January 2003 in accordance with generally
                   accepted government auditing standards. A more detailed discussion of
                   our scope and methodology is included in appendix I.


                   In the states we visited, state program officials used three tools—the
Results in Brief   states’ annual financial reports, the single audit process, and program
                   monitoring—to oversee Title I’s fiscal accountability requirements.
                   Program officials had little difficulty applying the maintenance of effort
                   provision because it involves a straightforward and objective calculation
                   from their annual financial reports data. But state and local program
                   officials and auditors we spoke with cited a number of factors that made it
                   difficult to enforce the supplement-not-supplant provision. Enforcement of
                   the supplement-not-supplant provision is primarily done through the single
                   audit process. One of the challenges auditors faced was determining
                   whether a local education agency would have removed its own funds from
                   a program and allocated them elsewhere if federal funds had not been
                   available. Another challenge was applying the supplement-not-supplant
                   provision in circumstances where it is difficult to track federal dollars—
                   for example, in schoolwide programs where federal, state, and local funds
                   are pooled or where districtwide school reforms have been implemented
                   and programs have changed from year to year—making it difficult to
                   compare funding. Some state program officials relied on the single audit



                   1
                   Arizona, California, Florida, Indiana, Louisiana, and Massachusetts.
                   2
                    Douglas Unified School District and Glendale Elementary School District in Arizona,
                   San Diego City Unified School District in California, Duval County Public Schools in
                   Florida, Indianapolis Public Schools in Indiana, and Jefferson Parish Public Schools in
                   Louisiana.




                   Page 3                                                GAO-03-377 Disadvantaged Students
without being aware of its limitations. For example, some state officials
did not understand that only selected school districts, programs, or
transactions are covered by the audit. Finally, while program monitoring
adds a degree of depth to the efforts to enforce the supplement-not-
supplant provision, most of the states in our review conducted only
limited program monitoring, covering only a portion of their local
education agencies in any given year.

We identified three key efforts the Department of Education made to
guide, monitor, and enforce the fiscal accountability provisions, but each
had limitations. First, Education provided guidance and technical
assistance to state education agencies, local education agencies, and
auditors on how to interpret and apply Title I’s fiscal accountability
provisions to programs in their states. Despite the availability of this
guidance, many of the auditors and program officials we spoke with
confused the various accountability provisions, believing, for example,
that one test could be substituted for another. Second, Education
conducted program monitoring of select state and local education
programs each year; however, this coverage is limited and fiscal
accountability provisions are, by design, not the primary focus of the
monitoring activity. In fact, the department’s guide for program monitors
does not provide any guidance on monitoring the supplement-not-supplant
provision at all. Rather, Education’s monitoring plans focus on progress
towards raising the level of student achievement. Third, Education reviews
the audit reports conducted under the Single Audit Act. However,
Education’s Office of Inspector General (OIG) has reported that many of
the reviewers lacked knowledge of the areas covered under the Single
Audit Act and how single audits were done; for example, they were not
aware that not every grantee, program, or transaction was covered in an
audit. As a consequence, Education could fail to review key programs or
provisions of law.

Few changes occurred in the federal/state/local fiscal partnership in
financing education services between school year 1999-2000 and
2000-2001. It is too soon to tell how recent increases in federal funds and
state and local fiscal pressures will affect funding for education and how
changes, if any, in state and local financing will affect the federal share. No
clear patterns emerged, among the states, with respect to the share of
state operating costs that states financed with federal funds. In the six
states we reviewed, the federal share of state operating expenditures in
school year 2000-2001 varied from 18 percent in Florida to 43 percent in
Indiana.



Page 4                                        GAO-03-377 Disadvantaged Students
                    Since the supplement-not-supplant is unworkable in a schoolwide context
                    we are suggesting that the Congress eliminate the SNS requirement for
                    schoolwide Title I programs. If it chooses to do so, it could also consider
                    increasing the MOE requirement for LEAs with schoolwide programs. In
                    addition, we recommend that Education amend its guidance for grantees
                    and oversight officers to address all of Title I’s fiscal requirements,
                    including the supplement-not-supplant provision where applicable.


                    Established in 1965 as part of the Elementary and Secondary Education
Background          Act (ESEA), Title I provides grants to help schools establish and maintain
                    programs to improve the educational opportunities of low-income and
                    disadvantaged students. Most Title I funds are distributed by formula from
                    Education to states. The states then pass through most of these funds to
                    their school districts after retaining some funds—up to 1.5 percent—for
                    state administration and state-level school improvement activities. The
                    amount of Title I funds a school district gets is determined by a formula
                    based on the number of students from low-income families and the state’s
                    per pupil expenditures.


Local Flexibility   Once LEAs receive funds from the state, they have flexibility in how they
                    allocate Title I funds to individual schools and how each school delivers
                    Title I services. As long as priority is given to schools with the highest
                    concentration of children from low-income families, LEAs are generally
                    free to designate which schools, among those eligible, receive funds and
                    how much each should get. LEAs can also select the type of framework
                    through which they deliver Title I services. Some districts have only
                    targeted assistance in their Title I schools, some only have schoolwide
                    programs, and others have a mixture of both. When Title I began, all
                    schools administered targeted assistance programs. These programs
                    targeted funds and services—such as teachers and materials—to specific
                    qualified students who met Title I eligibility requirements. In 1978, a
                    limited number of schools were allowed to deliver the services in the form
                    of schoolwide programs if 75 percent or more of their student population
                    was poor. Schools choosing to operate schoolwide programs can combine
                    federal resources with other funds to improve the school as a whole and
                    help all students achieve. In subsequent reauthorizations, the schoolwide
                    option was made available to more schools by lowering the threshold
                    percentage of low-income children required to operate a schoolwide
                    program. NCLB allows schoolwide programs in schools with a poverty
                    rate of 40 percent or more.



                    Page 5                                      GAO-03-377 Disadvantaged Students
                     During the mid-1990s there was a trend toward providing more flexibility
                     to state and local recipients of federal grants so they may operate
                     programs that best serve the needs of their communities. This trend
                     towards flexibility is evident, not only in education programs such as Title
                     I, but in many social service programs and health programs. In these
                     circumstances, we have found3 that new approaches to ensuring
                     accountability need to be designed to achieve a balance between flexibility
                     and accountability for attaining certain national objectives. In 2001, we
                     reported on some of the challenges in maintaining a federal-state fiscal
                     partnership in welfare reform4 and concluded that a broad-based
                     maintenance of effort requirement calling for states to maintain spending
                     across a wide range of relevant programs might both limit substitution of
                     state funds while at the same time preserve state and local flexibility
                     better than a traditional supplement-non-supplant requirement.
                     Specifically, we found that, once accountability shifts to the broad
                     purposes of the grant, federal fiscal oversight needed to shift as well and
                     focus not only on the specifics of welfare funding but also on how states
                     used multiple funding streams—federal, state, and local—to accomplish
                     the program’s broad goals. These findings could apply to the Title I
                     program because schoolwide program goals are broader than the goals of
                     a targeted assistance program and schoolwide programs combine funding
                     streams.


Title I Fiscal       Title I contains three fiscal requirements that grantees must comply with
Accountability       in order to continue to receive Title I funds from one year to the next. If an
Requirements         SEA or LEA fails to comply with MOE, SNS, or Comparability provisions,
                     it is required by law to return the amount of misused funds to Education.

                 •   Maintenance of effort (MOE). An LEA may receive funds if the SEA
                     finds that the LEA’s combined fiscal effort per student or the aggregate
                     expenditures of the LEA from state and local funds for free public
                     education for the preceding year is not less than 90 percent of the
                     combined fiscal effort or aggregate expenditures for the second preceding
                     year.




                     3
                      U.S. General Accounting Office, Block Grants: Issues in Designing Accountability
                     Provisions, GAO/AIMD-95-226 (Washington, D.C.: Sept. 1, 1995).
                     4
                      U.S. General Accounting Office, Welfare Reform: Challenges in Maintaining a Federal-
                     State Fiscal Partnership, GAO-01-828 (Washington, D.C.: Aug. 10, 2001).




                     Page 6                                             GAO-03-377 Disadvantaged Students
                     •   Supplement-not-supplant (SNS). State and local education agencies
                         must use federal funds to supplement, and not supplant, the amount of
                         funds that would, in the absence of federal funds, be made available from
                         nonfederal sources for the education of Title I students.
                     •   Comparability. State and local funds must be used to provide services in
                         Title I schools that are “at least comparable” to services provided by state
                         and local funds in non-Title I schools within the same LEA.

                         Each fiscal requirement is enforced at a different level. For example, the
                         MOE requirement applies only to the LEA not to individual Title I schools.
                         The Comparability requirement is evaluated at the school level because it
                         seeks to weigh the services provided in Title I schools with those provided
                         in non-Title I schools. In contrast, the SNS provision is applied differently
                         depending on how Title I services are applied. It is applied to the program
                         or the student in targeted assistance programs to ensure that those
                         targeted programs are providing more services for a Title I student than
                         non-Title I students receive, or it is applied to the school if it operates a
                         schoolwide program. (See fig. 1.)

                         Figure 1: Level at Which Fiscal Requirements Are Enforced




Monitoring Process       There are a variety of approaches that officials at the federal, state, and
                         local levels take to oversee state and local education agency compliance
                         with the fiscal accountability provisions associated with Title I, including
                         formal monitoring systems, such as the use of the single audit, and more
                         informal monitoring systems, such as monitoring provided by interest
                         groups.




                         Page 7                                         GAO-03-377 Disadvantaged Students
Formal Monitoring Systems       Education distributes Title I funds to the individual states and has primary
                                responsibility for overseeing federal education programs and providing
                                guidance and technical assistance to SEAs. Monitoring efforts focus on
                                state compliance with both programmatic and fiscal requirements. Any
                                issues of noncompliance reported at the state level are to be
                                communicated to Education and are typically resolved through the
                                development of an SEA corrective action plan, the implementation of
                                which will be monitored by federal agency officials.

                                States are considered the primary recipient, or grantee, of federal awards
                                like Title I and are responsible for ensuring that their subrecipients comply
                                with all federal laws and regulations governing the grant. Since SEAs pass
                                through most of the federal funds to the LEAs, states must have the
                                appropriate subrecipient monitoring systems in place to track Title I
                                spending. Program monitoring systems typically include a review of
                                funding applications, local budgets, self-assessment documents, scheduled
                                on-site visits to schools, and technical assistance.

Single Audits                   The Single Audit Act replaced multiple audits of separate grant awards
                                with one organizationwide audit. A single audit includes an audit of the
                                federal grant recipient’s financial statements as well as an examination of
                                its internal controls and its compliance with laws and regulations
                                governing federal awards. It does not, however, cover every federal grant
                                received by the organization. The objectives of the Single Audit Act are as
                                follows:

                            •   Promote sound financial management, including effective internal
                                controls, with respect to federal awards administered by nonfederal
                                entities.
                            •   Establish uniform requirements for audits of federal awards administered
                                by nonfederal entities.
                            •   Promote the efficient and effective use of audit resources.
                            •   Reduce burdens on state and local governments, Indian tribes, and
                                nonprofit organizations.
                            •   Ensure that federal departments and agencies rely on and use audit work
                                done pursuant to the act.




                                Page 8                                       GAO-03-377 Disadvantaged Students
                                  In 1994, we reported that state and local officials had reported that the
                                  single audit process had contributed to improving state and local
                                  government financial management practices.5

                                  Guidance for conducting a single audit is found in the Office of
                                  Management and Budget’s (OMB) Circular A-1336 and the accompanying
                                  compliance supplement. The guidance states that the scope of the audit
                                  shall include an examination of

                              •   financial statements—to determine if they are presented fairly in all
                                  material respects in conformity with generally accepted accounting
                                  principles and whether the schedule of expenditures of federal awards is
                                  presented fairly;
                              •   internal controls—to obtain an understanding of internal control over
                                  federal programs sufficient to plan the audit to support a low assessed
                                  level of control risk;
                              •   compliance—to determine whether the auditee has complied with laws,
                                  regulations, and the provisions of contracts or grant agreements that may
                                  have a direct and material effect on the federal program on each of its
                                  major programs; and
                              •   prior audit findings—to perform procedures to assess the reasonableness
                                  of the summary schedule of prior audit findings.

                                  Any single audit report should discuss the auditor’s analysis of these areas
                                  and include a section that specifically focuses on federal awards, including
                                  a schedule of findings and questioned costs. State and local governments
                                  and nonprofit organizations that spend $300,000 or more in federal awards
                                  in a fiscal year must undertake a single audit.7

Informal Monitoring Systems       In addition to formal monitoring systems, fiscal accountability is also
                                  monitored informally by interest groups, parents groups, individuals, and
                                  the media. The public nature and easy accessibility of school district
                                  budgets, financial reports, and other fiscal information promotes budget
                                  transparency and information sharing among people outside the school


                                  5
                                   U.S. General Accounting Office, Single Audit: Refinements Can Improve Usefulness,
                                  GAO/AIMD-94-133 (Washington, D.C., June 21, 1994).
                                  6
                                  Audits of States, Local Governments, and Non-Profit Organizations.
                                  7
                                   Each nonfederal entity that expends awards under only one federal program and is not
                                  subject to laws, regulations, or federal award agreements that require a financial statement
                                  audit, may elect to have a program-specific audit instead of a single audit. 31 U.S.C. 7502
                                  (a)(1)(C).




                                  Page 9                                                GAO-03-377 Disadvantaged Students
                         system. This informal system may promote grantee compliance with
                         applicable laws and regulations and raise red flags for the attention of the
                         formal monitoring system.


                         In the states we visited, state program officials use three tools—the states’
States Used Multiple     annual financial reports, the single audit process, and limited program
Tools to Enforce the     monitoring—to monitor Title I’s fiscal accountability requirements in their
                         LEAs. In these states, enforcing the MOE provision is straightforward and
Fiscal Accountability    objective. However, a number of factors made it difficult to ensure
Provisions, but Relied   compliance with SNS.
Primarily on the
Single Audit Process
to Enforce SNS

Monitoring Compliance    In the states we visited, verifying compliance with Title I’s MOE
with MOE Presents Few    requirement was a straightforward mathematical exercise and relied on
Challenges               LEAs’ data gathered through statewide financial accounting systems. In
                         part, monitoring and enforcing compliance with the MOE provision might
                         have presented few challenges because until recently state and local
                         revenues were increasing, and few grantees struggled to meet the MOE
                         requirement.8 Many state and LEA officials told us that the robust
                         economy and sound fiscal situation they experienced in the late 1990s
                         allowed them to increase spending on education.

                         Each of the six states we visited has strong vested interests in the integrity
                         of its LEAs’ financial reports because each has a large stake in education
                         finance in their states; all of these states mandate the level of effort the
                         local education agencies must provide each year in order to receive state
                         funds and impose their own financial reporting requirements on local
                         education agencies. While we did not verify the quality of the data, it is the
                         same data used to calculate the MOE requirements.

                         Five of the six SEAs we visited use their annual financial reports to verify
                         LEA compliance with the MOE requirements. In the sixth, Florida, the SEA



                         8
                          ESEA allows grantees to request a waiver from the MOE requirement if they are unable to
                         meet the requirement in any given year; but few LEAs have requested such a waiver. Only
                         25 LEAs have requested waivers since 1995, and Education has approved 7 requests.




                         Page 10                                             GAO-03-377 Disadvantaged Students
                            relied on LEAs to submit a separate form verifying that they were in
                            compliance with MOE requirements. A program official verified the form
                            submitted against the previous year’s submission and other grant award
                            documentation but did not independently check against the state’s
                            accounting records. However, this check is done by auditors in separate
                            compliance reviews. State officials in Florida said that they were
                            considering changing their MOE verification process. They said that
                            audited data were available from their annual financial reporting system,
                            and they were considering streamlining the verification process to
                            eliminate the separate reporting requirement.

                            Two of the states we visited, Arizona and California, do not verify LEA
                            compliance with MOE requirements until after the current year’s grant has
                            been awarded. This practice is due to routine delays in year-end account
                            reconciliation and timing of audits. The Arizona Office of the Auditor
                            General cited the state’s department of education for failing to enforce the
                            MOE provisions before the current year’s grant was awarded. State
                            program officials acknowledged that they complete the grant award
                            process before the audited financial data are available to verify
                            compliance with MOE; however, they said that verification is finished well
                            before the funds have been disbursed. Similarly, in California the audited
                            data are not available until 9 months after the grant has been awarded.
                            State program officials said that, despite these delays, there were few risks
                            that they would be unable to collect the penalties against an LEA that was
                            out of compliance with its MOE requirements.9


Many Factors Contribute     While verifying Title I’s MOE requirement was straightforward and
to Difficulties Enforcing   objective, verifying compliance with the SNS provision was more
SNS Provision               challenging. SEA officials relied primarily on the single audit process to
                            enforce the SNS provisions. But, many state and local program officials
                            and auditors we spoke with cited a number of factors that made it difficult
                            to ensure that grantees were in fact using federal funds to supplement and
                            not supplant their own funds. These factors include difficulties applying
                            the SNS provision to unique circumstances in their school districts,
                            reliance on the single audit to ensure compliance without understanding
                            its scope and methodology, and limited state and local program oversight
                            of the fiscal accountability provisions.



                            9
                             California plans to begin verifying LEA compliance with the MOE requirement before the
                            grant is awarded in 2003.




                            Page 11                                            GAO-03-377 Disadvantaged Students
The SNS Provision Is Difficult   It can be difficult for auditors to establish a finding of supplantation. One
to Apply in Many                 of the challenges auditors face in evaluating compliance with the SNS
Circumstances                    requirement is determining the basis for the states’ and LEAs’ funding
                                 decisions. The SNS requirement generally prohibits replacing state funds
                                 with federal funds where the displaced state funds could continue to be
                                 available for their original purpose. However, under certain
                                 circumstances, where state funding is discontinued, grantees may be able
                                 to replace these eliminated funds with Title I dollars. For example, if an
                                 SEA or LEA discontinued its own support for a particular program in
                                 response to a potential budget deficit, the use of Title I funds may be
                                 permissible.10 The challenge for auditors in deciding if an LEA has
                                 improperly supplanted, is determining what the LEA would have done in
                                 the absence of federal funds. For example, where a state reduces its own
                                 financial support for a program and uses federal funds instead, an auditor
                                 may presume supplanting has occurred; but, a grantee could rebut that
                                 presumption by presenting evidence that fiscal stress required state
                                 budget cuts that might not have otherwise been considered. The statute
                                 also permits states to use Title I funds to replace state or local funds that
                                 had been expended for a program meeting a Title I purpose by allowing
                                 such supplemental state funds to be excluded from the SNS compliance
                                 determination.11 In other words, an LEA is allowed to shift funds from one
                                 state or locally funded program targeted to low-income children,
                                 substitute federal funds for that program, and move its own funds to other
                                 priorities for disadvantaged children.

                                 Even if auditors could determine what a grantee would have done if it had
                                 not received federal funds, the way that Title I services are delivered can
                                 also make it difficult to apply the SNS provisions. Table 1 summarizes the
                                 relationships between the different ways programs are delivered—
                                 targeted assistance, schoolwide programs, and districtwide reforms and
                                 the application of the fiscal accountability provisions.




                                 10
                                   However, if there were evidence that other state funds could be made available, or that
                                 state law mandated state funding despite the budget deficit, the use of Title I funds could
                                 violate the SNS requirement. See State of New York v. Education, 903 F.2d 930
                                 (2d Cir. 1990).
                                 11
                                   20 U.S.C. § 6321(d). The implementing regulations, 34 C.F.R. § 200.79 generally provide
                                 that a program meets the intent and purposes of Title I if the program is either
                                 (1) implemented in a school in which the percentage of children from low-income families
                                 is at least 40 percent or (2) serves children who are failing, or at most risk of failing to meet
                                 the state’s challenging academic achievement standards.




                                 Page 12                                                 GAO-03-377 Disadvantaged Students
Table 1: Fiscal Accountability under Different Program Delivery Frameworks

                                 Are funding sources     Can funding for specific
                                 for specific services   services be separated
                                 comparable from one     by federal, state, and     Are MOE tests   Are SNS tests
 Program delivery framework      year to the next?       local sources?             workable?       workable?
 Targeted assistance             Yes                     Yes                        Yes             Yes
 Schoolwide programs             No                      No                         Yes             No
 Districtwide reform efforts     No                      No                         Yes             No
Source: GAO analysis.

                                        For schoolwide programs the distinction between state/local funds and
                                        federal funds—and hence the notion of supplantation—becomes unclear.
                                        In general, when services are delivered through schoolwide programs,
                                        federal, state, and local funds are pooled, making it impossible to
                                        distinguish among funding streams in an audit because a schoolwide
                                        school does not have to (1) show that Title I funds are paying for
                                        additional services, (2) demonstrate that Title I funds are used only for
                                        specific target populations, or (3) separately track federal program funds
                                        once they reach the school. While one can identify the separate funding
                                        sources going into a school one cannot identify what services they funded.
                                        Therefore, for schoolwide programs a test for SNS compliance could
                                        include either (1) a comparison from one year to the next of total—
                                        federal, state, and local—funds allocated to a Title I school or (2) a
                                        comparison of state and local funds spent in Title I schools and non-Title I
                                        schools. 12

                                        However, there are problems applying either test to schoolwide programs.
                                        For example, in the Glendale (Arizona) Elementary School District, every
                                        school is a Title I school and all schools operate schoolwide programs.
                                        District officials argued that because the district met its MOE requirement
                                        (in 2000-2001 it exceeded 100 percent of its preceding years expenditures),
                                        it did not need a separate internal control procedure to test for SNS.
                                        However, auditors cited the district for not having such a procedure. Our
                                        analysis shows that, for districts such as Glendale, in order to avoid
                                        supplanting funds, the district would have to maintain the same state and
                                        local funding from year to year. In other words, in districts where every
                                        school is a Title I school and all schools operate a schoolwide program,
                                        they would have to maintain a much higher MOE requirement,
                                        100 percent, than districts that are not in this circumstance in order to



                                        12
                                         See 34 CFR 200.25d (2003).




                                        Page 13                                          GAO-03-377 Disadvantaged Students
avoid supplanting funds unless they otherwise would not have spent those
funds.

Moreover, comparing expenditures from one year to the next in school
districts where there are both targeted assistance and schoolwide schools
presents challenges. Since schoolwide program administrators can
reallocate funds among programs in their schools, they can engage in
budgetary practices that are not allowed in a targeted assistance school in
the same district. Theoretically, the SNS provision imposes a higher
expectation on schools operating schoolwide programs than it does on
their targeted assistance counterparts because a year-to-year funding
comparison essentially requires a schoolwide school to maintain 100
percent of its previous effort in order to comply with the SNS provision.

Furthermore, comparing the allocation of state/local funds among schools
in the same year also presents challenges. For example, in Duval County
(Florida) all 72 of the district’s Title I schools operate schoolwide
programs but not all schools were Title I schools. Duval’s auditors
assessed compliance with SNS by comparing the per pupil expenditure of
state and local funds in Title I schools to the allocation in non-Title I
schools within the same year. They found that in 2001, 5 of the district’s
72 Title I schools received significantly less state and local funding per
pupil than the average school received, resulting in questioned costs of
$2.5 million. The auditors suspected that the district may have used federal
Title I funds in place of state and local funds in these schools, but district
officials claimed that many mitigating factors, such as higher teacher
salaries for more experienced teachers, could explain variations in the per
pupil expenditures among schools in the same district. The SEA
determined that the information presented in the audit report was not
sufficient to determine that supplanting occurred. SEA officials told us
that auditors would need to have programmatic expertise to interpret the
results of the per pupil cost comparisons in order to prove that
supplantation had occurred. The auditors agreed that many factors could
have contributed to the observed disparity in funding among the 5 Title I
schools, but they said there were limitations to what could be expected of
a single audit and pointed out that ultimately the SEA should use the audit
findings as a basis for determining whether the LEA is in compliance or
not.

Finally, when a district engages in comprehensive districtwide reform
resulting in programmatic changes, it can be difficult to make the types of
comparisons necessary to determine compliance with SNS, particularly in
the first year of reforms. For example, in 2000, San Diego City (California)


Page 14                                      GAO-03-377 Disadvantaged Students
                               Unified School District (USD) began school reform that entailed financing
                               new initiatives. As these reforms were implemented, the district and its
                               programs were restructured in such a way that there were no longer
                               points of comparison for determining whether the district was in
                               compliance with the SNS provision. In other words, funding for programs
                               in the current school year could not be compared with funding for those in
                               the previous year, because the programs had not previously existed. The
                               Superintendent of the San Diego City USD told us that the reform plan
                               could not have been implemented without the flexibility to reallocate
                               resources within and among schools.

Some Officials Rely on the     While some auditors struggled to apply the SNS provision to the particular
Single Audit, without          circumstance of districts and schools, SEA officials were frequently
Understanding What Its Scope   unaware of what the results of a single audit actually meant, potentially
and Methodology Mean for       failing to cover key programs or provisions of law, and thus adding to the
Assessing the SNS Provision    difficulty of enforcing the SNS provision. For example, numerous state
                               and local program officials told us that they assumed that the single audit
                               covered every LEA and every program, even though this is not what single
                               audits are designed to do. As a result, these officials may not engage in
                               other oversight activities that are warranted. Because only those grant
                               recipients that spend more than $300,000 in federal awards in any given
                               year must undertake a single audit,13 not all LEAs that receive Title I funds
                               are required to undergo one. Furthermore, even if an LEA is audited, the
                               Title I program may not be covered in the audit. The 1996 amendments to
                               the Single Audit Act give auditors more freedom to determine which
                               federal programs to include in their audit plan each year, allowing them to
                               exclude some programs based on risk-based criteria and on expenditure-
                               based criteria.14 Many of the auditors we spoke with assessed risk by
                               determining whether or not there had been findings of noncompliance in
                               recent audits. For example, if an LEA had a clean audit with respect to the
                               Title I program for the last few years, an auditor might legitimately view


                               13
                                 This threshold is appropriate as recommended in our previous work. (See U.S. General
                               Accounting Office, Single Audit: Refinements Can Improve Usefulness, GAO/AIMD-94-133
                               (Washington D.C., June 21, 1994). Single Audits are intended to help focus audit resources
                               where the Congress originally intended they be focused, that is, on recipients expending
                               the largest amounts of federal financial assistance.
                               14
                                 The use of risk-based criteria is appropriate as recommended in our previous work.
                               Single Audit: Refinements Can Improve Usefulness, GAO/AIMD-94-133 (Washington D.C.,
                               June 21, 1994). When considering program risk, auditors are required to consider such
                               items as the recipient’s current and prior audit experience with federal programs; the
                               results of recent oversight visits by federal, state, and local agencies; and the inherent risk
                               of the program.




                               Page 15                                                 GAO-03-377 Disadvantaged Students
the inherent risk of this program as low and exclude it from the audit in
the next year. Auditors for both San Diego City (California) USD and
Jefferson Parish (Louisiana) Public Schools told us that Title I probably
would not be covered in the districts’ 2002 single audit since there have
been no recent findings on the program.

In addition, some officials thought that the single audit examined every
transaction, even though it does not. As a result, officials may think that by
fixing the instances reported they are solving all the problems, when in
fact those problems may be more widespread. Generally accepted
government auditing standards allow statistical sampling methods and
auditors often use audit sampling to evaluate compliance with applicable
requirements. This involves testing less than 100 percent of the items
within a group of transactions for the purpose of evaluating compliance
with applicable laws and regulations. Transactions could be randomly
selected from all of the auditee’s financial transactions for the year under
review.15 While this technique allows auditors to test the population of
transactions for evidence of noncompliance and internal control
weaknesses, it will not identify every specific instance of noncompliance.16
When auditors of Douglas (Arizona) USD identified significant internal
control weaknesses based on analysis of a sample of the district’s financial
they reported that their review of the district’s internal controls would not
necessarily disclose all instances of non-compliance. However, the SEA
resolved the issue by requiring the auditee to reimburse the Title I program
for the amount of the transaction under question only and did not further
investigate if there were other erroneous payments made.

While there were problems with program officials understanding what
single audits are and what results from the single audit meant, in general
the auditors’ work plans we reviewed followed the guidance
recommended by Education and OMB for single audits. However, some of
the auditors could not document that they had followed their work plans.
For example, audit workpapers for San Diego City (California) USD show
that auditors held a discussion with a district budget official who told the




15
  In some cases, a random sample as small as 45 transactions could be used to test the
effectiveness of the internal control environment. A single error in this sample is evidence
that the control environment is not highly effective, i.e., material errors may occur.
16
  To identify every occurrence of noncompliance, one would have to audit every
transaction in the population.




Page 16                                               GAO-03-377 Disadvantaged Students
                             auditors that they were in compliance with the SNS provision, but the
                             workpapers did not indicate independent verification of these claims.

                             In five of the six states we reviewed, the SEA had a procedure in place to
                             resolve audit findings reported through the single audit process. However,
                             in 2001 the Louisiana Legislative Auditor reported in its statewide single
                             audit that the SEA did not have adequate internal controls to monitor
                             subrecipients for compliance with many federal education programs,
                             including Title I. The SEA concurred with the auditor’s finding and has
                             implemented policies to address the deficiencies.

Selected States Conduct      All of the states we visited supplemented their reviews of LEAs’ single
Limited Program Monitoring   audit reports with additional monitoring activities. While program
                             monitoring provided a depth of coverage that cannot be achieved in single
                             audits, these efforts were limited. Furthermore, in all of the states we
                             visited, the primary focus of any additional monitoring activities has now
                             centered on addressing efforts to raise the level of student achievement
                             with considerably less focus given to fiscal accountability requirements.
                             Informal monitoring by individuals and groups augmented the formal
                             monitoring process.

                             Limited program monitoring also took place during the application review
                             process. In all of the states we visited, the annual application process for
                             Title I funding contains questions on historic and proposed program
                             budget information that can be used by program officials in the SEA to
                             oversee compliance with SNS and MOE. In addition, some states require
                             LEAs to complete a self-assessment document in which they are asked to
                             assess themselves on their compliance with federal program requirements.
                             SEAs use these self-assessment documents for various purposes. For
                             example, in Florida, annual self-assessments were used as a self-
                             monitoring tool, but only one-quarter of the LEAs were required to
                             actually send in the completed guide for review in any given year. In
                             Arizona, the tool was also required annually and is designed to provide
                             guidance in program development and to identify areas in which technical
                             assistance may be needed. In California, LEAs must complete self-
                             assessments once every 4 years, at which time SEA officials evaluate the
                             self-assessment documents and use them to target their on-site monitoring
                             activities to those LEAs that pose the highest risks.

                             While four of the six states we visited followed up LEAs’ self-assessments
                             with on-site visits, the extent to which they conducted such visits varied
                             and, in some cases, was limited. Massachusetts and Arizona have
                             scheduled on-site monitoring visits in the LEAs at least once every 6 years.


                             Page 17                                     GAO-03-377 Disadvantaged Students
                        In Louisiana, state officials said that each LEA is visited once every
                        3 years. In California, while each LEA must go through the review cycle
                        every 4 years. In addition, in 2001 two of the six states we visited, Florida
                        and Indiana, did not follow up on the self-assessments with periodic on-
                        site program monitoring.17

                        Several state officials highlighted the importance of informal monitoring
                        networks, such as parents groups, in raising issues of noncompliance.
                        These watchdog groups play an informal role in questioning inappropriate
                        spending and submitting complaints to the school boards and, if they feel
                        their concerns are not addressed at this level, elevating the issues to the
                        SEA. SEA officials in both Indiana and California discussed recent
                        inquiries that were brought to their attention, not through single audit
                        reports or even program monitoring efforts, but rather by informal
                        watchdog groups. In Indiana, the issues raised dealt with unallowable
                        costs and high administrative charges to federal programs in one school;
                        the SEA is investigating and, according to state officials, the matter is still
                        unresolved. In California, a parents group in San Diego filed a complaint
                        with the California Department of Education citing issues relating to,
                        among other things, the reallocation of state and federal funding, including
                        Title I funds, by the San Diego City (California) USD to fund its
                        districtwide school reform strategy which, the watchdog group claimed,
                        no longer provides a comparable level of service to all students with state
                        and local funding. The SEA concurred and ordered the district to develop
                        a plan to allocate the state and local supplemental funds that complies
                        with all the federal comparability provisions. However, Education granted
                        the district a waiver in August 2002 which will allow the district to proceed
                        with the reform strategy under its current budget plan for 1 year.


                        We identified three key efforts the Department of Education made to help
Education’s Key         enforce the fiscal accountability provisions but each had limitations. First,
Efforts to Enforce      Education developed guidance and provided technical assistance to state
                        and local officials and their auditors; but, these officials have expressed
Fiscal Accountability   confusion regarding application of the SNS provision to their particular
Provisions Have         circumstances. Second, Education conducted limited program monitoring
                        of its own, but these efforts did not have fiscal accountability as a primary
Limitations             focus. Finally, Education reviewed states’ single audit reports conducted
                        under the Single Audit Act. But, the Inspector General of Education found


                        17
                         Florida plans to begin on-site monitoring of LEAs this year.




                        Page 18                                               GAO-03-377 Disadvantaged Students
                            that many reviewers in the department lacked knowledge about the single
                            audit process and compliance issues. As a consequence, Education’s
                            monitors could fail to review key programs or provisions of law. In
                            addition, we recently reported that Education could not demonstrate it
                            consistently worked to resolve audit findings.18


Officials and Auditors      Education developed guidance for its programs which appeared in the
Confused about              compliance supplement to OMB’s Circular A-133. This guidance was the
Application of Fiscal       basis for the audit plans for all the districts we visited. Education’s
                            guidance itemizes the SNS, MOE, and the comparability requirements as
Accountability Provisions   separate statutory requirements. However, many state and local officials
to Their Particular         and auditors we spoke with thought the three requirements were related
Circumstances               to each other and that, by meeting one or two of the requirements, they
                            would automatically be in compliance with the others.

                            Some auditors and program officials confuse the comparability
                            requirement with the SNS provision.19 While comparability is primarily
                            used to ensure that services—not funding—is comparable across schools
                            in the LEA, the two issues are closely related and frequently confused. For
                            example, guidance issued by the SEA in Arizona on the comparability
                            requirement states that comparability is used to ensure that schools within
                            an LEA do not supplant state and local funds with federal program funds.
                            Operating under the same misconception, Indianapolis Public Schools
                            incorrectly used the comparability test as the internal control to ensure
                            compliance with SNS. Moreover, the district’s auditors failed to question
                            the appropriateness of this test to ensure compliance with SNS. A similar
                            confusion was evident when officials in the Duval County Public Schools
                            told auditors that they could not understand how they failed to comply
                            with the prohibition on supplantation, given that they had not cut back on
                            their own overall spending thereby meeting their MOE requirements and
                            had documented meeting their comparability requirement.




                            18
                             U.S. General Accounting Office, Single Audit: Actions Needed to Ensure That Findings
                            Are Corrected, GAO-02-705 (Washington D.C., June 26, 2002).
                            19
                             An LEA is considered to have met the statutory comparability requirements if it has
                            implemented (1) an LEA-wide salary schedule; (2) a policy to ensure equivalence among
                            schools in teachers, administrators, and other staff; and (3) a policy to ensure equivalence
                            among schools in the provision of curriculum materials and instructional supplies. In most
                            of the states we visited, the SEA requires LEAs to submit certifications that they have
                            implemented these policies, which the auditors can then verify during their annual audits.




                            Page 19                                               GAO-03-377 Disadvantaged Students
                           Education recognizes that there is some confusion about the application
                           of the provisions. Education officials acknowledge the challenges of
                           writing guidance that can be understood and applied in every
                           circumstance. Many federal program officials said that they frequently
                           field questions from district officials and some auditors seeking technical
                           assistance applying the provisions in local circumstances. In December
                           2002, Education issued new regulations that reorganized its guidance on
                           schoolwide programs in a manner that might help address some of the
                           confusion.

                           State and local education agencies and their auditors told us that they also
                           rely on nongovernmental sources of guidance, such as workshops and
                           materials provided by consulting firms. For example, auditors in Arizona
                           provided us with excerpts from handbooks and other guidance on the Title
                           I program.20 School officials and auditors in other districts we visited also
                           told us they supplement federal guidance with similar nongovernmental
                           sources of guidance.


Fiscal Accountability Is   The fiscal accountability provisions have not been the focus of
Not the Primary Focus of   Education’s own monitoring efforts. From 1995-2001, Education used an
Education’s Program        approach to program monitoring called an integrated review approach. Its
                           primary focus was to see how all federal grant programs, working
Monitoring                 together, supported state and local reform efforts. The Title I program was
                           included in these reviews. However, only 1 of the 9 indicators Education’s
                           monitors used in integrated reviews focused on fiscal issues; the rest
                           focused on program performance, such as whether the state supported
                           and promoted high standards for all children, and whether states used
                           education research findings to inform decision making. Education’s
                           Inspector General criticized this approach to program reviews in 2001
                           because the integrated approach allotted insufficient time to monitor
                           specific programs for compliance with federal laws and regulations. The
                           Inspector General also found that the various teams of reviewers lacked




                           20
                            Kristen Tosh Cowan, Esq. and Leigh M. Manasevit, Esq., Brustein & Manasevit, The New
                           Title I: Balancing Flexibility with Accountability: Charles J. Edwards and Cheryl L. Sattler,
                           Ph. D., contributing editors (Washington, D.C.: Thompson Publishing Group, Inc., 2002).




                           Page 20                                                GAO-03-377 Disadvantaged Students
                             knowledge of the single audit process, thereby taking inconsistent
                             approaches to doing the reviews.21

                             In 2002 Education drafted guidelines for its monitors to use in a new
                             approach to program monitoring, but we found that the new approach
                             gives fiscal accountability requirements little emphasis and it does not
                             even mention SNS. In 2002, Education developed a new monitoring
                             strategy which it has named: Achievement Focused Monitoring (AFM). As
                             its name implies, the AFM approach seeks to realign oversight and
                             technical assistance for Title I to concentrate on student achievement.
                             Education officials acknowledged that their program monitoring guide
                             does not mention SNS and said they would provide additional guidance to
                             their monitors on the provision for use in the future. Education’s AFM plan
                             includes visits to 15 states—and at least one district in each state—in 2002
                             and 2003. By October 2002 Education had completed visits to four states.


Education’s Review of        Education has responsibility for reviewing the audit reports of state
State Single Audit Reports   education agencies. In 2002, we reported actions were needed to ensure
Has Weaknesses               that grantees correct findings identified in state single audit reports. Each
                             state must undertake a single audit each year. Each year their auditors
                             determine which federal programs to include in their audit plan and audit
                             those programs for compliance with the federal laws and regulations
                             covering those grant programs. Although Education had procedures for
                             obtaining states’ single audit reports, distributing audit findings to
                             appropriate audit offices, and assessing the seriousness of the findings, we
                             found that reviewers did not demonstrate they consistently worked to
                             resolve audit findings. Specifically, reviewers did not consistently follow-
                             up with written management decisions on final audit resolution and did
                             not communicate findings to senior department management.22




                             21
                              Review of the Office of Elementary & Secondary Education’s Monitoring of Formula
                             Grants: Final Audit Report, Office of Inspector General, United States Department of
                             Education, November 2001.
                             22
                              U.S. General Accounting Office, Single Audit: Actions Needed to Ensure That Findings
                             Are Corrected, GAO-02-705 (Washington D.C., June 26, 2002).




                             Page 21                                             GAO-03-377 Disadvantaged Students
                                        We found that few changes have occurred in the relative shares of federal,
Little Change in                        state’ and local funding for education for school years (SY) 1999-2000 and
Federal Share from                      2000-2001 (the most recent data available) in the six states we reviewed.
                                        (See fig. 2.) It is too soon to tell how recent increases in federal funds for
School Years 1999-                      Title I and other federal education programs and the fiscal pressures
2000 to 2000-2001                       facing states will affect funding for education in general and how changes,
                                        if any, in state and local financing will affect the federal share. However,
                                        this information does provide a baseline against which we can compare
                                        the impact of increases in federal funds and state and local fiscal pressures
                                        in the future.

Figure 2: Changes in the Shares of Total Funding for Education Services in Six States between SY 1999-2000 and 2000-2001




                                        Note: Percentages do not add due to rounding.


                                        In addition to the concern about the fiscal balance in education funding
                                        overall, questions have been raised about the federal share of operating
                                        SEAs. SEA operations include the administration of programs—primarily
                                        oversight, technical assistance, and training—related to specific federal
                                        programs operated at the local level. SEAs may also operate state-level
                                        programs, such as vocational rehabilitation. As we noted in a previous
                                        report, the level of federal support for SEA operations varied widely
                                        among states depending on the number and types of federal and state



                                        Page 22                                         GAO-03-377 Disadvantaged Students
programs the SEA operates, ranging in fiscal year 1993 from about 10 to
about 80 percent, with the average level of support being 41 percent.23 To
update this information, we looked at the federal share of SEA funding in
the six states we visited for school year 1999-2000. As in the past, we found
the federal share varied, from 18 percent in Florida to 43 percent in
Indiana. (See the shaded bars in fig. 3.)

Figure 3: Federal Share of SEA Operations in Six States (SY 2000-2001)




Another way to look at the federal share of SEA operating costs is through
the number of full-time equivalent positions (FTEs) that are funded by
federal funds. Some states operate federal programs at the state level,
such as vocational rehabilitation and disability determination. These may
require many more SEA FTEs than programs operated at the local level.
For example, in 2000-2001, the Florida SEA assumed responsibility for the
federal vocational rehabilitation programs that were previously housed in
another state department, adding more than 1,000 positions to the SEA
and raising its percent of federally funded FTEs from 43 percent to
63 percent.


23
 U. S. General Accounting Office, Education Finance: Extent of Federal Funding in State
Education Agencies, GAO/HEHS-95-3 (Washington, D.C.: Oct. 14, 1994).




Page 23                                            GAO-03-377 Disadvantaged Students
              Finally, table 2 provides some additional context when making
              comparisons and contrasts among the states we visited. Per pupil
              expenditure calculations serve as a proxy reflecting the cost differences
              among states in providing education.

              Table 2: Education Spending in Six States, School Year 1999-2000

                                      Total education                  Per       Federal share of
                                            spending                 pupil             education
                                          (in billions)        expenditure             spending
               Arizona                             $4.6             $5,656                  10%
               California                         $45.1             $7,571                    9%
               Florida                            $17.3             $7,269                    8%
               Indiana                             $7.7             $7,813                    5%
               Louisiana                           $4.8             $6,473                  12%
               Massachusetts                       $8.7             $9,108                    5%
              Source: GAO analysis.



              Single audits are a valuable oversight tool but they cannot be regarded as
Conclusions   the sole tool to use in enforcing the compliance requirements. Additional
              oversight is always necessary to ensure that grantees are in compliance
              with the laws and regulations governing specific programs and grant
              management in general. Single audits should inform, not substitute for
              program monitoring. However, as we have noted, many state officials told
              us that they relied primarily on the single audits to oversee compliance
              with federal laws and regulations. Because of this reliance, state program
              officials responsible for overseeing this program must have a better
              understanding of the scope and limitations of these audits and supplement
              the audits with more effective and frequent oversight activities. Instances
              of noncompliance found in the course of a single audit should trigger a
              broader search to determine whether the error is systemic.

              While NCLB emphasizes achieving higher student achievement levels,
              enforcing fiscal accountability is and will remain a critically important
              oversight activity. Resources for audit and evaluation activities will remain
              limited, and, as a result, these resources must be targeted where they will
              have the greatest impact. As we have noted, ensuring compliance with an
              MOE provision presents few challenges and requires few additional audit
              resources, whereas monitoring the SNS provision is very challenging and
              requires significant audit resources.

              Maintaining the intergovernmental fiscal partnership in the education of
              disadvantaged and low-income students presents many challenges. Title I’s



              Page 24                                        GAO-03-377 Disadvantaged Students
two fiscal accountability provisions—the MOE and the SNS provisions—
are intended to limit the extent that grantees can use federal funds to
replace their own and thereby erode the fiscal partnership. But each
provision helps to maintain the fiscal balance in very different ways and at
different levels—schools versus districts. The primary effect of a
nonsupplant provision is to prevent the reallocation of state and local
resources within a Title I school; essentially, that means that expenditures
paid for with state and local resources in a Title I school in one year
cannot be paid for with federal funds the next year. On the other hand, the
MOE provision’s primary effect is to limit the extent to which states and
LEAs can use federal funds for general fiscal relief; that is, substituting
federal funds for state and local funds generally, not just in Title I schools.
As noted, in schoolwide programs grantees are not required to show that
Title I funds are paying for additional services or are targeted to specific
students, nor are they required to separately track federal program funds
with other funds once they reach the school, thus “limiting the reallocation
of resources” becomes unworkable in a schoolwide setting.

An inherent tension exists between fostering a flexible grant environment
and ensuring fiscal accountability. For broader purpose grants, such as
schoolwide programs, the SNS provision can work to constrain local
flexibility in the use of federal funds by preventing districts from
reallocating the use of federal, state, and local funds. Moreover, the
provision is difficult to apply and can be very challenging to monitor and
enforce, primarily because it is not workable in those environments. As we
have previously reported, in flexible grant environments a strong MOE
provision may prove more useful than an SNS provision in limiting the
degree to which grantees can use federal funds to simply reduce their
overall fiscal commitments.

That different parties would have different views of the value of the
nonsupplant provisions is to be expected. Some argue that allowing
supplantation of any kind increases the likelihood that states could
weaken their commitment to educating disadvantaged children and
diminish the fiscal impact of the federal grant. Potentially, supplantation
allows the SEAs and LEAs to convert the federal Title I grant into a kind of
revenue sharing program with very little incremental impact on education
spending. Others would point to periodic changes to the Title I program
allowing more schools to participate as schoolwide programs, suggesting
that the Congress may be trying to encourage more flexible use of Title I
funds to improve the quality of education for disadvantaged students and
raise student achievement levels for all students, including low-income
students. Furthermore, in times of fiscal stress and greater needs in


Page 25                                       GAO-03-377 Disadvantaged Students
                      educating the disadvantaged, the reallocation of resources within and
                      among schools may be the only way to finance comprehensive
                      districtwide reform efforts. A nonsupplant provision could stymie those
                      districts that need more flexibility to attempt such reforms.


                      To better align its expectations for accountability with Title I schoolwide
Matters for           program goals, the Congress should consider eliminating the SNS
Congressional         requirement for schoolwide programs. If Congress eliminates SNS in the
                      context of schoolwide programs, Congress may want to consider
Consideration         strengthening the other fiscal accountability requirement, MOE. Currently,
                      LEAs must maintain only 90 percent of their previous years’ expenditures
                      in order to participate in the Title I program. For example, if this
                      requirement were increased, it would impose a higher expectation on
                      those districts to maintain the fiscal balance and it could represent a
                      reasonable tradeoff for those districts that want to begin more
                      comprehensive reform efforts.


                      We recommend that the U.S. Department of Education enhance its
Recommendations for   technical assistance and training efforts to ensure that SEAs and
Executive Action      Education program staff have a clearer understanding of the strengths and
                      weaknesses of the single audit process and the role the audits can play in
                      required oversight activities and encourage them to heighten the level of
                      attention they give the fiscal requirements in their own monitoring efforts.
                      In addition, we recommend that Education amend its guidance for
                      grantees and oversight officers to address all of Title I’s fiscal
                      requirements, including the SNS provision.


                      We received comments from Education on a draft of this report, which are
Agency Comments       reprinted in Appendix II. Education generally agreed with our
                      recommendations for executive action to enhance its technical assistance
                      and training efforts on the single audit process and to amend its own
                      guidance to address all of Title I’s fiscal accountability provisions.

                      On the policy issue of whether to eliminate the SNS requirement for
                      schoolwide programs, Education is not ready to take a position. However,
                      Education questioned the basis for the matter for congressional
                      consideration that we propose. Education acknowledges the difficulties
                      enforcing the SNS provision in schoolwide programs and we found that
                      none of the districts we visited were able to develop a test for SNS that
                      could be applied in a schoolwide setting. Education cited recent


                      Page 26                                     GAO-03-377 Disadvantaged Students
supplanting violations found by Title I monitoring staff to show that it was
possible to assess supplantation in a schoolwide setting. However,
according to an Education official, these findings were not for schoolwide
programs.

Education says that the loss of the SNS requirement would not be
completely offset by an enhanced MOE requirement because it would shift
responsibility for fiscal accountability from the school to the district level.
However, our review shows that the current requirement is unworkable in
a schoolwide setting. As we said, while one can identify the separate
funding sources going into a school, one cannot identify what services
they funded in a schoolwide setting because federal, state, and local funds
are pooled. In contrast, an MOE requirement is easier to measure, identify,
and track, and therefore better promotes fiscal accountability in these
settings. If Congress considers eliminating the SNS provision, we believe
that enhancing the MOE requirement is a reasonable tradeoff. With regard
to Education’s regulation governing the SNS requirement that Education
said we did not discuss, we did discuss this on page 13. We have added a
footnote to make the report more clear on that point.

Education said that it did not agree that the level or scope of monitoring is
inadequate. However, we found that Education’s efforts to enforce the
fiscal provisions have some limitations. By design, Education’s current
monitoring effort is directed at the provisions on accountability for
academic results, but we found that the fiscal requirements were given
little attention, and the materials developed by Education to guide
monitoring efforts did not even mention SNS.

Finally, with regard to Education’s review of single audit reports, this
finding was published previously in our June 2002 report and specifically
assessed the Title I program. The department concurred with our findings
at that time and has provided us with a corrective action plan. Secretary
Paige’s August 26, 2002, letter to GAO indicated that it planned to address
these findings by February 28, 2003.

In addition, we provided segments of this draft report to the states and
school districts we visited. We have incorporated their comments in the
report as appropriate.




Page 27                                       GAO-03-377 Disadvantaged Students
We are sending copies of this report to the Secretary of Education,
appropriate congressional committees, and other interested parties. In
addition, the report will be available at no charge on GAO’s Web site at
http://www.gao.gov.

If you or your staff have any questions or wish to discuss this material
further, please call Paul L. Posner at (202) 512-9573 or Marnie S. Shaul at
(202) 512-7215. Other GAO contacts and staff acknowledgments are listed
in appendix III.




Paul L. Posner
Managing Director, Intergovernmental Relations
 and Federal Budget Issues




Marnie S. Shaul
Director, Education, Workforce,
 and Income Security Issues




Page 28                                     GAO-03-377 Disadvantaged Students
             Appendix I: Scope and Methodology
Appendix I: Scope and Methodology


             To determine how select states ensure compliance with maintenance of
             effort (MOE) and supplement-not-supplant (SNS), we interviewed state
             program and budget officials in six states: Arizona, California, Florida,
             Indiana, Louisiana, and Massachusetts. We also reviewed budgets and
             financial statements for school years 1999-2000 and 2000-2001, as well as
             state guidance on fiscal accountability requirements. We also spoke with
             state auditors and reviewed their audit plans and other relevant
             workpapers. In addition to meeting with state officials, we spoke with
             local program and budget officials and school district administrators in six
             local education agencies including Douglas Unified School District and
             Glendale Elementary School District in Arizona, San Diego City Unified
             School District in California, Duval County Public Schools in Florida,
             Indianapolis Public Schools in Indiana, and Jefferson Parish Public
             Schools in Louisiana. Again, we reviewed budgets and financial statements
             for school years 1999-2000 and 2000-2001 and local auditors’ audit plans
             and relevant workpapers.

             We selected two of the states and three local school districts based on our
             search of the Federal Audit Clearinghouse,1 which is a Web-based
             database that we searched to identify states and school districts found out
             of compliance with one or more of the Title I fiscal accountability
             requirements in 2001. Two of the six states we selected were out of
             compliance with one of the fiscal accountability requirements, while the
             other four were not. Likewise, three of the school districts we visited were
             found to be out of compliance with the SNS provisions; the other three
             were not. Those states and local school districts without audit findings
             were selected to ensure variation in enrollment size, ethnic composition,
             economic condition, and geographic location.

             To determine what efforts the U.S. Department of Education has taken to
             enforce the Title I fiscal accountability provisions and what limitations, if
             any, these efforts may have, we spoke with Education officials and
             reviewed Education guidance and documentation as well as recent GAO
             and OIG reports.

             To assess what changes occurred between school years 1999-2000 and
             2000-01 in the federal share of education expenditures and to what extent



             1
              The Federal Audit Clearinghouse single audit database was established as a result of the
             Single Audit Act Amendments of 1996 and contains summary information on the auditor,
             the recipient and its federal programs, and the audit results.




             Page 29                                              GAO-03-377 Disadvantaged Students
Appendix I: Scope and Methodology




federal funds were used to support state education agencies’ operating
expenditures, we gathered information from state program and budget
officials on federal, state, and local funding streams as well as full time
equivalent (FTE) and operating expenditure data. We analyzed and
summarized this information and presented it in a way that provides
context and comparison across the six states. Due to the limited number
of states and districts selected, our findings cannot be generalized to
school districts nationwide.




Page 30                                      GAO-03-377 Disadvantaged Students
             Appendix II: Comments from the Department
Appendix II: Comments from the Department
             of Education



of Education




             Page 31                                     GAO-03-377 Disadvantaged Students
Appendix II: Comments from the Department
of Education




Page 32                                     GAO-03-377 Disadvantaged Students
Appendix II: Comments from the Department
of Education




Page 33                                     GAO-03-377 Disadvantaged Students
                  Appendix III: GAO Contacts and Staff
Appendix III: GAO Contacts and Staff
                  Acknowledgments



Acknowledgments

                  Tom James, (202) 512-2996, jamest@gao.gov
GAO Contacts      Eleanor Johnson, (202) 512-7209, johnsone@gao.gov


                  In addition to those named above Bill Keller, Jennifer Ashford, and Leah
Acknowledgments   Nash made key contributions to this report. Patrick DiBattista provided
                  exceptional editorial assistance on the content and message of the report.
                  Behn Miller and Richard P. Burkard supplied legal advice on several
                  complex aspects of our work. Thomas Broderick and Jacquelyn Hamilton
                  provided technical assistance on the Single Audit Act.




                  Page 34                                    GAO-03-377 Disadvantaged Students
               Appendix IV: Related GAO Products
Appendix IV: Related GAO Products


               Education School Finance: Per-Pupil Spending Differences between
Education      Selected Inner City and Suburban Schools Varied by Metropolitan Area.
               GAO-03-234. Washington, D.C.: December 9, 2002.

               Title I: Education Needs to Monitor States’ Scoring of Assessments. GAO-
               02-393. Washington, D.C.: April 1, 2002.

               Title I Funding: Poor Children Benefit Though Funding Per Poor Child
               Differs. GAO-02-242. Washington, D.C.: January 31, 2002.

               Title I Preschool Education: More Children Served, but Gauging Effect
               on School Readiness Difficult. GAO/HEHS-00-171. Washington, D.C.:
               September 20, 2000.

               Title I Program: Stronger Accountability Needed for Performance of
               Disadvantaged Students. GAO/HEHS-00-89. Washington, D.C.: June 1,
               2000.

               Education Finance: Extent of Federal Funding in State Education
               Agencies. GAO/HEHS-95-3. Washington, D.C.: October 14, 1994.


               Single Audit: Single Audit Act Effectiveness Issues.
Single Audit   GAO-02-877T. Washington, D.C.: June 26, 2002.

               Single Audit: Actions Needed to Ensure That Findings Are Corrected.
               GAO-02-705. Washington, D.C.: June 26, 2002.

               Single Audit: Survey of CFO Act Agencies. GAO-02-376. Washington, D.C.:
               March 15, 2002.

               Single Audit: Update on the Implementation of the Single Audit Act
               Amendments of 1996. GAO/AIMD-00-293. Washington, D.C.:
               September 29, 2000.

               Single Audit: Refinements Can Improve Usefulness. GAO/AIMD-94-133.
               Washington, D.C.: June 21, 1994.




               Page 35                                    GAO-03-377 Disadvantaged Students
                    Appendix IV: Related GAO Products




                    Welfare Reform: Challenges in Maintaining a Federal/State Fiscal
Intergovernmental   Partnership. GAO-01-828. Washington, D.C.: August 10, 2001.
Relations
                    Welfare Reform: Challenges in Saving for a Rainy Day. GAO-01-674T.
                    Washington, D.C.: April 26, 2001.

                    Welfare Reform: Early Fiscal Effects of the TANF Block Grant.
                    GAO/AIMD-98-137. Washington, D.C.: August 18, 1998.

                    Federal Grants: Design Improvements Could Help Federal Resources Go
                    Further. GAO/AIMD-97-7. Washington, D.C.: December 18, 1996.

                    Block Grants: Issues in Designing Accountability Provisions.
                    GAO/AIMD-95-226. Washington, D.C.: September 1, 1995.

                    Block Grants: Characteristics, Experience, and Lessons Learned.
                    GAO/HEHS-95-74. Washington, D.C.: February 9, 1995.

                    Proposed Changes in Federal Matching and Maintenance of Effort
                    Requirements. GAO/GGD-81-7. Washington, D.C.: December 23, 1980.




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                    Page 36                                   GAO-03-377 Disadvantaged Students
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