-----------------------------------------------------------------------
  Federal Student Aid's Performance as a Performance-Based Organization

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

## FINAL AUDIT REPORT

![](media/image1.pct)

**ED-OIG/A19H0008**

**December 2008**

+-------------------------+----------------------+---------------------+
| Our mission is to       | !                    | U.S Department of   |
| promote the efficiency, | [](media/image2.bmp) | Education           |
| effectiveness, and      |                      |                     |
| integrity of the        |                      | Office of Inspector |
| Department\'s programs  |                      | General             |
| and operations.         |                      |                     |
|                         |                      | Washington, DC      |
+-------------------------+----------------------+---------------------+

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 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

> THE INSPECTOR GENERAL

##### December 11, 2008 {#december-11-2008 .Enclosure-Number}

##### Memorandum {#memorandum .Enclosure-Number}

**TO:** Kent D. Talbert

Delegated Responsibilities of the Under Secretary

**FROM:** Jerry G. Bridges /s/

Acting Inspector General

**SUBJECT:** Final Audit Report

Federal Student Aid's Performance as a Performance-Based Organization

Control Number ED-OIG/A19H0008

Attached is the subject final audit report that covers the results of
our review of Federal Student Aid's (FSA) performance as a
performance-based organization. We received FSA's comments and its
corrective action plan for each of the recommendations in our draft
report.

Corrective actions proposed (resolution phase) and implemented (closure
phase) by your office will be monitored and tracked through the
Department's Audit Accountability and Resolution Tracking System
(AARTS). Department policy requires that you develop a final corrective
action plan (CAP) for our review in the automated system within 30 days
of the issuance of this report. The CAP should set forth the specific
action items, and targeted completion dates, necessary to implement
final corrective actions on the findings and recommendations contained
in this final audit report.

In accordance with the Inspector General Act of 1978, as amended, the
Office of Inspector General is required to report to Congress twice a
year on the audits that remain unresolved after six months from the date
of issuance.

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.

We appreciate the cooperation given us during this review. If you have
any questions, please call Michele Weaver-Dugan at (202) 245-6941.

Enclosure

cc: James Manning, Acting Chief Operating Officer, FSA

Marge White, Audit Liaison Officer (ALO), Internal Audits, FSA

Phil Link, Director, Executive Secretariat

TABLE OF CONTENTS

####### Page

[EXECUTIVE SUMMARY 1](#__RefHeading___Toc211753087)

[BACKGROUND 3](#__RefHeading___Toc211753088)

[AUDIT RESULTS 4](#__RefHeading___Toc211753089)

[FINDING NO. 1 -- FSA Did Not Always Fulfill Its Planning and Reporting
Responsibilities 4](#__RefHeading___Toc211753090)

[FINDING NO. 2 -- FSA's Progress in Integrating Its Student Financial
Assistance Systems Is Significantly Hindered
10](#__RefHeading___Toc211753091)

[FINDING NO. 3 -- FSA's Progress Towards the Reduction of Program
Administration Costs is Uncertain 13](#__RefHeading___Toc211753092)

[OBJECTIVE, SCOPE, AND METHODOLOGY 20](#__RefHeading___Toc211753093)

[ATTACHMENT FSA Response to Draft Report](#__RefHeading___Toc211753094)

[]{#__RefHeading___Toc211753087 .anchor}EXECUTIVE SUMMARY

The objective of our audit was to determine if Federal Student Aid (FSA)
is meeting its responsibilities under Title I, Part D of the Higher
Education Act (HEA), as amended, related to planning and reporting,
systems integration, and cost reduction. In response to the growing
complexity, increasing demand, and the likelihood for fraud, waste, and
abuse associated with student financial assistance programs, Congress
amended the HEA in 1998 to create a performance-based organization (PBO)
to manage and administer student financial assistance programs
authorized under Title IV of the HEA. As the designated PBO, FSA
operates without the constraints of certain rules and regulations for
the purpose of achieving specific measurable goals and objectives.

With regard to the scope of our audit, we found FSA is not meeting its
responsibilities under Title I, Part D of the HEA. We found that FSA has
not completely fulfilled its planning and reporting responsibilities, as
required, and its planning and reporting processes are not always
effective or efficient. Specifically, FSA did not issue its first
Five-Year Performance Plan (Five-Year Plan) until 2004 and did not
prepare one in 2005. We found none of the strategic objectives to be
measurable or quantifiable in FSA's Fiscal Year (FY) 2004-2008 plan. In
comparing the Five-Year Plans to the Annual Performance Plans (Annual
Plans), we found a weak correlation between the documents and found it
difficult to determine what action items from the Annual Plans were
necessary for FSA to achieve its Five-Year Plan goals. We also found
FSA's FY 2004 to 2006 Annual Performance Reports (Annual Reports) did
not always provide required information, including: 1) clear information
on how FSA met the Five-Year Plan goals; 2) performance requirements
under the Government Performance and Results Act of 1993 (GPRA); 3)
evaluation ratings of the Chief Operating Officer (COO) and senior
managers, including bonus amounts; and 4) recommendations for
legislative and regulatory changes. As a result, FSA has not clearly
informed Congress, the Secretary, or the public about its progress
toward achieving its purposes as established by the HEA.

We also found FSA's progress in integrating its student financial
assistance systems is significantly hindered. We found the development
of two out of three major systems integration initiatives, which FSA
planned to complete by 2008, have been canceled. FSA expects to release
only the first of two phases of the third initiative in 2008. Due to the
failure of its system integration efforts, FSA has been unable to
realize the expected benefits of the initiatives and has hindered its
progress in meeting the requirements of the HEA.

In addition, we found FSA's progress towards the reduction of program
administration costs is uncertain. Specifically, we found FSA did not
establish measurable strategic goals in the area of cost reduction until
its FY 2006 Five-Year Plan, and these measures will not be reported on
until FY 2008. We also found anticipated cost savings from three of four
major system initiatives identified in FY 2004-2006 Annual Reports are
not expected until FY 2008 and beyond. Further, we found the scope of
work for two of the four system initiatives was significantly reduced
and separate acquisitions of unknown cost are planned to complete these
initiatives. The transition of the third initiative has been delayed,
causing FSA to incur unexpected costs. Due to the limitations noted, it
is difficult to determine FSA's progress in reducing its costs. As a
result, Congress, the Secretary, and the public cannot determine if FSA
has reduced its program costs since becoming a PBO in 1998.

To correct the weaknesses identified, we recommended that the Under
Secretary ensure the Acting COO takes action to, among other things:

-   Implement controls to ensure Five-Year Plans include measurable and
    quantifiable strategic objectives, Annual Plans correlate with
    Five-Year Plans, and Annual Reports clearly convey the extent of
    meeting specific goals and objectives;

-   Ensure staff responsible for planning and reporting on FSA's
    performance are familiar with GPRA requirements;

-   Provide the most recently available rating and bonus information for
    the COO and each of the senior managers in the Annual Reports;

-   Identify recommendations for legislative and regulatory changes in
    each Annual Report;

-   Establish procedures and controls to ensure the feasibility of major
    system integration efforts;

-   Report savings from major system initiatives to facilitate tracking
    of planned savings to actual savings; and

-   Include appropriate transition clauses in all future contracts to
    avoid unnecessary transition costs.

In its response to the draft audit report, FSA stated, in general, it
agreed with many of the comments in the report, and provided a
corrective action plan to address each of the recommendations. FSA noted
disagreement with Finding 1, generally concurred with Finding 2, and
provided comments but did not specifically state whether or not it
concurred with Finding 3. The comments are summarized at the end of each
finding. No changes were made to the report as a result of FSA's
response. The full text of FSA's response is included as an Attachment
to this report.

[]{#__RefHeading___Toc211753088 .anchor}BACKGROUND

Federal Student Aid (FSA) manages and administers student financial
assistance programs authorized under Title IV of the Higher Education
Act (HEA), as amended. These programs include the William D. Ford
Federal Direct Loan Program, the Federal Family Education Loan Program
(FFEL), the Federal Pell Grant Program, and campus-based programs. In
response to the growing complexity, increasing demand, and the
likelihood for fraud, waste, and abuse associated with the student
financial assistance programs, Congress amended the HEA in 1998 to
create a performance-based organization (PBO) to manage and administer
student financial assistance programs authorized under Title IV of the
HEA. As the designated PBO, FSA operates without the constraints of
certain rules and regulations for the purpose of achieving specific
measurable goals and objectives.

As defined in Title I, Part D of the HEA, the purposes of FSA as a PBO
are to:

-   improve service to students and other participants in the student
    financial assistance programs;

-   reduce the costs of administering the programs;

-   increase the accountability of responsible officials;

-   provide greater flexibility in management of operational functions;

-   integrate information systems;

-   implement an open, common, integrated delivery system; and

-   develop and maintain a system that contains complete, accurate, and
    timely data to insure program integrity.

The HEA also requires the appointment of a Chief Operating Officer
(COO), establishment of a fair and equitable system for measuring staff
performance, and development of annual performance agreements for the
COO and other senior managers. In exchange for increased accountability,
the legislation allows for the payment of performance bonuses to the COO
and senior managers, the hiring of an unlimited number of senior
managers, and the appointment of up to 25 excepted service personnel to
administer the functions of the PBO.

FSA's enabling legislation requires several annual reporting
requirements to inform Congress and the public of the progress that FSA
is making toward achieving its intended purposes and goals. The COO and
Secretary must (1) agree on and publicly release each year a five-year
performance plan that includes measurable goals and objectives as well
as the action steps necessary to achieve a modernized student financial
assistance delivery system, and (2) provide an annual report to Congress
that describes the results achieved relative to the PBO's goals and
objectives.

[]{#__RefHeading___Toc211753089 .anchor}AUDIT RESULTS

With regard to the scope of our audit, we found FSA is not meeting its
responsibilities under Title I, Part D of the HEA, as amended.
Specifically, we found: (1) FSA has not always fulfilled its planning
and reporting responsibilities, (2) FSA's progress in integrating its
student financial assistance systems is significantly hindered, and (3)
FSA's progress towards the reduction of program administration costs is
uncertain. As a result, FSA has not clearly informed Congress, the
Secretary, or the public about its progress toward achieving its
purposes as established by law; FSA has been unable to realize benefits
associated with systems integration and has hindered its progress in
meeting related requirements; and Congress, the Secretary, and the
public cannot determine if FSA has reduced its program administration
costs since becoming a PBO in 1998.

In its response to the draft audit report, FSA stated, in general, it
agreed with many of the comments in the report, and provided a
corrective action plan to address each of the recommendations. FSA noted
disagreement with Finding 1, generally concurred with Finding 2, and
provided comments but did not specifically state whether or not it
concurred with Finding 3. The comments are summarized at the end of each
finding. No changes were made to the report as a result of FSA's
response. The full text of FSA's response is included as an Attachment
to this report.

[]{#__RefHeading___Toc211753090 .anchor}FINDING NO. 1 -- FSA Did Not
Always Fulfill Its Planning and Reporting Responsibilities

FSA needs to improve its planning and reporting of PBO activities. We
determined that FSA has not completely fulfilled its planning and
reporting responsibilities under Title I, Part D of the HEA, and its
planning and reporting processes are not always effective or efficient.

[Five-Year Performance Plans]{.underline}

The HEA requires FSA to develop a Five-Year Performance Plan (Five-Year
Plan) annually. Although established as a PBO in 1998, FSA did not issue
its first Five-Year Plan until 2004.[^1] Our review of the Fiscal Year
(FY) 2004-2008 plan noted it contained five strategic objectives
outlining FSA's general goals over the term of the plan. It also
contained tactical goals which offered descriptive procedures for
obtaining the strategic objectives. However, similar to what the
Government Accountability Office (GAO) reported in October 2004, [^2] we
found none of the strategic objectives to be measurable or quantifiable.
We also found 14 of the 38 (37 percent) tactical goals to be
immeasurable, and none of the tactical goals was directly linked to
specific strategic objectives.

We noted FSA did not prepare a Five-Year Plan in FY 2005, as required.
Our review of FSA's 2006-2010 plan noted some improvements from FY 2004,
as tactical goals were linked to specific strategic objectives, and
performance standards were established that would enable FSA to measure
its success in achieving identified goals.

[Annual Performance Plans]{.underline}

Although not required by the HEA, FSA also develops an Annual
Performance Plan (Annual Plan), which provides a more detailed
discussion of procedures to complete the goals identified in the
Five-Year Plan. FSA officials stated the Annual Plan essentially "gives
birth" to the Annual Report, and also feeds into the Five-Year Plan. FSA
officials stated that everything FSA does comes from the Annual Plan,
and these items should tie back to the Five-Year Plan. The Annual Plan
includes the project number, responsible area, responsible general
managers, why FSA is doing the project, how FSA will know it was
successful in completing the project (success measure), and the target
completion date.

In comparing the Five-Year Plans to the Annual Plans, we noted a weak
correlation between documents. The Annual Plans from FYs 2004 through
2006 provided action items for the strategic objectives identified in
the 2004 Five-Year Plan. Because the 2004 Five-Year Plan did not
identify which tactical goals related to the strategic objectives, we
found it difficult to determine what action items from the Annual Plans
were necessary for FSA to achieve its tactical goals. We found a
stronger correlation between FSA's 2006 Five-Year Plan and the FY 2006
Annual Plan because the Five-Year Plan linked its short-term tactical
goals to its specific long-term strategic objectives.

[Annual Performance Reports]{.underline}

FSA is also required by the HEA to prepare an Annual Performance Report
(Annual Report). We reviewed FSA's Annual Reports for FYs 2004 to 2006
and found the reports did not always meet the requirements of the HEA.
Specifically, we noted the reports did not provide:

-   Clear information that conveyed to what extent the PBO met Five-Year
    Plan goals and objectives;[^3]

-   Performance requirements applicable to the PBO under the Government
    Performance and Results Act of 1993 (GPRA);

-   Evaluation ratings of the performance of the COO and senior
    managers, including the amounts of the bonus compensation awarded to
    these individuals; and

-   Recommendations for legislative and regulatory changes.

We also noted the Annual Report format changed each year, making it
difficult to follow progress from one year to the next, and that
statements made in the reports tended to be broad in nature, making it
difficult to determine exactly where FSA was in achieving its goals.

According to FSA officials, the Annual Report discusses progress made
and goals accomplished with regard to the Annual Plan. However, we noted
accomplishments mentioned in the reports did not always correlate to
stated quantitative success measures or goals that were identified in
the related Annual Plan and/or Five-Year Plan. Only 60 percent of FY
2004 accomplishments related to systems integration and cost reduction
were found to correlate with the FY 2004 Annual Plan and/or related
Five-Year Plan, and 88 percent of accomplishments in the FY 2005 Annual
Report were found to correlate with related plans. Ninety-six percent of
FY 2006 Annual Report accomplishments were found to correlate with the
respective Annual Plan and/or Five-Year Plan.

Conversely, we noted that not many action items and success measures per
the Annual Plan were included in the Annual Report. We judgmentally
selected 47 out of 274 action items (17 percent) with 100 out of 315
associated success measures (32 percent), as relating to systems
integration and cost reduction, from FY 2004-2006 Annual Plans and
traced them to the corresponding Annual Report. Only 3 of 14 selected
action items (21 percent) and 3 of 24 selected success measures (13
percent) were included in FY 2004; 10 of 25 selected action items (40
percent) and 18 of 55 selected success measures (33 percent) were
reported in the FY 2006 Annual Report. [^4]

We also reviewed documentation available to support accomplishments
noted in the Annual Reports related to systems integration and cost
reduction efforts. FSA could not initially support 24 of 38 (63 percent)
accomplishments in the FY 2004-2006 reports. In response to our request,
FSA provided additional documentation that supported 16 additional
accomplishments. Ultimately, we were not provided with information to
support 8 of the 38 (21 percent) accomplishments.

We found that items noted as being canceled and items that were not
successfully completed were not mentioned in the reports. In general,
the FY 2004 and 2006 reports tended not to note any problems that had
been encountered.

Section 141 (c)(1) of the HEA, as amended, states,

(A) In general- Each year, the Secretary and Chief Operating Officer
    shall agree on, and make available to the public, a performance plan
    for the PBO for the succeeding 5 years that establishes measurable
    goals and objectives for the organization.

Section 141 (c)(2) of the HEA states,

> Each year, the Chief Operating Officer shall prepare and submit to
> Congress, through the Secretary, an annual report on the performance
> of the PBO, including an evaluation of the extent to which the PBO met
> the goals and objectives contained in the 5-year performance plan....
> The annual report shall include the following...:
>
> \(B\) Financial and performance requirements applicable to the PBO
> under the Chief Financial Officer Act of 1990 and the Government
> Performance and Results Act of 1993...
>
> \(D\) The evaluation rating of the performance of the Chief Operating
> Officer and senior managers...including the amounts of bonus
> compensation awarded to these individuals.
>
> \(E\) Recommendations for legislative and regulatory changes to
> improve service to students and their families, and to improve program
> efficiency and integrity....

Section 1116 of the *Government Performance and Results Act of* *1993*
requires an annual performance report and states,

> \(d\) Each report shall-
>
> \(1\) review the success of achieving the performance goals of the
> fiscal year;
>
> \(2\) evaluate the performance plan for the current fiscal year
> relative to the performance achieved toward the performance goals in
> the fiscal year covered by the report;
>
> \(3\) explain and describe, where a performance goal has not been
> met...
>
> \(A\) why the goal was not met;
>
> \(B\) those plans and schedules for achieving the established
> performance goal; and
>
> \(C\) if the performance goal is impractical or infeasible, why that
> is the case and what action is recommended....

FSA management cited timing and a lack of resources as reasons for not
preparing a Five-Year Plan for FY 2005.

Regarding Annual Report GPRA requirements, FSA management stated that
the FY 2006 Annual Report contained the status of certain projects, and
referred readers to the Annual Performance Plan Report, posted on a
website at
[www.federalstudentaid.ed.gov](http://www.federalstudentaid.ed.gov/),
for additional information. Management was not entirely familiar with
the GPRA requirement on reporting on canceled initiatives, but stated
that such data is made available to the public. We reviewed this website
and found that an Annual Performance Plan Report was not provided. In
addition, FY 2006 was the first time performance standards and
measurable baselines were established, making it difficult for FSA to
meet GPRA reporting requirements in prior years.

Information to be included in the Annual Reports was determined by FSA's
Executive Management Team (EMT), which consisted of the COO and senior
management officials.

We noted that highlights from the Annual Report also served as the COO's
accomplishment statement and justification for the COO's bonus, as well
as the justification for Secretarial approval of senior official
bonuses.

FSA management stated the decision not to include individual evaluation
ratings and bonuses awarded in the Annual Reports was made by FSA's COO.
We noted that the COO never actually received a rating of record, just a
bonus. Therefore, FSA would not be able to include an evaluation rating
for her. We also noted that FSA could find the evaluations for only 3
out of 12 of its EMT members for FY 2005, and there was confusion
determining exactly who was on the EMT in any given year, all of which
could make it difficult to include as required in the Annual Report.

Regarding recommendations for legislative and regulatory changes, FSA
officials stated that FSA is an advisory body when it comes to policy.
FSA's Policy Liaison and Implementation office is in constant
communication with the Office of Postsecondary Education (OPE), which
handles policy matters. However, we happened to note that in at least
one report prior to FY 2004, FSA had included recommendations that it
was making to OPE.

As a result of the issues noted above, FSA has not clearly or fully
informed Congress, the Secretary, or the public about its progress
toward achieving its purposes as established by the HEA. Policymaking,
spending decisions and program oversight are handicapped by a lack of
disclosure. To the extent the Secretary relied upon information
presented in the Annual Reports, he/she may not have had complete
information upon which to base the COO and senior official bonus
decisions.

For example, we noted that serious problems with systems integration
efforts were not disclosed in the FY 2005 Annual Report. The report gave
no indication that anything was wrong with the ADvance effort, even
though a cure notice had been issued to the contractor at the end of the
fiscal year due to serious performance concerns. The only thing noted in
the report was that the ADvance contract had been awarded during the
year. FSA's FY 2005 report included a section on possible future effects
of existing events and conditions, where performance problems could have
been noted and observations made that the difficulties encountered could
cause a delay on integration efforts. In fact, only four months later,
the development portion of the ADvance initiative was canceled.

The FY 2005 Annual Report simply noted that the Common Services for
Borrowers (CSB) initiative continued to be implemented, and that the
implementation plans established in the Annual Plan were 99.8% complete,
even though the attached chart noted that two of the seven planned
activities had been canceled -- migration of the Direct Loan Servicing
System and retirement of the Direct Loan Consolidation System -- and one
item was carried over to the FY 2007 performance plan. Nothing was
mentioned about the problems encountered during the year that led to FSA
modifying its go-live date in April 2005.

The FY 2006 Annual Report again mentioned nothing about the problems on
the ADvance contract. The narrative noted that FSA continued to identify
requirements, and the table of benchmarks noted targets were not met for
ADvance, but did not provide any specifics as to why, other than there
was a change in acquisition strategy. Continued design of CSB was noted,
along with a statement in the table that the target was not met due to
delays in meeting established timelines. However, the brief explanations
provided do not appear to adequately explain the reasons for delays in
meeting established targets.

While the information presented in these reports was not necessarily
untrue, it was misleading and did not fully disclose the status of the
major integration efforts. As a result, when the integration efforts
subsequently failed, it was likely a surprise to outside parties.
Without full disclosure in accordance with GPRA requirements,
information presented can be misleading and not provide for appropriate
accountability.

Subsequent to the completion of our fieldwork, FSA issued its FY 2007
Annual Report. Our limited review of the report noted some improvements
over prior reports. Specifically, we noted a more consistent reporting
format, recently available information on performance ratings and
bonuses, and topic areas for legislative and regulatory changes.

## Recommendations {#recommendations .RptSubcaption}

We recommend that the Under Secretary ensure the Acting COO takes action
to:

1.  Effectively utilize resources by reissuing the same Five-Year Plan
    annually when no significant changes are necessary, and include an
    addendum noting changes from the previous year's Five-Year Plan.

2.  Implement controls to ensure Five-Year Performance Plans include
    strategic objectives that are measurable and quantifiable, with
    goals linked to specific objectives, Annual Performance Plans
    correlate with Five Year Performance Plans, and Annual Performance
    Reports clearly convey the extent of meeting specific goals and
    objectives, as required.

3.  Include a section in the Annual Report on major obstacles faced
    during the fiscal year, along with a list of significant activities
    that have been canceled. Explain why each of these activities was
    canceled and the plans/schedule for completing them in the future.

4.  Implement a consistent reporting format to afford readers with a
    means to easily track progress from year to year.

5.  Ensure staff responsible for planning and reporting on FSA's
    performance are familiar with GPRA requirements.

6.  Provide the most recently available information related to
    individual performance ratings and bonuses for the COO and each of
    the senior managers in the Annual Reports.

7.  Identify recommendations for legislative and regulatory changes in
    each Annual Report, or indicate that there are none.

In addition, we recommend that the Under Secretary:

8.  Ensure the COO receives an actual rating of record, based upon the
    overall PBO performance.

**FSA Comments**

While FSA acknowledged that the development of a comprehensive strategic
and tactical planning, tracking, and reporting structure for FSA has
been evolutionary, FSA disagreed that it was not meeting its
responsibilities as outlined under the PBO legislation. FSA stated it
has worked with OIG \[Office of Inspector General\] to continually
refine both the Five-Year Plan and the Annual Report. FSA also stated
that OIG has reviewed and ultimately approved every Five-Year Plan and
Annual Report produced during the time in question. In addition, since
2005, FSA stated every accomplishment listed in the Management's
Discussion and Analysis \[MD&A\] section of the Annual Report was
audited, verified and approved by an OIG auditor and extensive
supporting documentation was provided to support every accomplishment.

**OIG Response**

FSA is correct that OIG reviewed and commented on FSA's Five-Year Plan
and Annual Reports as part of the Department's Executive Secretariat
Document Clearance process. However, OIG did not approve the plans and
reports in that process. OIG did meet and discuss with FSA how FSA could
address OIG comments, but the decision to incorporate or respond to OIG
comments, as well as responsibility for the contents of the plans and
reports, remained with the Department. Several of the issues noted in
the finding were identified by OIG as part of the review and comment
process. As stated in the finding, OIG continues to believe FSA reports
do not meet all of the requirements of the HEA.

In addition, the OIG contractor that audited FSA's consolidated and
combined financial statements did not audit and verify FSA's
accomplishments in the Annual Reports included in our review. As noted
in the Report of Independent Auditors included in FSA's FY 2005 and 2006
Annual Reports, the audits were conducted for the purpose of forming an
opinion on the basic financial statements taken as a whole. The
information presented in the MD&A is not a required part of the basic
financial statements, but is supplementary information required by the
Office of Management and Budget. Certain limited procedures were
performed on this information, consisting primarily of inquiries of
management regarding the methods of measurement and presentation of
information. However, the information was not audited and no opinion was
expressed on it.

[]{#__RefHeading___Toc211753091 .anchor}FINDING NO. 2 -- FSA's Progress
in Integrating Its Student Financial Assistance Systems Is Significantly
Hindered

Since 2004, FSA has not made significant progress in completing
activities designed to integrate its student financial assistance
systems. In October 2004, GAO reported that while FSA continued to take
actions toward better integrating systems supporting its student
financial assistance programs, FSA remained several years from operating
in a fully integrated information systems environment. GAO noted FSA had
begun three major systems integration initiatives, which it planned to
complete by 2008. We found FSA has since canceled the development
portions of two of the major systems integration initiatives, CSB and
ADvance, [^5] and expects to release only the first of two phases of the
Integrated Partner Management (IPM) initiative in 2008.

System integration is an important purpose for FSA's creation as a PBO.
Section 141 (a)(2) of the HEA*,* as amended, states the purposes of the
PBO are...

(E) to integrate the information systems supporting the Federal student
    financial assistance programs;

(F) to implement an open, common, integrated system for the delivery of
    student financial assistance under Title IV....

[ADvance]{.underline}

The ADvance initiative was intended to support the end-to-end needs of
the customer by bringing together the front-end operations of the
student aid process. ADvance was to align FSA's business processes with
its strategic objectives, and ultimately re-engineer the front-end
student aid application processes, disbursement processes, funds
management, and customer service functions into a single integrated
business solution. The ADvance contract was awarded on February 1, 2005,
and FSA officials described it as two-fold. The first portion of the
contract was to keep the following legacy systems supporting front-end
operations running: Central Processing System, Common Origination and
Disbursement, Public Inquiry Call Center, Editorial Services, Ombudsman
Support, Ombudsman Case Tracking System, and Student Aid Internet
Gateway. The second portion of the contract dealt with development and
planning efforts to integrate the legacy systems under a unified
platform.

In September 2005, seven months after contract award, FSA formally
documented concerns in a cure notice and cited contractor performance
which it believed endangered the satisfactory start up of the ADvance
solution. On February 1, 2006, FSA and the contractor bilaterally agreed
to modify the contract to, among other things: 1) accept existing
development related work products "as is;" and 2) stop development work
and related efforts under the contract if an ongoing effort to negotiate
a separate agreement to restart all or part of this work was not reached
by April 12, 2006. FSA officials stated that no separate agreement was
reached, and on April 13, 2006, the decision to halt development work
was formalized. According to FSA officials, this divided the contract so
the contractor's primary responsibility was with the continued
operations of the legacy systems. As a result, FSA canceled items from
its FY 2006 Annual Performance Plan to implement the ADvance solution,
which required identifying resources to support transition, completing
the detailed business requirements and high-level design, and developing
the detailed implementation approach. Currently, the legacy systems are
running as seven independent systems, six of which had already been
under the operation of the ADvance contractor. The ADvance contract, as
modified, expires January 31, 2015, if all option years are exercised.

FSA officials stated they were meeting with the contractor approximately
three times per week and saw little to no progress being made to
integrate the systems. As a result, FSA began to question whether the
systems could be integrated with the contractor in place. After the cure
notice was issued, the contractor responded and admitted there had been
delay in the development effort, but claimed that any delay was
excusable. In its response, the contractor asserted the fault for any
delay lay primarily with FSA and admitted only minimal responsibility
for the lack of progress. Due to FSA's concerns with the contractor's
response, including the lack of accountability, the decision was made to
cancel further development work.

[CSB]{.underline}

Through the CSB initiative, FSA planned to improve and simplify back-end
services related to the management of student aid obligations by
combining the borrower-related functions of Direct Loan Servicing, Loan
Consolidation, Conditional Disability Discharge Tracking, and Debt
Management Collection into a single integrated solution. The CSB
contract was awarded on November 20, 2003, to develop a vehicle that
fulfilled core business objectives in areas such as data management,
payment and transaction processing, and delinquency and program
management.

As with ADvance, difficulties were experienced with the effort to
achieve the envisioned integrated end-state system. FSA officials stated
a modification to the CSB contract was executed on April 29, 2005,
because of performance concerns, which in part established go-live dates
for various phase releases and penalties for missing these dates.
Further difficulties towards the achievement of the desired end state
ultimately resulted in a contract modification on May 29, 2007, which
formalized a "De-scoping Settlement Agreement." This modification
descoped all uncompleted CSB transition software development work and
stated the contractor had no further contractual obligation with respect
to the CSB end-state system other than current production systems and
business operations. To date, these four legacy systems have been
consolidated under one vendor, but remain as four independent systems.
The CSB contract, as modified, expires November 19, 2013, if all option
years are exercised.

FSA officials stated that the prime contractor for the CSB initiative
had difficulties managing its subcontractors, which included the
contractors for the legacy systems being integrated, due to differences
in distinct business cultures. They stated the contractor failed to meet
delivery dates and fell behind schedule, which they believed was due to
both a lack of coordinated effort between the prime and subcontractors
and a failure to understand the complexities of the software lifecycle
development process. FSA officials also noted the implementation
schedule was aggressive, and had the contractor proposed (and FSA
accepted) a more realistic timeline, the initiative might have worked.
In addition, FSA officials said the contractor accused FSA of providing
inadequate guidance on system requirements.

[IPM]{.underline}

IPM is intended to integrate common functions within the partner
management business systems in order to provide a streamlined and
consolidated solution to managing partner interactions and support the
delivery of Title IV funds from both a cost and customer satisfaction
perspective. FSA plans to address some of the deficiencies in its
current stove-piped system architecture, characterized by multiple
partner entry points, redundant data entry, redundant data storage, and
excessive file exchange activities by replacing the following legacy
systems: Application for Approval to Participate in Federal Student
Financial Aid Programs, eZ-Audit, Electronic Records Management,
Postsecondary Education Participants System, and the Participation
Management portion of the Student Aid Internet Gateway. Expected
benefits include operational efficiencies and overall cost savings. FSA
anticipated receiving funding for this initiative in 2005 and
implementing the entire initiative in 2008. However, the funding was not
received until 2006, delaying full implementation until 2009. []{.mark}

With the CSB and ADvance initiatives, FSA expected to streamline,
consolidate, and reengineer common functions to deliver significant
improvements in managing student aid obligations from both a cost and
borrower satisfaction perspective. Due to the failure of its integration
efforts, FSA has been unable to realize these benefits and has hindered
its progress in meeting the requirements of the HEA.

Subsequent to canceling two of its major integration efforts, FSA
developed the Enterprise Development Support Services (EDSS) Model to
use a more in-depth approach to analyze FSA's business vision and needs,
and determine how best to achieve those needs. Under EDSS, FSA intends
to move away from a "single vendor" environment by "pre-qualifying"
vendors for tasks within service categories, such as development and
operations and maintenance support. FSA plans to award indefinite
delivery/indefinite quantity contracts to pre-qualified vendors based
around the defined functional segments of work.

The former FSA Chief Information Officer (CIO) stated that one lesson
learned from the CSB and ADvance initiatives was that FSA did not obtain
the best services in each of the many service categories using a single
procurement. She affirmed that although EDSS differs contractually from
the previous initiatives, the primary business objective remains the
same -- creating a seamless experience for the customer on both the
front-end and back-end. The former FSA CIO added the visions for CSB and
ADvance are still intact at the enterprise level, but the technical
strategy has changed. Furthermore, she said the integration of the
legacy systems will depend on the quality of the systems themselves and
it is likely some new systems will be built.

**Recommendations**

We recommend that the Under Secretary ensure the Acting COO takes action
to:

1.  Establish procedures and controls to ensure the feasibility of major
    system integration efforts, as well as offerors' proposed technical
    solutions.

2.  Engage industry consultants, when necessary, to assist in the above
    noted processes.

**FSA Comments**

FSA generally concurred with the finding and provided a corrective
action plan for each of the recommendations.

[]{#__RefHeading___Toc211753092 .anchor}FINDING NO. 3 -- FSA's Progress
Towards the Reduction of Program Administration Costs is Uncertain

Several factors have hindered the ability to measure FSA's progress
towards the reduction of costs of administering its programs. Due to
limitations noted with earlier efforts to establish cost reduction
metrics, FSA will not have measurable results to report until FY 2008.
In addition, anticipated cost savings from three of four major system
initiatives identified in FY 2004 -- FY 2006 annual reports are not
expected until FY 2008 and beyond. FSA does not plan to report on
individual progress towards anticipated cost reductions by initiative,
limiting the ability to determine whether planned savings were actually
achieved. Further, our review noted the scope of work for two of the
four system initiatives was significantly reduced and separate
acquisitions of unknown cost are now planned to complete these
initiatives. The transition of the third initiative has been delayed,
causing FSA to incur unexpected costs.

Section 141 (a)(2)(B) of the HEA, as amended, establishes the reduction
of program administration costs as a purpose of the PBO.

[Cost Reduction Strategic Goals]{.underline}

In October 2004, GAO noted that while FSA had developed a cost model
that had addressed previously noted problems and limitations, the model
was still not fully functional. As a result, GAO concluded that FSA was
still unable to demonstrate that it reduced the cost of administering
its programs. Our review noted that FSA's Five-Year Plan for FY
2004-2008 did not establish measurable goals in the area of cost
reduction. FSA did not complete a Five-Year Plan for FY 2005-2009, as
such no measurable strategic goals were established. FSA did establish
measurable strategic goals in the area of cost reduction in its FY
2006-2010 Five-Year plan. However, within this plan there are no
specific cost reduction success measures that will be reported on until
FY 2008.

FSA's Five-Year Plan for FY 2006-2010 included four cost reduction
performance measures. As shown in Table 1 below, the FY 2006 success
measure was baseline development, with measurable unit cost reduction
standards established for FY 2008 and FY 2010.

**Table 1 -- Cost Reduction Performance Measures and Related Standards**

  -------------------- --------------- ---------------- ------------------
  **Performance        **FY 2006       **FY 2008        **FY 2010
  Measure**            Standard**      Standard**       Standard**

  Reduce electronic    Develop         20% Reduction    25% Reduction
  FAFSA[^6] direct     Baseline                         
  unit costs                                            

  Reduce origination   Develop         10% Reduction    15% Reduction
  and disbursement     Baseline                         
  direct unit costs                                     

  Reduce direct loan   Develop         12% Reduction    12% Reduction
  servicing direct     Baseline                         
  unit costs                                            

  Reduce collections   Develop         14% Reduction    14% Reduction
  direct unit costs    Baseline                         
  -------------------- --------------- ---------------- ------------------

FSA first reported on specific program administration unit costs in its
FY 2006 Annual Report. This report identified baseline unit costs in
each of the four areas from Table 1 above. We noted that FSA reported
these unit baselines as FY 2006 actual results when the related data was
from FY 2005 operations. In addition, while the FFEL program is FSA's
largest program, there is no related cost reduction measure identified
for FFEL.

[Cost Reductions from System Initiatives]{.underline}

FSA's Annual Reports from FY 2004 through FY 2006 identified four
significant system initiatives with anticipated cost reductions of
almost \$1.7 billion. As shown in Table 2, three of the four initiatives
are not expected to begin realizing cost reductions until FY 2008 or
beyond. Two of the four acquisitions have recently experienced
significant reductions in scope and additional acquisitions are being
planned to meet the original system integration objectives. Another
initiative has experienced significant delays in transitioning to a new
contractor and has caused FSA to incur unexpected costs. We also noted
that while anticipated cost reductions from these initiatives were
reported separately in FSA's Annual Reports, FSA does not plan to report
on progress towards actual cost reductions by initiative. Any reductions
in cost will be reflected through the unit costs associated with the
four performance measures identified above.

**Table 2 -- Initiatives With Reported Cost Reductions**

  --------------------- ---------------- --------------- ------------------
  **Initiatives**       **Reported       **Anticipated   **Unanticipated
                        Anticipated Cost Cost Reductions Scope Reduction or
                        Reductions (in   Begin**         Delay in
                        millions)**                      Implementation**

  Advance               \$500            FY 2009         Yes

  CSB                   \$1,000          FY 2004         Yes

  IPM                   \$5              FY 2008         No

  Virtual Data Center   \$150            FY 2008         Yes
  (VDC)                                                  

  **Total**             **\$1,655**                      
  --------------------- ---------------- --------------- ------------------

Additional details relating to the initiatives, as pertaining to
anticipated cost reductions, are presented below.

> *ADvance*\
> \
> The ADvance initiative was intended to support the end-to-end needs of
> the customer by bringing together the front-end operations of the
> student aid process. In its FY 2005 Annual Report, FSA estimated the
> initiative would save \$500 million over the life of the contract.
> Implementation of this initiative was planned for FY 2008.
> Documentation supporting the anticipated savings showed that cost
> savings were not expected to be realized until contract year four
> (February 2008 -- January 2009). Anticipated savings were calculated
> through establishment of baseline estimates for contract costs for the
> continued operation of various front-end legacy systems under the
> prior system of contracts in comparison to estimated ADvance contract
> costs. FSA officials stated that since the contract was reduced in
> scope, they were no longer actively tracking actual ADvance costs and
> comparing them to anticipated costs of continued operation of the
> legacy systems under the prior method.
>
> Contract awards related to the integration portion of the ADvance
> contract are estimated to be made in late June 2008.[^7] The maximum
> cumulative dollar ceiling value of all contracts to be awarded is
> \$300,000,000.
>
> *CSB*\
> \
> The CSB initiative was intended to consolidate back-end systems for
> Direct Loan Servicing, Consolidation, and Collections into a single
> integrated solution. In its FY 2004 Annual Report, FSA estimated the
> initiative would save over \$1 billion over the life of the contract,
> with implementation originally planned to begin in FY 2005.
> Anticipated savings were calculated through establishment of baseline
> estimates for contract and other costs associated with the continued
> operation of various back-end legacy systems in comparison to
> estimated contract and other costs associated with the operation under
> the CSB contractor.
>
> FSA officials indicated that although the integration effort was
> de-scoped, they continued to compare actual costs incurred under CSB
> to estimated costs under prior contracts. FSA officials believed they
> would fully realize the anticipated savings due to the reduced costs
> of the CSB contract to continue operation of the legacy systems when
> compared to the estimated costs under the prior contracts.
>
> Contract awards related to the integration portion of the CSB contract
> are estimated to be made in late June 2008. The maximum cumulative
> dollar ceiling value of all contracts to be awarded is
> \$300,000,000.[^8]
>
> *IPM*\
> \
> IPM is intended to modernize and replace legacy systems associated
> with management functions such as enrollment, eligibility, and
> oversight. In its FY 2006 Annual Report, FSA estimated the initiative
> would save \$5.4 million over the life of the contract. The estimate
> of cost reduction included factors such as cost benefits from retiring
> legacy systems and work
>
> hour reductions from the increased automation of operational
> processes. Cost reductions were not expected to be realized until
> implementation of the first phase, scheduled for 2008.
>
> *VDC*\
> \
> The VDC includes computer systems that support and operate the
> delivery of Title IV student aid. It operates as a hub connecting
> several data and processing centers into a single servicing operation.
> The VDC contract was recompeted and awarded to a new contractor on
> September 1, 2006. In its FY 2006 Annual Report, FSA stated the new
> VDC contract would save \$150 million over the contract term. The cost
> reduction estimate was based on a forward projection of current VDC
> contract prices compared to the terms of the new VDC contract. Cost
> reductions were not expected to be realized until contract period 2
> during FY 2008. FSA officials stated they planned to track actual
> costs under the new contract and compare them to anticipated costs
> under the prior agreements once the transition period ended and the
> new contractor was responsible for operation and maintenance.
>
> We found the transition of the VDC has been delayed. FSA officials
> stated the transition of the VDC to the incoming contractor was
> expected to be completed by September 30, 2007. However, due to
> delays, the VDC transition did not occur until June 22, 2008. Overall,
> we determined FSA has incurred additional costs of approximately
> \$22.2 million as a result of the delayed transition and parallel
> operations of both contractors' facilities, and could incur up to an
> additional \$15.4 million in costs associated with an extension to the
> incumbent contract.

FSA officials indicated several factors contributed to delays in
establishing and reporting measurable cost reduction strategic goals and
measures. These factors included concerns raised by GAO relating to
FSA's initial efforts in FY 1998 to develop unit cost measures which led
to a revision in its approach.[^9] FSA officials stated that the current
activity based cost model was implemented in FY 2004 in response to
these concerns, and time was required for FSA operational components to
review the reported costs and related metrics prior to concurring and
including them in FSA's strategic plans. FSA officials also stated it
was likely that actual unit cost data reported will be from the previous
year, as the current year data will not yet be final at the time the
annual reports are prepared. With regard to the lack of an apparent cost
reduction goal for the FFEL program, FSA indicated the primary driver
for measures to include in the Five-Year Plan was the inclusion of
measures that closely mapped with the information systems where FSA was
making its largest investments. FSA noted that a majority of its costs
were accounted for in the four outputs chosen. FSA also stated its
preferred goal was to look at the reduction of costs globally as opposed
to on a project-by-project basis.

FSA's progress in recognizing cost reductions associated with
significant systems initiatives has been hampered for several
reasons.[^10] FSA officials stated several factors contributed to the
delays and additional costs associated with the VDC transition. First,
officials said a high speed data transfer solution was proposed by the
incoming contractor and accepted by FSA, but the incumbent contractor
found it to be unacceptable because the solution imposed a risk to its
production environment. As a result, the incumbent contractor created an
alternative transfer solution, requiring additional equipment to be
purchased.

FSA officials stated additional software licenses were needed in order
to operate the software at both contractors' facilities. Since the
licenses were in the incumbent contractor's name only and not meant for
distribution elsewhere, permission was required from the software
vendors. The officials said FSA needed to obtain 27 dual-license
agreements. Some vendors negotiated the dual-usage licenses at no-cost,
but others saw it as an opportunity to generate revenue.

In addition, the officials said the transition clause in the incumbent
contract was general and did not require the contractor to transition
easily. One official said approximately one-month after the contract
award, the incumbent contractor began evading FSA.

FSA officials said as a result of delays created by the issues noted
above, the incoming contractor proposed to move FSA's mainframes in
mid-November 2007, but that date was too close to the testing in
preparation of the FAFSA peak processing season. The officials said if
the mainframes were transitioned during mid-November, FSA would not be
able to adequately test the results of the move and the risk of error
would be too great. FSA officials stated as a result, the mainframes
could not begin to transition until after FAFSA peak processing, which
ends in late February or early March 2008. These delays created the need
for a contract extension with the incumbent contractor, and a request
for equitable adjustment from the new contractor to cover unanticipated
costs.

The former FSA CIO said FSA was very conservative with the projected
\$150 million savings from the VDC recompete. She said while the savings
may be lower than what was previously expected, FSA will still realize
cost savings because the savings will come from the long-term operations
and maintenance costs with the incoming contractor.

Overall, due to the limitations noted, it is difficult to determine
FSA's progress in reducing its costs. Data that can be compared to
recently established baselines will not be reported until FY 2008,
measures that FSA has selected to report out on may not adequately
reflect costs associated with all of the major programs administered by
FSA, and cost reductions associated with major system initiatives may
not be recognized due to significant modifications to plans associated
with the original savings projections. In addition, FSA's plans to
include cost reductions associated with individual system initiatives
only in overall unit cost measures will likely make it difficult to
determine whether any of the planned savings were actually recognized.
Congress, the Secretary, and the public cannot determine if FSA has
reduced its program costs since becoming a PBO in 1998.

**Recommendations**

We recommend that the Under Secretary ensure the Acting COO takes action
to:

3.  Include a cost reduction measure in FSA's strategic plans and annual
    reports that adequately captures administration costs associated
    with the FFEL program.

```{=html}
<!-- -->
```
3.  Include a disclosure in FSA's annual reports that clearly explains
    the actual reported unit costs are the prior year's costs.

```{=html}
<!-- -->
```
3.  Report savings from major system initiatives on an aggregate and
    individual basis to facilitate tracking of planned savings to actual
    savings.

```{=html}
<!-- -->
```
3.  Include appropriate transition clauses in all future contracts to
    ensure the timely cooperation of incumbent contractors and avoid
    unnecessary transition costs.

**FSA Comments**

FSA did not state whether it concurred with the finding, but provided a
corrective action plan for each of the recommendations. FSA stated the
measurement of cost reduction takes time, and that it is incorrect to
infer from this that cost reductions are not being achieved. FSA also
stated that while it acknowledges that changes have been made to the
CSB, Advance, IPM, and VDC contracts, changes in contract scope do not
necessarily result in the loss of projected cost reductions.

With regard to the FFEL program, FSA stated it is not appropriate to
expect FSA to exert influence over the cost of this program nor is it
reasonable to judge FSA based on reductions in the cost of this program.
The primary costs to the government are lender and guaranty agency
subsidies, which can be reduced only through changes to the authorizing
legislation and the regulations. FSA stated that because of this, the
administrative costs of the FFEL program are generally limited to
eligibility determination and oversight and monitoring of FFEL
participants, and as a result, on a unit cost basis, these costs are
relatively minor in comparison to the administrative costs of other
programs. FSA also stated that while it will identify a FFEL cost
standard, in its opinion, a more important standard to measure is FSA's
performance in conducting oversight of these program participants. FSA
said it is currently identifying possible standards to address this need
and will incorporate them in its next update to the Five-Year Plan.

**OIG Response**

In the finding, OIG did not conclude that cost reductions are not being
achieved or that changes in contract scope would result in the loss of
projected cost reductions. OIG noted several factors have hindered the
ability to measure FSA's progress towards the reduction of costs of
administering its programs. These include the cost reduction measures
that FSA selected to report out on may not adequately reflect costs
associated with all of the major programs administered by FSA, and the
anticipated cost reductions associated with major system initiatives may
not be recognized due to significant modifications to plans associated
with the original savings projections. In addition, FSA's plans to
include reductions associated with individual system initiatives only in
overall unit cost measures will likely make it difficult to determine
whether any of the planned savings were actually recognized. Due to
these limitations, OIG concluded it was difficult to determine FSA's
progress in reducing its program administration costs.

OIG is aware that the primary costs of the FFEL program are the subsidy
payments made to lenders and guaranty agencies to originate, guarantee
and service loans, and OIG never stated or implied that FSA should exert
influence on the statutory definition of those costs. OIG also
recognizes that part of FSA's administrative costs of the FFEL program
are for eligibility determination and oversight and monitoring. However,
there are other significant administrative contract costs for
information technology systems necessary for FSA to operate the FFEL
program. The administrative costs of the contracts are under FSA's
control. For example, FSA incurs costs for the Lender Reporting System
(LARS), Guaranty Agency Financial Reporting (Form 2000), and the
National Student Loan Data System (NSLDS). These systems are critical
for the financial management operation of the FFEL program, such as
collecting information on outstanding amounts, types, and statuses of
loans, and for processing payments to lenders and guaranty agencies.

OIG does not agree that oversight standards are sufficient as a primary
response to the HEA's mandate to reduce administrative costs. The
mandate in Section 141 (a)(2)(B) of the HEA does not exclude the FFEL
program. FSA needs to fully identify the FFEL program's administrative
costs and plan efforts to reduce those costs. To improve program
integrity, OIG fully supports FSA's intent to identify and develop
standards to measure performance in conducting oversight of FFEL program
participants, and incorporate them in the next update of its Five-Year
Plan to supplement administrative cost reduction standards for the FFEL
program.

[]{#__RefHeading___Toc211753093 .anchor}OBJECTIVE, SCOPE, AND
METHODOLOGY

The objective of our audit was to determine if FSA is meeting its
responsibilities under Title I, Part D of the HEA, as amended, related
to planning and reporting, systems integration, and cost reduction. To
accomplish our objective, we gained an understanding of internal control
applicable to FSA's responsibilities under the HEA. We reviewed
applicable laws and regulations, policies and procedures, and GAO
*Standards for Internal Control in the Federal Government*. We reviewed
GAO audit reports and OIG inspection reports that discussed FSA's
performance as a PBO. We performed an analysis of information from
Annual Performance Plans, Five-Year Performance Plans, and Annual
Performance Reports for FYs 2004 through 2006. We also performed a
limited review of the FY 2007 Annual Performance Report.

[Planning and Reporting Processes]{.underline}

We conducted interviews with FSA officials to gain an understanding of
the planning and reporting processes required under the HEA. We reviewed
all accomplishments identified in FY 2004-2006 Annual Reports as
relating to systems integration or cost reduction and traced them to the
corresponding Annual Plan. We also reviewed documentation provided by
FSA staff to support completion of these projects. We judgmentally
selected 47 out of 274 action items (17 percent) with 100 out of 315
associated success measures (32 percent) as relating to systems
integration and cost reduction from FY 2004-2006 Annual Plans and traced
them to the corresponding Annual Report. Further, we reviewed
performance agreements for the COO and senior managers on the EMT,
including annual ratings and awarded bonuses.

We relied on computer-processed data maintained in the Project
Performance Measurement System (PPMS) representing the completion status
of projects from the FY 2004 to 2006 Annual Plans. We verified the
accuracy of the reported completion status from PPMS against supporting
documentation provided. Based on our testing, we determined the data was
sufficiently reliable for the purpose of our audit.

[Systems Integration]{.underline}

Our review included an analysis of data relating to FSA's systems
integration strategic objective from FY 2004 through 2006. We held
discussions with FSA management and staff responsible for the ADvance,
CSB, and IPM initiatives regarding integration efforts and
accomplishments. We also reviewed contract file documentation for the
ADvance, CSB, and IPM initiatives.

[Cost Reduction]{.underline}

We held discussions with FSA management and staff knowledgeable about
the activity-based costing system and development of FSA's unit cost
baselines. In addition, we held discussions with FSA staff regarding
statements of cost savings for the ADvance, CSB, IPM, and VDC
initiatives in the FYs 2005 and 2006 Annual Performance Reports. We also
reviewed documentation of the cost savings for these four systems
initiatives.

The fieldwork for our audit was conducted at Department offices in
Washington, DC, during the period March 2007 through January 2008. We
held an exit conference with FSA management and staff on April 23, 2008.
Our audit was performed in accordance with generally accepted government
auditing standards appropriate to the scope of the review described
above.

[[]{#__RefHeading___Toc211753094 .anchor}]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

[]{.mark}

Attachment: FSA Response to Draft Report

Ms. Michele Weaver-Dugan, Director

Operations Internal Audit Team

U.S. Department of Education

Office of Inspector General

400 Maryland Avenue, SW

Washington, DC 20202-1510

RE: Audit Control Number ED-OIG/A19H0008

Dear Ms. Weaver-Dugan:

Thank you for providing us the opportunity to review and respond to your
Draft Audit Report entitled "Federal Student Aid's Performance as a
Performance-Based Organization." The Under Secretary has asked me to
respond on her behalf.

In general, while Federal Student Aid agrees with many of the comments
and looks forward to working with your office to implement a corrective
action plan, the report fails to recognize these issues:

-   The development of a comprehensive strategic and tactical planning
    and reporting structure for Federal Student Aid has evolved over the
    past four years. Today, a comprehensive collection of processes and
    programs, some mandated and several that are not, provide management
    with an effective infrastructure to manage the organization's
    planning and reporting responsibilities;

```{=html}
<!-- -->
```
-   While Federal Student Aid has reevaluated components of its
    integration strategy, its Target State Vision remains the same and
    progress continues on our multi-year sequencing plan to bring us
    closer to that integrated vision; and

```{=html}
<!-- -->
```
-   From the development of processes to measure unit costs to the
    identification of appropriate standards to accurately gauge
    meaningful cost control to the compilation of sufficient results
    necessary to compare cost movement, the measurement of cost
    reduction takes time. However, it is incorrect to infer from this
    that cost reductions are not being achieved. In addition, changes to
    contract scope do not necessarily result in the loss of projected
    cost reductions.

In the discussion that follows, we have addressed some of your comments
and specific concerns.

**[Finding No. 1]{.underline}**

While we acknowledge that the development of a comprehensive strategic
and tactical planning, tracking and reporting structure for Federal
Student Aid has been evolutionary, we disagree that Federal Student Aid
is not meeting its responsibilities as outlined under the PBO
legislation. Federal Student Aid has worked with your office to
continually refine both the Five-Year Plan and the Annual Report. While
there may be differences in interpretations of how and what constitutes
compliance with the legislation (such as the utility of including
short-term tactical plans or performance standards in a long-term
strategy document or how to report senior management compensation), your
office has reviewed and ultimately approved every Five-Year Plan and
Annual Report produced during the time in question.

The result is a process that we believe is successful and by your own
admission has improved. In fact, in removing the student financial
assistance programs from their High Risk List, the GAO reported in 2005
that "Education has demonstrated a strong commitment to addressing
risks; developed and implemented corrective action plans; and, through
its annual planning and reporting processes, monitored the effectiveness
and sustainability of its corrective measures."

More importantly, Federal Student Aid has worked to develop
complementary planning and reporting processes to augment apparent gaps
in the mandated procedures. Our performance management initiatives are
wide-ranging and influence every aspect of our business. Today, Federal
Student Aid produces a comprehensive suite of strategic and tactical
planning, tracking and reporting processes that are used by senior-level
management as well as rank-and-file employees for budgeting, planning,
monitoring, control and reporting.

The Five-Year Plan outlines Federal Student Aid's strategic direction
and provides long-term guidance in achieving organizational objectives.
The Five-Year Plan aligns with Federal Student Aid's annual, tactical
business-level planning, tracking and implementation processes including
the Annual Performance Plan.

Federal Student Aid's **Annual Performance Plan** establishes specific
tactical initiatives to achieve organizational strategic objectives
outlined in the Five-Year Plan. Timelines, milestones and status are
reported in the Annual Performance Plan and evaluated on a monthly basis
to ensure their alignment with current business needs, the allocation of
resources and capital, policy considerations, and statutory and
regulatory requirements.

The **Annual Report** provides the mechanism for reporting the
organization's annual performance results, including the organization's
audited financial statements, a summary of the organization's progress
in meeting tactical goals established in the Annual Performance Plan and
detailed results of the organization's success in meeting performance
standards established in the Five-Year Plan. These documents---the
Five-Year Plan, the Annual Performance Plan and the Annual Report---form
the foundation of Federal Student Aid's strategic planning, tactical
implementation and reporting processes.

Federal Student Aid also produces weekly and monthly project planning
and reporting activities detailing the scope, schedule, cost, quality
and overall status of key initiatives. Federal Student Aid's budget
management process and our unit-cost model provide cost identification,
control and management. Federal Student Aid also tracks and reports
enterprise-wide operational, human capital and performance metrics
through a series of dashboard tracking reports.

In addition to annual planning and reporting, Federal Student Aid\'s
performance management is supported by several teams throughout the
enterprise that help us to meet our five core objectives. The groups
described below each play an integral part in ensuring Federal Student
Aid performs effectively and efficiently.

-   **Project Management Office**

> The Project Management Office, established in FY 2003, is a central
> point of oversight for identified projects. Through the Project
> Management Office, we integrate project activities within Federal
> Student Aid, linking them to strategic objectives, priorities and
> available resources. It supports project managers by establishing
> enterprise project management standards of practice, advising on
> systems integration strategy, sharing information across projects
> during the full life cycle of the projects through our Enterprise
> Change Management (ECM) Group and providing relevant reports and data
> to management.

-   **Enterprise Risk Management**

> Federal Student Aid has also established an Enterprise Risk Management
> (ERM) function to provide strategic direction in assessing, monitoring
> and managing risk across the organization. The ERM Group is
> responsible for development and implementation of an enterprise risk
> management program at Federal Student Aid. This program provides a
> strategic view of downstream risk potentials and enables senior
> management to better anticipate, analyze and manage risks inherent in
> the federal student financial assistance programs and develop
> strategies to address these risks. The ERM Group also performs
> internal reviews, conducts risk assessments and provides internal
> audit tracking and resolution services for the organization.

This collection of processes and programs provide management with an
effective infrastructure to manage the organization's strategic and
tactical planning and reporting functions. While we continually strive
to improve the alignment between these planning, tracking and reporting
functions, we believe they fulfill Federal Student Aid's responsibility
for planning and reporting of PBO activities and complies with Title I,
Part D of the HEA, as amended.

The following discussion addresses some of the specific comments under
Finding No. 1:

-   We acknowledge that it took too long to establish Federal Student
    Aid's first official Five-Year Plan. However, we also agree with you
    in questioning the value to the organization and the taxpayer of
    updating a Five-Year Plan on an annual basis. Per your suggestion,
    we attempted, albeit unsuccessfully, to change the requirement when
    Congress recently reauthorized the Higher Education Act. We concur
    with your suggestion to reissue the document during those years when
    there are no updates to report.

-   You noted and we acknowledge the 2004 Five-Year Plan and the 2004
    and 2005 Annual Reports failed to include several key components
    such as tactical goals, goals that were linked to strategic
    objectives, performance standards and the organization's results in
    meeting those standards, and a "weak correlation" between the
    Five-Year Plan and the corresponding Annual Plans. However we
    believe, and judging by your acknowledgement of improvements, many
    of these issues were satisfactorily addressed with revisions
    identified by both your office and ours and incorporated into the
    2006 Five-Year Plan, the 2006 and 2007 Annual Plans and the 2006 and
    2007 Annual Reports.

-   You noted that "not many action items and success measures per the
    Annual Plan were included in the Annual Report." While this is true,
    Federal Student Aid maintains a different interpretation of the
    correlation between these two documents. The Annual Plan spells out
    in specific detail (over 300 line items in FY 2008) the actual
    projects to be accomplished during the year and the organization's
    progress in completing those projects. While the Annual Report
    references the Annual Plan for specific progress made by the
    organization in completing the stated action items, the Annual
    Report is presented in summary form providing a high-level overview
    of the organization's progress in achieving the objectives outlined
    in the Five-Year Plan and the corresponding action items from the
    Annual Performance Plan.

-   In 2005, Federal Student Aid combined two redundant annual reporting
    requirements combining the Annual Report and the Annual Performance
    and Accountability Report into a single document satisfying both
    requirements. The result was that the Annual Report was now subject
    to the Department's annual financial audit. As a result, every
    accomplishment listed in the Management's Discussion and Analysis
    section of the Annual Report was audited, verified and approved by
    your auditor. As part of this process, extensive supporting
    documentation was supplied to your auditor for every accomplishment
    listed in the Management's Discussion and Analysis section of the
    Annual Report. We are happy to provide this information to your
    office as well in the future.

**[Finding No. 2]{.underline}**

Federal Student Aid generally concurs with your finding regarding the
three integration efforts referenced in the audit, Common Services for
Borrowers (CSB), Advance and Integrated Partner Management (IPM).
However, while some of our integration initiatives have been revised,
Federal Student Aid's overall target state vision for system and process
integration remains unchanged and we continue to develop and support
efforts to achieve it.

Through CSB, Advance and IPM, we were successful in reducing many of the
operating costs of our legacy operations. (See our response to Finding 3
below for additional details). However, what we discovered was that
large contracts requiring multiple business capabilities, and supporting
a complex and multi-faceted business process, do not provide Federal
Student Aid the best solution providers from the marketplace. In
addition, the lack of post-award competition led to price, quality and
innovation issues preventing Federal Student Aid from being able to
quickly transition services, potentially putting our business at risk.

In order to increase the competitive environment, increase our product
quality, and reduce the risk of a single point of failure, Federal
Student Aid decided to adopt a strategy where multi-vendor contract
vehicles for core business capabilities will replace single large
contracts. In addition, large contracts for system development will be
replaced with smaller task orders for component-based development. For
example, Federal Student Aid now plans to develop the functions of
Advance in several components and under several separate task orders,
thereby reducing risk and increasing overall competition and quality.

In addition, we believe it is important to note that the concept of
integration has changed since the inception of the PBO in 1998. At that
time, integration generally aimed at consolidating sets of business
functions onto a single platform whenever practical. Since that time,
concepts of integration have evolved with the introduction of Web
services, service-oriented architecture and other technological
advances.

Federal Student Aid has not confined its integration strategy to
development efforts aimed at consolidating computer systems. Federal
Student Aid understands system integration to encompass infrastructure,
business application development and supporting processes. Our
integration efforts today extend far beyond the office of Chief
Information Officer and require the redeployment of physical, human and
financial assets to support enterprise integration efforts. Federal
Student Aid has made progress towards integration of all support systems
and activities required to deliver the Title IV programs. This
understanding of integration aligns with the changes in organizational
planning, business modeling and technological advancements established
over the last decade.

During the coming years, Federal Student Aid will continue to pursue
system and business process integration measures that will lower our
overall costs while improving program integrity and system security, as
well as the quality and accessibility of our products and services. As
we pursue integration initiatives, we will continuously reevaluate
existing strategies, as necessary, and explore new and innovative
approaches and technology to help us achieve our goals. Projects such as
Advance and CSB will continue forward, but with different development
and contracting strategies that will allow Federal Student Aid to
incrementally enable functions with new technology rather than perform
only large-scale system replacements. It is important to reiterate that
while Federal Student Aid has reevaluated components of its strategy to
achieve its integration efforts, its Target State Vision remains the
same and progress continues on our multi-year sequencing plan by
focusing on major initiatives and activities that bring us closer to
that vision.

**[Finding No. 3]{.underline}**

From the development of processes to measure unit costs to the
identification of appropriate standards to accurately gauge meaningful
cost control to the compilation of sufficient results necessary to
compare cost movement, the measurement of cost reduction takes time.
However, it is incorrect to infer from this that cost reductions are not
being achieved. In addition, changes to contract scope do not
necessarily result in the loss of projected cost reductions.

While your office correctly noted that performance standards published
in the FY 2006- 2010 Five-Year Plan only provide targets identified for
FY 2006, 2008 and 2010, it is incorrect to interpret this to mean that
no cost reductions will occur or be reported until 2008. On the
contrary, actual results indicate that cost reductions have been
realized and are published annually in the Annual Report. In fact,
Federal Student Aid reported (in the FY 2007 Annual Report) unit cost
reductions that, in every case but one, were lower than the baseline. In
the one case where unit costs rose, (the unit cost of servicing a Direct
Loan borrower), the increase was attributed to a decrease in servicing
volume. We anticipate unit costs for this standard will be reduced
dramatically this year and for the foreseeable future due to the
significant increase in Direct Loan volume.

With regard to cost reductions from systems initiatives, we acknowledge
that changes have been made to the contracts in question (CSB, Advance,
IPM and VDC). However, changes in contract scope do not necessarily
result in the loss of projected cost reductions. For example, in 2007,
Federal Student Aid changed the scope of the CSB contract. This change
did not impact the Department's original cost reduction estimates and,
in fact, resulted in even greater savings. More importantly, this change
did not in any way impact service levels to students. Changes to the
Advance, IPM and the VDC contracts will also result in savings to the
Department, although in some cases they may be less than originally
projected.

With regard to the Federal Family Education Loan (FFEL) Program, it is
not appropriate to expect Federal Student Aid to exert influence over
the cost of this program nor is it reasonable to judge Federal Student
Aid based on reductions in the cost of this program. Federal Student Aid
has very little influence over FFEL costs. In fact, operational and
programmatic costs are borne primarily by private entities such as
lenders, servicers and guaranty agencies. The primary costs to the
government are lender and guaranty agency subsidies, which can only be
reduced through changes to the authorizing legislation and the
regulations. Because of this, the administrative costs of the FFEL
program are generally limited to eligibility determination and oversight
and monitoring of FFEL participants. As a result, on a unit cost basis,
these costs are relatively minor in comparison to the administrative
costs of some of our other programs such as the Direct Loan Program.
While we will identify a FFEL cost standard, in our opinion, a more
important standard to measure is Federal Student Aid's performance in
conducting oversight of these program participants. We are currently
identifying possible standards to address this need and will incorporate
them in our next update to the Five-Year Plan.

Finally, because of the time it takes to calculate annual unit costs
coupled with Congressionally mandated deadlines for submission of the
Annual Report, we are unable to report current year unit costs. While we
regret our original reporting of these costs may have been
misinterpreted by some, beginning with the FY 2007 Annual Report, we
have begun clearly footnoting the years being reported.

Enclosed is a corrective action plan addressing each of your findings
and recommendations. Thank you for providing us the opportunity to
respond to your report and we look forward to working with your office
to implement these changes.

> Best regards,
>
> Lawrence A. Warder
>
> Acting Chief Operating Officer
>
> Federal Student Aid

[^1]: FSA prepared a draft Five-Year Plan for FY 2000-2004 dated
    November 30, 1999.

[^2]: GAO, *Office of Federal Student Aid: Better Strategic and Human
    Capital Planning Would Help Sustain Management Progress*, GAO-05-31,
    October 2004.

[^3]: Only the FY 2006 report included this information.

[^4]: The FY 2005 Annual Report included an appendix to the report
    entitled, "FY 2005 Tactical Accomplishments," which listed action
    items in a manner that attempted to approximate the details of the
    FY 2005 Annual Plan. It reported items that were considered
    completed and those that were outstanding, allowing the reader to
    more easily track progress associated with FSA's plans.

[^5]: This effort commenced in FY 2004 as the Front End Business
    Integration (FEBI) initiative. FEBI was renamed ADvance in March
    2005, with the overall goal unchanged.

[^6]: Free Application for Federal Student Aid

[^7]: Five indefinite delivery indefinite quantity (IDIQ) contracts were
    subsequently awarded on September 25, 2008.

[^8]: These are the same awards as noted under the ADvance initiative.
    Five IDIQ contracts were subsequently awarded on September 25, 2008.

[^9]: GAO-02-255, *Federal Student Aid -- Additional Management
    Improvements Would Clarify Strategic Direction and Enhance
    Accountability*, April 2002.

[^10]: Information related to reasons for delays in recognizing initial
    planned cost savings associated with the ADvance and CSB initiatives
    is noted in Finding No. 2.