# Audit Of The Colorado Student Loan Program's

# Establishment And Use Of Federal And Operating Funds For The Federal Family Education Loan Program 

# 

# 

# 

# 

# FINAL AUDIT REPORT

### 

### 

### 

### ED-OIG/A07-C0009

### July 2003

Our mission is to promote the efficiency, U.S. Department of Education

effectiveness, and integrity of the Office of Inspector General

Department's programs and operations. Region VII - Kansas City Office

#  

# 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 will be made by the appropriate Department
of Education Officials.**

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

Audit Of The Colorado Student Loan Program's

Establishment And Use Of Federal And Operating Funds

For The Federal Family Education Loan Program

# 

Table of Contents

# 

Executive
Summary..........................................................................................
1

Audit
Results................................................................................................
2

Finding No. 1 -- CSLP Improperly Transferred Approximately \$1.63
Million From The Federal Fund To The Operating
Fund...............\...........................................................
2

Finding No. 2 -- CSLP Improperly Allocated A Reimbursement For Indirect
Costs

Incurred By Its Loan Servicing
Unit.............................\...........\...........\...........\.........
4

###### 

###### Finding No. 3 -- CSLP Used Federal Funds To Pay For Unallowable Expenditures........... 5

####### Finding No. 4 -- CSLP Miscalculated The Beginning Balance Of The Federal Fund.......... 7

####### 

#######  

> Background\...\...\...\...\...\...\..........................\...\...\...\...\...\..............
> ...............\...\...\...\...\...\........... 8

# 

# Objective, Scope, And Methodology\...\...\...\...\...\...\...\...\...\...\.......................\...\............\........\.... 9 

# 

> Statement On Management
> Controls............\...\...\...\...\...\...........\...
> ............\...\...\...\...\...\............11

# Appendix -- Colorado Student Loan Program Response To The Draft Audit Report.............12 

# Audit Of The Colorado Student Loan Program's

Establishment And Use Of Federal And Operating Funds

For The Federal Family Education Loan Program

# 

Executive Summary

# 

The Colorado Student Loan Program (CSLP) did not fully comply with the
Higher Education Act of 1965 as amended (HEA) and applicable regulations
in the establishment of Federal and Operating Funds for the Federal
Family Education Loan (FFEL) Program. We found the following occurred
during our audit period, July 1, 1998 through June 30, 1999:

-   CSLP improperly transferred approximately \$1.63 million from the
    Federal Fund to the Operating Fund for a working capital reserve.

-   CSLP improperly allocated a reimbursement for indirect costs
    incurred by its Loan Servicing Unit (LSU), resulting in a \$302,824
    understatement in the Federal Fund.

-   CSLP used Federal funds to pay for unallowable expenditures,
    resulting in a \$236,078 understatement of the beginning balance of
    the Federal Fund.

-   CSLP miscalculated the beginning balance of the Federal Fund,
    resulting in a \$36,131 understatement in the beginning balance of
    the Federal Fund.

We recommend that the Chief Operating Officer (COO) for Federal Student
Aid (FSA) require CSLP to return to the Federal Fund the \$547,185 in
remaining applicable imputed interest on all findings.

In its response to our draft report, CSLP agreed with Findings 2, 3, and
4 but disagreed with Finding 1. In addition, CSLP did not agree with the
rate we used to calculate imputed interest due to the Federal Fund. CSLP
provided documentation that it had repaid the \$1.63 million we cited in
Finding 1 as well as the remaining balance of the \$10.9 million it had
transferred for a working capital reserve. We have summarized its
responses at the end of the respective findings and provided the full
text of the responses as an appendix to this report.

Audit Results

The objective of the audit was to determine whether CSLP complied with
the HEA and regulations governing the establishment and maintenance of
its Federal and Operating Funds. Within the scope and limitations of the
audit, we concluded that CSLP complied with these federal requirements
with the exception of the findings documented in this report. We found
that CSLP inappropriately used loan-servicing expenditures to calculate
the amount of funds it transferred from the Federal Fund, resulting in a
transfer of approximately \$1.63 million in excess of the amount allowed
by the HEA. We also found that CSLP did not deposit approximately
\$302,824 due to the Federal Fund. This occurred because CSLP did not
properly allocate and deposit a portion of an indirect cost
reimbursement from the LSU into the Federal Fund. CSLP also used reserve
funds to pay for approximately \$236,000 of unallowable expenditures and
miscalculated the beginning balance of the Federal Fund due to a
spreadsheet error.

# 

# Finding No. 1 -- CSLP Improperly Transferred Approximately \$1.63 Million From The Federal Fund To The Operating Fund 

CSLP transferred a total of approximately \$10.9 million from the
Federal Fund to the Operating Fund as a working capital reserve under §
422A(f)(1) of the HEA when it established the funds on December 2, 1998.
The HEA limited the allowable transfer to 180 days' cash expenses for
normal operating expenses to perform the duties of the guaranty agency.
CSLP exceeded the limit by approximately \$1.63 million when it
improperly included the expenses of the LSU, a separate unit detached
from any fiscal relationship with CSLP's guaranty operations.

According to 34 C.F.R. § 682.421 (b)(1), a guaranty agency \"may
transfer an amount up to the equivalent of 180 days of cash expenses for
purposes allowed by §§ 682.410 (a)(2) and 682.418 (not including claim
payments) for normal operating expenses to be deposited into the
agency\'s Operating Fund.\" The federal regulations in 34 C.F.R. §
682.410 (a)(2)(ii) provide that a guaranty agency must use the assets of
the reserve fund to pay only costs that are reasonable, as defined under
682.410(a)(11)(iii), and that are ordinary and necessary for the agency
to fulfill its responsibilities under the HEA. The regulations in 34
C.F.R. § 682.410 (a)(11)(iii)(B) state that, in determining the
reasonableness of a cost, consideration must be given to factors such as
the terms and conditions of the guaranty agency's agreements with the
Secretary.

In a November 6, 1998, letter to the U.S. Department of Education (the
Department), CSLP requested fiscal separation of the LSU from CSLP
guaranty operations. The letter pointed out that since the early years
of the LSU it had been self-sustaining and had not been subsidized by
federal funds. A subsequent letter from CSLP to the Department documents
a November 9, 1998, agreement between the Department and CSLP allowing
for the separation CSLP had requested.

By using the LSU expenditures in the 180-day expenditure calculation,
CSLP exceeded the amount of funds it could transfer from the Federal
Fund to the Operating Fund. The transfer (or loan) from the Federal Fund
should not have exceeded \$9,290,167.52 (\$10,921,058.47 -
\$1,630,890.95) because LSU expenditures were not reasonable and
necessary for CSLP to fulfill its responsibilities under the HEA.

Recommendation

We recommend that the COO for FSA require CSLP to

1.  Reimburse the Federal Fund \$451,824 of imputed interest on the
    amount improperly

transferred calculated through June 30, 2002. [^1]

**CSLP Comments --** CSLP contested the propriety of this finding. CSLP
stated that at the time of the transfer of funds from the Federal Fund
to the Operating Fund there were no regulations implementing §422A
(f)(1) of the HEA, as amended by the 1998 amendments. In addition, CSLP
stated that the statute does not specify that the amount of any loan
must relate to expenses for guaranty activities only and that a program
review by the Financial Partners Channel of the Department resulted in
no adverse findings related to the establishment of the Funds. CSLP
provided additional information to evidence that the initial transfer of
the monies from the Federal Fund to the Operating Fund to establish a
working capital reserve were completely repaid on September 10, 2002.

**OIG Response --** CSLP's comments did not alter our overall position
on the allowability of its transfer of \$1,630,891 from the Federal Fund
to the Operating Fund. However, we modified the requested reimbursement
amount in the recommendation to reflect CSLP's complete repayment of the
principal amount in question (\$1,630,891). While regulations regarding
the matter of such transfers were not issued until after December 1998,
pre-existing regulations support our position on the subject transfer.
Allowable transfers are limited by § 422A (f)(1) of the HEA to a portion
of the "normal operating expenses" of a guaranty agency, which are
defined in 34 C.F.R. § 682.410 (a)(1) as expenses relating to "guaranty
activities." Such expenses are defined more specifically by 34 C.F.R. §§
682.410 (a)(2)(ii) and 682.410 (a)(11)(iii), as discussed in this
finding. The transfer amount was not reasonable and necessary
considering the terms of the guaranty agency's LSU separation agreement
with the Department.

# Finding No. 2 -- CSLP Improperly Allocated A Reimbursement For Indirect Costs Incurred By Its Loan Servicing Unit

######## 

CSLP did not properly account for the Federal Fund\'s portion of the LSU
payment for indirect costs allocated to it in FY 1999.[^2] CSLP
allocated its central service department costs, such as accounting,
legal, and human resource expenses, to various departments within CSLP.
Our review of CSLP's cost allocation plan showed that CSLP billed its
LSU for FY 1999 indirect costs in accordance with OMB Circular A-87.
However, it did not credit the Federal Fund as required.

The HEA provides that the Department may not regulate the uses or
expenditures of moneys in the Operating Fund unless a transfer under §
422A (f)(1) of the HEA is outstanding from the Federal Fund. Since CSLP
has not repaid the transfer from the Federal Fund, it is subject to the
cost allocation plan requirements of 34 C.F.R. § 682.418 (c), which
provide that a guaranty agency must follow the cost allocation
requirements described in OMB Circular A-87. OMB Circular A-87, Section
C.4.a. provides that, "\[t\]o the extent that \[applicable\] credits
accruing to or received by the governmental unit relate to allowable
costs, they shall be credited to the Federal award either as a cost
reduction or cash refund, as appropriate.\" This same section of the
Circular defines applicable credits as "those receipts or reduction of
expenditure-type transactions that offset or reduce expense items
allocable to Federal awards as direct or indirect costs."

On July 23, 1999, CSLP transferred approximately \$1.2 million from the
LSU Fund to the Operating Fund for LSU indirect costs. A portion of the
FY 1999 indirect costs incurred by the LSU (covering the period July
1998 through September 1998) was paid from reserve funds. At the end of
FY 1999, CSLP should have prorated the indirect cost reimbursement from
its LSU between the Federal and Operating Funds. Instead, the full
amount went to the Operating Fund.

######### Recommendation

We recommend that the COO for FSA require CSLP to

1.  Reimburse the Federal Fund for the remaining \$46,729 in imputed
    interest calculated through June 30, 2002.

**CSLP Comments** -- CSLP agreed with our finding. CSLP stated that the
pro-ration should have occurred and that it made a transfer of one
quarter of the indirect costs for FY 1999, in the amount of \$302,824,
from the Operating Fund to the Federal Fund. CSLP provided documentation
that this reimbursement occurred on June 30, 2002. CSLP agreed that
additional interest might be owed to the Federal Fund; however, it
believed that the interest rate should be based on the actual interest
paid by the Colorado State Treasury.

**OIG Response --** Our review of CSLP's comments did not change our
position. The Treasury Current Value of Funds rate is specified by the
Debt Collection Act of 1982, 31 U.S.C. 3717, as the minimal rate of
interest for debts owed the Government.

# Finding No. 3 -- CSLP Used Federal Funds To Pay For Unallowable Expenditures 

CSLP used reserve funds for two expenditures that were not allowable or
allocable to the reserve fund after September 30, 1998. This resulted in
an understatement of the Federal Fund amounting to \$236,078. The
expenditures were unallowable under 34 C.F.R. § 682.410 (a)(2)(ii),
which provides that reserve fund assets may only be used to pay those
costs that are allocable to the FFEL Program.

Both expenditures were made using reserve funds before the new Federal
and Operating Funds were established, and they both involved payments
that were made for costs not allocable to the FFEL Program.

-   On September 30, 1998, CSLP paid \$132,077 to the State of Colorado
    for liability and

> worker\'s compensation insurance for the fiscal year ending June 30,
> 1999. Although the State only requested that CSLP pay \$33,019 for the
> insurance for the first quarter of FY 1999, CSLP paid the entire
> amount. CSLP made the payment with federal reserve funds and made no
> adjustment when it established the Federal and Operating Funds for the
> amount that covered the period from October 1, 1998, to June 30, 1999.
> The result of CSLP's failure to adjust for the payment that had been
> made for the last nine months of FY 1999 was that the opening balance
> of the Federal Fund was understated by \$99,058 (\$132,077 less
> \$33,019).

-   On September 30, 1998, CSLP paid \$137,020 for computer programs and
    licenses. Since this expense was for licenses from November 1, 1998,
    through October 31, 1999, it should have been charged to the
    Operating Fund. CSLP paid the amount from federal reserve funds
    prior to October 1, 1998. CSLP made no adjustment when it
    established the Federal and Operating Funds for these licenses. The
    result of CSLP's failure to adjust for these payments was that the
    opening balance of the Federal Fund was understated by \$137,020.

Recommendation

We recommend that the COO for FSA require CSLP to

1.  Reimburse the Federal Fund \$47,460 for imputed interest on the
    unallowable expenditures calculated through June 30, 2002.

**CSLP Comments --** CSLP agreed with our finding. CSLP stated that FY
1998 was the first time that the State allowed quarterly payment of the
insurance and that CSLP had elected to continue to pay it annually. CSLP
also stated that the contract for the software licenses was approved on
September 25, 1998, and due to anticipated deadlines, the software
needed to be installed immediately. CSLP provided documentation that it
transferred a total of \$236,078 for these expenses from the Operating
Fund to the Federal Fund on June 30, 2002. CSLP agreed that additional
interest might be owed to the Federal Fund; however, it believed that
the interest rate should be based on the actual interest paid by the
Colorado State Treasury.

**OIG Comments --** Our review of CSLP's comments did not change our
position. The Treasury Current Value of Funds rate is specified by the
Debt Collection Act of 1982, 31 U.S.C. 3717, as the minimal rate of
interest for debts owed the Government.

# Finding No. 4 -- CSLP Miscalculated The Beginning Balance Of The Federal Fund 

CSLP made an error in calculating the amount needed to establish the
Operating Fund. We found a \$36,131 transfer to the Operating Fund that
was not supported. CSLP explained that it had made an error on the
spreadsheet CSLP used to calculate the beginning balance of the
Operating Fund. A formula in the spreadsheet picked-up the date,
12/02/98, and interpreted it as a dollar amount, resulting in an error
of \$36,131. As a result, the beginning balance of the Federal Fund was
understated by \$36,131. We calculated that CSLP owed the Federal Fund
an additional \$8,884 in imputed interest on this amount calculated
through March 31, 2002. Not correcting such an error would be
inconsistent with sound business practices, as required by 34 CFR §
(a)(11)(iii)(B).

######### Recommendation

We recommend that the COO for FSA require CSLP to

1.  Reimburse the Federal Fund for the remaining \$1,172 in imputed
    interest on the spreadsheet error calculated through March 31, 2002.

**CSLP Comments** -- CSLP agreed with this finding but disagreed with
the OIG recommendation as to the amount of imputed interest that should
be transferred from the Operating Fund to the Federal Fund. CSLP stated
that it had made its interest calculations on the interest paid by the
State Treasury.

**OIG Response --** Our review of CSLP's comments did not change our
position. The Treasury Current Value of Funds rate is specified by the
Debt Collection Act of 1982, 31 U.S.C. 3717, as the minimal rate of
interest for debts owed the Government.

# Background

######### Federal And Operating Funds

The Higher Education Amendments of 1998, enacted October 7, 1998,
required each guaranty agency to establish a Federal and Operating Fund
within 60 days of enactment. All funds, securities, and other liquid
assets previously held in an agency's reserve fund were to be deposited
into a Federal Student Loan Reserve Fund (Federal Fund) by December 6,
1998.

The Federal Fund, which is used to pay lender claims and default
aversion fees, is the property of the Department. The Operating Fund is
used to pay for application processing, loan disbursement, enrollment
and repayment status management, and other guaranty agency activities.
It is the property of the guaranty agency, except for any funds it may
contain by means of transfer from the Federal Fund. Funds transferred
from the Federal Fund remain the property of the Department and use of
the Operating Fund is restricted by federal regulations.

######### The Colorado Student Loan Program

CSLP is the designated guaranty agency for Colorado and is located in
Denver. It is a state agency. CSLP established its Federal and Operating
Funds on December 2, 1998. Its Operating Fund contains funds transferred
from the Federal Fund and is therefore subject to all of the regulations
under 34 C.F.R. § 682.418.

# 

Objective, Scope, And Methodology

# 

The objective of the audit was to determine whether CSLP complied with
the HEA and regulations governing the establishment and maintenance of
its Federal and Operating Funds. The period covered by the audit
extended from July 1, 1998, through June 30, 1999, with the exception of
the review of the usage fees, which extended from July 1, 2000, through
June 30, 2002. To accomplish our objective, we reviewed FY 1999
accounting records relevant to the establishment, maintenance, and
transfer of Federal and Operating Funds.

To review the establishment of the funds, we judgmentally selected 14 of
321 deposits and 9 of 634 expenditures with amounts exceeding \$10,000
that were recorded in the Federal Fund prior to and immediately
following the establishment of the fund. We also judgmentally selected 3
of 75 deposits and 16 of 109 expenditures with amounts exceeding
\$10,000 that were recorded in the Operating Fund prior to and
immediately following the establishment of the fund. We judgmentally
selected 5 of 188 Federal Fund deposit records and 12 of 884 Federal
Fund expenditure records with amounts over \$10,000 for further review
of maintenance of the fund. We also judgmentally selected 10 of 568
Operating Fund deposit records and 12 of 182 Operating Fund expenditure
records with amounts over \$10,000 for further review of the maintenance
of the fund. We judgmentally selected records for testing based on our
perception of which ones were most susceptible to errors and would have
the most impact on the balance of the Federal Fund.

We reviewed CSLP's cost allocation plan and related deposits and
expenditures for State FYs 1998 and 1999. We also reviewed CSLP records
with respect to non-liquid assets, usage fees, and investment and
repayment of funds transferred from the Operating Fund to the Federal
Fund. We reviewed CSLP's financial and single audit reports for FY 1999
as well as the supporting working papers of the independent public
accountant that performed the audits. We interviewed various CSLP
personnel and FSA officials.

To achieve our objective, we relied on data from the Colorado Financial
Reporting System (COFRS) automated accounting system. To assess the
reliability of this data, we reviewed work completed by the independent
public accountant and conducted additional tests. We tested the
accuracy, authenticity, and completeness of the COFRS data by comparing
the data to source records. We concluded that the data contained in the
COFRS accounting system were sufficiently reliable to be used in meeting
the audit's objective.

We performed on-site fieldwork at CSLP offices periodically from January
to June 2002, and continued to collect and analyze data in our offices
through October 2002. We held an exit conference with officials of CSLP
on November 4, 2002, and issued a draft audit report on April 17, 2003.
We received CSLP's comments on the draft report on May 12, 2003, and
clarifying information from CSLP on June 17, 2003. We conducted the
audit in accordance with generally accepted government auditing
standards appropriate to the scope of the audit described above.

# 

Statement On Management Controls

# 

As part of our audit, we made an assessment of CSLP's management control
structure, policies, procedures, and practices applicable to CSLP's
establishment and use of the FFEL Federal and Operating Funds. The
purpose of our assessment was to assess the level of control risk, that
is, the risk that material errors, irregularities, or illegal acts may
occur. We performed the control risk assessment to assist us in
determining the nature, extent, and timing of the substantive tests
needed to accomplish our audit objectives.

To make our assessment, we identified significant controls and
classified them into the following categories:

-   Establishment of the Federal and Operating Funds;

-   Maintenance of the Federal and Operating Funds;

-   Ownership of fixed assets used to administer the FFEL Program;

-   Transfers of assets from the Federal Fund to the Operating Fund;

-   Transactions involving the federal reserve fund, prior to the
    establishment of the Federal and Operating Funds, that significantly
    impacted the opening balances of those funds; and

-   Conflict of interest standards.

Due to inherent limitations, a study and evaluation made for the limited
purpose described above would not necessarily disclose all material
weaknesses in the control structure. However, we identified weaknesses
in CSLP's procedures used to establish the Federal and Operating Funds
as well as weaknesses in transactions involving the federal reserve fund
prior to the establishment of the funds. We describe the weaknesses in
the Audit Results section.

# Appendix

**CSLP Comments On The Draft Report**

#  {#section-23 .unnumbered}

# Audit Of The Colorado Student Loan Program's

# Establishment And Use Of Federal And Operating Funds For The Federal Family Education Loan Program

# 

# Report Distribution List

## Auditee

Ms. Jeanne Adkins, Director 1 1

Colorado Student Loan Program

One Denver Place -- South Terrace

999 18^th^ Street, Suite 425

Denver, CO 80202-2471

[ED Action Official]{.underline}

Theresa S. Shaw, Chief Operating Officer 1

Federal Student Aid

[Other ED Officials (electronically)]{.underline}

Chief of Staff, Office of the Secretary 1

Under Secretary, Office of the Under Secretary 1

Deputy Secretary, Office of the Deputy Secretary 1

Director, Office of Public Affairs 1

Press Secretary, Office of Public Affairs 1

Assistant Secretary, Legislation and Congressional Affairs 1

Assistant Secretary, Office of Intergovernmental and Interagency Affairs
1

Chief Financial Officer 1

Director, Financial Improvement & Post Audit Operations, OCFO 1

Supervisor, Post Audit Group 1

Audit Liaison Officer, Federal Student Aid 1

Audit Liaison Officer, Office of the General Counsel 1

[Office of Inspector General (electronically)]{.underline}

Inspector General 1

Deputy Inspector General 1 1

Assistant Inspector General for Audit 1 1

Assistant Inspector General for Analysis and Inspections 1 1

Assistant Inspector General for Investigations 1 1

Deputy Assistant Inspector General for Audit 1 1

Director, Federal Student Aid Advisory and Assistance 1 1

Regional Inspectors General for Audit 1 each 1 each

Directors, Internal Audit Teams 1 each 1 each

[^1]: Throughout this report, imputed interest has been calculated by
    using the U.S. Department of the Treasury's Current Value of Funds
    rate.

[^2]: 2 Throughout this report, fiscal years refer to the fiscal year
    designated by the State of Colorado, which extends from July 1
    through June 30.