**Enclosure D**

June 11, 2008

Honorable Aníbal Acevedo Vilá

Governor

Commonwealth of Puerto Rico

PO Box 9020082

San Juan, Puerto Rico 00902-0082

Honorable Rafael Aragunde Torres

Secretary of Education

Puerto Rico Department of Education

Post Office Box 190759

San Juan, Puerto Rico 00919-0759

Dear Governor Acevedo Vilá and Secretary Aragunde Torres:

Enclosed are special conditions that the U.S. Department of Education
(Department) is imposing on all grants awarded to the Puerto Rico
Department of Education (PRDE) for Federal Fiscal Year (FFY) 2008. These
special conditions incorporate by reference requirements of the current
Memorandum of Agreement (MOA) and the 2007 Compliance Agreement (2007
Agreement) entered into by the Commonwealth of Puerto Rico (Puerto
Rico), PRDE, and the Department on December 17, 2007.

As you know, over the past several years, the Department and Puerto Rico
have worked cooperatively toward addressing many systemic and
longstanding grant management and accountability issues that PRDE has
been facing with regard to the administration of Federal education
grants. On October 25, 2004, the Department entered into a Compliance
Agreement with Puerto Rico and PRDE to address systemic improvements
that were needed in PRDE's management of Department grants to ensure
compliance with Federal program and fiscal management requirements
applicable to those grants (2004 Agreement). Puerto Rico and PRDE
developed, and have begun to implement, several new grants management,
administrative, and fiscal management processes that the Department has
determined will satisfy requirements in the 2004 Agreement if the
processes are implemented fully and effectively, as approved by the
Department, throughout Puerto Rico's school system, and if PRDE
implements the approved 2004 corrective action plans (2004 CAPs) in the
areas of grants management, payroll, and procurement. The MOA with the
Department governs the implementation, review, and oversight of certain
activities that are currently being conducted, and will continue to be
conducted, by Puerto Rico and PRDE in compliance with, and in follow up
to, certain terms and conditions of the 2004 Agreement. The MOA expires
no later than April 30, 2009, at which time, as Puerto Rico and PRDE
have agreed, all action steps under the MOA will be completed.

In addition, the Department entered into the 2007 Agreement with Puerto
Rico and PRDE because the Department determined it would take PRDE more
than one year to completely address several programmatic issues
requiring corrective action, and to establish the continued cooperation
of other parts of the Puerto Rico government in this effort, such as the
Puerto Rico Department of the Treasury (Hacienda) and PRDE's Office of
Management and Budget. The programs under which PRDE receives funds from
the Department, and in which corrective action is necessary, include
Titles I, II, and IV of the Elementary and Secondary Education Act
(ESEA), Title IV of the Higher Education Act of 1965, and the
Individuals with Disabilities Education Act (IDEA) (covered Federal
programs). The 2007 Agreement also addresses the progress and
effectiveness of the PRDE Internal Audit Office (Audit Office) and the
independent Audit Oversight Committee (Audit Committee). Grant
recipients are required to provide assurances that grant funds are being
spent in accordance with Federal program and legislative requirements.
The Department relies on these assurances to approve grant applications.
Successful operation of both the Audit Office and the Audit Committee
will help PRDE provide these needed assurances. Their operations are
especially important during this time of fiscal and programmatic
concern. Accordingly, Task 16 of the 2007 Agreement requires the full
implementation of PRDE's Audit Office and Audit Committee by December
31, 2008.

At the end of the three-year 2007 Agreement, PRDE must be in full
compliance with all applicable program requirements in order to continue
to receive Federal education funds under the covered Federal programs.
Through the 2007 Agreement, Puerto Rico and PRDE, with technical
assistance from the Department, agreed, and are working, to develop and
implement solutions to PRDE's program performance and implementation
problems. These programmatic issues are being carefully examined and
addressed from the perspective of PRDE and other Puerto Rico agencies
with management responsibility for resources or programs that have an
impact on education in Puerto Rico and on PRDE's administration of
Federal education funds.

The implementation of the MOA and the 2007 Agreement, as well as other
steps taken by PRDE prior to these Agreements, demonstrate PRDE's
initiative and commitment to resolving the systemic problems originally
identified by the Department in 2002. However, much work remains to be
done by Puerto Rico and PRDE to fully and effectively implement all
action steps outlined in the MOA and the tasks in the 2007 Agreement,
including the corrective action plans (2007 CAPs) developed in
conjunction with, and incorporated into, the 2007 Agreement. Therefore,
we are imposing upon all grants awarded by the Department to PRDE for
FFY 2008, the enclosed Departmental special conditions.

We know that you take seriously our mutual responsibilities to ensure
that Federal program funds are being spent properly to educate children
and students in the Commonwealth of Puerto Rico. It is the Department's
hope that PRDE, you, as key officials of the Commonwealth, and officials
of other entities within and outside the government will recognize the
need for coordination and cooperation and thus work more closely
together to effect the necessary change and improvement in PRDE
education program administration for the benefit of Puerto Rico's
students.

We look forward to continuing to work with you and other Puerto Rico
officials to improve the delivery of Federal education services so that
no child in Puerto Rico is left behind.

Sincerely,

/s/ Philip A. Maestri

Philip A. Maestri, Director

Risk Management Service

cc: Ramon De Azua, Director, PRDE Office of Federal Affairs

Enclosure

**Commonwealth of Puerto Rico Department of Education**

**FFY 2008 Departmental Special Conditions**

PREAMBLE: These special conditions are imposed on the Puerto Rico
Department of Education's (PRDE's) Federal fiscal year (FFY) 2008 grants
made available by the U.S. Department of Education (Department) on or
after the date of these special conditions, and will affect all funds
under all other grants still available for obligation by PRDE. These FFY
2008 grant awards from the Department to PRDE are made in accordance
with the terms of the Compliance Agreement (2007 Agreement) and the
Memorandum of Agreement (MOA) among the Commonwealth of Puerto Rico
(Puerto Rico), PRDE, and the Department, signed on December 17, 2007.
The special conditions are imposed to help ensure that Department grant
awards are expended by PRDE in accordance with applicable legal
requirements, the 2007 Agreement, the MOA, and the appropriate fiscal
accountability measures and management practices and controls.

I. BACKGROUND

A. In 2002, the Department designated PRDE a "high-risk" grantee, under
the Education Department General Administrative Regulations (EDGAR) (at
34 C.F.R. 80.12). At that time, special conditions were placed on all
Department grants awarded to PRDE because of its history of
unsatisfactory performance, as uncovered by audits dating back to 1994.
The Department's 2002 special conditions were intended to bring about
necessary changes to Federal program administration and appropriate
fiscal oversight in Puerto Rico that would ultimately bring it into
compliance with all Federal education program requirements. The special
conditions were intended to result in important improvements to Federal
grants administration in Puerto Rico so that the systemic problems
uncovered by the auditors would be corrected and would not reoccur. In
addressing the special conditions, and in conjunction with the
Department's Cooperative Audit Resolution and Oversight Initiative
(CAROI), as outlined below, PRDE has taken numerous steps to address
underlying problems.

B. As a result of PRDE's demonstrated initiative and commitment to
resolving the problems that led to the 2002 "high-risk" designation, and
in recognition of PRDE's progress in that regard, the Department removed
PRDE's "high-risk" grantee designation, on a probationary basis, upon
the October 25, 2004 signing of a Compliance Agreement among Puerto
Rico, PRDE, and the Department (2004 Agreement).

C. Starting in September 2003, the Department and PRDE worked together
in a collaborative effort under the CAROI process, to jointly resolve
the backlog of unresolved PRDE audits, which contained over six hundred
audit findings dating back to 1994. As a result of this effort, PRDE has
taken steps and established controls to improve its payroll and
procurement processes and its management of grants to address numerous
recurring audit issues and make systemic changes. It has assigned
knowledgeable staff to this task and has employed expert contractors to
assist in this effort. PRDE has sought to come into compliance with
Federal requirements through the implementation of corrective action
plans in the areas of grants management, procurement, and payroll, with
the ultimate goal of improving educational services to all students in
Puerto Rico.

> D. The 2004 Agreement primarily addressed systemic problems in PRDE's
> program administration and management of Federal education funds.
> Under the 2004 Agreement, Puerto Rico and PRDE developed, and began to
> implement, several new grants management, administrative, and fiscal
> management processes. At the conclusion of the 2004 Agreement, the
> Department determined that these new processes will satisfy
> requirements in the 2004 Agreement if the processes are implemented
> fully and effectively, as approved by the Department, throughout
> Puerto Rico's school system, and if PRDE implements the 2004
> corrective action plans developed in conjunction with the 2004
> Agreement (2004 CAPs) in the areas of grants management, payroll, and
> procurement. Accordingly, on December 17, 2007, Puerto Rico and PRDE
> entered into the MOA with the Department that governs the
> implementation, review, and oversight of certain activities that
> Puerto Rico and PRDE have committed to conducting, are currently
> conducting, and will continue to conduct, in compliance with, and in
> follow up to, certain terms and conditions of the 2004 Agreement. The
> MOA expires no later than April 30, 2009, at which time, as Puerto
> Rico and PRDE have agreed that all action steps under the MOA are to
> be completed.
>
> E. As a result of recent monitoring of PRDE's Federal programs, the
> Department identified several program areas requiring corrective
> action by PRDE. The programs under which PRDE receives funds from the
> Department, and in which corrective action is necessary, include
> Titles I, II, and IV of the Elementary and Secondary Education Act
> (ESEA), Title IV of the Higher Education Act of 1965, and the
> Individuals with Disabilities Education Act (IDEA) (covered Federal
> programs). The Department determined that it will take more than one
> year for PRDE to completely address the identified program compliance
> issues under those covered Federal programs and to establish the
> continued cooperation of other parts of the Puerto Rico government in
> this effort, such as the Puerto Rico Department of the Treasury
> (Hacienda) and PRDE's Office of Management and Budget. Therefore, on
> December 17, 2007, under the authority of section 457 of the General
> Education Provisions Act (GEPA), the Department entered into a
> comprehensive, three-year Compliance Agreement (2007 Agreement) with
> Puerto Rico and PRDE.
>
> F. In addition to programmatic issues, the 2007 Agreement also
> addresses the progress and effectiveness of the PRDE Internal Audit
> Office (Audit Office) and the independent Audit Oversight Committee
> (Audit Committee), both of which are critical in assuring the
> Department that grant funds it awards to PRDE are being spent in
> accordance with Federal program requirements. Accordingly, Task 16 of
> the 2007 Agreement requires the full implementation of PRDE's Audit
> Office and Audit Committee by December 31, 2008.
>
> G. The 2007 Agreement will allow PRDE time to develop and implement
> significant changes and improvements necessary to address the
> deficiencies that the Department has identified in PRDE's
> implementation of the covered Federal programs and to come into full
> compliance with identified Federal program requirements. At the end of
> this three-year period, PRDE must be in full compliance with all
> applicable program requirements in order to continue to receive
> Federal education funds under the covered Federal programs.

II\. SPECIAL CONDITIONS

A. [Required Adequate Progress in Implementing MOA action steps and 2007
Agreement Corrective Action Plans (2007 CAPs) and Related Reporting
Requirements]{.underline}

Through the MOA and the 2007 Agreement, Puerto Rico and PRDE, with
technical assistance from the Department, have agreed to complete
integrated, coordinated and systemic solutions to problems they have had
over a period of many years in the management of Federal education funds
and programs and to address deficiencies that the Department has
identified in its implementation of the covered Federal programs. PRDE
has committed to meeting specific goals and objectives aimed at
correcting these problems through (1) action steps in the MOA designed
to result in full implementation of the processes initiated by Puerto
Rico and PRDE under the 2004 Agreement in the areas of grants
management, payroll, and procurement; and (2) action steps in the 2007
CAPs designed to implement the 16 Tasks outlined in the 2007 Agreement
to address deficiencies in program implementation under the covered
Federal programs, as well as result in the full implementation of PRDE's
Audit Office and Audit Committee. It is essential that steady progress
continue in PRDE's implementation of all corrective actions under the
MOA and the 2007 CAPs in order for PRDE to meet fully the requirements
of both the MOA and the 2007 Agreement. Therefore, as specified in
Section 5 of the MOA and Section IV of the 2007 Agreement, PRDE is
required to submit to the Department on a quarterly basis, in English,
detailed written descriptions of the extent to which agreed-upon target
dates, goals, and measures are being met. The reporting requirements
specified in the MOA and the 2007 Agreement, including any requirements
for meetings or conference calls prior to submission by PRDE of written
reports, are incorporated herein by reference.

For purposes of the 2007 Agreement, in general, each quarterly report
will include information such as: (1) a description of activities and
progress for each task and its related sub-tasks during the reporting
period, (2) the status of each critical action step required to be taken
during the reporting period, (3) documentation of critical action step
completion for those steps required to be completed during the reporting
period (including explanations of delays for all steps not completed
that were scheduled to be completed during the period, and expected
completion dates for all unimplemented steps), (4) documentation of
measures of performance and results, and (5) other data or documentation
as specified within the action steps for each task or related sub-task
in the 2007 Agreement, and/or discussed in the pre-report meeting or
conference call among the Department, Puerto Rico, and PRDE.

For purposes of the MOA, in general, each quarterly report will include
the following: (1) a description of activities completed or progress
made for each action step; (2) documentation related to the activities
completed or progress made for each action step (e.g., copies of any
procedures, manuals, templates, policies, instruments, timelines, or
similar documents that PRDE is required to develop under the MOA); (3)
for action steps that require PRDE to fully implement a system by a
particular date, the date on which PRDE began full implementation of the
system and written evidence that implementation began on that date; and
(4) documentation demonstrating the effective implementation of new
systems.

The Puerto Rico Secretary of Education or other authorized official of
PRDE shall certify to the completeness and accuracy of the reports. The
PRDE Internal Audit Office shall verify the accuracy of the reports and
audit the implementation of the action steps in the action plans and
issue a report to PRDE and the Department within four weeks after PRDE
submits its quarterly report to the Department.

B. [Internal Audit Office and Audit Oversight Committee Status
Report]{.underline}

> All Department grant recipients are required to provide assurances
> that grant funds are being spent according to program and legislative
> requirements. The Department relies on these assurances to approve
> grant applications. The successful implementation of PRDE's initiative
> to strengthen the PRDE Audit Office and independent Audit Committee
> are critical to helping PRDE provide the required assurances.

In the quarterly reports required by these special conditions and the
2007 Agreement, PRDE shall provide the Department updates on the
implementation and activities of the Audit Office and the independent
Audit Committee. In addition to the regular quarterly reporting
specified in Section II.A above, the Department also requires PRDE to
provide:

1.  Copies of Audit Office reports as they are issued.

2.  A report on accomplishments of the PRDE Audit Office and the Audit
    Committee every six months.

> C. [Prompt Response to Request for Records]{.underline}
>
> PRDE shall promptly provide the Department or its representatives any
> requested records and information.
>
> D. [Program-Specific Conditions]{.underline}
>
> Additional special conditions may be imposed on FFY 2008 grant awards
> made under one or more Department programs, in addition to the special
> conditions that are contained in this document. Each such
> program-specific special condition will be contained in an attachment
> to the final grant award notification document that is provided by the
> Department to PRDE.

III\. FAILURE TO COMPLY WITH SPECIAL CONDITIONS**:**

A.  [Enforcement Action Steps or Additional Conditions]{.underline}

> If a plan, report or documentation under Section II above is not
> provided by PRDE on a timely basis or is not considered acceptable to
> the Department (i.e., it does not demonstrate that PRDE is making
> substantial progress toward the full implementation of any or all
> corrective actions outlined in the MOA, the 2007 Agreement, or one or
> more of the 2007 CAPs), the Department may consider it a failure to
> comply with the special conditions contained in Section II above and,
> therefore, such a failure may be subject to the remedies outlined
> below or to the terms in Section IV.A below. If the Department
> determines that PRDE has not made substantial progress in meeting
> program objectives, or has not met program requirements or the special
> conditions contained in Section II above, the Department may consider
> not continuing PRDE's grants, taking further enforcement action steps,
> or applying additional conditions, including:

1.  Conditions under which PRDE would receive no further funds under one
    or more grant awards or would receive funds only on a reimbursement
    basis;

2.  Conditions providing for the Department's recovery of misspent funds
    from PRDE; or

3.  Conditions requiring PRDE to contract (on a competitive basis) with
    a third party, who must be approved by the Department, to provide
    the program services, financial management, or both, under one or
    more PRDE grant awards, in which case the third party would, at a
    minimum, assist in preparing the vouchers to be submitted to the
    Department for reimbursement, and would verify their accuracy and
    legitimacy as appropriate expenditures under one or more grant
    awards.

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B.  [Reinstatement of "High-Risk" Status Under 34 CFR
    §80.12]{.underline}

> In the event that PRDE and Puerto Rico fail to continue their efforts
> toward correcting the systemic problems uncovered by the auditors
> between 1994 and 2006, and are not making sufficient progress toward
> meeting the terms of the MOA and the 2007 Agreement, the Department
> retains the authority to reinstate the "high-risk" designation that it
> removed from PRDE and Puerto Rico in 2004. If the Department
> determines that such reinstatement becomes necessary, additional
> special conditions or restrictions may include, but will not
> necessarily be limited to: (1) payment of Federal funds on a
> reimbursement basis; (2) withholding authority to proceed to next
> phase until receipt of evidence of acceptable performance within a
> given funding period; (3) requiring additional, more detailed
> financial reports; (4) requiring additional project monitoring; (5)
> requiring PRDE to obtain technical or management assistance, including
> the designation of a third-party fiduciary to administer all or part
> of PRDE's grants from the Department (the third party fiduciary would,
> at a minimum, assist in preparing the vouchers to be submitted to the
> Department for reimbursement, and would verify their accuracy and
> legitimacy as an appropriate expenditure under one or more grant
> awards); (6) establishing additional prior approvals; or (7) recovery
> of misspent funds. The use of a condition for one covered Federal
> program does not require or preclude its use for a different covered
> Federal program.

IV\. OTHER TERMS

> A. [Enforcement]{.underline}
>
> If PRDE fails to meet any of the above FFY 2008 special conditions,
> the Department is authorized to take other appropriate enforcement
> action. These terms and conditions do not preclude the Department from
> taking any otherwise authorized enforcement or other actions at any
> time.
>
> B. [Submission of Reports]{.underline}
>
> All reports that are required to be submitted by PRDE to the
> Department under these special conditions shall be submitted to:
>
> []{.mark}
>
> Susan Benbow
>
> U.S. Department of Education
>
> 400 Maryland Avenue, SW
>
> LBJ, Room 7E208
>
> Washington, DC 20202
>
> C. [Reconsideration and Modifications]{.underline}

At any time, PRDE may request reconsideration of one or more of the
above special conditions contained in Section II above by contacting the
Department and providing in writing the reasons why PRDE believes one or
more particular conditions are no longer needed. Additionally, the
Department may impose additional special conditions or modify these
special conditions, as appropriate. The Department will remove one or
more of the special conditions contained in Section II above at such
time as PRDE meets, to the Department's satisfaction, these conditions
and other applicable requirements.

> Dated (Same as Program Special Conditions, if any, or date of grant
> award):
>
> \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_