> Oregon Student Assistance Commission's

Administration of the Federal Family Education Loan Program Federal and
Operating Funds

# 

# FINAL AUDIT REPORT

![](media/image1.png){width="3.859722222222222in"
height="2.911111111111111in"}

**ED-OIG/A09-B0016**

**MAY 2002**

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Our mission is to promote the efficiency, U.S. Department of Education

effectiveness, and integrity of the Office of Inspector General

Department's programs and operations Sacramento, California

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. Determination of corrective action to
be taken will be made by the appropriate Department of Education
officials.

In accordance with the Freedom of Information Act (5 U.S.C. § 552),
reports issued by the Office of Inspector General are made available, if
requested, to members of the press and general public to the extent
information contained therein is not subject to exemptions under the
Act.

## 

## **TABLE OF CONTENTS**

**[Page]{.underline}**

**EXECUTIVE SUMMARY 1**

######### AUDIT RESULTS 2

##### 

##### **FINDING NO. 1 -- OSAC Improperly Excluded \$1.6 Million When It Established the Federal Fund 2**

######## **Recommendations 4**

######## **OSAC Comments 5**

######## **OIG Response 5**

######## **FINDING NO. 2 -- OSAC Improperly Deposited \$160,000 of Supplemental Preclaims Assistance in the Operating Fund 7**

######## **Recommendations 8**

######## **OSAC Comments 8**

#### 

######## **FINDING NO. 3 -- OSAC Did Not Comply with Federal Regulations and**

######## **OMB Circular A-87 for Costs Charged to the** 

######## **Operating Fund 8**

######## 

######## **Recommendations 12**

######## **OSAC Comments 13**

######## **OIG Response 13**

#### 

######### OTHER MATTERS 14

**BACKGROUND 15**

**AUDIT OBJECTIVE, SCOPE, AND METHODOLOGY 15**

# STATEMENT ON MANAGEMENT CONTROLS 17

# ATTACHMENT - OSAC Comments on the Draft Report 18

**EXECUTIVE SUMMARY**

The Oregon Student Assistance Commission (OSAC) did not fully comply
with the Higher Education Act of 1965 (HEA), as amended, and applicable
Federal regulations in its establishment and in the use of Federal and
Operating Funds for the Federal Family Education Loan (FFEL) program. We
found that---

-   OSAC improperly excluded about \$1.6 million from the fund balance
    when it established the Federal Fund. OSAC claimed that the amount
    was owed to the Commission for the remaining principal balance and
    accrued interest on State funds, held in the reserve fund, for the
    period October 1967 through November 1998.

-   OSAC improperly deposited about \$160,000 of supplemental preclaims
    assistance payments received after October 1, 1998, in the Operating
    Fund instead of the Federal Fund.

-   OSAC did not comply with Federal regulations and Office of
    Management and Budget (OMB) Circular A-87 for costs charged to the
    Operating Fund as required by

34 C.F.R. § 682.423(a). Specifically, OSAC did not (1) follow the OMB
Circular A-87 in developing its cost allocation plan, (2) consistently
apply the percentages stated in its cost allocation plan, (3) provide
periodic certifications for staff who worked solely on the FFEL program,
and (4) ensure that charges to the Operating Fund were allocable to the
FFEL program and adequately documented.

We recommended that the Chief Operating Officer for Federal Student
Aid[^1] require OSAC to transfer about \$2 million from its Operating
Fund to the Federal Fund and to take corrective action to ensure that
costs charged to the Operating Fund comply with Federal requirements.

The OTHER MATTERS section of the report provides information on
additional areas that came to our attention during the review regarding
(1) investment interest income earned on the Federal share of
collections, (2) late payment of usage fees, and (3) sponsorship fees
for the "Mapping Your Future" program exceeded the allowed contribution
limit.

In its comments to the draft report, OSAC did not agree with our finding
that it improperly excluded \$1.6 million from the fund balance when it
established the Federal Fund. OSAC generally agreed with the other
findings and recommendations. The full text of OSAC comments is provided
as an attachment to the report.

## **AUDIT RESULTS**

We concluded that OSAC complied with the HEA and regulations governing
the initial establishment of the Federal and Operating Funds, except
that OSAC improperly excluded about \$1.6 million from the Federal Fund.
We found that OSAC did not fully comply with the HEA and regulations
governing sources of funds when it did not deposit supplemental
preclaims assistance payments, totaling about \$160,000, in the Federal
Fund. From our review of financial transactions for the period July 1,
1998, through June 30, 2001 and cost allocation plans for fiscal years
1999 through 2002, we found that OSAC had not fully complied with
regulations governing uses of funds and OMB Circular A‑87 when it
charged administrative costs to the Operating Fund. We concluded that
OSAC had properly identified the ownership of fixed assets, but, as
disclosed in the OTHER MATTERS section of the report, OSAC did not
deposit usage fees in the Federal Fund on a timely basis.

**FINDING NO. 1 -- OSAC Improperly Excluded \$1.6 Million When It
Established the Federal Fund**

The 1998 amendments to the HEA of 1965, enacted on October 7, 1998,
required each guaranty agency to establish a Federal Fund and an
Operating Fund. HEA § 422A(a) states---

> Each guaranty agency shall, not later than 60 days after the date of
> enactment of this section, deposit all funds, securities, and other
> liquid assets contained in the reserve fund established pursuant to
> section 422 into a Federal Student Loan Reserve Fund \[Federal Fund\]
> . . . .

Our review found that at the time OSAC established the Federal Fund, it
improperly placed \$1,586,006 from its FFEL Program Account[^2] into the
Operating Fund rather than the Federal Fund. According to OSAC
officials, the \$1,586,006 represented State money (\$18,573) held in
the FFEL Program Account on December 6, 1998, and accrued interest
(\$1,567,433) on State money held in the FFEL Program Account during
various times from October 1967 to November 1998. OSAC provided an
agency-prepared worksheet as support for its calculation of the
\$1,586,006. The worksheet shows the State money that OSAC claimed was
in its reserve each month and the accrued interest compounded monthly.

To identify the State money in its reserve each month, OSAC used amounts
reported on ED's Form 1130[^3] (Line 1 -- State Appropriations and Funds
from Other Sources). The amounts included State funds available to OSAC
under a continuing appropriation. OSAC's audited financial statements
for the period July 1, 1966 to December 31, 1967 included the following
reference to the State of Oregon statute that provided the initial
appropriation in 1967.

Oregon Revised Statute 348.570(3) states---

"Out of the moneys in the General Fund, there is continuously
appropriated to the State Scholarship Commission such sums as are
necessary, but not to exceed \$240,000 in total \[this amount was
increased to \$550,000 in 1975\], to guarantee payment of loans made by
eligible lending institutions to student residents of the State of
Oregon... Funds may be disbursed from this appropriation on order of the
State Scholarship Commission to reimburse eligible lending institutions
where the lendee has failed to repay the principal sum of any loan
specifically guaranteed by the appropriation made by this subsection."

We concluded from information contained in OSAC's audited financial
statements covering periods from July 1, 1966, through December 31,
1976, that the entire amounts of the 1967 and 1975 continuing
appropriations were not deposited in the FFEL Program Account. The
audited financial statements showed the following amounts were used from
the continuing appropriations to reimburse lenders.

+------------------------+---------------------+-----------------------+
| **1967 and 1975        |                     |                       |
| Continuing             |                     |                       |
| Appropriations**       |                     |                       |
+------------------------+---------------------+-----------------------+
| **Financial Statement  |                     | **Expenditures**      |
| Period**               |                     |                       |
+------------------------+---------------------+-----------------------+
| **From**               | **To**              |                       |
+------------------------+---------------------+-----------------------+
| July 1, 1966           | December 31, 1967   | > \$ ---              |
+------------------------+---------------------+-----------------------+
| January 1, 1968        | December 31, 1968   | 4,484                 |
+------------------------+---------------------+-----------------------+
| January 1, 1969        | December 31, 1969   | 18,871                |
+------------------------+---------------------+-----------------------+
| January 1, 1970        | December 31, 1971   | 800                   |
+------------------------+---------------------+-----------------------+
| January 1, 1972        | December 31, 1973   | ---                   |
+------------------------+---------------------+-----------------------+
| January 1, 1974        | December 31, 1976   | ---                   |
+------------------------+---------------------+-----------------------+
| **Total Expenditures** |                     | **\$24,155**^a^       |
+------------------------+---------------------+-----------------------+
| ^a^ The actual amount  |                     |                       |
| may be lower because   |                     |                       |
| recoveries from        |                     |                       |
| borrowers on the       |                     |                       |
| defaulted loans were   |                     |                       |
| deposited to the       |                     |                       |
| credit of the State    |                     |                       |
| General Fund. Note 4   |                     |                       |
| to the Financial       |                     |                       |
| Statements for         |                     |                       |
|                        |                     |                       |
| January 1, 1974, to    |                     |                       |
| June 30, 1976,         |                     |                       |
| states---              |                     |                       |
|                        |                     |                       |
| > Prior to the 1975    |                     |                       |
| > enactment, the       |                     |                       |
| > accounting records   |                     |                       |
| > reflected            |                     |                       |
| > appropriations       |                     |                       |
| > totaling \$22,847.32 |                     |                       |
| > . . . Taking into    |                     |                       |
| > account payments and |                     |                       |
| > recoveries of        |                     |                       |
| > payments, the amount |                     |                       |
| > of the continuous    |                     |                       |
| > appropriation is     |                     |                       |
| > overstated by        |                     |                       |
| > approximately        |                     |                       |
| > \$14,500.            |                     |                       |
+------------------------+---------------------+-----------------------+

For this same period, the agency-prepared worksheet showed amounts
totaling \$568,573.

The audited financial statements also disclosed that funds from the
continuing appropriation were transferred to the FFEL Program Account,
as needed, to reimburse lenders. The financial statements for January 1,
1968, through December 31, 1968, included the following explanation
regarding an amount due to the FFEL Program Account from the continuing
appropriation.[^4]

> The \$507.50 balance is the amount required to be transferred from the
> continuing guarantee loan appropriation for the purpose of reimbursing
> lending banks for loans defaulted prior to December 31, 1968. The
> continuing guarantee loan appropriation is reflected in the records
> \[of the FFEL Program Account\] only as it is needed to reimburse
> lenders for defaulted loans . . . .

Thus, the funds provided by the continuing appropriations did not remain
in the FFEL Program Account for a lengthy period of time.

Based on the information presented in its audited financial statements,
OSAC did not have a valid basis for excluding the \$1,586,006 from the
Federal Fund. OSAC has not provided us with documentation to show that
the 1967 and 1975 appropriations in their entirety or that interest
earned on those funds were deposited in the FFEL Program Account.

######### Recommendations

######### 

######### We recommend that the Chief Operating Officer for Federal Student Aid require OSAC to---

######### 1.1. Transfer \$1,859,592 from the Operating Fund to the Federal Fund. This amount is comprised of the \$1,586,006 plus \$273,586 of imputed interest from October 1, 1998, through December 31, 2001.[^5]

######### 

######### 1.2. Return to the Federal Fund interest earned on the \$1,586,006 from December 31, 2001. This interest should be computed using the CVFR and calculated through the date that the \$1,586,006 was transferred to the Federal Fund.

# OSAC Comments

OSAC did not agree with our finding and recommendations. In its comments
to our draft report, OSAC stated its belief that the Federal and
Operating Funds were accurately and appropriately established. OSAC
described the process it used to determine that the funds and accrued
interest from the 1967 and 1975 continuing appropriations were in the
FFEL Program Account. OSAC stated that it---

-   Confirmed that the State of Oregon provided State funds for the
    purpose of administering the FFEL program and that the funds were
    continuously appropriated.

-   Contacted the State of Oregon Audits Division and the State of
    Oregon Treasury to gain an understanding of the accounting treatment
    for continuous appropriations. According to OSAC, it was informed by
    these state agencies that "\[m\]onies continuously appropriated are
    held at Treasury, but are tracked individually with both principle
    \[sic\] and interest accruing to the designated FFELP \[FFEL
    Program\] account."

-   Verified that balances on its Form 1130s were accurate and
    represented actual funds available.

-   Obtained a certified public accountant's (CPA's) confirmation of
    OSAC's interest calculation and the CPA's analysis of interest
    earnings, and conclusion from that analysis, that the FFEL Program
    Account contained the State funds.

OSAC also stated that the U.S. Department of Education did not raise
questions during its two reviews that specifically looked at OSAC's
establishment of the Operating Fund. OSAC stated that it plans to obtain
additional documentation to support its position that the funds and
accrued interest from the 1967 and 1975 continuing appropriations were
in the FFEL Program Account. As part of its response, OSAC provided
letters from its CPA and the Oregon State Treasury. OSAC stated that, in
combination, the two letters further reinforce its position.

# 

# OIG Response

OSAC provided no additional reliable evidence that would contradict the
information contained in its audited financial statements regarding the
accounting for the 1967 and 1975 continuing appropriations. The State of
Oregon Treasury letter and records, which were submitted for our review,
provided no evidence that the total amount of State funds provided by
the continuing appropriations or that interest earned on those State
funds were deposited in the FFEL Program Account.

The CPA analyzed interest earnings reported for three separate financial
statement periods: January 1, 1972 through December 31, 1973; January 1,
1974 through June 30, 1976; and July 1, 1981 through June 30, 1984. We
found that the CPA's analysis of interest earnings was based on
unsubstantiated assumptions rather than verified facts. Also, the
analysis was incomplete, contained calculation errors, and generally
disregarded explanations and financial statements information that were
contrary to OSAC's assertions.

We did not contest the fact that the 1967 and 1975 continuing
appropriations made State funds available for the purpose of
administering the FFEL program. Nor have we questioned the accuracy of
OSAC's Form 1130s or that the amounts shown on the forms represented
actual funds available to guarantee loans. Neither the existence of the
continuing appropriations nor the accuracy of the Form 1130s provide
evidence that the State funds were, in fact, held in the FFEL Program
Account or that interest earned on those State funds were deposited in
the FFEL Program Account.

Even if OSAC was able to document that the full amount or a partial
amount of State funds from the 1967 and 1975 continuing appropriations
were placed in the FFEL Program Account, it still would have been
improper for OSAC to exclude the \$1.6 million from the fund balance
when it established the Federal Fund. Once funds are deposited into the
FFEL Program Account, the funds lose their character as State funds and
became the property of the Federal Government. The 1998 Amendments to
the HEA required that the assets of the FFEL Program Account be
deposited in the Federal Fund. OSAC provided no authority for excluding
the amount it claimed to be State funds or accrued interest from the
Federal Fund.

The Department's regulations permit a guaranty agency to return funds
provided to the agency by a State under certain limited circumstances.
Specifically, the regulations at 34 C.F.R. § 682.410(a)(2)(ix)(A) allow
a guaranty agency to repay funds to a state if the agency provides the
Department with 30 days prior notice of the repayment and demonstrates
that: (1) the amounts were originally received on a temporary basis only
as shown by appropriate contemporaneous documentation; (2) the objective
for which the funds were provided has been fully achieved; and (3)
repayment of the funds will not cause the agency to drop below the
required minimum reserve levels. OSAC did not notify the Department of
the proposed repayment of the funds or meet any of the conditions. Also,
the HEA and the Department's regulations contain no provision for
charging interest to the Federal Government on State funds held in the
FFEL Program Account. Thus, even if the State funds and related accrued
interest had been deposited in the FFEL Program Account, OSAC would have
had no authority to unilaterally return the funds to the State or to
deposit those funds into the Operating Fund.

Staff from the Department's Federal Student Aid, Financial Partners
Channel did conduct a technical review in March 2000 and program review
in January 2001, that covered aspects of the establishment of the
Federal and Operating Funds. Financial Partners Channel staff obtained
OSAC's calculation of the \$1.6 million, but did not request support for
OSAC's assertion that the State funds and accrued interest from the 1967
and 1975 continuing appropriations were in the FFEL Program Account or
review the working papers supporting the CPA's conclusions. The limited
nature of the technical and program reviews neither negates OSAC's
responsibility to comply with HEA and applicable regulations in the
establishment of the Federal and Operating Funds, nor limits the OIG's
authority to report noncompliance and recommend corrective action.

**FINDING NO. 2 -- OSAC Improperly Deposited \$160,000 of Supplemental
Preclaims Assistance in the Operating Fund**

Guaranty agencies are required to deposit supplemental preclaims
activity payments for activity periods prior to October 1, 1998, in the
Federal Fund.

After the establishment of the Federal Fund, a guaranty agency shall
deposit into the Federal Fund . . . all amounts received from the
Secretary as payment for supplemental preclaims activity performed prior
to the date of enactment of this section . . . .

HEA § 422A(c)(4)

> The agency must deposit into the Federal Fund . . . Federal payments
> for supplemental preclaims assistance activities performed before
> October 1, 1998 . . . .
>
> 34 C.F.R. § 682.419(b)(4)

We found that over the period December 1998 through May 1999, OSAC
improperly deposited \$160,099 of supplemental preclaims activity
payments in the Operating Fund. The deposits represented supplemental
preclaims activity payments for activities performed prior to

October 1, 1998.

The following table shows the amounts received and the imputed interest
through December 31, 2001.

+----------------------+------------------------+----------------------+
| **Supplemental       |                        |                      |
| Preclaims Activity   |                        |                      |
| Payments**           |                        |                      |
+----------------------+------------------------+----------------------+
| **Date**             | **Amount**             | **OIG Imputed**      |
|                      |                        |                      |
| **Received**         |                        | **Interest^a^**      |
+----------------------+------------------------+----------------------+
|                      |                        |                      |
+----------------------+------------------------+----------------------+
| 12/07/98             | \$ 39,817              | \$ 6,371             |
+----------------------+------------------------+----------------------+
| 12/29/98             | 43,749                 | 7,000                |
+----------------------+------------------------+----------------------+
| 01/29/99             | 25,535                 | 3,979                |
+----------------------+------------------------+----------------------+
| 02/24/99             | 24,924                 | 3,780                |
+----------------------+------------------------+----------------------+
| 03/18/99             | 17,151                 | 2,530                |
+----------------------+------------------------+----------------------+
| 04/15/99             | 8,802                  | 1,262                |
+----------------------+------------------------+----------------------+
| 05/11/99             | 121                    | 16                   |
+----------------------+------------------------+----------------------+
| **Totals**           | **\$160,099**          | **\$24,938**         |
+----------------------+------------------------+----------------------+
| > ^a^ We calculated  |                        |                      |
| > the imputed        |                        |                      |
| > interest using the |                        |                      |
| > CVFR of five       |                        |                      |
| > percent for        |                        |                      |
| > calendar years     |                        |                      |
| > 1998, 1999, and    |                        |                      |
| > 2000, and the CVFR |                        |                      |
| > of six percent for |                        |                      |
| > calender year      |                        |                      |
| > 2001.              |                        |                      |
+----------------------+------------------------+----------------------+

######### Recommendations

We recommend that the Chief Operating Officer for Federal Student Aid
require OSAC to---

1.  Transfer \$185,037 (\$160,099 plus \$24,938 of imputed interest
    through

> December 31, 2001) from the Operating Fund to the Federal Fund.

######### 2.2. Return to the Federal Fund interest earned on the \$160,099 from December 31, 2001. This interest should be computed using the CVFR and calculated through the date that the \$160,099 was transferred to the Federal Fund.

# OSAC Comments

OSAC concurred with the finding and recommendations. OSAC stated that it
began handling the transactions correctly once the error was recognized.

**FINDING NO. 3 -- OSAC Did Not Comply with Federal Regulations and OMB
Circular A-87 for Costs Charged to the Operating Fund**

OSAC is required to comply with OMB Circular A-87, which sets forth the
cost principles and standards for determining costs for Federal awards
carried out through grants, cost reimbursement contracts, and other
agreements with State and local governments. OSAC is also required to
comply with Federal regulations at 34 C.F.R. § 682.423(a). When OSAC
established the Operating Fund, it transferred \$2.7 million from the
Federal Fund to the Operating Fund with a plan to return the funds in
two equal installments in September 2002 and 2003. Federal regulations
at 34 C.F.R. § 682.423(a) state---

> During periods in which the Operating Fund contains funds transferred
> from the Federal Fund, the Operating Fund may be used only as
> permitted by 34 C.F.R. §§ 682.410(a)(2) and 682.418.

Among the provisions in the cited sections are the requirements that (1)
costs charged to the Operating Fund are ordinary and necessary for the
agency to fulfill its responsibilities under the HEA, (2) costs charged
are allocable to the FFEL program, and (3) guaranty agencies that share
costs with other programs shall develop a cost allocation plan
consistent with the requirements described in OMB Circular A-87.

OSAC did not fully comply with OMB Circular A-87 and 34 C.F.R. §
682.423(a) for costs charged to the Operating Fund. Specifically, OSAC
did not (1) follow OMB Circular A-87 in developing its cost allocation
plan, (2) consistently apply the percentages shown in its cost
allocation plan, (3) provide periodic certifications for staff who
worked solely on the FFEL program, and (4) ensure that costs charged
were allocable, and adequately documented.

**OSAC Did Not Follow OMB Circular A-87**

**in Developing Its Cost Allocation Plan**

In addition to the FFEL program, OSAC administers the State Opportunity
Grant Program, over 200 privately funded scholarship programs, and other
programs. The regulations at 34 C.F.R. § 682.418(c) state---

> Each guaranty agency that shares costs with any other program . . .
> shall develop a cost allocation plan consistent with the requirements
> described in OMB Circular A-87 and maintain the plan and related
> supporting documentation for audit . . . .

A cost allocation plan is used to facilitate an equitable distribution
of costs that are (a) incurred for a common or joint purpose benefiting
more than one program, and (b) not readily assignable to the program
specifically benefitted, without expending effort disproportionate to
the results achieved. OMB Circular A-87, Attachment E, C.3.c lists the
criteria for an acceptable allocation base---

> \(1\) \[I\]t can readily be expressed in terms of dollars or other
> quantitative measures (total direct costs, direct salaries and wages,
> . . . ) and (2) it is common to the benefitted functions during the
> base period.

OSAC's cost allocation plans contain percentages for charging general
administrative costs to the FFEL program and non-FFEL programs. OSAC
developed separate percentages for each administrative position and each
group of services and supplies costs that could not be directly
associated with a program.

Our review of OSAC's cost allocation plans for fiscal years 1999, 2000,
2001, and 2002 found that (1) OSAC could not provide documentation
showing its calculation of the percentages, and (2) the allocation bases
described in the plans for fiscal years 2000, 2001, and 2002 did not
meet the criteria specified in Attachment E, C.3.c.

[Administrative employee salary costs]{.underline}

*Cost allocation plan for fiscal year 1999*. The plan states that OSAC
used data from work activity logs prepared by employees during July 1997
through May 1998 to allocate administrative employee salary costs.[^6]
The logs showed the hours recorded for activities related to FFEL
program and non-FFEL programs and activities that could not be
identified to one program. OSAC provided the work activity logs for our
review, but it had not retained documentation showing the calculation of
the allocation percentages from the information on the logs and OSAC
staff could not provide a verbal explanation of the procedures used to
perform the calculations.

*Cost allocation plans for fiscal years 2000, 2001, and 2002*. For
administrative salary costs, the plans state that OSAC used data
collected from the administrative employees and their official job
descriptions to derive the allocation percentages. According to OSAC's
Fiscal Coordinator, administrative employees provided the information
verbally to her at the beginning of the year on how they would allocate
their time between the FFEL and non-FFEL program activities during the
year. The Fiscal Coordinator did not retain documentation of the
information provided. The official job descriptions did not contain
information that could be used to develop a quantitative measure.

Because OSAC could not provide documentation showing its calculation of
the percentages and used allocation bases that did not meet the
requirements of OMB Circular A-87, we were unable to determine whether
the percentages in OSAC's cost allocation plans provided an equitable
distribution of general administrative salary costs to the FFEL program.
During fiscal years 1999, 2000, and 2001, OSAC charged about \$1,979,407
of unsupported general administrative salary costs to the FFEL program.
(The amount is comprised of \$524,580 for fiscal year 1999, \$705,803
for fiscal year 2000, and \$749,024 for fiscal year 2001).

[Administrative services and supplies costs]{.underline}

*Cost allocation plan for fiscal year 1999*. The plan allocated
administrative services and supplies costs by the full-time equivalents
who worked 100 percent for the FFEL or a non-FFEL program. We concluded
that this base provided an equitable distribution of the costs.

*Cost allocation plans for fiscal years 2000, 2001, and 2002*. For
administrative services and supplies costs, the plans state that the
allocation percentages were determined by management analysis. The
allocation percentages actually reflected the proportion of the agency's
biennium state budget not funded by State general funds.

Even though OSAC did not use an acceptable base in its cost allocation
plans for administrative services and supplies, the allocation
percentages in the plans for fiscal year 2000 and 2001 appear
reasonable. The percentages were not significantly different from the
percentages based on full-time equivalents that worked 100 percent on
the FFEL or a non-FFEL program. For fiscal year 2002, the percentages in
the cost allocation plan differed significantly from the percentage of
full-time equivalents.

######### OSAC Did Not Consistently Apply Percentages Stated in Its Cost Allocation Plan

According to the OSAC's Fiscal Coordinator, the allocation percentages
specified in the cost allocation plan for general administrative
employee salaries are preset in the payroll system at the beginning of
each fiscal year. Our analysis of salary charges to the Operating Fund
for fiscal years 1999, 2000, and 2001 found that the percentages of
salary costs charged to the

FFEL program differed from the percentages stated in the cost allocation
plans. Generally, the percentages used were higher than the percentages
in the cost allocation plans. We also found that the cost allocation
plans did not contain allocation percentages for all general
administrative positions.

+-----+-----+--------------+-------------+-----------------+---------+
| **G |     |              |             |                 |         |
| ene |     |              |             |                 |         |
| ral |     |              |             |                 |         |
| Ad  |     |              |             |                 |         |
| min |     |              |             |                 |         |
| ist |     |              |             |                 |         |
| rat |     |              |             |                 |         |
| ive |     |              |             |                 |         |
| Em  |     |              |             |                 |         |
| plo |     |              |             |                 |         |
| yee |     |              |             |                 |         |
| s** |     |              |             |                 |         |
+-----+-----+--------------+-------------+-----------------+---------+
| *   | **T | **Percentage | **Position  | **Total         | **      |
| *Fi | ota | Used         | Not Listed  | Employees With  | Percent |
| sca | l** | Differed     | in the      | Salary          | of      |
| l** |     | From         | Plan**      | Allocations Not | Empl    |
|     |     | Percentage   |             | Supported By    | oyees** |
| **  |     | in Plan**    |             | the Plan**      |         |
| Yea |     |              |             |                 |         |
| r** |     |              |             |                 |         |
+-----+-----+--------------+-------------+-----------------+---------+
| 1   | 15  | 4^a^         | --          | 4               | 27%     |
| 999 |     |              |             |                 |         |
+-----+-----+--------------+-------------+-----------------+---------+
| 2   | 23  | 3^b^         | 2           | 5               | 22%     |
| 000 |     |              |             |                 |         |
+-----+-----+--------------+-------------+-----------------+---------+
| 2   | 22  | 5^c^         | 6           | 11              | 50%     |
| 001 |     |              |             |                 |         |
+-----+-----+--------------+-------------+-----------------+---------+
| ^a^ |     |              |             |                 |         |
| For |     |              |             |                 |         |
| the |     |              |             |                 |         |
| 3   |     |              |             |                 |         |
| e   |     |              |             |                 |         |
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+-----+-----+--------------+-------------+-----------------+---------+

As shown in the above table, salaries costs charged to the FFEL program
were not supported by OSAC's cost allocation plan for 22 to 50 percent
of the general administrative staff during fiscal years 1999 to 2001.

**OSAC Did Not Provide Periodic Certifications** **for Employees Who
Worked Solely on the FFEL Program**

OSAC's Loan Processing Division, Default Prevention & Claims Division,
and Collections Division work exclusively in the FFEL program. OMB
Circular A-87 requires certifications, at least semi-annually, for
employees who work only for a Federal program. Attachment B, 11.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.

During fiscal years 1999, 2000, and 2001, OSAC did not require employees
who worked

100 percent on the FFEL program to complete certifications. According to
OSAC's Executive Director, the certification requirement was overlooked
for a period of time due to staff turnover and workloads. He informed us
that OSAC would reinstate a semi‑annual certification requirement during
fiscal year 2002. Even though OSAC did not have the required
certifications, we concluded, based on interviews with long-term
employees, payroll documentation, and OSAC's organizational structure,
that salary costs charged to the FFEL program were appropriate for staff
in the Loan Processing, Default Prevention & Claims, and Collections
Divisions.

**OSAC Did Not Ensure that Charges to the Operating Fund Were Allocable
to the FFEL Program and Adequately Documented**

Permitted uses of the Operating Fund during periods that the fund
contains funds transferred from the Federal Fund are listed in 34 C.F.R.
§ 682.410(a)(2). Paragraph (ii) of this section lists---

> Costs that are reasonable . . . and that are ordinary and necessary
> for the agency to fulfill its responsibilities under the HEA . . .
> Those costs must be---

(A) Allocable to the FFEL Program . . .

> \(E\) Documented in accordance with applicable legal and accounting
> standards . . . .

OMB Circular A-87 Attachment A, Paragraph C.1, contains similar
provision on the allowability of costs.

During our review of Operating Fund expenditures for fiscal years 1999
and 2000, we identified the following transactions that did not meet
these provisions.[^7]

-   [Not allocable to FEEL program]{.underline}. OSAC charged \$192 for
    coffee provided at a private awards meeting. According to the Fiscal
    Coordinator, the amount was erroneously charged to the Operating
    Fund due to a coding error.

-   [Not adequately documented]{.underline}. OSAC lacked adequate
    documentation for six reviewed transactions totaling \$6,221 in
    charges to the Operating Fund. OSAC did not provide any
    documentation for two transactions and only a staff email message
    for another. For three transactions, OSAC did not provide invoices
    or shipping receipts for charges on credit card statements.

OSAC needs to have sufficient management controls to ensure that charges
to the Operating Fund meet Federal requirements.

######### Recommendations

We recommend that the Chief Operating Officer for Federal Student Aid
require OSAC to---

3.1 Develop a cost allocation plan for fiscal year 2002 that is
consistent with requirements of OMB Circular A-87, submit the plan for
the Department's review and approval, and make any needed adjustments
for costs allocated to the Operating Fund for the fiscal year. For the
review of the cost allocation plan, Federal Student Aid, Financial
Partners Channel should consider soliciting assistance from Financial
Improvement and Post Audit Operations in ED's Office of the Chief
Financial Officer.

3.2 Either develop cost allocation plans for fiscal years 1999, 2000,
and 2001 that are consistent with requirements of OMB Circular A-87 and
make any needed adjustments for costs allocated to the appropriate fund
for those fiscal years [or]{.underline} return \$1,979,407 to the
appropriate fund.

3.3. Provide confirming documentation that OSAC implemented a written
policy for preparing semi-annual certification and that certifications
were prepared for the most recent period.

3.4. Evaluate its policies and procedures to identify and implement
steps that will provide increased assurance that future expenditures
charged to the Operating Fund meet Federal regulations and OMB Circular
A-87 requirements, including assurances that OSAC staff responsible for
approving and coding transactions are knowledgeable of applicable
Federal regulations and OMB Circular A-87 requirements.

3.5. Either provide appropriate documentation for the unsupported
expenditures [or]{.underline} return \$6,221 to the Operating Fund.

3.6. Return the \$192 that was used for coffee at the private awards
meeting to the Operating Fund.

# OSAC Comments

OSAC generally concurred with the finding and recommendations. In its
response to the draft report, OSAC described the corrective actions
taken and provided a copy of its revised cost allocation plan effective
July 1, 2001. OSAC stated that it surveyed current employees whose
positions were partially funded by the FFEL Program and concluded that,
in each situation, the survey results were consistent with the
percentages identified in past allocation plans. OSAC identified
\$61,357 to be returned to the Operating Fund to correct over charges
for the past three fiscal years that resulted from the inconsistent use
of percentages stated in its cost allocation plans. OSAC stated that
employees who were working solely on the FFEL Program completed
certifications in September 2001 and March 2002. OSAC agreed to return
the \$192 used for coffee at the private awards meeting to the Operating
Fund and provide the Department with documentation for the \$6,221 of
unsupported expenditures.

######### OIG Response

As noted in our recommendation, we suggest that the Federal Student Aid,
Financial Partners Channel obtain assistance from Financial Improvement
and Post Audit Operations when reviewing OSAC's revised cost allocation
plan effective July 1, 2001, employee survey, and support for the amount
to be returned to the Operating Fund to correct past years' allocations.

In the draft report, Recommendation 3.6 included \$1,029 that OSAC
charged to the Operating Fund for polo shirts provided to employees of
the Loan Processing Division. OSAC provided an acceptable justification
for the expenditure. Thus, we eliminated the \$1,029 expenditure from
the finding and recommendation. We have provided OSAC with a list of the
transactions comprising the \$6,221 of unsupported expenditures.

## **OTHER MATTERS**

[Interest earned on the Federal share of collections]{.underline}. In a
program review report, dated April 16, 2001, the Financial Partners
Channel for Federal Student Aid (FSA) reported that OSAC had not
transferred into the Federal Fund the investment interest accrued on the
Federal share of loan collections held in a holding account from October
1998 through

August 2000. FSA's Dear Guaranty Agency Director Letter, dated
July 18, 2000, informed guaranty agencies that their procedures must
provide that the Federal share of loan collections, including investment
income earned on the Federal share, is deposited into the Federal Fund
no later than 30 days after receipt. FSA delayed its enforcement of the
requirement to transfer the investment interest until the Department
concludes on-going discussion of the requirement with the National
Council of Higher Education Loan Programs. In September 2000, OSAC
discontinued its use of the holding account and began depositing loan
collections directly into the Federal Fund.

[Late payment of usage fees]{.underline}. If a guaranty agency uses the
Federal portion of a nonliquid asset for purposes other than the
performance of its guaranty activities, the agency must promptly deposit
into the Federal Fund an amount representing the net fair value of the
use of the asset (usage fees). During its program review, FSA's
Financial Partners Channel found that OSAC had calculated the usage fees
for quarters ended September 30, 2000, and December 31, 2000, but OSAC
had not deposited the fees in the Federal Fund. The regulations at

34 C.F.R. § 682.420(c)(2) state that payments to the Federal Fund for
usage fees must be made no less frequently than quarterly. On June 30,
2001, OSAC deposited \$46,243 in the Federal Fund for usage fees
covering the period July 1, 2000, through June 30, 2001. In its response
to the draft report, OSAC stated that it is current with its payment of
usage fees.

[Sponsorship fees for the "Mapping Your Future" program exceeded the
contribution limit]{.underline}. The HEA, § 422(h) required that \$1
billion of guaranty agency reserve funds be placed in escrow accounts
over five years for deposit in the U.S. Treasury in September 2002. To
comply with this requirement, FSA instructed each guaranty agency to set
aside a specific amount each year in a restricted funds account. The
HEA, § 422(h)(4)(B) allows a guaranty agency to use earnings from the
restricted funds account for default reduction activities. In a November
1999 letter, the Department approved guarantee agencies' use of
investment earnings for contributions of up to \$1,500 to the "Mapping
Your Future" program. OSAC's contribution for the Fiscal Year 2000
Annual Sponsorship Fees for the "Mapping Your Future" program totaled
\$7,500. Thus, OSAC improperly contributed \$6,000 more than the allowed
contribution limit. In its response to the draft report, OSAC stated
that it plans to request permission from the Department to allow the
excess expenditure.

**BACKGROUND**

The 1998 amendments to the HEA of 1965, enacted on October 7, 1998,
required each guaranty agency to establish a Federal Fund and an
Operating Fund. The final date for establishing these funds was December
6, 1998. The guaranty agencies were to transfer all funds, securities
and other liquid assets of the guaranty agency's FFEL program reserve
fund to the Federal Fund, which is the property of the Federal
Government. The HEA required guaranty agencies to deposit revenue from
specific sources into the Federal Fund and defined the uses of Federal
Fund assets. The HEA also specified the deposits to be made into the
Operating Fund and the general uses of Operating Fund assets. Except for
funds transferred from the Federal Fund, the Operating Fund is the
property of the guaranty agency. If the Operating Fund contains funds
transferred from the Federal Fund, the Operating Fund assets may be used
only as permitted by the regulations.

OSAC, formerly called the Oregon State Scholarship Commission, is the
state agency responsible for administering student financial aid in the
State of Oregon. OSAC became responsible for administering the FFEL
program in 1967. OSAC contracts with USA Group or FFEL program related
computer services, except for loan collections, which is supported by
in-house staff. OSAC also administers a variety of Federal, State, and
privately funded student financial aid programs for the benefit of
Oregonians attending institutions of postsecondary education.
Commissioners are members of the public appointed by the Governor. Its
main office is located in Eugene, Oregon.

**AUDIT OBJECTIVE, SCOPE, AND METHODOLOGY**

The objective of the audit was to determine whether OSAC complied with
the HEA and regulations governing the establishment and operations of
the Federal and Operating Funds. Specifically, we evaluated the (1)
initial establishment of the two funds, (2) sources and uses of the
funds, and (3) ownership of nonliquid assets and usage fees paid.

We gained an understanding of applicable HEA provisions and Federal
regulations; the State of Oregon accounting system, reports, and
records; and OSAC's management controls. We reviewed OSAC's audited
financial statements and single audits covering the periods July 1,
1997, through June 30, 2000. We reviewed the working papers prepared by
the independent public accountant (IPA) that conducted the single audit
for fiscal year 2000. We reviewed the FSA-Financial Partners Channel
report issued on April 16, 2001, covering its program review conducted
at OSAC on January 22-25, 2001. We interviewed various OSAC personnel
and FSA-Financial Partners Channel officials. We reviewed relevant FSA
Dear Colleague Letters, FSA Dear Guaranty Agency Director Letters, and
correspondence between OSAC and FSA.

To evaluate compliance with the HEA and regulations governing the
establishment of the Federal and Operating Funds, we reviewed OSAC's
procedures used to establish the fund balances and supporting
documentation. We confirmed OSAC's General Ledger Trail Balance at
September 30, 1998. We reviewed OSACs audited financial statements
covering the periods July 1, 1966, through December 31, 1976, and July
1, 1981, through June 30, 1984. We reviewed the IPA's working papers
supporting the Independent Accountant's Report on Applying Agreed-Upon
Procedures.[^8]

We reviewed transactions recorded in the FFEL Program Account from July
1, 1998, to September 30, 1998, and traced 35 transactions (judgmentally
selected) to supporting documentation. To evaluate the OSAC's management
controls covering sources and uses of the Federal and Operating Funds,
we reviewed transactions recorded in the FFEL Program Account, Federal
Fund and Operating Fund from October 1, 1998, to June 30, 2000, and
traced 146 transactions (judgmentally selected) to supporting
documentation. The auditors selected transactions related to
establishment of the Federal and Operating Fund, transactions described
as miscellaneous or had other descriptions that were not readily
identifiable, and travel expenditures with higher dollar amounts.

We also reviewed supporting documentation related to the claims, default
aversion fee, and collection processes for 25 borrowers. The borrowers
were judgmentally selected from OSAC's default aversion fee reports
dated May 31, 2000, and April 30, 2001. The auditors selected
transactions that represented a variety of purchase dates, loan amounts,
and lenders and loan servicers.

We reviewed OSAC's cost allocation plans for fiscal years 1999, 2000,
2001, and 2002. We analyzed expenditure transactions for general
administrative salary costs recorded in the Operating Fund for fiscal
years 1999, 2000, and 2001. There is no assurance that the judgmental
samples were representative of the entire populations and should not be
used for projections.

To review the ownership of nonliquid assets and usage fees paid, we
reviewed OSAC's schedule of nonliquid assets and the audited financial
statements to identify unlisted assets. We evaluated the reasonableness
and accuracy of usage fees charges and traced usage fees payments to the
Federal Fund.

To achieve our audit objective, we relied on standard reports from USA
Group's loan processing system and OSAC's loan collection system. We
also used standard reports and electronic data from the State of
Oregon's Statewide Financial Management System. Our assessment of the
reliability of the data was limited to confirming the data to supporting
documentation for the transactions reviewed in our judgmental samples
and obtaining assurances in OSAC's management representation letter of
the propriety of the data provided. Based on these tests and assurances,
we concluded that the data are sufficiently reliable to be used in
meeting our objective.

We conducted our fieldwork from July 16, 2001, through September 19,
2001. We performed the majority of our fieldwork at OSAC's location in
Eugene, Oregon. We performed our audit in accordance with government
auditing standards appropriate to the scope of review described above.

**STATEMENT ON MANAGEMENT CONTROLS**

As part of our audit, we made an assessment of OSAC's management control
structure, policies, procedures, and practices applicable to OSAC's
administration of the FFEL program. The purpose of our assessment was to
assess the level of control risk, that is, the risk that material
errors, irregularities, or illegal acts may occur. We performed the
control risk assessment to assist us in determining the nature, extent,
and timing of the substantive tests needed to accomplish our audit
objectives.

To make our assessment, we identified significant controls and
classified them into the following categories:

-   Establishment of the Federal and Operating Funds

-   Sources and Uses of the Federal and Operating Funds

-   Ownership of fixed assets and usage fees

Due to inherent limitations, a study and evaluation made for the limited
purpose described above would not necessarily disclose all material
weaknesses in the control structure. However, we identified weaknesses
in OSAC's procedures used to establish the funds and controls over the
sources and uses of the funds. We describe the weaknesses in the AUDIT
RESULTS and the OTHER MATTERS sections of the report.

### ATTACHMENT

**OSAC Comments on the Draft Report**

[^1]: Formerly the U.S. Department of Education's Student Financial
    Assistance (SFA). SFA changed its name to Federal Student Aid on
    March 6, 2002.

[^2]: Prior to December 6, 1998, OSAC had one account with the Oregon
    State Treasury (called the FFEL Program Account) which contained the
    money for two OSAC funds: Fund 0110--FFEL Program Limited Fund and
    Fund 0150--FFEL Program Non-limited Fund. As of December 6, 1998,
    the money in the FFEL Program Account was allocated to two OSAC
    funds with separate accounts in the Oregon State Treasury: Fund
    0165--Federal Student Loan Reserve (referred to as the Federal Fund
    in our report) and Fund 0110--Student Loan Guarantee Fund Account
    (referred to as the Operating Fund in our report).

[^3]: The 1968 through 1984 versions of the Form 1130 used by OSAC to
    identify the State money in its reserve each month are obsolete.

[^4]: The financial statements also provided an explanation of the
    amount reported on the Form 1130: "It is noted that the unrecorded
    balance of this continuing appropriation at

    December 31, 1968, is \$235,515.85, and that reports to the Federal
    Government include this appropriation as a part of the reserve fund
    balance used in computing the total loan capacity available under
    the Guarantee Student Loan Program \[FFEL Program\]."

[^5]: We calculated the imputed interest using the U.S. Treasury Current
    Value of Funds Rate (CVFR) of five percent for calendar years 1998,
    1999, and 2000 and the CVFR of six percent for calendar year 2001.

[^6]: OSAC did not require administrative employees to prepare work
    activity logs after May 1998.

[^7]: These transactions were identified during our review of 181
    transactions that were judgmentally selected from the FFEL Program
    Account and Operating Fund transactions for fiscal years 1999 and
    2000.

[^8]: The working papers showed that the audit work was conducted in
    January 2000. (The report was not dated.)