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Report to Congressional Requesters:

United States General Accounting Office:

GAO:

February 2003:

DISADVANTAGED STUDENTS:

Fiscal Oversight of Title I Could Be Improved:

GAO-03-377:

GAO Highlights:

Highlights of GAO-03-377, a report to Congressional Requesters.

DISADVANTAGED STUDENTS

Fiscal Oversight of Title I Could Be Improved.

Why GAO Did This Study:

New resources for education come at a time when states are struggling 

to address budget shortfalls.  Two provisions in Title Imaintenance of 

effort (MOE) and supplement not supplant (SNS)are designed to limit 

the extent to which federal funds could be used to replace state and 

local resources. To assess the quality of oversight of these 
provisions, 

GAO determined (1) how 6 statesArizona, California, Florida, Indiana, 

Louisiana, and Massachusettsconducted oversight of the  MOE and SNS 

provisions and what factors affected their ability to do so; (2) what 

efforts were made by the U.S. Department of Education to enforce MOE 

and SNS; and (3) in the 6 states, what changes  have occurred in the 

federal share of education funding from school year 1999-2000 to 

2000-2001.

What GAO Found:

In the states we visited, state program officials used three toolsthe 

states annual financial reports, the single audit process, and limited 

program monitoringto oversee Title Is fiscal accountability 

requirements.  While program officials had little difficulty in 

applying the MOE provision because it involves a straightforward 

calculation, state and local program officials and auditors we spoke 

with cited a number of factors that made it difficult to enforce the 

SNS provision under certain circumstances.  One of the challenges 

auditors faced was determining whether a school district would have 

removed its own funds from a program and allocated them elsewhere even

if federal funds had not been availablean action that is allowable. 

Another challenge was applying the SNS provision in circumstances where 

it is difficult to track federal dollars such as in schoolwide 
programs

where all funds are pooledor in districts undergoing significant 

districtwide reformswhere comparisons to previous budgets are 

problematic.  While some auditors struggled to apply the SNS provision 

to the particular circumstance of districts and schools, program 

officials relied primarily on the results of the single audits without 

being aware of some of these audits limitations. For example, some 

officials did not understand that not all districts, programs, or 

transactions may be covered by the audit.  While program monitoring 

adds a degree of depth to the efforts to oversee the SNS provision, 

most of the states in GAOs review conducted only limited program 

monitoring. We identified three key efforts Education made to guide, 

monitor, and enforce the fiscal accountability provisions, but each had 

limitations. First, Education provided guidance and technical 

assistance to state and local education agencies and auditors on how 

to interpret and apply Title Is fiscal accountability requirements. 

Despite the availability of this guidance, many of the auditors and 

program officials we spoke with expressed confusion regarding the 

application of these provisions to their particular circumstances, 

such as schoolwide programs. Second, Education conducted program 

monitoring of select state and local education programs each year; 

however, coverage was limited.  Third, Education reviewed the audit 

reports conducted under the Single Audit Act.  However, Educations 

Office of Inspector General and GAO have criticized the review and 

audit follow up process. Few changes occurred in the federal/state/
local 

fiscal partnership in financing education services between school year 

1999-2000 and 2000-2001. It is too soon to tell how recent increases 

in federal funds and state and local fiscal pressures will affect 

funding for education and the federal share.

What GAO Recommends:

To more effectively focus audit resources, Congress should consider 

eliminating the SNS requirement for schoolwide programswhere it is 

unworkableand increase the MOE requirement. In addition, GAO 

recommends that the Secretary of Education enhance technical 

assistance and training efforts to ensure better oversight of Title 

Is fiscal requirements and more effective use of the single audit 

process.

To view the full report, including the scope

and methodology, click on the link above.

For more information, contact Marnie Shaul on (202) 512-7215 or Paul 

Posner on (202) 512-9573.

Contents:

Letter:

Results in Brief:

Background:

States Used Multiple Tools to Enforce the Fiscal Accountability 

Provisions, but Relied Primarily on the Single Audit Process to Enforce 

SNS:

Educations Key Efforts to Enforce Fiscal Accountability Provisions 

Have Limitations:

Little Change in Federal Share from School Years 1999-2000 to 2000-

2001:

Conclusions:

Matters for Congressional Consideration:

Recommendations for Executive Action:

Agency Comments:

Appendix I: Scope and Methodology:

Appendix II: Comments from the Department of Education:

Appendix III: GAO Contacts and Staff Acknowledgments:

GAO Contacts:

Acknowledgments:

Appendix IV: Related GAO Products:

Education:

Single Audit:

Intergovernmental Relations:

Tables:

Table 1: Fiscal Accountability under Different Program Delivery 

Frameworks:

Table 2: Education Spending in Six States, School Year 1999-2000:

Figures:

Figure 1: Level at Which Fiscal Requirements Are Enforced:

Figure 2: Changes in the Shares of Total Funding for Education Services 

in Six States between SY 1999-2000 and 2000-2001:

Figure 3: Federal Share of SEA Operations in Six States (SY 2000-2001):

Abbreviations:

AFM Achievement Focused Monitoring

ESEA Elementary and Secondary Education Act

FTE full-time equivalent 

LEA local education agency

MOE maintenance of effort

NCLB No Child Left Behind Act

OIG Office of Inspector General

OMB Office of Management and Budget

SEA state education agency

SNS supplement not supplant

SY school year

USD Unified School District:

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copyrighted materials separately from GAOs product.

United States General Accounting Office:

Washington, DC 20548:

February 28, 2003:

The Honorable Edward M. Kennedy

Ranking Minority Member

Committee on Health, Education, Labor, and Pensions

United States Senate:

The Honorable George Miller

Ranking Member

Committee on Education and the Workforce

House of Representatives:

On January 8, 2002, the President signed the No Child Left Behind Act 

(NCLB) of 2001 into law. NCLB amends the Elementary and Secondary 

Education Act (ESEA) of 1965 and reauthorizes many federal aid programs 

for elementary and secondary education. ESEAs Title I program is the 

largest federal elementary and secondary education program, providing 

about $10.4 billion to benefit 11 million low-income and disadvantaged 

students in about 45,000 schools nationwide in 2002. Title I funds are 

distributed by formula from the federal government to state education 

agencies (SEA), which then pass through most of these funds to their 

local education agencies (LEA). LEAs use these funds to operate two 

types of Title I programs--targeted assistance programs, which target 

funds only to qualified low-income children who meet Title I 

eligibility requirements, and schoolwide programs, which pool funds to 

help all students in a school improve their performance.

Under NCLB, federal funds for elementary and secondary education have 

grown substantially; for example, Title I grew 30 percent from $8 

billion in 1999 to $10.4 billion in 2002. These new resources for 

federal education programs come at the same time that states and school 

districts face difficult funding choices as they struggle to address 

budget shortfalls resulting from economic downturns and other 

requirements, (i.e., homeland security.) These shortfalls heighten the 

risk that state and school district officials will use federal 

resources to replace their own funds. Two provisions in the act limit 

the extent to which states and LEAs can do that. First, a maintenance 

of effort (MOE) provision requires that an LEA maintain at least 90 

percent of its aggregate state and local education expenditures or its 

per student expenditures for the preceding year as a condition for 

receiving any federal Title I grant funds; this provision limits the 

amount of fiscal relief a grantee can achieve by substituting federal 

funds for its own by requiring local education agencies to sustain 

their own funding levels for education programs in the aggregate. 

Second, a supplement-not-supplant (SNS) provision requires grant 

recipients to use federal funds to supplement the amount of funds that 

would, in the absence of such federal funds, be made available from 

nonfederal sources; this provision limits substitution of federal funds 

for state/local funds at the school--or program--level by preventing 

LEAs from reallocating funds for specific activities. Some have raised 

concerns about whether these provisions are adequately enforced either 

by the Department of Education, which is responsible for monitoring the 

SEAs, or the SEAs, which are responsible for monitoring LEAs.

Federal grant management policies require SEAs to take the 

responsibility for ensuring that their LEAs comply with federal laws 

and regulations. States must:

* identify to the LEAs all applicable compliance requirements,

* monitor LEA activities to provide reasonable assurance that the LEA 

is in compliance with federal requirements, and:

* ensure required audits are performed and require that LEAs take 

prompt corrective action on any audit findings.

Federal grant recipients that spend more than $300,000 in federal 

awards in any given year must undertake a single audit as required 

under the Single Audit Act (Single Audit Act), as amended. Many grant 

recipients spend funds from a number of federal programs, and the 

single audit focuses audit resources on a federal grant recipients 

internal controls which covers an entitys process over its operations 

and financial reporting. In addressing compliance issues, the single 

audit reviews only selected provisions of laws and regulations that 

have a direct and material effect governing selected federal awards. 

This is in contrast to the more detailed transactional auditing that 

was conducted under program-specific audits.

To better assess the adequacy of oversight of the fiscal accountability 

provisions, you asked us to determine (1) how selected states ensure 

compliance with both the MOE and the SNS provisions and what factors 

affect their ability to do so; (2) what efforts were made by Education 

to enforce these provisions and what limitations, if any, did these 

efforts have; and (3) in selected states what changes occurred between 

school year 1999-2000 and 2000-2001 in the federal share of education 

expenditures and, in 2000-2001, what share of the SEA operating 

expenditures were financed with federal funds.

As agreed, we focused on six states[Footnote 1] and six local school 

districts.[Footnote 2] We reviewed guidance on the fiscal 

accountability provisions developed by the SEAs, and we reviewed both 

SEA and LEA budgets and financial statements for school year 1999-2000 

and 2000-2001. We interviewed state and local program officials, school 

district administrators, and their auditors about their roles and 

responsibilities for enforcing the fiscal accountability provisions and 

reviewed the auditors workpapers. We interviewed officials at 

Education and reviewed Educations guidance and regulations on these 

two fiscal accountability provisions. We also asked finance officers 

from the six SEAs to provide us with comparable information on total 

funding for education and the federal share of resources used to 

finance the SEAs operating costs. We conducted our work between July 

2002 and January 2003 in accordance with generally accepted government 

auditing standards. A more detailed discussion of our scope and 

methodology is included in appendix I.

Results in Brief:

In the states we visited, state program officials used three tools--the 

states annual financial reports, the single audit process, and program 

monitoring--to oversee Title Is fiscal accountability requirements. 

Program officials had little difficulty applying the maintenance of 

effort provision because it involves a straightforward and objective 

calculation from their annual financial reports data. But state and 

local program officials and auditors we spoke with cited a number of 

factors that made it difficult to enforce the supplement-not-supplant 

provision. Enforcement of the supplement-not-supplant provision is 

primarily done through the single audit process. One of the challenges 

auditors faced was determining whether a local education agency would 

have removed its own funds from a program and allocated them elsewhere 

if federal funds had not been available. Another challenge was applying 

the supplement-not-supplant provision in circumstances where it is 

difficult to track federal dollars--for example, in schoolwide programs 

where federal, state, and local funds are pooled or where districtwide 

school reforms have been implemented and programs have changed from 

year to year--making it difficult to compare funding. Some state 

program officials relied on the single audit without being aware of its 

limitations. For example, some state officials did not understand that 

only selected school districts, programs, or transactions are covered 

by the audit. Finally, while program monitoring adds a degree of depth 

to the efforts to enforce the supplement-not-supplant provision, most 

of the states in our review conducted only limited program monitoring, 

covering only a portion of their local education agencies in any given 

year.

We identified three key efforts the Department of Education made to 

guide, monitor, and enforce the fiscal accountability provisions, but 

each had limitations. First, Education provided guidance and technical 

assistance to state education agencies, local education agencies, and 

auditors on how to interpret and apply Title Is fiscal accountability 

provisions to programs in their states. Despite the availability of 

this guidance, many of the auditors and program officials we spoke with 

confused the various accountability provisions, believing, for example, 

that one test could be substituted for another. Second, Education 

conducted program monitoring of select state and local education 

programs each year; however, this coverage is limited and fiscal 

accountability provisions are, by design, not the primary focus of the 

monitoring activity. In fact, the departments guide for program 

monitors does not provide any guidance on monitoring the supplement-

not-supplant provision at all. Rather, Educations monitoring plans 

focus on progress towards raising the level of student achievement. 

Third, Education reviews the audit reports conducted under the Single 

Audit Act. However, Educations Office of Inspector General (OIG) has 

reported that many of the reviewers lacked knowledge of the areas 

covered under the Single Audit Act and how single audits were done; for 

example, they were not aware that not every grantee, program, or 

transaction was covered in an audit. As a consequence, Education could 

fail to review key programs or provisions of law.

Few changes occurred in the federal/state/local fiscal partnership in 

financing education services between school year 1999-2000 and 

2000-2001. It is too soon to tell how recent increases in federal funds 

and state and local fiscal pressures will affect funding for education 

and how changes, if any, in state and local financing will affect the 

federal share. No clear patterns emerged, among the states, with 

respect to the share of state operating costs that states financed with 

federal funds. In the six states we reviewed, the federal share of 

state operating expenditures in school year 2000-2001 varied from 18 

percent in Florida to 43 percent in Indiana.

Since the supplement-not-supplant is unworkable in a schoolwide context 

we are suggesting that the Congress eliminate the SNS requirement for 

schoolwide Title I programs. If it chooses to do so, it could also 

consider increasing the MOE requirement for LEAs with schoolwide 

programs. In addition, we recommend that Education amend its guidance 

for grantees and oversight officers to address all of Title Is fiscal 

requirements, including the supplement-not-supplant provision where 

applicable.

Background:

Established in 1965 as part of the Elementary and Secondary Education 

Act (ESEA), Title I provides grants to help schools establish and 

maintain programs to improve the educational opportunities of low-

income and disadvantaged students. Most Title I funds are distributed 

by formula from Education to states. The states then pass through most 

of these funds to their school districts after retaining some funds--up 

to 1.5 percent--for state administration and state-level school 

improvement activities. The amount of Title I funds a school district 

gets is determined by a formula based on the number of students from 

low-income families and the states per pupil expenditures.

Local Flexibility:

Once LEAs receive funds from the state, they have flexibility in how 

they allocate Title I funds to individual schools and how each school 

delivers Title I services. As long as priority is given to schools with 

the highest concentration of children from low-income families, LEAs 

are generally free to designate which schools, among those eligible, 

receive funds and how much each should get. LEAs can also select the 

type of framework through which they deliver Title I services. Some 

districts have only targeted assistance in their Title I schools, some 

only have schoolwide programs, and others have a mixture of both. When 

Title I began, all schools administered targeted assistance programs. 

These programs targeted funds and services--such as teachers and 

materials--to specific qualified students who met Title I eligibility 

requirements. In 1978, a limited number of schools were allowed to 

deliver the services in the form of schoolwide programs if 75 percent 

or more of their student population was poor. Schools choosing to 

operate schoolwide programs can combine federal resources with other 

funds to improve the school as a whole and help all students achieve. 

In subsequent reauthorizations, the schoolwide option was made 

available to more schools by lowering the threshold percentage of low-

income children required to operate a schoolwide program. NCLB allows 

schoolwide programs in schools with a poverty rate of 40 percent or 

more.

During the mid-1990s there was a trend toward providing more 

flexibility to state and local recipients of federal grants so they may 

operate programs that best serve the needs of their communities. This 

trend towards flexibility is evident, not only in education programs 

such as Title I, but in many social service programs and health 

programs. In these circumstances, we have found[Footnote 3] that new 

approaches to ensuring accountability need to be designed to achieve a 

balance between flexibility and accountability for attaining certain 

national objectives. In 2001, we reported on some of the challenges in 

maintaining a federal-state fiscal partnership in welfare 

reform[Footnote 4] and concluded that a broad-based maintenance of 

effort requirement calling for states to maintain spending across a 

wide range of relevant programs might both limit substitution of state 

funds while at the same time preserve state and local flexibility 

better than a traditional supplement-non-supplant requirement. 

Specifically, we found that, once accountability shifts to the broad 

purposes of the grant, federal fiscal oversight needed to shift as well 

and focus not only on the specifics of welfare funding but also on how 

states used multiple funding streams--federal, state, and local--to 

accomplish the programs broad goals. These findings could apply to the 

Title I program because schoolwide program goals are broader than the 

goals of a targeted assistance program and schoolwide programs combine 

funding streams.

Title I Fiscal Accountability Requirements:

Title I contains three fiscal requirements that grantees must comply 

with in order to continue to receive Title I funds from one year to the 

next. If an SEA or LEA fails to comply with MOE, SNS, or Comparability 

provisions, it is required by law to return the amount of misused funds 

to Education.

* Maintenance of effort (MOE). An LEA may receive funds if the SEA 

finds that the LEAs combined fiscal effort per student or the 

aggregate expenditures of the LEA from state and local funds for free 

public education for the preceding year is not less than 90 percent of 

the combined fiscal effort or aggregate expenditures for the second 

preceding year.

* Supplement-not-supplant (SNS). State and local education agencies 

must use federal funds to supplement, and not supplant, the amount of 

funds that would, in the absence of federal funds, be made available 

from nonfederal sources for the education of Title I students.

* Comparability. State and local funds must be used to provide services 

in Title I schools that are at least comparable to services provided 

by state and local funds in non-Title I schools within the same LEA.

Each fiscal requirement is enforced at a different level. For example, 

the MOE requirement applies only to the LEA not to individual Title I 

schools. The Comparability requirement is evaluated at the school level 

because it seeks to weigh the services provided in Title I schools with 

those provided in non-Title I schools. In contrast, the SNS provision 

is applied differently depending on how Title I services are applied. 

It is applied to the program or the student in targeted assistance 

programs to ensure that those targeted programs are providing more 

services for a Title I student than non-Title I students receive, or it 

is applied to the school if it operates a schoolwide program. (See fig. 

1.):

Figure 1: Level at Which Fiscal Requirements Are Enforced:

[See PDF for image]

[End of figure]

Monitoring Process:

There are a variety of approaches that officials at the federal, state, 

and local levels take to oversee state and local education agency 

compliance with the fiscal accountability provisions associated with 

Title I, including formal monitoring systems, such as the use of the 

single audit, and more informal monitoring systems, such as monitoring 

provided by interest groups.

Formal Monitoring Systems:

Education distributes Title I funds to the individual states and has 

primary responsibility for overseeing federal education programs and 

providing guidance and technical assistance to SEAs. Monitoring efforts 

focus on state compliance with both programmatic and fiscal 

requirements. Any issues of noncompliance reported at the state level 

are to be communicated to Education and are typically resolved through 

the development of an SEA corrective action plan, the implementation of 

which will be monitored by federal agency officials.

States are considered the primary recipient, or grantee, of federal 

awards like Title I and are responsible for ensuring that their 

subrecipients comply with all federal laws and regulations governing 

the grant. Since SEAs pass through most of the federal funds to the 

LEAs, states must have the appropriate subrecipient monitoring systems 

in place to track Title I spending. Program monitoring systems 

typically include a review of funding applications, local budgets, 

self-assessment documents, scheduled on-site visits to schools, and 

technical assistance.

Single Audits:

The Single Audit Act replaced multiple audits of separate grant awards 

with one organizationwide audit. A single audit includes an audit of 

the federal grant recipients financial statements as well as an 

examination of its internal controls and its compliance with laws and 

regulations governing federal awards. It does not, however, cover every 

federal grant received by the organization. The objectives of the 

Single Audit Act are as follows:

* Promote sound financial management, including effective internal 

controls, with respect to federal awards administered by nonfederal 

entities.

* Establish uniform requirements for audits of federal awards 

administered by nonfederal entities.

* Promote the efficient and effective use of audit resources.

* Reduce burdens on state and local governments, Indian tribes, and 

nonprofit organizations.

* Ensure that federal departments and agencies rely on and use audit 

work done pursuant to the act.

In 1994, we reported that state and local officials had reported that 

the single audit process had contributed to improving state and local 

government financial management practices.[Footnote 5]

Guidance for conducting a single audit is found in the Office of 

Management and Budgets (OMB) Circular A-133[Footnote 6] and the 

accompanying compliance supplement. The guidance states that the scope 

of the audit shall include an examination of:

* financial statements--to determine if they are presented fairly in 

all material respects in conformity with generally accepted accounting 

principles and whether the schedule of expenditures of federal awards 

is presented fairly;

* internal controls--to obtain an understanding of internal control 

over federal programs sufficient to plan the audit to support a low 

assessed level of control risk;

* compliance--to determine whether the auditee has complied with laws, 

regulations, and the provisions of contracts or grant agreements that 

may have a direct and material effect on the federal program on each of 

its major programs; and:

* prior audit findings--to perform procedures to assess the 

reasonableness of the summary schedule of prior audit findings.

Any single audit report should discuss the auditors analysis of these 

areas and include a section that specifically focuses on federal 

awards, including a schedule of findings and questioned costs. State 

and local governments and nonprofit organizations that spend $300,000 

or more in federal awards in a fiscal year must undertake a single 

audit.[Footnote 7]

Informal Monitoring Systems:

In addition to formal monitoring systems, fiscal accountability is also 

monitored informally by interest groups, parents groups, individuals, 

and the media. The public nature and easy accessibility of school 

district budgets, financial reports, and other fiscal information 

promotes budget transparency and information sharing among people 

outside the school system. This informal system may promote grantee 

compliance with applicable laws and regulations and raise red flags for 

the attention of the formal monitoring system.

States Used Multiple Tools to Enforce the Fiscal Accountability 

Provisions, but Relied Primarily on the Single Audit Process to Enforce 

SNS:

In the states we visited, state program officials use three tools--the 

states annual financial reports, the single audit process, and limited 

program monitoring--to monitor Title Is fiscal accountability 

requirements in their LEAs. In these states, enforcing the MOE 

provision is straightforward and objective. However, a number of 

factors made it difficult to ensure compliance with SNS.

Monitoring Compliance with MOE Presents Few Challenges:

In the states we visited, verifying compliance with Title Is MOE 

requirement was a straightforward mathematical exercise and relied on 

LEAs data gathered through statewide financial accounting systems. In 

part, monitoring and enforcing compliance with the MOE provision might 

have presented few challenges because until recently state and local 

revenues were increasing, and few grantees struggled to meet the MOE 

requirement.[Footnote 8] Many state and LEA officials told us that the 

robust economy and sound fiscal situation they experienced in the late 

1990s allowed them to increase spending on education.

Each of the six states we visited has strong vested interests in the 

integrity of its LEAs financial reports because each has a large stake 

in education finance in their states; all of these states mandate the 

level of effort the local education agencies must provide each year in 

order to receive state funds and impose their own financial reporting 

requirements on local education agencies. While we did not verify the 

quality of the data, it is the same data used to calculate the MOE 

requirements.

Five of the six SEAs we visited use their annual financial reports to 

verify LEA compliance with the MOE requirements. In the sixth, Florida, 

the SEA relied on LEAs to submit a separate form verifying that they 

were in compliance with MOE requirements. A program official verified 

the form submitted against the previous years submission and other 

grant award documentation but did not independently check against the 

states accounting records. However, this check is done by auditors in 

separate compliance reviews. State officials in Florida said that they 

were considering changing their MOE verification process. They said 

that audited data were available from their annual financial reporting 

system, and they were considering streamlining the verification process 

to eliminate the separate reporting requirement.

Two of the states we visited, Arizona and California, do not verify LEA 

compliance with MOE requirements until after the current years grant 

has been awarded. This practice is due to routine delays in year-end 

account reconciliation and timing of audits. The Arizona Office of the 

Auditor General cited the states department of education for failing 

to enforce the MOE provisions before the current years grant was 

awarded. State program officials acknowledged that they complete the 

grant award process before the audited financial data are available to 

verify compliance with MOE; however, they said that verification is 

finished well before the funds have been disbursed. Similarly, in 

California the audited data are not available until 9 months after the 

grant has been awarded. State program officials said that, despite 

these delays, there were few risks that they would be unable to collect 

the penalties against an LEA that was out of compliance with its MOE 

requirements.[Footnote 9]

Many Factors Contribute to Difficulties Enforcing SNS Provision:

While verifying Title Is MOE requirement was straightforward and 

objective, verifying compliance with the SNS provision was more 

challenging. SEA officials relied primarily on the single audit process 

to enforce the SNS provisions. But, many state and local program 

officials and auditors we spoke with cited a number of factors that 

made it difficult to ensure that grantees were in fact using federal 

funds to supplement and not supplant their own funds. These factors 

include difficulties applying the SNS provision to unique circumstances 

in their school districts, reliance on the single audit to ensure 

compliance without understanding its scope and methodology, and limited 

state and local program oversight of the fiscal accountability 

provisions.

The SNS Provision Is Difficult to Apply in Many Circumstances:

It can be difficult for auditors to establish a finding of 

supplantation. One of the challenges auditors face in evaluating 

compliance with the SNS requirement is determining the basis for the 

states and LEAs funding decisions. The SNS requirement generally 

prohibits replacing state funds with federal funds where the displaced 

state funds could continue to be available for their original purpose. 

However, under certain circumstances, where state funding is 

discontinued, grantees may be able to replace these eliminated funds 

with Title I dollars. For example, if an SEA or LEA discontinued its 

own support for a particular program in response to a potential budget 

deficit, the use of Title I funds may be permissible.[Footnote 10] The 

challenge for auditors in deciding if an LEA has improperly supplanted, 

is determining what the LEA would have done in the absence of federal 

funds. For example, where a state reduces its own financial support for 

a program and uses federal funds instead, an auditor may presume 

supplanting has occurred; but, a grantee could rebut that presumption 

by presenting evidence that fiscal stress required state budget cuts 

that might not have otherwise been considered. The statute also permits 

states to use Title I funds to replace state or local funds that had 

been expended for a program meeting a Title I purpose by allowing such 

supplemental state funds to be excluded from the SNS compliance 

determination.[Footnote 11] In other words, an LEA is allowed to shift 

funds from one state or locally funded program targeted to low-income 

children, substitute federal funds for that program, and move its own 

funds to other priorities for disadvantaged children.

Even if auditors could determine what a grantee would have done if it 

had not received federal funds, the way that Title I services are 

delivered can also make it difficult to apply the SNS provisions. Table 

1 summarizes the relationships between the different ways programs are 

delivered--targeted assistance, schoolwide programs, and districtwide 

reforms and the application of the fiscal accountability provisions.

Table 1: Fiscal Accountability under Different Program Delivery 

Frameworks:

Program delivery framework: Targeted assistance; Are funding sources 

for specific services comparable from one year to the next?: Yes; Can 

funding for specific services be separated by federal, state, and local 

sources?: Yes; Are MOE tests workable?: Yes; Are SNS tests workable?: 

Yes.

Program delivery framework: Schoolwide programs; Are funding sources 

for specific services comparable from one year to the next?: No; Can 

funding for specific services be separated by federal, state, and local 

sources?: No; Are MOE tests workable?: Yes; Are SNS tests workable?: 

No.

Program delivery framework: Districtwide reform efforts; Are funding 

sources for specific services comparable from one year to the next?: 

No; Can funding for specific services be separated by federal, state, 

and local sources?: No; Are MOE tests workable?: Yes; Are SNS tests 

workable?: No.

[End of table]

Source: GAO analysis.

For schoolwide programs the distinction between state/local funds and 

federal funds--and hence the notion of supplantation--becomes unclear. 

In general, when services are delivered through schoolwide programs, 

federal, state, and local funds are pooled, making it impossible to 

distinguish among funding streams in an audit because a schoolwide 

school does not have to (1) show that Title I funds are paying for 

additional services, (2) demonstrate that Title I funds are used only 

for specific target populations, or (3) separately track federal 

program funds once they reach the school. While one can identify the 

separate funding sources going into a school one cannot identify what 

services they funded. Therefore, for schoolwide programs a test for SNS 

compliance could include either (1) a comparison from one year to the 

next of total--federal, state, and local--funds allocated to a Title I 

school or (2) a comparison of state and local funds spent in Title I 

schools and non-Title I schools.[Footnote 12]

However, there are problems applying either test to schoolwide 

programs. For example, in the Glendale (Arizona) Elementary School 

District, every school is a Title I school and all schools operate 

schoolwide programs. District officials argued that because the 

district met its MOE requirement (in 2000-2001 it exceeded 100 percent 

of its preceding years expenditures), it did not need a separate 

internal control procedure to test for SNS. However, auditors cited the 

district for not having such a procedure. Our analysis shows that, for 

districts such as Glendale, in order to avoid supplanting funds, the 

district would have to maintain the same state and local funding from 

year to year. In other words, in districts where every school is a 

Title I school and all schools operate a schoolwide program, they would 

have to maintain a much higher MOE requirement, 

100 percent, than districts that are not in this circumstance in order 

to avoid supplanting funds unless they otherwise would not have spent 

those funds.

Moreover, comparing expenditures from one year to the next in school 

districts where there are both targeted assistance and schoolwide 

schools presents challenges. Since schoolwide program administrators 

can reallocate funds among programs in their schools, they can engage 

in budgetary practices that are not allowed in a targeted assistance 

school in the same district. Theoretically, the SNS provision imposes a 

higher expectation on schools operating schoolwide programs than it 

does on their targeted assistance counterparts because a year-to-year 

funding comparison essentially requires a schoolwide school to maintain 

100 percent of its previous effort in order to comply with the SNS 

provision.

Furthermore, comparing the allocation of state/local funds among 

schools in the same year also presents challenges. For example, in 

Duval County (Florida) all 72 of the districts Title I schools operate 

schoolwide programs but not all schools were Title I schools. Duvals 

auditors assessed compliance with SNS by comparing the per pupil 

expenditure of state and local funds in Title I schools to the 

allocation in non-Title I schools within the same year. They found that 

in 2001, 5 of the districts 

72 Title I schools received significantly less state and local funding 

per pupil than the average school received, resulting in questioned 

costs of $2.5 million. The auditors suspected that the district may 

have used federal Title I funds in place of state and local funds in 

these schools, but district officials claimed that many mitigating 

factors, such as higher teacher salaries for more experienced teachers, 

could explain variations in the per pupil expenditures among schools in 

the same district. The SEA determined that the information presented in 

the audit report was not sufficient to determine that supplanting 

occurred. SEA officials told us that auditors would need to have 

programmatic expertise to interpret the results of the per pupil cost 

comparisons in order to prove that supplantation had occurred. The 

auditors agreed that many factors could have contributed to the 

observed disparity in funding among the 5 Title I schools, but they 

said there were limitations to what could be expected of a single audit 

and pointed out that ultimately the SEA should use the audit findings 

as a basis for determining whether the LEA is in compliance or not.

Finally, when a district engages in comprehensive districtwide reform 

resulting in programmatic changes, it can be difficult to make the 

types of comparisons necessary to determine compliance with SNS, 

particularly in the first year of reforms. For example, in 2000, San 

Diego City (California) Unified School District (USD) began school 

reform that entailed financing new initiatives. As these reforms were 

implemented, the district and its programs were restructured in such a 

way that there were no longer points of comparison for determining 

whether the district was in compliance with the SNS provision. In other 

words, funding for programs in the current school year could not be 

compared with funding for those in the previous year, because the 

programs had not previously existed. The Superintendent of the San 

Diego City USD told us that the reform plan could not have been 

implemented without the flexibility to reallocate resources within and 

among schools.

Some Officials Rely on the Single Audit, without Understanding What Its 

Scope and Methodology Mean for Assessing the SNS Provision:

While some auditors struggled to apply the SNS provision to the 

particular circumstance of districts and schools, SEA officials were 

frequently unaware of what the results of a single audit actually 

meant, potentially failing to cover key programs or provisions of law, 

and thus adding to the difficulty of enforcing the SNS provision. For 

example, numerous state and local program officials told us that they 

assumed that the single audit covered every LEA and every program, even 

though this is not what single audits are designed to do. As a result, 

these officials may not engage in other oversight activities that are 

warranted. Because only those grant recipients that spend more than 

$300,000 in federal awards in any given year must undertake a single 

audit,[Footnote 13] not all LEAs that receive Title I funds are 

required to undergo one. Furthermore, even if an LEA is audited, the 

Title I program may not be covered in the audit. The 1996 amendments to 

the Single Audit Act give auditors more freedom to determine which 

federal programs to include in their audit plan each year, allowing 

them to exclude some programs based on risk-based criteria and on 

expenditure-based criteria.[Footnote 14] Many of the auditors we spoke 

with assessed risk by determining whether or not there had been 

findings of noncompliance in recent audits. For example, if an LEA had 

a clean audit with respect to the Title I program for the last few 

years, an auditor might legitimately view the inherent risk of this 

program as low and exclude it from the audit in the next year. Auditors 

for both San Diego City (California) USD and Jefferson Parish 

(Louisiana) Public Schools told us that Title I probably would not be 

covered in the districts 2002 single audit since there have been no 

recent findings on the program.

In addition, some officials thought that the single audit examined 

every transaction, even though it does not. As a result, officials may 

think that by fixing the instances reported they are solving all the 

problems, when in fact those problems may be more widespread. Generally 

accepted government auditing standards allow statistical sampling 

methods and auditors often use audit sampling to evaluate compliance 

with applicable requirements. This involves testing less than 100 

percent of the items within a group of transactions for the purpose of 

evaluating compliance with applicable laws and regulations. 

Transactions could be randomly selected from all of the auditees 

financial transactions for the year under review.[Footnote 15] While 

this technique allows auditors to test the population of transactions 

for evidence of noncompliance and internal control weaknesses, it will 

not identify every specific instance of noncompliance.[Footnote 16] 

When auditors of Douglas (Arizona) USD identified significant internal 

control weaknesses based on analysis of a sample of the districts 

financial they reported that their review of the districts internal 

controls would not necessarily disclose all instances of non-

compliance. However, the SEA resolved the issue by requiring the 

auditee to reimburse the Title I program for the amount of the 

transaction under question only and did not further investigate if 

there were other erroneous payments made.

While there were problems with program officials understanding what 

single audits are and what results from the single audit meant, in 

general the auditors work plans we reviewed followed the guidance 

recommended by Education and OMB for single audits. However, some of 

the auditors could not document that they had followed their work 

plans. For example, audit workpapers for San Diego City (California) 

USD show that auditors held a discussion with a district budget 

official who told the auditors that they were in compliance with the 

SNS provision, but the workpapers did not indicate independent 

verification of these claims.

In five of the six states we reviewed, the SEA had a procedure in place 

to resolve audit findings reported through the single audit process. 

However, in 2001 the Louisiana Legislative Auditor reported in its 

statewide single audit that the SEA did not have adequate internal 

controls to monitor subrecipients for compliance with many federal 

education programs, including Title I. The SEA concurred with the 

auditors finding and has implemented policies to address the 

deficiencies.

Selected States Conduct Limited Program Monitoring:

All of the states we visited supplemented their reviews of LEAs single 

audit reports with additional monitoring activities. While program 

monitoring provided a depth of coverage that cannot be achieved in 

single audits, these efforts were limited. Furthermore, in all of the 

states we visited, the primary focus of any additional monitoring 

activities has now centered on addressing efforts to raise the level of 

student achievement with considerably less focus given to fiscal 

accountability requirements. Informal monitoring by individuals and 

groups augmented the formal monitoring process.

Limited program monitoring also took place during the application 

review process. In all of the states we visited, the annual application 

process for Title I funding contains questions on historic and proposed 

program budget information that can be used by program officials in the 

SEA to oversee compliance with SNS and MOE. In addition, some states 

require LEAs to complete a self-assessment document in which they are 

asked to assess themselves on their compliance with federal program 

requirements. SEAs use these self-assessment documents for various 

purposes. For example, in Florida, annual self-assessments were used as 

a self-monitoring tool, but only one-quarter of the LEAs were required 

to actually send in the completed guide for review in any given year. 

In Arizona, the tool was also required annually and is designed to 

provide guidance in program development and to identify areas in which 

technical assistance may be needed. In California, LEAs must complete 

self-assessments once every 4 years, at which time SEA officials 

evaluate the self-assessment documents and use them to target their on-

site monitoring activities to those LEAs that pose the highest risks.

While four of the six states we visited followed up LEAs self-

assessments with on-site visits, the extent to which they conducted 

such visits varied and, in some cases, was limited. Massachusetts and 

Arizona have scheduled on-site monitoring visits in the LEAs at least 

once every 6 years. In Louisiana, state officials said that each LEA is 

visited once every 

3 years. In California, while each LEA must go through the review cycle 

every 4 years. In addition, in 2001 two of the six states we visited, 

Florida and Indiana, did not follow up on the self-assessments with 

periodic on-site program monitoring.[Footnote 17]

Several state officials highlighted the importance of informal 

monitoring networks, such as parents groups, in raising issues of 

noncompliance. These watchdog groups play an informal role in 

questioning inappropriate spending and submitting complaints to the 

school boards and, if they feel their concerns are not addressed at 

this level, elevating the issues to the SEA. SEA officials in both 

Indiana and California discussed recent inquiries that were brought to 

their attention, not through single audit reports or even program 

monitoring efforts, but rather by informal watchdog groups. In Indiana, 

the issues raised dealt with unallowable costs and high administrative 

charges to federal programs in one school; the SEA is investigating 

and, according to state officials, the matter is still unresolved. In 

California, a parents group in San Diego filed a complaint with the 

California Department of Education citing issues relating to, among 

other things, the reallocation of state and federal funding, including 

Title I funds, by the San Diego City (California) USD to fund its 

districtwide school reform strategy which, the watchdog group claimed, 

no longer provides a comparable level of service to all students with 

state and local funding. The SEA concurred and ordered the district to 

develop a plan to allocate the state and local supplemental funds that 

complies with all the federal comparability provisions. However, 

Education granted the district a waiver in August 2002 which will allow 

the district to proceed with the reform strategy under its current 

budget plan for 1 year.

Educations Key Efforts to Enforce Fiscal Accountability Provisions 

Have Limitations:

We identified three key efforts the Department of Education made to 

help enforce the fiscal accountability provisions but each had 

limitations. First, Education developed guidance and provided technical 

assistance to state and local officials and their auditors; but, these 

officials have expressed confusion regarding application of the SNS 

provision to their particular circumstances. Second, Education 

conducted limited program monitoring of its own, but these efforts did 

not have fiscal accountability as a primary focus. Finally, Education 

reviewed states single audit reports conducted under the Single Audit 

Act. But, the Inspector General of Education found that many reviewers 

in the department lacked knowledge about the single audit process and 

compliance issues. As a consequence, Educations monitors could fail to 

review key programs or provisions of law. In addition, we recently 

reported that Education could not demonstrate it consistently worked to 

resolve audit findings.[Footnote 18]

Officials and Auditors Confused about Application of Fiscal 

Accountability Provisions to Their Particular Circumstances:

Education developed guidance for its programs which appeared in the 

compliance supplement to OMBs Circular A-133. This guidance was the 

basis for the audit plans for all the districts we visited. Educations 

guidance itemizes the SNS, MOE, and the comparability requirements as 

separate statutory requirements. However, many state and local 

officials and auditors we spoke with thought the three requirements 

were related to each other and that, by meeting one or two of the 

requirements, they would automatically be in compliance with the 

others.

Some auditors and program officials confuse the comparability 

requirement with the SNS provision.[Footnote 19] While comparability is 

primarily used to ensure that services--not funding--is comparable 

across schools in the LEA, the two issues are closely related and 

frequently confused. For example, guidance issued by the SEA in Arizona 

on the comparability requirement states that comparability is used to 

ensure that schools within an LEA do not supplant state and local funds 

with federal program funds. Operating under the same misconception, 

Indianapolis Public Schools incorrectly used the comparability test as 

the internal control to ensure compliance with SNS. Moreover, the 

districts auditors failed to question the appropriateness of this test 

to ensure compliance with SNS. A similar confusion was evident when 

officials in the Duval County Public Schools told auditors that they 

could not understand how they failed to comply with the prohibition on 

supplantation, given that they had not cut back on their own overall 

spending thereby meeting their MOE requirements and had documented 

meeting their comparability requirement.

Education recognizes that there is some confusion about the application 

of the provisions. Education officials acknowledge the challenges of 

writing guidance that can be understood and applied in every 

circumstance. Many federal program officials said that they frequently 

field questions from district officials and some auditors seeking 

technical assistance applying the provisions in local circumstances. In 

December 2002, Education issued new regulations that reorganized its 

guidance on schoolwide programs in a manner that might help address 

some of the confusion.

State and local education agencies and their auditors told us that they 

also rely on nongovernmental sources of guidance, such as workshops and 

materials provided by consulting firms. For example, auditors in 

Arizona provided us with excerpts from handbooks and other guidance on 

the Title I program.[Footnote 20] School officials and auditors in 

other districts we visited also told us they supplement federal 

guidance with similar nongovernmental sources of guidance.

Fiscal Accountability Is Not the Primary Focus of Educations Program 

Monitoring:

The fiscal accountability provisions have not been the focus of 

Educations own monitoring efforts. From 1995-2001, Education used an 

approach to program monitoring called an integrated review approach. 

Its primary focus was to see how all federal grant programs, working 

together, supported state and local reform efforts. The Title I program 

was included in these reviews. However, only 1 of the 9 indicators 

Educations monitors used in integrated reviews focused on fiscal 

issues; the rest focused on program performance, such as whether the 

state supported and promoted high standards for all children, and 

whether states used education research findings to inform decision 

making. Educations Inspector General criticized this approach to 

program reviews in 2001 because the integrated approach allotted 

insufficient time to monitor specific programs for compliance with 

federal laws and regulations. The Inspector General also found that the 

various teams of reviewers lacked knowledge of the single audit 

process, thereby taking inconsistent approaches to doing the 

reviews.[Footnote 21]

In 2002 Education drafted guidelines for its monitors to use in a new 

approach to program monitoring, but we found that the new approach 

gives fiscal accountability requirements little emphasis and it does 

not even mention SNS. In 2002, Education developed a new monitoring 

strategy which it has named: Achievement Focused Monitoring (AFM). As 

its name implies, the AFM approach seeks to realign oversight and 

technical assistance for Title I to concentrate on student achievement. 

Education officials acknowledged that their program monitoring guide 

does not mention SNS and said they would provide additional guidance to 

their monitors on the provision for use in the future. Educations AFM 

plan includes visits to 15 states--and at least one district in each 

state--in 2002 and 2003. By October 2002 Education had completed visits 

to four states.

Educations Review of State Single Audit Reports Has Weaknesses:

Education has responsibility for reviewing the audit reports of state 

education agencies. In 2002, we reported actions were needed to ensure 

that grantees correct findings identified in state single audit 

reports. Each state must undertake a single audit each year. Each year 

their auditors determine which federal programs to include in their 

audit plan and audit those programs for compliance with the federal 

laws and regulations covering those grant programs. Although Education 

had procedures for obtaining states single audit reports, distributing 

audit findings to appropriate audit offices, and assessing the 

seriousness of the findings, we found that reviewers did not 

demonstrate they consistently worked to resolve audit findings. 

Specifically, reviewers did not consistently follow-up with written 

management decisions on final audit resolution and did not communicate 

findings to senior department management.[Footnote 22]

Little Change in Federal Share from School Years 1999-2000 to 2000-

2001:

We found that few changes have occurred in the relative shares of 

federal, state and local funding for education for school years (SY) 

1999-2000 and 2000-2001 (the most recent data available) in the six 

states we reviewed. (See fig. 2.) It is too soon to tell how recent 

increases in federal funds for Title I and other federal education 

programs and the fiscal pressures facing states will affect funding for 

education in general and how changes, if any, in state and local 

financing will affect the federal share. However, this information does 

provide a baseline against which we can compare the impact of increases 

in federal funds and state and local fiscal pressures in the future.

Figure 2: Changes in the Shares of Total Funding for Education Services 

in Six States between SY 1999-2000 and 2000-2001:

[See PDF for image]

[End of figure]

Note: Percentages do not add due to rounding.

In addition to the concern about the fiscal balance in education 

funding overall, questions have been raised about the federal share of 

operating SEAs. SEA operations include the administration of programs-

-primarily oversight, technical assistance, and training--related to 

specific federal programs operated at the local level. SEAs may also 

operate state-level programs, such as vocational rehabilitation. As we 

noted in a previous report, the level of federal support for SEA 

operations varied widely among states depending on the number and types 

of federal and state programs the SEA operates, ranging in fiscal year 

1993 from about 10 to about 80 percent, with the average level of 

support being 41 percent.[Footnote 23] To update this information, we 

looked at the federal share of SEA funding in the six states we visited 

for school year 1999-2000. As in the past, we found the federal share 

varied, from 18 percent in Florida to 43 percent in Indiana. (See the 

shaded bars in fig. 3.):

Figure 3: Federal Share of SEA Operations in Six States (SY 2000-2001):

[See PDF for image]

[End of figure]

Another way to look at the federal share of SEA operating costs is 

through the number of full-time equivalent positions (FTEs) that are 

funded by federal funds. Some states operate federal programs at the 

state level, such as vocational rehabilitation and disability 

determination. These may require many more SEA FTEs than programs 

operated at the local level. For example, in 2000-2001, the Florida SEA 

assumed responsibility for the federal vocational rehabilitation 

programs that were previously housed in another state department, 

adding more than 1,000 positions to the SEA and raising its percent of 

federally funded FTEs from 43 percent to 

63 percent.

Finally, table 2 provides some additional context when making 

comparisons and contrasts among the states we visited. Per pupil 

expenditure calculations serve as a proxy reflecting the cost 

differences among states in providing education.

Table 2: Education Spending in Six States, School Year 1999-2000:

Arizona; Total education spending 

(in billions): $4.6; Per pupil

 expenditure: $5,656; Federal share of education spending: 10%.

California; Total education spending 

(in billions): $45.1; Per pupil

 expenditure: $7,571; Federal share of education spending: 9%.

Florida; Total education spending 

(in billions): $17.3; Per pupil

 expenditure: $7,269; Federal share of education spending: 8%.

Indiana; Total education spending 

(in billions): $7.7; Per pupil

 expenditure: $7,813; Federal share of education spending: 5%.

Louisiana; Total education spending 

(in billions): $4.8; Per pupil

 expenditure: $6,473; Federal share of education spending: 12%.

Massachusetts; Total education spending 

(in billions): $8.7; Per pupil

 expenditure: $9,108; Federal share of education spending: 5%.

[End of table]

Source: GAO analysis.

Conclusions:

Single audits are a valuable oversight tool but they cannot be regarded 

as the sole tool to use in enforcing the compliance requirements. 

Additional oversight is always necessary to ensure that grantees are in 

compliance with the laws and regulations governing specific programs 

and grant management in general. Single audits should inform, not 

substitute for program monitoring. However, as we have noted, many 

state officials told us that they relied primarily on the single audits 

to oversee compliance with federal laws and regulations. Because of 

this reliance, state program officials responsible for overseeing this 

program must have a better understanding of the scope and limitations 

of these audits and supplement the audits with more effective and 

frequent oversight activities. Instances of noncompliance found in the 

course of a single audit should trigger a broader search to determine 

whether the error is systemic.

While NCLB emphasizes achieving higher student achievement levels, 

enforcing fiscal accountability is and will remain a critically 

important oversight activity. Resources for audit and evaluation 

activities will remain limited, and, as a result, these resources must 

be targeted where they will have the greatest impact. As we have noted, 

ensuring compliance with an MOE provision presents few challenges and 

requires few additional audit resources, whereas monitoring the SNS 

provision is very challenging and requires significant audit resources.

Maintaining the intergovernmental fiscal partnership in the education 

of disadvantaged and low-income students presents many challenges. 

Title Is two fiscal accountability provisions--the MOE and the SNS 

provisions--are intended to limit the extent that grantees can use 

federal funds to replace their own and thereby erode the fiscal 

partnership. But each provision helps to maintain the fiscal balance in 

very different ways and at different levels--schools versus districts. 

The primary effect of a nonsupplant provision is to prevent the 

reallocation of state and local resources within a Title I school; 

essentially, that means that expenditures paid for with state and local 

resources in a Title I school in one year cannot be paid for with 

federal funds the next year. On the other hand, the MOE provisions 

primary effect is to limit the extent to which states and LEAs can use 

federal funds for general fiscal relief; that is, substituting federal 

funds for state and local funds generally, not just in Title I schools. 

As noted, in schoolwide programs grantees are not required to show that 

Title I funds are paying for additional services or are targeted to 

specific students, nor are they required to separately track federal 

program funds with other funds once they reach the school, thus 

limiting the reallocation of resources becomes unworkable in a 

schoolwide setting.

An inherent tension exists between fostering a flexible grant 

environment and ensuring fiscal accountability. For broader purpose 

grants, such as schoolwide programs, the SNS provision can work to 

constrain local flexibility in the use of federal funds by preventing 

districts from reallocating the use of federal, state, and local funds. 

Moreover, the provision is difficult to apply and can be very 

challenging to monitor and enforce, primarily because it is not 

workable in those environments. As we have previously reported, in 

flexible grant environments a strong MOE provision may prove more 

useful than an SNS provision in limiting the degree to which grantees 

can use federal funds to simply reduce their overall fiscal 

commitments.

That different parties would have different views of the value of the 

nonsupplant provisions is to be expected. Some argue that allowing 

supplantation of any kind increases the likelihood that states could 

weaken their commitment to educating disadvantaged children and 

diminish the fiscal impact of the federal grant. Potentially, 

supplantation allows the SEAs and LEAs to convert the federal Title I 

grant into a kind of revenue sharing program with very little 

incremental impact on education spending. Others would point to 

periodic changes to the Title I program allowing more schools to 

participate as schoolwide programs, suggesting that the Congress may be 

trying to encourage more flexible use of Title I funds to improve the 

quality of education for disadvantaged students and raise student 

achievement levels for all students, including low-income students. 

Furthermore, in times of fiscal stress and greater needs in educating 

the disadvantaged, the reallocation of resources within and among 

schools may be the only way to finance comprehensive districtwide 

reform efforts. A nonsupplant provision could stymie those districts 

that need more flexibility to attempt such reforms.

Matters for Congressional Consideration:

To better align its expectations for accountability with Title I 

schoolwide program goals, the Congress should consider eliminating the 

SNS requirement for schoolwide programs. If Congress eliminates SNS in 

the context of schoolwide programs, Congress may want to consider 

strengthening the other fiscal accountability requirement, MOE. 

Currently, LEAs must maintain only 90 percent of their previous years 

expenditures in order to participate in the Title I program. For 

example, if this requirement were increased, it would impose a higher 

expectation on those districts to maintain the fiscal balance and it 

could represent a reasonable tradeoff for those districts that want to 

begin more comprehensive reform efforts.

Recommendations for Executive Action:

We recommend that the U.S. Department of Education enhance its 

technical assistance and training efforts to ensure that SEAs and 

Education program staff have a clearer understanding of the strengths 

and weaknesses of the single audit process and the role the audits can 

play in required oversight activities and encourage them to heighten 

the level of attention they give the fiscal requirements in their own 

monitoring efforts. In addition, we recommend that Education amend its 

guidance for grantees and oversight officers to address all of Title 

Is fiscal requirements, including the SNS provision.

Agency Comments:

We received comments from Education on a draft of this report, which 

are reprinted in Appendix II. Education generally agreed with our 

recommendations for executive action to enhance its technical 

assistance and training efforts on the single audit process and to 

amend its own guidance to address all of Title Is fiscal 

accountability provisions.

On the policy issue of whether to eliminate the SNS requirement for 

schoolwide programs, Education is not ready to take a position. 

However, Education questioned the basis for the matter for 

congressional consideration that we propose. Education acknowledges the 

difficulties enforcing the SNS provision in schoolwide programs and we 

found that none of the districts we visited were able to develop a test 

for SNS that could be applied in a schoolwide setting. Education cited 

recent supplanting violations found by Title I monitoring staff to show 

that it was possible to assess supplantation in a schoolwide setting. 

However, according to an Education official, these findings were not 

for schoolwide programs.

Education says that the loss of the SNS requirement would not be 

completely offset by an enhanced MOE requirement because it would shift 

responsibility for fiscal accountability from the school to the 

district level. However, our review shows that the current requirement 

is unworkable in a schoolwide setting. As we said, while one can 

identify the separate funding sources going into a school, one cannot 

identify what services they funded in a schoolwide setting because 

federal, state, and local funds are pooled. In contrast, an MOE 

requirement is easier to measure, identify, and track, and therefore 

better promotes fiscal accountability in these settings. If Congress 

considers eliminating the SNS provision, we believe that enhancing the 

MOE requirement is a reasonable tradeoff. With regard to Educations 

regulation governing the SNS requirement that Education said we did not 

discuss, we did discuss this on page 13. We have added a footnote to 

make the report more clear on that point.

Education said that it did not agree that the level or scope of 

monitoring is inadequate. However, we found that Educations efforts to 

enforce the fiscal provisions have some limitations. By design, 

Educations current monitoring effort is directed at the provisions on 

accountability for academic results, but we found that the fiscal 

requirements were given little attention, and the materials developed 

by Education to guide monitoring efforts did not even mention SNS.

Finally, with regard to Educations review of single audit reports, 

this finding was published previously in our June 2002 report and 

specifically assessed the Title I program. The department concurred 

with our findings at that time and has provided us with a corrective 

action plan. Secretary Paiges August 26, 2002, letter to GAO indicated 

that it planned to address these findings by February 28, 2003.

In addition, we provided segments of this draft report to the states 

and school districts we visited. We have incorporated their comments in 

the report as appropriate.

We are sending copies of this report to the Secretary of Education, 

appropriate congressional committees, and other interested parties. In 

addition, the report will be available at no charge on GAOs Web site 

at http://www.gao.gov.

If you or your staff have any questions or wish to discuss this 

material further, please call Paul L. Posner at (202) 512-9573 or 

Marnie S. Shaul at (202) 512-7215. Other GAO contacts and staff 

acknowledgments are listed in appendix III.

Paul L. Posner

Managing Director, Intergovernmental Relations

 and Federal Budget Issues:

Signed by Paul L. Posner:

Marnie S. Shaul

Director, Education, Workforce,

 and Income Security Issues:

Signed by Marnie S. Shaul:

[End of section]

Appendix I: Scope and Methodology:

To determine how select states ensure compliance with maintenance of 

effort (MOE) and supplement-not-supplant (SNS), we interviewed state 

program and budget officials in six states: Arizona, California, 

Florida, Indiana, Louisiana, and Massachusetts. We also reviewed 

budgets and financial statements for school years 1999-2000 and 2000-

2001, as well as state guidance on fiscal accountability requirements. 

We also spoke with state auditors and reviewed their audit plans and 

other relevant workpapers. In addition to meeting with state officials, 

we spoke with local program and budget officials and school district 

administrators in six local education agencies including Douglas 

Unified School District and Glendale Elementary School District in 

Arizona, San Diego City Unified School District in California, Duval 

County Public Schools in Florida, Indianapolis Public Schools in 

Indiana, and Jefferson Parish Public Schools in Louisiana. Again, we 

reviewed budgets and financial statements for school years 1999-2000 

and 2000-2001 and local auditors audit plans and relevant workpapers.

We selected two of the states and three local school districts based on 

our search of the Federal Audit Clearinghouse,[Footnote 24] which is a 

Web-based database that we searched to identify states and school 

districts found out of compliance with one or more of the Title I 

fiscal accountability requirements in 2001. Two of the six states we 

selected were out of compliance with one of the fiscal accountability 

requirements, while the other four were not. Likewise, three of the 

school districts we visited were found to be out of compliance with the 

SNS provisions; the other three were not. Those states and local school 

districts without audit findings were selected to ensure variation in 

enrollment size, ethnic composition, economic condition, and geographic 

location.

To determine what efforts the U.S. Department of Education has taken to 

enforce the Title I fiscal accountability provisions and what 

limitations, if any, these efforts may have, we spoke with Education 

officials and reviewed Education guidance and documentation as well as 

recent GAO and OIG reports.

To assess what changes occurred between school years 1999-2000 and 

2000-01 in the federal share of education expenditures and to what 

extent federal funds were used to support state education agencies 

operating expenditures, we gathered information from state program and 

budget officials on federal, state, and local funding streams as well 

as full time equivalent (FTE) and operating expenditure data. We 

analyzed and summarized this information and presented it in a way that 

provides context and comparison across the six states. Due to the 

limited number of states and districts selected, our findings cannot be 

generalized to school districts nationwide.

[End of section]

Appendix II: Comments from the Department of Education:

UNITED STATES DEPARTMENT OF EDUCATION:

THE UNDER SECRETARY:

February 24, 2003:

Ms. Marnie S. Shaul Director:

Education, Workforce,

and Income Security Issues:

United States General Accounting Office Washington, D.C. 20548:

Dear Ms. Shaul:

This is in response to the draft report, Disadvantaged Students: 

Fiscal Oversight of Title I Could Be Improved (GAO 03 377) developed 

by GAO subsequent to its review of the implementation of the Title I 

fiscal requirements in six States, and of the Department of Educations 

efforts to enforce these requirements. Although GAO makes two 

recommendations for Executive Action with which we generally agree, 

there are a number of statements in the report that are factually 

incorrect.

GAO recommends under Matter for Congressional Consideration (on page 

26 of the report) that Congress consider eliminating the supplement, 

not supplant (SNS) requirements for schoolwide programs, and 

strengthen the maintenance of effort (MOE) requirement. While we are 

not yet ready to take a position on the proposed legislative change in 

light of the short time given to comment, we are commenting on GAOs 

basis for suggesting such a change.

In support of this recommendation, GAO cites the difficulty in 

determining compliance with the SNS requirement (ensuring compliance 

with an MOE provision presents few challenges and requires few 

additional audit resources, whereas monitoring the SNS provision is 

very challenging and requires significant audit resources). Though 

compliance with the SNS provision of the Title I legislation might be 

challenging in some instances, the provision is important in ensuring 

that Title I funds are supplementary in a schoolwide context and we do 

not believe that the recommendation to eliminate the provision is well 

supported. The SNS requirement provision helps to maintain the 

integrity of the program and to ensure that Title I funds are used to 

supplement State and local education funds.

The SNS requirement is very important in meeting the longstanding 

Congressional intent of the Title I program, which the authorizing 

statute makes clear is to supplement State and local education 

resources for the purpose of providing the additional instruction that 

low-achieving students in high-poverty schools need to meet State 

academic standards. For example, section I 114(a)(2)(B) of the ESEA 

states that schoolwide programs must use Title I funds only to 

supplement the amount of funds that would, in the absence of funds 

under this part, be made available from non-Federal sources for the 

school. Similarly, schoolwide reform strategies must increase the 
amount and 

quality of learning time [1114(b)(1)(B)(ii)(II)] and targeted 

assistance programs must give primary consideration to providing 

extended learning time [I I15(c)(1)(C)(i)]. In this context, the SNS 

requirement is central to the fiscal integrity of the program and to 

the successful achievement of the goals that Congress and President 

Bush set for Title I in the No Child Left Behind Act.

The SNS provision has meaning within the context of a schoolwide 

program and merely raising the MOE level for a local educational agency 

(LEA) would not ensure that a particular school or its students receive 

a fair share of State and local resources. Under the Departments 

regulation governing the SNS requirement in the context of schoolwide 

programs (in 34 CFR 200.25(d)), which the GAO draft report does not 

discuss, a school operating a schoolwide program must use its Title I 

and other Federal funds only to supplement the total amount of funds 

that would, in the absence of the Federal funds, be made available from 

non-Federal sources for that school, including funds needed to provide 

services that are required by law for children with disabilities and 

children with limited English proficiency. (See also the guidance in 

the compliance supplement.) The MOE provision does not serve to ensure 

that a particular school operating a schoolwide program receives 

supplemental services from the Federal funds.

We also do not agree that the level or scope of monitoring is 

inadequate. While we continue to make improvements to the monitoring 

process, we believe that our current monitoring is appropriately 

directed at the provisions on accountability for academic results and 

other requirements, including the fiscal requirements. Recently 

Department Title I monitoring staff found supplanting violations in 

providing Title I services in the use of Title I equipment at private 

schools, the funding of pre-school programs, and Title I-paid salaries 

of administrators at the LEA level. We are continuing to work with the 

States involved to resolve these matters. While we agree that there is 

no simple numeric formula that can be applied to SNS, as can be done 

for comparability and maintenance of effort, this does not make the 

prohibition any less important or valuable for ensuring that the Title 

I program is truly supplementary and has the full opportunity to have a 

positive impact on the students it serves. Determining if SNS is being 

met may require a comparison of Title I schools to non-Title I schools, 

looking at school, LEA and State education agency budgets to determine 

if resources have been cut in the anticipation of the receipt of the 

Federal funds, and asking questions of school personnel, LEA personnel, 

and SEA personnel. Further, strengthening the MOE provisions to require 

LEAs to maintain 95 percent of their previous years expenditures (an 

increase from 90 percent) would not offset a diminished role of SNS.

GAO concludes (on page 24 of the report) that the primary effect of a 

nonsupplant provision is to prevent the reallocation of State and local 

resources within a Title I school. This is only partially correct - 

while it would not be permissible for an LEA to pay for goods and 

services with State and local funds one year, and then use Title I 

funds for those same goods and services the next, the SNS provision 

prohibits LEAs from using Title I funds for activities that would 

otherwise be funded with State and local funds. Department Title I 

monitoring staff have found instances of noncompliance with the SNS:

requirement in the immediate (current) school year when monitoring was 

conducted. What we have found (in the instances noted above) is that, 

in some cases, LEAs use Title I funds to pay for services or activities 

in Title I schools, and use State or local funds to pay for these same 

services or activities in non-Title I schools. This is a clear 

violation of the SNS requirement.

Lastly, we disagree with the finding on pages 21-22 of the report 

that, although Education had procedures for obtaining States single 

audit reports, distributing audit findings to appropriate audit offices 

and assessing the seriousness of the findings, we found that reviewers 

did not demonstrate they consistently worked to resolve audit findings. 

Specifically, reviewers did not consistently follow-up with written 

management decisions on final audit resolution and did not communicate 

findings to senior department management.	Since the report deals 

specifically with the Title I (Part A) program, we must assume that the 

reviewers referenced in the report are those in the Department 

responsible for the Title I audit resolution process. These staff have 

consistently followed Department policy and procedures in reviewing and 

resolving audits, conducting thorough analyses of State audit reports 

(including audit work papers) in a timely manner. These staff fully 

understand the fiscal provisions discussed in the report and are very 

capable of reviewing findings involving these provisions. Final 

Department responses to all Title I-related audits are prepared by 

experienced staff, and reviewed by other Department offices with 

expertise in implementing and understanding these requirements 

(including, in some cases, the Office of Inspector General) and are 

ultimately issued by the Assistant Secretary after a careful review 

process.

We have no problems with improving technical assistance as recommended 

by the draft GAO report. However, we believe that the draft GAO report 

does not fully recognize the strength of regulations and guidance that 

the Department has already issued, the success of its monitoring 

efforts, and the knowledge and understanding of the fiscal requirements 

by those involved in the audit resolution process. Therefore, we 

believe that the draft report has some serious weaknesses. We would be 

glad to work with GAO to supply further information to improve the 

report.

Sincerely,

Eugene W. Hickok:

Signed by Eugene W. Hickok:

[End of section]

Appendix III: GAO Contacts and Staff Acknowledgments:

GAO Contacts:

Tom James, (202) 512-2996, jamest@gao.gov

Eleanor Johnson, (202) 512-7209, johnsone@gao.gov

Acknowledgments:

In addition to those named above Bill Keller, Jennifer Ashford, and 

Leah Nash made key contributions to this report. Patrick DiBattista 

provided exceptional editorial assistance on the content and message of 

the report. Behn Miller and Richard P. Burkard supplied legal advice on 

several complex aspects of our work. Thomas Broderick and Jacquelyn 

Hamilton provided technical assistance on the Single Audit Act.

[End of section]

Appendix IV: Related GAO Products:

Education:

Education School Finance: Per-Pupil Spending Differences between 

Selected Inner City and Suburban Schools Varied by Metropolitan Area. 

GAO-03-234. Washington, D.C.: December 9, 2002.

Title I: Education Needs to Monitor States Scoring of Assessments. 

GAO-02-393. Washington, D.C.: April 1, 2002.

Title I Funding: Poor Children Benefit Though Funding Per Poor Child 

Differs. GAO-02-242. Washington, D.C.: January 31, 2002.

Title I Preschool Education: More Children Served, but Gauging Effect 

on School Readiness Difficult. GAO/HEHS-00-171. Washington, D.C.: 

September 20, 2000.

Title I Program: Stronger Accountability Needed for Performance of 

Disadvantaged Students. GAO/HEHS-00-89. Washington, D.C.: June 1, 2000.

Education Finance: Extent of Federal Funding in State Education 

Agencies. GAO/HEHS-95-3. Washington, D.C.: October 14, 1994.

Single Audit:

Single Audit: Single Audit Act Effectiveness Issues.

GAO-02-877T. Washington, D.C.: June 26, 2002.

Single Audit: Actions Needed to Ensure That Findings Are Corrected. 

GAO-02-705. Washington, D.C.: June 26, 2002.

Single Audit: Survey of CFO Act Agencies. GAO-02-376. Washington, D.C.: 

March 15, 2002.

Single Audit: Update on the Implementation of the Single Audit Act 

Amendments of 1996. GAO/AIMD-00-293. Washington, D.C.:

September 29, 2000.

Single Audit: Refinements Can Improve Usefulness. GAO/AIMD-94-133. 

Washington, D.C.: June 21, 1994.

Intergovernmental Relations:

Welfare Reform: Challenges in Maintaining a Federal/State Fiscal 

Partnership. GAO-01-828. Washington, D.C.: August 10, 2001.

Welfare Reform: Challenges in Saving for a Rainy Day.  GAO-01-674T. 

Washington, D.C.: April 26, 2001.

Welfare Reform: Early Fiscal Effects of the TANF Block Grant. GAO/AIMD-

98-137. Washington, D.C.: August 18, 1998.

Federal Grants: Design Improvements Could Help Federal Resources Go 

Further. GAO/AIMD-97-7. Washington, D.C.: December 18, 1996.

Block Grants: Issues in Designing Accountability Provisions.

GAO/AIMD-95-226. Washington, D.C.: September 1, 1995.

Block Grants: Characteristics, Experience, and Lessons Learned. GAO/

HEHS-95-74. Washington, D.C.: February 9, 1995.

Proposed Changes in Federal Matching and Maintenance of Effort 

Requirements. GAO/GGD-81-7. Washington, D.C.: December 23, 1980.

GAOs Mission:

The General Accounting Office, the audit, evaluation and investigative 

arm of Congress, exists to support Congress in meeting its 

constitutional responsibilities and to help improve the performance and 

accountability of the federal government for the American people. GAO 

examines the use of public funds; evaluates federal programs and 

policies; and provides analyses, recommendations, and other assistance 

to help Congress make informed oversight, policy, and funding 

decisions. GAOs commitment to good government is reflected in its core 

values of accountability, integrity, and reliability.

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Orders should be sent to:

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Accountability Provisions, GAO/AIMD-95-226 (Washington, D.C.: Sept. 1, 

1995).

FOOTNOTES

[1] Arizona, California, Florida, Indiana, Louisiana, and 

Massachusetts.

[2] Douglas Unified School District and Glendale Elementary School 

District in Arizona, 

San Diego City Unified School District in California, Duval County 

Public Schools in Florida, Indianapolis Public Schools in Indiana, and 

Jefferson Parish Public Schools in Louisiana.

[3] U.S. General Accounting Office, Welfare Reform: Challenges in 

Maintaining a Federal-State Fiscal Partnership, GAO-01-828 

(Washington, D.C.: Aug. 10, 2001).

[4] U.S. General Accounting Office, Single Audit: Refinements Can 

Improve Usefulness, GAO/AIMD-94-133 (Washington, D.C., June 21, 1994).

[5] Audits of States, Local Governments, and Non-Profit Organizations.

[6] Each nonfederal entity that expends awards under only one federal 

program and is not subject to laws, regulations, or federal award 

agreements that require a financial statement audit, may elect to have 

a program-specific audit instead of a single audit. 31 U.S.C. 7502 

(a)(1)(C).

[7] ESEA allows grantees to request a waiver from the MOE requirement 

if they are unable to meet the requirement in any given year; but few 

LEAs have requested such a waiver. Only 25 LEAs have requested waivers 

since 1995, and Education has approved 7 requests.

[8] California plans to begin verifying LEA compliance with the MOE 

requirement before the grant is awarded in 2003.

[9] However, if there were evidence that other state funds could be 

made available, or that state law mandated state funding despite the 

budget deficit, the use of Title I funds could violate the SNS 

requirement. See State of New York v. Education, 903 F.2d 930 

(2d Cir. 1990).

[10] 20 U.S.C.  6321(d). The implementing regulations, 34 C.F.R.  

200.79 generally provide that a program meets the intent and purposes 

of Title I if the program is either

(1) implemented in a school in which the percentage of children from 

low-income families is at least 40 percent or (2) serves children who 

are failing, or at most risk of failing to meet the states challenging 

academic achievement standards.

[11] See 34 CFR 200.25d (2003).

[12] This threshold is appropriate as recommended in our previous work. 

(See U.S. General Accounting Office, Single Audit: Refinements Can 

Improve Usefulness, GAO/AIMD-94-133 (Washington D.C., June 21, 1994). 

Single Audits are intended to help focus audit resources where the 

Congress originally intended they be focused, that is, on recipients 

expending the largest amounts of federal financial assistance. 

[13] The use of risk-based criteria is appropriate as recommended in 

our previous work. Single Audit: Refinements Can Improve Usefulness, 

GAO/AIMD-94-133 (Washington D.C., June 21, 1994). When considering 

program risk, auditors are required to consider such items as the 

recipients current and prior audit experience with federal programs; 

the results of recent oversight visits by federal, state, and local 

agencies; and the inherent risk of the program. 

[14] In some cases, a random sample as small as 45 transactions could 

be used to test the effectiveness of the internal control environment. 

A single error in this sample is evidence that the control environment 

is not highly effective, i.e., material errors may occur.

[15] To identify every occurrence of noncompliance, one would have to 

audit every transaction in the population.

[16] Florida plans to begin on-site monitoring of LEAs this year. 

[17] U.S. General Accounting Office, Single Audit: Actions Needed to 

Ensure That Findings Are Corrected, GAO-02-705 (Washington D.C., June 

26, 2002).

[18] An LEA is considered to have met the statutory comparability 

requirements if it has implemented (1) an LEA-wide salary schedule; (2) 

a policy to ensure equivalence among schools in teachers, 

administrators, and other staff; and (3) a policy to ensure equivalence 

among schools in the provision of curriculum materials and 

instructional supplies. In most of the states we visited, the SEA 

requires LEAs to submit certifications that they have implemented these 

policies, which the auditors can then verify during their annual 

audits.

[19] Kristen Tosh Cowan, Esq. and Leigh M. Manasevit, Esq., Brustein & 

Manasevit, The New Title I: Balancing Flexibility with Accountability: 

Charles J. Edwards and Cheryl L. Sattler, Ph. D., contributing editors 

(Washington, D.C.: Thompson Publishing Group, Inc., 2002).

[20] Review of the Office of Elementary & Secondary Educations 

Monitoring of Formula Grants: Final Audit Report, Office of Inspector 

General, United States Department of Education, November 2001.

[21] U.S. General Accounting Office, Single Audit: Actions Needed to 

Ensure That Findings Are Corrected, GAO-02-705 (Washington D.C., June 

26, 2002).

[22] U. S. General Accounting Office, Education Finance: Extent of 

Federal Funding in State Education Agencies, GAO/HEHS-95-3 (Washington, 

D.C.: Oct. 14, 1994).

[23] The Federal Audit Clearinghouse single audit database was 

established as a result of the Single Audit Act Amendments of 1996 and 

contains summary information on the auditor, the recipient and its 

federal programs, and the audit results.

[24]

GAOs Mission:

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of the federal government for the American people. GAO examines the use 

of public funds; evaluates federal programs and policies; and provides 

analyses, recommendations, and other assistance to help Congress make 

informed oversight, policy, and funding decisions. GAOs commitment to 

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20548: