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| Elizabeth Public School District                                      |
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| Allowability of Title I, Part A Expenditures                          |
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## FINAL AUDIT REPORT

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.

**ED-OIG/A02G0020**

**October 2007**

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| Our mission is to       |                      | U.S. Department of  |
| promote the efficiency, |                      | Education           |
| effectiveness, and      |                      |                     |
| integrity of the        |                      | Office of Inspector |
| Department's programs   |                      | General             |
| and operations.         |                      |                     |
|                         |                      | New York, New York  |
+-------------------------+----------------------+---------------------+

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> **UNITED STATES DEPARTMENT OF EDUCATION**

OFFICE OF INSPECTOR GENERAL

### 32 Old Slip, 26th Floor, Financial Square

New York, New York 10005

Telephone (646) 428-3860 Fax (646) 428-3868

> October 9, 2007

Lucille E. Davy

Commissioner of Education

New Jersey Department of Education

Office of the Commissioner

100 River View Plaza

P.O. Box 500

Trenton, NJ 08625

Dear Commissioner Davy:

Enclosed is our final audit report, Control Number ED-OIG/A02G0020,
entitled *Elizabeth Public School District Allowability of Title I, Part
A Expenditures*. This report incorporates the comments you provided in
response to the draft report. If you have any additional comments or
information that you believe may have a bearing on the resolution of
this audit, you should send them directly to the following Education
Department official, who will consider them before taking final
Departmental action on this audit:

> Kerri L. Briggs

Assistant Secretary

Office of Elementary and Secondary Education

U.S. Department of Education

400 Maryland Avenue, SW

Washington, DC 20202

It is the policy of the U. S. Department of Education to expedite the
resolution of audits by initiating timely action on the findings and
recommendations contained therein. Therefore, receipt of your comments
within 30 days would be appreciated.

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.

Sincerely,

/s/

Daniel P. Schultz

> Regional Inspector General for Audit

Enclosure

TABLE OF CONTENTS

####### Page

[**EXECUTIVE SUMMARY** Error! Bookmark not
defined.](#__RefHeading___Toc179098185)

[BACKGROUND Error! Bookmark not defined.](#__RefHeading___Toc179098186)

[AUDIT RESULTS Error! Bookmark not
defined.](#__RefHeading___Toc179098187)

[FINDING NO. 1 -- Elizabeth Could Not Provide Adequate Support for
\$822,796 of Title I Expenditures Error! Bookmark not
defined.](#__RefHeading___Toc179098188)

[NJDOE's Comments. Error! Bookmark not
defined.](#__RefHeading___Toc179098189)

[OIG Response......... Error! Bookmark not
defined.](#__RefHeading___Toc179098190)

[FINDING NO. 2 -- Elizabeth Charged \$618,392 of Unallowable
Expenditures to Title I Error! Bookmark not
defined.](#__RefHeading___Toc179098191)

[NJDOE's Comments.. Error! Bookmark not
defined.](#__RefHeading___Toc179098192)

[OIG Response......... Error! Bookmark not
defined.](#__RefHeading___Toc179098193)

[FINDING NO. 3 -- Elizabeth Used \$505,737 of Title I Funds to Supplant
Non-Federal Funds Error! Bookmark not
defined.](#__RefHeading___Toc179098194)

[NJDOE's Comments. Error! Bookmark not
defined.](#__RefHeading___Toc179098195)

[OIG Response......... Error! Bookmark not
defined.](#__RefHeading___Toc179098196)

[FINDING NO. 4 -- Elizabeth Did Not Maintain Proper Internal Controls
Error! Bookmark not defined.](#__RefHeading___Toc179098197)

[NJDOE's Comments. **Error! Bookmark not
defined.**](#__RefHeading___Toc179098198)

[OBJECTIVE, SCOPE, AND METHODOLOGY Error! Bookmark not
defined.](#__RefHeading___Toc179098199)

[Enclosure............... 2](#__RefHeading___Toc179098200)

EXECUTIVE SUMMARY

The objective of our audit was to determine if the Elizabeth Public
School District's (Elizabeth) Title I, Part A (Title I) expenditures,
distributed through the New Jersey Department of Education (NJDOE), were
allowable in accordance with applicable laws and regulations. Our audit
period was July 1, 2004, through June 30, 2005.

We randomly and judgmentally sampled \$2,289,094 of \$8,265,724, in
Title I funds Elizabeth expended during our audit period and found that
Elizabeth did not fully comply with applicable laws and regulations. We
found that Elizabeth charged \$822,796 in unsupported salary and
non-salary expenditures to Title I. Further, Elizabeth used \$618,392 of
its Title I funds for unallowable purposes. Elizabeth also used
\$505,737 in Title I funds to supplant non-federal funds for its
after-school program. In addition, we concluded that Elizabeth did not
maintain effective internal controls over its Federal funds.

We recommend that the Assistant Secretary for Elementary and Secondary
Education instruct NJDOE to require Elizabeth to:

-   Provide support for the \$822,796 in salary and non-salary Title I
    expenditures, or return the funds, with applicable interest, to the
    U.S. Department of Education (ED).

-   Implement procedures that provide for the proper disbursement of and
    accounting for Title I expenditures for teacher tutor salaries.

-   Follow the *Governance Manual policies regulations bylaws*[^1]
    (Governance Manual) by requiring the return of receiving requestors
    (receiving reports) to the District[^2] office upon receipt of goods
    and services.

-   Return the \$12,939 for unallowable computer equipment and vendor
    expenditures, plus applicable interest, to ED.

-   Implement procedures to ensure the Business Office is advised of
    changes that may impact Federal grants.

-   Ensure that equipment purchased with Title I funds is properly
    labeled and used for Title I purposes.

-   Implement controls to ensure that only allowable Title I
    expenditures are allocated to Title I.

-   Provide support that demonstrates that Title I funds were not used
    by Elizabeth to supplant non-federal funds or return the \$505,737
    in 2004-2005 Title I funds, with applicable interest, to ED.

-   Implement internal control procedures to provide reasonable
    assurance that Elizabeth manages Title I in accordance with laws and
    regulations, including adequate segregation of duties.

-   Update the Governance Manual to include current changes to internal
    control procedures and ensure Elizabeth personnel adhere to
    procedures outlined in the Governance Manual.

We recommend that the Assistant Secretary for Elementary and Secondary
Education:

-   Consider Elizabeth's claim that it inadvertently failed to indicate
    in its application the option to grandfather the three non-Title I
    schools and determine whether Elizabeth should return the \$605,453
    in unallowable expenditures, plus applicable interest, to ED.

We also recommend that the Assistant Secretary for Elementary and
Secondary Education instruct NJDOE to:

-   Review Elizabeth's non-salary Title I expenditures for the period
    July 1, 2004, through June 30, 2005, not included in our sample to
    determine if the expenditures were adequately supported and require
    Elizabeth to return any unsupported funds with applicable interest
    to ED.

-   Determine the 2005-2006 Title I funds used to supplant non-federal
    funds that were outside the scope of our audit, and require
    Elizabeth to return the Title I funds used to supplant non-federal
    funds, with applicable interest, to ED.

We provided a draft of this report to NJDOE. We reviewed NJDOE's
response, dated August 31, 2007; however, our findings remain unchanged.
In its response, NJDOE concurred with 10 of 13 recommendations,
partially agreed with 2 recommendations, and disagreed with 1
recommendation. We revised two recommendations based on the comments
received. We have summarized NJDOE's comments and our response after
each finding. A copy of NJDOE's comments is attached. However, due to
the voluminous number of attachments included with NJDOE's comments, we
have not included them in this enclosure. A copy of NJDOE's comments and
attachments will be forwarded, under separate cover, to the Assistant
Secretary for Elementary and Secondary Education.

BACKGROUND

For the 2004-2005 school year, Elizabeth had 27 schools serving over
21,000 students. In fiscal year (FY) 2005, Elizabeth received \$11.5
million in Elementary and Secondary Education Act of 1965, as amended by
the No Child Left Behind Act of 2001 (ESEA) funding.[^3] Of this amount,
Title I accounted for \$8.3 million. For the 2004-2005 school year, 15
of the 27 Elizabeth schools were approved to receive Title I funds. All
schools approved for Title I funds were schoolwide programs.

Title I grants are provided through State educational agencies (SEAs) to
local educational agencies (LEAs) to help ensure that all children have
the opportunity to obtain a high-quality education and reach proficiency
on challenging state academic standards and assessments. Eligible
schoolwide schools are able to use their Title I funds, in combination
with other Federal, State, and local funds (blended funds), to upgrade
the entire educational program of the school and to raise academic
achievement for all students. Except for some of the specific
requirements of the Title I program, funds that are used in a schoolwide
program may not be subject to the statutory or regulatory requirements
of programs providing the funds as long as the schoolwide program meets
the intent and purpose of those programs.

AUDIT RESULTS

We found that Elizabeth did not fully comply with applicable laws and
regulations regarding its Title I expenditures. Elizabeth could not
provide support for \$822,796 in salary and non-salary expenditures. In
addition, expenditures of \$618,392 were unallowable and \$505,737 in
Title I funds were used to supplant non-federal funds. Further, we found
that Elizabeth did not maintain proper internal controls in relation to
obtaining and maintaining documents, proper approval of purchases, and
approval of principal timecards.

FINDING NO. 1 -- Elizabeth Could Not Provide Adequate Support for
\$822,796 of Title I Expenditures

*[Unsupported Salaries for Teacher Tutors]{.underline}*

Elizabeth did not adequately support \$666,681 in salaries for teacher
tutors that it charged to Title I. As part of our random sample, we
reviewed a journal entry for (\$445,101) representing a transfer of
teacher tutor salaries from Title I to Title II, Part A (Title IIA).[^4]
Elizabeth budgeted approximately 15 teacher tutors to Title I and 27
teacher tutors to Title IIA. However, Elizabeth could not specifically
identify which teacher tutor salaries were charged to Title I and which
were charged to Title IIA.

Elizabeth originally recorded all teacher tutor salaries as charges to
Title I. Once the budgetary limit for Title I teacher tutors was
reached, a journal entry was posted to transfer the salary overages to
Title IIA. Elizabeth only transferred to Title IIA, the amount of
salaries that exceeded the \$666,681 budgeted to Title I. Since
Elizabeth used this accounting methodology to record teacher tutor
salaries, it could not identify each specific teacher tutor salary that
should have been charged to Title I or IIA.

During our audit period, Elizabeth employed 43 teacher tutors, whose
salaries were charged to Title I and Title IIA.[^5] An Elizabeth
official stated all 43 teacher tutors were employed at Title I schools.
However, we found 16 of the 43 teacher tutors worked at non-Title I
schools. Based on the accounting methodology Elizabeth used, there was
no assurance that salary expenditures charged to Title I for teacher
tutors were actually for Title I teachers. We concluded that if all
teacher tutors were employed at Title I schools, then adjusting entries
to the teacher tutor salary account would not have caused a questionable
charge to Title I. However, because some teacher tutors worked at
non-Title I schools and Elizabeth did not ensure proper disbursement of,
and accounting for, Title I salaries, we could not determine whether the
\$666,681 charged to Title I for teacher tutors included charges for
teacher tutors working at non-Title I schools. Therefore, the \$666,681
in Title I salaries charged for teacher tutors was unsupported.

*[Unsupported Non-Salary Expenditures]{.underline}*

Elizabeth did not adequately support \$157,763[^6] in non-salary Title I
expenditures. Elizabeth used receiving reports to verify the receipt of
goods and services. However, Elizabeth was unable to provide 16 of 48
receiving reports in our sample to support the charges for supplies,
textbooks, and educational services. Of the total unsupported amount,
\$154,392 was from our random and judgmental samples of District Title I
expenditures. We also found \$3,371 of schoolwide Title I expenditures
allocated to School 6[^7] was unsupported. This occurred because
District officials did not properly supervise school officials and
enforce policies and procedures set forth in the Governance Manual for
the receipt of goods and services. As a result, there was no assurance
that the \$156,115 of expenditures related to the goods and services
were actually received.

The General Education Provisions Act \[20 U.S.C. § 1232f (a)\], requires
each recipient of Federal funds\... shall keep records which fully
disclose the amount and disposition by the recipient of those funds, the
total cost of the activity for which the funds are used, the share of
that cost provided from other sources, and such other records as will
facilitate an effective financial or programmatic audit.

Office of Management and Budget (OMB) Circular A-87 § C.1.j, states that
to be allowable under Federal awards, costs must be adequately
documented.

According to the ESEA § 9306 (a)(5), an applicant \[Elizabeth\] that
submitted a plan or application for ESEA programs \[Title I\] would use
such fiscal control and fund accounting procedures as would ensure
proper disbursement of, and accounting for, Federal funds paid to the
applicant under each such program.

According to the Governance Manual, the originating department should
submit a signed receiving \[report\] to the District as a receipt for
items or services received.

Elizabeth did not properly account for teacher tutor salaries in
accordance with regulations. Furthermore, there was no assurance that
goods and services were received. As a result, Elizabeth could not
adequately support \$822,796[^8] in Title I expenditures.

## Recommendations {#recommendations .RptSubcaption}

We recommend that the Assistant Secretary for Elementary and Secondary
Education instruct NJDOE to:

1.  Require Elizabeth to provide support for the \$822,796 in salary and
    non-salary Title I expenditures, or return the funds, with
    applicable interest, to ED.

```{=html}
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1.  Require Elizabeth to implement procedures that provide for the
    proper disbursement of and accounting for Title I expenditures for
    teacher tutor salaries.

2.  Require Elizabeth to follow the Governance Manual by requiring the
    return of receiving reports to the District office upon receipt of
    goods and services.

3.  Review Elizabeth's non-salary Title I expenditures for the period
    July 1, 2004, through June 30, 2005, not included in our sample to
    determine if the expenditures were adequately supported and require
    Elizabeth to return any unsupported funds to ED.

NJDOE's Comments

In its response to the draft report, NJDOE did not fully concur with
Finding 1 and recommendation 1.1, and agreed with recommendations 1.2,
1.3, and 1.4. NJDOE reviewed subsequent information, which was also
provided to the OIG, and concluded that teacher tutor salaries were
supported. NJDOE stated that the teacher schedules and after-the-fact
certifications were sufficient support for the \$666,681 in Title I
charges for teacher tutors. NJDOE noted that ED guidance issued in May
2006, stated that time and effort reporting for non-consolidated funds
required semi-annual certifications and there was no similar guidance
prior to May 2006 that addressed this issue in a schoolwide program.

NJDOE agreed that \$3,371 of the unsupported \$157,763 should be
returned since it was expended at non-Title I schools, but stated that
the contemporaneous receiving reports Elizabeth provided supported the
remaining \$154,392. NJDOE stated that these secondary forms, which were
signed by Elizabeth personnel prior to payment, should be considered
sufficient support. NJDOE further noted that the missing original
documents should not warrant the return of funds when the program goals
were satisfied.

OIG Response

We considered NJDOE's response to Finding 1 and recommendation 1.1;
however, our position remains unchanged. Elizabeth provided
"after-the-fact certifications" for some teacher tutors to verify that
they worked solely on the Title I program. Teacher tutors were not part
of the schoolwide program. In addition, the guidance relevant to the
2004-2005 school year was OMB Circular A-87, Attachment B, Paragraph
8.h.3, first effective June 9, 2004. This guidance states that employees
whose salaries are charged solely to a particular Federal program are
required to sign certifications on a semi-annual basis. Since the
semi-annual certifications were not signed at the time services were
rendered, we were unable to determine whether these teachers actually
provided these services. Therefore, the "after-the-fact certifications"
were insufficient support for the \$666,681 of Title I funds expended
for teacher tutors. Furthermore, NJDOE's response did not address the
accounting methodology used by Elizabeth that resulted in the improper
accounting of teacher tutor salaries. Therefore, the \$666,681 remains
unsupported.

OIG also maintains that the \$157,763 of Title I non-salary expenditures
was unsupported. As stated in our report, we concluded that the \$3,371
was unsupported because receiving reports were not provided. NJDOE
stated that the \$3,371 was unsupported because it was spent at
non-Title I schools. The contemporaneous receiving reports that NJDOE
referred to in its response were copies of invoices provided by vendors
and signed by Elizabeth personnel as verification of receipt. For
\$154,252, the OIG was not provided signed invoices or any other
alternative documentation to support that the services were rendered. On
the documentation we reviewed, we noted that invoices were signed, but
not dated, for the remaining \$3,371. We could not determine whether the
receipt of goods and services was verified prior to payment. Therefore,
the \$157,763 of Title I non-salary expenditures was not adequately
supported.

FINDING NO. 2 -- Elizabeth Charged \$618,392 of Unallowable Expenditures
to Title I

*[\$605,453 of Title I Funds Expended for Non-Title I
Schools]{.underline}*

Elizabeth improperly allocated Title I expenditures of \$605,453[^9] to
Schools 14, 18, and 26 that were not eligible to receive Title I funds
in FY 2005. We compared the statement of blended fund resources that was
reported in the Elizabeth 2005 Comprehensive Annual Financial Report
(CAFR)[^10] to the list of Title I schools approved by NJDOE and found
that Elizabeth inappropriately budgeted \$637,861 for three schools that
were not eligible Title I schools. Of this amount, Elizabeth expended
\$605,453 in Title I funds for the three non-Title I schools.

According to Elizabeth, the three schools were eligible Title I
schoolwide schools in the 2003-2004 school year. The Grants Office at
Elizabeth was aware that the three schools lost eligibility as Title I
schools for FY 2005, but failed to communicate this to the Business
Office. The Business Office prepared the 2005 CAFR assuming that the
schools maintained their Title I eligibility and erroneously allocated
Title I resources within the blended fund to the three non-Title I
schools. Although these schools were eligible Title I schoolwide schools
for the 2003- 2004 school year, they did not meet the poverty level
requirements for Title I eligibility in FY 2005.[^11] Elizabeth later
contended that it had the authority to use its discretion in designating
as eligible, any school in which at least 35 percent of the children
were from low-income families, and it could have extended eligibility
for an additional year to any school that lost its eligibility status.
However, Elizabeth did not use its discretion to designate as Title I or
extend Title I eligibility to the three ineligible schools in its
Consolidated Grant Application to NJDOE in accordance with Federal
regulations. Therefore, we concluded that the three schools were
ineligible to receive Title I funds for FY 2005.

*[\$7,696 of Title I Funds Expended for Computer Equipment]{.underline}*

Elizabeth did not ensure that equipment purchased with Title I funds was
labeled as Federal equipment and used for Title I purposes. As part of
our random sample of non-salary expenditures charged to Title I by the
District, we reviewed a purchase of four computers totaling \$7,696.
Elizabeth identified in its financial system that Title I funds were
charged for the purchase of the equipment. However, this system did not
interface with the District system for tracking inventory. Upon
inspection of the computers, we found the computers were not labeled as
Federal equipment. Elizabeth did not follow its procedures to ensure
that equipment purchased with Title I funds was labeled as Federal
equipment.

According to District officials, the computer equipment was assigned to
four employees who were employed to provide professional development to
middle school math and science teachers. We interviewed two of the
employees who stated that they were math coaches. The employees stated
that they provided professional development to all math teachers within
the district. Accordingly, all students in the district, whether they
were Title I or non-Title I students, received the benefit of the
equipment. We found that the computers were not used primarily for the
benefit of Title I programs and students, and therefore, the \$7,696
expenditure was unallowable.

*[\$5,243 of Title I Expended for Vendor Purchases at Non-Title I
Schools]{.underline}*

During our analysis of the Elizabeth financial expenditure records, we
judgmentally sampled \$267,183 in non-salary District expenditures. We
found Title I funds of \$5,243 were expended at six schools that were
not approved as Title I schools in the Elizabeth approved Consolidated
Grant Application. The expenditures were for the purchase of various
school supplies. However, Elizabeth was unable to explain why it charged
the supplies to Title I. Accordingly, Title I students did not obtain
the benefit of \$5,243 in non-salary expenditures that were not
allocable to Title I and are therefore, unallowable.

ESEA § 1113 (a)(1) states that an LEA may use Title I funds received
only in eligible school attendance areas. ESEA § 1113 (a)(2)(B) defines
an eligible school attendance area as one "\... in which the percentage
of children from low-income families is at least as high as the
percentage of children from low-income families served by the \[LEA\] as
a whole."

According to ESEA § 1113 (a)(3),

> If funds allocated\... are insufficient to serve all eligible school
> attendance areas, a \[LEA\] shall -- (A) annually rank\... eligible
> school attendance areas in which the concentration of children from
> low-income families exceeds 75 percent from highest to lowest
> according to the percentage of children from low-income families; and
> (B) serve such eligible school attendance areas in rank order.

Further, ESEA § 1113 (a)(4) states that the remaining funds should be
used to serve eligible school attendance areas from highest to lowest
for the entire LEA according to the percentage of children from low
income families.

According to the Governance Manual, "\... all equipment shall be clearly
marked to identify the grant under which it was acquired."

Elizabeth improperly expended Title I funds for ineligible schools.
Elizabeth did not follow procedures in its Governance Manual regarding
the labeling of equipment and did not ensure equipment purchased with
Title I funds primarily benefited Title I programs and students. As a
result, Elizabeth charged \$618,392 of unallowable expenditures to Title
I.

**Recommendations**

We recommend that the Assistant Secretary for Elementary and Secondary
Education:

1.  Consider Elizabeth's claim that it inadvertently failed to indicate
    in its application the option to grandfather the three non-Title I
    schools and determine whether Elizabeth should return the \$605,453
    in unallowable expenditures, plus applicable interest, to ED.

2.  Instruct NJDOE to require Elizabeth to return the \$12,939 in
    unallowable computer equipment and vendor expenditures, plus
    applicable interest, to ED.

3.  Instruct NJDOE to require Elizabeth to implement procedures to
    ensure the Business Office is advised of changes that may impact
    Federal grants.

4.  Instruct NJDOE to require Elizabeth to ensure that equipment
    purchased with Title I funds is properly labeled and used for Title
    I purposes.

5.  Instruct NJDOE to require Elizabeth to implement controls to ensure
    that only allowable Title I expenditures are allocated to Title I.

NJDOE's Comments

NJDOE concurred with Finding 2 and recommendations 2.2, 2.3, and 2.4,
but disagreed with recommendation 2.1. NJDOE stated that Elizabeth
inappropriately expended Title I funds at three ineligible schools;
however, they believe that the return of funds is a penalty that is too
severe. In addition, Elizabeth responded to NJDOE that its Title I
grants manager inadvertently failed to indicate on the its application
the option to grandfather the three schools. Regarding recommendation
2.1, NJDOE stated that it had provided technical assistance on Title I
ranking methods and school eligibility using the LEA discretion option
to Elizabeth. The District has also been notified that it must use Title
I funds only in eligible Title I schools listed on the NCLB Consolidated
Application.

OIG Response

We considered NJDOE's response in relation to recommendation 2.1, and
revised our recommendation to state that ED should consider Elizabeth's
claim that it inadvertently failed to indicate in its application the
option to grandfather the three schools. NJDOE agreed that three
ineligible schools were inappropriately funded with Title I. NJDOE
approved 15 schools for Title I based on Elizabeth's approved NCLB
Consolidated Application. However, Elizabeth funded 18 schools with
Title I. According to 34 C.F.R. § 200.78, an LEA must allocate funds to
schools identified as eligible and selected to participate under ESEA §
1113. The \$605,453 in Title I funds expended at the three ineligible
schools was unallowable, because these schools were neither identified
as eligible nor selected to participate based on the NCLB Consolidated
Application. Since these funds were expended at ineligible schools, they
were not made available to approved Title I schools. The \$605,453 of
Title I funds should have been allocated to, and expended at, properly
approved Title I schools in accordance with Elizabeth's Consolidated
Application and ESEA. Allowing LEAs to expend Title I funds at schools
that have not been approved by the SEA, is a breakdown in the approval
process that places Federal funds at risk of misuse.

In addition, NJDOE did not provide additional documentation to support
that the \$7,696 of Title I funds expended for computer equipment and
the \$5,243 of Title I expended for vendor purchases at Non-Title I
schools were allowable. Therefore, the \$12,939 is unallowed and should
be returned with interest, to ED.

FINDING NO. 3 -- Elizabeth Used \$505,737 of Title I Funds to Supplant
Non-Federal Funds

Elizabeth used Title I funds to provide services to Title I students
that were also provided to non-Title I students using non-federal funds.
In total, \$988,355 was incurred by Elizabeth for an after-school
program. Of this amount, \$505,737 in salary and non-salary expenditures
was charged to Title I. Therefore, the \$505,737 of Title I funds
expended during our audit period were used to supplant non-federal
funds.

In January 2006, Elizabeth received notice from NJDOE that its 2005-2006
District-wide after-school program did not qualify as a Title I
supplemental educational services (SES) program. NJDOE stated the
program was offered at all of its schools and therefore was not
supplemental to other District activities. Elizabeth officials disagreed
with this finding in a letter dated February 6, 2006. Elizabeth
officials explained that in the 2003-2004 school year the District began
providing supplemental services, in the form of an after-school program,
to students at schools in need of improvement. Based on the success of
the program, the supplemental services were expanded and implemented
District-wide in an effort to provide beneficial services to more
Elizabeth students. In a letter dated March 6, 2006, NJDOE maintained
that Elizabeth used Title I funds in FY 2006 to support a District-wide
after-school program that was in violation of Federal regulations
because it did not meet the definition of a Title I SES program and it
did not comply with supplement not supplant requirements. On January 25,
2007, Elizabeth signed an agreement with NJDOE to implement an SES
program in compliance with Federal regulations. However, Elizabeth
stated that it did not use Federal funds to supplant non-federal funds
because it met the exception to the supplement not supplant requirement
in ESEA § 1120A(d)[^12].

According to Elizabeth officials, the after-school program funded with
Title I was offered to low-income, low-achieving students at Title I
schools in need of improvement. Elizabeth was unable to provide
supporting documentation to demonstrate the criteria used for the
students who were offered after-school services at Title I schools not
in need of improvement funded with blended funds and non-Title I schools
funded with State and local funds. Since there is insufficient support
regarding the criteria used to provide after-school services, we could
not determine whether the after-school program in the Title I and
non-Title I schools was comparable. Therefore, the exception to the
supplement not supplant requirements cannot be applied.

According to ESEA § 1120A(b)(1), "A \[SEA\] or \[LEA\] shall use Federal
funds received under this part only to supplement the funds that would,
in the absence of such Federal funds, be made available from non-Federal
sources for the education of pupils participating in programs assisted
under this part, and not to supplant such funds."

Elizabeth used Title I funds to supplant non-federal funds for an
after-school program. Therefore, the \$505,737 of Title I funds expended
for the after-school program was unallowable.

**Recommendations**

We recommend that the Assistant Secretary for Elementary and Secondary
Education instruct NJDOE to:

3.1 Require Elizabeth to provide support that demonstrates that Title I
funds were not used by Elizabeth to supplant non-federal funds or return
the \$505,737 in 2004-2005 Title I funds, with applicable interest, to
ED.

3.2 Determine the 2005-2006 Title I funds used to supplant non-federal
sources that were outside the scope of our audit, and require Elizabeth
to return the Title I funds used to supplant non-federal funds, with
applicable interest, to ED.

NJDOE's Comments

NJDOE did not concur with Finding 3, partially agreed with
recommendation 3.1, and agreed to comply with recommendation 3.2. NJDOE
stated that Elizabeth's SES program at all but two schools met the
exception to the supplement not supplant requirement under ESEA §
1120A(d) and 34 C.F.R. § 200.79(b)(1).

In its response, NJDOE cited ESEA § 1120A(d), the exception clause to
the supplement not supplant requirement, which states that supplemental
state and local funds may be excluded when a program meets the intent
and purposes of Title I.

NJDOE also cited 34 C.F.R. § 200.79(b)(1), which states that a program
meets the intent and purposes of Title I if the program:

\(i\) is implemented in a school in which the percentage of children
from low-income families is at least 40 percent;

\(ii\) is designed to promote schoolwide reform and upgrade the entire
educational operation of the school to support students in their
achievement toward meeting the State's challenging academic achievement
standards that all children are expected to meet;

\(iii\) is designed to meet the educational needs of all children in the
school, particularly the needs of children who are failing, or most at
risk of failing, to meet the State's challenging student academic
achievement standards.

\(iv\) uses the State's assessment system under ESEA § 200.2 to review
the effectiveness of the program.

NJDOE stated that Elizabeth provided documentation sufficient to support
that all but two schools met the exception to the supplement not
supplant requirement under ESEA § 1120A(d) and 34 C.F.R. § 200.79(b)(1).
The poverty level at the two schools that were below the 40 percent
threshold required by 34 C.F.R. § 200.79(b)(1)(i), preventing them from
qualifying for the exception. However, NJDOE held that the District met
all four components of the exception for all other schools. According to
NJDOE, at most, the \$51,996 expended at the two schools that did not
meet the 40 percent threshold should be unallowable due to supplanting.

OIG Response

We considered NJDOE's response along with its attachments, and revised
recommendation 3.1. We recognize that the supplement not supplant
requirement and its exception are complicated matters that may require
further review during audit resolution. While NJDOE stated that
Elizabeth's SES program met the exception to the supplement not supplant
requirement under ESEA § 1120A(d) and 34 C.F.R. § 200.79(b)(1), the
attachments provided did not clearly identify that this was the case.

The attachments provided did not clearly identify the criteria used for
the students who were offered after-school services. Although the
attachments stated that the after school programs targeted children who
were "most in need of academic assistance," and suggested that
low-income children were accommodated, they did not provide sufficient
support to make a final determination. In addition, the documents
provided to us during our audit were not consistent with the information
provided to NJDOE by Elizabeth. Therefore, we cannot determine what
student population was actually served.

An SES after-school program targets low-income students. Given this, an
after-school program that properly followed the ESEA rules for SES may
not meet the exception criteria under 34 C.F.R. § 200.79(b)(1)(iii),
because an SES program is not designed to meet the needs of all children
in the school. Instead, the SES program is designed to target low-income
children and give priority to the lowest-achieving eligible children.
According to an Elizabeth official, its SES after-school program was
offered to low-income, low-achieving students at Title I schools in need
of improvement. Therefore, it did not appear that Elizabeth's SES after
school program met the intent and purpose of Title I under the criteria
at 34 C.F.R. § 200.79(b)(1).

FINDING NO. 4 -- Elizabeth Did Not Maintain Proper Internal Controls

Elizabeth did not effectively maintain internal controls over its
Federal programs to assure Federal funds were managed in compliance with
laws and regulations. During our audit, we reviewed the system of
internal controls, policies, procedures, and practices applicable to the
administration of Title I by Elizabeth. Our assessment disclosed
internal control weaknesses which adversely affected the administration
of Title I funds expended by Elizabeth.

*[Missing Requisitions and Receiving Reports]{.underline}*

Elizabeth was unable to provide 4 original purchase requisitions and 16
receiving reports from our sample of 48 records. Requisitions are the
documents used by school officials to request permission from the
District to purchase goods or services. The requisitions were for the
purchase of various school supplies and textbooks. Elizabeth stated the
four requisitions could not be located because the file boxes stored at
the warehouse were damaged, and the documents were lost. Elizabeth
provided electronic versions of the requisitions. However, the
electronic versions did not show approval signatures or dates, and
therefore, we could not determine whether the purchase of the supplies
and textbooks were properly approved.

Receiving reports are the documents signed by school officials to
certify that the requested goods or services were received. However,
school officials did not always return signed receiving reports to the
District Accounts Payable Office when goods or services were received.
In these cases, Accounts Payable personnel would send school officials
copies of invoices. We were told that school officials were requested to
sign the invoices and return them to the District office as proof of
receipt of goods or services. We found that school officials signed
invoices for 11 of the 16 missing receiving reports. However, 8 of the
11 signed invoices were not dated. Therefore, there was no assurance
that school officials ensured that goods were actually received and used
for their intended purpose.

The District did not follow the policies and procedures set forth in the
Governance Manual since it did not properly maintain documentation of
purchased goods and services. Moreover, the section of the Governance
Manual regarding purchasing procedures had not been updated since 1991.
According to District officials, employees did not use the Governance
Manual as a reference tool for guidance on procedures. Due to the
missing requisitions and receiving reports, there was no assurance that
the purchase of supplies, textbooks, and services were properly approved
and used for their intended purpose.

*[Services Rendered Prior to Approval]{.underline}*

From our judgmental sample of \$261,940 of non-salary District
expenditures, we found that Elizabeth permitted a vendor to provide
services, totaling \$172,269, for two contracts prior to approval by the
Elizabeth Board of Education. The two contracts, both to Union County
Educational Services Commission, were to provide educational services to
students for the 2004-2005 school year. The Elizabeth Board of Education
was to approve the contracts through signed resolutions. We reviewed the
resolutions and found the contracts were approved two and three months
after services started.

In addition, we reviewed \$1,556,258 in our random sample of School 6
non-salary expenditures. We found that School 6 received services for 7
of 19 non-salary expenditures prior to proper approval. The
expenditures, totaling \$4,925, were for the services of charter buses
for various school field trips. In most cases, services were provided
two to three months before approval. The amount of the services
allocable to Title I was \$345.

The District and school officials did not follow proper procedures, as
established by the Governance Manual, for the proper approval of
contracts and services.

*[Time Distribution Not Documented and Title I Certification Not
Maintained]{.underline}*

From our random sample of District Title I charges for salary and
journal entries expenditures, we found that Elizabeth did not provide
time distributions and semi-annual employee Title I certifications to
adequately support \$58,296 in salaries. We reviewed timecards for 10
employees who received \$20,892 in salaries charged to Title I for time
worked beyond the regular school day. However, the employees did not
document on the timecards the portion of time dedicated to Title I, as
required. In addition, for one salary sample of \$37,404, one employee
did not sign a semi-annual certification. The employee was a teacher
tutor whose sole salary was chargeable to Title I by the District and
therefore, was required to sign a certification. As a result, a total of
\$58,926 in salaries charged to Title I were not adequately supported.
The \$20,892 in unsupported salaries was included in the amount of Title
I funds used to supplant non-federal funds in Finding 3, and \$37,404
was included in Finding 1 for unsupported teacher tutor salaries.

Elizabeth did not require teachers to specifically indicate cost codes
on timesheets or sign semi-annual Title I certifications. The Elizabeth
Human Resources office was unaware that Title I teachers were required
to sign semi-annual certifications. Elizabeth did not comply with
Federal requirements regarding teacher timecards and semi-annual
certifications and therefore, there was no assurance that the teachers
actually worked for the Title I program.

*[Principals Certified Their Own Timesheets]{.underline}*

According to the *Generally Accepted Accounting Principles For New
Jersey School District: A Technical Systems Manual* (New Jersey State
Technical Manual), LEAs are responsible to establish effective internal
controls over payroll transactions. However, we found that Elizabeth did
not have procedures in place that required principal timecards to be
certified by a supervisor. Our sample of 23 employees, whose salaries
were charged to Title I by the District, included three principals who
were compensated for working hours beyond the regular school day. These
principals improperly signed their own timecards to certify that the
hours recorded were correct. School employees prepared timecards when
they worked hours beyond the regular school day, as approved by the
Elizabeth Board of Education. All timecards were approved by the school
principal prior to being submitted to the District office for payment. A
principal who signed his or her own timecard indicated a lack of
segregation of duties, because there was no independent verification of
hours worked. As a result, there was no assurance that the hours
recorded were accurate.

According to OMB Circular A-133 §\_\_\_. 300, "The auditee shall\... (b)
Maintain internal control over Federal programs that provides reasonable
assurance that the auditee is managing Federal awards in compliance with
laws, regulations, and the provisions of contracts or grant agreements
that could have a material effect on the each of its Federal programs."

OMB Circular A-87 § C.1.j, states that to be allowable under Federal
awards, costs must be adequately documented.

According to the Governance Manual section on Purchasing Procedures,
dated December 12, 1991, purchase orders should originate through the
requisition. Proper approval from department officials and district
officials is necessary to process the requisition into a purchase order;
the vendor should provide the service or deliver the items before
sending the voucher and invoice to the district to request payment. In
addition, the department receiving such services or items should submit
a signed receiving requestor to the district. Both the voucher and
receiving requestor are needed at the district level to release a
payment to the vendor for their service or product.

According to the Governance Manual, the purchase of extraordinary,
unspecifiable services "must still follow the normal purchase procedure
and be initiated by a requisition." In addition, the Governance Manual
states that the "Board of Education must approve all purchases over the
bid threshold by resolution of the Board."

According to OMB Circular A-87, Attachment B, Paragraph 8.h.(3) an
employee who works solely on a single cost objective must furnish a
semi-annual certification to support the activities charged to that cost
objective.

According to OMB Circular A-87, Attachment B, Paragraph 8.h.(4), an
employee who works on multiple activities must maintain time
distribution records. Further, Circular A-87, Attachment B, Paragraph
8.h.(5) states that time distribution records must (a) reflect an
after-the-fact distribution of actual activity; (b) account for the
total activity for which the employee is compensated, (c) be prepared at
least monthly; and (d) be signed by the employee.

Further, OMB Circular A-133 Compliance Supplement, Part 6 (March 2004),
provides a description of the components of internal control and
examples of characteristics common to compliance requirements:

Control Activities are the policies and procedures that help ensure that

management's directives are carried out\....

-   Adequate segregation of duties provided between performance, review,
    and recordkeeping of a task.

According to the New Jersey State Technical Manual, the LEA should
establish an internal control structure to ensure that payroll
transactions are recorded accurately and timely in the accounting
records. In addition, the manual encourages the LEA to establish a
policy that "Time records, sign-in sheets and reports of leave should be
reviewed by supervisors and approved."

Elizabeth lacked proper controls in maintaining requisitions and
obtaining receiving reports, providing services prior to proper
approval, documenting time distribution, and maintaining Title I
certifications. Elizabeth did not have procedures regarding principals
signing their own timesheets. These weaknesses in internal controls
could lead to the misuse of ED funds.

**Recommendations**

We recommend that the Assistant Secretary for Elementary and Secondary
Education instruct NJDOE to require Elizabeth to:

4.1 Implement internal control procedures to provide reasonable
assurance that Elizabeth manages Title I in accordance with laws and
regulations, including adequate segregation of duties.

4.2 Update the Governance Manual to include current changes to internal
control procedures.

4.3 Ensure Elizabeth personnel adhere to procedures outlined in the
Governance Manual.

NJDOE's Comments

NJDOE concurred with the Finding and recommendations.

OBJECTIVE, SCOPE, AND METHODOLOGY

Our objective was to determine if Elizabeth's Title I expenditures,
distributed through NJDOE, were allowable in accordance with applicable
laws and regulations for the period July 1, 2004, through June 30, 2005.

We stratified our sample of salary and non-salary expenditures and
journal entries into District charges to Title I and Title I schoolwide
expenditures charged within the blended fund.[^13] We selected our
schoolwide sample from School 6 expenditures, because it had the highest
amount of expenditures according to the CAFR for FY ending June 30,
2005.

We randomly sampled and reviewed a net total of \$2,021,911 in
schoolwide expenditures and District charges to Title I. Of this amount,
the schoolwide sample consisted of \$836,993 in salaries for 20
instructional and non-instructional staff, \$1,555,133 in non-salary
expenditures for 18 records, and \$5,166 in journal entries for four
records charged to the blended fund for School 6. [^14] We also reviewed
District-level Title I charges of \$54,459 in salaries for 10
instructional and non-instructional staff, \$8,070 in non-salary
expenditure for 5 records, and a net total of (\$437,910) in journal
entries for 10 records. [^15]

In addition, we judgmentally selected \$267,183 in non-salary District
charges to Title I. Of this amount, \$5,243 was charged to Title I for
non-Title I schoolwide schools per the 2005 CAFR. We also chose
\$261,940 in District charges to Title I for goods and services provided
by three vendors that accounted for the highest percentage of non-salary
District-level charges to Title I.

We examined:

-   Elizabeth's approved Consolidated Grant Application to NJDOE,
    including the Entitlement Web-Enabled Grant application and the
    parallel paper application for FY year 2005;

-   County review of Elizabeth's 2005 Parallel Consolidated Grant
    application;

-   Elizabeth's CAFR Report for FYs 2004, 2005, and 2006;

-   Correspondence between NJDOE and Elizabeth related to a review of
    Title I for the 2005-2006 school year;

-   Board minutes for meetings held between July 1, 2004, and June 30,
    2006;

-   Employee ledger reports, timecards, and personnel files for our
    random and judgmental samples;

-   Cancelled payroll checks related to our random and judgmental sample
    of employees;

-   Purchasing packages which included requisitions, vouchers, receiving
    reports, and invoices for purchase transactions included in our
    random and judgmental samples;

-   Cancelled checks related to transactions in our sample of vendor
    purchases; and

-   Supporting documentation for journal entries randomly selected for
    testing.

We interviewed:

-   Key officials at NJDOE to obtain an understanding of the SEA award
    process, award monitoring, and payment of Title I awards to LEAs;

-   Elizabeth's District personnel to obtain an understanding of
    internal controls over payroll, vendor purchases, disbursements,
    record keeping, and the administration of Title I;

-   The principal at School 6 to obtain an understanding of the roles of
    school-level employees in the payroll and purchasing process and to
    determine if internal control procedures established by the District
    were followed; and

-   A representative from ED's Office of the General Counsel to gain an
    understanding of supplanting.

To ensure the completeness and accuracy of the data, we obtained and
extracted from Elizabeth's financial system, all Title I expenditures
for the period July 1, 2004, through June 30, 2005. We sampled from a
population of Title I salary and non-salary expenditures to arrive at
our findings as described above. Based on the tests, we determined that
the data was sufficiently reliable to support the findings, conclusions,
and recommendations and using the data would not lead to an incorrect or
inaccurate conclusion.

We conducted our fieldwork in the offices of the New Jersey Department
of Education in Trenton, New Jersey, and the Elizabeth Public School
District in Elizabeth, New Jersey. The audit was conducted from
September 13, 2006, through March 12, 2007.

Our work disclosed significant deficiencies in Elizabeth's internal
controls for assuring and documenting that it met the requirements of
Title I for administration of Federal awards. These deficiencies are
discussed in the Audit Results section of this report. Our audit was
performed in accordance with generally accepted government auditing
standards appropriate to the scope of the review described above.

[]{#__RefHeading___Toc179098200 .anchor}Enclosure

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[^1]: The Governance Manual details the policies, procedures and bylaws
    for the Elizabeth Public Schools.

[^2]: District refers to the staff working or expenditures initiated in
    Elizabeth's central office.

[^3]: Elizabeth received funds for five ESEA programs in addition to
    Title I.

[^4]: Title IIA funds are used to increase student achievement by
    improving the quality of teachers and principals and by increasing
    the number of highly qualified teachers.

[^5]: We did not determine whether the teacher tutor salaries charged to
    Title IIA were an allowable expense since this was outside of the
    scope of our audit.

[^6]: Of this amount, \$1,648 was included as unallowable costs in
    Finding 2, resulting in \$156,115 of net unsupported expenditures.

[^7]: School 6 is a Pre-Kindergarten to 8^th^ grade school named Marquis
    de Lafayette.

[^8]: This amount represents the \$666,681 for unsupported teacher
    tutors salaries and the net unsupported expenditures of \$156,115.

[^9]: This amount was not included as part of our random and judgmental
    sample.

[^10]: The CAFR is an annual report of financial statements, budget and
    expenditure, prepared by Elizabeth as a representation of the
    financial position and operations of the District during the school
    year.

[^11]: Elizabeth ranked its schools at or above the district average
    poverty level of 60.34 percent to determine its eligible Title I
    schools for FY 2005.

[^12]: For the purpose of determining compliance with the supplement
    requirement in ESEA § 1120A(b), an LEA may exclude supplemental
    State or local funds expended in any school attendance area or
    school for programs that meet the intent and purposes of Title I.

[^13]: Districts participating in whole school reform must record the
    revenues and expenditures of all schools participating in whole
    school reform separately in character class 15. Character class 15
    is the blended fund.

[^14]: We sampled and reviewed schoolwide transactions charged to the
    blended fund totaling \$2,397,292. However, according to the 2005
    CAFR, actual expenditures allocated to Title I was determined based
    on the revenue percentage that Title I represented in comparison to
    the total resources included in the blended fund. For FY 2005, 7
    percent of actual total blended fund expenditures at School 6 were
    allocated to Title I.

[^15]: We sampled five salary journal entries totaling (\$446,725) and
    five non-salary journal entries totaling \$8,815 charged to Title I
    by the District.