Honorable Charles Norwood
          House of Representatives
          Washington, DC 20515

Dear Congressman Norwood:

I am writing to provide you with a report of our efforts to correct            long-standing management problems at the Department of Education. Some            of the persistent management problems that I inherited have been identified            in the Ernst & Young financial statement audit for the period ended            September 2000, and in the testimony to Congress by the Department's            Inspector General. As a result of the Inspector General's testimony,            there have been widely quoted news reports suggesting that $450 million            was lost due to mismanagement, fraud, or theft.

This letter is intended to explain what we have learned to date as            a result of our investigations regarding that figure. It will also explain            the nature and type of payments or costs reflected in the $450 million,            how they were discovered and whether they resulted in actual losses            to the Department, methods of recovery we have initiated to recapture            any lost funds, and actions I have undertaken to ensure that this situation            does not occur again. I want to clarify at the outset that the $450            million figure does not represent funds lost by the Department and is            not a proper measure of the Department's financial management problems.

This Department provides approximately $63 billion in payments to recipients            annually. These funds are awarded to a wide range of government agencies,            private and public organizations, and individuals. For example, recipients            typically include state and local education agencies, colleges and universities,            nonprofit organizations, private contractors, and individual students.            In making these payments, the Department makes about 500,000 financial            transactions every year.

The Inspector General characterized $450 million of these payments            or costs as improper over the period 1998-2000. The following three            categories explain how this $450 million was determined:

- $250 million represents duplicate payments or two payments provided            to one entity for the same purpose. The Department recovered this            entire amount and no financial loss occurred to the taxpayer. The            money was not properly awarded, but it has been recovered. The $250            million is not "missing."
- $100 million was identified as legal judgments against grantees or            other recipients of Department funds who may have obtained funds through            illegal or improper methods. Responsibility for the recovery of this            money has been turned over to the Justice Department, and they have            informed us that to date they have recovered approximately $40 million            of these funds. We are continuing to work aggressively with the Justice            Department to pursue recovery of the remaining funds.
- $100 million was identified as misspent through routine financial            audits of grantees, contractors, and other fund recipients conducted            by the Department and Inspector General. As a result of this audit work,            the Inspector General questioned, and Department staff later agreed,            that approximately $100 million had been misspent. This includes, for            example, funds not spent in accordance with the terms and conditions            of a grant award, or expenditures where the recipient was unable to            provide adequate documentation to support the expenditures. We have            recovered almost $3 million of these funds, and have promissory notes            outstanding from entities and students that should result in the recovery            of an additional $53 million. I must note, however, that it is unlikely            that most of the remaining $44 million will be recovered. Some of the            recipients of this money have now declared bankruptcy. Also, it may            ultimately be determined that some of the money may not be owed to the            Department, since the audit determinations may be reduced or overturned            through legal or administrative appeals.

None of the $200 million described in the two preceding bullets            represents losses due to financial mismanagement by the Department.            Rather, these amounts reflect wrongdoing by recipients of Department            funds, failure to adhere to contract or grant terms, or lack of documentation            by recipients. Efforts by the Inspector General's office, other            Department offices, and the Justice Department to find these problems,            recover the funds, and enforce the law are examples of efforts we need            to make in order to protect the federal interest.

As you know, I have launched an initiative to strengthen Department            management, with a particular emphasis on financial management. A few            weeks ago, I held a news conference and told the press and the American            taxpayer that yes, there have been problems in the past, and that there            are no excuses for those problems. Our job is straightforward: fix the            problems and protect the taxpayers' money.

Our two major goals are to obtain a clean audit (an unqualified financial            statement audit opinion) and remove the General Accounting Office's           "high risk" designation from our student financial aid programs. I believe            that achievement of these goals is vital to assure public confidence            in the integrity of the Department, and our ability to carry out our            mission to improve education in our Nation. The American people and            the Congress have every right to expect effective stewardship of taxpayer            funds by the Department. Rest assured, as Secretary of Education, it            is my mission to see that taxpayers' money is protected and spent on            educating children.

We are working hard to correct long-standing management problems we            found in the Department. I look forward to sharing the results of our            management improvement efforts regularly with Congress and the public.            I also look forward to working with you and others in Congress as we            strive to reform American education and improve student achievement            so that no child is left behind.

Sincerely,

/s/

Rod Paige

|Last Modified: 09/15/2004
|-------------------------