Disadvantaged Students: Fiscal Oversight of Title I Could Be Improved
Published: 2003-02-28T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: New resources for education come at a time when states are struggling to address budget shortfalls. Two provisions in Title I--maintenance 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 states--Arizona, California, Florida, Indiana, Louisiana, and Massachusetts--conducted 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.
section_title: What GAO Found
paragraphs: In the states we visited, state program officials used three tools--the states' annual financial reports, the single audit process, and limited program monitoring--to oversee Title I's 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 available--an 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 pooled--or in districts undergoing significant districtwide reforms--where 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 audit's 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 GAO's 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 I's 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, Education's 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.

section_title: Letter
paragraphs: 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. ESEA’s 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 LEA’s  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 recipient’s internal controls  which covers an entity’s 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 and six local school districts. 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 Education’s 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 SEA’s 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.
subsections: section_title: Background
paragraphs: 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 state’s  per pupil expenditures.
subsections: section_title: Local Flexibility
paragraphs: 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 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 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 program’s 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.
section_title: Title I Fiscal Accountability Requirements
paragraphs: 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 LEA’s 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.)
section_title: Monitoring Process
paragraphs: 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.
subsections: section_title: Formal Monitoring Systems
paragraphs: 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.
section_title: Single Audits
paragraphs: 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 recipient’s 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.
Guidance for conducting a single audit is found in the Office of  Management and Budget’s (OMB) Circular A-133 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 auditor’s 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.
section_title: Informal Monitoring Systems
paragraphs: 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.
section_title: States Used Multiple Tools to Enforce the Fiscal Accountability Provisions, but Relied Primarily on the Single Audit Process to Enforce SNS
paragraphs: 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 I’s 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.
subsections: section_title: Monitoring Compliance with MOE Presents Few Challenges
paragraphs: In the states we visited, verifying compliance with Title I’s 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. 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 year’s submission and other grant award  documentation but did not independently check against the state’s  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 year’s 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 state’s department of education for failing to enforce the  MOE provisions before the current year’s 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.
section_title: Many Factors Contribute to Difficulties Enforcing SNS Provision
paragraphs: While verifying Title I’s 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.
subsections: section_title: The SNS Provision Is Difficult to Apply in Many Circumstances
paragraphs: 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. 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. 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.
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.
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 district’s Title I schools operate schoolwide  programs but not all schools were Title I schools. Duval’s 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 district’s   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.
section_title: Some Officials Rely on the Single Audit, without Understanding What Its Scope and Methodology Mean for Assessing the SNS Provision
paragraphs: 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, 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. 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 auditee’s financial transactions for the year under  review. 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.  When auditors of Douglas (Arizona) USD identified significant internal  control weaknesses based on analysis of a sample of the district’s financial  they reported that their review of the district’s 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 auditor’s finding and has  implemented policies to address the deficiencies.
section_title: Selected States Conduct Limited Program Monitoring
paragraphs: 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.
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.
section_title: Education’s Key Efforts to Enforce Fiscal Accountability Provisions Have Limitations
paragraphs: 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, Education’s  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.
subsections: section_title: Officials and Auditors Confused about Application of Fiscal Accountability Provisions to Their Particular Circumstances
paragraphs: Education developed guidance for its programs which appeared in the  compliance supplement to OMB’s Circular A-133. This guidance was the  basis for the audit plans for all the districts we visited. Education’s  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. 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 district’s 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. School officials and auditors in other districts we visited also  told us they supplement federal guidance with similar nongovernmental  sources of guidance.
section_title: Fiscal Accountability Is Not the Primary Focus of Education’s Program Monitoring
paragraphs: The fiscal accountability provisions have not been the focus of  Education’s 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 Education’s  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. Education’s  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.
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. Education’s 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.
section_title: Education’s Review of State Single Audit Reports Has Weaknesses
paragraphs: 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.
section_title: Little Change in Federal Share from School Years 1999- 2000 to 2000-2001
paragraphs: 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.
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. 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.)
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.
section_title: Conclusions
paragraphs: 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 I’s  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 provision’s 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.
section_title: Matters for Congressional Consideration
paragraphs: 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.
section_title: Recommendations for Executive Action
paragraphs: 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 I’s fiscal  requirements, including the SNS provision.
section_title: Agency Comments
paragraphs: 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 I’s 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 Education’s 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 Education’s efforts to enforce the  fiscal provisions have some limitations.  By design, Education’s 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 Education’s 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  Paige’s 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 GAO’s 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.
section_title: Appendix I: Scope and Methodology
paragraphs: 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, 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.
section_title: Appendix II: Comments from the Department of Education
section_title: Appendix III: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Acknowledgments
paragraphs: 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.
section_title: Appendix IV: Related GAO Products
subsections: section_title: Education
paragraphs: 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.
section_title: Single Audit
paragraphs: 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.
section_title: Intergovernmental Relations
paragraphs: 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.