March 30, 2004

# Control Number

# ED-OIG/A02-D0014

## Honorable César A. Rey-Hernández

## Secretary of Education

Puerto Rico Department of Education

Calle Teniente González, Esq. Calle Calaf -- 12^th^ Floor

Urb. Tres Monjitas

San Juan, Puerto Rico 00919

Dear Secretary Rey-Hernández:

This is our Final Audit Report entitled *Puerto Rico Department of
Education's (PRDE) Title I Expenditures for the period, July 1, 2002 to
December 31, 2002*. The objective of our audit was to determine if the
non-salary, Elementary and Secondary Education Act, Title I, Part A
expenditures reported by PRDE for the six-month period ending December
31, 2002, were allowable and spent in accordance with Federal law and
regulations. During the course of the expenditure review, we found that
PRDE had allowed approximately \$109.8 million to lapse for the grant
award years 1997 through 2001. We also found that PRDE improperly
expended \$49,536 in Title I funding.

We provided a draft of this report to PRDE. In its response dated March
12, 2004, PRDE stated that it is working in cooperation with the U.S.
Department of Education (ED) to ensure that lapsed Title I funds can be
reimbursed to PRDE as quickly as possible. PRDE also stated that the
questioned expenditures at the targeted assistance schools failed to
establish harm to the Federal interest. PRDE's response did not cause us
to change our findings or recommendations. We have summarized PRDE's
comments after each finding and have included PRDE's entire response as
an Attachment.

**BACKGROUND**

On May 29, 2002, ED designated PRDE as a "high-risk" grantee under 34
C.F.R. § 80.12 because of problems in PRDE's fiscal and program
accountability such as:

-   late submission of Single Audits,

-   failure to adhere to procurement regulations and procedures,

-   lack of proper internal controls, and

-   actions leading to the indictments of the former Secretary of
    Education and other associated individuals.

On June 27, 2002, PRDE submitted a Corrective Action Plan that outlined
steps already taken and those to be taken to address the problems and
ensure compliance with all of the requirements applicable to ED's
programs.

On August 28, 2002, ED informed PRDE that the Office of Elementary and
Secondary Education (OESE) had approved the issuance of fiscal year 2002
grant awards for 12 programs with Special Conditions. The Special
Conditions required quarterly reports for each program with regard to
expenditures and progress in implementing the grants, and a quarterly
report of PRDE's progress in implementing the Corrective Action Plan. ED
allowed PRDE to draw down only up to half of the total funding on each
of these grants until ED received the first quarterly report and
determined PRDE demonstrated substantial progress.

On January 31, 2003, PRDE submitted to ED the first quarterly report,
which included the six-month period, July 1, 2002 to December 31, 2002.
The report covered \$258 million in expenditures incurred by PRDE from
Federal education funds for this six-month period. Our audit report
covers non-salary related Title I expenditures that totaled
\$18,653,325, as reported by PRDE.

**AUDIT RESULTS**

**Finding 1 PRDE had approximately \$109.8 million in Title I funds that
have lapsed**

PRDE did not effectively manage its Federal grant funds. As a result,
PRDE will be unable to use \$109,805,677 in five Title I grants, awarded
from October 1, 1997, through July 1, 2001. These funds could have been
used to benefit Title I students. Of that amount, \$15,937,608 from one
of the grant awards was de-obligated and reverted to the U.S. Treasury
on September 30, 2003. The remaining \$93,868,069 from the other four
grants lapsed and will revert to the U.S. Treasury unless PRDE can
provide evidence to ED of outstanding expenses obligated during the
grant periods.

According to 34 C.F.R. § 80.20(b)(2),[^1] "Accounting records . . . must
contain information pertaining to grant or subgrant awards and
authorizations, obligations, unobligated balances, assets, liabilities,
outlays or expenditures, and income."

The regulations at 34 C.F.R. § 80.20(b)(3) state, "Internal Control . .
. Effective control and accountability must be maintained for all grant
and subgrant cash . . . ."

Pursuant to 34 C.F.R. § 80.23(a) and (b), "Where a funding period is
specified, a grantee may charge to the award only costs resulting from
obligations of the funding period unless carryover of unobligated
balances is permitted, in which case the carryover balances may be
charged for costs resulting from obligations of the subsequent funding
period. . . . A grantee must liquidate all obligations incurred under
the award not later than 90 days after the end of the funding period. .
. . The Federal agency may extend this deadline at the request of the
grantee."

Under the "Tydings Amendment," Section 421(b) of the General Education
Provisions Act, 20 U.S.C. 1225(b), any funds not obligated and expended
during the period for which they were awarded become carryover funds and
may be obligated and expended during the succeeding fiscal year.

ED's Grant Administration and Payment System (GAPS) shows information on
grant awards, such as authorizations, confirmed deposits, draws, and
available balances. As of March 12, 2004, GAPS reported the following
Title I grant award funds as lapsed:

> **[Grant Award]{.underline}** **[Authorization]{.underline}**
> **[Lapsed Funds]{.underline}**

S010A970052 \$ 262,486,541 \$15,937,608

S010A980052 262,430,968 1,306,037

S010A990052 262,430,237 19,735,690

S010A000052 262,415,735 31,409,119

S010A010052 [267,301,457]{.underline} [41,417,223]{.underline}

**Totals** \$1,317,064, 938 \$ 109,805,677

Of the \$109,805,677 in lapsed funds, \$15,937,608 from award
S010A970052 reverted to the U.S. Treasury on September 30, 2003.

PRDE did not closely monitor available grant balances. According to PRDE
officials, the problem began when PRDE's Budget Division did not open
grant accounts timely in the Puerto Rico Treasury Department's Puerto
Rico Integrated Financial Accounting System (PRIFAS). PRDE officials
stated that this forced them to charge payroll for the new grants to the
previous grant year or any other grant that had an available balance,
resulting in untimely multiple adjusting entries in GAPS.

Additionally, PRDE officials stated that their Accounting Division did
not obtain the payroll report, known as the GL 200, from the Puerto Rico
Treasury Department until two to three months after the payroll had been
processed. Consequently, PRDE had to make multiple adjusting entries
months after the charges were made and, in some instances, after the
grant had been closed in GAPS.

PRDE officials stated that they allowed charges to be made to previous
grant years because the account codes in PRIFAS remained open for five
years, as opposed to three years in GAPS. This allowed charges to be
made against the grants for funding periods already closed in GAPS.

We concluded that, had internal controls been in place to prevent lapsed
funds, approximately \$109.8 million could have been better used to
provide Title I services to Puerto Rico's students.

**Recommendations**

We recommend that the Assistant Secretary for OESE require PRDE to:

1.  Provide evidence to OESE of any valid obligations made within the
    authorized award periods so that grants, with funds that have not
    yet reverted to the U.S. Treasury, can be reopened and funds
    liquidated;

2.  Access and use the data in GAPS to closely monitor available grant
    balances;

3.  Implement a system that will require PRDE's Budget Division to open
    new grant account codes upon the receipt of the Grant Award
    Notification;

4.  Open the grant account codes in PRIFAS timely and make payroll
    charges to the corresponding grant year only;

5.  Implement a system that will allow the receipt of the GL 200 payroll
    report from the Puerto Rico Treasury Department no more than two
    weeks after the payroll has been processed; and

6.  Implement a system that will require PRDE's Accounting Division to
    make timely reconciliations to the GL 200 payroll report and timely
    adjusting entries to GAPS, as appropriate.

**PRDE's response**

PRDE stated that it is working in cooperation with ED to ensure that
lapsed Title I funds can be reimbursed as quickly as possible. During
recent conversations with ED, PRDE explained that it had properly
obligated the funds in question during the authorized period, but ED had
not reimbursed the funds. PRDE indicated that once it provides evidence
to ED of obligations that were properly incurred, but not reimbursed, ED
would reopen the grants and permit PRDE to liquidate the funds.

**OIG's reply**

We considered PRDE's response, but did not change our finding or
recommendations. Although PRDE is working with ED to ensure that funds
can be reimbursed, PRDE must provide evidence that the obligations were
incurred within the grant period. PRDE also made adjustments and
liquidations to grant award S010A010052, and we have adjusted the lapsed
funds amounts accordingly. No other adjustments or liquidations occurred
to the remaining reported Title I grant awards. As a result, PRDE had
lapsed funds totaling \$109,805,677, as of March 12, 2004.

Although PRDE reported it is in the process of implementing
recommendation 1.1, it did not present a corrective action plan
addressing the remaining recommendations to avoid this situation in the
future. Specifically, PRDE did not address recommendations 1.2 through
1.6. As a result, PRDE is unable to ensure that Title I funds will not
continue to lapse and revert to the U.S. Treasury.

**Finding 2 PRDE improperly expended \$49,536 in Title I funds**

PRDE did not properly monitor Title I expenditures in the regions and at
targeted assistance schools. Also, PRDE officials lacked knowledge and
training in the proper use of Title I funds at targeted assistance
schools. Our review of a sample of non-salary related Title I
expenditures reported by PRDE for the period July 1, 2002, through
December 31, 2002, disclosed that PRDE improperly expended \$49,536 in
Title I funds. As a result, PRDE could not assure ED that funds were
expended properly.

Appropriate use of Title I funds depends on whether the school is
operating a schoolwide program or a targeted assistance program.
According to the Elementary and Secondary Education Act of 1965, as
amended by the No Child Left Behind Act of 2001,

> Sec. 1114. Schoolwide Programs. (a) Use of Funds for Schoolwide
> Programs -- (1) In General - A local educational agency may
> consolidate and use funds under this part, together with other
> Federal, State, and local funds, in order to upgrade the entire
> educational program of a school that serves an eligible school
> attendance area in which not less than 40 percent of the children are
> from low-income families, or not less than 40 percent of the children
> enrolled in the school are from such families.
>
> Sec. 1115. Targeted Assistance Schools. (a) In General . . . all
> schools selected to receive funds . . . that are ineligible for a
> schoolwide program . . . or that choose not to operate such a
> schoolwide program . . . may use funds received under this part only
> for programs that provide services to eligible children . . .
> identified as having the greatest need for special assistance.
>
> \[Sec. 1115(b)(3) states,\] Funds received under this part may not be
> used to provide services that are otherwise required by law to be made
> available to children . . . but may be used to coordinate or
> supplement such services.

We found that PRDE expended \$42,941 in Title I funds to supplant rather
than supplement State funds at a targeted assistance school. This school
purchased a digital duplicator, supplies, computer equipment, and
computer licenses that were used by ineligible students. We also found
that at another targeted assistance school PRDE improperly expended
\$275 to purchase a desk for a principal. PRDE expended \$1,950 for
catering services at training entitled "Nursing Mothers" given to school
nurses. In addition, a PRDE region improperly charged \$4,370 to Title I
when the expense was actually for Title II, Class Size Reduction.

**Recommendations**

We recommend that the Assistant Secretary for OESE require PRDE to:

1.  Refund \$49,536 for improper expenditures to the Title I account;

2.  Institute monitoring controls to ensure targeted assistance schools
    properly expend Title I funds according to the regulations; and

3.  Provide training to PRDE officials regarding the supplementing
    provisions of the Title I program.

**PRDE's response**

PRDE stated that the questioned expenditures at the targeted assistance
schools failed to establish harm to the Federal interest. PRDE stated at
least \$43,216 (\$42,941 and \$275) of questionable expenditures in two
schools, Republica El Salvador and Sotero Figueroa, were used to satisfy
the requirements of a schoolwide program. PRDE also stated that although
the draft audit report treated the two schools as targeted assistance
schools, both schools meet the qualification for a schoolwide program
under section 1114 of the Elementary and Secondary Education Act.

### OIG's reply

We considered PRDE's response, but did not change our finding or
recommendations. Although PRDE stated both Republica El Salvador and
Sotero Figueroa meet the qualifications for a schoolwide program, PRDE
had designated both schools as targeted assistance schools. In fact,
PRDE provided OIG documentation during the audit that these two schools
were targeted assistance schools. As a result, expenditures must be
treated as targeted assistance school expenses. PRDE did not provide a
response to the remaining questioned costs or recommendations 2.2 and
2.3.

**OTHER MATTERS**

During our audit work, we noticed significant lapsed funds in program
areas that are in addition to the scope of this audit. On December 9,
2003, we issued an Interim Audit Memorandum (State and Local No. 04-02)
to ED's Chief Financial Officer identifying a total of approximately
\$217.4 million in ED grant funds that would lapse by December 31, 2003.
This amount included the \$96.3 million reported in the draft of this
report, the \$38.3 million reported in our concurrent draft audit report
on PRDE's Special Education Expenditures (report No. ED-OIG/A02-D0020),
and \$82.8 million we identified in grant funds that are from programs
outside the scope of these two audits. As of March 12, 2004, PRDE had
lapsed funds totaling \$109.8 million and \$38.1 million for Title I and
Special Education grants, respectively. Had internal controls been in
place to prevent lapsed funds, and pending evidence of any outstanding
obligations, approximately \$230.7 million in ED grants could have been
better used to provide services to Puerto Rico's students.

**OBJECTIVE, SCOPE, AND METHODOLOGY**

The objective of our audit was to determine if the non-salary, Title I
expenditures reported by PRDE for the six-month period ending December
31, 2002, were allowable and in accordance with Federal law and
regulations.

To accomplish our audit objective, we reviewed PRDE's fiscal year 2002
Single Audit report and documents supporting the expenditures selected
for testing. In addition, we interviewed ED program officials, PRDE's
Central Office officials, and PRDE's regional and school officials. We
performed our fieldwork at PRDE's offices in Hato Rey, Puerto Rico, from
April 16, 2003, through October 20, 2003, the date of our exit
conference.

To test the expenditures, we made site visits, from August 26, 2003,
through August 29, 2003, to the following targeted assistance schools:
SU Nemesio R. Canales II, República El Salvador, Miguel Such, Dr. José
N. Gandara, Dr. José Celso Barbosa, Luis Muñoz Rivera, Juan Antonio
Corretjer, Sotero Figueroa, Berwind Superior, and Jose F. Díaz.

To achieve our audit objective, we selected both random and judgmental
samples from a universe developed from the \$139,608,705 of Title I
expenditures reported by PRDE in its January 31, 2003, report to ED. Of
that amount, \$18,653,325 represented non-salary related expenditures.
Included in this total were expenditures not covered by the Special
Conditions reporting requirement (2002/2003 expenditures). First, we
selected random samples and found that some transactions were grouped
transactions that contained multiple (50 plus) expenditures. We then
judgmentally selected from within these grouped transactions for
testing. We stratified our sample between non-salary related
expenditures covered by the Special Conditions and the expenditures not
covered by the Special Conditions. The universe of non-salary
expenditures covered by the Special Conditions was 558 expenses totaling
\$4,098,268. The universe of non-salary expenditures not covered by the
Special Conditions was 3,789 expenses totaling \$14,555,057, including
numerous negative adjusting transactions.

We sampled 30 expenditures from the universe of expenditures covered by
the Special Conditions; 50 expenditures from the universe of
expenditures not covered by the Special Conditions; and 10 judgmentally
selected negative expenditures from the universe of non-Special
Conditions expenditures.

The sample of 30 expenditures from the universe of expenditures covered
by the Special Conditions was stratified by dollar volume, omitting
transactions under \$1,000, and using the following strata:

\$1,000 - \$12,999 17 expenditures

\$13,000 - \$159,999 5 expenditures

\$160,000 plus 8 expenditures

The sample of 50 expenditures from the universe of positive expenditures
not covered by the Special Conditions was stratified by dollar volume,
using the following strata:

\$2,000 - \$9,999 20 expenditures

\$10,000 - \$99,999 10 expenditures

\$100,000 - \$999,999 10 expenditures

\$1,000,000 plus 10 expenditures

The judgmental sample of 10 negative expenditures not covered by the
Special Conditions was based on the highest dollar expenditure.

In total, our samples accounted for \$7,123,033 (38 percent) of the
total reported non-salary related Title I expenditures. However,
included in our samples were 19 "Petition of Funds" transactions. These
transactions represent the disbursement of funds to Community Schools
and were not actually 19 transactions, but multiple (50 plus)
expenditures, supporting one transaction. As a result, we selected a
judgmental sample based on the schools receiving the most funds. Using
this basis, we judgmentally selected the targeted assistance schools in
the San Juan Region.

To achieve our objective, we relied on the computer-processed data
provided by PRDE to ED in its report dated January 31, 2003. To test the
reliability and completeness of PRDE's data, we attempted to reconcile
the expenditures reported by PRDE to drawdowns reported in GAPS. While
verifying PRDE's GAPS reconciliations, we found five grants with closed
funding periods that had lapsed funds. Consequently, we incorporated
this matter and its effects in the AUDIT RESULTS section of this report.

To further test the reliability of the data, we tested three GAPS
drawdowns. To accomplish this analysis we requested PRDE to re-run its
query of PRIFAS to determine if the query submitted to ED was complete.
Based upon these tests, we concluded that the data was not complete, but
it was sufficiently reliable for audit purposes.

We conducted the audit in accordance with generally accepted government
auditing standards appropriate to the scope of the review described
above.

**STATEMENT ON MANAGEMENT CONTROLS**

As part of this audit we assessed the system of management controls
applicable to PRDE's administration of Title I expenditures and Title I
account balances. Our assessment was performed to gain an understanding
of PRDE's system. Based on previous knowledge gained through our prior
audits (ED-OIG/A01-90006, ED-OIG/A01-90007, ED-OIG/A01-A0004,
ED-OIG/A02-B0012, ED-OIG/A02-B0025, and ED-OIG/A02-C00017) and ED's
designation of PRDE as a "high-risk" grantee under 34 C.F.R. § 80.12, we
determined the level of control risk, that is the risk that material
errors, or irregularities, or illegal actions may occur, to be high. We
found that PRDE lacked adequate controls for managing its Title I
account balances and for expending Title I funds. These weaknesses and
their effects are fully disclosed in the AUDIT RESULTS section of this
report.

**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 Education Department official, who will
consider them before taking final Departmental action on this audit:

> Raymond J. Simon

Assistant Secretary

Office of Elementary and Secondary Education

Federal Building 6

400 Maryland Ave., SW, Room 3W315

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 greatly appreciated.

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 to
members of the press and general public to the extent the information
contained therein is not subject to exemptions in the Act.

Sincerely,

/s/

Daniel P. Schultz

Regional Inspector General

> for Audit

![](media/image1.png){width="6.495833333333334in"
height="8.66388888888889in"}

![](media/image2.png){width="6.4944444444444445in"
height="8.294444444444444in"}

![](media/image3.png){width="6.497916666666667in"
height="8.613194444444444in"}

![](media/image4.png){width="6.4944444444444445in"
height="8.738888888888889in"}

[^1]: Unless otherwise specified, all regulatory citations are to the
    July 1, 2002 volume.