+-----------------------------------------------------------------------+
| Los Angeles Unified School District's                                 |
|                                                                       |
| Procedures for Calculating and Remitting                              |
|                                                                       |
| Interest Earned on Federal Cash Advances                              |
+-----------------------------------------------------------------------+

## 

**FINAL REPORT**

![](media/image1.pct){width="2.5in" height="2.497916666666667in"}

**ED-OIG/A09H0019**

**December 2008**

+-------------------------+----------------------+---------------------+
| Our mission is to       | ![](media/image      | U.S Department of   |
| promote the efficiency, | 2.png){width="0.8in" | Education           |
| effectiveness, and      | height="0.8in"}      |                     |
| integrity of the        |                      | Office of Inspector |
| Department\'s programs  |                      | General             |
| and operations.         |                      |                     |
|                         |                      | Sacramento, CA      |
+-------------------------+----------------------+---------------------+

> NOTICE
>
> Statements that managerial practices need improvements, as well as
> other conclusions and recommendations in this report, represent the
> opinions of the Office of Inspector General.  Determinations of
> corrective action to be taken, including the recovery of funds, will
> be made by the appropriate Department of Education officials in
> accordance with the General Education Provisions Act.
>
> In accordance with the Freedom of Information Act (5 U.S.C. § 552),
> reports issued by the Office of Inspector General are available to
> members of the press and general public to the extent information
> contained therein is not subject to exemptions in the Act.
>
> ![](media/image3.pct)**UNITED STATES DEPARTMENT OF EDUCATION**

OFFICE OF INSPECTOR GENERAL

Audit Services

Sacramento Region

December 2, 2008

Mr. Jack O'Connell

State Superintendent of Public Instruction

California Department of Education

1430 N Street

Sacramento, CA 95814

Dear Mr. O'Connell:

Enclosed is our final audit report, Control Number ED-OIG/A09H0019,
entitled *Los Angeles Unified School District's Procedures for
Calculating and Remitting Interest Earned on Federal Cash Advances*.
This report incorporates the comments you provided in response to the
draft report. If you have any additional comments or information that
you believe may have a bearing on the resolution of this audit, you
should send them directly to the following Education Department
official, who will consider them before taking final Departmental action
on this audit:

Thomas Skelly

Acting Chief Financial Officer

Office of the Chief Financial Officer

U.S. Department of Education

400 Maryland Avenue, SW

Washington, D.C. 20202

It is the policy of the U. S. Department of Education to expedite the
resolution of audits by initiating timely action on the findings and
recommendations contained therein. Therefore, receipt of your comments
within 30 days would be appreciated.

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

Sincerely,

/s/

Gloria Pilotti

> Regional Inspector General
>
> for Audit

Enclosure

TABLE OF CONTENTS

[EXECUTIVE SUMMARY 1](#__RefHeading___Toc198632945)

[BACKGROUND 3](#__RefHeading___Toc198632946)

[AUDIT RESULTS 6](#__RefHeading___Toc198632947)

[FINDING NO. 1 - LAUSD Estimated Interest Earned on Federal Cash
Advances 6](#OLE_LINK2)

[FINDING NO. 2 - LAUSD Inappropriately Reduced the Estimated Interest
Earned on Federal Cash Advances to Compensate for Temporary Use of Other
Available Cash Resources 13](#tm_1980530877)

[FINDING NO. 3 -- LAUSD Needs to Improve Internal Controls to Ensure
Earned Interest Identified As Due to the Federal Government Is Promptly
Remitted to CDE and Other Grantors 18](#__RefHeading___Toc198632950)

[OBJECTIVES, SCOPE, AND METHODOLOGY 22](#__RefHeading___Toc198632951)

ATTACHMENT -- CDE and LAUSD Comments on the Draft Report 24

[]{#__RefHeading___Toc198632945 .anchor}EXECUTIVE SUMMARY

Over the 12-year period (fiscal year (FY) 1995 through FY2006), Los
Angeles Unified School District (LAUSD) received more than \$8 billion
in Federal revenues and earned millions of dollars of interest on
Federal cash advances. LAUSD retained the interest earnings instead of
remitting the earnings to the U.S. Department of Education (ED) and
other Federal agencies as required by Federal regulations. LAUSD's
noncompliance was repeatedly reported in its single audit reports. On
March 9, 2007, LAUSD began remitting the earned interest to the
California Department of Education (CDE) for submission to ED and other
Federal agencies. At the time of our review, LAUSD had remitted about
\$25 million to CDE for interest earned on Federal cash advances from
FY1995 through FY2007. Based on the results of our review, we estimated
that the remitted amount may not have included about \$6.3 million of
interest earned on Federal cash advances during that period.[^1]

The purpose of our audit was to determine whether LAUSD 1) used a
methodology for calculating the interest earned on Federal cash advances
that was compliant with Federal requirements, and 2) has policies and
procedures in place to ensure that future interest earned on Federal
cash advances is accurately computed and remitted on a quarterly basis
to CDE. To evaluate LAUSD procedures, we reviewed LAUSD's calculation
and remittance of earned interest on Federal cash advances for FY2004
through FY2007.

LAUSD does not have procedures that identify the actual amount of
interest earned on Federal cash advances. While LAUSD had developed a
methodology for estimating the amount, the reliability of the estimate
was not readily determinable due to the design and application of the
methodology. Thus, LAUSD's methodology may overstate or understate the
interest earned on Federal cash advances. We recommend that CDE work
with the Los Angeles County Office of Education (LACOE) and LAUSD to
develop a method for LAUSD to identify actual interest earned on Federal
cash balances. We also recommend that, in the interim, LAUSD take the
following steps to improve the reliability of its current estimation
methodology: 1) perform a subsequent adjustment when the prior quarter
earnings rate is used in calculations, and 2) improve the internal
controls over performance of the calculations.

LAUSD did not remit the entire amount of estimated interest earned for
FY2004 through FY2007 that was due to ED and other Federal agencies. As
we describe in the following paragraphs, LAUSD improperly reduced the
amount due by about \$1.48 million and did not demonstrate that another
\$817,784 of interest identified as due was actually remitted to CDE or
other grantors.

LAUSD improperly reduced the amount of earned interest to be remitted to
CDE and other grantors to compensate LAUSD for the temporary use of
other cash resources to operate Federal programs. Our review identified
about \$1.48 million of earned interest that was excluded from LAUSD's
estimates for FY2004 through FY2007 due to the improper reduction. We
recommend that LAUSD exclude from its procedures the reduction of earned
interest for the temporary use of other cash resources to operate
Federal programs. We also recommend that LAUSD remit to CDE the \$1.48
million identified by our audit that was improperly excluded from
analysts' calculations of earned interest due and identify and remit all
other earned interest improperly excluded for FY1995 through FY2007 and
later. If the periods reviewed are representative of the prior years, we
estimate that about \$2.58 million may have been improperly excluded
from amounts due to CDE and other grantors for interest earned during
FY1995 through FY2003 to compensate for the temporary use of other cash
resources to operate Federal programs.

LAUSD's current internal controls may not be adequate to ensure that
amounts it identified as due to CDE and other grantor agencies are
promptly remitted. Our review identified about \$817,784 of earned
interest for FY2004 through FY2007 that LAUSD's accounting analysts
identified in their worksheets as due to CDE or other grantors, but was
not included in provided remittance documentation. We recommend that
LAUSD remit the \$817,784 or provide documentation confirming the prior
remittance of the amount. We also recommend that LAUSD reconcile its
documentation for FY1995 through FY2003 and for fiscal years after
FY2007 to identify any other amounts due in the analysts' worksheets
that were not remitted and remit those amounts to CDE or other grantors.
If the periods reviewed are representative of the prior years (FY1995
through FY2003), there could be about \$1.42 million of additional
earned interest that was identified by the analysts, but not remitted to
CDE or other grantors. Finally, we recommend that CDE review LAUSD's
internal controls for ensuring prompt remittance of all interest earned
to grantor agencies and monitor LAUSD, on an on-going basis, to ensure
that LAUSD continues to remit interest earnings to CDE on a quarterly
basis.

In response to the draft report, CDE provided us with LAUSD's written
comments on the reported findings and recommendations and stated that
the comments and positions set forth in the letter are solely those of
LAUSD. LAUSD partially concurred with our findings and concurred or
partially concurred with our recommendations, except for those
recommendations that provided for the remittance of additional amounts
of interest for periods earlier than the five‑year limitation period
specified in the General Education Provision Act (GEPA).

CDE did not provide its own comments on the findings and recommendations
except to state that it would continue to work with LAUSD and ED in
resolving the issues delineated in the audit report. LAUSD's comments
are summarized at the end of each finding and the entire text of the CDE
and LAUSD letters are included in an attachment to the report.

[]{#__RefHeading___Toc198632946 .anchor}BACKGROUND

ED makes Federal funds available to state educational agencies for
administration of Federal education programs at local educational
agencies (LEAs). State educational agencies are responsible for
providing the Federal funds to the LEAs (subgrantees).

ED General Administrative Regulations, at 34 C.F.R. § 80.21, prescribe
the basic standards and methods that ED must follow when making payments
to grantees and that grantees must follow when making payments to
subgrantees. Paragraphs (c) and (d) of 34 C.F.R. § 80.21 state that
grantees and subgrantees are to be paid in advance, provided they
maintain or demonstrate the willingness and ability to maintain
procedures to minimize the time elapsing between the transfer and
disbursement of funds by the grantee or subgrantee. When the grantee or
subgrantee cannot meet the timing requirement, reimbursement of incurred
expenditures is the preferred method of payment. Paragraph (i) requires
grantees and subgrantees to remit to ED, at least quarterly, interest
earned on advances when the interest exceeds \$100 per year.

CDE generally uses the advance method for providing Federal funds to
LEAs. LEAs hold the advanced funds in investment accounts with their
respective County Treasurer's Office until the amounts are used for
Federal program expenditures. California State law requires that County
Offices of Education provide fiscal oversight of the LEAs within their
respective counties.

LAUSD is the nation's second largest school district with over 700,000
students and total revenues exceeding \$10 billion in FY 2006, of which
about \$1 billion was revenue from the Federal Government. As shown in
Table 1, over the 12-year period from July 1, 1994 through
June 30, 2006, LAUSD received more than \$8 billion in Federal revenues.

+-------------------+---------------+-------------------+------------+
| **Table 1: LAUSD  |               |                   |            |
| Revenues for FY   |               |                   |            |
| 1995-2006** (a)   |               |                   |            |
|                   |               |                   |            |
| **(in             |               |                   |            |
| thousands)**      |               |                   |            |
+-------------------+---------------+-------------------+------------+
| **Fiscal Year**   | **Total**     | **Federal**       | **Federal  |
|                   |               |                   | Pe         |
| **(July through   | **Revenues**  | **Revenues**      | rcentage** |
| June)**           |               |                   |            |
+-------------------+---------------+-------------------+------------+
| 2006              | \$10,167,841  | \$1,150,060       | 11%        |
+-------------------+---------------+-------------------+------------+
| 2005              | 8,566,578     | 1,071,628         | 13%        |
+-------------------+---------------+-------------------+------------+
| 2004              | 7,498,310     | 984,482           | 13%        |
+-------------------+---------------+-------------------+------------+
| 2003              | 9,939,832     | 814,681           | 8%         |
+-------------------+---------------+-------------------+------------+
| 2002              | 7,390,773     | 686,278           | 9%         |
+-------------------+---------------+-------------------+------------+
| 2001              | 7,208,339     | 598,540           | 8%         |
+-------------------+---------------+-------------------+------------+
| 2000              | 6,425,483     | 590,308           | 9%         |
+-------------------+---------------+-------------------+------------+
| 1999              | 5,497,979     | 504,998           | 9%         |
+-------------------+---------------+-------------------+------------+
| 1998              | 5,392,988     | 454,281           | 8%         |
+-------------------+---------------+-------------------+------------+
| 1997              | 4,462,704     | 426,404           | 10%        |
+-------------------+---------------+-------------------+------------+
| 1996              | 3,951,167     | 404,939           | 10%        |
+-------------------+---------------+-------------------+------------+
| 1995              | 3,775,930     | 471,216           | 12%        |
+-------------------+---------------+-------------------+------------+
| Totals            | \$80,277,924  | \$8,157,815       | 10%        |
+-------------------+---------------+-------------------+------------+
| \(a\) Source:     |               |                   |            |
| LAUSD's           |               |                   |            |
| Comprehensive     |               |                   |            |
| Annual Financial  |               |                   |            |
| Reports (CAFR).   |               |                   |            |
| The report for    |               |                   |            |
| FY2007 was not    |               |                   |            |
| available at the  |               |                   |            |
| time of our       |               |                   |            |
| review.           |               |                   |            |
+-------------------+---------------+-------------------+------------+

Over the years, LAUSD earned millions of dollars of interest on Federal
cash advances and retained those earnings instead of remitting the
interest earnings to ED and other Federal agencies as required by
Federal regulations. This condition was repeatedly reported as a
compliance finding by Independent Public Accountants (IPAs) that
conducted single audits of LAUSD.

-   [Single audit reports for FY1995 and FY1996]{.underline}. In the
    FY1995 single audit report, the IPA included a finding that LAUSD
    was holding interest earned on excess Federal funds. In its
    response, LAUSD stated it would develop procedures to monitor cash
    received and expended for each Federal grant and develop a process
    for allocating interest earned to the appropriate funding
    agency.[^2] In the FY1996 single audit report, the IPA reported
    LAUSD had implemented the corrective action. However, as noted in
    the next paragraph, the finding was again reported in the FY1997
    single audit.

-   [Single audit report for FY1997]{.underline}. The IPA included a
    finding that LAUSD had not reported interest earned on Federal funds
    to the funding agency. The IPA recommended that LAUSD report the
    interest earned and either request permission to reprogram the
    interest as an increase of total program funding, or request
    instructions for remitting the interest. The IPA also reported that,
    for FY1997 and the prior two years, LAUSD had calculated the
    interest earned on Federal cash advances and established a liability
    to the Federal Government.

-   [Single audit reports for FY1998 through FY2006]{.underline}. The
    IPAs repeatedly reported that LAUSD was not in compliance with 34
    C.F.R. § 80.21(i) in findings in the single audit reports for FY1998
    through FY2002 and FY2004 through FY2006. In the FY2003 single audit
    report, the IPA did not report this finding, but did include the
    finding in the status of the prior year's finding section of the
    single audit report.

In its responses to the findings, LAUSD stated it had communicated with
ED officials regarding the interest earned on Federal cash advances that
was being held by LAUSD.

-   [Single audit report for FY1998]{.underline}. LAUSD reported that
    its Chief Financial Officer had written a letter to the ED Director
    of Compensatory Education Programs, dated February 20, 1998,
    reporting the interest earned and requesting permission for LAUSD to
    retain the interest as additional program funds.

-   [Single audit report for FY1999]{.underline}. LAUSD reported that a
    letter was sent to ED on April 23, 1999 as a follow up to its
    earlier letter.

-   [Single audit report for FY2004]{.underline}. LAUSD reported that
    another letter was sent to ED on December 8, 2003, and that no
    response was received from ED on that letter.[^3]

-   [Single audit report for FY2006]{.underline}. LAUSD reported that it
    had informal discussions with ED regarding the use of interest
    earned on Federal cash advances. LAUSD stated that it would decide
    in Fall 2006 whether to submit a plan for use of the interest
    earnings or to remit the amounts to ED.

In March 2007, LAUSD began remitting the interest earned on Federal cash
advances to CDE for transfer to ED and other Federal agencies.
Documentation provided by LAUSD and CDE confirmed the remittance of
about \$25 million for interest earned on Federal cash advances during
FY1995 through FY2007.

[]{#__RefHeading___Toc198632947 .anchor}AUDIT RESULTS

[]{#OLE_LINK2 .anchor}

LAUSD did not identify the actual amount of interest earned on Federal
cash balances. While LAUSD developed a methodology for estimating the
amount, the reliability of the estimate was not readily determinable due
to the design and application of the methodology. In addition, when
determining the amount of earned interest to be remitted to CDE and
other grantor agencies, LAUSD improperly reduced the amount to
compensate for the temporary use of other cash resources to operate
Federal programs. Also, LAUSD's current internal controls may not be
adequate to ensure that amounts identified as due to the Federal
Government are promptly remitted to CDE and other grantors.

FINDING NO. 1 - LAUSD Estimated Interest Earned on Federal Cash Advances

LAUSD does not have procedures to identify the actual amount of interest
earned on Federal cash advances. ED General Administrative Regulations
at 34 § C.F.R. 80.20 (b) establish the standards for financial
management systems at LEAs receiving Federal education grants and
subgrants. The standard on internal control addresses effective control
and accountability of cash and other assets.

> 3\) *Internal control.* Effective control and accountability must be
> maintained for all grant and subgrant cash, real and personal
> property, and **other assets**. Grantees and subgrantees must
> adequately safeguard all such property and must assure that it is used
> solely for authorized purposes. \[**Bold** emphasis added.\]

Other assets would include the interest earned on cash advances from
Federal grants and subgrants. Thus, LEAs should have financial
procedures for identifying the interest earned on Federal cash balances.
The procedures should have a level of precision that ensures only an
amount up to \$100 per year is retained for administrative expenses.
Paragraph (i) of 34 C.F.R. § 80.21 states---

> ...\[G\]rantees and subgrantees shall promptly, but at least
> quarterly, remit interest earned on advances to the Federal agency.
> The grantee or subgrantee may keep interest amounts up to \$100 per
> year for administrative expenses.

**Reports on Interest Earnings**

**Available to LAUSD**

Cash received by LAUSD from Federal, state, and other sources is
deposited in the School Fund managed by the Los Angeles County
Treasurer. The School Fund is a pooled investment fund that includes
cash received by various educational organizations, such as school
districts, community college districts, and charter schools. Each month,
the Los Angeles County Treasurer's Office provides LACOE with a
statement showing the interest earned that month on cash held in the
School Fund.

LACOE allocates the amount of earned interest reported by the
Treasurer's Office to educational organizations on a quarterly basis
using financial records that LACOE maintains for each organization's
funds and subfunds. For example, LACOE maintains financial records on
LAUSD's General Fund, Adult Education Fund, and other funds and subfunds
that account for receipts from various Federal, state and local sources,
including ED programs. LACOE uses the financial records to determine the
average daily cash balance for each fund/subfund and uses the average
balances to allocate the earned interest reported by the Treasurer's
Office for the quarter to the funds/subfunds. LACOE provides educational
organizations with quarterly reports showing the average daily cash
balance for each of the organization's funds/subfunds and the amount of
interest allocated to each fund/subfund for the fiscal quarter.

LAUSD can not identify the interest earned on Federal cash balances from
the LACOE reports because LAUSD funds/subfunds contain amounts received
from Federal, state, and other sources. Thus, to identify the amount,
LAUSD developed a methodology for estimating the interest earned on
Federal cash balances.

**LAUSD's Methodology for Estimating**

**Interest Earned on Federal Cash Balances**

LAUSD used a methodology that estimated the earned interest on Federal
cash balances by revenue code. LAUSD's financial accounting system uses
revenue codes to trace receipts and expenditures by funding source. A
revenue code may be used to account for cash receipts and expenditures
for one or more Federal grants. Accounting analysts in LAUSD's
Accounting and Disbursement Division are responsible for applying
LAUSD's methodology through the use of a series of electronic files
containing detailed and summary worksheets. Each analyst is assigned
responsibility for preparing the worksheets for groups of revenue codes.

-   [Detailed Worksheet]{.underline}. The analyst prepares a detailed
    month-by-month worksheet for each assigned revenue code that covers
    a fiscal year. The worksheet begins with the amount of available
    cash for the revenue code. The analyst obtains the total cash
    receipts and expenditures by month for the revenue code from LAUSD's
    accounting system and enters the amounts on the electronic
    worksheet. The receipts are added to the month's beginning balance
    to obtain the available cash for the revenue code during the month.
    Then, the expenditures are subtracted from the available cash to
    derive the ending balance for the month and subsequent month's
    beginning balance. The month's ending balance is multiplied by
    one-twelfth of the School Fund interest earnings rate (School
    Rate)[^4] to compute an estimate of the interest earned for the
    month on Federal cash balances for each revenue code. When the
    ending balance for the month is negative (expenditures exceed
    available cash for the revenue code), the calculation results in a
    negative amount of interest for the month.

-   [Summary Worksheet]{.underline}. The analyst prepares a summary
    worksheet to calculate the amount of the earned interest that is to
    be remitted to CDE or other grantor agencies for each assigned
    revenue code for the fiscal quarter and, in total, for the fiscal
    year. This worksheet is discussed in Finding No. 2.

The reliability of LAUSD's estimated amounts of monthly earned interest
could not be readily determined due to the design and application of the
methodology.

-   The methodology was designed to only provide calculations of the
    estimated earned interest for revenue codes from Federal sources.
    The calculations for all revenue codes in the General Fund or other
    funds would be needed to compare the total estimated earned interest
    derived using LAUSD's methodology to the total actual interest
    earnings that LACOE reported to LAUSD.

-   The methodology was designed to use information from LAUSD's
    financial accounting system when the actual interest earnings were
    determined by LACOE using information from LACOE's financial
    records. Using information from a source other than the source used
    to calculate the actual interest earned by LAUSD increases the risk
    that LAUSD's methodology may not produce reliable estimates.

-   The methodology was designed to calculate the estimated earned
    interest using the month-end cash balance rather than the average
    daily balance. As noted earlier, LACOE allocates the interest
    earnings to LAUSD and the other educational organizations using
    average daily balances. The daily cash balances for a revenue code
    would vary depending on the timing of receipts and expenditures.

-   The application of the methodology utilizes numerous worksheets and
    calculations prepared by various LAUSD analysts. For example, LAUSD
    provided us with detailed and summary worksheets for FY2007 covering
    190 revenue codes. If monthly interest calculations were performed
    for all 190 revenue codes each month, the detailed worksheets for
    just this one year would contain 2,280 separate calculations (190
    revenue codes times 12 months). Performing that number of
    calculations would mean that 2,280 separate times the receipts and
    expenditures would be entered in the worksheets, month-end balances
    calculated, applicable School Rates identified, and the School Rate
    applied to the month-end balance. While the analysts used electronic
    worksheets, the worksheet formats varied among the analysts and were
    manually prepared using data obtained from LAUSD's accounting
    system. Due to the number of individual worksheets, calculations,
    and data elements and the variance in analysts' worksheets and their
    manual preparation, there is risk that the methodology may not be
    applied consistently, that the data used in the calculations may not
    be accurate, or the calculations may be incorrect. Our limited
    review[^5]of the worksheets identified instances where analysts did
    not prepare summary worksheets, did not consistently apply the
    methodology, used an interest rate other than the applicable School
    Rate, or used an incorrect formula in the worksheets.

-   When the School Rate for the 4^th^ quarter is not available at the
    time its analysts' perform the calculations, LAUSD's methodology
    provided for the analysts to use the School Rate for the prior
    fiscal quarter in the calculations of the estimated interest earned
    for the months in the 4^th^ quarter. The methodology did not provide
    for the subsequent adjustment of the calculations when the School
    Rate for the 4^th^ quarter became available.[^6] LACOE's list of
    School Rates for FY1998 through FY2007 showed that the 4^th^ quarter
    rates were higher than the 3^rd^ quarter rates in 7 of the last 10
    fiscal years. Thus, when the analysts used the prior quarter School
    Rate for 4^th^ quarter calculations, the methodology understated the
    estimated interest earned on Federal cash balance in seven of the
    fiscal years and overstated the amount in the other three fiscal
    years.

Due to the above factors, LAUSD's methodology may overstate or
understate the interest earned on Federal cash advances.

We have not recommended that LAUSD revise its current methodology to
address the above factors, because the application of the methodology to
all revenue codes and the calculation of average daily balances for each
month for all revenue codes would require a substantial increase in the
significant amount of staff resources already committed to the
application of LAUSD's methodology. As we present in the next section,
an alternative to LAUSD's current methodology may be available that
would likely reduce the staff resources needed and identify the actual
interest earned on Federal cash advances. However, until an alternative
is implemented, LAUSD should take the following interim steps to improve
the reliability of estimates.

-   LAUSD could improve the reliability of its estimates by adjusting
    the calculations for the months of April, May, and June after
    receipt of the School Rate for the 4^th^ quarter, or delay
    performance of the calculations until the 4^th^ quarter rate is
    available.

-   Also, LAUSD could take additional steps to improve the internal
    control over application of its methodology. LAUSD issued Policy
    Bulletin ADD-007-004 in March 2007 updating its procedures, which
    included a standard detailed worksheet for calculating the monthly
    interest for revenue codes. LAUSD should further enhance its
    procedures for applying the methodology by providing a standard
    summary worksheet and making the use of standard detailed and
    summary worksheets mandatory for analysts. LAUSD could also explore
    methods to incorporate internal controls within the design of the
    worksheets to ensure the accuracy of formulas and information
    entered into the worksheets. Taking these additional steps would
    improve the consistency and accuracy of interest calculations across
    all spreadsheets prepared by different analysts.

The above interim steps could improve the reliability of LAUSD's
estimate of the interest earned on Federal cash balances without a
significant increase in use of its staff resources.

**LACOE Could Include in Its Reports the**

**Interest Earned on Federal Cash Balances**

LACOE advised us that its current financial report system allows
educational organizations, such as LAUSD, to use subfunds within their
General Fund and other funds to separately identify the cash balance for
Federal programs as long as all the Federal programs are grouped into
the same subfund(s) with no other non-federal programs maintained in the
same subfund. This accounting structure enables the interest allocation
process in the current financial system to report quarterly on the
actual interest earned, in total, on Federal cash held in those subfunds
for the individual Federal programs. However, none of the educational
agencies are currently maintaining such a structure in the financial
system. Any structural change requires all the agencies to perform
systematic tasks, such as a one-time crosswalk of all the existing
balances from the current subfund to the new one. This change would only
be effective if LAUSD and other educational agencies are allowed to
remit interest earned on Federal cash balances in the subfund rather
than on a grant-by-grant basis.

Federal regulations applicable to ED programs do not require states or
LEAs to return interest earned on Federal cash balances on a
grant-by-grant basis. Also, ED only identifies the grantee remitting the
amount (e.g., CDE) and does not record the individual program
information since the interest remittances are deposited in the U.S.
Treasury as miscellaneous receipts.

If the subfunds were set up by Federal agency source, the LACOE reports
could contain the information needed by LAUSD to meet ED requirements
for reporting and remitting the actual interest earned on Federal cash
balances. This change would substantially reduce the staff resources
currently expended by LAUSD to estimate earned interest on a
grant-by-grant basis while providing for the remittance of the actual
interest earned on Federal cash balances.

**Recommendations\
**

## We recommend that the Chief Financial Officer require CDE to--- {#we-recommend-that-the-chief-financial-officer-require-cde-to .RptSubcaption}

1.  Work with LACOE and LAUSD to develop a methodology for LAUSD to
    identify actual interest earned on Federal cash balances.

2.  Instruct LAUSD to take the interim step to provide a more reliable
    estimate by revising its current methodology to either include a
    subsequent adjustment of the calculations when the School Rate for
    the 3^rd^ quarter rate is used for months in the 4^th^ quarter
    (April, May and June) or delay performance of the calculations until
    the 4^th^ quarter rate is available.

3.  Instruct LAUSD to recalculate the estimated interest earned on
    Federal cash balances for the 4^th^ quarter of FY1995 through FY2007
    and later using the actual School Rates for the 4^th^ quarter, and
    remit any additional amounts due to CDE and other grantors, as
    permitted under Federal law.

4.  Instruct LAUSD to take the interim step to enhance the procedures
    for applying its current methodology by providing a standard summary
    worksheet for use by its analysts, making the use of the standard
    worksheets mandatory, and incorporating internal controls into the
    design of the worksheets to ensure the accuracy of formulas and
    information entered into the worksheets.

5.  Instruct LAUSD to implement appropriate reviews to ensure analysts
    are applying the new procedures consistently and accurately.

**LAUSD Comments**

In its comments on the draft report, LAUSD agreed that its methodology
for determining remittance obligations was based on monthly estimates of
interest earned on Federal cash advances. However, LAUSD disagreed with
the OIG's finding that its methodology did not produce a reliable
determination of the actual interest earned. LAUSD cited its
recalculation of interest earned in FY2007 on Federal cash advances for
the Elementary and Secondary Education Act (ESEA), Title I, Part D
Program to demonstrate the difference between using month-end balances
versus average daily balances in its calculations. LAUSD stated that the
difference between the two calculations was less than one percent.

LAUSD stated that it is not aware of any applicable statute, regulation,
or ED guidance that provided clear notice that the District's
methodology for estimating interest was improper. LAUSD stated that
neither 34 C.F.R. § 80.20(b), which states that Federal grantees must
maintain "\[e\]ffective control and accountability" over grant assets,
nor 34 C.F.R. § 80.21(i), which permits grantees to retain only up to
\$100 per year in earned interest, expressly requires any particular
interest calculation methodology. LAUSD stated that, absent clear
notice, it was unjust to penalize the District for its methodology
especially since LAUSD repeatedly sought guidance from ED regarding
policies and practices for remitting interest on Federal cash advances.

LAUSD expressed eagerness to work expeditiously with LACOE and CDE to
develop an alternative methodology for calculating interest earned on
Federal cash balances, so long as the resulting procedure is not
significantly more burdensome to the District than its current approach.
LAUSD is willing to consider adoption of OIG's proposed alternative
methodology; however, implementation would require support from LACOE
and concurrence from CDE that grant-by-grant reporting of interest
remittances is no longer required. LAUSD stated that it has had
preliminary discussions with CDE and has begun reviewing its current
methodology to determine ways in which it might be streamlined.

LAUSD explained how it had already revised its interest calculation
methodology in accordance with Recommendation 1.2. LAUSD stated that it
continues to estimate interest for the 4^th ^quarter using the 3^rd^
quarter School Rate, but requires analysts to make a subsequent
adjustment to the calculations when the actual 4^th^ quarter rate
becomes available in the following fiscal year. LAUSD provided
inter-office correspondence, dated October 31, 2006, which advised staff
to recalculate interest for the 4^th^ Quarter of FY2006 using the actual
rate for the quarter.

LAUSD advised that it was in the process of verifying that remitted
interest for FY2006 and FY2007 was calculated using the actual School
Rates for the 4^th^ quarter. For periods prior to FY2006, LAUSD contends
that the District should not have to calculate and remit additional
interest. LAUSD stated that the statute of limitations provision of the
GEPA applies to FY2003 and earlier. LAUSD cited a House Committee
Report, which stated that the statute of limitations was enacted to
encourage more prompt audits and remove the threat of repayment of
expenditures made many years before an audit. LAUSD stated that, under
the statute of limitations, its monetary liability would at most extend
no further back than five years from the present (i.e., FY2004). LAUSD
asserted that its earlier voluntary remittances of interest for periods
prior to FY2004 do not constitute a waiver of the statute of limitation
provision and that the earlier remittances were intended to demonstrate
LAUSD's good-faith commitment to work with ED and CDE to resolve the
matter.  LAUSD stated that significant staff resources would be required
to perform recalculations for the remaining two fiscal years---FY2004
and FY2005 and that such calculations would likely yield small sums of
additional interest.

LAUSD stated that it would develop a standard template for both detail
and summary worksheets to ensure accuracy of formulas and information
entered into the worksheets and require staff to use the template. LAUSD
expects to have the standard templates developed by October 1, 2008 for
use in performing recalculations for FY2009.

LAUSD stated a procedure was already in place for Senior Accounting
Analysts to review each worksheet and ensure that analysts are applying
procedures consistently and accurately. LAUSD stated that, through
training and appropriate monitoring, it would ensure that this procedure
is followed rigorously and that the Senior Accounting Analysts perform
careful and thorough reviews.

**OIG Response**

We did not change our finding or recommendations. In its comments, LAUSD
inaccurately portrayed our conclusion regarding the reliability of its
methodology. We concluded reliability could not be readily determined
due to the factors listed in the finding regarding the design and
application of the methodology. The recalculation for the ESEA, Title I,
Part D Program provided an isolated example of only one of the factors
listed in our finding. In addition, the pattern of receipts and
disbursements for the ESEA, Title I, Part D Program may not be
representative of the pattern for other programs since CDE does not have
a standard method for determining the amount and timing of Federal cash
disbursements to LEAs. Additionally, LAUSD may disburse cash at
different times within the month for other programs.

The regulations cited in the finding clearly state the requirement to
remit interest earned and, as LAUSD acknowledged, its methodology
produces an estimate of the earned amount, not the amount actually
earned. The cited regulations clearly state that LEAs need to have
effective accountability for assets and LEAs must return all interest in
excess of \$100. As we noted in the Background section of the report,
LAUSD's letters to ED were requests for permission to retain the
interest or use the amounts for program purposes, not for information on
the methodology for determining the amount of interest earned on Federal
cash advances.

We have not modified our recommendation in response to LAUSD's argument
that GEPA's statute of limitations provision prevents ED from recovering
interest retained by LAUSD for any period more than five years prior to
an administrative determination by the Department. During audit
resolution, ED will determine the proper application of GEPA
requirements to the recovery of interest unlawfully and intentionally
retained by LAUSD. As we noted in the Background Section of the report,
LAUSD was aware of the requirement to remit the interest earned on
Federal cash advances at the time its FY1995 single audit report was
issued and its FY1997 single audit report disclosed that LAUSD had begun
calculating the interest earned and had established a liability to the
Federal Government. LAUSD, however, did not remit any amounts until
March 2007. We noted that the first remittance occurred immediately
after LAUSD was notified of the initiation of the OIG's earlier review
of LAUSD's controls in accounting for Federal funds.[^7] The statute of
limitations provision of GEPA does not directly address this situation.
The five-year provision addresses the liability of a recipient of
Federal education program funds to "return funds which were **expended**
in a manner not authorized by law...." \[Emphasis added.\] The earned
interest amounts were neither program funds received by LAUSD nor
expenditures of LAUSD. We had identified the potential GEPA issue in a
footnote to our draft report. Since that issue is now included in LAUSD
comments and our response, we have removed the footnote from the final
report.

[]{#tm_1980530877 .anchor}

**FINDING NO. 2 - LAUSD Inappropriately Reduced the Estimated Interest
Earned on Federal Cash Advances to Compensate for Temporary Use of Other
Available Cash Resources**

LAUSD understated the amount due to grantor agencies when it
inappropriately reduced the estimated interest earned on Federal cash
advances to compensate for the temporary use of other available cash
resources for Federal programs. For purposes of the report, we refer to
this process as "netting."

To calculate the amount of earned interest to be remitted to CDE and
other grantors for the fiscal year, the analyst prepares a summary
worksheet for each assigned revenue code showing an amount for each
fiscal quarter. To obtain the quarterly amounts, the analyst combines
the related monthly estimated earned interest amounts shown on the
detailed worksheets. As we noted in Finding No. 1, LAUSD's methodology
can result in a negative amount for interest earned for a month when
expenditures exceed the available cash for a revenue code.

When a quarter has both positive and negative monthly amounts, the
analyst nets the amounts to obtain the quarterly earned interest to be
remitted for the revenue code (quarterly netting). Thus, netting at the
quarterly level reduces the estimated earned interest to be remitted and
can result in a negative amount for the quarter. Then, the analyst
combines the quarterly amounts on the summary worksheet to derive the
amount to be remitted for the fiscal year. When a fiscal year has both
positive and negative quarterly amounts, the analyst again nets the
amounts to obtain the earned interest to be remitted for the fiscal year
for the revenue code (fiscal year netting). Thus, fiscal year netting
can further reduce the estimated earned interest to be remitted to the
grantor agency.

As we noted in Finding No. 1, 34 C.F.R. § 80.21(i) allows grantees or
subgrantees to keep only up to \$100 per year of interest earned on
Federal cash advances for administrative expenses. Federal laws and
regulations do not contain provisions for compensating LEAs for the use
of other available cash resources to operate ED programs. In fact,
Office of Management and Budget (OMB) Circular A-87, *Cost Principles
for State, Local, and Indian Tribal Governments*, Attachment B which
establishes the principles and standards for determining allowable costs
for Federal awards, prohibits the use of Federal funds for such
purposes. Attachment B, Paragraph 23.a states that costs incurred for
"the use of a governmental unit's own funds, however represented, are
unallowable."

The U.S. Department of the Treasury regulation at 31 C.F.R. § 205.14(a),
which is applicable to ED programs[^8], allows states to collect
interest from the Federal Government when funds are not delivered to the
state in time to fund a Federal program. There is no similar provision
for LEAs and the definition of a state used in the Treasury regulations
specifically excludes local governments. Also, the Federal Government
may deny a state's interest claim for interest if the state fails to
request Federal funds timely. In the case of the example of netting
shown in Table 2, the Elementary and Secondary Education Act (ESEA)
funds for school year 2006-2007 were available to CDE on July 1, 2006.
CDE did not make the initial advance to LAUSD until December 2006. Thus,
CDE had not made the Federal funds available to LAUSD when needed for
Federal program expenditures.

[Impact of Quarterly Netting]{.underline}. The following example
demonstrates the impact of netting when determining the amount to be
remitted for a quarter.

+-----------------------------+---------------------+------------------+
| **Table 2: Impact of Fiscal |                     |                  |
| Quarter Netting For Revenue |                     |                  |
| Code R046-003F** (a)        |                     |                  |
|                             |                     |                  |
| **October through December  |                     |                  |
| 2006**                      |                     |                  |
+-----------------------------+---------------------+------------------+
| **Month**                   | **Estimated         | **Notes**        |
|                             | Interest Earned     |                  |
|                             | From Detailed       |                  |
|                             | Worksheet**         |                  |
+-----------------------------+---------------------+------------------+
| October 2006                | \<\$ 87,830\>       | Expenditures     |
|                             |                     | exceeded         |
|                             |                     | available cash   |
+-----------------------------+---------------------+------------------+
| November 2006               | \<\$212,229\>       | Expenditures     |
|                             |                     | exceeded         |
|                             |                     | available cash   |
+-----------------------------+---------------------+------------------+
| December 2006               | \$336,224           | Available cash   |
|                             |                     | exceeded         |
|                             |                     | expenditures     |
+-----------------------------+---------------------+------------------+
| LAUSD analyst's calculation | \$36,165            |                  |
| of interest earned for the  |                     |                  |
| quarter, with netting       |                     |                  |
+-----------------------------+---------------------+------------------+
| OIG calculation of interest | \$336,224           |                  |
| earned for the quarter,     |                     |                  |
| without netting             |                     |                  |
+-----------------------------+---------------------+------------------+
| Additional interest due to  | \$300,059           |                  |
| CDE for the quarter         |                     |                  |
+-----------------------------+---------------------+------------------+
| \(a\) ESEA, Title I, Part A |                     |                  |
| -- Basic Grants to LEAs     |                     |                  |
+-----------------------------+---------------------+------------------+

Our review of the detailed worksheets for R046-003F identified a total
of five quarters (including the one above) in FY2004 through FY2007
where LAUSD's analyst netted interest earned for the quarter because of
negative amounts for one or more of the months. The additional interest
due to ED for FY2004 through FY2007 because of quarterly netting for
Revenue Code R046‑003F is as follows:

April -- June 2004 \$ 85,241

> January -- March 2006 119,131
>
> October -- December 2006 300,059
>
> January -- March 2007 101,530
>
> April -- June 2007 [281,831]{.underline}
>
> Total Additional Interest Earned Due \$887,792

The above example represents LAUSD's largest Federal grant and, thus,
would not be representative of the impact that fiscal quarter netting
had on other individual Federal programs. However, the cumulative effect
on the other Federal programs over the four year period would likely be
significant, as would the impact on the interest remitted for ESEA,
Title I and other Federal programs in prior years (FY1995 through
FY2003).

[Impact of Fiscal Year Netting]{.underline}. The following examples
shown in Table 3 demonstrate the impact of netting when determining the
earned interest to be remitted for a fiscal year.

+-----------------------------------+---------------+-----------------+
| **Table 3: Impact of Fiscal Year  |               |                 |
| Netting for Selected Revenue      |               |                 |
| Codes**                           |               |                 |
|                                   |               |                 |
| **FY 2006**                       |               |                 |
+-----------------------------------+---------------+-----------------+
| **Fiscal Quarter**                | **Revenue     |                 |
|                                   | Code**        |                 |
+-----------------------------------+---------------+-----------------+
|                                   | **R344-634F** | **Y349-636F**   |
|                                   | (a)           | (b)             |
+-----------------------------------+---------------+-----------------+
|                                   | *Example 1*   | *Example 2*     |
+-----------------------------------+---------------+-----------------+
| July-Sept 2005                    | \$19,980      | \$4,126         |
+-----------------------------------+---------------+-----------------+
| Oct-Dec 2005                      | \<\$4,700\>   | \<\$10,866\>    |
+-----------------------------------+---------------+-----------------+
| Jan-Mar 2006                      | \$796         | \<\$15,684\>    |
+-----------------------------------+---------------+-----------------+
| Apr-June 2006                     | \$531         | \<\$15,921\>    |
+-----------------------------------+---------------+-----------------+
| LAUSD analyst's calculation of    | \$16,607      | None (c)        |
| interest with netting             |               |                 |
+-----------------------------------+---------------+-----------------+
| OIG calculation of interest       | \$21,307      | \$4,126         |
| without netting                   |               |                 |
+-----------------------------------+---------------+-----------------+
| Difference                        | \$4,700       | \$4,126         |
+-----------------------------------+---------------+-----------------+
| (a) ESEA, Title I, Comprehensive  |               |                 |
|     School Reform Grant           |               |                 |
|                                   |               |                 |
| (b) 21^st^ Century Community      |               |                 |
|     Learning Centers Grant        |               |                 |
|                                   |               |                 |
| (c) When the sum for the four     |               |                 |
|     quarters is a negative        |               |                 |
|     amount, the LAUSD analyst     |               |                 |
|     records the interest to be    |               |                 |
|     remitted as zero for the      |               |                 |
|     revenue code.                 |               |                 |
+-----------------------------------+---------------+-----------------+

When the quarterly amounts include both positive and negative amounts,
fiscal year netting results in an understatement of the amount of earned
interest to be remitted as shown by the examples in Table 3. Fiscal year
netting has no effect on the amount when quarterly amounts are either
all positive or all negative.

Our review of LAUSD's summary worksheets for all Federal revenue codes
for FY2004 through FY2007 identified the following amounts, in total,
that were not included in earned interest to be remitted to grantor
agencies because of LAUSD's use of fiscal year netting.

FY2004 \$ 39,966

FY2005 369,862

FY2006 146,422

FY2007 [40,580]{.underline}[^9]

Total \$596,830

Our review identified a total of \$1,484,622 (\$887,792 + \$596,830) of
interest earned during FY2004 through FY2007 that was excluded from
amounts returned to grantors due to quarterly and fiscal year netting.
If the impact of netting in FY2004 through FY2007 is representative of
the impact in prior years, we estimated that the combination of
quarterly and fiscal year netting on interest remitted for FY1995
through FY2003 was about \$2.58 million.[^10] Thus, the overall impact
of the use of netting on amounts remitted to grantors could be about
\$4.06 million.

The IPA reported a finding in LAUSD's FY2005 single audit that netting
was inappropriate and recommended that LAUSD discontinue the practice.
LAUSD disagreed with the IPA's recommendation. LAUSD stated that it
"believes that the practice of netting the interest expense incurred by
the grant against the subsequent interest earnings of the grant funds is
appropriate and that the Federal Government does not want LAUSD to
decrease its available regular program resources so as to benefit the
Federal programs." The IPA repeated the finding and recommendation in
its report for the FY2006 single audit.[^11]

## Recommendations  {#recommendations .RptSubcaption}

## We recommend that the Chief Financial Officer require CDE to--- {#we-recommend-that-the-chief-financial-officer-require-cde-to-1 .RptSubcaption}

1.  Instruct LAUSD to revise its procedures to exclude netting or any
    other method that reduces the interest due to grantor agencies for
    the temporary use of other available cash resources to operate
    Federal programs.

2.  Instruct LAUSD to remit to CDE and other grantor agencies, as
    permitted under Federal law, the \$1,484,622 (\$887,792 + \$596,830)
    that our audit identified as not included in its estimated interest
    earnings due to grantor agencies because of the use of netting in
    LAUSD's calculations.

3.  Instruct LAUSD to identify other amounts of interest earned on
    Federal cash advances that were not remitted to CDE and other
    grantor agencies due to the use of netting in FY1995 through FY2007
    and later, and remit the amounts to the agencies, as permitted under
    Federal law.[^12] We estimated that about \$2.58 million may have
    not been remitted for FY1995 through FY2003 due to LAUSD's use of
    quarterly and fiscal year netting.

4.  Promptly transmit to ED the interest amounts remitted by LAUSD under
    Recommendations 2.2 and 2.3.

**LAUSD Comments**

LAUSD agreed that it used a process called "netting" to reduce the
remittances of interest earned on Federal cash advances. While LAUSD
disagreed that "netting" was improper, it stated that staff were
informed on July 29, 2008 to cease netting for FY2008. LAUSD stated that
it is willing to make this policy revision permanent, provided that CDE
eliminates, or substantially reduces, the time-lag between the date on
which ED makes Federal funds available to CDE and the date on which CDE
makes the initial advance to LAUSD.

LAUSD disagreed that it should be required to undertake any
recalculations or additional remittances or that monetary liability
should be imposed for its past practice of "netting." LAUSD stated it
was not aware of any applicable statute, regulation, or ED guidance that
expressly prohibits netting where local educational agencies are
recipients of Federal grant funds that "pass through" from State
agencies and reiterated that clear notice is required for valid
imposition of conditions upon a school district's receipt of Federal
funds.

LAUSD asserted that school districts should be allowed to use "netting"
since current U.S. Department of Treasury regulations allow states
to collect interest from the Federal Government when funds are not
delivered in time to fund a Federal program. LAUSD cited opinions issued
in the 1980s by the U.S. Department of Justice and the U.S. Comptroller
General applying Federal statutory provisions applicable to States and
their subgrantees. LAUSD also stated it was unfair to prohibit "netting"
when the procedure was used primarily to mitigate the financial impact
of delays in the receipt of Federal grant funds. LAUSD stated that the
delays have no impact on the State of California's treasury and are
beneficial to the Federal Government since it may use the cash for other
purposes until the grant funds are drawn by the State. LAUSD reiterated
its position that the statute of limitations provision in the GEPA would
be applicable to the period prior to FY2004 and stated that remittance
of additional funds would result in fewer resources being available to
fund district programs.

**OIG Response**

We did not change our finding or recommendations. The regulation at 34
C.F.R. § 80.21 clearly states the requirement to remit interest earned
on Federal cash advances quarterly. Federal law and regulations
applicable to the time periods covered by our recommendations do not
contain provisions for compensating LEAs for the temporary use of cash
from other available resources. In fact, as we noted in the report,
other Federal requirements explicitly state that the Federal Government
cannot be charged for a government unit's use of its own funds.

The U.S. Department of Justice decision and the U.S. Comptroller General
opinions are not relevant to the interest remittance requirement for the
periods covered by our recommendations. These decisions related to a
provision of the Intergovernmental Cooperation Act of 1968 that was
amended by the Cash Management Improvement Act (CMIA) of 1990.[^13] The
current Treasury regulations reflect the amended provision. While the
CMIA amended the provision on interest to provide for the payment of
interest from states to the Federal Government and from the Federal
Government to states, the amended provision does not provide for payment
of interest by the Federal Government to local governments, such as
school districts. Even if the provision were applicable to local
governments, LAUSD could not charge interest to the Federal Government
since, as we noted in the finding, Federal funds were available at the
time to CDE for disbursement to California LEAs.

We understand LAUSD's desire to mitigate the financial impact of delays
in its receipt of Federal grant funds. However, LAUSD has no recourse
with the Federal Government since the Federal funds were available to
CDE for disbursement to LEAs. As we noted earlier, ED will make a
determination during audit resolution on the appropriate application of
the statute of limitations provision in the GEPA.

[]{#__RefHeading___Toc198632950 .anchor}**FINDING NO. 3 --** **LAUSD
Needs to Improve Internal Controls to Ensure Earned Interest Identified
As Due to the Federal Government Is Promptly Remitted to CDE and Other
Grantors**

In March 2007, LAUSD issued Policy Bulletin ADD-007-004 updating its
procedures to provide for prompt remittance of interest earned on
Federal cash advances to the grantor agency. In the Bulletin, LAUSD
included the procedures for interest calculation, interest remittance,
and remittance verification, and the standard worksheet to be used by
analysts to calculate the monthly interest for each revenue code. Based
on our review of LAUSD's documentation for FY2004 through FY2007, LAUSD
needs to take additional steps to ensure it has adequate internal
controls to ensure that amounts due to the Federal Government are
promptly remitted to CDE and other grantor agencies. Also, given that
LAUSD had not previously remitted interest timely, CDE needs to monitor
LAUSD, on an on-going basis, to ensure that LAUSD continues to remit
interest earnings to CDE on a quarterly basis. As we mentioned in
Finding No. 1, 34 C.F.R. § 80.20(b) requires that financial management
systems of grantees and subgrantees meet specific standards, including
an internal control standard that addresses the effective control and
accountability of cash and other assets. In Finding No. 1, we also
mentioned that 34 C.F.R. § 80.21 requires grantees and subgrantees to
promptly, but at least quarterly, remit interest earned on Federal cash
advances to the grantor agency.

LAUSD began remitting interest to grantor agencies in March 2007, but
may not have remitted all amounts its analysts identified in their
worksheets as due for interest earned during FY1995 through FY2007. We
compared amounts in LAUSD's remittance documentation for FY2004 through
FY2007 to the amounts shown as due on the analysts' worksheets for those
years. The comparison identified additional earned interest amounts due
to grantor agencies. Table 4 shows the number of revenue codes and the
\$817,784 of related amounts identified in the comparison that may not
have been remitted to CDE and other grantor agencies.

  --------------------------- ---------------------------- -----------------------
  **Table 4: Results of OIG                                
  Comparison of Remittance                                 
  Documentation                                            
  to Analysts' Worksheets**                                

  **Fiscal Year**             **Number of Revenue Codes    **Total Earned Interest
                              with Earned Interest         Due**
                              Amounts Due**                

  2004                        56                           \$255,596

  2005                        14                           \$305,829

  2006                        37                           \$218,289

  2007 (a)                    14                           \$38,070

  **Total**                                                **\$****817,784**

  \(a\) Information for                                    
  FY2007 represents amounts                                
  through the 3^rd^ quarter                                
  of the fiscal year. At the                               
  time of our review, the                                  
  interest earned during the                               
  4^th^ quarter had not yet                                
  been remitted to the                                     
  grantor agency.                                          
  --------------------------- ---------------------------- -----------------------

The results of our comparison indicate LAUSD's internal controls may not
be adequate for ensuring that all interest earned identified as due to
the Federal Government is promptly remitted to CDE and other grantor
agencies.

Our comparison covered remittance documentation and analysts' worksheets
for FY2004 through FY2007 (3^rd^ quarter). Amounts shown on analysts'
worksheets for earlier years (FY1995 through FY2003) as due to grantor
agencies may not have been included in LAUSD documentation of amounts
remitted to CDE and other grantor agencies. If the periods reviewed were
representative of the prior years (FY1995 through FY2003), there could
be about 1.42 million[^14] of additional earned interest that was
identified by the analysts, but not remitted to CDE and other grantor
agencies.

## Recommendations  {#recommendations-1 .RptSubcaption}

## We recommend that the Chief Financial Officer require CDE to--- {#we-recommend-that-the-chief-financial-officer-require-cde-to-2 .RptSubcaption}

1.  Instruct LAUSD to remit the \$817,784 to CDE and other grantor
    agencies, as permitted under Federal law, for the amounts LAUSD
    identified as due for interest earned during FY2004 through FY2007
    (3^rd^ quarter), or if previously remitted, provide documentation
    confirming the remittance.

2.  Instruct LAUSD to reconcile analysts' worksheets amounts with
    remittance documentation to identify earned interest for FY1995
    through FY2003 that was not remitted to CDE or other grantor
    agencies and remit the identified interest to the agencies, as
    permitted under Federal law. We estimated that about \$1.42 million
    of additional earned interest may not have been remitted for FY1995
    through FY2003.

3.  Promptly transmit to ED the interest amounts remitted by LAUSD under
    Recommendations 3.1 and 3.2.

4.  Obtain confirmation from LAUSD that it has remitted to CDE or other
    grantor agencies all amounts LAUSD identified as due for interest
    earned for the 4^th^ quarter of FY2007 and later.

5.  Evaluate LAUSD's internal controls for ensuring that all interest
    earned on Federal cash advances are remitted promptly to grantor
    agencies and require LAUSD to implement any needed additional
    controls.

6.  Monitor LAUSD, on an on-going basis, to ensure that it continues to
    remit interest earnings to CDE on a quarterly basis.

**LAUSD Comments**

LAUSD stated that it will complete a review of its records to verify
interest remittances for FY2004 through FY2007 and provide the necessary
documentation to confirm the remittances. The target date for completion
of the review was October 31, 2008. However, LAUSD asserted that, even
if the review identifies interest that has not been remitted, it should
not be required to remit the amounts. LAUSD stated that it already
demonstrated a good-faith commitment to resolve the audit by voluntarily
remitting interest for periods covered by the statute of limitations,
and that the amounts previously remitted should more than suffice to
remedy any possible omissions due to discrepancies in documentation for
prior years. LAUSD also claimed that it was due, at least in part, to
CDE's grant-by-grant reporting requirement that LAUSD developed such a
staff-intensive interest remittance methodology which, by its nature,
was more prone to inadvertent calculation errors.

LAUSD stated that it will have, by September 30, 2008, remitted to CDE
and other grantor agencies all amounts it has identified as due for
interest earned for the 4^th^ quarter of FY2007 and for FY2008. LAUSD
noted some delay in its remittances has occurred due to continued
implementation issues with its new financial accounting system. LAUSD
did not expect that such issues will affect interest remittances for
FY2009 and subsequent years.

LAUSD stated that it will collaborate with CDE in the evaluation of its
internal controls for ensuring that all interest earned on Federal cash
advances is remitted promptly to grantor agencies and discuss with CDE
how best to implement a collaborative monitoring process. LAUSD
expressed willingness to implement additional controls provided such
controls are not unduly burdensome to the District. LAUSD also stated,
if CDE agrees to make the changes required to permit LAUSD to adopt the
alternative interest calculation methodology proposed in Finding No. 1,
LAUSD's procedures would be vastly simplified and, thus, much more
easily monitored and reviewed.

**OIG Response**

We did not change our finding or recommendations. LAUSD is required to
remit interest earned on Federal cash advances. LAUSD's previous
remittances do not negate its liability for additional amounts that have
been due to the Federal Government for periods of up to 13 years without
penalty to LAUSD for late remittance. ED will make a determination
during audit resolution on the applicability of the statute of
limitations provision.

[]{#__RefHeading___Toc198632951 .anchor}OBJECTIVES, SCOPE, AND
METHODOLOGY

The purpose of the audit was to determine whether LAUSD 1) used a
methodology for calculating the interest earned on Federal cash advances
that was compliant with Federal requirements, and 2) has policies and
procedures in place to ensure that future interest earned on Federal
cash advances are accurately computed and remitted on a quarterly basis
to CDE. To evaluate LAUSD procedures, we reviewed LAUSD's calculation
and remittance of earned interest on Federal cash advances for FY2004
through FY2007.

Originally, we had planned to review LAUSD's calculations of interest
earned on Federal cash advances during FY1995 through FY2007. LAUSD was
experiencing delays in responding to our request due to problems
experienced with implementation of a new financial accounting system.
After reviewing the initial documentation provided by LAUSD and
assessing the staff resources needed to review each fiscal year, we
opted to focus our review on FY2004 through FY2007.

Prior to initiating the audit, our office completed a general assessment
of LAUSD's controls over, and administration of, Federal education funds
provided under the ESEA. We used information, documentation, and
analyses previously obtained or conducted as part of the general
assessment to accomplish the objectives of this audit. We also---

-   Reviewed Federal laws and regulations related to cash management and
    financial administration of Federal grants.

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-   Reviewed cash management findings reported in the single audit
    portion of LAUSD's CAFRs from FY1995 through FY2006.

-   Interviewed officials and staff at ED, CDE, LACOE, and LAUSD to gain
    an understanding of their cash management activities, Federal cash
    advance processes, and their related oversight responsibilities.

-   Interviewed representatives from other Federal agencies including
    the Office of Management and Budget and the U.S. Treasury's
    Financial Management Service to gain an understanding of laws and
    regulations regarding interest earned on Federal cash advances.

-   Interviewed the IPA that conducted all or a portion of the LAUSD's
    single audits for FY1998 though FY2007 and reviewed audit
    documentation supporting the cash management finding reported in the
    single audit portion of the CAFR for FY2006.

To determine whether LAUSD used a methodology for calculating the
interest earned on Federal cash advances that was compliant with Federal
requirements, we reviewed 34 electronic files provided by LAUSD that
contained detailed and summary worksheets for FY2004 through FY2007.
Since we concluded that LAUSD's methodology did not result in a reliable
amount for the interest earned on Federal cash advances, we limited our
review to confirming the accuracy of formulas and interest rates on the
summary worksheets and consistency of analysts' adherence to LAUSD's
calculation methodology. When we identified anomalies on the summary
worksheets, we expanded our review to the related detailed worksheets
when necessary to resolve the anomaly. We did not confirm the accuracy
of beginning cash balances and monthly receipts and expenditure amounts
entered on the worksheets. We also did not confirm that LAUSD provided
worksheets for all revenue codes for Federal programs.

To determine whether LAUSD has policies and procedures in place to
ensure that future interest earned on Federal cash advances are
accurately computed and remitted on a quarterly basis to CDE, we
reviewed LAUSD's Cash Management Policy Bulletin, dated March 2007. We
also reviewed copies of interest remittance documents supporting the
submission of interest earned on Federal cash advances for FY2004
through FY2007. We compared amounts in the remittance documentation for
FY2004 through FY2007 to the amounts due that were shown on the
analysts' worksheets for those years.

We performed our onsite fieldwork at LAUSD's headquarters in Los
Angeles, California. We held an exit briefing with LAUSD officials on
March 19, 2008 and CDE officials on March 25, 2008. Our audit was
performed in accordance with generally accepted government auditing
standards appropriate to the scope of the review described above.

**ATTACHMENT**

**CDE and LAUSD**

**Comments on the Draft Report**

![](media/image4.png){width="7.555511811023622in"
height="1.4307086614173228in"}![](media/image5.png){width="7.555511811023622in"
height="0.41653543307086616in"}

August 15, 2008

Gloria L. Pilotti, Regional Inspector for Audit

U. S. Department of Education

Office of Inspector General

501 I Street, Suite 9-200

Sacramento, CA 95814-2559

Dear Ms. Pilotti:

**Subject: Los Angeles Unified School District's Procedures for
Calculating and Remitting Interest Earned on Federal Cash Advances,
Control Number ED-OIG/A09H0019**

In response to the U.S. Department of Education, Office of Inspector
General's draft report entitled *Los Angeles Unified School District's
Procedures for Calculating and Remitting Interest Earned on Federal Cash
Advances*, the Los Angeles Unified School District (LAUSD) written
comments on the reported findings and recommendations are contained in
the attached LAUSD letter; the comments and positions set forth in the
LAUSD letter are solely those of the LAUSD.

The California Department of Education (CDE) will continue to work with
the LAUSD and the U.S. Department of Education in resolving the issues
delineated in the audit report.

If you have any questions regarding the LAUSD's response to the draft
report, please contact me at 916‑323‑1547, or by e-mail at
[kchan@cde.ca.gov]{.underline}.

Sincerely,

*/s/*

Kevin W. Chan, Director

Audits and Investigations Division

kwc:ab

Gloria L. Pilotti, Regional Inspector for Audit

August 15, 2008

Page 2

cc: Megan Reilly, Chief Financial Officer, Los Angeles Unified School
District

John Walsh, Legal Counsel, Los Angeles Unified School District

Timothy Rosnick, Interim Controller, Los Angeles Unified School District

  --------------------------------- -------------------------------------
  **MEMBERS OF THE BOARD**          **LOS ANGELES UNIFIED SCHOOL
                                    DISTRICT**

  --------------------------------- -------------------------------------

+-------------------------+-------------+------------------------------+
| **MONICA GARCIA,        | ![](me      | **Administrative Office**    |
| PRESIDENT**             | dia/image6. |                              |
|                         | png){width= | **333 South Beaudry Avenue,  |
| **MARLENE CANTER**      | "1.12430555 | 24^th^ Floor**               |
|                         | 55555554in" |                              |
| **YOLIE FLORES          | height="    | **Los Angeles, California    |
| AGUILAR**               | 1.103472222 | 90017**                      |
|                         | 2222222in"} |                              |
| **TAMAR GALATZAN**      |             | **Telephone: (213)           |
|                         |             | 241-7000**                   |
| **JULIE KORENSTEIN**    |             |                              |
|                         |             | **Fax: (213) 241-8442**      |
| **MARGUERITE POINDEXTER |             |                              |
| LAMOTTE**               |             | **DAVID L. BREWER III**      |
|                         |             |                              |
| **RICHARD A. VLADOVIC** |             | **SUPERINTENDENT OF          |
|                         |             | SCHOOLS**                    |
+-------------------------+-------------+------------------------------+

August 11, 2008

Mr. Jack O'Connell

State Superintendent of Public Instruction

California Department of Education

1430 N Street

Sacramento, CA 95814

RE: ***Los Angeles Unified School District's Procedures for Calculating
and Remitting Interest Earned on Federal Cash Advances*, Control Number
ED-OIG/ A09H0019**

Dear Superintendent O'Connell:

The Los Angeles Unified School District ("LAUSD") is pleased that the
California Department of Education ("CDE") has extended this opportunity
to submit a response to the Draft Audit Report, titled *Los Angeles
Unified School District's Procedures for Calculating and Remitting
Interest Earned on Federal Cash Advances*, recently issued by the U.S.
Department of Education ("ED") Office of Inspector General ("OIG"). The
District has always strived to administer its Federal grants within the
purview of current Federal and State law, policies, and procedures.
LAUSD is committed to working with CDE on an ongoing basis to resolve
this audit review.

LAUSD is also appreciative of the hard work on the part of OIG in this
audit review. The Draft Audit Report helps clarify ED's position on key
aspects of the requirement set forth in ED's General Administrative
Regulations that "grantees and subgrantees shall promptly, but at least
quarterly, remit interest earned on advances to the Federal agency." 34
C.F.R. § 80.21(i). Since 1999, LAUSD has made repeated contact with ED
to seek clarification with respect to matters that the Draft Audit
Report addresses. Moreover, the District has frequently expressed its
commitment to cooperate in good faith with this audit review. In March
2007, for instance, LAUSD began remitting interest for the period
covered by this audit review to CDE for submission to ED and other
Federal agencies. Without conceding any defenses that may be applicable
here, LAUSD has voluntarily remitted to date about \$25 million for
interest earned on Federal cash advances from FY1995 through FY2007, and
will remit additional amounts going forward.

Set forth below are LAUSD's specific responses to each of the
preliminary findings and recommendations identified in the Draft Audit
Report. In addition, LAUSD asserts at the outset a general statute of
limitations defense that, in our view, requires amendment of several of
OIG's recommendations to: (a) reduce the additional funds that the
District would be directed to remit by at least \$4 million and perhaps
more; and (b) to relieve the District of the obligation to investigate
further its interest remittance practices prior to FY2004.

*Jack O'Connell*

*State Superintendent of Public Instruction*

*Los Angeles Unified School District's Procedures for Calculating and
Remitting Interest Earned*

*August 11, 2008*

*Page 2 of 12*

I.  **[OIG's recommendations should be revised to conform to the
    applicable statute of limitations]{.underline}**

LAUSD respectfully requests that OIG revise its recommendations so they
are consistent with the applicable statute of limitations set forth in
20 U.S.C. § 1234a(k). This provision mandates that recipients of ED
program funds are *not* "liable to return funds which were expended in a
manner not authorized by law more than 5 years before the recipient
received written notice of a preliminary departmental decision."  20
U.S.C. § 1234a(k); *see also* 34 C.F.R. § 81.31(c); *State of Cal. Dep't
of Educ. v. Bennett*, 851 F.2d 241, 242-43 (9th Cir. 1988)
(reimbursement not required for funds expended five years before ED
issued notice of the violation).

OIG concedes the existence of this statute of limitations but declines
to express a view with respect to its applicability to this audit
review. *See* Draft Audit Report at 10 n.7. Yet, it is unquestionable
that this statute of limitations is operative in these circumstances. By
enacting 20 U.S.C. § 1234a(k), " 'Congress has clearly manifested its
intention to raise a statutory barrier' " to avoid open-ended
investigations that would require ED grantees and subgrantees to worry
constantly about the need to reach far back into the past to reconstruct
prior practices and undertake forensic reviews of financial records.
*Harrod v. Glickman*, 206 F.3d 783, 789 (8th Cir. 2000) (quoting *United
States v. Wurts*, 303 U.S. 414, 416 (1938)). ED decision-makers, as well
as OIG, have routinely acknowledged the applicability of this statute of
limitations.  *See, e.g.*, ED, Notice of Intent to Compromise Claim
Against Louisiana State Dep't of Educ., 67 Fed. Reg. 64102, 64102 (Oct.
17, 2002); ED, Notice of Intent to Compromise Claim Against Puerto Rico
Dep't of Educ., 67 Fed. Reg. 45103, 45104 (July 8, 2002); ED, Notice of
Intent to Compromise Claim Against Minnesota State Vocational Educ.
Program, 50 Fed. Reg. 4570, 4570 (Jan. 31, 1985); OIG, *Audit of Funds
Not Recovered Due to the Statute of Limitations*, ED-OIG/A19-C0004 (Jan.
6, 2004).

Application of this statute of limitations here is consistent with the
Congressional intent behind 20 U.S.C. §1234a(k), as reflected in the
House Committee Report on the precursor to this provision:

> The Committee has adopted this amendment because it believes that such
> a five year "statute of limitations" will lead to better
> administration of ESEA programs.  It will encourage HEW \[of which the
> Department of Education was then a part\] to make audits more promptly
> than has been the case.  It will also remove the threat presently
> hanging over the heads of school administrators that some day, some
> time, they may be forced to make repayments of expenditures made many
> years before.

H. Rep. No. 805, 93rd Cong., 2d Sess. (1974), *reprinted in* 1974 U.S.
Code Cong. & Ad. News 4093, 4160.  This Congressional intent would be
undermined if ED were to require LAUSD to repay funds expended years ago
for programs designed to improve achievement of school children in the
District.

To date, the five-year statutory period has not yet been triggered
because ED has not yet issued and LAUSD has not yet received a "written
notice of a preliminary departmental decision."  20 U.S.C. § 1234a(k).
Pursuant to ED regulations, the Draft Audit Report does not constitute
the requisite notice. *See* 20 U.S.C. § 1234a(a); 34 C.F.R. § 81.34. 
Thus, LAUSD's monetary liability would at most extend no further back
than five years from the present, *i.e.*, August, 2003. As a result,
there is no basis for any

*Jack O'Connell*

*State Superintendent of Public Instruction*

*Los Angeles Unified School District's Procedures for Calculating and
Remitting Interest Earned*

*August 11, 2008*

*Page 3 of 12*

of OIG's preliminary recommendations that require recalculation or
remittance of funds for periods prior to FY2004. Depending on when ED
decides to issue the requisite written notice, the statute of
limitations may also limit recovery for some or all of FY2004 and
possibly periods thereafter.

To the extent that LAUSD has voluntarily remitted interest for periods
prior to FY2004, these remittances do not constitute a waiver of the
statute of limitations; rather, they were intended to demonstrate the
District's good-faith commitment to work with ED and CDE to resolve the
audit review. 

II. **[LAUSD's specific responses to OIG's preliminary findings and
    recommendations]{.underline}**

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(A) **[LAUSD concurs in part with preliminary Finding No.
    1]{.underline}**

LAUSD agrees with OIG that the District has used a methodology for
determining its remittance obligations that is based on monthly
estimates of interest earned on Federal cash advances. But LAUSD
respectfully disagrees with OIG's finding that this methodology does not
produce a reliable determination of the interest LAUSD actually earned.
Indeed, even OIG concedes that, in some fiscal years, LAUSD's
methodology may have "overstate\[d\] . . . the interest earned on
Federal cash advances." Draft Audit Report at 9.

For example, LAUSD identified such an overstatement in a sample analysis
previously shared with OIG. LAUSD recalculated interest earned on
Federal cash advances for its FY2007 Title I Part D grant, using OIG's
proposed alternative methodology based on average daily balances. Under
LAUSD's methodology, the interest earned totaled \$50,663.03, which was
the amount the District remitted. Under OIG's alternative, the amount of
earned interest was \$50,190. Thus, the District remitted *more*
interest than would have been required under OIG's proposed alternative.
Moreover, the difference between the two approaches is extremely small:
less than 1%.

LAUSD further disagrees that its interest methodology is improper under
existing law. OIG asserts a broad interpretation of two regulatory
provisions: (a) 30 C.F.R. § 80.20(b), which states that Federal grantees
must maintain "\[e\]ffective control and accountability" over grant
assets, and (b) 30 C.F.R. § 80.21(i), which in pertinent part permits
grantees to retain only up to \$100 per year in earned interest. *See*
Draft Audit Report at 6. Although LAUSD appreciates OIG's effort to
clarify ED's interpretation of these provisions, it should be noted that
both provisions are phrased in general terms, and neither expressly
requires any particular interest calculation methodology. Nor is LAUSD
aware of any applicable statute, regulation, or ED guidance that
provides clear notice that the District's methodology for estimating
interest is improper. *Cf. Arlington Cent. Sch. Dist. Bd. of Educ. v.
Murphy*, 548 U.S. 291 (2006) (requiring clear notice for valid
imposition of conditions upon school district's receipt of federal
funds).

Absent clear notice, it is unjust to penalize the District for the
methodology it selected---especially since, as OIG notes, LAUSD
repeatedly sought---without success---guidance from ED regarding its
polices and practices for remitting interest on Federal cash advances.
*See* Draft Audit Report at 4-5. Moreover, as OIG also notes, it would
have been extremely difficult if not impossible for LAUSD to

*Jack O'Connell*

*State Superintendent of Public Instruction*

*Los Angeles Unified School District's Procedures for Calculating and
Remitting Interest Earned*

*August 11, 2008*

*Page 4 of 12*

have adopted OIG's preferred alternative methodology for interest
calculations at any point from FY1995 through the present due to
limitations inherent in the technical finance systems used by the County
Treasurer's office, accounting procedures maintained by the Los Angeles
County Office of Education ("LACOE"), and reporting requirements
mandated by CDE, which are discussed further below. *Id.* at 6-10.

**(B) [LAUSD concurs in part with PRELIMINARY Recommendations 1.1
through 1.5]{.underline}**

OIG recommends that ED's Chief Financial Office ("CFO") require CDE to
take five corrective actions to address its first preliminary finding.
Below LAUSD provides its response to each of OIG's preliminary
recommendations.

**1.1 Work with LACOE and LAUSD to develop a methodology for LAUSD to
identify actual interest earned on Federal cash balances.**

**[LAUSD partially concurs with Recommendation 1.1]{.underline}**.
Notwithstanding the concerns expressed above, LAUSD is eager to work
expeditiously with LACOE and CDE to develop an alternative methodology
for calculating interest earned on Federal cash balances, so long as the
resulting procedure is not significantly more burdensome to the District
than its current approach. LAUSD has already begun to review its current
methodology to determine ways in which it might be streamlined.

LAUSD appreciates OIG's decision not to recommend that the District
revise its current methodology to calculate actual interest earned on a
daily basis for all revenue codes. Draft Audit Report at 9. As OIG
notes, "calculation of average daily balances for each month for all
revenue codes would require a substantial increase in the significant
staff resources already committed to the application of LAUSD's
methodology." *Id.* Instead, ED proposes an alternative approach that
would permit LAUSD to take advantage of the subfund component of LACOE's
current financial report system and group together cash balances for all
Federal programs. According to OIG, this subfund approach would be
satisfactory to ED because it would enable LAUSD to report quarterly on
the actual interest earned, in total, on Federal cash held in those
subfunds. *Id.* at 9-10.

LAUSD is willing to consider adoption of OIG's proposed alternative
methodology because it would have the advantage of simplifying the
District's procedures by significantly reducing the number of
computations required. As a result, the District would likely be able to
devote fewer staff resources to Federal grant administration. Moreover,
this alternative should also diminish the need for the sort of
heightened internal controls addressed by OIG in its third preliminary
finding and related recommendations.

Yet, as OIG points out, there are two obstacles to implementation of its
proposed alternative methodology. First, LAUSD needs support from LACOE
in order to use LACOE's financial reporting system to undertake a
"one-time crosswalk" to the new subfund methodology. *Id*. at 10.

Second, and perhaps more significantly, the subfund methodology would be
more, not less, resource-intensive than LAUSD's current methodology
(even if it were to be streamlined internally as

*Jack O'Connell*

*State Superintendent of Public Instruction*

*Los Angeles Unified School District's Procedures for Calculating and
Remitting Interest Earned*

*August 11, 2008*

*Page 5 of 12*

much as possible) if the District were required to continue remitting
interest on a grant-by-grant basis. OIG points out that under Federal
law LAUSD is allowed to remit the total amount of interest earned in a
lump-sum payment rather than on a grant-by-grant basis. *Id.* Indeed, ED
does not even record grant program information for interest remittances.
*Id.* Nonetheless, CDE has directed local educational agencies to remit
interest on a grant-by-grant basis. Before migrating to the new system,
LAUSD would need concurrence from CDE that grant-by-grant reporting of
interest remittances is no longer required. LAUSD has entered into
preliminary discussions with CDE on this matter, but understands that
CDE has not yet made a determination whether to continue to require
grant-by-grant reporting.

**1.2 Instruct LAUSD to take the interim step to provide a more reliable
estimate by revising its current methodology to either include a
subsequent adjustment of the calculations when the School Rate for the
3^rd^ quarter rate is used for months in the 4^th^ quarter (April, May
and June) or delay performance of the calculations until the 4^th^
quarter rate is available.**

**[LAUSD concurs with Recommendation 1.2]{.underline}**. It is LAUSD's
understanding that this Recommendation is intended for the interim
period while the District works with CDE to implement the alternative
methodology proposed in Recommendation 1.1. One aspect of LAUD's current
methodology with which OIG takes issue is the District's practice of
using the prior fiscal quarter School Rate in interest calculations for
months in the 4^th^ quarter of the fiscal year when the actual School
Rate is not yet available. LAUSD notes that this approach does not
necessarily produce outcomes favorable to the District. As OIG found,
"the methodology understated the estimated interest earned on Federal
cash balance\[s\] in seven of the fiscal years and overstated the amount
in the other three years \[that OIG analyzed\]." Draft Audit Report at
9. Moreover, over time, the net fiscal impact of this practice is quite
minor.

Nevertheless, LAUSD has already revised its interest calculation
methodology in accordance with this Recommendation. While LAUSD
continues to estimate interest for the 4^th^ quarter using the 3^rd^
quarter School Rate, it now requires analysts to make a subsequent
adjustment to the calculations when the actual 4^th^ quarter rate
becomes available in the following fiscal year. Please see the attached
memorandum, dated October 31, 2008, instructing staff to make this
subsequent adjustment for FY2006 and thereafter.

**1.3 Instruct LAUSD to recalculate the estimated interest earned on
Federal cash balances for the 4^th^ quarter of FY1995 through FY2007 and
later using the actual School Rates for the 4^th^ quarter, and remit any
additional amounts due to CDE and other grantors, as permitted under
Federal law.**

**[LAUSD partially concurs with Recommendation 1.3]{.underline}**.
Consistent with Recommendation 1.2, LAUSD is willing to develop and
implement on a prospective basis an interest calculation methodology
consistent with the Draft Audit Report. But the District contends that
it should not have to remit additional interest for FY1995 through
FY2007 beyond the \$25 million it has already voluntarily remitted.
Significantly, LAUSD believes that the interest amounts that the
District has already remitted for the period from FY2006 through FY2007
were calculated using the actual School Rates for the 4^th^ quarter
because, as previously stated in our response to Recommendation 1.2, the
District adjusted its interest methodology in this respect, beginning
with FY2006. LAUSD is in the process of verifying this

*Jack O'Connell*

*State Superintendent of Public Instruction*

*Los Angeles Unified School District's Procedures for Calculating and
Remitting Interest Earned*

*August 11, 2008*

*Page 6 of 12*

fact and will provide additional documentation once its review is
complete. The target date for completion of this review is October 31,
2008.

For periods prior to FY2006, LAUSD contends that it should not be
obligated to undertake further remittances. As stated above, due to the
five-year statute of limitations provision set forth in 20 U.S.C. §
1234a(k), LAUSD has no obligation to undertake any recalculations or
additional remittances for the period prior to FY2004. It would require
significant staff resources to redo calculations for the remaining two
fiscal years---FY2004 and FY2005. And such calculations would likely
yield small sums of additional remittances. Remittances for these two
years would also be inappropriate for the following previously stated
reasons: (a) ED failed to provide sufficiently clear notice with respect
to its preferred interest methodology; and (b) LAUSD tried
unsuccessfully for years to obtain clarification from ED on its interest
remittance practices.

**1.4 Instruct LAUSD to take the interim step to enhance the procedures
for applying its current methodology by providing a standard summary
worksheet for use by its analysts, making the use of the standard
worksheets mandatory, and incorporating internal controls into the
design of the worksheets to ensure the accuracy of formulas and
information entered into the worksheets.**

**[LAUSD concurs with Recommendation 1.4]{.underline}**. It is LAUSD's
understanding that this Recommendation, similar to Recommendation 1.2,
is intended to apply in the interim period while the District works with
CDE to implement the alternative methodology proposed in Recommendation
1.1. To comply with this Recommendation, LAUSD will develop a standard
template for both detail and summary worksheets to ensure accuracy of
formulas and information entered into the worksheets. LAUSD will require
staff to use this and only this template. We expect to have the standard
templates developed by October 1, 2008, in time to use them for FY2009
calculations.

**1.5 Instruct LAUSD to implement appropriate reviews to ensure analysts
are applying the new procedures consistently and accurately.**

**[LAUSD concurs with Recommendation 1.5]{.underline}**. The District
has in place a procedure for Senior Accounting Analysts to review each
worksheet and ensure that analysts are applying procedures consistently
and accurately. Through training and appropriate monitoring, we will
ensure that this procedure is followed rigorously and that the Senior
Accounting Analysts perform careful and thorough review.

**(C) [LAUSD concurs in part with preliminary Finding No.
2]{.underline}**

LAUSD partially concurs with the OIG's second preliminary finding. LAUSD
agrees with OIG's determination that the District has used a process
called "netting," through which it has reduced its remittances of
interest earned on Federal cash advances to compensate for its temporary
use of other available cash resources in circumstances where CDE or ED
was late in making Federal funds available. Yet LAUSD respectfully
disagrees with OIG's conclusion that netting is improper.

*Jack O'Connell*

*State Superintendent of Public Instruction*

*Los Angeles Unified School District's Procedures for Calculating and
Remitting Interest Earned*

*August 11, 2008*

*Page 7 of 12*

LAUSD is not aware of any applicable statute, regulation, or ED guidance
that expressly prohibits netting where, as here, local education
agencies are recipients of Federal grants that "pass through" State
agencies---*i.e.*, the State receives grant funds from a federal agency
and then re-distributes the funds to a local government entity or other
sub-grantee. Under federal law, clear notice is required for valid
imposition of conditions upon a school district's receipt of federal
funds. *Cf. Arlington Cent. Sch. Dist. Bd. of Educ. v. Murphy*, 548 U.S.
291 (2006).

In the absence of clear notice, LAUSD adopted netting as a good-faith
effort to reconcile its legal obligations with the practical
difficulties it has faced in Federal grants management. LAUSD relied on
precedent that supports application of the same interest remittances
rules for State "pass-through" grants as those that govern direct grants
to States. Until the early 1990s, Federal law exempted States from the
general rule that interest earned on Federal grant funds belongs to the
Federal government. While this exemption did not cover direct Federal
grants to local entities, the U.S. Department of Justice and Comptroller
General endorsed its application to situations in which States acted as
"pass-through" entities to local government entities or other
sub-grantees. *See* U.S. Dep't of Justice, Office of Legal Counsel,
*Recovery of Interest on Advance Payments to State Grantees and
Subgrantees*, 6 U.S. Op. Off. Legal Counsel 127 (1982); GAO, Office of
General Counsel, *Principles of Federal Appropriations Law* (Redbook),
vol. II, at 10-86 (3d ed. 2006).

This blanket exemption for States has been repealed, but U.S. Department
of Treasury regulations applicable to ED programs allow States to engage
in netting by collecting interest from the Federal Government when funds
are not delivered in time to fund a Federal program. *See* 31 C.F.R. §
205.14(a); *see also* 31 U.S.C. § 6503(d)(1) ("If a State disburses its
own funds for program purposes in accordance with Federal law, Federal
regulation, or Federal-State agreement, the State shall be entitled to
interest from the time the State's funds are paid out to redeem checks
or warrants, or make payments by other means, until the Federal funds
are deposited to the State's bank account."). OIG acknowledges that CDE
was authorized to engage in netting; but it fails to recognize that,
under the same reasoning as the Department of Justice and the
Comptroller General previously endorsed, it would be rational to
conclude that netting should also apply to State "pass-through" grants
to entities such as LAUSD.

Moreover, from an equitable standpoint, it is unfair to proscribe LAUSD
from netting when it used this procedure primarily to mitigate delays in
receipt of Federal grant funds. OIG found that CDE did not make Federal
funds available to LAUSD on a timely basis when they were needed for
Federal program expenditures. *See* Draft Audit Report at 12. For
instance, OIG notes that for the 2006-2007 school year Elementary and
Secondary Education Act funds were available to CDE on July 1, 2006, but
CDE did not make the initial advance to LAUSD until December 2006. *Id.*
The consequences of this delay were significant. Table 2 of the Draft
Audit Report indicates that LAUSD expenditures exceeded available
expenditures by at least \$300,059 (\$87,830 + \$212,229) in October and
November 2006 alone. *Id.* The overall financial impact to the District
of such delay from FY1995 through the present is of far greater
magnitude.

In sum, when Federal funds are not made available on a timely basis,
LAUSD suffers significantly because it must dip into other resources to
fund Federal programs. By contrast, such delays have no impact on the
State's treasury and are, in fact, beneficial to the Federal government.
Until the moment when grant funds are drawn down, the Federal government
may use these moneys for other purposes.

*Jack O'Connell*

*State Superintendent of Public Instruction*

*Los Angeles Unified School District's Procedures for Calculating and
Remitting Interest Earned*

*August 11, 2008*

*Page 8 of 12*

And, as explained above, Federal law expressly permits the State to
engage in netting. If LAUSD were ordered to remit additional funds, it
would have fewer resources available to fund future programs
simply because it took steps to ensure that such delays would not impede
its continued operation of critical Federal programs. Thus, at the end
of the day, District school children would be the primary victims of any
corrective action required here.

**(D) [LAUSD concurs in part with Preliminary Recommendations 2.1
through 2.4]{.underline}**

OIG recommends that ED's CFO require CDE to take four corrective actions
to address its second preliminary finding. Below LAUSD provides its
response to each of OIG's preliminary recommendations.

**2.1 Instruct LAUSD to revise its procedures to exclude netting or any
other method that reduces the interest due to grantor agencies for the
temporary use of other available cash resources to operate Federal
programs.**

**[LAUSD partially concurs with Recommendation 2.1]{.underline}**. For
the reasons stated above, LAUSD is unwilling to concede that its netting
practices were improper. Nevertheless, in light of the Draft Audit
Report's preliminary findings, LAUSD has revised its procedures to cease
netting for FY2008 as well as the remainder of this audit review. Staff
was informed of the change on July 29, 2008. LAUSD is willing to make
this policy revision permanent, provided that CDE eliminates---or at
least substantially reduces---the time-lag between the date on which ED
makes Federal funds available to CDE and the date on which CDE makes the
initial advance to LAUSD.

**2.2 Instruct LAUSD to remit to CDE and other grantor agencies, as
permitted under Federal law, the \$1,484,622 (\$887,792 + \$596,830)
that our audit identified as not included in its estimated interest
earnings due to grantor agencies because of the use of netting in
LAUSD's calculations.**

**[LAUSD disagrees with Recommendation 2.2]{.underline}**. In the
District's view, ED should not impose retrospective monetary liability
for LAUSD's past practices of netting. As explained above, in the
absence of clear guidance from ED, LAUSD adopted netting as a good-faith
effort to reconcile legal precedents regarding State "pass-through"
grants with the practical difficulties it has faced.

**2.3 Instruct LAUSD to identify other amounts of interest earned on
Federal cash advances that were not remitted to CDE and other grantor
agencies due to the use of netting in FY1995 through FY2007 and later,
and remit the amounts to the agencies, as permitted under Federal law.
We estimated that about \$2.58 million may have not been remitted for
FY1995 through FY2003 due to LAUSD's use of quarterly and fiscal year
netting.**

**[LAUSD does not concur with Recommendation 2.3]{.underline}**. LAUSD
should not be obligated to undertake any recalculations or additional
remittances for the period prior to FY2004 due to the five-year statute
of limitations set forth in 20 U.S.C. § 1234a(k), for the reasons
explained above in Section I of this response. Accordingly, LAUSD should
not be required to remit the \$2.58 million that OIG

*Jack O'Connell*

*State Superintendent of Public Instruction*

*Los Angeles Unified School District's Procedures for Calculating and
Remitting Interest Earned*

*August 11, 2008*

*Page 9 of 12*

estimates may have not been remitted for FY1995 through FY2003, or any
other amount for this period, due to LAUSD's use of quarterly and fiscal
year netting. Nor should LAUSD be required to undertake further
investigations to identify other amounts it may not have remitted for
FY1995 through FY2003.

Even for periods for which the statute of limitations does not apply,
LAUSD disagrees, for the reasons stated in its response to
Recommendation 2.2, with OIG's recommendation that the District should
be required to identify other amounts of interest earned on Federal cash
advances that were not remitted.

**2.4 Promptly transmit to ED the interest amounts remitted by LAUSD
under Recommendations 2.2 and 2.3**.

**[LAUSD does not concur with Recommendation 2.4]{.underline}**. Based
on LAUSD's objections to Recommendations 2.2 and 2.3, it should not be
obligated to remit any additional funds to CDE for FY1995 through
FY2007. Thus, this Recommendation should be moot.

**(E) [LAUSD CONCURS IN PART WITH Preliminary Finding No.
3]{.underline}**

As OIG notes, LAUSD issued Policy Bulletin ADD-007-004 in March 2007 to
update its procedures for prompt remittance of interest earned on
Federal cash advances to CDE and other grantor agencies. *See* Draft
Audit Report at 15. This Policy Bulletin has substantially improved the
District's internal controls for interest calculation, interest
remittance, and remittance verification, and it has helped update and
standardize the worksheets analysts use to calculate monthly interest
for revenue codes.

[]{.mark}

Notwithstanding these revisions, OIG found that LAUSD needs to make
further improvements in its internal controls. *Id.* OIG compared
LAUSD's analyst worksheets with the documentation accompanying the \$25
million in interest LAUSD has thus far remitted and found possible
discrepancies. *Id.* It should be noted that this finding was tentative,
not conclusive.

LAUSD believes that it has remitted all interest earned during the
relevant period, but, as explained further below, it is still in the
process of reviewing its records to resolve the possible discrepancies.
Even if some discrepancies are identified, however, the District submits
that development and implementation of more rigorous internal controls
going forward may not be necessary. If CDE agrees to permit LAUSD to
adopt OIG's proposed alternative interest calculation methodology, the
District's Federal grant administration obligations would be vastly
simplified. As a result, heightened internal controls should no longer
be required.

**(F) [LAUSD concurs in part with Preliminary Recommendations 3.1
through 3.6]{.underline}**

OIG recommends that ED's CFO require CDE to take six corrective actions
to address its third preliminary finding. Below LAUSD provides its
response to each of OIG's preliminary recommendations.

*Jack O'Connell*

*State Superintendent of Public Instruction*

*Los Angeles Unified School District's Procedures for Calculating and
Remitting Interest Earned*

*August 11, 2008*

*Page 10 of 12*

**3.1 Instruct LAUSD to remit the \$817,784 to CDE and other grantor
agencies, as permitted under Federal law, for the amounts LAUSD
identified as due for interest earned during FY2004 through FY2007
(3^rd^ quarter), or if previously remitted, provide documentation
confirming the remittance.**

**[LAUSD does not concur with Recommendation 3.1]{.underline}**. LAUSD
believes that it has remitted all interest earned during FY2004 through
the 3^rd^ quarter of FY2007. As of the date of this letter, however,

LAUSD has not completed the extensive forensic accounting necessary to
reconcile analysts' worksheets with prior remittance records in order to
provide the requested documentation confirming the remittance. In the
short response time permitted by OIG, other projects, such as fiscal
year closeout, required the attention of the District's Controller's
office.

Nevertheless, LAUSD fully intends to complete a full review of its
records to verify the appropriateness of its interest remittances for
FY2004 through FY2007 and to provide necessary documentation to confirm
the remittance. The target date for completion of this review is October
31, 2008. The District reserves the right to supplement its response
when the review is completed. [^15]/

[]{.mark}

Should LAUSD find that some amounts of interest were not remitted for
this period, however, ED should not obligate recovery of those amounts.
LAUSD has already demonstrated its good-faith commitment to resolve the
audit review by voluntarily remitting interest for periods that, as
explained in Section I, are covered by the five-year statute of
limitations set forth in 20 U.S.C. § 1234a(k). Thus, LAUSD has gone far
above and beyond what would be technically required under applicable
law. The amounts LAUSD previously remitted should more than suffice to
remedy any possible omissions due to discrepancies in documentation for
prior years. Moreover, as indicated above, it was due, at least in part,
to CDE's grant-by-grant reporting requirement that LAUSD developed such
a staff-intensive interest remittance methodology in the first place.
The more staff-intensive the District's methodology, the more likely
inadvertent calculation errors may occur.

**3.2 Instruct LAUSD to reconcile analysts' worksheets amounts with
remittance documentation to identify earned interest for FY1995 through
FY2003 that was not remitted to CDE or other grantor agencies and remit
the identified interest to the agencies, as permitted under Federal law.
We estimated that about \$1.42 million of additional earned interest may
not have been remitted for FY1995 through FY2003.**

**[LAUSD does not concur with Recommendation 3.2]{.underline}**. For the
reasons discussed above in Section I, the five-year statute of
limitations in 20 U.S.C. § 1234a(k) bars ED from mandating that LAUSD
remit funds associated with periods prior to FY2004.

*Jack O'Connell*

*State Superintendent of Public Instruction*

*Los Angeles Unified School District's Procedures for Calculating and
Remitting Interest Earned*

*August 11, 2008*

*Page 11 of 12*

**3.3 Promptly transmit to ED the interest amounts remitted by LAUSD
under Recommendations 3.1 and 3.2.**

**[LAUSD does not concur with Recommendation 3.3]{.underline}**. Based
on LAUSD's objection to Recommendations 3.1 and 3.2, it should not be
obligated to remit any additional funds to CDE. Thus, this
Recommendation should be moot.

**3.4 Obtain confirmation from LAUSD that it has remitted to CDE or
other grantor agencies all amounts LAUSD identified as due for interest
earned for the 4th quarter of FY2007 and later.**

**[LAUSD concurs with Recommendation 3.4]{.underline}**. By September
30, 2008, LAUSD will have remitted to CDE and other grantor agencies all
amounts it has identified as due for interest earned for the 4^th^
quarter of FY2007 and for FY2008. There has been some delay in LAUSD's
remittances due to continued implementation issues with the District's
new financial accounting system. LAUSD does not expect that such issues
will similarly affect interest remittances for FY2009 and subsequent
years.

**3.5 Evaluate LAUSD's internal controls for ensuring that all interest
earned on Federal cash advances are remitted promptly to grantor
agencies and require LAUSD to implement any needed additional
controls.**

**[LAUSD partially concurs with Recommendation 3.5]{.underline}**. LAUSD
is eager to collaborate with CDE in the evaluation of its internal
controls for ensuring that all interest earned on Federal cash advances
is remitted promptly to grantor agencies. LAUSD also is willing to
implement additional controls identified in the course of this
evaluation, provided such controls are not unduly burdensome to the
District. Nevertheless, it is unlikely that such an evaluation will
identify additional controls that will be necessary going forward.
Assuming CDE agrees to make the changes required to permit LAUSD to
adopt OIG's proposed alternative interest calculation methodology, the
District's Federal grant administration obligations will be vastly
simplified and, thus, much more easily monitored and reviewed.

**3.6 Monitor LAUSD, on an on-going basis, to ensure that it continues
to remit interest earnings to CDE on a quarterly basis.**

**[LAUSD partially concurs with Recommendation 3.6]{.underline}**. LAUSD
stands ready to assist CDE to monitor the District, on an on-going
basis, to ensure that it continues to remit interest earnings to CDE,
provided that such monitoring is not unduly burdensome to the District.
LAUSD is eager to begin conversations with CDE to discuss how best to
arrange a fully collaborative monitoring process.

**[CONCLUSION]{.underline}**

In sum, LAUSD has acted in good-faith throughout this audit review
process and is committed to working with CDE, LACOE, and ED to revise
its interest remittance policies and practices, on a prospective basis,
provided such revisions are not unduly burdensome to the District. LAUSD

*Jack O'Connell*

*State Superintendent of Public Instruction*

*Los Angeles Unified School District's Procedures for Calculating and
Remitting Interest Earned*

*August 11, 2008*

*Page 12 of 12*

disagrees, however, that it should be required to remit additional
amounts beyond the \$25 million it has already repaid for the period
from FY1995 through FY2007. Of the \$6.3 million in additional interest
that OIG has recommended LAUSD remit, at least \$4 million is excludable
pursuant to the applicable statute of limitations. Even where the
statute of limitations may not apply, LAUSD believes it should not be
required to remit the remaining \$2.3 million or any other amounts for
fiscal years covered by this audit review for the reasons stated in more
detail above.

LAUSD looks forward to working with you further on this matter, and will
be pleased to answer any questions you may have or to receive your
comments.

Sincerely,

/s/

David L. Brewer III

Superintendent of Schools

Los Angeles Unified School District

c: Gloria Pilotti

Regional Inspector General for Audits

U.S. Department of Education

Los Angeles Unified School District

INTER-OFFICE CORRESPONDENCE

TO: ANALYSIS Date: October 31, 2006

FROM: HELEN RIEL

SUBJECT: FY 06 4^th^ QTR INTEREST INCOME ADJUSTMENT

> Please recalculate the interest income (expense) of your
> [Federal]{.underline} Grants for the 4th Quarter FY 2005-06 based on
> the actual interest rate of 4.86%. Please book only the difference of
> the amount booked at the rate of 4.27% and the recalculated amount at
> 4.86%.

Please use the following account codes to book the interest income
(expense):

For interest income earned: DR CR

31-001-07R-8534 Interest Income-FY XXX

02-001-9667 Federal Interest Payable XXX

> A copy of your work papers and journal voucher should be give to Patt
> not later than 4:00 p.m. on 11/07/06 for review and approval.
>
> Please see me if you have any questions.
>
> HR: pp

[^1]:  The \$6.3 million is the sum of amounts presented in the
    Executive Summary for additional amounts that may be due to Federal
    agencies for interest earned during FY1995 through FY2007
    (\$1.48 million + \$2.58 million + \$817,784 + \$1.42 million).

[^2]: In the FY1995 report, the IPA incorrectly referred to the interest
    earned on Federal cash advances as program income. The regulation at
    34 C.F.R. § 80.25 states that program income is to be deducted from
    total allowable program costs to determine the net allowable costs,
    but explicitly states interest earned on grant funds is not program
    income. Thus, the IPA improperly recommended that the District
    credit all interest earned to each Federally funded program.

[^3]: ^?^ LAUSD provided a copy of its letter of December 8, 2003, but
    was unable to locate the earlier letters.

[^4]: LAUSD obtains the annualized School Rate for each fiscal quarter
    from LACOE.

[^5]: Due to the number of calculations and variability in the provided
    documentations, we limited our review to the summary worksheets for
    FY2004 through FY2007. Our reviews of the detailed worksheets were
    limited to gaining an understanding of LAUSD's methodology and
    investigating anomalies in the summary worksheets.

[^6]: Our review of analysts' worksheets for FY2004 through FY2007 found
    that the actual School Rate for the 4^th^ quarter was only used in
    estimated interest calculations for April, May, and June 2006 and
    then only by six of the eight analysts who performed the
    calculations for FY2006.

[^7]: ED-OIG issued a letter to LAUSD on February 8, 2007 announcing a
    review of LAUSD's administration of the Federal education funds. The
    review comprised an assessment of LAUSD's controls in accounting for
    Federal funds and administering programs authorized by the ESEA, as
    amended. Based on that assessment, the ED-OIG initiated the audit
    that resulted in this report.

[^8]: The regulation at 34 C.F.R. § 80.21 provides the basic standard
    and the methods under which a Federal agency will make payments to
    grantees, and grantees will make payments to subgrantees and
    contractors. The basic standard refers to the regulations at 31
    C.F.R. Part 205, issued by the U.S. Department of the Treasury.

[^9]: In March 2007, LAUSD began remitting the interest earned on
    Federal cash advances to CDE for transfer to ED and other Federal
    agencies. Since some of the interest remittances were for interest
    liabilities incurred during the first three quarters of FY2007,
    LAUSD did not net across all revenue codes for the full fiscal year.
    Thus, we calculated the effects of fiscal year netting only for the
    first 3 quarters of FY2007**.**

[^10]: We calculated the estimate for the prior FYs by applying the
    percentage of additional earned interest identified by our audit for
    FY2004 through FY2007 to the earned interest that LAUSD remitted for
    the prior FYs.

    Additional interest due from netting identified

    by our audit for FY2004-2007 \$1,484,622

    X

    \$16,039,512

    =

    \$2,576,853Interest LAUSD remitted \$9,240,968

    for FY2004-2007 Interest LAUSD remitted

    for FY1995-2003Estimated additional interest due from netting
    FY1995-FY2003

[^11]: LAUSD's 2007 CAFR, which contains the single audit findings, was
    not yet available at the time of our fieldwork.

[^12]: The \$887,792 in Recommendation 2.2 includes the impact of
    quarterly netting for only the ESEA, Title I -- Basic Grants to LEAs
    for FY2004 through FY2007. Our review did not identify the impact of
    quarterly netting for other Federal program advances.

[^13]: As explained in the General Accountability Office's *Principles
    of Federal Appropriation Law* (Redbook), prior to 1968, the
    prohibition on retention of interest earned on Federal cash advances
    applied to states as well as other grantees. The passage of the
    Intergovernmental Cooperation Act of 1968 created a major exception
    to the rule for states---states were no longer required to return
    interest earned on grant funds pending their disbursement for
    program purposes. That statutory exception did not prove
    satisfactory since grantor agencies complained of premature drawdown
    of grant advances while grantee states complained of slow Federal
    payment in reimbursement situations. The passage of the CMIA in 1990
    amended the statute.

[^14]: The estimate for the prior FYs was calculated using the following
    formula:

    Additional amounts due but not remitted

    identified by our audit FY2004-2007 \$817,784

    X

    \$16,039,512

    =

    \$1,419,423Interest LAUSD remitted \$9,240,968

    for FY2004-2007 Interest LAUSD remitted

    for FY1995-2003Estimated additional interest due for FY1995-2003

[^15]: / LAUSD's understanding is that this course of action will be
    satisfactory to OIG. OIG recently "clarif\[ied\] that it is not
    necessary or expected that CDE or LAUSD complete the corrective
    actions to address the recommendations prior to providing comments
    on the draft report. . . .  When the recommendation requires the
    remittance of a specific amount (such as recommendation 3.1), CDE
    could explain in its comments that LAUSD is reviewing its records to
    confirm the amount due."  G. Pilotti, Email to K. Chan, regarding
    "Extension to provide comments on draft audit report
    ED-OIG/A09H0019" (July 11, 2008).