**CONTROL NUMBER**

**ED-OIG/A05-B0020**

Mr. George Dowaliby, Bureau Chief

Connecticut State Department of Education

Bureau of Special Education and Pupil Services

25 Industrial Park Road

Middletown, CT 06457-1543

Dear Mr. Dowaliby:

This **Final Audit Report** presents the results of our audit of
Individuals with Disabilities Education Act Part B (IDEA) funds at the
Connecticut State Department of Education, Bureau of Special Education
and Pupil Services (CSDOE) and three selected local educational agencies
(LEAs). The objectives of our audit were to determine: (1) the extent of
and reasons for carryovers at the three selected LEAs; (2) how many LEAs
implemented the 20 percent supplanting provision and, where implemented,
how the supplanted funds were used and accounted for; and (3) if CSDOE
developed and implemented cash management controls to minimize excess
cash.

Statements that financial and/or managerial practices need improvement
or recommendations that costs questioned be refunded or unsupported
costs be adequately supported, and recommendations for the better use of
funds, as well as other conclusions and recommendations in this report,
represent the opinions of the Office of Inspector General.
Determinations on these matters will be made by the appropriate
Education Department officials.

We provided CSDOE with a draft of this report. CSDOE concurred with the
cash management finding and recommendation. We paraphrased CSDOE's
comments after the finding and have included the response as an
Attachment to this report.

**AUDIT RESULTS**

The percentage of IDEA funds that the three LEAs in our sample carried
over ranged from 23 to 45 percent of their 1999 grant year (July 1,
1999 - June 30, 2000) total IDEA allocation. Two of the LEAs had a
carryover because expenses during the grant year were less than
expected, and the third LEA planned to have a carryover. CSDOE did not
monitor LEAs to determine if they used the 20 percent supplanting
provision and had no record that any LEA used the provision. Two of the
three LEAs maintained excess cash. CSDOE needs to improve controls to
ensure that the LEAs comply with cash management requirements.

***[Carryover]{.underline}***

Under the Tydings Amendment, 20 U.S.C. § 1225, IDEA funds not obligated
by the end of the fiscal year for which they were appropriated can be
carried over to the following fiscal year. Under the Tydings Amendment,
LEAs have up to 27 months to obligate IDEA funds. Statewide, the
carryover percentage for 105 of 153 LEAs increased between the 1996 and
1999 grant award years. For the 1999 grant award year, the 153 LEAs had
an average carryover of 25 percent. The three LEAs in our sample had an
average 1999 grant award carryover of 32 percent. Two of the LEAs
planned to expend their entire IDEA allocation during the grant award
year. However, expenses during the year were less than expected. As a
result, the two LEAs carried over unexpended funds. The other LEA
planned to have a carryover.

***[Supplanting]{.underline}***

IDEA contains a supplanting provision that allows LEAs to use 20 percent
of the federal funding increase in place of non-federal funds. CSDOE did
not monitor LEAs to determine if they used the 20 percent supplanting
provision. However, based on data in the LEAs' audited financial
statements, CSDOE assumed that 10 and 17 LEAs used the 20 percent
supplanting provision during the 1997 and 1998 grant years,
respectively, because the data indicated they had not met the federal
maintenance of effort requirement. CSDOE made adjustments to the data to
allow for the use of the 20 percent supplanting provision, and concluded
the LEAs still did not meet the federal maintenance of effort
requirement. It then asked each LEA to provide documentation explaining
why it did not meet the requirement. We reviewed the documentation for 3
of the 17 LEAs from the 1998 grant year, and concluded that they did
meet the maintenance of effort requirement and did not use the 20
percent supplanting provision. Although we did not review documentation
for the remaining LEAs, nothing came to our attention to indicate that
any of them used the supplanting provision. CSDOE obtained no other
information on use of the 20 percent supplanting provision from the
LEAs.

***[Cash Management]{.underline}***

While reviewing IDEA cash flow, we identified excess cash at two of the
three LEAs. According to 34 C.F.R. §80.20 (b) (7) (July 1, 1999
codification), procedures for minimizing the time elapsing between the
transfer of funds from the U.S. Treasury and disbursement by grantees
and subgrantees must be followed whenever advance payment procedures are
used. Grantees must monitor cash drawdowns by their subgrantees to
assure that they conform substantially to the same standards of timing
and amount as apply to advances to the grantees.

However, CSDOE\'s process for obtaining IDEA funds and disbursing them
to the LEAs did not comply with the regulation. The LEAs used the
Monthly Cash Management Report (CSDOE form ED 111) to report total cash
needs through the end of the upcoming month. CSDOE used the reported
amounts, minus previous drawdowns, to obtain IDEA funds from the
Department and disburse them to the LEAs. CSDOE did not determine how
much of the reported total cash needs were actual expenses or if
projected needs through the end of the upcoming month were reasonable.

Each of the two LEAs that maintained excess cash reported cash needs
based on overstated projections. One LEA reported cash needs based on a
predetermined schedule for receiving funds. The predetermined amounts
significantly exceeded actual expenses plus projected cash needs through
the end of the upcoming month. Cash on hand at that LEA as of June 30,
2000, reached a high of \$272,089, or 50 percent of its total 1999 grant
year award. In May 1998 and 1999, the second LEA reported, as total cash
needs, amounts that it did not expend until June 1999 and 2000,
respectively. Cash on hand at that LEA as of November 24, 1999, reached
a high of \$56,644, or 30 percent of its total 1999 grant year award.

The excess cash on hand at the LEAs resulted in an imputed interest cost
to the U.S. Government. We did not do sufficient testing to
statistically project the statewide imputed interest cost. Based on our
limited testing, using the 5 percent U.S. Treasury Current Value of
Funds Rate, we estimate the additional cost could have been between
\$4,000 and \$28,000 a month.

**Recommendation**

The Assistant Secretary for the Office of Special Education and
Rehabilitative Services should instruct CSDOE to improve controls to
ensure that the LEAs comply with cash management requirements. For
example, CSDOE could require LEAs to report total receipts, actual
cumulative disbursements, and projected needs for the upcoming month. By
comparing IDEA funds previously received to the actual expenses and
projected needs, CSDOE could determine the amount of funds to provide to
the LEAs.

**CSDOE's Comments --** CSDOE concurred with our cash management
finding. CSDOE's response indicated that it had taken action to improve
controls to ensure that the LEAs comply with cash management
requirements. In addition, CSDOE has alerted Independent Public
Accountants to its concerns involving excess cash and will monitor
Single Audit Reports for cash management findings.

**BACKGROUND**

The purpose of IDEA is to (1) ensure that children with disabilities
have available to them a free appropriate public education that
emphasizes special education and related services designed to meet their
unique needs and prepare them for employment and independent living; (2)
ensure that the rights of children with disabilities and parents of such
children are protected; and (3) assist states, localities, educational
service agencies, and federal agencies to provide for the education of
all children with disabilities. IDEA was enacted in 1975 and is
scheduled for reauthorization in 2002.

The IDEA programs are governed by regulations contained in 34 C.F.R.
Part 300, *Assistance to States for the Education of Children with
Disabilities*. In addition, IDEA is subject to the provisions contained
in the *State-Administered Programs* (34 C.F.R. Part 76), *Uniform
Administrative Requirements for Grants and Cooperative Agreements to
State and Local Governments* (34 C.F.R. Part 80), and *General Education
Provisions Act-Enforcement* (34 C.F.R. Part 81) regulations.

For grant year 1999, the Department provided \$53.0 million to CSDOE for
IDEA. Of that amount, CSDOE kept \$11.3 million for administration and
state level activities and allocated \$41.6 million to its 153 LEAs.
CSDOE provided \$2.109 million to Hartford Public Schools, \$546,000 to
Hamden Public Schools, and \$163,000 to Wolcott Public Schools.

**OBJECTIVES, SCOPE, AND METHODOLOGY**

The objectives of our audit were to determine: (1) the extent of and
reasons for carryovers at the three selected LEAs; (2) how many LEAs
implemented the 20 percent supplanting provision and, where implemented,
how the supplanted funds were used and accounted for; and (3) if CSDOE
developed and implemented cash management controls to minimize excess
cash.

To meet our objectives, we reviewed: (1) CSDOE\'s written procedures for
requesting and receiving IDEA funds from the Department and disbursing
funds to the LEAs; (2) appendices to CSDOE\'s State Agency Appropriation
Accounting System Manual; (3) CSDOE\'s IDEA grant application, bank
records, draw down records, payment lists, vouchers, carryover records,
and State Treasurer\'s reports; (4) Cash Management Improvement Act
Agreements between CSDOE and the U.S. Treasury; (5) CSDOE records of
LEAs that may have used the supplanting provision; and (6) LEA receipt
and expenditure records and expense reports.

We reviewed findings from the 1998 and 1999 single audit reports for the
State of Connecticut and researched the Office of Special Education
Program\'s web page for recent monitoring reports. In addition, we
interviewed officials from CSDOE, the three selected LEAs, and an
official at the Connecticut Auditor of Public Accounts.

To achieve the assignment\'s objectives, we relied on data contained in
electronic accounting records at CSDOE and two LEAs. We verified that
CSDOE\'s disbursement information agreed with receipt information in the
electronic accounting records at two LEAs and the manual accounting
records at the third LEA. We did not verify data reliability because the
data were not critical to meeting the objectives of the audit. However,
during our audit, nothing came to our attention that caused us to doubt
the acceptability of the data.

Our audit covered the 1997, 1998, and 1999 grant award years. To
calculate the increase in carryover for the three years covered, we
obtained and used 1996 grant year data as a base year. We performed
field work at CSDOE in Middletown, Connecticut, from April 23-25, 2001,
and at three LEAs from April 25-May 4, 2001. We randomly selected the
LEAs by selecting one each from stratified universes of 6 large, 15
medium, and 90 small LEAs statewide. We conducted our audit in
accordance with government auditing standards appropriate to the scope
of our review.

**STATEMENT ON MANAGEMENT CONTROLS**

As part of our review, we gained an understanding of CSDOE\'s management
control structure, as well as its policies, procedures, and practices
applicable to the scope of the audit. We identified applicable
significant controls at CSDOE related to carryovers, supplanting, and
cash management. We gained an understanding of the policies, procedures,
and practices related to carryovers, supplanting, and cash management at
the three LEAs. Due to inherent limitations, gaining an understanding of
management controls would not necessarily disclose all material
weaknesses. However, we identified a cash management weakness at CSDOE
related to monitoring LEA reported disbursement amounts. The Audit
Results section of this report fully discusses this weakness and its
effect.

**ADMINISTRATIVE MATTERS**

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 ED official, who will consider them before
taking final action on the audit:

Robert Pasternack

> Assistant Secretary for Special Education
>
> and Rehabilitative Services
>
> FOB 6, Room 7W103
>
> 400 Maryland Avenue, SW
>
> Washington, DC 20202

Office of Management and Budget Circular A-50 directs federal agencies
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 greatly appreciated.

In accordance with the Freedom of Information Act (5 U.S.C. §552),
reports issues 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 exemptions in the Act.

Sincerely,

Lorraine Lewis

Attachment

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