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  The School District of the City of Detroit's Use of Title I, Part A
  Funds Under the No Child Left Behind Act of 2001

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## 

## FINAL AUDIT REPORT

![](media/image1.wmf){width="2.5in" height="2.497916666666667in"}

**ED-OIG/A05H0010**

**July 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.         |                      |                     |
+-------------------------+----------------------+---------------------+

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, including the recovery of funds, will
> be made by the appropriate Department of Education officials in
> accordance with the General Education Provisions Act.
>
> 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.wmf)**UNITED STATES DEPARTMENT OF EDUCATION**

OFFICE OF INSPECTOR GENERAL

AUDIT SERVICES

Chicago/Kansas City/Dallas Audit Region

> July 18, 2008

Michael P. Flanagan

Superintendent of Public Instruction

Michigan Department of Education

608 West Allegan Street

P.O. Box 30008

Lansing, MI 48909

Dear Mr. Flanagan:

Enclosed is our final audit report, Control Number ED-OIG/A05H0010,
entitled ***The School District of the City of Detroit's Use of Title I,
Part A Funds Under the No Child Left Behind Act of 2001***. 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 Department of Education official, who will
consider them before taking final Departmental action on this audit:

Kerri L. Briggs

Assistant Secretary for Elementary and Secondary Education

U.S. Department of Education

400 Maryland Ave., S.W.

> Room 3W315

Washington, D.C. 20202

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

Regional Inspector General

> for Audit

TABLE OF CONTENTS

####### 

####### Page

[**EXECUTIVE SUMMARY 1**](#__RefHeading___Toc204070550)

[BACKGROUND 3](#__RefHeading___Toc204070551)

[AUDIT RESULTS](#__RefHeading___Toc204070552)
[4](#tm_2454978718auditresults)

[FINDING NO. 1 -- Detroit Charged Unallowable Personnel Costs to the
Title I, Part A Program 6](#__RefHeading___Toc204070553)

[FINDING NO. 2 -- Detroit Did Not Always Support Compensation Charges
with Adequate and Timely Time and Effort Certifications or Personal
Activity Reports 10](#__RefHeading___Toc204070554)

[FINDING NO. 3 -- Detroit Used Title I, Part A Funds for Non-Personnel
Costs That Were Unallowable or Inadequately Documented
17](#__RefHeading___Toc204070555)

[FINDING NO. 4 -- Detroit Used Title I, Part A Funds for Contract
Expenditures That Were Unallowable or Inadequately Documented
18](#__RefHeading___Toc204070556)

[FINDING NO. 5 -- MDE Inadequately Monitored the Resolution of a Detroit
Internal Investigative Report 20](#__RefHeading___Toc204070557)

[OBJECTIVES, SCOPE, AND METHODOLOGY 22](#__RefHeading___Toc204070558)

[Enclosure 1: Cost Schedules for the 2004-2005 School Year
26](#__RefHeading___Toc204070559)

[Enclosure 2: Cost Schedules for the 2005-2006 School Year
31](#__RefHeading___Toc204070560)

[Enclosure 3: Auditee's Comments 41](#__RefHeading___Toc204070561)

[]{#__RefHeading___Toc204070550 .anchor}EXECUTIVE SUMMARY

The objectives of our audit were to determine whether (1) the School
District of the City of Detroit (Detroit) returned funds received under
the Elementary and Secondary Education Act of 1965, as amended by the No
Child Left Behind Act of 2001 (NCLB), Title I, Part A (Title I, Part A),
related to contracts for the 2004-2005 school year that a Detroit
internal investigative report identified as unallowable; (2)
expenditures related to selected Title I, Part A contracts for the
2004-2005 school year were adequately documented, reasonable, and
allowable; and (3) Title I, Part A personnel and non-personnel
expenditures for the 2005-2006 school year were adequately documented,
reasonable, and allowable.

We determined that Detroit (1) did not return Title I, Part A funds
related to contracts for the 2004-2005 school year that a Detroit
internal investigative report identified as unallowable;

\(2\) used Title I, Part A funds for expenditures related to selected
Title I, Part A contracts for the 2004-2005 school year that were not
adequately documented, reasonable, and allowable; and

\(3\) used Title I, Part A funds for personnel and non-personnel
expenditures for the 2005-2006 school year that were not adequately
documented, reasonable, and allowable. Specifically,

-   Detroit charged unallowable personnel expenditures to the Title I,
    Part A program (\$1,025,561);

-   Detroit did not always support compensation charges with adequate
    and timely time and effort certifications, personnel activity
    reports, or employee insurance cost data (a projected \$49,508,642
    in inadequately documented costs);

-   Detroit used Title I, Part A funds for non-personnel costs that were
    unallowable or inadequately documented (\$348,664 in unallowable
    costs and \$2,918,249 in inadequately documented costs, totaling
    \$3,266,913);

-   Detroit used Title I, Part A funds for contract expenditures that
    were unallowable or inadequately documented (\$14,580 in unallowable
    costs and \$1,764,988 in inadequately documented costs, totaling
    \$1,779,568); and

-   The Michigan Department of Education (MDE) inadequately monitored
    the resolution of a Detroit internal investigative report.

Unduplicated unallowable costs (\$1,388,805) and projected inadequately
documented costs (\$52,230,054) total \$53,618,859.

Detroit's noncompliance occurred, in part, because MDE did not provide
adequate oversight of federal grant funds distributed to Detroit. Also,
Detroit did not have adequate policies and procedures in place to review
Title I, Part A contracts, invoices, employee insurance benefit costs,
and adjusting journal entries to ensure they were adequately documented,
reasonable, and allowable.

We recommend, among other things, that the Assistant Secretary for
Elementary and Secondary Education instruct MDE to require Detroit to
---

-   Return \$1,388,805 in unallowable charges to the U.S. Department of
    Education (Department);

-   Either provide adequate documentation to support \$52,230,054 in
    inadequately documented expenditures or return that amount to the
    Department;

-   Develop and implement policies and procedures to ensure that
    adequate and accurate time and effort certifications and personal
    activity reports are timely prepared; and

-   Develop and implement policies and procedures to adequately review
    contracts, invoices, employee insurance benefit costs, and adjusting
    journal entries.

Additionally, we recommend that MDE track local educational agency (LEA)
reviews and ensure that LEAs take appropriate corrective actions.

MDE and Detroit provided comments in two installments. MDE and Detroit
disagreed in whole with the draft audit report and requested the
findings be reconsidered and revised and the recommendations for
repayment be withdrawn. We disagree with their position and have
summarized it and included our response in the Audit Results section.
MDE and Detroit also did not concur specifically with portions of each
finding. These comments and the OIG Response to the finding comments are
summarized at the end of each finding and in Enclosures 1 and 2. The
full text of their comments is included as Enclosure 3.

MDE and Detroit also provided additional documentation they claimed
refuted the expenditures questioned in our draft audit report. We
considered all of the comments and reviewed all of the documentation
provided in 24 exhibits. Because of the voluminous number of these
exhibits, we have not included them in this report. Based on those
comments and additional documentation provided, we:

-   Reclassified \$5,180,633 in previously unallowable personnel
    expenditures for the Head Start program to inadequately documented
    personnel expenditures. We also reclassified \$1,143,644 in
    previously unallowable employee insurance benefits costs to
    inadequately documented personnel expenditures and increased the
    amount to \$4,088,095. (See FINDING NO. 1 and FINDING NO. 2)

-   Accepted \$1,903,372 in previously inadequately documented
    non-personnel costs as adequately documented and reclassified
    \$10,330 in previously accepted costs to inadequately documented
    costs. (See FINDING NO. 3)

-   Accepted \$5,000 in previously inadequately documented contract
    costs as adequately documented. (See FINDING NO. 4)

We made changes to the findings and recommended recoveries to reflect
the above reclassifications in the findings and recommendations but did
not substantially change the remainder of the findings.

[]{#__RefHeading___Toc204070551 .anchor}BACKGROUND

The Elementary and Secondary Education Act of 1965, as amended by the
NCLB, increases accountability for states, LEAs, and schools; school
choice for parents and students; flexibility for states', LEAs', and
schools' use of federal education funds; and provides an emphasis on
reading. The Title I, Part A program helps LEAs and schools improve the
teaching and learning of children who are failing, or most at-risk of
failing, to meet challenging state academic standards. The program is
administered by the Department's Office of Elementary and Secondary
Education. Under the *Uniform Administrative Requirements for Grants and
Cooperative Agreements to State and Local Governments* (34 C.F.R. §
80.40), MDE is required to monitor Detroit's compliance with federal
requirements.

Incorporated in 1842, Detroit is the largest public school system in
Michigan. During the 2005‑2006 school year, Detroit enrolled 130,718
students at 97 elementary schools, 81 kindergarten through 8th grade and
middle schools, 29 high schools, 10 alternative schools, 11 special
education schools, and 4 career technical and vocational centers. It
employed approximately 14,960 employees. Because of declining population
and students transferring to charter schools, private schools, and
surrounding school districts, Detroit\'s enrollment has declined from
173,848 during the 1998-1999 school year. For the years ended June 30,
2005, and June 30, 2006, Detroit spent \$131,134,604 and \$125,896,498,
respectively, in Title I, Part A grant funds. Detroit's Office of Title
I and Section 31a Compliance (Title I Office) oversees its Title I, Part
A program.

Detroit's *Single Audit Report, June 30, 2006,* reported an adverse
opinion on Detroit's compliance with federal requirements for its Title
I, Part A program. A Detroit internal investigative report identified
unallowable contracts paid for with Title I funds and identified other
contracts that should also be reviewed. FINDING NO. 5 concluded on the
resolution of this internal investigative report and FINDING NO. 4
concluded on the allowability of expenditures related to the contracts
identified in the report.

[]{#tm_2454978718auditresults .anchor}AUDIT RESULTS

Detroit (1) did not return Title I, Part A funds related to contracts
for the 2004-2005 school year that a Detroit internal investigative
report identified as unallowable; (2) used Title I, Part A funds for
expenditures related to selected Title I, Part A contracts for the
2004-2005 school year that were not adequately documented, reasonable,
and allowable; and (3) used Title I, Part A funds for personnel and
non-personnel expenditures for the 2005-2006 school year that were not
adequately documented, reasonable, and allowable. Specifically,

-   Detroit charged unallowable personnel expenditures to the Title I,
    Part A program, including (1) excessive employee insurance benefits
    (\$571,025), (2) excessive Title I Office employee compensation
    (\$203,000), (3) excessive targeted assistance teacher compensation
    (\$173,082), (4) disciplinary administrative leave compensation
    (\$73,292), and (5) a duplicate compensation payment (\$12,492);

    -   Detroit did not always support compensation charges with
        adequate and timely time and effort certifications, personnel
        activity reports, or employee insurance cost data (a projected
        \$49,508,642 in inadequately documented costs);

    -   Detroit used Title I, Part A funds for non-personnel costs that
        were unallowable or inadequately documented (\$348,664 in
        unallowable costs and \$2,918,249 in inadequately documented
        costs, totaling \$3,266,913);

    -   Detroit used Title I, Part A funds for contract expenditures
        that were unallowable or inadequately documented (\$14,580 in
        unallowable costs and \$1,764,988 in inadequately documented
        costs, totaling \$1,779,568); and

    -   MDE inadequately monitored the resolution of a Detroit internal
        investigative report.

We found unduplicated unallowable costs (\$1,388,805) and projected
inadequately documented costs (\$52,230,054) totaling \$53,618,859.

**MDE's and Detroit's Overall Comments to the Draft Audit Report**

In response to the draft audit report, MDE and Detroit stated OIG
erroneously concluded that Detroit did not properly administer Title I,
Part A funds. MDE and Detroit stated the audit methodology used was
seriously flawed for the following reasons:

1)  It appears that the audit failed to review the voluminous
    documentation and accounting records supporting the Title I, Part A
    expenditures at issue.

2)  The draft audit report erroneously relies in some sections on the
    amounts budgeted rather than the actual expenditures documented
    after-the-fact.

3)  The audit failed to take into account any schoolwide flexibility,
    despite the fact that Detroit overwhelmingly consists of schoolwide
    programs.

4)  The draft audit report's methodology uses extremely small sample
    sizes to estimate larger findings. Although Detroit has
    approximately 14,960 employees, the audit consistently sampled a
    small number of transactions to arrive at its findings for the
    entire school district. Small employee sample sizes for a district
    with as many employees as Detroit possesses are not statistically
    significant.

5)  The audit failed to analyze harm to the Federal interest, as
    required, in making findings and failed to properly consider valid
    after-the-fact documentation.

**OIG Response to MDE's and Detroit's Overall Comments to the Draft
Audit Report**

1)  OIG carefully reviewed and considered all documentation and
    accounting records that Detroit provided during the audit. We
    reclassified or accepted some Title I, Part A costs based on
    documentation MDE and Detroit provided with their comments to the
    draft audit report that Detroit did not provide during the audit.

2)  In response to the *Excessive Employee Insurance Benefits*
    sub-finding in FINDING NO. 1 of the draft audit report, MDE and
    Detroit argue OIG erroneously relied on budgeted amounts rather than
    the actual expenditures documented after-the-fact. During the audit,
    we collected cost data from Detroit's third-party benefits
    administrator, as recommended by Detroit, because Detroit told us it
    did not have the supporting documentation. The third-party benefits
    administrator claimed these were actual costs. In response to the
    draft audit report, MDE and Detroit stated this administrator
    provided projected insurance costs based on prior year estimates,
    rather than actual insurance costs. Because (1) we cannot use the
    budgeted cost data as MDE and Detroit advised, and (2) they have not
    provided any other supporting documentation for the actual costs for
    any of the sampled insurance benefit transactions, insurance
    benefits for all single cost activity employees are inadequately
    documented (See FINDING NO. 2, Auditee Comments and OIG Response,
    *Inadequately Documented Employee Insurance Benefits)*.

3)  As documented in the OIG Response to FINDING NO. 1, *Excessive
    Targeted Assistance Teacher Compensation,* and FINDING NO. 2,
    *Inadequate Personal Activity Reports for Non-Workshop Duties,* we
    considered the schoolwide status of schools. When expending funds
    for students at any school, including schoolwide schools and schools
    that could qualify as schoolwide schools, Detroit must adequately
    document Title I, Part A expenditures.

4)  The comment regarding the use of extremely small sample sizes
    relates to three sub‑findings and is not valid. We used statistical
    sampling, with a confidence level of 90 percent and precision of
    less than 20 percent, to project the inadequately documented costs
    in FINDING NO. 2, *Inadequate Time and Effort Certifications*. Our
    sample sizes were sufficient within those parameters. The projection
    of inadequately documented insurance benefits for all single cost
    activity employees (see FINDING NO. 2, *Inadequately Documented
    Employee Insurance Benefits)* is based on Detroit providing
    inadequate documentation for all 30 sampled transactions. The
    projection of inadequately documented costs related to inadequate
    personal activity reports for non‑workshop duties is based on a
    sample of 57 multiple cost activity employees (see FINDING NO. 2,
    Auditee Comments and OIG Response, *Inadequate Personal Activity
    Reports for Non-Workshop Duties)*. Detroit provided inadequate
    documentation for all 57 employees.

5)  All findings in the report included unallowable costs or a lack of
    demonstrated benefit to the Title I, Part A program. We considered
    all documentation provided. In response to the sub-finding related
    to the charging of Head Start compensation costs (see FINDING NO. 2,
    Auditee Comments and OIG Response, *Inadequate Time and Effort
    Certifications or Personal Activity Reports for Compensation Charges
    in Adjusting Journal Entries)*, MDE and Detroit stated that the
    charging of these costs did not cause harm to the federal interest.
    However, Detroit has not shown a benefit to the Title I, Part A
    program because (1) it did not provide personal activity reports or
    equivalent documentation, (2) it did not provide documentation to
    demonstrate that the identified teachers comprise the transferred
    compensation costs, and (3) it provided certifications that are
    inadequate and conflict with a statement by the Grants Accounting
    Supervisor that the employees were multiple cost activity employees.

[]{#__RefHeading___Toc204070553 .anchor}FINDING NO. 1 -- Detroit Charged
Unallowable Personnel Costs to the Title I, Part A Program

For the 2005-2006 school year, Detroit charged unallowable personnel
expenditures to the Title I, Part A program. These charges included
excessive employee insurance benefits (\$571,025), excessive Title I
Office employee compensation (\$203,000), excessive targeted assistance
teacher compensation (\$173,082), disciplinary administrative leave
compensation (\$73,292), and a duplicate compensation payment
(\$12,492). The unduplicated amount of unallowable personnel
expenditures totaled \$1,025,561.

*Office of Management and Budget Circular A-87 (Revised 5/10/04) -- Cost
Principles for State, Local and Indian Tribal Governments* (OMB Circular
A-87), *Attachment A, Paragraph C.1.b* states that, to be allowable
under federal awards, costs must be allocable to the awards.

## Excessive Employee Insurance Benefits {#excessive-employee-insurance-benefits .RptSubcaption}

Detroit used Title I, Part A funds to pay employee insurance benefits
for employees who worked on supplemental activities, such as workshops
and after-school programs. Typically, Detroit only charges employee
insurance benefits to the funding sources that pay for an employee's
regular work activities. For employees whose regular job duties included
only non-Title I, Part A activities, Detroit improperly charged to the
Title I, Part A program \$571,025 of employee insurance benefit costs
and related indirect costs. These employees worked on non-Title I, Part
A activities for their regular duties and also worked on Title I, Part A
supplemental activities. These insurance costs should have been charged
to the non-Title I, Part A funding sources that paid for the employees'
regular job duties, not the Title I, Part A program that paid the salary
for the employees' supplemental work duties.

OMB Circular A-87, *Attachment A, Paragraph C.1.e* states that, to be
allowable under federal awards, costs charged to the awards must, among
other requirements, "be consistent with policies, regulations, and
procedures that apply uniformly to both Federal awards and other
activities of the governmental unit."

Detroit's accounting system did not charge employee insurance benefits
to compensation for supplemental activities. However, staff responsible
for entering compensation data into the accounting system did not always
properly code after-school programs and workshops as supplemental
activities. Therefore, the accounting system included these activities
as regular work activities and distributed a portion of the insurance
benefit costs to the supplemental activities.

##  {#section-3 .RptSubcaption}

## Excessive Title I Office Employee Compensation {#excessive-title-i-office-employee-compensation .RptSubcaption}

Detroit charged an estimated \$203,000 in excessive compensation to the
Title I, Part A program by charging the entire salaries, benefits, and
related indirect costs of Title I Office employees who split their time
between Title I, Part A program activities and non-Title I, Part A
program activities (including the Michigan Section 31a program)[^1] for
68 of 68 judgmentally selected transactions for Title I Office
employees.[^2] The Title I Office employees did not create
contemporaneous records documenting the amount of time worked on the
activities, and Detroit provided no evidence of the desired level of
time and effort for these employees to dedicate to each activity. We
asked several current Title I Office employees to estimate the actual
proportion of time they spent on each activity. Based on their
responses, we conservatively estimated that they spent approximately 90
percent of their time working on Title I, Part A activities and
approximately 10 percent of their time working on non-Title I, Part A
program activities, including the Michigan Section 31a program.

Detroit believed that it was appropriate to charge the full compensation
of program administrators to the Title I, Part A program because it was
not permitted to use Michigan Section 31a program funds for this
purpose.

## Excessive Targeted Assistance Teacher Compensation {#excessive-targeted-assistance-teacher-compensation .RptSubcaption}

Detroit charged \$173,082 in excessive compensation to the Title I, Part
A program for the salaries, benefits, and related indirect costs of
teachers who taught ineligible children in Title I targeted assistance
schools. Even though the teachers taught both Title I and non-Title I
children, Detroit charged to the Title I, Part A program the entire
compensation for five of five judgmentally sampled kindergarten teachers
at Title I targeted assistance schools. The percentages of children who
were Title I eligible in these five teachers' classes ranged from 41 to
72 percent.

NCLB, Title I, Part A, Section 1115(a), states,

> In all schools selected to receive funds under section 1113(c) that
> are ineligible for a schoolwide program under section 1114, or that
> choose not to operate such a schoolwide program, a local education
> agency serving such school may use funds received under this part only
> for programs that provide services to eligible children under
> subsection (b) identified as having the greatest need for special
> assistance.

Detroit Title I Office staff did not review an adjusting journal entry
transferring the compensation of kindergarten teachers to the Title I,
Part A program from the general fund at the end the 2005-2006 school
year, to ensure that the costs were allowable.

## Disciplinary Administrative Leave Compensation {#disciplinary-administrative-leave-compensation .RptSubcaption}

Detroit charged \$73,292 to the Title I, Part A program for the salary,
benefits, and related indirect costs of an administrator who was placed
on administrative leave while under investigation by the district.
Detroit did not provide a policy for paying salaries and benefits to
administrators who were on administrative leave. Detroit was not aware
that it could not charge administrative leave to the Title I, Part A
grant without an administrative leave policy.

OMB Circular A-87, *Attachment B, Paragraph 8.a. (1)* states that
compensation must conform ". . . to the established policy of the
governmental unit. . . ."

## Duplicate Compensation Charge {#duplicate-compensation-charge .RptSubcaption}

## Detroit charged a duplicate payment totaling \$12,492 for salary, benefits, and related indirect costs to the Title I, Part A program during the 2005-2006 school year. Detroit entered a portion of one adjusting journal entry into its accounting system twice to transfer an employee's compensation from the Reading First program to the Title I, Part A program. {#detroit-charged-a-duplicate-payment-totaling-12492-for-salary-benefits-and-related-indirect-costs-to-the-title-i-part-a-program-during-the-2005-2006-school-year.-detroit-entered-a-portion-of-one-adjusting-journal-entry-into-its-accounting-system-twice-to-transfer-an-employees-compensation-from-the-reading-first-program-to-the-title-i-part-a-program. .RptSubcaption}

OMB Circular A-87, *Attachment A, Paragraph C.1.g* states that, to be
allowable under federal awards, costs must be determined in accordance
with generally accepted accounting principles.

Two accounting staff members responsible for entering adjusting journal
entries into the accounting system each received the same request to
transfer an employee's compensation from the Reading First program to
the Title I, Part A program. Each accounting staff member entered the
adjustment without knowing that the other staff member entered the same
adjustment.

The total unallowable salaries, benefits, and related indirect cost is
\$1,032,891. Of this amount, \$7,329 is duplicated between the
sub-findings. The total unduplicated, unallowable cost is \$1,025,561.
Enclosure 2, Table C of this report identifies the duplication.

## Recommendations {#recommendations .RptSubcaption}

We recommend that the Assistant Secretary for Elementary and Secondary
Education instruct MDE to require Detroit to

1.  Return \$1,025,561 in unallowable salaries, benefits, and related
    indirect costs to the Department;

2.  Determine the extent of excessive compensation charged to the Title
    I, Part A program for teachers at targeted assistance schools for
    the year ended June 30, 2006, and return these funds to the
    Department;

3.  Provide training to Title I Office officials regarding the
    allowability of costs charged to the Title I, Part A program;

4.  Develop and implement a policy requiring a Title I Office official
    to review adjusting journal entries that transfer compensation
    charges to the Title I, Part A program for allowability;

5.  Develop and implement a policy requiring Detroit officials to enter
    proper codes in the system to identify supplemental and overtime
    activities as non-regular work duties;

6.  Track the actual time that Title I Office employees work on Title I,
    Part A activities and only charge the Title I, Part A program for
    the actual time worked on these activities;

7.  Track the percentage of eligible Title I students who teachers teach
    at targeted assistance schools and only compensate these teachers
    with Title I, Part A funds for this percentage of their work; and

8.  Develop and implement a policy to not charge disciplinary
    administrative leave compensation to the Title I, Part A program.

**Auditee Comments and OIG Response**

As described below, MDE and Detroit disputed the majority of this
finding. Based on comments to the draft report, we moved the Head Start
Program Compensation sub-finding and a portion of the Excessive Employee
Insurance Benefits sub-finding to FINDING NO. 2. We did not
substantially change the remainder of the finding or recommendations.

## [Excessive Employee Insurance Benefits]{.underline} {#excessive-employee-insurance-benefits-1 .RptSubcaption}

*Auditee Comments.* In response to this sub-finding, MDE and Detroit
provided documentation that showed insurance charges were distributed
proportionally to the salary charges for employees' regular and
supplemental duties and stated this cost is allowable. MDE and Detroit
claimed this documentation shows Detroit properly distributed insurance
charges.

*OIG Response.* These charges for employee insurance benefits are
unallowable because none should have been distributed to the Title I,
Part A program. All of the charges should have been distributed to the
non-Title I, Part A fund that funded 100 percent of the employees'
regular job duties. None of the charges should have been distributed to
the Title I, Part A program that funded the employees' supplemental
duties. Charges for employee insurance benefits should not be
distributed proportionally to the salary charges for regular and
supplemental duties because (1) this is not consistent with Detroit's
policy and (2) paying employees for performing supplemental duties did
not increase Detroit's insurance expense. Insurance charges should only
be distributed proportionally to the salary charges for regular duties.
Detroit's accounting system is set up to identify supplemental duties so
that insurance costs are not distributed to them. Detroit used this
system properly in some cases. However, in our reported cases, data
entry personnel did not code supplemental duties properly, so the
accounting system erroneously distributed insurance costs to the
supplemental duties as if they were regular duties.

[Excessive Targeted Assistance Teacher Compensation]{.underline}

*Auditee Comments*. MDE and Detroit stated the Title I targeted
assistance schools could have qualified as schoolwide schools, even
though Detroit chose to classify them as Title I targeted assistance
schools. Therefore, they believe the Title I targeted assistance schools
should only have to comply with the requirements of schoolwide schools
which do not require schools to identify children as Title I, Part A
eligible. MDE and Detroit provided documentation that shows the Title I
targeted assistance schools' poverty rates and school improvement plans
and claimed the plans contain "a number of required schoolwide
elements."

*OIG Response*. The documentation does not demonstrate the targeted
assistance schools were designated as, or operated as, schoolwide
schools. NCLB, Title I, Part A, Section 1115 states: "In all schools
selected to receive funds under section 1113(c) that are ineligible for
a schoolwide program under section 1114, ***or that choose not to
operate such a schoolwide program***, a local education agency serving
such school may use funds received under this part only for programs
that provide services to eligible children under subsection (b)
identified as having the greatest need for special assistance."
(Emphasis added). Without documentation that shows the schools were
designated as, or operated as, schoolwide schools instead of Title I
targeted assistance schools, the rules for Title I targeted assistance
schools are controlling. Also, MDE and Detroit did not claim that the
school improvement plans contained all of the requirements for
classification as a schoolwide school, only some of them. We identified
schoolwide requirements that were not included in these school
improvement plans.

[Disciplinary Administrative Leave Compensation]{.underline}

*Auditee Comments*. MDE and Detroit provided a sworn affidavit from
Detroit's Executive Director of Employee Relations stating Detroit pays
employees based upon their individual employment agreements and
classification, applicable Michigan state law, as well as practices and
customs. MDE and Detroit claimed that (1) the Teacher Tenure Act, Public
Act No. 4, Public Acts of Michigan, 1937, as amended (Teacher Tenure
Act) requires payment for disciplinary administrative leave for teachers
in certain cases, and (2) Detroit consistently applied the requirements
to all employees subject to disciplinary action, taking into account the
employee's employment agreement and classification.

 

*OIG Response*. Detroit has not provided sufficient audit evidence
showing it had an official policy for paying salaries and benefits to
administrators who were on administrative leave.  We consider sufficient
audit evidence to be written policy and procedures or other documentary
evidence, such as accounting and personnel records showing that others
in a similar situation were paid in a similar manner, not a sworn
affidavit from one individual.  Also, the Teacher Tenure Act applies to
certified teachers, not administrators.  The subject employee was an
administrator.  In the affidavit, Detroit's Executive Director of
Employee Relations stated Detroit gives all employees protections \"akin
to (although not identical to) those provided to certified teachers
under the \[Teacher Tenure Act\]."  Given that this Detroit official
stated that Detroit does not provide identical protections to all
employees, we cannot determine that Detroit had a disciplinary
administrative leave policy for administrators.

[]{#__RefHeading___Toc204070554 .anchor}FINDING NO. 2 -- Detroit Did Not
Always Support Compensation Charges with Adequate and Timely Time and
Effort Certifications or Personal Activity Reports

For the 2005-2006 school year, Detroit charged personnel expenditures to
the Title I, Part A program that were inadequately documented. Detroit
did not always support the compensation of (1) single cost activity
employees[^3] with adequate time and effort certifications (a projected
\$9,119,940), (2) regular, overtime, and non-workshop supplemental
duties of multiple cost activity employees[^4] with personal activity
reports (\$12,979,760), (3) workshop duties of multiple cost activity
employees with sign-in/sign-out sheets (\$3,274), and (4) employees
included in adjusting journal entries with adequate time and effort
certifications or personal activity reports (\$23,317,574). Detroit also
did not support insurance benefits charges for single cost activity
employees (\$4,088,095). The unduplicated amount of the projected
inadequately documented personnel expenditures totaled \$47,546,817.

## Inadequate Time and Effort Certifications  {#inadequate-time-and-effort-certifications .RptSubcaption}

Detroit did not always timely prepare time and effort certifications for
employees who worked solely on Title I, Part A activities. For 102 of
400 randomly sampled salary transactions for single cost activity
employees, Detroit either did not provide a time and effort
certification or provided a time and effort certification that was
inadequate. The projected salaries, benefits, and related indirect costs
charged for these employees were \$9,119,940.[^5] The following table
identifies the inadequate time and effort certifications from the random
sample:

**Table 1 -- Inadequate Time and Effort Certifications**

  ------------------------------------------ ----------------------------
  **Time and Effort Certification Category** **Number of Transactions**

  Not Timely Prepared[^6]                    93

  Unsigned                                   0

  Undated                                    0

  Signed by a supervisor who did not oversee 1
  the work performed by the employee during  
  the certification period                   

  Not provided                               8

  **Total**                                  **102**
  ------------------------------------------ ----------------------------

## Inadequate Personal Activity Reports for Non-Workshop Duties  {#inadequate-personal-activity-reports-for-non-workshop-duties .RptSubcaption}

Detroit did not provide adequate personal activity reports for multiple
cost activity employees whose compensation for their regular, overtime,
or supplemental (non-workshop) duties was charged to the Title I, Part A
program. In place of personal activity reports, Detroit provided
examples of multiple cost activity employees' daily lesson plans or time
logs related to the employees' regular duties. However, the lesson plans
and time logs provided did not specify the proportion of each employee's
time that was spent on Title I, Part A activities. Additionally, the
lesson plans and time logs were not after-the-fact certifications of
actual time spent on Title I, Part A activities. In the universe of
personnel transactions for the Title I, Part A program, we identified
\$12,979,760 of salaries, benefits, and related indirect costs charged
for the regular, overtime, and supplemental (non-workshop) activities of
multiple cost activity employees.

## Inadequate Personal Activity Reports for Workshop Duties {#inadequate-personal-activity-reports-for-workshop-duties .RptSubcaption}

For multiple cost activity employees who attended Title I, Part A funded
workshops, Detroit's policy was to prepare sign-in sheets. For 20
sampled personnel transactions for workshops, Detroit provided sign-in
and after-the-fact sign-out sheets for 4 transactions, sign-in sheets
with no after-the-fact sign-out record for 12 transactions, and no
sign-in or sign-out record for 4 transactions. The salaries, fringe
benefits, and related indirect costs charged for the 16 transactions
without after-the-fact sign-out sheets were \$3,274.

##  {#section-4 .RptSubcaption}

## Inadequate Time and Effort Certifications or Personal Activity Reports for Compensation Charges in Adjusting Journal Entries {#inadequate-time-and-effort-certifications-or-personal-activity-reports-for-compensation-charges-in-adjusting-journal-entries .RptSubcaption}

Using adjusting journal entries, Detroit transferred to the Title I,
Part A program \$21,824,996 in charges for the salaries and benefits of
employees who were initially paid from non-Title I, Part A funding
sources. The total salaries, benefits, and indirect costs charged to the
Title I, Part A grant for these adjusting journal entries is
\$23,317,574.[^7] These employees included kindergarten teachers
(\$11,499,897), Head Start Program teachers and assistants
(\$4,849,251), Michigan Early Childhood Education program teachers
(\$3,593,013), and substitute teachers (\$1,882,835).

Detroit included charges for the compensation of kindergarten and
Michigan Early Childhood Education program teachers in its Title I, Part
A budget approved by MDE. Detroit identified the kindergarten teachers
whose compensation was charged to the Title I, Part A program. Detroit
charged the projected salaries, pension benefits, and tax benefits for
these employees instead of actual compensation. After we requested time
and effort certifications, one official from Detroit signed time and
effort certifications for 142 of the 145 teachers included in the
adjusting journal entry for kindergarten teachers. These time and effort
certifications were not timely prepared. For the compensation charges
for Michigan Early Childhood Education program and substitute teachers,
Detroit did not identify the employees who were included in the
adjusting journal entries and did not provide time and effort
certifications or personal activity reports for these employees. Detroit
charged a portion of the salaries, benefits, and related indirect costs
of all Head Start program teachers and assistants to the Title I, Part A
program in a series of 12 adjusting journal entries. While Head Start is
not a Title I, Part A program, NCLB, Title I, Part A, Section 1112
(b)(1)(K) requires Detroit to include in its LEA plan a description of
how it will use Title I, Part A funds for children, particularly
children participating in a Head Start program. Detroit did not include
Head Start in its Title I, Part A program application that was approved
by MDE. Detroit also did not identify the employees whose compensation
was transferred to the Title I, Part A program and did not provide
personal activity reports certifying the employees worked on Title I,
Part A program activities.

**\
**OMB Circular A-87, *Attachment B, Paragraph 8.h. (3)* states,

> Where employees are expected to work solely on a single Federal award
> or cost objective, charges for their salaries and wages will be
> supported by periodic certifications that the employees worked solely
> on that program for the period covered by the time and effort
> certification. These time and effort certifications will be prepared
> at least semi-annually and will be signed by the employee or
> supervisory official having first hand knowledge of the work performed
> by the employee.

OMB Circular A-87, *Attachment B, Paragraph 8.h. (4)* states, "Where
employees work on multiple activities or cost objectives, a distribution
of their salaries or wages will be supported by personal activity
reports or equivalent documentation which meets the standards in
subsection (5). . . ." Subsection (5) states,

> Personnel activity reports or equivalent documentation must meet the
> following standards:

(a) They must reflect an after-the-fact distribution of the actual
    activity of each employee,

> \(b\) They must account for the total activity for which each employee
> is compensated,
>
> \(c\) They must be prepared at least monthly and must coincide with
> one or more pay periods, and
>
> \(d\) They must be signed by the employee.
>
> \(e\) Budget estimates or other distribution percentages determined
> before the services are performed do not qualify as support for
> charges to Federal awards. . . .

Detroit required school officials to submit semi-annual time and effort
certifications to the Title I Office for single cost activity employees.
However, Title I Office staff did not follow up with school officials
who did not submit time and effort certifications to the Title I Office
to ensure that all time and effort certifications were prepared. Detroit
officials were unaware of the requirement that multiple cost activity
employees must sign after-the-fact, monthly personal activity reports
that account for the time spent on Title I, Part A activities.
Additionally, Detroit did not have a process to review adjusting journal
entries that charged personnel costs to the Title I, Part A program.

**Inadequately Documented Employee Insurance Benefits**

Detroit charged the Title I, Part A program for employee insurance
benefit costs that were inadequately documented. For 29 of 30 randomly
sampled employee insurance benefits transactions, Detroit's third-party
benefits administrator reported employee insurance benefit costs that
were up to \$306 less than the amount Detroit charged to the Title I,
Part A program for each of these transactions.[^8] The third-party
benefits administrator subsequently stated this cost data was projected
and not actual. Because Detroit did not provide any supporting
documentation for the actual costs of any of the sampled insurance
benefit transactions, insurance benefits totaling \$3,849,430 charged to
the Title I, Part A program for all single cost activity employees were
inadequately documented. The total inadequately documented insurance
benefits and related indirect costs for all single cost activity
employees is \$4,088,095.

The combined total inadequately documented costs for all of the above is
a projected \$49,508,642. Of this amount, \$1,961,825 is duplicated in
FINDING NO. 1. The unduplicated amount is a projected \$47,546,817.
Enclosure 2, Table C of this report identifies the cost duplication.

**Recommendations**

We recommend that the Assistant Secretary for Elementary and Secondary
Education instruct MDE to require Detroit to

2.1 Either provide adequate documentation to support the projected
\$47,546,817 in inadequately documented personnel expenditures or return
any portion of that amount for which it does not provide adequate
documentation to the Department;

2.2 Adhere to its policy requiring single cost activity employees or
their supervisors to timely sign semi-annual time and effort
certifications and follow up with school officials to ensure that
adequate time and effort certifications are timely submitted;

3.  Develop and implement a policy requiring multiple cost activity
    employees to, at least monthly, prepare and sign after-the-fact
    personal activity reports, or equivalent sign-in/sign-out sheets for
    workshop activities, that account for the total activity for which
    each employee is compensated, including time spent on Title I, Part
    A activities;

4.  Develop and implement a policy requiring a Title I Office official
    to review adjusting journal entries that transfer compensation
    charges to the Title I, Part A program to ensure that the
    compensation is supported by adequate time and effort certifications
    or personal activity reports; and

5.  Develop and implement a policy requiring a Title I Office official
    to review employee insurance benefit charges to the Title I, Part A
    program to ensure that only actual employee insurance benefits are
    charged.

**Auditee Comments and OIG Response**

As described below, MDE and Detroit disputed the majority of this
finding. Based on comments to the draft report, we moved the Head Start
Program Compensation sub-finding and a portion of the Excessive Employee
Insurance Benefits sub-finding from FINDING NO. 1 in the draft audit
report to FINDING NO. 2 and have revised the finding and recommendations
accordingly. We did not substantially change the remainder of the
finding or recommendations.

[Inadequate Time and Effort Certifications]{.underline}

*Auditee Comments.* MDE and Detroit claimed they provided credible,
after-the-fact time and effort certifications that met all of the
requirements of OMB Circular A-87, *Attachment B, Paragraph 8.h.(3)*.
They provided numerous additional certifications that were prepared
after we requested them. MDE and Detroit also cited many examples they
claimed demonstrate that recipients may use after-the-fact documentation
to reconstruct the time and effort they spent on federal programs.

*OIG Response*. The documentation does not show the certifications were
prepared timely. Detroit prepared these certifications after we
requested them and more than a year after the certification period
ended. They were not prepared at least semi-annually, as required by OMB
Circular A-87, *Attachment B, Paragraph 8.h.(3)*. Additionally, many of
these certifications do not appear credible because they refer to the
20008 project code (i.e., the fiscal year 2008 Title I, Part A grant) or
refer to the 20106 project code (i.e., the Title I, Part A 2006
carryover grant) as a \"Special Education\" program, instead of the
Title I, Part A program. Also, we contacted four principals for Title I,
Part A funded kindergarten teachers. All four principals stated the
kindergarten teachers were not Title I, Part A employees. Later, we
received untimely certifications that certified the teachers were Title
I, Part A employees. This discrepancy indicates that these untimely
certifications are not credible. Also, all of the examples MDE and
Detroit cited are not relevant because they were dated in 1995 or
earlier. OMB Circular A-87, *Attachment B, Paragraph 8.h.(3)*, which
requires that certifications be prepared at least semi-annually, became
effective on June 9, 2004.

[Inadequate Personal Activity Reports for Non-Workshop
Duties]{.underline}

*Auditee Comments*. MDE and Detroit stated Detroit did not provide
personal activity reports. They claimed that (1) substitute
documentation should be acceptable; (2) personal activity reports should
not be necessary, because most of Detroit's schools are schoolwide
schools; and (3) our alleged five employee sample size is insufficient.
MDE and Detroit provided new documentation for four sampled employees.

*OIG Response*. We did not change this sub-finding for the following
reasons:

-   These documents are not equivalent to personal activity reports. The
    documentation included time logs or lesson plans in a format that
    varied from employee to employee. None of the documentation
    indicated the amount of time spent on Title I activities. Therefore,
    we cannot allocate time to the Title I, Part A program based on the
    documents. OMB Circular A‑87, *Attachment B, paragraph 8.h.(5)*
    requires personal activity reports or equivalent documentation to
    reflect an after-the-fact distribution of the actual activity of
    each employee.

-   The requirements for personal activity reports apply regardless of a
    school's schoolwide status. Also, non-regulatory guidance issued
    subsequent to our audit period, entitled *Non-Regulatory Guidance
    Title I Fiscal Issues: Maintenance of Effort; Comparability;
    Supplement, Not Supplant; Carryover; Consolidating Funds in
    Schoolwide Programs; and Grantback Requirements (February 2008)*
    states that if schools do not consolidate funds, then they must
    follow the requirements for personal activity reports. Detroit did
    not consolidate funds for schoolwide schools.

-   We sampled 57 multiple cost activity employees (27 Title I Office
    and 30 non-Title I Office employees), not 5 employees.  Detroit did
    not provide personal activity reports for any of these 57 employees
    but stated equivalent documentation was available.  Detroit provided
    additional documentation for 5 of the 57 employees. However, it was
    not equivalent documentation because it did not reflect an
    after-the-fact distribution of the actual activity of each employee
    or facilitate allocation of time to the Title I, Part A
    program.  Given the documentation was inadequate, we did not
    request similar documentation for the remaining 52.

[Inadequate Time and Effort Certifications or Personal Activity Reports
for Compensation Charges in Adjusting Journal Entries]{.underline}

*Auditee Comments.* MDE and Detroit stated that all Head Start students
were eligible to receive Title I, Part A services. Therefore, charging
these costs to the Title I, Part A program did not cause harm to the
federal interest and Head Start compensation costs should be allowable.
MDE and Detroit provided additional documentation, including a
description of the Head Start program and documentation identifying some
Head Start teachers. MDE and Detroit also stated they provided two
semi-annual certifications that demonstrate the relevant employees
worked 100% of their time on Title I, Part A program activities for the
entire fiscal year 2005-2006, which fulfills the requirement of
providing signed, semi-annual certifications per OMB Circular A-87,
*Attachment B, Paragraph 8.h.(3)*.

*OIG Response*. The documentation provided did not consist of personal
activity reports or equivalent documentation. These adjusting journal
entries remain inadequately documented based on the lack of (1) personal
activity reports or equivalent documentation and (2) documentation to
demonstrate the identified teachers comprise the transferred
compensation costs (i.e., MDE and Detroit provided no documentation that
shows that these teachers\' compensation matches the amounts in the
adjusting journal entries). The certifications MDE and Detroit provided
are inadequate because (1) they were signed in January 2008, which is
over 18 months after the certification periods ended, and (2) one
administrator signed for over 100 employees on one certification for
each semester. OMB Circular A-87, *Attachment B, Paragraph 8.h.(3)*
requires that certifications be prepared at least semi-annually by the
employee or a supervisory official having first-hand knowledge of the
work performed by the employee. These certifications were not prepared
semi-annually and it is not reasonable for 1 individual to have
first-hand knowledge of the work performed by over 100 employees more
than 18 months after the certification periods ended. Also, these
certifications contradict the Grants Accounting Supervisor's statement
that a percentage of each employee's time was charged to the Title I,
Part A program. Because these employees were all multiple cost activity
employees, they should have personal activity reports supporting the
allocation of their time between the Head Start and Title I, Part A
programs.

[Inadequately Documented Employee Insurance Benefits]{.underline}

*Auditee Comments.* MDE and Detroit stated that the third-party benefits
administrator provided us with projected insurance costs based on prior
year estimates, rather than actual insurance costs. Therefore, MDE and
Detroit claimed that the cost data used for the finding is irrelevant
and they should not have to repay any amounts. MDE and Detroit provided
cost data for five employees and email correspondence with the
third-party benefits administrator indicating that it had provided
projected, rather than actual insurance costs.

*OIG Response*. Because MDE and Detroit stated that the third-party
benefits administrator's cost data is irrelevant, MDE and Detroit have
not provided any supporting documentation for the actual costs for any
of the sampled insurance benefit transactions. During our audit, we
collected cost data from the third-party benefits administrator as
recommended by Detroit, because Detroit said that it did not have the
supporting documentation. In the draft report, we questioned only the
costs that Detroit charged in excess of the costs that the third-party
benefits administrator previously claimed were actual costs. However,
because the third-party benefits administrator has now stated that the
cost data it provided was projected and not actual, we have increased
the costs to include all of the insurance benefit charges for single
cost activity employees and re‑classified them as inadequately
documented costs. MDE and Detroit correctly noted projected costs do not
qualify as support for charges to Federal awards.[^9] The cost data that
MDE and Detroit provided for five employees is not relevant because it
does not contain any actual cost data for the employees that comprised
our sample described in this finding.

[]{#__RefHeading___Toc204070555 .anchor}FINDING NO. 3 -- Detroit Used
Title I, Part A Funds for Non-Personnel Costs That Were Unallowable or
Inadequately Documented

For the 2005-2006 school year, Detroit charged unallowable (\$348,664)
and inadequately documented (\$2,918,249) non-personnel costs, totaling
\$3,266,913, to the Title I, Part A program.[^10] Unallowable costs
Detroit charged to the Title I, Part A program consisted of payments for
(1) capital expenditures for general purpose equipment and improvements
to buildings that MDE did not approve, (2) services provided to
non-Title I schools or ineligible students, (3) invoices that exceeded
the approved contract amount or paid for shipping costs that were
prohibited by the contract, (4) a duplicate invoice, and (5) an invoice
for which Detroit received a credit from the vendor but did not apply
the credit to the Title I, Part A program.

We considered non-personnel costs to be inadequately documented if
Detroit did not provide adequate documentation to support that the costs
were necessary, reasonable, and allocable to the Title I, Part A
program, and the documentation provided for these costs did not
demonstrate any benefit to the Title I, Part A program. Inadequately
documented costs consisted of payments for (1) transactions that were
not supported by invoices or receipts, (2) invoices that were vague and
did not include adequate documentation, (3) computers for which Detroit
could not provide evidence of existence or use by Title I students, (4)
gift cards for which Detroit did not provide evidence of students
receiving them, (5) an invoice paid before the services would have been
received with no after-the-fact documentation demonstrating benefit to
the Title I, Part A program, and (6) a payment for temporary employees
with duties similar to Detroit employees.

OMB Circular A-87, *Attachment A, Paragraph C.1* provides that costs
must be necessary and reasonable for proper and efficient performance
and administration of federal awards, be allocable to federal awards,
and be adequately documented.

Detroit charged unallowable and inadequately documented non-personnel
costs to the Title I, Part A program because it did not (1) ensure that
it only paid for invoices that adequately demonstrated that costs were
necessary, reasonable, and allocable to the Title I, Part A program or
(2) require pre-approved purchase orders. Detroit officials stated that
the Title I Office did not always review invoices for charges to the
Title I, Part A program before the accounts payable department paid them
because some vendors sent them directly to accounts payable or
individual schools, which then sent them directly to accounts payable.
Also, Detroit did not document

\(1\) which invoices were approved by the Title I Office or (2) who in
the Title I Office may have approved invoices that went to the Title I
Office before accounts payable paid them. Having a Title I Office
official who understands the application of OMB Circular A-87
requirements review all Title I, Part A program invoices and other
required support and documenting this review may have prevented the
payment of unallowable and inadequately documented expenditures. Detroit
charged \$348,664 in unallowable costs to the Title I, Part A program.
Also, Detroit cannot show how \$2,918,249 in inadequately documented
costs benefited the Title I program.

**Recommendations**

We recommend that the Assistant Secretary for Elementary and Secondary
Education require MDE to instruct Detroit to

3.1 Return \$348,664 in unallowable costs to the Department;

3.2 Either provide adequate documentation to support \$2,918,249 in
inadequately documented non-personnel costs or return any portion of
that amount for which it does not provide adequate documentation to the
Department; and

3.3 Develop and implement policies and procedures that provide
reasonable assurance that Title I, Part A expenditures are necessary,
reasonable, allocable, and adequately documented. Specifically, Detroit
should require (1) pre-approved purchase orders for all non-personnel
expenditures and (2) a designated official in the Title I Office to
review all invoices for evidence that the expenditures are necessary,
reasonable, allocable, and adequately document benefit to the Title I,
Part A program.

**Auditee Comments**

MDE and Detroit did not dispute the majority of the unallowable
expenditures and a portion of the inadequately documented expenditures.
As described in Enclosure 2, Table B, MDE and Detroit disputed two
unallowable expenditure categories and five inadequately documented
expenditure categories.

**OIG Response**

As a result of additional documentation MDE and Detroit provided, we
accepted \$1,903,372 in previously inadequately documented costs as
adequately documented and reclassified \$10,330 in previously adequately
documented costs to inadequately documented costs. The finding and
recommendations have been revised accordingly. Enclosure 2, Table B
explains OIG's response in detail.

[]{#__RefHeading___Toc204070556 .anchor}FINDING NO. 4 -- Detroit Used
Title I, Part A Funds for Contract Expenditures That Were Unallowable or
Inadequately Documented[^11]

For 2004-2005 school year contracts, Detroit charged to the Title I,
Part A program unallowable costs (\$14,580) and inadequately documented
costs (\$1,764,988), totaling \$1,779,568.[^12] Unallowable costs
Detroit charged to the Title I, Part A program consisted of payments
for invoices that exceeded the approved contract amount with a specific
vendor.  This contract did not prescribe an hourly or weekly pay rate
and was for an amount not to exceed \$18,000.  Detroit used Title I,
Part A funds to pay the vendor for non-itemized invoices totaling
\$31,729, which exceeded the contract\'s limit by \$13,729. Including
related indirect costs, this unallowable amount is \$14,580.

We considered contract-related costs to be inadequately documented
because Detroit did not provide enough documentation to support that the
costs were necessary, reasonable, and allocable to the Title I, Part A
program. The documentation provided for these costs did not demonstrate
any benefit to the Title I, Part A program. Inadequately documented
costs, totaling \$1,764,988, consisted of payments for (1) transactions
not supported by invoices or receipts; (2) transactions supported only
by invoices that were vague and did not include required support;
(3) invoices dated before the services would have been received and for
which Detroit provided no after-the-fact support that these services
were received; (4) contractors with prescribed duties similar to those
of Detroit employees; (5) invoices for the development of a grants
management system intended to track Title I, Part A grants and other
federal and non-federal grants that was not completed, and billed for a
position not listed in the contract; and (6) one invoice for an
unexplained initial mobilization fee paid to a vendor that was
contracted to monitor Title I programs.

**\
**OMB Circular A-87, *Attachment A, Paragraph C.1* provides that costs
must be necessary and reasonable for proper and efficient performance
and administration of federal awards, be allocable to federal awards,
and be adequately documented. 

 

Detroit charged unallowable and inadequately documented non-personnel
costs to the Title I, Part A program because the Title I Office did not
adequately review contracts or invoices. Detroit's Office of Contracting
and Procurement, rather than the Title I Office, reviewed Title I, Part
A contracts. Detroit officials stated that the Title I Office did not
always review invoices before the accounts payable department paid them
because some vendors sent invoices directly to accounts payable. Detroit
did not document (1) which invoices were approved by the Title I Office
or (2) who in the Title I Office may have approved invoices that went to
the Title I Office before accounts payable paid them. Having a Title I
Office official who understands the application of OMB Circular A-87
requirements review all Title I, Part A program contracts, invoices, and
other required support and documenting this review may have prevented
the payment of unallowable and inadequately documented expenditures.

Detroit could have used the \$14,580 in unallowable costs charged to the
Title I, Part A program for effective Title I activities and has not
demonstrated how it used \$1,764,988 to benefit the Title I, Part A
program.

**Recommendations**

We recommend that the Assistant Secretary for Elementary and Secondary
Education require MDE to instruct Detroit to

4.1 Return \$14,580 in unallowable costs to the Department;

4.2 Either provide adequate documentation to support \$1,764,988 in
inadequately documented non-personnel costs or return any portion of
that amount for which it does not provide adequate documentation to the
Department; and

4.3 Develop and implement policies and procedures that provide
reasonable assurance that Title I, Part A expenditures related to
contracts are necessary, reasonable, allocable, and adequately
documented. Specifically, Detroit should require a designated official
in the Title I Office to review all contracts and invoices for
demonstration that the expenditures are necessary, reasonable,
allocable, and adequately document benefit to the Title I, Part A
program.

**Auditee Comments**

MDE and Detroit did not dispute the unallowable expenditures and the
majority of the inadequately documented expenditures. As described in
Enclosure 1, Table B, MDE and Detroit disagreed with our conclusion that
Detroit paid Title I, Part A funds for certain invoices that were
inadequately documented. Specifically, MDE and Detroit disagreed with
our conclusions regarding payment of invoices (1) that were dated before
the services would have been received, (2) that were vague and did not
include adequate documentation, and (3) paid contractors for duties
similar to those of Detroit employees.

**OIG Response**

As a result of additional documentation MDE and Detroit provided, we
accepted \$5,000 in previously inadequately documented costs as
adequately documented. Enclosure 1, Table B explains OIG's Response in
detail.

[]{#__RefHeading___Toc204070557 .anchor}FINDING NO. 5 -- MDE
Inadequately Monitored the Resolution of a Detroit Internal
Investigative Report

**\
**MDE did not adequately monitor the resolution of a Detroit internal
investigative report that identified unallowable contracts. MDE was
aware that this internal investigation reviewed Title I, Part A
contracts but did not track the resolution of the report. Detroit did
not provide this report to MDE or otherwise notify MDE of the
unallowable contracts identified in it.

Under the *Uniform Administrative Requirements for Grants and
Cooperative Agreements to State and Local Governments* (34 C.F.R. §
80.40), MDE is required to monitor grant and sub-grant supported
activities to assure compliance with federal requirements.

Detroit's General Counsel stated that because this internal
investigative report was prepared for Detroit during a review by
independent counsel, it was protected by Attorney Client Privilege
and could not be released to MDE.  During the review, MDE was notified
of specific contracts and concluded whether the contracts were
allowable. Detroit was unaware that it had an obligation to further
advise MDE on this issue because MDE had drawn the conclusions.  MDE
provided no further formal communication that it disallowed the
contracts and related expenditures. MDE did not have adequate procedures
in place to track the resolution of the report after an MDE official who
had knowledge of the review retired.

Because MDE failed to track the resolution of this internal
investigative report, Title I, Part A funds used for unallowable and
inadequately documented costs were not returned to the Title I, Part A
program. Also, MDE did not determine if Detroit modified the internal
control deficiencies that resulted in the unallowable and inadequately
documented costs.

**Recommendations**

We recommend that the Assistant Secretary for Elementary and Secondary
Education require MDE to

1.  Develop procedures to track LEA reviews that identify unallowable
    Title I, Part A expenditures to ensure that funds are returned to
    the Title I, Part A program and any internal control deficiencies
    are corrected; and

2.  Provide greater oversight of federal grant funds that are
    distributed to Detroit. (This recommendation is based on the issues
    identified in all findings included in the AUDIT RESULTS section of
    this report).

**Auditee Comments**

MDE did not dispute our finding and stated that it received a copy of
the investigative report on September 10, 2007. In response to the
recommendations, MDE stated that (1) it has effective existing
procedures to identify unallowable Title I, Part A expenditures, (2) the
MDE School Auditing Manual contains procedures for reporting unallowable
expenses, and (3) it is in the process of strengthening its monitoring
and oversight of LEAs. MDE also described some corrective actions it
will take, including developing procedures to help identify internal
investigations and developing a tracking process to identify and follow
up on alleged fiscal irregularities until they are appropriately
dismissed or resolved.

**OIG Response**

While MDE stated that it has effective existing procedures to identify
unallowable Title I, Part A expenditures, it received a copy of the
internal investigative report only after we notified it of this finding.
The corrective action it described to track fiscal irregularities and
strengthen monitoring and oversight of LEAs did not include any
documentation to support the tracking process it plans to establish or
specifically address unallowable expenditures. Therefore, we have not
changed our finding or recommendations.

[]{#__RefHeading___Toc204070558 .anchor}OBJECTIVES, SCOPE, AND
METHODOLOGY

The objectives of our audit were to determine whether (1) Detroit
returned funds received under Title I, Part A related to contracts for
the 2004-2005 school year that a Detroit internal investigative report
identified as unallowable; (2) expenditures related to selected Title I,
Part A contracts for the 2004-2005 school year were adequately
documented, reasonable, and allowable; and (3) Title I, Part A personnel
and non-personnel expenditures for the 2005-2006 school year were
adequately documented, reasonable, and allowable.

To achieve our objectives, we performed the following procedures:

1.  Reviewed significant laws and guidance, including Title I, Part A
    *(Improving Basic Programs Operated by Local Educational Agencies)*
    of NCLB; 34 C.F.R. Part 76 *(State-Administered Programs)*; 34
    C.F.R. Part 80 *(Uniform Administrative Requirements for Grants and
    Cooperative Agreements to State and Local Governments)*; and OMB
    Circular A‑87 *(Cost Principles for State, Local, and Indian Tribal
    Governments)*, effective June 9, 2004;

2.  Interviewed Detroit officials; interviewed officials at MDE and
    Ceridian, Detroit's third-party benefits administrator; and reviewed
    documents provided by Detroit to gain an understanding of Detroit's
    internal control over compliance with Title I, Part A provisions of
    NCLB, applicable regulations, and cost principles;

3.  Reviewed Detroit's organizational chart;

4.  Reviewed Detroit's *Title I, Part A Regular -- Improving Basic
    Programs Budget Summary and Budget Detail for the 2005-2006 School
    Year Grant; Comprehensive Annual Financial Report for the Fiscal
    Year Ended June 30, 2005*; *Comprehensive Annual Financial Report,
    June 30, 2006*; *Federal* *Awards Supplemental Information, June 30,
    2005*;[^13] and *Single Audit Report, June 30, 2006*;

5.  Reviewed accounting records pertaining to Title I, Part A funds
    budgeted and expended, including Detroit's general ledgers, budget
    and expenditure summary financial documents, non-personnel
    expenditure sub-ledgers for the period July 1, 2004, through June
    30, 2006, and payroll sub-ledgers for the period July 1, 2005,
    through June 30, 2006;[^14] and

6.  Reviewed contracts with vendors, invoices, purchase orders,
    cancelled checks, time and effort certifications, pay rosters,
    workshop descriptions and sign in sheets, adjusting journal entry
    documentation, lesson plans, and fringe benefits cost data.

[Review of Personnel Expenditures]{.underline}

Detroit charged \$73,211,592 in salaries and fringe benefits to the
Title I, Part A program for the year ended June 30, 2006, including both
regular and carryover grant sources. This amount included a net
\$23,234,772 in adjusting journal entries. To review these personnel
expenditures, we selected the following four samples of personnel
transactions:[^15]

(1) The first sample was from a universe of all personnel transactions
    from the payroll sub-ledgers for regular Title I, Part A grant
    sources for the school year ended June 30, 2006. This universe did
    not include carryover grant funding sources. This universe included
    34,553 salary transactions totaling \$30,087,010 and 91,138 fringe
    benefit transactions totaling \$11,771,082. The universe included
    125,691 salary and fringe benefits transactions totaling
    \$41,858,092. We judgmentally selected a sample of 182 salary
    transactions totaling \$441,313. These transactions were selected to
    cover compensation for Title I Office staff, workshops, supplemental
    activities, hourly employees, regular duties of multiple cost
    activity employees, regular duties of single cost activity
    employees, and salary transactions exceeding \$7,400 in one pay
    period. For the sampled employees, we collected pay records,
    including time and effort certifications, pay rosters, workshop
    descriptions, and sign-in sheets. The following table identifies the
    salary transactions in the sample.

Table 2 -- Sampled Salary Transactions

  ------------------------- ----------------------- ----------------------
  **Category of Employee**  **Number of Salary      **Amount of Salary
                            Transactions Sampled**  Charges for Sample
                                                    Transactions**

  Title I Office            68                      \$137,123

  Workshops                 20                      \$ 3,088

  Supplemental Activities   3                       \$ 1,071

  Hourly                    5                       \$ 4,031

  Multiple Cost Activity    32                      \$ 47,878

  Single Cost Activity      40                      \$ 32,083

  Transactions exceeding    14                      \$216,039
  \$7,400                                           

  **Sampled Items**         **182**                 **\$441,313**

  **Universe**              **34,553**              **\$30,087,010**
  ------------------------- ----------------------- ----------------------

From this universe, we also haphazardly selected 12 fringe benefit
transactions totaling \$2,008 to review fringe benefits. For these
transactions, we collected records for the cost of employee insurance
benefits, pension, and taxes.

\(2\) The second sample was from a universe of salary transactions and
related fringe benefits transactions[^16] from the payroll sub-ledgers
for both regular and carryover Title I, Part A grant sources expended
during the period August 13, 2005, through June 2, 2006. This universe
only included single cost activity Title I, Part A employees. This
universe partially overlaps with the universe in the first sample. We
randomly sampled 400 salary transactions totaling \$863,512, which
includes salaries and related fringe benefits, from a universe of 13,948
transactions totaling \$30,209,812 in salaries and related fringe
benefits. For all 400 salary transactions, we reviewed available
time-and-effort certifications. For the first 30 transactions, we also
reviewed pay rosters and employee insurance benefit cost data to
determine if Detroit charged the correct insurance benefits for each
transaction.

\(3\) The third sample was from a universe of all salary and fringe
benefits adjusting journal entries for the 2005-2006 school year. We
judgmentally selected, based on transaction descriptions that did not
appear to be Title I, Part A program related, 17 adjusting journal
entries totaling a net \$21,844,901 from a universe of 49 adjusting
journal entries totaling a net \$23,234,772 for the year ended June 30,
2006. This universe included both regular and carryover grant sources.
We traced these transactions to adjusting journal entry documents.

\(4\) The fourth sample was from a universe of kindergarten teachers
whose compensation for the 2005-2006 school year was charged to the
Title I, Part A grant in one adjusting journal entry totaling
\$11,499,897 in salaries and benefits. This adjusting journal entry was
1 of the 17 sampled entries included in the third sample. We
judgmentally selected 5 teachers who received a total of \$408,576 in
salary and fringe benefits from a universe of 145 kindergarten teachers,
because these 5 employees were teachers at targeted assistance schools
and paid with Title I, Part A funds. We compared the rosters of students
who these teachers taught with a listing of Title I, Part A students at
their schools.

[Review of Non-Personnel Expenditures]{.underline}

For the 2004-2005 school year, we tested judgmentally selected
non-personnel transactions with vendors that were included in the
Detroit internal investigative report.[^17] For those vendors that we
determined had unallowable or inadequately documented costs during the
2004-2005 school year, we also reviewed all expenditures during the
2005-2006 school year. We reviewed a total of 90 judgmentally selected
non-personnel transactions, totaling \$1,872,787, from a universe of 148
transactions totaling \$2,158,766. The transactions reviewed included 87
of 113 transactions with 11 vendors and 3 of 35 transactions for a
series of Title I, Part A mini-grants from Detroit to schools.

For the 2005-2006 school year, we reviewed a total of 124 judgmentally
selected non-personnel transactions, totaling \$10,417,114, from a
universe of 28,515 non-personnel transactions totaling \$46,199,780. We
also reviewed a total of 6 adjusting journal entries totaling a net
negative \$3,027,550 from a universe of 98 adjusting journal entries
totaling a net negative \$3,020,701. These 98 adjusting journal entries
included both positive and negative transactions.

[Data Reliability\
]{.underline}To achieve our objectives, we relied, in part, on
computer-processed general ledger and sub‑ledger data originally
obtained from Detroit's accounting system. This data contained our
universe of Title I, Part A personnel and non-personnel expenditures for
the 2004-2005 and 2005-2006 school years. We verified the completeness
and accuracy of the data by reviewing supporting documentation to
validate expenditure amounts recorded in Detroit's general ledgers and
comparing sub-ledgers to the general ledgers. Expenditures were
generally supported by evidence such as invoices, cancelled checks, time
and effort certifications, and pay rosters. Therefore, we concluded that
the computer-processed data were sufficiently reliable for the purposes
of our audit.

We performed our audit work at Detroit's schools and administrative
office in Detroit, Michigan, and our offices, from February through
November 2007. We discussed the results of our audit with Detroit and
MDE officials on November 27, 2007. Our audit was performed in
accordance with generally accepted government auditing standards
appropriate to the scope of the review described above.

[]{#__RefHeading___Toc204070559 .anchor}Enclosure 1: Cost Schedules for
the 2004-2005 School Year

**TABLE A: Schedule of Sampled Costs Reviewed, Recommended for
Acceptance, Unallowable Costs, and Inadequately Documented Costs for the
2004-2005 School Year (Excluding Indirect Costs)**

  --------------- ------------- ------------- -------------- --------------- ----------------
  **Cost          **Total Paid  **Total Costs **Costs        **Unallowable   **Inadequately
  Category**      to Selected   Reviewed**    Recommended    Costs**         Documented
                  Vendors**                   for                            Costs**
                                              Acceptance**                   

  Non-Personnel   \$2,158,766   \$1,872,787   \$196,462      \$13,729        \$1,662,596
  Transactions                                                               
  --------------- ------------- ------------- -------------- --------------- ----------------

**TABLE B: Total Unallowable and Inadequately Documented Costs for the
2004-2005 School Year (Including Indirect Costs)**

  --------------- --------------- --------------- ------------- ---------------- ---------------- --------------
  **Cost          **Unallowable   **Unallowable   **Total       **Inadequately   **Inadequately   **Total
  Category**      Costs**         Indirect        Unallowable   Documented       Documented       Inadequately
                                  Costs**         Costs**       Costs**          Indirect Costs** Documented
                                                                                                  Costs**

  Non-Personnel   \$13,729 (1)    \$851           \$14,580      \$1,662,596 (2)  \$102,392        \$1,764,988
  Transactions                                                                                    
  --------------- --------------- --------------- ------------- ---------------- ---------------- --------------

(1) Contrary to OMB Circular A-87, *Attachment A, Paragraph C.1*, which
    provides that, to be allowable, costs must be, among other things,
    necessary and allocable to federal awards, Detroit overpaid \$13,729
    to a vendor to provide consulting services. The contract with the
    vendor did not prescribe an hourly or weekly pay rate and was for an
    amount not to exceed \$18,000. Detroit paid this contractor for
    non-itemized invoices totaling \$31,729, which exceeded the
    contract\'s limit by \$13,729.

> \(2\) Contrary to OMB Circular A-87, *Attachment A, Paragraph C.1*,
> Detroit did not provide adequate documentation to show that these
> costs were necessary and reasonable for proper and efficient
> performance of federal awards, and allocable to federal awards.

-   Transactions were not supported by invoices or receipts (\$8,014).

```{=html}
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```
-   Transactions were supported by invoices that were vague and did not
    include adequate documentation (\$1,048,563). Detroit paid for (1) a
    Teacher Toolkit Video Conferencing Project but did not provide
    evidence of the project or what teachers the project was for
    (\$3,692), (2) an after school program for which it did not provide
    the specific dates the after school program occurred or a list of
    students and schools that participated in each session
    (\$37,100), (3) payments for invoices for which Detroit did not
    provide Production Reports and Financial Reports required by the
    contract with the vendor (\$148,604), and (4) a college preparatory
    program for which the invoices had no itemization of costs as
    required by the contract, including a description of the college
    preparatory program, an explanation of which students the program
    was made available to, the dates and locations the program occurred,
    or the names of all students who participated (\$859,167).

-   Detroit paid for invoices dated before the services would have been
    received and provided no after-the-fact documentation that these
    services were received (\$246,167). Detroit paid for (1) martial
    arts training for which it did not provide the dates of the training
    or a list of the students who participated (\$150,000) and
    (2) consulting services with vague invoice descriptions that did not
    demonstrate benefit to the Title I, Part A program (\$96,167).

-   Detroit paid contractors for duties similar to those of Detroit
    employees (\$111,713). Detroit paid for (1) assessment of Title I
    schools, which was similar to the duties of Title I Office program
    supervisors (\$5,000); (2) website management for which it did not
    explain why its internal information technology department did not
    provide this service (\$7,000); and (3) other consulting services,
    including completion of the Michigan Electronic Grants System
    applications and assisting with a U.S. Department of Education,
    Office of Inspector General audit, which were the prescribed duties
    of the Title I Office's Executive Director and Director (\$99,713).

-   Invoices paid were for the development of a case management system
    that was intended to track Title I grants and other federal and
    non-federal grants (\$173,140). The vendor did not complete this
    system, Detroit never used the system, and some of the invoices
    billed for a Deputy Consultant, which was not an approved position
    in the contract.

-   One invoice (\$75,000) was for a *Start up cost for Audit Compliance
    Services*. The contract with this vendor did not explain why this
    charge was necessary or how it was computed. Therefore, Detroit did
    not demonstrate the reasonableness of this payment. All of the
    subsequent invoices with this vendor, which was hired to monitor
    Title I programs, were inadequately documented.

**Auditee Comments and OIG Response**

[Title I, Part A Funds Expended for Martial Arts Training (included in
the draft report as Enclosure 1, Table B, Item 2, third
bullet)]{.underline}

*Auditee Comments.* MDE and Detroit stated they provided a number of
documents regarding these services that demonstrate benefit to the Title
I, Part A program. They provided two cancelled checks totaling
\$150,000, a program description, a list of all of the schools that
received services, and sign-in sheets for all students who participated
in the program from 2004‑2006.

*OIG Response*. We determined we already reviewed most of the
documentation provided for this sub-finding. The documentation included
some sign-in sheets but did not include a list of all the schools that
received services. The only new documentation provided was several
sign-in sheets for December 2005, January 2006, and April 2006. These
sign-in sheets adequately documented \$5,000 of the expenditures for
these classes. Therefore, we re-classified as adequately documented
\$5,000 of the \$155,000 included in the draft report. Because we have
no evidence of benefit to the Title I, Part A program for the remaining
expenditures, \$150,000 remains inadequately documented. We modified
this enclosure to reflect this updated amount.

[Title I, Part A Funds Expended for Accounting and Financial
Services]{.underline}

*Auditee Comments.* MDE and Detroit stated that they have submitted
documentation to demonstrate that EVO Accounting and Financial Services
(EVO) provided a benefit to the Title I, Part program. For certain
transactions, MDE and Detroit stated they provided invoices with (1)
weekly status reports that explain accomplishments, new project
developments, observations and recommendations, planned tasks for the
subsequent week, and a weekly schedule; and (2) timesheets. MDE and
Detroit stated that the weekly timesheets detail the number of hours
each EVO consultant worked. They also concluded that the documentation
adequately documented the expenditures relating to five specific
invoices.

*OIG Response*. The documentation provided did not demonstrate that
Detroit's Title I, Part A program benefited from the expenditures
relating to the following invoices or that the charges were reasonable.
MDE's and Detroit's submissions in response to our draft report provided
no after-the-fact support to show that EVO's services referred to on the
invoices were received, as may have been documented on the Production
Reports and Financial Reports for December 2004, January 2005, and
February 2005. These reports were required by the contract between
Detroit and EVO. We requested these reports during our audit, but MDE
and Detroit did not provide them. The charges remain inadequately
documented.

[Invoice for \$6,712.50, dated January 3, 2005 (included in the draft
report as Enclosure 1, Table B, Item 2, second bullet, number
3)]{.underline}

*Auditee Comments.* In response to our request for the employee hourly
reports for the weeks covered by this invoice (the weeks ended December
17, 2004, and December 24, 2004), MDE and Detroit provided only employee
hourly reports for the week ended December 31, 2004, which listed no
billable hours for EVO. They did not provide the hourly reports for the
weeks ended December 17, 2004, and December 24, 2004. MDE and Detroit
stated that the employee hourly reports for the week ended December 31,
2004, demonstrate that (1) EVO was not previously paid for services
rendered by its consultants for the weeks ended December 17 and 24,
2004; (2) EVO was not paid for 83.5 billable hours; and (3) Detroit paid
this amount to compensate EVO for those billable hours.

*OIG Response*. MDE and Detroit did not provide support to change this
portion of the sub‑finding because (1) they did not provide employee
hourly reports for the weeks covered by the invoice, (2) they did not
provide the required Production Report and Financial Report for December
2004, and (3) the weekly client status report for December 31, 2004, is
not reliable. The latter report is not reliable because it states that
billable hours were 83.5 as of December 31, 2004, while the invoice
bills for 89.5 hours through December 24, 2004. Thus, this invoice
remains inadequately documented.

[Invoice for \$45,833.33, dated January 4, 2005 (included in the draft
report as Enclosure 1, Table B, Item 2, third bullet, number
2)]{.underline}

*Auditee Comments*. MDE and Detroit stated Detroit did not prepay the
invoice because, while the invoice specified the services were to be
provided in January 2005, the invoice is dated January 4, 2005, and
Detroit paid the invoice on January 13, 2005 (as demonstrated by a
"Distributed" stamp and hand-written date on the invoice).

*OIG Response*. This invoice for EVO services through the end of January
was dated before most of the services were to be provided. Detroit's
contract with EVO requires EVO to bill Detroit for services rendered the
previous month. Also, the documentation provided no support to change
this portion of the sub-finding because the documentation (1) is vague
as to the services to be rendered, (2) did not provide employee hourly
reports for the weeks covered by the invoice, and (3) did not provide
the required Production Report and Financial Report for January 2005.
Thus, this invoice remains inadequately documented.

[Invoice for \$45,833.33, dated February 8, 2005 (included in the draft
report as Enclosure 1, Table B, Item 2, third bullet, number
2)]{.underline}

*Auditee Comments*. MDE and Detroit stated Detroit did not prepay the
invoice because, while the invoice specified the services were to be
provided in February 2005, the invoice is dated February 8, 2005, and
Detroit paid the invoice on February 10, 2005 (as demonstrated by a
"Distributed" stamp and hand-written date on the invoice).

*OIG Response.* We do not agree that the stamp and date show when the
invoice was paid. This invoice remains inadequately documented because
the invoice was dated before most of the services were to be provided,
and MDE and Detroit have not provided any after-the-fact support, such
as the required Production Report and Financial Report for February
2005, demonstrating that services were received. Detroit's contract with
EVO requires EVO to bill Detroit for services rendered the previous
month.

[Invoice for \$22,912.50, dated February 7, 2005 (included in the draft
report as Enclosure 1, Table B, Item 2, fourth bullet, number
2)]{.underline}

*Auditee Comments*. MDE and Detroit stated the weekly status reports and
time sheets for the weeks ended January 7, January 14, January 21,
January 28, and February 4, 2005, demonstrate that EVO consultants
provided services to Detroit for that time period. The hourly reports
for the weeks ended January 7, 14, 21, and 28, 2005, indicate the
consultants worked on the plan to assist Detroit with the U.S.
Department of Education, Office of Inspector General audit and reviewed
for compliance documents requested during the audit. MDE and Detroit
disagreed with our view that these services were similar to the duties
of the Title I Director.

*OIG Response.* We have not changed our conclusion that Detroit's
expenditures for these services are not adequately documented because
(1) the identified audit services were similar to the duties of the
Title I Office's Executive Director and Director; (2) the audit services
identified in the hourly reports were inconsistent with the duties
identified in the contract between Detroit and EVO; and (3) Detroit did
not provide the required Production Report and Financial Report for
January 2005, which may have shown in detail the services rendered by
EVO during that month.

[Invoice for \$5,400, dated February 23, 2005 (included in the draft
report as Enclosure 1, Table B, Item 2, fourth bullet, number
2)]{.underline}

*Auditee Comments*. MDE and Detroit stated the weekly status report and
time sheets for the weeks ended February 11 and February 18, 2005,
demonstrate that EVO consultants provided services to Detroit during
that time period. The hourly reports for those weeks indicate the
consultants worked on assisting Detroit with the U.S. Department of
Education, Office of Inspector General audit. MDE and Detroit disagreed
with our view that these services were similar to the duties of the
Title I Director.

*OIG Response.* We have not changed our conclusion that Detroit's
expenditures for these services are not adequately documented because
(1) the identified audit services were similar to the duties of the
Title I Office's Executive Director and Director; (2) the audit services
identified in the hourly reports were inconsistent with the duties
identified in the contract between Detroit and EVO; and (3) Detroit did
not provide the required Production Report and Financial Report for
February 2005, which may have shown in detail the services rendered by
EVO during that month.

[]{#__RefHeading___Toc204070560 .anchor}Enclosure 2: Cost Schedules for
the 2005-2006 School Year

**TABLE A: Schedule of Sampled Costs Reviewed, Recommended for
Acceptance, Unallowable Costs, and Inadequately Documented Costs for the
2005-2006 School Year (Excluding Indirect Costs)**

  --------------- ------------------- ------------------ ----------------- --------------- ------------------
  **Cost          **Total Charged to  **Total Costs      **Costs           **Unallowable   **Inadequately
  Category**      Title I, Part A**   Reviewed**[^18]    Recommended for   Costs**         Documented Costs**
                                                         Acceptance**                      

  Personnel       \$49,976,820        \$1,303,725        \$861,447         \$20,926        \$421,353
  Transactions                                                                             

  Personnel       \$23,234,772        \$21,844,901       \$8,222           \$173,563       \$21,663,117
  Adjusting                                                                                
  Journal Entries                                                                          

  Non-Personnel   \$46,199,780        \$10,417,114       \$7,349,980       \$326,757       \$2,740,377
  Transactions                                                                             

  Non-Personnel   (\$3,020,702)       (\$3,027,550)      (\$3,027,550)     \$0             \$0
  Adjusting                                                                                
  Journal Entries                                                                          

  **Totals        **\$116,390,670**   **\$30,538,190**   **\$5,192,099**   **\$521,246**   **\$24,824,847**
  (net)**                                                                                  
  --------------- ------------------- ------------------ ----------------- --------------- ------------------

**TABLE B: Total Unallowable and Inadequately Documented Costs for the
2005-2006 School Year (Including Indirect Costs)**

  ------------------- ----------------- --------------- ----------------- ------------------ ----------------- ------------------
  **Cost Category**   **Unallowable     **Unallowable   **Total           **Inadequately     **Inadequately    **Total
                      Costs**           Indirect        Unallowable       Documented Costs** Documented        Inadequately
                                        Costs**         Costs**[^19]                         Indirect Costs**  Documented Costs**

  Personnel           \$786,955         \$53,033        \$839,988         \$22,913,957       \$1,488,368       \$24,402,325
  Transactions[^20]                                                                                            

  Personnel Adjusting \$173,563         \$12,011        \$185,574         \$21,663,117       \$1,481,375       \$23,144,492
  Journal Entries                                                                                              

  Non-Personnel       \$326,757 (1)     \$21,906        \$348,664         \$2,740,377 (2)    \$177,872         \$2,918,249
  Transactions                                                                                                 

  Non-Personnel       \$0               \$0             \$0               \$0                \$0               \$0
  Adjusting Journal                                                                                            
  Entries                                                                                                      

  **Totals**          **\$1,287,275**   **\$86,950**    **\$1,374,226**   **\$47,317,451**   **\$3,147,615**   **\$50,465,066**
  ------------------- ----------------- --------------- ----------------- ------------------ ----------------- ------------------

\(1\) OMB Circular A-87, *Attachment A, Paragraph C.1*, provides that,
to be allowable, costs must be, among other things, necessary and
allocable to federal awards.

-   Detroit paid for capital expenditures for general purpose
    equipment and improvements to buildings that MDE did not approve
    (\$137,780), including payments for digital copiers (\$57,492) and
    classroom repairs and renovations (\$80,288). OMB Circular A-87,
    *Attachment B, Paragraph 15.b* provides that capital expenditures
    for general purpose equipment and improvements to buildings which
    materially increase their value or useful life are unallowable as
    direct charges, except where approved in advance by the awarding
    agency. Detroit budgeted for these expenditures on its Consolidated
    Application under the category \'Purchased Services,\' rather than
    \'Capital Outlay,\' which is for equipment items with a cost of
    \$5,000 or more per unit. Therefore, MDE was not aware that Detroit
    was budgeting for capital expenditures.

-   Detroit paid for services to non-Title I schools or ineligible
    students (\$100,399), including payments totaling \$42,943 for
    reading and mathematics testing at two, non‑Title I schools (Bates
    Academy and Renaissance High School) and payments for supplemental
    educational services for students not attending a Detroit school
    (\$57,456).

-   Detroit paid for invoices that exceeded the approved contract amount
    or paid for shipping costs that were prohibited by a contract
    (\$86,781). This amount included an overpayment to a vendor for
    consulting services for \$81,950, which was for the first option
    year of the contract with the vendor (for the period September 1,
    2005, through August 31, 2006). The amount paid (\$1,314,570)
    exceeded the approved amount in the contract (\$1,232,620) by
    \$81,950. Also, Detroit paid a vendor \$4,831 for shipping. However,
    according to the contract with this vendor, the vendor could not
    charge for shipping expenses.

-   Detroit paid for an invoice twice (\$1,043). Detroit voided the
    check for one of the payments but did not reverse the duplicate
    charge to the Title I, Part A program.

-   A credit was not applied to the Title I, Part A program (\$755).
    Detroit purchased 31 computers for Blackwell Institute and received
    one that was damaged. The school received a credit of \$755 for this
    damaged computer, which was no longer at the school. However, this
    credit was not applied to the Title I, Part A program.

**Auditee Comments and OIG Response**

[Capital Expenditures (included in the draft report as Enclosure 2,
Table B, item 1, first bullet)]{.underline}

*Auditee Comments*. MDE and Detroit concurred that MDE did not
pre-approve the capital expenditures. MDE and Detroit provided a sworn
affidavit from MDE's Field Services Consultant in the Office of School
Improvement stating this employee reviewed documentation related to some
of these expenditures after-the-fact. The employee concluded that
\$90,146 of these capital expenditures would have been allowable. MDE
and Detroit also provided copies of invoices.

*OIG Response.* MDE and Detroit did not provide any new documentation
and agreed that it did not approve these expenditures in advance. OMB
Circular A-87, *Attachment B, Paragraph 15.b* provides that capital
expenditures for general purpose equipment and improvements to buildings
which materially increase their value or useful life are unallowable as
direct charges, except where approved in advance by the awarding agency.
Without the draft report, MDE would not have approved, or even been
aware of, these capital expenditures because Detroit misclassified them
as 'Purchased Services' instead of 'Capital Outlay' on its Consolidated
Application.

[Payments for Reading and Mathematics Testing Software (included in the
draft audit report as Enclosure 2, Table B, item 1, second bullet, for
\$42,943)]{.underline}

*Auditee Comments*. MDE and Detroit stated the contract for testing
software with Renaissance Learning, Inc. did not include Bates Academy.
MDE and Detroit also provided a letter from this vendor stating
Renaissance High School was originally in the contract, but its software
license was transferred to Chadsey High School. MDE and Detroit stated
this documentation demonstrates that the \$42,943 was not for non-Title
I, Part A schools and is therefore allowable.

*OIG Response.* \$39,307 of the \$42,943 involved a vendor other than
Renaissance Learning, Inc., so the contract and letter MDE and Detroit
described above were only relevant to \$3,636 of this sub-finding. The
invoice from Renaissance Learning, Inc. included both Chadsey High
School and Renaissance High School, so the statement that the license
was transferred to Chadsey High School is not valid. Therefore, the
\$3,636 paid to this vendor remains unallowable.

As part of the response to another sub-finding, MDE and Detroit provided
the contract related to \$39,307 of the \$42,943, but this contract
included no documentation, such as a list of schools, to refute this
sub-finding. Both Renaissance High School and Chadsey High School were
also included on the invoices from that vendor, so the statement that
the license was transferred to Chadsey High School is not valid.
Therefore, the \$39,307 paid to that vendor remains unallowable.

\(2\) Contrary to OMB Circular A-87, *Attachment A, Paragraph C.1*,
Detroit did not provide adequate documentation to show that these costs
were necessary and reasonable for proper and efficient performance of
federal awards, and allocable to federal awards.

-   Transactions were not supported by invoices or receipts (\$20,763).

-   Invoices were vague and did not include adequate documentation
    (\$452,170). Detroit paid \$92,600 for an invoice that stated that a
    Project Manager, Technical Assistant, and 40 Assessment Advisors
    provided services from September 2005 through March 2006. The
    invoice listed an amount for each month, with no detail of hours
    worked. Detroit did not provide the contract or other evidence to
    explain what Title I services were provided or the hours worked.
    Detroit also paid \$161,000 for a science program that the vendor
    would have provided two years prior to this payment. Detroit
    provided no after-the-fact support to demonstrate what services were
    received or what students or schools were served. Detroit also paid
    for two invoices totaling \$164,713 for school nurses who would have
    provided services over two years prior to the payments. Detroit did
    not provide the contracts for the nurses applicable to the periods
    covered by the invoices and did not provide a description of the
    type of services provided or Consultants' Reports, which were
    required by the contract with the vendor for a previous year.
    Detroit also paid \$33,857 for meals at local hotels for Title I
    school events but could not support the number of meals purchased.

-   Detroit leased computers for which it could not provide evidence of
    existence or use by Title I students (\$976,900). Detroit leased
    1,534 desktop computers and 554 laptop computers, including
    installation and insurance, for \$879,426. Detroit provided us with
    the shipping report from the vendor and shipping records from the
    schools that were to receive these computers. For 5 of 22
    judgmentally selected schools, the number of computers listed on the
    vendor's shipping reports was greater than the number of computers
    shipped to these schools according to Detroit\'s shipping records.
    Therefore, Detroit\'s shipping records for these 5 schools did not
    support all of the computers shipped to those respective schools
    according to the vendor\'s shipping records. Also, during our visit
    to 1 of these schools (Cleveland High School), the school did not
    show us any of the 22 computers that were leased for the school,
    according to the vendor's shipping report. We have no assurance
    that (1) Detroit can physically account for \$876,428 of the
    computers or laptops leased for \$879,426 or that (2) those
    computers are currently being used by eligible Title I students.
    Detroit also paid \$550,145 for computers that were supported by an
    invoice that did not list the number of units purchased or a per
    unit price. Based on another invoice for identical computers that
    was dated within 16 days of the invoice date, we calculated that
    Detroit purchased 589 computers at a per unit price of \$934.24.
    Because Detroit provided serial numbers and locations for only 500
    computers, 89 computers totaling \$83,025 are unaccounted for and
    inadequately documented. Also, Detroit purchased 37 computers for
    Cleveland Middle School. Because we could not physically verify 13
    of the computers at the school and because we have evidence that 12
    of the 13 computers were either stolen, damaged, or were reported
    missing, 13 computers totaling \$17,447 are inadequately documented.

-   Detroit paid for supplemental educational services that were not
    supported by detailed attendance forms (\$17,581). These forms,
    required by the contracts with vendors, were necessary to document
    students tutored, hours tutored, and dates of service.

-   Detroit paid \$4,028 for movies (\$1,500), incentives (\$314), gym
    mats (\$790), and book bags and T-shirts (\$1,423) for which it
    provided no evidence of benefit to the Title I, Part A program.

-   Detroit paid \$5,675 for gift cards for which it provided no record
    of whether the appropriate students received the gift cards (which
    were awarded for attendance and involvement in a program that
    encouraged students to improve academic achievement and
    employability skills).

-   Detroit paid invoices before the services would have been received
    (\$1,254,935) and did not provide any after-the-fact documentation
    demonstrating benefit to the Title I, Part A program. One invoice
    (\$1,232,620) included pre-payment for, among other items,
    (1) 75 consultant days for \$112,500, (2) training materials for
    \$105,900, and (3) 448 consultant days for \$672,000. Detroit only
    provided support for 10 consultant days paid for \$15,000. For the
    remaining \$1,217,620 of this invoice, Detroit did not provide the
    specific dates that the consulting services would have been provided
    at schools, the locations of the services, a list of the specific
    training materials received, or evidence that it received \$105,900
    in training materials. Therefore, \$1,217,620 of this invoice is
    inadequately documented. For another invoice (\$37,315), Detroit
    received the invoice 4 months before, and paid it 3 months before,
    the vendor was scheduled to provide the service. Detroit provided no
    after-the-fact support to demonstrate that this service was
    provided.

-   Detroit paid for temporary employees whose duties were similar to
    those of Title I Office employees (\$8,325). The duties of these
    temporary employees included monitoring and creating Title I
    budgets, which are similar to the duties of the Title I Director and
    Program Supervisors. Detroit did not explain why it hired these
    temporary employees or demonstrate that they provided any services
    beyond what the Title I Director and Program Supervisors were
    already paid to do.

**Auditee Comments and OIG Response**

[Harvard Graduate School of Education Professional Program Expenses
(included in the draft report as Enclosure 2, Table B, item 2, first
bullet, for \$37,315)]{.underline}

*Auditee Comments*. MDE and Detroit provided the invoice for this
transaction which lists the per-participant charge and provided a list
of the participants. MDE and Detroit stated that this documentation
adequately documents the expense.

*OIG Response.* The invoice, dated February 20, 2006, and paid on March
16, 2006, was for services to be provided on June 25-30, 2006.
Therefore, Detroit received this invoice 4 months before, and paid it 3
months before, the vendor was scheduled to provide the service. MDE and
Detroit provided no after-the-fact support to demonstrate that the
service was provided. Therefore, we classified this cost as having an
invoice paid before the services would have been received with no
after-the-fact support demonstrating benefit to the Title I, Part A
program, rather than a cost not supported by an invoice. We moved this
cost to Enclosure 2, Table B, item 2, seventh bullet.

[Payment for Meals with Title I, Part A Funds Related to 3-Day Workshop
(included in the draft report as Enclosure 2, Table B, item 2, second
bullet, for \$23,527)]{.underline}

*Auditee Comments*. MDE and Detroit stated they provided (1)
documentation to support the number of meals purchased, including the
\$23,527 that was inadequately documented; and (2) workshop agendas,
contemporaneous sign-in sheets for staff, and a list of the Center for
School Leaders staff and Detroit central-level staff that attended.

*OIG Response.* MDE and Detroit provided a list of the Center for School
Leaders staff and Detroit central-level staff that attended for March
9-11, 2006, and sign-in sheets for these three days. During the audit,
we already received and reviewed the sign-in sheets for March 9 and
March 11. The sign‑in sheets for March 10 were new sign-in sheets that
were completely different from the ones Detroit provided during the
audit. While most of the names are different, we identified 13 names
that were on both sign-in sheets. Some of the 13 names were initialed on
both sheets, and others were only initialed on one sheet. MDE and
Detroit did not explain why these individuals would have signed two
sign-in sheets for the same day. Additionally, the initials for 6 names
on the 2 sign-in sheets appear different. These discrepancies place the
authenticity and credibility of both sign-in sheets for March 10 in
question. Therefore, we did not accept either sign-in sheet and
classified the entire amount paid for meals for March 10 as inadequately
documented. Because we will no longer accept any of the sign-in sheets
provided for March 10, \$10,330 that we previously determined was
adequately documented is now inadequately documented. In total, \$33,857
is now inadequately documented. We modified this enclosure to reflect
this updated amount.

Detroit provided additional sign-in sheets for March 11. However, these
sign-in sheets appeared to be for a different event because they were
identified with the title 'NBPTS 2005-2006 Additional Sessions' rather
than 'The Challenge of Leadership. . .' title that was on the other
sign-in sheets for March 10 and March 11. We also did not accept the
list of the Center for School Leaders staff and Detroit central-level
staff that attended because it did not include any initials. Also, one
name on this list also appeared on a sign-in sheet without signed
initials.

[Computers Leased with Title I, Part A Funds (included in the draft
report as Enclosure 2, Table B, item 2, third bullet, for
\$879,426)]{.underline}

*Auditee Comments*. MDE and Detroit disagreed that Detroit purchased the
computers and stated that they were leased. MDE and Detroit also stated
that each school's *Receipt of Equipment Form* documents that the leased
computers were received by Detroit schools, and therefore, Detroit
adequately documented this expense.

*OIG Response.* MDE and Detroit provided (1) documentation of a
cancelled purchase order and a new purchase order for the leased
computers, (2) the invoice, and (3) *Receipt of Equipment Forms* for 4
schools (Academy of the Americas, Bennett, Cleveland, and George
Washington Carver). The only new documentation provided was the *Receipt
of Equipment Forms.* We reviewed the *Receipt of Equipment Forms* for
the 4 schools to determine if they matched the shipping records from the
vendor. The serial numbers for computers provided for two schools
(Academy of the Americas and Bennett) did not match. Only 3 of 22
computer serial numbers for Cleveland matched. However, because we were
unable to view any of the computers listed on the shipping report from
the vendor during our visit to Cleveland, we did not accept this
documentation. Ten of 11 serial numbers matched for George Washington
Carver. Because the Principal signed this form documenting that these 10
computers were at the school as of October 29, 2007, we accepted this
documentation for the 10 computers. Therefore, \$2,998 of the \$879,426
is now adequately documented and \$876,428 of the \$879,426 remains
inadequately documented. We modified this enclosure to reflect these
updated amounts.

We modified this finding to state that Detroit leased the computers.
Regardless of whether Detroit purchased or leased the computers, it
should be able to account for the computers that were shipped to each
school. Detroit has not demonstrated schools received computers leased
with Title I, Part A funds.

[Title I, Part A Funds Expended for Consulting Services (included in the
draft report as Enclosure 2, Table B, item 2, seventh bullet, for
\$1,232,620)]{.underline}

*Auditee Comments*. MDE and Detroit stated they provided documentation
that clearly demonstrates the \$1,232,620 benefited the Title I, Part A
program and stated there is no evidence that Detroit prepaid invoices.
MDE and Detroit also stated they provided supplementary documents that
further demonstrate the vendor provided services to Detroit that
benefited the Title I, Part A program, including the *Algebraic Thinking
Report for Fourth Quarter, 2005-2006;* an example of the schedule for a
professional development *Algebraic Thinking Project* session; a chart
of the distribution of assessment used for each *Skill Builder
Assessment;* and student textbook distribution for school year
2005-2006. In addition, it provided a number of sign-in sheets for
training sessions conducted by the vendor for 6th and 8th grade teachers
for the following dates: August 1-5, 2005; August 8-12, 2005; July
24-28, 2006; and July 31-August 4, 2006. MDE and Detroit also stated
that because this documentation describes the services provided, the
goods that were delivered, and confirms the dates that training sessions
occurred, it demonstrates that Detroit's Title I, Part A program
received a benefit from this expenditure.

*OIG Response.* The documentation provided clearly indicates that
Detroit paid this invoice before it would have received most of these
services. The invoice was dated September 22, 2005, and Detroit paid the
invoice on November 17, 2005. The invoice was for the period September
1, 2005, through August 31, 2006. The *Algebraic Thinking Report for
Fourth Quarter, 2005-2006* includes an undated and unsigned report from
the vendor that gives short summaries of conclusions for many schools,
but provides no evidence of if or when required visitations or
consultations sessions were made to these schools. While the invoice
itemizes a total of 448 school visits (8 each to 56 schools), the
documentation states that the vendor made at least 1,386 school visits
(14 each to 99 schools). We have no evidence of when this report was
written or by whom. The large discrepancy in the number of schools
served and the total number of school visits and the lack of dates or
signatures of any Detroit or vendor official discredits the entire
vendor report. The example of the schedule for a professional
development *Algebraic Thinking Project* session did not identify the
year the session took place. Therefore, we cannot determine if it took
place during the period covered by the invoice, and we cannot accept it
as support. The chart of the distribution of assessment used for each
*Skill Builder Assessment* provides no evidence of consulting days or
visitation to schools, so we cannot accept it. The student textbook
distribution for school year 2005-2006 is too vague to accept as support
because it does not identify the specific books that would have been
provided or list the cost per book. It also does not indicate that any
items were actually distributed to schools and has no signatures or
dates. The sign-in sheets provided for August 1-5, 2005, and August
8-12, 2005, are not relevant because they did not relate to the period
covered by the invoice. The sign-in sheets provided for July 24-28,
2006, and July 31-August 4, 2006, are relevant to the period covered by
the invoice and adequately document 10 consulting days provided by the
vendor. For this expenditure, \$15,000 is adequately documented. Other
than documentation for 10 consulting days, Detroit provided none of the
specific after-the-fact documentation we requested to demonstrate it
received any of the items on the invoice. Therefore, \$1,217,620 of the
\$1,232,620 remains inadequately documented. We modified this enclosure
to reflect this updated amount.

[Title I, Part A Funds Expended for Math and Reading Testing (included
in the draft report as Enclosure 2, Table B, item 2, second bullet, for
\$1,885,374)]{.underline}

*Auditee Comments*. MDE and Detroit provided contracts and contract
modifications with the vendor for 2002-2007. MDE and Detroit referred to
specific portions of the contract provided and stated that this
documentation covers a number of different goods and services provided
to Detroit and supports these expenditures for \$1,885,374.

*OIG Response.* The contract MDE and Detroit provided demonstrated
benefit to Title I, Part A schools. Therefore, we reclassified these
expenditures totaling \$1,885,374 as adequately documented in this
enclosure.

**TABLE C -- Schedule of Unallowable and Inadequately Documented
Personnel Cost Duplication**

  ---------------------- ------------------- ----------------- ------------------ --------------
                         **Unduplicated**    **Duplicated**    **Total**          **Duplicated
                                                                                  with Finding
                                                                                  Number**

  **PERSONNEL                                                                     
  TRANSACTIONS**                                                                  

  Unallowable -- Finding \$571,025           \$0               \$571,025          
  1A                                                                              

  Unallowable -- Finding \$203,000           \$0               \$203,000          
  1B                                                                              

  Unallowable -- Finding \$65,962            \$7,329           \$73,292           1B
  1D                                                                              

  **Total Unallowable    **\$****839,988**   **\$7,329**       **\$847,317**      
  Costs**[^21]                                                                    

                                                                                  

  Inadequately           \$8,042,577         \$1,077,363       \$9,119,940        2E[^22]
  Documented -- Finding                                                           
  2A                                                                              

  Inadequately           \$12,268,402        \$711,358         \$12,979,760       1A, 1B, and
  Documented -- Finding                                                           1D[^23]
  2B                                                                              

  Inadequately           \$3,252             \$22              \$3,274            1B
  Documented -- Finding                                                           
  2C                                                                              

  Inadequately           \$4,088,095         \$0               \$4,088,095        
  Documented -- Finding                                                           
  2E                                                                              

  **Total Inadequately   **\$24,402,325**    **\$1,788,743**   **\$26,191,069**   
  Documented Costs**                                                              

  **Total Unallowable    **\$25,242,313**    **\$1,796,072**   **\$27,038,385**   
  and Inadequately                                                                
  Documented Costs**                                                              

                                                                                  

  **PERSONNEL ADJUSTING                                                           
  JOURNAL ENTRIES**                                                               

  Unallowable -- Finding \$173,082           \$0               \$173,082          
  1C                                                                              

  Unallowable -- Finding \$12,492            \$0               \$12,492           
  1E                                                                              

  **Total Unallowable    **\$185,574**       **\$0**           **\$185,574**      
  Costs**                                                                         

                                                                                  

  Inadequately           \$23,144,492        \$173,082         \$23,317,574       1C
  Documented -- Finding                                                           
  2D                                                                              

  **Total Unallowable    **\$23,330,065**    **\$173,082**     **\$23,503,147**   
  and Inadequately                                                                
  Documented Costs**                                                              
  ---------------------- ------------------- ----------------- ------------------ --------------

## Finding 1A = Excessive Employee Insurance Benefits, page 6. {#finding-1a-excessive-employee-insurance-benefits-page-6. .RptSubcaption}

Finding 1B = Excessive Title I Office Employee Compensation, page 6.

## Finding 1C = Excessive Targeted Assistance Teacher Compensation, page 7. {#finding-1c-excessive-targeted-assistance-teacher-compensation-page-7. .RptSubcaption}

## Finding 1D = Disciplinary Administrative Leave Compensation, page 7.  {#finding-1d-disciplinary-administrative-leave-compensation-page-7. .RptSubcaption}

Finding 1E = Duplicate Compensation Charge, page 8.

Finding 2A = Inadequate Time and Effort Certifications, page 11.

Finding 2B = Inadequate Personal Activity Reports for Non-Workshop
Duties, page 11.

## Finding 2C = Inadequate Personal Activity Reports for Workshop Duties, page 11. {#finding-2c-inadequate-personal-activity-reports-for-workshop-duties-page-11. .RptSubcaption}

Finding 2D = Inadequate Time and Effort Certifications or Personal
Activity Reports for Compensation Charges in Adjusting Journal Entries,
page 12.

Finding 2E = Inadequately Documented Employee Insurance Benefits, Page
13.

[]{#__RefHeading___Toc204070561 .anchor}Enclosure 3: Auditee's Comments

On March 13, 2008, MDE and Detroit provided comments to the draft report
and 17 exhibits. On March 28, 2008, MDE and Detroit provided
supplemental comments to the draft report and an additional 7 exhibits.
We documented the comments and the supplemental comments in this
enclosure. The exhibits will be made available upon request.

+----------------+---+------------------------------+---+-----------------+
| ![](medi       |   |                              |   | ![](m           |
| a/image4.png){ |   |                              |   | edia/image5.png |
| width="0.69027 |   |                              |   | ){width="1.2902 |
| 77777777778in" |   |                              |   | 777777777779in" |
| he             |   |                              |   | height="0.59305 |
| ight="0.759027 |   |                              |   | 55555555556in"} |
| 7777777777in"} |   |                              |   |                 |
|                |   |                              |   | Michael p.      |
| Jennifer M.    |   |                              |   | flanagan        |
| Granholm       |   |                              |   |                 |
|                |   |                              |   | [Superintendent |
| [Governo       |   |                              |   | of]{.smallcaps} |
| r]{.smallcaps} |   |                              |   |                 |
|                |   |                              |   | [Public         |
|                |   |                              |   | Instructi       |
|                |   |                              |   | on]{.smallcaps} |
+----------------+---+------------------------------+---+-----------------+

March 13, 2008

Mr. Gary Whitman

Regional Inspector General for Audit

U.S. Department of Education

Office of Inspector General

500 West Madison Street

Suite 1414

Chicago, IL 60661

RE: The School District of the City of Detroit's Use of Title I, Part A
Funds Under the No Child Left Behind Act of 2001; Office of Inspector
General Draft Audit Report (Control Number ED-OIG/A05H0010)

Dear Mr. Whitman:

Thank you for the opportunity to comment on the above referenced Office
of Inspector Draft Audit Report. Because that report dealt extensively
with Detroit Public Schools' (DPS) use of funds under Title I, Part A of
the No Child Left Behind Act, we worked closely with DPS staff in
responding to your proposed findings. I am enclosing a detailed
response, which was developed collaboratively by the Michigan Department
of Education (MDE) and DPS. I am also enclosing a number of exhibits
referenced in our response.

We find compelling assertions involving the audit's failure to review
all available provided documentation, erroneous reliance upon budgeted
rather than actual expenditures, schoolwide flexibility, issues
regarding small sample sizes, and a failure to analyze harm to the
Federal interest. We are also deeply concerned about the educational
impact that any financial disallowance would have on this very
financially distressed school district. We are grateful for your
cooperative approach in granting us a 5-week extension on our original
response due date. Nonetheless, given the extensive nature of the
findings, as well as significant recent turnover among the DPS staff, we
know that there is much more relevant material to be analyzed and
submitted. We request your authorization to make a subsequent
supplemental response to these findings, particularly those involving
documentation regarding goods and services received by DPS (primarily
addressed in Findings No. 3 and 4).

Mr. Gary Whitman

Page 2

March 13, 2008

We strongly request your reconsideration of the audit findings and
recommendations.

If we can provide further information, please contact Michael Radke,
Assistant Director, Office of School Improvement, at 517-373-3921.

Thank you for your consideration in this matter.

Sincerely,

/s/

Michael P. Flanagan

Superintendent of Public Instruction

Enclosure

**Michigan Department of Education**

**Response to Draft Audit Report: ED-OIG/A05H0010**

Submitted to:

Mr. Gary Whitman

Regional Inspector General for Audit

U.S. Department of Education

Office of Inspector General

500 West Madison Street

Suite 1414

Chicago, IL 60661

This is the response of the Michigan Department of Education ("MDE") to
the U.S. Department of Education's Office of Inspector General ("OIG")
Draft Audit Report ED-OIG/A05H0010 ("Draft Audit Report"), issued
January 9, 2008, entitled *The School District of the City of Detroit's
Use of Title I, Part A Funds Under the No Child Behind Act of 2001*. OIG
reviewed Title I, Part A ("Title I-A") programs operated by the Detroit
Public Schools ("DPS") for fiscal years 2004-2005 and 2005-2006. OIG
erroneously concluded that DPS did not properly administer Title I-A
funds expended over that time period.

MDE and DPS respectfully submit that the audit methodology used was
seriously flawed for the following reasons:

> 1\) It appears that the audit failed to review the voluminous
> documentation and accounting records supporting the Title I-A
> expenditures at issue.
>
> 2\) The Draft Audit Report erroneously relies in some sections on the
> amounts budgeted rather than the actual expenditures documented after
> the fact.

3)  The audit failed to take into account any schoolwide flexibility,
    despite the fact that DPS overwhelmingly consists of schoolwide
    programs.

4)  The Draft Audit Report's methodology uses extremely small sample
    sizes to estimate larger findings. Although DPS has approximately
    14,960 employees, the audit consistently sampled a small number of
    transactions to arrive at its findings for the entire school
    district. Small employee sample sizes for a district with as many
    employees as DPS possesses are not statistically significant.

5)  The audit failed to analyze harm to the Federal interest, as
    required, in making findings and failed to properly consider valid
    after-the-fact documentation.

MDE's response below, based on each Draft Audit Report finding,
addresses the overarching flaws in audit methodology, the inaccuracy of
each of the rationales supplied for the finding, and supporting
documentation for DPS's expenditures.

I.  **Finding No. 1 -- Personnel Costs Charged to Title I, Part A**

***Head Start Program Compensation***

OIG found that DPS charged salaries, benefits, and related indirect
costs to its Title I-A program for Head Start program teachers and
assistants through ten adjusting journal entries in the amount of
\$5,180,663 for school year 2005-2006. OIG stated that DPS did not
identify the employees whose compensation was transferred to Title I-A
and did not provide personnel activity reports for these employees to
certify that they worked on Title I-A program activities. OIG cited OMB
Circular A-87, Attachment A, Paragraph C.3.c, which does not allow costs
allocable to a particular Federal award or cost objective to be charged
to other Federal awards to overcome fund deficiencies.

In order to recover funds, there must be an analysis reflecting the
value of the program services actually obtained in a determination of
harm to the Federal interest. 20 U.S.C. 1234a(a)(2). The U.S. Department
of Education ("USDE") may require recipients to return only an amount
that is proportional to the extent of the harm its violation caused to
an identifiable Federal interest associated with the program. 34 C.F.R.
§ 81.32(a)(1). MDE and DPS acknowledge that the accounting procedures
could have been clearer. However, these DPS teachers served students who
were Title I-eligible, in an educational program that is an allowable
Title I program. Under the Elementary and Secondary Education Act (ESEA)
Sec. 1115(b)(2)(B), a child who, at any time in the preceding two years
participated in a Head Start program, is eligible for Title I-A targeted
assistance services. For students attending schoolwide programs, ESEA
Section 1114(a)(2) does not require schoolwide programs to identify
children as Title I-A eligible or to ensure that the services provided
to children are supplementary. Therefore, all DPS Head Start students
for school year 2005-2006 were also eligible to received Title I-A
services.

DPS has provided a Head Start program description, a calendar describing
program activities, a list of DPS Head Start schools, a Head Start
program student application, and a roster of all Head Start students who
participated in the program.[^24] DPS's Head Start program description
states the following:

> To meet the identified need to provide full day service for children
> enrolled in Head Start, Title I funds have been allocated to
> compliment and extend the program service day for children eligible
> for both Title I and Head Start. The Title I funds support a portion
> of the teacher and school service assistant salaries and fringe
> benefits to all for the extended daily schedule and *educational
> services for the children most at risk of not meeting the State's
> challenging student achievement standards*. Head Start funds provide
> other salaries, fringes, and services. (Emphasis added.)

DPS ensured that all of its students met the eligibility criteria for
Head Start, which also qualified them for Title I-A services under ESEA
Sec. 1115(b)(2)(B). DPS's documentation supports this fact. DPS has
provided a Head Start student application.[^25] The application contains
an "Enrollment Criteria Point System" for the purpose of identifying
eligible Head Start students. The point system takes into account
factors such as family income, nutrition, age, and other indicators. DPS
also provided Head Start class lists for all Head Start students in each
school operating a Head Start program. These lists demonstrate that each
student is eligible for Head Start based upon accruing the requisite
number of points under the Enrollment Criteria Point System. The lists
ensure that DPS's schools that operate Head Start programs only serve
eligible students, as all DPS students participating in Head Start are
eligible for Title I-A. Therefore, the DPS teachers who taught Head
Start students were also instructing Title I-eligible students in a
Title I-A program. Because these DPS teachers were serving Title
I-eligible students, there is no harm to the Federal interest in paying
them from Title I-A funds.

***Employee Insurance Benefits***

OIG found that, based on its projection, DPS charged excessive insurance
benefits to Title I-A in the amount of \$1,143,944 for the 2005-2006
school year. OIG based this projection on a sample of 30 selected
employees, where it found that, in 29 transactions, Title I-A was
overcharged by \$2,601. The State respectfully submits that OIG
miscalculated the amounts DPS charged to its Title I-A program. The
amounts OIG cited were based upon beginning of the year estimates by
Ceridian, a private contractor used by DPS to assist with its payroll
accounting. Ceridian stated that it arrived at an annual amount of
insurance benefits charged to DPS based upon benefits rates calculated
in June, before the charges actually occurred.[^26] Therefore, OIG's
finding was not based upon *actual* insurance benefit amounts charged to
the Title I-A program, but on *projections* by Ceridian as to insurance
benefit amounts DPS would charge based on prior year estimates.

Reporting budget estimates rather than actual expenditures violates
Federal cost principles. Under OMB Circular A-87, Paragraph 8.h.(5)(e),
"Budget estimates or other distribution percentages determined before
the services are performed do not qualify as support for charges to
Federal awards." OIG has issued findings against grant recipients for
using budget estimates. For instance, OIG issued a finding against a
subgrantee for charging "personnel costs that were based on budgeted
rather than actual school expenditures."[^27] OIG further stated that
because the charge was "based on budgeted rather than actual costs,
there is no assurance that the amount was, in fact, used for allowable
personnel costs."[^28] In another audit, OIG cited a subgrantee for
failure to track expenditures, stating that:

> \[Officials\] prepared the budget on a per-school basis, but they did
> not account for Title I expenditures for each school. Without
> determining how much each school actually received, we could not
> determine if \[subgrantee\] demonstrated that its schoolwide program
> in each school reasonably addressed the intent of the program,
> particularly as it related to the most disadvantaged students.[^29]

Ceridian acknowledges that the amount that DPS's account is charged can
change up to twice per year, as follows:

> 1\) \[W\]hen we \[Ceridian\] receive the renewal rates from DPS that
> are effective on 7/1 of every year and 2) \[W\]hen the employee can
> potentially go through open enrollment and change what plan they are
> in. Both of these scenarios can change \[the\] employer amount.[^30]

As Ceridian indicates, due to changes in insurance rates and employee
insurance benefit choices, it is impossible to accurately predict
month-by-month charges to DPS based upon a beginning of the year
estimate.

Ceridian also provided a sample spreadsheet for five DPS employees,
which shows both the beginning-of-the-year estimates by Ceridian and the
actual charges to employee insurance benefits.[^31] The Ceridian
spreadsheet demonstrates that often, due to changes in insurance benefit
rates and employee benefits choices, Ceridian's estimated insurance
charges are not representative of actual charges to employee insurance
benefits.[^32]

The amounts Ceridian provided to OIG were estimates, not DPS actual
charges for employee insurance benefits. Because OIG only examined
Ceridian estimates, not actual DPS employee insurance benefits, it did
not investigate the proper documentation. Because of this flaw in OIG's
analysis, DPS should not have to repay any amounts it charged to Title
I-A for employee insurance benefits.

***Fringe Benefits Charges for Employee Insurance***

OIG found that DPS improperly charged employee insurance benefits to
Title I-A in the amount of \$571,025 for employees who worked on Title
I-A supplemental activities, including workshops and after-school
programs, for the 2005-2006 school year. OIG provided a sample of 5
selected employees where it found improper distribution of Title I-A
funds for insurance benefits.[^33]

Under OMB Circular A-87, Attachment B, Paragraph 8.d.(5), the cost of
fringe benefits in the form of employer contributions must be allocated
to Federal awards and all other activities in a manner consistent with
the pattern of benefits attributable to the individuals or group(s) of
employees whose salaries and wages are chargeable to such Federal awards
and other activities. Here, DPS charged Title I-A for funds expended on
employee insurance benefits for employees who worked on both non-Title
I-A and Title I-A activities *proportionally* to the compensation paid
to each employee. For example, \[employee name deleted\], Employee ID
35912 (one of the employees identified in Exception Report #5), one of
the sampled employees, was paid as follows for the identified pay
periods:

  -------- ------------ ---------- ------------ ----------- ----------- ----------- ------- -----------
  Pay End  DPS General  Title I-A  Total Gross  DPS General Title I-A   Total       Title   Title I-A %
  Date     Fund Pay     Pay        Pay          Fund        Insurance   Insurance   I-A %   of
                                                Insurance   Cost        Cost        of      Insurance
                                                Cost                                Gross   Cost
                                                                                    Pay     

  9/9/05   \$2,736.73   \$172.50   \$2,909.23   \$228.57    \$14.40     \$242.97    5.93%   5.93%
  -------- ------------ ---------- ------------ ----------- ----------- ----------- ------- -----------

The chart immediately above demonstrates that \[employee name deleted\]
was paid Title I-A funds for compensation and employee insurance
benefits in equal proportion. DPS has provided similar data, including a
spreadsheet and payroll distribution data by employee for the five
sampled employees as evidence that Title I-A funds were expended in
equal proportion for employee compensation and insurance benefits.[^34]
These documents prove that DPS expended its Title I-A funds in
accordance with the Federal cost principles in OMB Circular A-87.

***Title I Targeted Assistance Teacher Compensation for Golightly and
Beard Schools***

OIG found that DPS charged excessive compensation to Title I-A for
salaries, benefits, and indirect costs of teachers who taught ineligible
children in Title I-A targeted assistance schools in the amount of
\$173,082 for the 2005-2006 school year. OIG provided a sample of five
selected kindergarten teachers from Title I-A targeted assistance
schools and determined that they taught both Title I-A and non-Title I-A
students. Specifically, OIG stated that the five sampled DPS teachers
taught ineligible students at Golightly Educational Center ("Golightly")
and Beard ("Beard").[^35]

For school year 2005-2006, Golightly had a poverty rate of forty-eight
percent and Beard had a poverty rate of seventy-nine percent.[^36] The
Title I-A schoolwide model is based on the belief that once poverty
reaches a certain threshold in a school, it makes more sense to improve
the whole instructional program than to provide services separately to
some students. Under ESEA Sec. 1114(a)(1), a local educational agency,
such as DPS, may operate schoolwide programs for schools serving an
attendance area with forty percent or more of the children from
low-income families. Section 1114(a)(2) does not require schoolwide
programs to identify children as\
Title I-A eligible or to ensure that the services provided to children
are supplementary. Instead, schoolwide program schools can serve all
students using Federal funds. ESEA presumes that a school eligible to
operate as a schoolwide program will operate as a schoolwide program.
ESEA Sec. 6315(a). Title I presumes that unless a school is ineligible
or "opts out" of the schoolwide program, it will operate as a schoolwide
program school.

Although the Draft Audit Report treats Golightly and Beard as targeted
assistance schools, they meet the qualifications of schoolwide program
schools under Section 1114 and essentially function as schoolwide
programs. As evidence that Golightly and Beard operated similarly to a
schoolwide school, DPS has provided their school plans, which
demonstrate that both schools adhere to a number of the statutory
requirements for a schoolwide plan in Section 1114(b).[^37]

Golightly's school plan includes a number of required schoolwide program
elements, such as:

-   The plan was developed with the input of Golightly's school staff
    and a school improvement team consisting of parents, community and
    business members, students, staff and administrators. It was
    developed using the five-phase school improvement model developed by
    DPS to ensure that all school plans are aligned and comply with
    Federal, state, and district requirements. The plan uses data-driven
    decision-making and research-based proven practice strategies in
    identifying the needs of the school.

-   Golightly conducted a needs assessment to identify areas where
    improvements are necessary. The school analyzed the disaggregated
    Michigan Educational Assessment Program (MEAP) data, which showed
    improvement in reading and math skills among its students. Golightly
    needs to improve the experience level of non-certified and
    substitute teachers in regular positions, address personnel
    scarcity, and improve the teacher-to-student ratio. Through the
    school's Performance Improvement System, the school aspires to
    enhance the academic program while developing and expanding a
    diversified curriculum that facilitates the needs of all students.

-   The plan identifies students at risk of not meeting student academic
    achievement standards through a set of risk factors, which include
    collecting data on students transferring into Golightly, students in
    temporary housing, number of suspensions per student for the year,
    and students changing schools in the past year. The school also
    relies upon teacher observations and assessment performance to
    identify students with difficulties. To address these needs,
    Golightly offers after-school enrichment activities and tutoring.

-   Golightly has a number of opportunities for parental involvement.
    The school has a leadership team that involves parents within the
    school's decision-making process. Golightly also has a school
    committee, which represents all stakeholders, including parents,
    which meets monthly and discusses various strengths and weaknesses
    and focuses on academic student achievement.

Beard's School Improvement Plan also includes a number of the required
elements, such as:

-   The plan addresses the process of identifying the needs of
    low-achieving children through a number of different techniques.
    Teachers identify students with difficulties based on classroom
    observations, student portfolios, progress reports, parent
    observations, reading and mathematics assessments, and daily logs.
    For students identified as at risk of not meeting academic
    standards, there are additional measures taken, including (1)
    Bilingual staff to interpret for English language learners, (2)
    Individual Education Plans for all Prekindergarten students, (3)
    multi-level instruction, (4) and small group instruction for
    children with academic challenges.

-   The plan provides for high-quality and ongoing professional
    development for teachers, principals through programs such as "6+1
    Writing Traits," "Hampton Brown Training," and a number of bilingual
    education and early childhood professional development programs.
    Professional development also occurs through visits to other
    classrooms for cooperative peer observation, progress reports and
    evaluations, and extended learning activities.

-   The plan addresses attempts to increase parental involvement through
    a number of activities. Beard involves parents through monthly
    parent meetings, home activity calendars, district parenting
    classes, a parent group, and parental involvement on school
    improvement and Title I committees. The school has a
    student/parent/school compact with a number of pledges by parents,
    Beard staff, and students. Also, Beard holds adult and community
    education activities, including English, GED, parenting, literacy,
    Omni arts and education, and Migrant Education programs. In
    addition, the school conducts library classes for parents.

-   The plan contains activities to assist preschool children
    transitioning from early childhood programs to local elementary
    programs, including the following: (1) Pre-kindergarten teachers,
    parents, and students visiting kindergarten classes and meeting with
    teachers to receive an overview of expectations; (2) Preschoolers
    participate in cross-grade activities with kindergarteners; (3)
    Teachers introduce lessons explaining the similarities and
    differences in the upcoming grade; (4) Kindergartners visit the
    local elementary school; (5) Professional Growth and Development
    opportunities for teachers to attend workshops on bridging the grade
    levels; (5) Teachers attend collaborative learning sessions for
    pre-kindergarten and 1st grade learning; and (6) Linking curriculum
    expectations with correlations between grade levels.

This documentation demonstrates that these high-poverty schools were
functioning as schoolwide programs. Therefore, they should be treated as
schoolwide programs for purposes of determining whether the expenditures
resulted in any harm to the Federal interest. Because funds in a
schoolwide program may be used to benefit all students in a school, the
Federal expenditures in this case would have been allowable had the two
schools been treated as schoolwide program schools. Therefore, there is
no identifiable harm to the Federal interest in this case because
Golightly and Beard schools were eligible to operate as schoolwide
programs and essentially functioned as schoolwide schools.

I.  **Finding No. 2 -- Time and Effort Certifications and Personnel
    Activity Reports**

***Time and Effort Certifications for Single Cost Objective Employees***

OIG found that, for a number of sampled salary transactions, DPS did not
provide adequate time and effort certifications for single cost
objective employees for school year 2005-2006.[^38] For some of the
employees sampled, DPS has provided after-the-fact time and effort
certifications.[^39] These certifications confirm that the employee
worked 100% of his or her time on a single cost objective for the
relevant time period and are signed by each employee's school
administrator or principal.

Under OMB Circular A-87, Attachment B, Paragraph 8.h.(3) states,

> Where employees are expected to work solely on a single Federal award
> or cost objective, charges for their salaries and wages will be
> supported by periodic certifications that the employees worked solely
> on that program for the period covered by the certification. These
> certifications will be prepared at least semi annually and will be
> signed by the employee or supervisory official having first hand
> knowledge of the work performed by the employee.

All of DPS's certifications meet these requirements, as each (1)
certifies that the employee worked only on Title I-A activities for the
relevant work period, (2) is prepared semi-annually, and (3) is signed
by a supervisor with first-hand knowledge of the employee's work. For
example, \[employee name deleted\], a teacher at Drew Middle School, has
a certification that confirms that she only worked on Title I-A
activities for July 1, 2005 -- November 30, 2005, which was signed by
\[employee name deleted\], the principal of Drew Middle School. All of
the semi-annual certification provided by DPS similarly meet all of the
requirements of OMB\
Circular A-87 Attachment B, Paragraph 8.h.(3).

It is well settled that recipients may use after-the-fact documentation
to reconstruct the time and effort they spent on Federal programs.
[See]{.underline} [Application of the New York State Department of
Education]{.underline}, Docket No. 90-70-R (1994) ("This tribunal will
also accept the after-the-fact affidavits executed by supervisors and
submitted by NYSED in the case at bar."); [Consolidated Appeals of the
Florida Department of Education]{.underline}, Docket Nos. 29-293-88 &
33-297-88 (1990) ("The use of later affidavits\... is not categorically
precluded\... This Panel\... finds the \[affidavits submitted\] to be
credible and useful evidence."); [Application of Escambia County Board
of Education]{.underline}, Docket No. 89-9-R (1989) ("The Education
Appeal Board (EAB) and the Secretary of Education have indicated that
after-the-fact evidence can be considered to substantiate costs
disallowed in a Final Letter of Determination."); [Appeal of Fort Valley
State College]{.underline}, Docket No. 21(196)85 (1987) ("The EAB has in
the past permitted such expenditures if, after the fact, the grantee can
support them with alternative, equivalent, or contemporaneous
documentation."); [Appeal of Government of Guam]{.underline}, Docket No.
30(162)84 (1986) ("The Secretary agrees that where appropriate, a Panel
can permit a recipient to meet its burden by constructing a time
distribution formula based on credible evidence."); [Appeal of Albany
State College]{.underline}, Docket No. 41(173)84 (1986) ("\[T\]he
Department of Education\... has indicated its satisfaction with certain
after-the-fact affidavits and has revised its demand accordingly.").

There is no limit on the types of after-the-fact documentation that can
be submitted as long as the evidence is "credible." [Application of
Escambia County Board of Education]{.underline}, Docket No. 89-9-R
(1989). [See also]{.underline} [Appeal of Fort Valley State
College]{.underline}, Docket No. 21(196)85 (1987). When reviewing
affidavits, the U.S. Department of Education's Office of Administrative
Law Judges (OALJ) typically looks to a variety of factors to determine
if they are credible such as whether they are specific and whether the
affiant had personal knowledge of the facts set out in the affidavit.
[See, e.g.,]{.underline} [Appeal of Indiana State Library]{.underline},
Docket No. 19(219)86 (1987). For example, the OALJ rejected affidavits
from a supervisor that did not have actual knowledge of how the relevant
employees spent their time. [See]{.underline} [Application of the New
York State Department of Education]{.underline}, Docket No. 90-70-R
(1994). The OALJ also rejected documentation that did not specifically
relate to the amount of time an employee spent on a particular cost
objective such as travel logs. [See, e.g.]{.underline}, [Application of
Escambia County Board of Education]{.underline}, Docket No. 89-9-R
(1989). The OALJ has, however, repeatedly accepted affidavits from
supervisors with first hand knowledge of an employee's activities,
especially when such affidavits are supported by job descriptions, work
evaluations and payroll records supporting the statements made in the
affidavit. [See]{.underline} [Application of New York State Education
Department]{.underline}, Docket No. 91-81-R (1995); [Application of the
New York State Department of Education]{.underline}, Docket No. 90-70-R
(1994); [Consolidated Appeals of the Florida Department of
Education]{.underline}, Docket Nos. 29-293-88 & 33-297-88 (1990).

DPS's after-the-fact, semi-annual certifications constitute an accurate,
credible representation of relevant single cost objective employees'
time for a number of reasons. First, because the sampled DPS employees
worked on a sole cost objective, Title I-A, for school year 2005-2006,
there is little risk of confusion regarding work activities. An
administrator or principal, without a significant amount of research,
could determine which employees worked on a single cost objective for
relevant time periods. Second, because each of the semi-annual
certifications was signed by an administrator or principal, DPS has
demonstrated that its staff is certain that each of the sampled
employees was a single cost objective employee. Because of the
credibility of these certifications, DPS has proven that its Title I-A
expenditures for these employees have been adequately documented.

***Personnel Activity Reports for Multiple Cost Objective Employees***

OIG found that DPS did not provide adequate personnel activity reports
for multiple cost objective employees whose compensation was charged in
part to Title I-A funds for school year 2005-2006. OIG identified
\$12,979,760 in salaries, benefits, and related indirect costs charged
for multiple cost objective employees without adequate documentation.
OIG sampled\
five multiple cost objective employees, \[five employee names deleted\],
in making its finding.[^40] DPS provided after-the-fact documentation of
each employee's activities, including daily lesson plans, counseling
logs, activity sheets, and weekly logs to demonstrate activities
performed by these employees. OIG stated that these lesson plans were
not after-the-fact reports of actual time spent on Title I-A activities.

While DPS did not provide personnel activity reports, it did provide
after-the-fact documentation of the actual activities performed by the
sampled DPS employees. As noted above, it is well-settled that
recipients may use after-the-fact documentation to reconstruct the time
and effort they spent on federal programs. Each sampled DPS employee has
provided documentation to demonstrate the activities performed by each
employee, as follows:

1)  \[employee name deleted\]

For school year 2005-2006, \[employee name deleted\] was a guidance
counselor at Mark Twain School & Academy ("Mark Twain") whose
compensation was paid fifty percent from Title I-A funds and fifty
percent from Michigan Section 31a funds. DPS has provided weekly logs of
her activities for the entire 2005-2006 school year, from September 5,
2005 to June 12, 2006.[^41] Because these activity logs were created
contemporaneously to the activities \[employee name deleted\] undertook,
with her first-hand knowledge, they should be considered an accurate,
credible representation of her time.

For school year 2005-2006, Mark Twain operated a schoolwide program.
Therefore, under ESEA Section 1114(a)(2), in serving students for that
school year, Mark Twain staff was not required to identify children as
Title I-A eligible or to ensure that the services provided to children
were supplementary. Instead, Mark Twain staff was allowed to serve all
students using Federal funds. In her capacity as a guidance counselor
paid with Title I-A funds, \[employee name deleted\] could serve all
students within the school. Therefore, in this case, there is no harm to
the federal interest because \[employee name deleted\]'s activities are
allocable to Title I-A purposes.

2)  \[employee name deleted\]

For school year 2005-2006, \[employee name deleted\] was the Project
Director for the Head Start program within DPS's central office whose
compensation was paid twenty percent from Title I-A funds and eighty
percent from Head Start funds. DPS has provided weekly logs of her
activities for the entire 2005-2006 school year, from July 4, 2005 to
June 30, 2006.[^42] Because these activity logs were created
contemporaneously to the activities \[employee name deleted\] undertook,
with her first-hand knowledge, they should be considered an accurate,
credible representation of her time. \[employee name deleted\] is paid
from both Title I-A and Head Start funds. The activity logs created by
\[employee name deleted\] denoted which activities were allocable to
Title I-A and Head Start purposes. While OIG stated that the
documentation submitted by DPS did not specify what proportion of each
employee's time was expended on Title I-A activities, \[employee name
deleted\]'s weekly logs demonstrate that she consistently worked on Head
Start and Title I-A activities every day. Therefore, her salary was
properly charged to those two programs. As a result, in this case, there
is no harm to the federal interest because \[employee name deleted\]'s
activities were allocable to Title I-A purposes.

3)  \[employee name deleted\]

For school year 2005-2006, \[employee name deleted\] was a mathematics
teacher at Robinson Middle School ("Robinson") whose compensation was
paid thirty percent from Title I-A funds and seventy percent from
Michigan Section 31a funds. DPS has provided a calculation of her time
distribution and samples of her lesson plans from different points
within the 2005-2006 school year.[^43] As the documentation states,
middle school teachers, such as \[employee name deleted\], follow the
same schedule every day, so these lesson plans are representative of her
activity on a day-to-day basis. Therefore, because \[employee name
deleted\] taught the same six block periods noted on the calculation of
her time distribution, her Title I-A and Michigan Section 31a activities
were static throughout the school year. \[Employee name deleted\]'s
lesson plans were created contemporaneously to her activities, with her
first-hand knowledge, such that they should be considered an accurate,
credible representation of her time.

For school year 2005-2006, Robinson operated a schoolwide program.
Therefore, under ESEA Section 1114(a)(2), in serving students for that
school year, Robinson staff was not required to identify children as
Title I-A eligible or to ensure that the services provided to children
were supplementary. Instead, staff was allowed to serve all students
using Federal funds. In her capacity as a mathematics teacher, paid with
Title I-A funds, \[employee name deleted\] could serve all students
within the school. Therefore, in this case, there is no harm to the
federal interest because \[employee name deleted\]'s activities are
allocable to Title I-A purposes.

4)  \[employee name deleted\]

For school year 2005-2006, \[employee name deleted\] was a school
service assistant at Clippert Academy Magnet School ("Clippert") whose
compensation was paid fifty percent from Title I-A funds and fifty
percent from Michigan Section 31a funds. DPS has provided daily logs of
her activities for the entire 2005-2006 school year, from September 12,
2005 to June 15, 2006.[^44] \[Employee name deleted\] provided daily
information regarding her activities and the students she served.
Because these activity logs were created contemporaneously to the
activities \[employee name deleted\] undertook, with her first-hand
knowledge, they should be considered an accurate, credible
representation of her time.

For school year 2005-2006, Clippert operated a schoolwide program.
Therefore, under ESEA Section 1114(a)(2), in serving students for that
school year, Clippert staff was not required to identify children as
Title I-A eligible or to ensure that the services provided to children
were supplementary. Instead, Clippert staff was allowed to serve all
students using Federal funds. In her capacity as a school service
assistant, paid with Title I-A funds, \[employee name deleted\] could
serve all students within the school. Therefore, in this case, there is
no harm to the federal interest because \[employee name deleted\]'s
activities are allocable to Title I-A purposes.

5)  \[employee name deleted\]

For school year 2005-2006, \[employee name deleted\] was a mathematics
instructional specialist at Louis Pasteur Elementary School ("Louis
Pasteur") whose compensation was paid fifty percent from Title I-A funds
and fifty percent from Michigan Section 31a funds. DPS has provided a
sample week, January 17-21, 2005, explaining \[employee name deleted\]'s
time distribution.[^45] \[Employee name deleted\] followed the same
schedule every day, so these time distribution records are
representative of his activity on a day-to-day basis for the entire
school year. \[Employee name deleted\]'s records were created
contemporaneously to his activities, with his first-hand knowledge, such
that they should be considered an accurate, credible representation of
his time spent.

For school year 2005-2006, Louis Pasteur operated a schoolwide program.
Therefore, under ESEA Section 1114(a)(2), in serving students for that
school year, Louis Pasteur staff was not required to identify children
as Title I-A eligible or to ensure that the services provided to
children were supplementary. Instead, staff was allowed to serve all
students using Federal funds. In his capacity as a mathematics
instructional specialist, paid with Title I-A funds,\
\[employee name deleted\] could serve all students within the school.
Therefore, in this case, there is no harm to the federal interest
because \[employee name deleted\]'s activities are allocable to Title
I-A purposes.

I.  **Finding No. 3 -- Title I, Part A Funds for Non-Personnel Costs**

***Payments for Reading and Mathematics Testing Software***

OIG found that DPS paid for reading and mathematics testing software for
non-Title I-A schools, Bates Academy and Renaissance High School, with
Title I-A funds in the amount of \$42,943 in school year 2005-2006. DPS
has provided the contract for testing software with Renaissance
Learning, Inc.[^46] The contract indicates that Bates Academy was not
one of the DPS schools that received services from Renaissance Learning.

DPS has also provided a letter from Renaissance Learning indicating that
Renaissance High School was originally on the contract, but that the
software licenses were removed and transferred to Chadsey High School,
effective December 1, 2005.[^47] DPS also provided an in-house
memorandum addressing this issue with the same explanation.

This documentation demonstrates that DPS did not expend funds for the
purchase of software for non-Title I-A schools. Therefore, DPS should
not be required to return \$42,943 for this expenditure.

***Harvard Graduate School of Education Professional Program Expenses***

OIG found that DPS had transactions unsupported by invoices or receipts,
including an expense for a professional education program at Harvard
Graduate School of Education. Specifically, OIG stated that it received
only a purchase order for this expense.[^48] DPS has provided a detailed
invoice of the expense.[^49] The invoice, for \$37,315, explains the per
participant charge, \$2,195, for seventeen total DPS participants. DPS
also provided a list of staff who attended the program, which occurred
June 25-30, 2006. These documents demonstrate that DPS has adequately
documented this expense in accordance with the cost principles in OMB
Circular A-87.

***Payment for Meals with Title I, Part A Funds Related to 3-Day
Workshop***

OIG found that DPS paid \$23,527 for meals at local hotels for Title I-A
school events but could not support the number of meals purchased. In
fact, DPS has documentation to support the number of meals purchased.
The Holiday Inn Fairlane-Dearborn quoted DPS a price for a three-day
workshop that took place March 9-11, 2006.[^50] Based on an estimate of
the number of Center for School Leaders staff members, DPS central level
staff members, and DPS school personnel attending the workshops, DPS
estimated that it would need 400 breakfast/lunch and dinner meals for
March 9th, 300 breakfast/lunch and dinner meals for March 10th, and 250
breakfast/lunch meals for March 11th. DPS has also provided agenda for
the workshop and contemporaneous sign-in sheets for staff who attended
the workshops. For instance, sign-in sheets demonstrate that 352 DPS
school personnel attended the workshops on March 9, 2006, in addition
to\
15 Center for School Leaders staff members and 24 DPS central-level
staff members. Therefore, this documentation proves that DPS can support
the number of meals purchased and the number of workshop attendees.

***Computers Leased with Title I, Part A Funds***

OIG found that DPS paid for computers for which it could it could not
provide evidence of existence or use by Title I-eligible students.
Specifically, OIG stated that DPS purchased\
1,534 computers and 554 laptops for \$979,898, including installation
and insurance, and that for five of the schools receiving computers, the
number of computers listed on the vendors' shipping report was greater
than the number of computers shipped to those schools.

While OIG states that DPS *purchased* computers, in fact, DPS
respectfully submits that it entered into a lease agreement with Dell,
Inc. for 2005-2008, to lease computers. DPS did not buy computers from
Dell; it issued a purchase order to buy computers, which was cancelled.
DPS has provided a number of documents as evidence. In an in-house
memorandum, dated December 21, 2005, \[employee name deleted\], DPS's
Chief Academic Officer, Division of Leadership and Educational
Accountability, explained the timeline for how DPS entered into a
leasing agreement with Dell[^51]:

> Our office \[DPS\] was given additional funding to purchase more
> technology for the 2005-2006 school year. We decided to use the funds
> to purchase 533 desktops,\
> 100 printers and 250 noteboooks. Soon after we issued the purchase
> order, we learned that the Michigan Department of Education would be
> assessing all eighth graders on the newly released Technology
> Standards and Expectations during this school year... After
> investigating how our office could provide more technology to these
> schools and further our District's curriculum initiatives, Dell
> offered a leasing agreement which would allow us to proactively
> provide additional equipment and immediate professional development.
>
> \[DPS entered into a\] lease agreement which will provide an
> additional 1000 desktops, 300 notebooks, 200 printers and \$300,000 to
> assist our Division with technology-related issues that are current
> obstacles (building wiring, professional development, additional
> equipment, software or however our Division deems necessary). Dell
> will also insure our equipment during this three-year period. After
> the three years, each school will be allowed to purchase each piece of
> equipment for \$1.00.

DPS provided memoranda explaining that purchase order no. 625495, the
original purchase order for 533 desktop computers, was cancelled. DPS
also provided internal documentation demonstrating that the purchase
order, issued 10/31/2005, was cancelled on 1/6/2006.[^52] The lease
agreement with Dell, which has also been provided, shows that DPS paid
\$989,099.23.

Because OIG mischaracterized DPS's arrangement with Dell as a purchase
rather than a lease, it is unclear to which computers it is referring.
For schools receiving leased computers, each has a "Receipt of Equipment
Form," with model and serial numbers for all computers received.[^53]
These are evidence that DPS has documentation that the leased computers
were received by DPS schools, which were all Title I-eligible
schools.[^54] Therefore, because DPS has demonstrated that it entered
into a lease with Dell and that its schools received the leased
computers, it expended its Title I-A funds properly.

***Title I, Part A Funds Expended for Consulting Services***

OIG found that DPS misspent Title I-A funds on consulting services to
National Training Network for its Algebraic Thinking Project in the
amount of \$1,232,620 for school year\
2005-2006. Specifically, OIG stated that DPS prepaid invoices, failed to
provide after-the-fact support demonstrating a benefit to the Title I-A
program, and failed to provide specific dates or locations where the
services were provided.

DPS has provided a number of documents in response. In an email,
\[employee name deleted\] of DPS confirms that National Network
conducted training sessions on June 27-July 1, 2005,\
August 1-5, 2005 and August 8-12, 2005.[^55] DPS has also provided the
Algebraic Thinking Report for Fourth Quarter, 2005-2006, which details
the activities National Training Network engaged in.[^56] According to
the report, in addition to the on-site visits noted above,

> Monthly classroom visits started on October 17, 2005 and continued
> throughout the school year. A minimum of 14 visits were made to each
> school this year. The majority of coaching time spent in schools
> consisted of modeling lessons and lesson preparation.

The Algebraic Thinking Report also provides descriptions of services
provided at 99 DPS elementary and middle schools. For each school, the
report describes implementation of the program and the teachers National
Training Network served. This document clearly demonstrates the benefit
DPS's Title I-A program received from National Training Network's
services.

DPS has also provided National Training Network's proposal for the
Algebraic Thinking Project and the contract between DPS and National
Training Network.[^57] The Algebraic Thinking Project proposal details
the scope and implementation of the project, as well as its alignment
with successful program standards and the program's benefits for
students and teachers. The contract contains a payment schedule that
specifies that DPS was to pay National Training Network an initial
payment for training, material, expenses and books, followed by payments
for follow-up training, supervision, and observation every two months
until the end of the contract. There is no provision in the contract
stating that DPS was to prepay National Training Network for its
services. There is no evidence that it prepaid invoices. In fact,
because DPS has adequately documented its expenditures for these
services, they are allowable under the cost principles in OMB Circular
A-87.

***Title I, Part A Funds Expended for Math and Reading Testing***

OIG found that DPS misspent Title I-A funds on math and reading testing
in the amount of \$1,885,374 for school year 2005-2006. Specifically,
OIG stated that DPS "did not provide the contract or other evidence to
explain what schools should have been covered by the invoices and what
the per-student cost should have been."[^58] OIG notes that per-student
cost ranges from \$2.32 to \$12.43. This finding relates to goods and
services provided by Measured Progress Inc. to DPS.[^59] Measured
Progress has provided its testing services and products to DPS since
2002. Therefore, DPS has provided the all of the contracts and contract
modifications from\
2002-2007.[^60]

OIG questioned the per-student costs paid by DPS to Measured Progress
for its services. In fact, as the contracts demonstrate, Measured
Progress provides a number of different goods and services to DPS at
different per-student and per-unit prices. Depending on the year, the
contracts specify between thirty-five and thirty-nine goods and services
provided by Measured Progress. For instance, as noted in the 2005-2006
contract, the per-unit price for a "Consumable Test Booklet, Grades 1&2"
was \$1.28, while a "Consumable Large Print Tests, Grades 1&2" costs
\$2.40. Because of the different products provided by Measured Progress,
there is not a finite per-student cost for every student or per-unit
cost for every item purchased. This documentation proves that DPS can
support the good and services it paid to Measured Progress. Therefore,
because DPS has adequately documented its expenditures for these
services, they are allowable under the cost principles in OMB Circular
A-87.

II. **Finding No. 5 -- MDE Monitoring and Oversight of DPS**

OIG found that MDE did not adequately monitor DPS's administration of
its Title I-A program, including the resolution of a DPS internal
investigative report that identified unallowable contracts. OIG
recommended that MDE develop procedures to track local educational
agency (LEA) reviews that identify unallowable Title I-A expenditures
and internal control deficiencies and that MDE provide greater oversight
of federal grant funds that are distributed to DPS. MDE respectfully
submits that it does have effective existing procedures to identify
unallowable Title I-A expenditures by LEAs. MDE received a copy of the
above mentioned DPS internal investigate report on September 10, 2007.
Based on that report and its own evaluation, MDE is also in the process
of strengthening its monitoring and oversight of LEAs.

Currently, the MDE School Auditing Manual contains procedures for
reporting unallowable expenses.[^61] The manual, under General Audit
Issues, Section A, Reports, II. B. 3. *Reports on Findings of Suspected
Fraud and or Embezzlement*, requires the following:

> During the course of an engagement, the independent CPA should be
> constantly aware of the possibility of fraud and or embezzlement. SAS
> 54, 82, and 99 should be followed where applicable. If the possibility
> of any fiscal fraud, defalcation, misfeasance, nonfeasance, or
> malfeasance comes to the auditor's attention, the school should make
> an "oral report" immediately to \[employee name and phone number
> deleted\] Director of the Michigan Department of Education, Office of
> Audits. This oral report should be promptly followed up by a written
> report to the Director disclosing the CPA's findings. If the school
> fails to report, then the CPA is required to report the information to
> the Department...

MDE is also implementing the following measures to strengthen its
monitoring and oversight of LEAs:

1\) The MDE School Auditing Manual, General Audit Issues, Section A,
Reports, II. B. 3. *Reports on Findings of Suspected Fraud and or
Embezzlement,* will be revised as follows (the edits are italicized):

> During the course of an engagement, the independent CPA should be
> constantly aware of the possibility of fraud and or embezzlement. SAS
> 54, 82, and 99 should be followed where applicable. If the possibility
> of any fiscal fraud, defalcation, misfeasance, nonfeasance, or
> malfeasance comes to the auditor's attention, the school should make
> an "oral report" immediately to \[employee name and phone number
> deleted\] Director of the Michigan Department of Education, Office of
> Audits. *This oral report should be followed up by a written report to
> the Director with a copy to the CPA disclosing the CPA's findings
> within two weeks. If the CPA does not receive a copy of the report to
> the Director within two weeks, then the CPA is required to report the
> information to the Department*...

2\) MDE will also take the following actions:

-   MDE will establish a tracking process to identify alleged fiscal
    irregularities in a district and follow up on them until MDE is
    satisfied that they have been appropriately dismissed or resolved.

-   MDE will notify any district of suspected fiscal irregularities that
    come to the attention of MDE independently, giving the district two
    weeks to conduct an initial investigation and report results of the
    initial investigation. The district will conduct a complete
    investigation and report it to MDE promptly.

-   MDE may impose financial penalties consistent with Section 162 of
    the State School Aid Act or 34 CFR Part 80.45 and escalate penalties
    until MDE receives a copy of the internal investigation report.

-   MDE will include an article on the proper reporting of suspected
    fraud, embezzlement or other fiscal irregularities in its 2007-2008
    accounting and auditing alert.

-   MDE will provide training to the Michigan Association of CPAs, the
    Michigan School Business Officials and other appropriate
    organizations on this section of the Michigan school auditing
    manual.

-   MDE will amend federal fund application assurances to require
    reporting of suspected fiscal irregularities.

-   MDE will include in on-site monitoring visits, a question to
    identify any internal investigations that may reveal fiscal
    irregularities in accordance with the Michigan school auditing
    manual.

    I.  **Conclusion**

In closing, MDE and DPS respectfully disagree in whole with the Draft
Audit Report findings and request that the findings be reconsidered,
revised, and that the recommendations for repayment be withdrawn before
the issuance of a final audit report. The serious flaws in audit
methodology led to obvious errors in the Draft Audit Report and bring
question to the management of the audit as a whole, such that the
findings and recommendations should be reviewed and withdrawn.

+--------------+---+------------------------------+---+----------------+
| ![           |   |                              |   | ![](medi       |
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| e4.png){widt |   |                              |   | width="1.29027 |
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| 777777778in" |   |                              |   | he             |
| height       |   |                              |   | ight="0.593055 |
| ="0.75902777 |   |                              |   | 5555555556in"} |
| 77777777in"} |   |                              |   |                |
|              |   |                              |   | Michael p.     |
| Jennifer M.  |   |                              |   | flanagan       |
| Granholm     |   |                              |   |                |
|              |   |                              |   | [              |
| [Governor]   |   |                              |   | Superintendent |
| {.smallcaps} |   |                              |   | o              |
|              |   |                              |   | f]{.smallcaps} |
|              |   |                              |   |                |
|              |   |                              |   | [Public        |
|              |   |                              |   | Instructio     |
|              |   |                              |   | n]{.smallcaps} |
+--------------+---+------------------------------+---+----------------+

March 28, 2008

Mr. Gary Whitman

Regional Inspector General for Audit

U.S. Department of Education

Office of Inspector General

500 West Madison Street

Suite 1414

Chicago, IL 60661

RE: The School District of the City of Detroit's Use of Title I, Part A
Funds Under the No Child Left Behind Act of 2001; Office of Inspector
General Draft Audit Report (Control Number ED-OIG/A05H0010)

Dear Mr. Whitman:

Thank you for the opportunity to submit supplemental documents and
comments on the above referenced Office of Inspector Draft Audit Report.
Because that report dealt extensively with Detroit Public Schools' (DPS)
use of funds under Title I,

Part A of the No Child Left Behind Act, we worked closely with DPS staff
in responding to your proposed findings. I am enclosing a detailed
supplemental response, which was developed collaboratively by Michigan
Department of Education (MDE) and DPS. I am also enclosing a number of
exhibits referenced in our response.

We are grateful for your cooperative approach in granting us an
extension for further submission of documents. Based upon our initial
response to the

Draft Audit Report and this supplemental response, we strongly request
your reconsideration of the audit findings and recommendations.

Thank you for your consideration in this matter.

Sincerely,

/s/

Michael P. Flanagan

Superintendent of Public Instruction

**Michigan Department of Education**

**Supplemental Response to Draft Audit Report: ED-OIG/A05H0010**

Submitted to:

Mr. Gary Whitman

Regional Inspector General for Audit

U.S. Department of Education

Office of Inspector General

500 West Madison Street

Suite 1414

Chicago, IL 60661

This is the supplemental response of the Michigan Department of
Education ("MDE") to the U.S. Department of Education's Office of
Inspector General ("OIG") Draft Audit Report ED-OIG/A05H0010 ("Draft
Audit Report"), issued January 9, 2008, entitled *The School District of
the City of Detroit's Use of Title I, Part A Funds Under the No Child
Behind Act of 2001*. OIG reviewed Title I, Part A ("Title I-A") programs
operated by the Detroit Public Schools ("DPS") for fiscal years
2004-2005 and 2005-2006. Originally, OIG allowed MDE until March 14,
2008 to respond to the Draft Audit Report. MDE submitted a response on
March 14, 2008, in which it requested additional time from OIG to
provide more comments and documentation. OIG has allowed MDE until March
28, 2008 to provide additional documentation in its response. MDE's
supplemental response below, based on the Draft Audit Report findings,
addresses the overarching flaws in audit methodology, the inaccuracy of
each of the rationales supplied for the finding, and provides additional
supporting documentation for DPS's expenditures.

**I. Finding No. 1 -- Personnel Costs Charged to Title I, Part A**

***Head Start Program Compensation***

OIG found that DPS charged salaries, benefits, and related indirect
costs to its Title I-A program for Head Start program teachers and
assistants through ten adjusting journal entries in the amount of
\$5,180,663 for school year 2005-2006. OIG stated that DPS did not
identify the employees whose compensation was transferred to Title I-A
and did not provide personnel activity reports for these employees to
certify that they worked on Title I-A program activities. DPS responded
and provided documents in its March 14, 2008 response to the Draft
Audit.

DPS has provided supplementary documents that further address the time
and effort of the employees paid with Title I-A funds.[^62] These
documents include two signed, semi-annual payroll certifications, one
for July 1, 2005-December 31, 2005 and the other for January 1,
2006-June 30, 2006. The certifications demonstrate that the relevant
employees worked 100% of their time on Title I-A program activities for
the entire fiscal year 2005-2006. The documents also fulfill DPS's
requirement to provide signed, semi-annual certifications for single
cost objective employees under OMB Circular A-87, Attachment B,
Paragraph 8.h.(3). Because DPS has adequately documented its salary
expenditures, they are allowable under the cost principles in OMB
Circular A-87.

***Disciplinary Administrative Leave Compensation***

OIG found that DPS charged salary, benefits, and related indirect costs
of an employee to its Title I-A program in the amount of \$73,292. That
employee was placed on administrative leave while receiving that amount.
OIG stated that this expenditure violated OMB Circular A-87, Attachment
B, Paragraph 8.a.(1), which requires that compensation conform to the
established policy of the governmental unit.

In a sworn affidavit, \[employee name deleted\], DPS's Executive
Director of Employee Relations, stated that DPS pays employees based
upon their individual employment agreements and classification,
applicable Michigan state law, as well as practices and customs.[^63]
DPS accords procedural protections to all employees on a district-wide
basis under the Teacher Tenure Act, Public Act No. 4, Public Acts of
Michigan, 1937, as amended. The Teacher Tenure Act requires that a
teacher's salary must continue during suspension, except in cases in
which the employee is suspended or terminated for certain listed
offenses or unless the teacher's classification does not require paid
leave. According to \[employee name deleted\], DPS consistently applied
the applicable laws, rules, regulations district-wide practices and
procedures during the 2005-2006 school year for all employees subject to
disciplinary action, also taking into account the employee's individual
employment agreement and classification. Accordingly, DPS paid the
employee at issue during the time period he was placed on administrative
leave.

Under OMB Circular A-87, Paragraph 8.a.(2), compensation for individual
employees must be made in accordance with a governmental unit\'s laws
and rules and meet its merit system or other requirements required by
Federal law, where applicable. In this instance, DPS's practice followed
Michigan's state law, as well as the rules established under employees'
employment agreements and classification. Therefore, DPS's expenditure
was consistent with the applicable cost principles in OMB Circular A-87
and was allowable.

**II. Finding No. 3 -- Title I, Part A Funds for Non-Personnel Costs**

***Capital Expenditures***

OIG found that DPS misspent Title I-A funds on capital expenditures for
general purpose equipment and improvements to buildings, including
payments for digital copiers in the amount of \$57,492 and classroom
repairs and renovations in the amount of \$80,288 for school year
2005-2006 without MDE's approval. OIG stated that DPS violated OMB
Circular A-87, Attachment B, Paragraph 15.b, which provides that capital
expenditures for general purpose equipment and improvements to buildings
which increase their value or useful life are unallowable as direct
charges, except where approved in advance by the awarding agency (in
this case, MDE).

DPS acknowledges that it did not seek approval from the proper MDE
personnel before making these capital expenditures with Title I-A funds.
However, after the fact, DPS provided records of its capital
expenditures (\$129,300.00) to MDE's Field Services Consultant in the
Office of School Improvement, \[employee name deleted\]. \[Employee name
deleted\] is responsible for reviewing and approving Consolidated
Applications which include these types of capital expenditures. After
reviewing DPS's documentation regarding these expenditures, \[employee
name deleted\], in a sworn affidavit, stated that the expenditures, with
the exception of \$39,154.00, would have been allowable by MDE.[^64]
Therefore, Title I-A funds expended by DPS in the amount of \$90,146.00
were allowable. Please note that DPS will need additional time to
provide detailed documentation of the expenditure of \$39,154.00 to
renovate a laboratory, in order to allow MDE's field service
representative to determine if the expenditures would have been approved
as allowable.

In order to recover funds, there must be an analysis reflecting the
value of the program services actually obtained in a determination of
harm to the Federal interest. 20 U.S.C. 1234a(a)(2). The U.S. Department
of Education ("USDE") may require recipients to return only an amount
that is proportional to the extent of the harm its violation caused to
an identifiable Federal interest associated with the program. 34 C.F.R.
§ 81.32(a)(1). MDE and DPS acknowledge that the required pre-approval
process for these capital expenditures was not followed. However, DPS
did expend \$90,146.00 on allowable Title I-A costs; therefore, there is
no harm to the federal interest for that amount expended and MDE should
not be required to repay that amount.

***Title I, Part A Funds Expended for Consulting Services***

OIG found that DPS misspent Title I-A funds on consulting services to
National Training Network (NTN) for its Algebraic Thinking Project in
the amount of \$1,232,620 for school year 2005-2006. Specifically, OIG
stated that DPS prepaid invoices, failed to provide after-the-fact
support demonstrating a benefit to the Title I-A program, and failed to
provide specific dates or locations where the services were provided.
DPS provided documents in its March 14, 2008 response to the Draft Audit
Report.

DPS has provided a number of supplementary documents that further
demonstrate that NTN provided services to DPS that benefited the Title
I-A program.[^65] These documents include an example of the schedule for
a professional development Algebraic Thinking Project session, a chart
of the distribution of assessment used for each "Skill Builder
Assessment," and student textbook distribution for school year
2005-2006. In addition, DPS provided a number of sign-in sheets for
training sessions conducted by NTN for 6th and 8th grade teachers
(including some special education training) for the following dates:
August 1-5, 2005, August 8-12, 2005, July 24-28, 2006, and July
31-August 4, 2006.

Because this documentation describes the services provided, the goods
that were delivered, and confirms the dates that training sessions
occurred, it demonstrates that DPS's Title I-A program received a
benefit from NTN's Algebraic Thinking Project. The documents also
fulfill DPS's requirement to document expenditures adequately.
Therefore, because DPS has adequately documented its expenditures for
these services, they are allowable under the cost principles in OMB
Circular A-87.

**III. Finding No. 4 -- Title I, Part A Funds for Contract
Expenditures**

***Title I, Part A Funds Expended for Martial Arts/Conflict Resolution
Classes***

OIG found that DPS paid Title I-A funds to Alkebu-Lan Village (ALV) for
martial arts and conflict resolution training without providing a list
of students who participated in the amount of \$155,000.[^66] DPS has
provided a number of documents regarding these services. The documents
include two cancelled checks, totaling \$150,000, a program description,
a list of all of the schools that received services, and sign-in sheets
for all students who participated in the program from 2004-2006.[^67]
This documentation demonstrates that DPS's expenditure for martial arts
services benefited its Title I-A program. Therefore, because DPS has
adequately documented its expenditures for these services, they are
allowable under the cost principles in OMB Circular A-87.

***Title I, Part A Funds Expended for Accounting and Financial
Services***

OIG found that DPS expended Title I-A funds for accounting and financial
services with vague invoices. Specifically, OIG cited DPS for invoices
paid for services rendered by EVO Accounting and Financial Services
(EVO) for school year 2004-2005 in the following amounts: \$45,833.33,
\$6,712.50, \$22,912.50, \$45,833.33, and \$5,400.00.[^68]

DPS has provided documentation to demonstrate that its Title I-A program
received a benefit from EVO.[^69] OIG found that all of the invoices
paid by DPS were vague. DPS has provided the invoices with weekly client
status reports and timesheets. The weekly client reports detail the
following:

-   Accomplishments for the time period;

-   New project developments;

-   EVO observations and recommendations;

-   Planned tasks for the subsequent week; and

-   Weekly schedule.

The weekly time sheets, by employee, detail the number of hours each EVO
employee worked for the relevant time period. This documentation
demonstrates that the work performed by EVO is documented and benefits
DPS's Title I-A program.

In addition to OIG's finding that each invoice was vague, OIG provided a
specific explanation for the reason it disallowed DPS's expenditure. DPS
responds to each finding as follows:

-   OIG disallowed DPS's payment of an invoice for \$45,833.33, dated
    January 4, 2005, stating that it was dated before the services were
    provided. In fact, the invoice specified that the services were to
    be provided in January 2005, such that DPS did not prepay the
    invoice. DPS paid the invoice on January 13, 2005 (as demonstrated
    by the "Distributed" stamp on the invoice).

-   OIG disallowed DPS's payment of an invoice for \$6,712.50, dated
    January 3, 2005. DPS paid the invoice on January 13, 2005 (as
    demonstrated by the "Distributed" stamp on the invoice). The weekly
    status report and time sheets for the week ending December 31, 2004
    demonstrate that EVO was not previously paid for services rendered
    by employees \[two employee names deleted\] for the weeks ending
    December 17 and 24, 2004. The weekly status report and time sheet
    indicate that EVO was not paid for 83.5 billable hours. Therefore,
    DPS paid this amount to compensate EVO for those billable hours

-   OIG disallowed DPS's payment of an invoice for \$22,912.50, dated
    February 7, 2005. DPS paid the invoice on February 10, 2005 (as
    demonstrated by the "Distributed" stamp on the invoice). The weekly
    status report and time sheets for the weeks ending January 7,
    January 14, January 21, January 28, and February 4, 2005 demonstrate
    that EVO employees \[two employee names deleted\] provided their
    consulting services to DPS for that time period. OIG stated that
    "this expenditure is not reasonable because the duties are
    duplicative of the duties of the Director." DPS respectfully
    disagrees. DPS's programmatic staff determined that it was necessary
    and reasonable for EVO to provide consulting services on
    strengthening audit strategies, internal controls, policies and
    procedures. It is within DPS's local prerogative to determine the
    most economic and efficient manner in carrying out its Title I-A
    program, including hiring contractors. It is improper for USDE to
    infringe on DPS's local decision-making.

-   OIG disallowed DPS's payment of an invoice for \$45,833.33, dated
    February 8, 2005, stating that it was dated before the services were
    provided. In fact, the invoice specified that the services were to
    be provided in February 2005, such that DPS did not prepay the
    invoice. DPS paid the invoice on February 10, 2005 (as demonstrated
    by the "Distributed" stamp on the invoice).

-   OIG disallowed DPS's payment of an invoice for \$5,400.00, dated
    February 23, 2005. DPS paid the invoice on March 2, 2005 (as
    demonstrated by the "Distributed" stamp on the invoice). The weekly
    status report and time sheets for the weeks ending February 11 and
    February 18, 2005 demonstrate that EVO employees \[two employee
    names deleted\] provided their consulting services to DPS for that
    time period. OIG again stated that "this expenditure is not
    reasonable because the duties are duplicative of the duties of the
    Director." DPS again respectfully disagrees. DPS's programmatic
    staff determined that it was necessary and reasonable for EVO to
    provide consulting services on strengthening audit strategies,
    internal controls, policies and procedures. It is within DPS's local
    prerogative to determine the most economic and efficient manner in
    carrying out its Title I-A program, including hiring contractors. It
    is improper for USDE to infringe on DPS's local decision-making.

**IV. Conclusion**

In closing, MDE and DPS respectfully disagree in whole with the Draft
Audit Report findings and request that the findings be reconsidered,
revised, and that the recommendations for repayment be withdrawn before
the issuance of a final audit report. The serious flaws in audit
methodology led to obvious errors in the Draft Audit Report and bring
question to the management of the audit as a whole, such that the
findings and recommendations should be reviewed and withdrawn.

[^1]: The Michigan Section 31a program, which provides state funds based
    on the number of students in districts who meet income eligibility
    criteria, has some objectives similar to the Title I, Part A
    program. Michigan Section 31a program funds may be used for
    activities including instructional programs, direct
    non-instructional services such as medical or counseling services,
    breakfast programs, hearing and vision screenings, reduction of
    class size, adult education, and early intervention programs.

[^2]: Detroit charged \$2,028,620 in salaries, benefits, and related
    indirect costs for all Title I Office employees during the 2005-2006
    school year. We conservatively estimated, based on interviews with
    Title I Office employees, that at least 10 percent of their time was
    spent on non-Title I, Part A activities. We applied the 10 percent
    estimate to the total salaries, benefits, and related indirect costs
    of all Title I Office employees, because Detroit charged all
    compensation for the 68 sampled transactions to the Title I, Part A
    program.

[^3]: Single cost activity employees are employees who were paid for
    their regular job duties during a time and effort certification
    period only with Title I, Part A grant funds.

[^4]: Multiple cost activity employees are employees who (1) were paid
    with both Title I, Part A funds and non-Title I, Part A funds for
    their regular job duties during a certification period, or (2) were
    not paid with Title I, Part A funds for their regular job duties but
    were paid with Title I, Part A funds for their overtime,
    supplemental, or workshop duties during a certification period.

[^5]: From a universe of 13,948 transactions for single cost activity
    employees totaling \$30,209,812 in salaries and related fringe
    benefits, we sampled 400 transactions totaling \$863,512 in salaries
    and related fringe benefits. Of the 400 sampled transactions, 102
    transactions totaling \$245,464 in salaries and related fringe
    benefits were inadequately documented. We are 90 percent confident
    that the projected inadequately documented salaries and benefits is
    \$8,587,514, plus or minus \$1,327,004 (15.45 percent). We added
    related indirect costs totaling \$532,426 to this projection using a
    6.2 percent indirect cost rate to compute a total of \$9,119,940 of
    projected inadequately documented salaries, benefits, and indirect
    costs.

[^6]: These time and effort certifications were prepared by Detroit
    after we requested them. They were prepared more than one year after
    the end of the certification period. Time and effort certifications
    prepared more than a year after the work was performed are not
    credible.

[^7]: This \$23,317,574 includes \$21,824,996 in charges for salaries
    and benefits, \$1,492,577 in related indirect costs, and a \$1
    immaterial rounding difference.

[^8]: From a universe of 13,948 salary transactions for single cost
    activity employees, of which 12,839 had employee insurance benefit
    costs totaling \$3,849,430, we sampled 30 transactions totaling
    \$9,299 in employee insurance benefit costs. Of the 30 sampled
    transactions, 29 transactions had overcharges totaling \$2,601.

[^9]: OMB Circular A-87, *Attachment B, Paragraph 8.h (5)(e*) quoted
    above*.*

[^10]: See Enclosure 2, Table A for details about total costs (1)
    Detroit charged to the Title I, Part A program, (2) we reviewed, (3)
    we recommend for acceptance, (4) we determined to be unallowable,
    and (5) we determined to be inadequately documented. Unallowable and
    inadequately documented costs in this finding and Enclosure 2, Table
    B, include related indirect costs.

[^11]: All expenditures included in this finding relate to expenditures
    with vendors in the internal investigative report described in
    FINDING NO. 5.

[^12]: See Enclosure 1, Table A for details about total costs (1)
    Detroit paid to selected Title I, Part A program vendors, (2) we
    reviewed, (3) we recommend for acceptance, (4) we determined to be
    unallowable, and (5) we determined to be inadequately documented.
    Enclosure 1, Table B includes indirect costs.

[^13]: *Federal Awards Supplemental Information, June 30, 2005,* is
    Detroit's single audit for the year ended June 30, 2005.

[^14]: We reviewed these ledgers for both regular and carryover grant
    funding sources. Regular grant sources are the original Title I,
    Part A grants covering a 15-month period. Carryover grant sources
    are grant funds that were not expended in their original fiscal
    year, but were approved by MDE to be spent in the following fiscal
    year.

[^15]: A personnel transaction is a charge for salary or fringe benefits
    for an employee for one pay period for a specific object code in the
    payroll sub-ledger.

[^16]: We selected our sample transactions from the universe of salary
    transactions only. We then included, in our review, all fringe
    benefits transactions related to the selected salary transactions.
    Therefore, the dollar amount of each sampled salary transaction
    includes the amount for the salaries and the related fringe benefits
    amounts.

[^17]: This report identified unallowable contracts but did not identify
    the total expenditures charged to the Title I, Part A grant for each
    vendor. To achieve Objective 2, we identified and tested
    expenditures for each vendor.

[^18]: Some totals in this table do not add to the exact dollar because
    of rounding differences. All amounts are rounded to the nearest
    dollar.

[^19]: Some totals in this table do not add to the exact dollar because
    of rounding differences. All amounts are rounded to the nearest
    dollar.

[^20]: The costs for personnel transactions in this table include
    amounts applied or projected to the universe of personnel costs
    based on sample testing.

[^21]: Some totals in this table do not add to the exact dollar because
    of rounding differences. All amounts are rounded to the nearest
    dollar.

[^22]: We are 90 percent confident that the projected duplicated
    inadequately documented employee insurance benefits are \$1,014,467,
    plus or minus \$181,372 (17.88 percent). Including indirect costs of
    \$62,897, the duplicated amount is a projected \$1,077,363.

[^23]: Cost Duplication = \$442,396 with Finding 1A only, \$195,671 with
    Finding 1B only, \$65,962 with Finding 1D only, and \$7,329 with
    both Findings 1B and 1D.

[^24]: See Exhibit 1.

[^25]: See *Id*.

[^26]: See Exhibit 2, email correspondence between \[employee name
    deleted\], a Ceridian employee, and \[employee name deleted\],
    Executive Director of the Chief Financial Officer, Detroit Public
    Schools.

[^27]: Office of Inspector General Final Audit Report, dated December 6,
    2006, entitled *KIPP Foundation's Administration of the Fund for the
    Improvement of Education Grants* (Control Number ED-OIG/A09G0010).

[^28]: See *Id*.

[^29]: Office of Inspector General Final Audit Report, dated April 10,
    2007, entitled *Hempstead Union Free School District's (Hempstead)
    Elementary and Secondary Education Act of 1965, as amended
    (ESEA),^?^ Title I, Part A (Title I) Non-Salary Expenditures*
    (Control Number ED-OIG/A02G0007).

[^30]: See Exhibit 2.

[^31]: See *Id*.

[^32]: On the Ceridian sample spreadsheet, for each of the five
    employees listed, there are two columns each for the following
    categories: medical, dental and vision benefits. The first column
    for each category represents the estimated cost, while the second
    column represents the actual cost. There are discrepancies for some
    employees between Ceridian's estimated cost and the actual costs
    expended.

[^33]: See Exception Report #5.

[^34]: See Exhibit 3. On the document entitled "Detroit Public Schools
    Payroll Distribution Data by Employee," expenditures under Project
    ID 0000000000 are funds drawn from DPS's General Fund, while
    expenditures under Project ID 0000020005 are funds drawn from DPS's
    Title I-A fund.

[^35]: See Exception Report #11.

[^36]: See Exhibit 4.

[^37]: See Exhibit 5.

[^38]: See Attachment to Exception Report #7.

[^39]: See Exhibit 6. DPS has provided semi-annual certifications for
    July 1, 2005 to November 30, 2005 for the following employees: \[11
    employee names deleted\]. DPS has provided semi-annual
    certifications for December 31, 2005 to May 30, 2006 for the
    following employees: \[26 employee names deleted\].

[^40]: See Exception Report #6.

[^41]: See Exhibit 7.

[^42]: See Exhibit 8.

[^43]: See Exhibit 9.

[^44]: See *Id*.

[^45]: See Exhibit 10.

[^46]: See Exhibit 11.

[^47]: See *Id*.

[^48]: See Attachment to Exception Report #8.

[^49]: See Exhibit 12.

[^50]: See Exhibit 13.

[^51]: See Exhibit 14.

[^52]: See *Id*.

[^53]: See Exhibit 15. Because of the large number of leased computers,
    DPS has provided Receipt of Equipment Form from a few of its schools
    as examples of its process for inventorying its computers.

[^54]: See Exhibit 4.

[^55]: See Exhibit 16.

[^56]: See *Id*.

[^57]: See *Id.*

[^58]: See Draft Audit Report, p. 24.

[^59]: See Attachment to Exception Report #8.

[^60]: See Exhibit 17.

[^61]: The MDE School Auditing Manual is available at:
    [www.Michigan.gov/mdeaudit](http://www.Michigan.gov/mdeaudit).

[^62]: See Exhibit 1.

[^63]: See Exhibit 2.

[^64]: See Exhibit 3.

[^65]: See Exhibit 4.

[^66]: See Attachment to Exception Report #9.

[^67]: See Exhibits 5, 6.

[^68]: See Attachment to Exception Report #9.

[^69]: See Exhibit 7.