Recovery Act: As Initial Implementation Unfolds in States and Localities, Continued Attention to Accountability Issues Is Essential
Published: 2009-04-23T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: This testimony discusses GAO's work examining the uses and planning by selected states and localities for funds made available by the American Recovery and Reinvestment Act of 2009 (Recovery Act). The Recovery Act is estimated to cost about $787 billion over the next several years, of which about $280 billion will be administered through states and localities. Funds made available under the Recovery Act are being distributed to states, localities, and other entities and individuals through a combination of grants and direct assistance. As Congress may know, the stated purposes of the Recovery Act are to: (1) preserve and create jobs and promote economic recovery; (2) assist those most impacted by the recession; (3) provide investments needed to increase economic efficiency by spurring technological advances in science and health; (4) invest in transportation, environmental protection, and other infrastructure that will provide long-term economic benefits; and (5) stabilize state and local government budgets, in order to minimize and avoid reductions in essential services and counterproductive state and local tax increases. As described in GAO's March testimony, the Recovery Act specifies several roles for GAO including conducting bimonthly reviews of selected states' and localities' use of funds made available under the act. This statement today is based on our report being released today, Recovery Act: As Initial Implementation Unfolds in States and Localities, Continued Attention to Accountability Issues Is Essential, which is the first in a series of bimonthly reviews we will do on states' and localities' uses of Recovery Act funding and covers the actions taken under the Act through April 20, 2009. Our report and our other work related to the Recovery Act can be found on our new website called Following the Money: GAO's Oversight of the Recovery Act, which is accessible through GAO's home page at www.gao.gov . Like the report, this statement discusses (1) selected states' and localities' uses of and planning for Recovery Act funds, (2) the approaches taken by the selected states and localities to ensure accountability for Recovery Act funds, and (3) states' plans to evaluate the impact of the Recovery Act funds they received.
section_title: What GAO Found
paragraphs: About 90 percent of the estimated $49 billion in Recovery Act funding to be provided to states and localities in FY2009 will be through health, transportation and education programs. Within these categories, the three largest programs are increased Medicaid Federal Medical Assistance Percentage (FMAP) grant awards, funds for highway infrastructure investment, and the State Fiscal Stabilization Fund (SFSF). The funding notifications for Recovery Act funds for the 16 selected states and the District of Columbia (the District) have been approximately $24.2 billion for Medicaid FMAP on April 3, $26.7 billion for highways on March 2, and $32.6 billion for SFSF on April 2. Fifteen of the 16 states and the District have drawn down approximately $7.96 billion in increased FMAP grant awards for the period October 1, 2008 through April 1, 2009. The increased FMAP is for state expenditures for Medicaid services. The receipt of this increased FMAP may reduce the state share for their Medicaid programs. States have reported using funds made available as a result of the increased FMAP for a variety of purposes. For example, states and the District reported using these funds to maintain their current level of Medicaid eligibility and benefits, cover their increased Medicaid caseloads-which are primarily populations that are sensitive to economic downturns, including children and families, and to offset their state general fund deficits thereby avoiding layoffs and other measures detrimental to economic recovery. States are undertaking planning activities to identify projects, obtain approval at the state and federal level and move them to contracting and implementation. For the most part, states were focusing on construction and maintenance projects, such as road and bridge repairs. Before they can expend Recovery Act funds, states must reach agreement with the Department of Transportation on the specific projects; as of April 16, two of the 16 states had agreements covering more than 50 percent of their states' apportioned funds, and three states did not have agreement on any projects. While a few, including Mississippi and Iowa had already executed contracts, most of the 16 states were planning to solicit bids in April or May. Thus, states generally had not yet expended significant amounts of Recovery Act funds. The states and D.C. must apply to the Department of Education for SFSF funds. Education will award funds once it determines that an application contains key assurances and information on how the state will use the funds. As of April 20, applications from three states had met that determination- South Dakota, and two of GAO's sample states, California and Illinois. The applications from other states are being developed and submitted and have not yet been awarded. The states and the District report that SFSF funds will be used to hire and retain teachers, reduce the potential for layoffs, cover budget shortfalls, and restore funding cuts to programs. Planning continues for the use of Recovery Act funds. State activities indlude appointing Recovery Czars; establishing task forces and other entities, and developing public websites to solicit input and publicize selected projects. GAO found that the selected states and the District are taking various approaches to ensuring that internal controls manage risk up-front; they are assessing known risks and developing plans to address those risks. State auditors are also planning their work including conducting required single audits and testing compliance with federal requirements. Nearly half of the estimated spending programs in the Recovery Act will be administered by non-federal entities. State officials suggested opportunities to improve communication in several areas. Officials in nine of the 16 states and the District expressed concern about determining the jobs created and retained under the Recovery Act, as well as methodologies that can be used for estimation of each.

section_title: Letter
paragraphs: I am pleased to be here today to discuss our work examining the uses and  planning by selected states and localities for funds made available by the  American Recovery and Reinvestment Act of 2009 (Recovery Act).  The  Recovery Act is estimated to cost about $787 billion over the next several  years, of which about $280 billion will be administered through states and  localities. Funds made available under the Recovery Act are being  distributed to states, localities, and other entities and individuals through a  combination of grants and direct assistance. As you know, the stated  purposes of the Recovery Act are to: preserve and create jobs and promote economic recovery;   assist those most impacted by the recession;    provide investments needed to increase economic efficiency by  spurring technological advances in science and health;  invest in transportation, environmental protection, and other  infrastructure that will provide long-term economic benefits; and  stabilize state and local government budgets, in order to minimize and  avoid reductions in essential services and counterproductive state and  local tax increases.
As I described in my March testimony,  the Recovery Act specifies several  roles for GAO including conducting bimonthly reviews of selected states’  and localities’ use of funds made available under the act.  My statement  today is based on our report being released today, Recovery Act: As Initial  Implementation Unfolds in States and Localities, Continued Attention to  Accountability Issues Is Essential, which is the first in a series of  bimonthly reviews we will do on states’ and localities’ uses of Recovery  Act funding and covers the actions taken under the Act through April 20,  2009.  Our report and our other work related to the Recovery Act can be  found on our new website called Following the Money: GAO’s Oversight  of the Recovery Act, which is accessible through GAO’s home page at  www.gao.gov.
Like the report, my statement this morning discusses (1) selected states’  and localities’ uses of and planning for Recovery Act funds, (2) the  approaches taken by the selected states and localities to ensure  accountability for Recovery Act funds, and (3) states’ plans to evaluate the  impact of the Recovery Act funds they received. Our report addresses each  of these objectives in detail and contains an appendix on each of the 16  states and the District of Columbia (the District) where we did our  detailed work that discusses our reporting objectives as they apply to each  of those locations.
As discussed in my March testimony, we selected a core group of 16 states  and the District that we will follow over the next few years to provide an  ongoing longitudinal analysis of the use of funds provided in conjunction  with the Recovery Act. The states are Arizona, California, Colorado,  Florida, Georgia, Iowa, Illinois, Massachusetts, Michigan, Mississippi, New  Jersey, New York, North Carolina, Ohio, Pennsylvania, and Texas. These  states contain about 65 percent of the U.S. population and are estimated to  receive collectively about two-thirds of the intergovernmental federal  assistance funds available through the Recovery Act. We selected these  states and the District on the basis of outlay projections, percentage of the  U.S. population represented, unemployment rates and changes, and a mix  of states’ poverty levels, geographic coverage, and representation of both  urban and rural areas. In addition for this bimonthly review, we visited a  non-probability sample of about 60 localities within the 16 selected states.
We collected documents from and conducted semi-structured interviews  with executive-level state and local officials and staff from Governors’  offices, “Recovery Czars,” State Auditors, Controllers, and Treasurers. We  also interviewed staff from state legislatures. In addition, our work  focused on federal, state, and local agencies administering programs  receiving Recovery Act funds. We analyzed data and interviewed officials  from the federal Office of Management and Budget (OMB). We also  analyzed other federal guidance on programs selected for this review and  spoke with relevant program officials at the Centers for Medicare &  Medicaid Services (CMS), the U.S. Department of Transportation and the  U.S. Department of Education. We did not review state legal materials for  this report, but relied on state officials and other state sources for  description and interpretation of relevant state constitutions, statutes,  legislative proposals, and other state legal materials. A detailed description  of our scope and methodology can be found in an appendix to our report.
We conducted a performance audit for our first bimonthly review from  February 17, 2009, to April 20, 2009 in accordance with generally accepted  government auditing standards. Those standards require that we plan and  perform the audit to obtain sufficient, appropriate evidence to provide a  reasonable basis for our findings and conclusions based on our audit  objectives. We believe that the evidence obtained provides a reasonable  basis for our findings and conclusions based on our audit objectives.
In addition to our ongoing work on selected states’ and localities’ use of  Recovery Act funding, we have completed two of the other mandates  included for us in the Recovery Act. First, on April 3, 2009, we announced  the appointment of 13 members to the Health Information Technology  Policy Committee, a new advisory body established by the Recovery Act.  Additionally, on April 16, 2009, we issued a report on the actions of the  Small Business Administration (SBA) to, among other things, increase  liquidity in the secondary market for SBA loans.
subsections: section_title: Summary of GAO Findings
subsections: section_title: Uses of Funds
paragraphs: About 90 percent of the estimated $49 billion Recovery Act funding to be  provided to states and localities in fiscal year 2009 will be through health,  transportation and education programs. Within these categories, the three  largest programs are increased Medicaid Federal Medical Assistance  Percentage (FMAP) grant awards, funds for highway infrastructure  investment, and the State Fiscal Stabilization Fund (SFSF). Table 1 shows  the breakout of funding available for these three programs in the 16  selected states and the District. The Recovery Act funding for these 17  jurisdictions accounts for a little less than two-thirds of total Recovery Act  funding for these three programs.
The 16 states and the District have drawn down approximately $7.96  billion in increased FMAP grant awards for the period October 1, 2008,  through April 1, 2009. The increased FMAP is for state expenditures for  Medicaid services. The receipt of this increased FMAP may reduce the  state share for their Medicaid programs. States have reported using funds  made available as a result of the increased FMAP for a variety of purposes.  For example, states and the District most frequently reported using these  funds to maintain their current level of Medicaid eligibility and benefits,  cover their increased Medicaid caseloads-which are primarily populations  that are sensitive to economic downturns, including children and families,  and to offset their state general fund deficits, thereby avoiding layoffs and  other measures detrimental to economic recovery.
subsections: section_title: Highway Infrastructure Investment
paragraphs: States are undertaking planning activities to identify projects, obtain  approval at the state and federal level, and move them to contracting and  implementation. Some state officials told us they were focusing on  construction and maintenance projects, such as road and bridge repairs.  Before they can expend Recovery Act funds, states must reach agreement  with the Department of Transportation on the specific projects; as of April  16, 2009, two of the 16 states had agreements covering more than 50  percent of their states’ apportioned funds, and three states did not have  agreement on any projects. While a few, including Mississippi and Iowa  had already executed contracts, most of the 16 states were planning to  solicit bids in April or May. Thus, states generally had not yet expended  significant amounts of Recovery Act funds.
section_title: State Fiscal Stabilization Fund
paragraphs: The states and the District must apply to the Department of Education for  SFSF funds. Education will award funds once it determines that an  application contains key assurances and information on how the state will  use the funds. As of April 20, applications from three states had met that  determination-South Dakota, and two of GAO’s sample states, California  and Illinois. The applications from other states are being developed and  submitted and have not yet been awarded. The states and the District  report that SFSF funds will be used to hire and retain teachers, reduce the  potential for layoffs, cover budget shortfalls, and restore funding cuts to  programs.
Planning continues for the use of Recovery Act funds. Figure 1 below  shows the projected timing when funds will be made available to states  and localities.
State planning activities include appointing Recovery Czars, establishing  task forces and other entities, and developing public websites to solicit  input and publicize selected projects. In many states, legislative  authorization is needed before the state can receive and/or expend funds  or make changes to programs or eligibility requirements.
Accountability Approaches  We found that the selected states and the District are taking various  approaches to ensure that internal controls are in place to manage risk up- front; they are assessing known risks and developing plans to address  those risks. However, officials in most of the states and the District  expressed concerns regarding the lack of Recovery Act funding provided  for accountability and oversight. Due to fiscal constraints, many states  reported significant declines in the number of oversight staff—limiting  their ability to ensure proper implementation and management of  Recovery Act funds. State auditors are also planning their work including  conducting required single audits and testing compliance with federal  requirements. The single audit process is important for effective oversight  but can be modified to be a more timely and effective audit and oversight  tool for the Recovery Act and OMB is weighing options on how to modify  it.
Nearly half of the estimated spending programs in the Recovery Act will be  administered by non-federal entities. State officials suggested  opportunities to improve communication in several areas. For example,  they wish to be notified when Recovery Act funds are made available  directly to prime recipients within their state that are not state agencies.
section_title: Plans to Evaluate Impact
paragraphs: An important objective of the Recovery Act is to preserve and create jobs  and promote economic recovery. Officials in nine of the 16 states and the  District expressed concern about determining jobs created and retained  under the Recovery Act, as well as methodologies that can be used for  estimation of each.
section_title: GAO’s Recommendations
paragraphs: OMB has moved out quickly to guide implementation of the Recovery Act.  As OMB’s initiatives move forward, it has opportunities to build upon its  efforts to date by addressing several important issues.
subsections: section_title: Accountability and Transparency Requirements
paragraphs: The Director of OMB should:  adjust the single audit process to provide for review of the design of  internal controls during 2009 over programs to receive Recovery Act  funding, before significant expenditures in 2010.  continue efforts to identify methodologies that can be used to  determine jobs created and retained from projects funded by the  Recovery Act.  evaluate current requirements to determine whether sufficient, reliable  and timely information is being collected before adding further data  collection requirements.
section_title: Administrative Support and Oversight
paragraphs: The Director of OMB should clarify what Recovery Act funds can be used  to support state efforts to ensure accountability and oversight.
section_title: Communications
paragraphs: The Director of OMB should provide timely and efficient notification to (1)  prime recipients in states and localities when funds are made available for  their use, (2) states, where the state is not the primary recipient of funds,  but has a state-wide interest in this information, and (3) all recipients, on  planned releases of federal agency guidance and whether additional  guidance or modifications are expected.
section_title: OMB, States, and District Comments on the Draft of Our Report
paragraphs: We provided the Director of the Office of Management and Budget with a  draft of this report for comment on April 20, 2009. OMB staff responded  the next day, noting that in its initial review, OMB concurred with the  overall objectives of our recommendations. OMB staff also provided some  clarifying information, adding that OMB will complete a more thorough  review in a few days. We have incorporated OMB’s clarifying information  as appropriate. In addition, OMB said it plans to work with us to define the  best path forward on our recommendations and to further the  accountability and transparency of the Recovery Act. The Governors of  each of the 16 states and the Mayor of the District were provided drafts for  comment on each of their respective appendixes in this report. Those  comments are included in the appendixes.
section_title: Background
paragraphs: Over time, the programmatic focus of Recovery Act spending will change.  As shown in figure 2, about two-thirds of Recovery Act funds expected to  be spent by states in the current 2009 fiscal year will be health-related  spending, primarily temporary increases in Medicaid FMAP funding.  Health, education, and transportation is estimated to account for  approximately 90 percent of fiscal year 2009 Recovery Act funding for  states and localities. However, by fiscal year 2012, transportation will be  the largest share of state and local Recovery Act funding. Taken together,  transportation spending, along with investments in community  development, energy, and environmental areas that are geared more  toward creating long-run economic growth opportunities, will represent  approximately two-thirds of state and local Recovery Act funding in 2012.
section_title: States’ and Localities’ Use of and Plans for Recovery Act Funds Focuses on Purposes of the Act and States’ Fiscal Stresses
subsections: section_title: Medicaid FMAP
paragraphs: Medicaid is a joint federal-state program that finances health care for  certain categories of low-income individuals, including children, families,  persons with disabilities, and persons who are elderly. The federal  government matches state spending for Medicaid services according to a  formula based on each state’s per capita income in relation to the national  average per capita income.  The amount of federal assistance states  receive for Medicaid service expenditures is known as the FMAP.
Under the Recovery Act, states are eligible for an increased FMAP for  expenditures that states make in providing services to their Medicaid  populations.  The Recovery Act provides eligible states with an increased  FMAP for 27 months between October 1, 2008 and December 31, 2010. On  February 25, 2009, CMS made increased FMAP grant awards to states, and  states may retroactively claim reimbursement for expenditures that  occurred prior to the effective date of the Recovery Act.  Generally, for  fiscal year 2009 through the first quarter of fiscal year 2011, the increased  FMAP, which is calculated on a quarterly basis, provides for: (1) the  maintenance of states’ prior year FMAPs; (2) a general across-the-board  increase of 6.2 percentage points in states’ FMAPs; and (3) a further  increase to the FMAPs for those states that have a qualifying increase in  unemployment rates. For the first two quarters of 2009, the increases in  the FMAP for the 16 states and the District ranged from 7.09 percentage  points in Iowa to 11.59 percentage points in California, as shown in table 2.
In our sample of 16 states and the District, officials from 15 states and the  District indicated that they had drawn down increased FMAP grant  awards, totaling $7.96 billion for the period of October 1, 2008 through  April 1, 2009—47 percent of their increased FMAP grant awards. In our  sample, the extent to which individual states and the District accessed  these funds varied widely, ranging from 0 percent in Colorado to about 66  percent in New Jersey. Nationally, the 50 states and several territories  combined have drawn down approximately $11 billion as of April 1, 2009,  which represents almost 46 percent of the increased FMAP grants  awarded for the first three quarters of federal fiscal year 2009 (table 3).
In order for states to qualify for the increased FMAP available under the  Recovery Act, they must meet certain requirements. In particular    Maintenance of Eligibility: In order to qualify for the increased  FMAP, states generally may not apply eligibility standards,  methodologies, or procedures that are more restrictive than those in  effect under their state Medicaid programs on July 1, 2008.  In  guidance to states, CMS noted that examples of restrictions of  eligibility could include (1) the elimination of any eligibility groups  since July 1, 2008 or (2) changes in an eligibility determination or  redetermination process that is more stringent than what was in effect  on July 1, 2008. States that fail to initially satisfy the maintenance of  eligibility requirements have an opportunity to reinstate their eligibility  standards, methodologies, and procedures before July 1, 2009 and  become retroactively eligible for the increased FMAP.
Compliance with Prompt Payment: Under federal law states are  required to pay claims from health practitioners promptly.  Under the  Recovery Act, states are prohibited from receiving the increased FMAP  for days during any period in which that state has failed to meet this  requirement.  Although the increased FMAP is not available for any  claims received from a practitioner on each day the state is not in  compliance with these prompt payment requirements, the state may  receive the regular FMAP for practitioner claims received on days of  non-compliance. CMS officials told us that states must attest that they  are in compliance with the prompt payment requirement, but that  enforcement is complicated due to differences across states in  methods used to track this information. CMS officials plan to issue  guidance on reporting compliance with the prompt payment  requirement and are currently gathering information from states on the  methods they use to determine compliance.
Rainy Day Funds: States are not eligible for an increased FMAP if any  amounts attributable (either directly or indirectly) to the increased  FMAP are deposited or credited into any reserve or rainy day fund of  the state.
Percentage Contributions from Political Subdivisions: In some  states, political subdivisions—such as cities and counties—may be  required to help finance the state’s share of Medicaid spending. States  that have such financing arrangements are not eligible to receive the  increased FMAP if the percentage contributions required to be made  by a political subdivision are greater than what was in place on  September 30, 2008.
In addition to meeting the above requirements, states that receive the  increased FMAP must submit a report to CMS no later than September 30,  2011 that describes how the increased FMAP funds were expended, in a  form and manner determined by CMS.  In guidance to states, CMS has  stated that further guidance will be developed for this reporting  requirement. CMS guidance to states also indicates that, for federal  reimbursement, increased FMAP funds must be drawn down separately,  tracked separately, and reported to CMS separately. Officials from several  states told us they require additional guidance from CMS on tracking  receipt of increased FMAP funds and on reporting on the use of these  funds.
The increased FMAP available under the Recovery Act is for state  expenditures for Medicaid services.  However, the receipt of this  increased FMAP may reduce the state share for their Medicaid programs.  States have reported using these available funds for a variety of purposes.  In our sample, individual states and the District reported that they would  use the funds to maintain their current level of Medicaid eligibility and  benefits, cover their increased Medicaid caseloads—which are primarily  populations that are sensitive to economic downturns, including children  and families, and to offset their state general fund deficits thereby avoiding  layoffs and other measures detrimental to economic recovery. Ten states  and the District reported using these funds to maintain program eligibility.  Nine states and the District reported using these funds to maintain  benefits. Specifically, Massachusetts reported that during a previous  financial downturn, the state limited the number of individuals eligible for  some services and reduced certain program benefits that were optional for  the state to cover. However, with the funds made available as a result of  the increased FMAP, the state did not have to make such reductions.
Similarly, New Jersey reported that the state used these funds to eliminate  premiums for certain children in its State Children’s Health Insurance  Program, allowing it to retain coverage for children whose enrollment in  the program would otherwise have been terminated for non-payment of  premiums.
Nine states and the District reported using these funds to cover increases  to their Medicaid caseloads, primarily to populations that are sensitive to  economic downturns, such as children and families. For example, New  Jersey indicated that these funds would help the state meet the increased  demand for Medicaid services. According to a New Jersey official, due to  significant job losses, the state’s proposed 2010 budget would not have  accommodated all the applicants newly eligible for Medicaid and that the  funds available as a result of the increased FMAP have allowed the state to  maintain a “safety net” of coverage for uninsured and unemployed people.  Six states in our sample also reported that they used funds made available  as a result of the increased FMAP to comply with prompt payment  requirements. Specifically, Illinois reported that these funds will permit  the state to move from a 90-day payment cycle to a 30-day payment cycle  for all Medicaid providers. Three states also reported using these funds to  restore or to increase provider payment rates.
In addition, 10 states and the District indicated that the funds made  available as a result of the increased FMAP would help offset deficits in  their general funds. Pennsylvania reported that because funding for its  Medicaid program is derived, in part, from state revenues, program  funding levels fluctuate as the economy rises and falls. However, the state  was able to use the funds made available to offset the effects of lower  state revenues. Arizona officials also reported that the state used funds  made available as a result of the increased FMAP to pay down some of its  debt and make payroll payments, thus allowing the state to avoid a serious  cash flow problem.
In our sample, many states and the District indicated that they need  additional guidance from CMS regarding eligibility for the increased FMAP  funds. Specifically, 5 states raised concerns about whether certain  programmatic changes could jeopardize the state’s eligibility for these  funds. For example, Texas officials indicated that guidance from CMS is  needed regarding whether certain programmatic changes being considered  by Texas, such as a possible extension of the program’s eligibility period,  would affect the state’s eligibility for increased FMAP funds. Similarly,  Massachusetts wanted clarification from CMS as to whether certain  changes in the timeframe for the state to conduct eligibility re- determinations would be considered a more restrictive standard. Four  states also reported that they wanted additional guidance from CMS  regarding policies related to the prompt payment requirements or changes  to the non-federal share of Medicaid expenditures. For example, California  officials noted that the state reduced Medicaid payments for in-home  support services, but that counties could voluntarily choose to increase  these payments without altering the cost sharing arrangements between  the counties and the state. The state wants clarification from CMS on  whether such an arrangement would be allowable in light of the Recovery  Act requirements regarding the percentage of contributions by political  subdivisions within a state toward the non-federal share of expenditures.
In response to states’ concerns regarding the need for guidance, CMS told  us that it is in the process of developing draft guidance on the prompt  payment provisions in the Recovery Act. One official noted that this  guidance will include defining the term practitioner, describing the types  of claims applicable under the provision, and addressing the principles  that are integral to determining a state’s compliance with prompt payment  requirements. Additionally, CMS plans to have a reporting mechanism in  place through which states would report compliance under this provision.  With regard to Recovery Act requirements regarding political subdivisions,  CMS described their current activities for providing guidance to states.  Due to the variability of state operations, funding processes, and political  structures, CMS has been working with states on a case-by-case basis to  discuss particular issues associated with this provision and to address the  particular circumstances for each state. A CMS official told us that if there  were an issue(s) or circumstance(s) that had applicability across the  states, or if there were broader themes having national significance, CMS  would consider issuing guidance.
subsections: section_title: Highway Infrastructure Investment
paragraphs: The Recovery Act provides approximately $48 billion to fund grants to  states, localities and regional authorities for transportation projects of  which the largest piece is $27.5 billion for highway and related  infrastructure investments. The Recovery Act largely provides for  increased transportation funding through existing programs-such as the  Federal-Aid Highway Surface Transportation Program—a federally  funded, state-administered program. Under this program, funds are  apportioned annually to each state department of transportation (or  equivalent) to construct and maintain roadways and bridges on the  federal-aid highway system. The Federal-Aid Highway Program refers to  the separately funded formula grant programs administered by the Federal  Highway Administration (FHWA) in the U.S. Department of  Transportation.
Of the $27.5 billion provided in the Recovery Act for highway and related  infrastructure investments, $26.7 billion is provided to the 50 states for  restoration, repair, construction and other activities allowed under the  Federal-Aid Highway Surface Transportation Program. Nearly one-third of  these funds are required to be sub-allocated to metropolitan and other  areas. States must follow the requirements for the existing program, and in  addition, the Recovery Act requires that the Governor must certify that the  state will maintain its current level of transportation spending, and the  governor or other appropriate chief executive must certify that the state or  local government to which funds have been made available has completed  all necessary legal reviews and determined that the projects are an  appropriate use of taxpayer funds. The certifications must include a  statement of the amount of funds the state planned to expend from state  sources as of the date of enactment, during the period beginning on the  date of enactment through September 30, 2010, for the types of projects  that are funded by the appropriation.
The U.S. Department of Transportation is reviewing the Governors’  certifications regarding maintaining their level of effort for highways.  According to the Department, of the 16 states in our review and the  District, three states have submitted a certification free of explanatory or  conditional language—Arizona, Michigan, and New York. Eight submitted  “explanatory” certifications—certifications that used language that  articulated assumptions used or stated the certification was based on the  “best information available at the time,” but did not clearly qualify the  expected maintenance of effort on the assumptions proving true or  information not changing in the future.  Six submitted a “conditional”  certification, which means that the certification was subject to conditions  or assumptions, future legislative action, future revenues, or other  conditions.
Recovery Act funding for highway infrastructure investment differs from  the usual practice in the Federal-Aid Highway Program in a few important  ways. Most significantly, for projects funded under the Recovery Act, the  federal share is 100 percent; typically projects require a state match of 20  percent while the federal share is typically 80 percent. Under the Recovery  Act, priority is also to be given to projects that are projected to be  completed within three years. In addition, within 120 days after the  apportionment by the Department of Transportation to the states (March  2, 2009), 50 percent of the apportioned funds must be obligated.  Any  amount of this 50 percent of apportioned funding that is not obligated may  be withdrawn by the Secretary of Transportation and redistributed to  other states that have obligated their funds in a timely manner.  Furthermore, one year after enactment, the Secretary will withdraw any  remaining unobligated funds and redistribute them based on states’ need  and ability to obligate additional funds. These provisions are applicable  only to those funds apportioned to the state and not those funds required  by the Recovery Act to be suballocated to metropolitan, regional and local  organizations.
Finally, states are required to give priority to projects that are located in  economically distressed areas as defined by the Public Works and  Economic Development Act of 1965, as amended. In March 2009, FHWA  directed its field offices to provide oversight and take appropriate action  to ensure that states gave adequate consideration to economically  distressed areas in selecting projects. Specifically, field offices were  directed to discuss this issue with the states and to document its review  and oversight of this process.
States are undertaking planning activities to identify projects, obtain  approval at the state and federal level, and move projects to contracting  and implementation. However, because of the steps necessary before  implementation, states generally had not yet expended significant amounts  of Recovery Act Funds. States are required to reach agreement with DOT  on a list of projects. States will then request reimbursement from DOT as  the state makes payments to contactors working on approved projects.
As of April 16, 2009, the U.S. Department of Transportation reported that  nationally $6.4 billion of the $26.6 billion in Recovery Act highway  infrastructure investment funding provided to the states had been  obligated--meaning Transportation and the states had reached agreements  on projects worth this amount. As shown in Table 4 below, for the  locations that GAO reviewed, the extent to which the Department of  Transportation had obligated funds apportioned to the states and the  District ranged from 0 to 65 percent.  For two of the states, the  Department of Transportation had obligated over 50 percent of the states’  apportioned funds, for 4 it had obligated 30 to 50 percent of the states’  funds, for 9 states it had obligated under 30 percent of funds, and for three  it had not obligated any funds.
While most states we visited had not yet expended significant funds, some  told us they were planning to solicit bids in April or May. Officials, also  stated that they planned to meet statutory deadlines for obligating the  highway funds. A few states had already executed contracts. As of April 1,  2009, the Mississippi Department of Transportation (MDOT), for example,  had signed contracts for 10 projects totaling approximately $77 million.   These projects include the expansion of State Route 19 in eastern  Mississippi into a four-lane highway. This project fulfills part of MDOT’s  1987 Four-Lane Highway Program which seeks to link every Mississippian  to a four-lane highway within 30 miles or 30 minutes. Similarly, as of April  15, 2009, the Iowa Department of Transportation had competitively  awarded 25 contracts valued at $168 million. Most often however, we  found that highway funds in the states and the District have not yet been  spent because highway projects were at earlier stages of planning,  approval, and competitive contracting. For example, in Florida, the  Department of Transportation (FDOT) plans to use the Recovery Act  funds to accelerate road construction programs in its preexisting 5-year  plan which will result in some projects being reprioritized and selected for  earlier completion. On April 15, 2009, the Florida Legislative Budget  Commission approved the Recovery Act-funded projects that FDOT had  submitted.
For the most part, states were focusing their selection of Recovery Act- funded highway projects on construction and maintenance, rather than  planning and design, because they were seeking projects that would have  employment impacts and could be implemented quickly. These included  road repairs and resurfacing, bridge repairs and maintenance, safety  improvements, and road widening. For example, in Illinois, the  Department of Transportation is planning to spend a large share of its  estimated $655 million in Recovery Act funds  for highway and bridge  construction and maintenance projects in economically distressed areas,  those that are shovel-ready, and those that can be completed by February  2012. In Iowa, the contracts awarded have been for projects such as bridge  replacements and highway resurfacing—shovel-ready projects that could  be initiated and completed quickly. Knowing that the Recovery Act would  include opportunities for highway investment, states told us they worked  in advance of the legislation to identify appropriate projects. For example,  in New York, the state DOT began planning to manage anticipated federal  stimulus money in November 2008. A key part of New York’s DOT’s  strategy was to build on existing planning and program systems to  distribute and manage the funds.
section_title: State Fiscal Stabilization Fund
paragraphs: The Recovery Act provided $53.6 billion in appropriations for the State  Fiscal Stabilization Fund (SFSF) to be administered by the U.S.  Department of Education. The Act requires that the Secretary set aside $5  billion for State Incentive Grants, referred to by the department as the  Reach for the Top program, and the establishment of an Innovation Fund.  The Recovery Act specifies that 81.8 percent (about $39.5 billion) is to be  distributed to states for support of elementary, secondary, and  postsecondary education, and early childhood education programs. The  remaining 18.2 percent of SFSF (about $8.8 billion) is available for basic  government services but may also be used for educational purposes. These  funds are to be distributed to states by formula, with 61 percent of the  state award based on the state’s relative share of the population aged 5 to  24 and 39 percent based on the state’s relative share of the total U.S.  population. The Department of Education announced on April 1, 2009 that  it will award the SFSF in two phases. The first phase—$32.6 billion— represents about two-thirds of the SFSF.
The states and the District must apply to the Department of Education for  SFSF funds and Education must approve those applications. As of April  20, 2009, applications from three states had been approved—South  Dakota, and two of GAO’s sample states, California and Illinois. Since  applications from other states are now being developed and submitted,  they have not yet received their SFSF funds. The applications to Education  must contain certain assurances. For example, states must assure that, in  each of fiscal years 2009, 2010, and 2011, they will maintain state support  at fiscal year 2006 levels for elementary and secondary education and also  for public institutions of higher education (IHEs). However, the Secretary  of Education may waive maintenance of effort requirements if the state  demonstrates that it will commit an equal or greater percentage of state  revenues to education than in the previous applicable year. The state  application must also contain (1) assurances that the state is committed to  advancing education reform in increasing teacher effectiveness,  establishing state-wide education longitudinal data systems, and  improving the quality of state academic standards and assessments; (2)  baseline data that demonstrates the state’s current status in each of the  education reform areas; and (3) a description of how the state intends to  use its stabilization allocation.
Within two weeks of receipt of an approvable SFSF application, Education  will provide the state with 67 percent of its SFSF allocation. Under certain  circumstances, Education will provide the state with up to 90 percent of  its allocation. In the second phase, Education intends to conduct a full  peer review of state applications before awarding the final allocations.
After maintaining state support for education at fiscal year 2006 levels,  states are required to use the education portion of the SFSF to restore  state support to the greater of fiscal year 2008 or 2009 levels for  elementary and secondary education, public IHEs, and, if applicable, early  childhood education programs. States must distribute these funds to  school districts using the primary state education formula but maintain  discretion in how funds are allocated to public IHEs. If, after restoring  state support for education, additional funds remain, the state must  allocate those funds to school districts according to the Title I, Part A  funding formula. However, if a state’s education stabilization fund  allocation is insufficient to restore state support for education, then a state  must allocate funds in proportion to the relative shortfall in state support  to public schools and IHEs. Education stabilization funds must be  allocated to school districts and public IHEs and cannot be retained at the  state level.
Once stabilization funds are awarded to school districts and public IHEs,  they have considerable flexibility over how they use those funds. School  districts are allowed to use stabilization funds for any allowable purpose  under the Elementary and Secondary Education Act (ESEA), (commonly  known as the No Child Left Behind Act), the Individuals with Disabilities  Education Act (IDEA), the Adult Education and Family Literacy Act, or the  Perkins Act, subject to some prohibitions on using funds for, among other  things, sports facilities and vehicles. In particular, because allowable uses  under the Impact Aid provisions of ESEA are broad, school districts have  discretion to use Recovery Act funding for things ranging from salaries of  teachers, administrators, and support staff to purchases of textbooks,  computers, and other equipment. The Recovery Act allows public IHEs to  use SFSF funds in such a way as to mitigate the need to raise tuition and  fees, as well as for the modernization, renovation, and repair of facilities,  subject to certain limitations. However, the Recovery Act prohibits public  IHEs from using stabilization funds for such things as increasing  endowments, modernizing, renovating, or repairing sports facilities, or  maintaining equipment. According to Education officials, there are no  maintenance of effort requirements placed on local school districts.  Consequently, as long as local districts use stabilization funds for  allowable purposes, they are free to reduce spending on education from  local-source funds, such as property tax revenues.
States have broad discretion over how the $8.8 billion in SFSF funds  designated for basic government services are used. The Recovery Act  provides that these funds can be used for public safety and other  government services and that these services may include assistance for  education, as well as for modernization, renovation, and repairs of public  schools or IHEs, subject to certain requirements. Education’s guidance  provides that the funds can also be used to cover state administrative  expenses related to the Recovery Act. However, the Act also places  several restrictions on the use of these funds. For example, these funds  cannot be used to pay for casinos (a general prohibition that applies to all  Recovery Act funds), financial assistance for students to attend private  schools, or construction, modernization, renovation, or repair of stadiums  or other sports facilities.
States expected that SFSF uses by school districts and public IHEs would  include retaining current staff and spending on programmatic initiatives,  among other uses. Some states’ fiscal condition could affect their ability to  meet maintenance of effort (MOE) requirements in order to receive SFSF  monies, but they are awaiting final guidance from Education on  procedures to obtain relief from these requirements. For example, due to  substantial revenue shortages, Florida has cut its state budget in recent  years and the state will not be able to meet the maintenance-of-effort  requirement to readily qualify for these funds. The state will apply to  Education for a waiver from this requirement; however, it is awaiting final  instructions from Education on submission of the waiver. Florida plans to  use SFSF funds to reduce the impact of any further cuts that may be  needed in the state education budget.
In Arizona, state officials expect that SFSF recipients, such as local school  districts, will generally use their allocations to improve the tools they use  to assess student performance and determine to what extent performance  meets federal academic standards, rehire teachers that were let go  because of prior budget cuts, retain teachers, and meet the federal  requirement that all schools have equal access to highly qualified teachers,  among other things. Funds for the state universities will help them  maintain services and staff as well as avoid tuition increases. Illinois  officials stated that the state plans to use all of the $2 billion in State Fiscal  Stabilization funds, including the 18.2 percent allowed for government  services, for K-12 and higher education activities and hopes to avert layoffs  and other cutbacks many districts and public colleges and universities are  facing in their fiscal year 2009 and 2010 budgets. State Board of Education  officials also noted that U.S. Department of Education guidance allows  school districts to use stabilization funds for education reforms, such as  prolonging school days and school years, where possible. However,  officials said that Illinois districts will focus these funds on filling budget  gaps rather than implementing projects that will require long-term  resource commitments. While planning is underway, most of the selected  states reported that they have not yet fully decided how to use the 18.2  percent of the SFSF, which is discretionary.
section_title: Plans to Track Recovery Act Funds
paragraphs: States’ and localities’ tracking and accounting systems are critical to the  proper execution and accurate and timely recording of transactions  associated with the Recovery Act. OMB has issued guidance to the states  and localities that provides for separate “tagging” of Recovery Act funds so  that specific reports can be created and transactions traced. Officials from  all 16 of the selected states and the District told us they have established  or were establishing methods and processes to separately identify,  monitor, track, and report on the use of Recovery Act funds they receive.  Officials in some states expressed concern that the use of different  accounting software among state agencies may make it difficult to provide  consistent and timely reporting. Others reported that their ability to track  Recovery Act funds may be affected by state hiring freezes, resulting from  budget shortfalls.
State officials reported a range of concerns regarding the federal  requirements to identify and track Recovery Act funds going to sub- recipients, localities, and other non-state entities. These concerns include  their ability to track these funds within existing systems, uncertainty  regarding state officials’ accountability for the use of funds which do not  pass through state government entities, and their desire for additional  federal guidance to establish specific expectations on sub-recipient  reporting requirements. Officials in many states expressed concern about  being held accountable for funds flowing directly from federal agencies to  localities or other recipients. Officials in some states said they would like  to at least be informed about funds provided to non-state entities, in order  to facilitate planning for their use and so they can coordinate Recovery  Act activities.
section_title: States’ Actions to Plan for Use of Recovery Act Funds Include New and Existing Entities and Processes
paragraphs: All of the 16 selected states and the District reported taking action to plan  for and monitor the use of Recovery Act funding. Some states reported  that Recovery Act planning activities for funds received by the state are  directed primarily by the governor’s office. In New York, for example, the  governor provides program direction to the state’s departments and  offices, and he established a Recovery Act Cabinet comprised of  representatives from all state agencies and many state authorities to  coordinate and manage Recovery Act funding throughout the state. In  North Carolina, Recovery Act planning efforts are led by the newly created  Office of Economic Recovery and Investment, which was established by  the governor to oversee the state’s economic recovery initiatives.
Other states reported that their Recovery Act planning efforts were less  centralized. In Mississippi, the governor has little influence over the state  Departments of Education and Transportation, as they are led by  independent entities. In Texas, oversight of federal Recovery Act funds  involves various stakeholders, including the Office of the Governor, the  Office of the Comptroller of Public Accounts, and the State Auditor’s  Office as well as two entities established within the Texas legislature  specifically for this purpose—the House Select Committee on Federal  Economic Stabilization Funding and the House Appropriations’  Subcommittee on Stimulus.
Several states reported that they have appointed “Recovery Czars” or  identified a similar key official and established special offices, task forces  or other entities to oversee the planning and monitor the use of Recovery  Act funds within their states. In Michigan, the governor appointed a  Recovery Czar to lead a new Michigan Economic Recovery Office, which  is responsible for coordinating Recovery Act programs across all state  departments and with external stakeholders such as GAO, the federal  OMB, and others.
Some states began planning efforts before Congress enacted the Recovery  Act. For example, the state of Georgia recognized the importance of  accounting for and monitoring Recovery Act funds and directed state  agencies to take a number of steps to safeguard Recovery Act funds and  mitigate identified risks. Georgia established a small core team in  December 2008 to begin planning for the state’s implementation of the  Recovery Act. Within 1 day of enactment, the governor appointed a  Recovery Act Accountability Officer, and she formed a Recovery Act  implementation team shortly thereafter. The implementation team  includes a senior management team, officials from 31 state agencies, an  accountability and transparency support group comprised of officials from  the state’s budget, accounting, and procurement offices, and five cross- agency implementation teams. At one of the first implementation team  meetings, the Recovery Act Accountability Officer disseminated an  implementation manual to agencies, which included multiple types of  guidance on how to use and account for Recovery Act funds, and new and  updated guidance is disseminated at the weekly implementation team  meetings.
Officials in other states are using existing mechanisms rather than creating  new offices or positions to lead Recovery Act efforts. For example, a  District official stated that the District would not appoint a Recovery Czar,  and instead would use its existing administrative structures to distribute  and monitor Recovery Act funds to ensure quick disbursement of funds. In  Mississippi, officials from the Governor’s office said that the state did not  establish a new office to provide statewide oversight of Recovery Act  funding, in part because they did not believe that the Recovery Act  provided states with funds for administrative expenses—including  additional staff. The Governor did designate a member of his staff to act as  a Stimulus Coordinator for Recovery Act activities.
All 16 states we visited and the District have established Recovery Act web  sites to provide information on state plans for using Recovery funding,  uses of funds to date, and, in some instances, to allow citizens to submit  project proposals. For example, Ohio has created www.recovery.Ohio.gov,  which represents the state’s efforts to create an open, transparent, and  equitable process for allocating Recovery Act funds. The state has  encouraged citizens to submit proposals for use of Recovery Act funds,  and as of April 8, 2009, individuals and organizations from across Ohio  submitted more than 23,000 proposals. Iowa officials indicated they want  to use the state’s recovery web site (www.recovery.Iowa.gov) to host a  “dashboard” function to report updated information on Recovery Act  spending that is easily searchable by the public. Also in Colorado, the state  plans to create a web-based map of projects receiving recovery funds to  help inform the public about the results of Recovery Act spending in  Colorado.
section_title: Selected States’ and Localities’ Internal Controls and Safeguards to Manage and Mitigate the Risk of Mismanagement, Waste, Fraud, and Abuse of Recovery Act Funds
paragraphs: The selected states and the District are taking various approaches to  ensure that internal controls are in place to manage risk up-front, rather  than after problems develop and deficiencies are identified after the fact,  and have different capacities to manage and oversee the use of Recovery  Act funds. Many of these differences result from the underlying  differences in approaches to governance, organizational structures, and  related systems and processes that are unique to each jurisdiction. A  robust system of internal control specifically designed to deal with the  unique and complex aspects of the Recovery Act funds will be key to  helping management of the states and localities achieve the desired  results. Effective internal control can be achieved through numerous  different approaches, and, in fact, we found significant variation in  planned approaches by state. For example,    New York’s Recovery Act cabinet plans to establish a working group  on internal controls; the Governor’s office plans to hire a consultant to  review the state’s management infrastructure and capabilities to  achieve accountability, effective internal controls, compliance and  reliable reporting under the act; and, the state plans to coordinate  fraud prevention training sessions.
Michigan’s Recovery Office is developing strategies for effective  oversight and tracking of the use of Recovery Act funds to ensure  compliance with accountability and transparency requirements.
Ohio’s Office of Internal Audit plans to assess the adequacy and  effectiveness of the current internal control framework and test  whether state agencies adhere to the framework.
Florida’s Chief Inspector General established an enterprise-wide  working group of agency program Inspectors General who are  updating their annual work plans by including the Recovery Act funds  in their risk assessments and will leave flexibility in their plans to  address issues related to funds.
Massachusetts’s Joint Committee on Federal Recovery Act Oversight  will hold hearings regarding the oversight of Recovery Act spending.
Georgia’s State Auditor plans to provide internal control training to  state agency personnel in late April. The training will discuss basic  internal controls, designing and implementing internal controls for  Recovery Act programs, best practices in contract monitoring, and  reporting on Recovery Act funds.
Internal controls include management and program policies, procedures,  and guidance that help ensure effective and efficient use of resources;  compliance with laws and regulations; prevention and detection of fraud,  waste, and abuse; and the reliability of financial reporting. Because  Recovery Act funds are to be distributed as quickly as possible, controls  are evolving as various aspects of the program become operational.  Effective internal control is a major part of managing any organization to  achieve desired outcomes and manage risk. GAO’s Standards for Internal  Control include five key elements: control environment, risk assessment,  control activities, information and communication, and monitoring.  Our  report contains a discussion of these elements and the related effort  underway in the jurisdictions we visited.
section_title: Current Single Audit Focus May Not Provide Timely Oversight Information for Recovery Act Funds
paragraphs: OMB’s Circular No. A-133 sets out implementing guidelines for the single  audit and defines roles and responsibilities related to the implementation  of the Single Audit Act, including detailed instructions to auditors on how  to determine which federal programs are to be audited for compliance  with program requirements in a particular year at a given grantee. The  Circular No. A-133 Compliance Supplement is issued annually to guide  auditors on what program requirements should be tested for programs  audited as part of the single audit. OMB has stated that it will use its  Circular No. A-133 Compliance Supplement to notify auditors of program  requirements that should be tested for Recovery Act programs, and will  issue interim updates as necessary.
Both the Single Audit Act and OMB Circular No. A-133 call for a “risk- based” approach to determine which programs will be audited for  compliance with program requirements as part of a single audit. In  general, the prescribed approach relies heavily on the amount of federal  expenditures during a fiscal year and whether findings were reported in  the previous period to determine whether detailed compliance testing is  required for a given program that year.  Under the current approach for  risk determination in accordance with Circular No. A-133, certain risks  unique to the Recovery Act programs may not receive full consideration.
Recovery Act funding carries with it some unique challenges. The most  significant of these challenges are associated with (1) new government  programs, (2) the sudden increase in funds or programs that are new for  the recipient entity, and (3) the expectation that some programs and  projects will be delivered faster so as to inject funds into the economy.  This makes timely and efficient evaluations in response to the Recovery  Act’s accountability requirements critical. Specifically,    new programs and recipients participating in a program for the first  time may not have the management controls and accounting systems  in place to help ensure that funds are distributed and used in  accordance with program regulations and objectives;    Recovery Act funding that applies to programs already in operation  may cause total funding to exceed the capacity of management  controls and accounting systems that have been effective in past years;  the more extensive accountability and transparency requirements for  Recovery Act funds will require the implementation of new controls  and procedures; and  risk may be increased due to the pressures of spending funds quickly.
In response to the risks associated with Recovery Act funding, the single  audit process needs adjustment to put appropriate focus on Recovery Act  programs and to provide the necessary level of accountability over these  funds in a timely manner. The single audit process could be adjusted to  require the auditor to perform procedures such as the following as part of  the routine single audit:    provide for review of the design and implementation of internal  control over compliance and financial reporting for programs under  the Recovery Act;  consider risks related to Recovery Act-related programs in determining  which federal programs are major programs; and  specifically, test Recovery Act programs to determine whether the  auditee complied with laws and regulations.
The first two items above should preferably be accomplished during 2009  before significant expenditures of funds in 2010 so that the design of  internal control can be strengthened prior to the majority of those  expenditures. We further believe that OMB Circular No. A-133 and/or the  Circular No. A-133 Compliance Supplement could be adjusted to provide  some relief on current audit requirements for low-risk programs to offset  additional workload demands associated with Recovery Act funds.
OMB told us that it is developing audit guidance that would address the  above audit objectives. OMB also said that it is considering reevaluating  potential options for providing relief from certain existing audit  requirements in order to provide some balance to the increased  requirements for Recovery Act program auditing.
section_title: State and Local Capacity to Manage Risks
paragraphs: Officials in several states also expressed concerns regarding the lack of  funding provided to state oversight entities, given the additional federal  requirements placed on states to provide proper accounting and ensure  transparency. Due to fiscal constraints, many states reported significant  declines in the number of oversight staff, limiting their ability to ensure  proper implementation and management of Recovery Act funds. Although  the majority of states reported that they lack the necessary resources to  ensure adequate oversight of Recovery Act funds, some states reported  that they are either hiring new staff or reallocating existing staff for this  purpose.
Officials we interviewed in several states said the lack of funding for state  oversight entities in the Recovery Act presents them with a challenge,  given the increased need for oversight and accountability. According to  state officials, state budget and staffing cuts have limited the ability of  state and local oversight entities to ensure adequate management and  implementation of the Recovery Act. For example, Colorado’s state  auditor reported that state oversight capacity is limited, noting that the  Department of Health Care Policy and Financing has had 3 controllers in  the past 4 years and the state legislature’s Joint Budget Committee  recently cut field audit staff for the Department of Human Services in half.  In addition, the Colorado Department of Transportation’s deputy  controller position is vacant, as is the Department of Personnel &  Administration’s internal auditor position. Colorado officials noted that  these actions are, in part, due to the natural tendency in an economic  downturn to cut administrative expenses in an attempt to maintain  program delivery levels. Our report contains more examples of capacity  issues from our selected states and the District.
Although most states indicated that they lack the resources needed to  provide effective monitoring and oversight, some states indicated they will  hire additional staff to help ensure the prudent use of Recovery Act funds.  For example, according to officials with North Carolina’s Governor’s  Crime Commission, the current management capacity in place is not  sufficient to implement the Recovery Act. Officials explained that the  Recovery Act funds for the Edward Byrne Memorial Justice Assistance  Grant program have created such an increase in workload that the  department will have to hire additional staff to handle over the next 3  years. Officials explained that these staff will be hired for the short term  since the money will run out in 3 years. Additionally, officials explained  that they are able to use 10 percent of the Justice Assistance Grants  funding to pay for the administrative positions that are needed.
A number of states expressed concerns regarding the ability to track  Recovery Act funds due to state hiring freezes, resulting from budget  shortfalls. For instance, New Jersey has not increased its number of state  auditors or investigators, nor has there been an increase in funding  specifically for Recovery Act oversight. In addition, the state hiring freeze  has not allowed many state agencies to increase their Recovery Act  oversight efforts. For example, despite an increase of $469 million in  Recovery Act funds for state highway projects, no additional staff will be  hired to help with those tasks or those directly associated with the  Recovery Act, such as reporting on the number of jobs created. While the  state’s Department of Transportation has committed to shift resources to  meet any expanded need for internal Recovery Act oversight, one person  is currently responsible for reviewing contractor-reported payroll  information for disadvantaged business enterprises, ensuring compliance  with Davis-Bacon wage requirements, and development of the job creation  figures. State education officials in North Carolina also said that greater  oversight capacity is needed to manage the increase in federal funding.  However, due to the state’s hiring freeze, the agency will be unable to use  state funds to hire the additional staff needed to oversee Recovery funds.  The North Carolina Recovery Czar said that his office will work with state  agencies to authorize hiring additional staff when directly related to  Recovery Act oversight.
With respect to oversight of Recovery Act funding at the local level,  varying degrees of preparedness were reported by state and local officials.  While the California Department of Transportation (Caltrans) officials  stated that extensive internal controls exist at the state level, there may be  control weaknesses at the local level. Caltrans is collaborating with local  entities to identify and address these weaknesses. Likewise, Colorado  officials expressed concerns that effective oversight of funds provided to  Jefferson County may be limited due to the recent termination of its  internal auditor and the elimination of its internal control audit function.  Arizona state officials expressed some concerns about the ability of rural,  tribal, and some private entities such as boards, commissions, and  nonprofit organizations to manage, especially if the Recovery Act does not  provide administrative funding.
section_title: State Plans to Assess Recovery Act Spending Impact
paragraphs: As recipients of Recovery Act funds and as partners with the federal  government in achieving Recovery Act goals, states and local units of  government are expected to invest Recovery Act funds with a high level of  transparency and to be held accountable for results under the Recovery  Act. As a means of implementing that goal, guidance has been issued and  will continue to be issued to federal agencies, as well as to direct  recipients of funding. To date, OMB has issued two broad sets of guidance  to the heads of federal departments and agencies for implementing and  managing activities enacted under the Recovery Act.  OMB has also  issued for public comment detailed proposed standard data elements that  federal agencies will require from all recipients (except individuals) of  Recovery Act funding.  When reporting on the use of funds, recipients  must show the total amount of recovery funds received from a federal  agency, the amount expended or obligated to the project, and project  specific information including the name and description of the project, an  evaluation of its completion status, the estimated number of jobs created  and retained by the project, and information on any subcontracts awarded  by the recipient, as specified in the Recovery Act.
State reactions vary widely and often include a mixture of responses to the  reporting requirements. Some states will use existing federal program  guidance or performance measures to evaluate impact, particularly for on- going programs. Other states are waiting for additional guidance from  federal departments or from OMB on how and what to measure to assess  impact. While Georgia is waiting on further federal guidance, the state is  adapting an existing system (used by the State Auditor to fulfill its Single  Audit Act responsibilities) to help the state report on Recovery Act funds.
The statewide web-based system will be used to track expenditures,  project status, and job creation and retention. The Georgia governor is  requiring all state agencies and programs receiving Recovery Act funds to  use this system. Some states indicated that they have not yet determined  how they will assess impact.
Officials in 9 of the 16 states and the District expressed concern about the  definitions of jobs retained and jobs created under the Recovery Act, as  well as methodologies that can be used for estimation of each.  Officials  from several of the states we met with expressed a need for clearer  definitions of “jobs retained” and “jobs created.” Officials from a few states  expressed the need for clarification on how to track indirect jobs,   while  others expressed concern about how to measure the impact of funding  that is not designed to create jobs. Mississippi state officials suggested the  need for a clearly defined distinction for time-limited, part-time, full-time,  and permanent jobs; since each state may have differing definitions of  these two categories. Officials from Massachusetts expressed concern that  contractors may overestimate the number of jobs retained and created.  Some existing programs, such as highway construction, have  methodologies for estimating job creation. But other programs, existing  and new, do not have job estimation methodologies.
Some of the questions that states and localities have about Recovery Act  implementation may have been answered in part via the guidance  provided by OMB for the data elements as well as by guidance issued by  federal departments. For example, OMB provided draft definitions for  employment, as well as for jobs retained and jobs created via Recovery  Act funding. However, OMB did not specify methodologies for estimating  jobs retained and jobs created, which has been a concern for some states.  Data elements were presented in the form of templates with section by  section data requirements and instructions. OMB provided a comment  period during which it is likely to receive many questions and requests for  clarifications from states, localities, and other entities that can be direct  recipients of Recovery Act funding. OMB plans to update this guidance  again in the next 30 to 60 days. Some federal agencies have also provided  guidance to the states. The Departments of Education, Housing and Urban  Development, Justice, Labor, Transportation, the Corporation for National  Community Service, the National Institutes of Health, and the Centers for  Medicare & Medicaid Services have provided guidance for program  implementation, particularly for established programs. Although guidance  is expected, some new programs, such as Broadband Deployment Grants,  are awaiting issuance of implementation instructions.
section_title: Concluding Observations and Recommendations: Moving Forward to Clarify Recovery Act Roles and Responsibilities
paragraphs: It has been a little over two months since enactment of the Recovery Act  and OMB has moved out quickly. In this period, OMB has issued two sets  of guidance, first on February 18 and next on April 3, with another round  to be issued within 60 days. OMB has sought formal public comment on its  April 3 guidance update and before this, according to OMB, reached out  informally to Congress, federal, state, and local government officials, and  grant and contract recipients to get a broad perspective on what is needed  to meet the high expectations set by Congress and the Administration. In  addition, OMB is standing up two new reporting vehicles, Recovery.gov,  which will be turned over to the Recovery Accountability and  Transparency Board and is expected to provide unprecedented public  disclosure on the use of Recovery Act funds, and a second system to  capture centrally information on the number of jobs created or retained.  As OMB’s initiatives move forward and it continues to guide the  implementation of the Recovery Act, OMB has opportunities to build upon  its efforts to date by addressing several important issues.
These issues can be characterized broadly in three categories: (1)  Accountability and Transparency Requirements, (2) Administrative  Support and Oversight, and (3) Communications.
subsections: section_title: Accountability and Transparency Requirements
paragraphs: Recipients of Recovery Act funding face a number of implementation  challenges in this area. The Act includes many programs that are new or  new to the recipient and, even for existing programs; the sudden increase  in funds is out of normal cycles and processes. Add to this the expectation  that many programs and projects will be delivered faster so as to inject  funds into the economy and it becomes apparent that timely and efficient  evaluations are needed. The following are our recommendations to help  strengthen ongoing efforts to ensure accountability and transparency.
subsections: section_title: Single Audit
paragraphs: The single audit process is a major accountability vehicle but should be  adjusted to provide appropriate focus and the necessary level of  accountability over Recovery Act funds in a timelier manner than the  current schedule. OMB has been reaching out to stakeholders to obtain  input and is considering a number of options related to the single audit  process and related issues.
We Recommend: To provide additional leverage as an oversight tool for  Recovery Act programs, the Director of OMB should adjust the current  audit process to:  focus the risk assessment auditors use to select programs to test for  compliance with 2009 federal program requirements on Recovery Act  funding;    provide for review of the design of internal controls during 2009 over  programs to receive Recovery Act funding, before significant  expenditures in 2010; and  evaluate options for providing relief related to audit requirements for  low-risk programs to balance new audit responsibilities associated  with the Recovery Act.
section_title: Reporting on Impact
paragraphs: Responsibility for reporting on jobs created and retained falls to non- federal recipients of Recovery Act funds. As such, states and localities  have a critical role in determining the degree to which Recovery Act goals  are achieved. Senior Administration officials and OMB have been soliciting  views and developing options for recipient reporting. In its April 3  guidance, OMB took an important step by issuing definitions, standard  award terms and conditions, and clarified tracking and documenting  Recovery Act expenditures. Furthermore, OMB and the Recovery  Accountability and Transparency Board are developing the data  architecture for the new federal reporting system that will be used to  collect recipient reporting information. According to OMB, state chief  information officers commented on an early draft and OMB expects to  provide an update for further state review.
We Recommend: Given questions raised by many state and local officials  about how best to determine both direct and indirect jobs created and  retained under the Recovery Act, the Director of OMB should continue  OMB’s efforts to identify appropriate methodologies that can be used to:  assess jobs created and retained from projects funded by the Recovery  Act;    determine the impact of Recovery Act spending when job creation is  indirect;  identify those types of programs, projects, or activities that in the past  have demonstrated substantial job creation or are considered likely to  do so in the future. Consider whether the approaches taken to estimate  jobs created and jobs retained in these cases can be replicated or  adapted to other programs.
There are a number of ways that the needed methodologies could be  developed. One option would be to establish a working group of federal,  state and local officials and subject matter experts.
section_title: State and Federal Data Collection
paragraphs: Given that governors have certified to the use of funds in their states, state  officials are uncertain about their reporting responsibilities when  Recovery Act funding goes directly to localities. Additionally, they have  concerns about the capacity of reporting systems within their states,  specifically, whether these systems will be capable of aggregating data  from multiple sources for posting on Recovery.gov. Some state officials  are concerned that too many federal requirements will slow distribution  and use of funds and others have expressed reservations about the  capacity of smaller jurisdictions and non-profits to report data. Even those  who are confident about their own systems are uncertain about the cost  and speed of making any required modifications for Recovery.gov  reporting or further data collection.
Problems also have been identified with federal systems that support the  Recovery Act as well. For example, questions have been raised about the  reliability of www.USASpending.gov (USAspending.gov) and the ability of  Grants.gov to handle the increased volume of grant applications. OMB is  taking concerted actions to address these concerns. It plans to reissue  USASpending guidance shortly to include changes in operations that are  expected to improve data quality. In a memorandum dated March 9, OMB  said that it is working closely with federal agencies to identify system risks  that could disrupt effective Recovery Act implementation and  acknowledged that Grants.gov is one such system. A subsequent  memorandum on April 8, offered a short-term solution to the significant  increase in Grants.gov usage while longer-term alternative approaches are  being explored. GAO has work underway to review differences in agency  policies and methods for submitting grant applications using Grants.gov  and will issue a report shortly.
OMB addressed earlier questions about reporting coverage in its April 3  guidance. According to OMB there are limited circumstances in which  prime and sub recipient reporting will not be sufficient to capture  information at the project level. OMB stated that it will expand its current  model in future guidance. OMB guidance described recipient reporting  requirements under the Recovery Act’s section 1512 as the minimum  which must be collected, leaving it to federal agencies to determine  whether additional information would be required for program oversight.
We Recommend: In consultation with the Recovery Accountability and  Transparency Board and States, the Director of OMB should evaluate  current information and data collection requirements to determine  whether sufficient, reliable and timely information is being collected  before adding further data collection requirements. As part of this  evaluation, OMB should consider the cost and burden of additional  reporting on states and localities against expected benefits.
section_title: Administrative Support and Oversight
paragraphs: At a time when states are experiencing cutbacks, state officials expect the  Recovery Act to incur new regulations, increase accounting and  management workloads, change agency operating procedures, require  modifications to information systems, and strain staff capacity,  particularly for contract management. Although federal program  guidelines can include a percentage of grants funding available for  administrative or overhead costs, the percentage varies by program. In  considering other sources, states have asked whether the portion of the  State Fiscal Stabilization Fund that is available for government services  could be used for this purpose. Others have suggested a global approach  to increase the percentage for all Recovery Act grants funding that can be  applied to administrative costs. As noted earlier, state auditors also are  concerned with meeting increased audit requirements for Recovery Act  funding with a reduced number of staff and without a commensurate  reduction in other audit responsibilities or increase in funding. OMB and  senior administration officials are aware of the states’ concerns and have a  number of options under consideration.
We Recommend: The Director of OMB should timely clarify what  Recovery Act funds can be used to support state efforts to ensure  accountability and oversight, especially in light of enhanced oversight and  coordination requirements.
section_title: Communications
paragraphs: State officials expressed concerns regarding communication on the  release of Recovery Act funds and their inability to determine when to  expect federal agency program guidance. Once funds are released, there is  no consistent procedure for ensuring that the appropriate officials in  states and localities are notified. According to OMB, agencies must  immediately post guidance to the Recovery Act web site and inform to the  “maximum extent practical, a broad array of external stakeholders.” In  addition, since nearly half of the estimated spending programs in the  Recovery Act will be administered by non-federal entities, state officials  have suggested opportunities to improve communication in several areas.  For example, they wish to be notified when funds are made available to  prime recipients that are not state agencies.
Some of the uncertainty can be attributed to evolving reports and timing of  these reports at the federal level as well as the recognition that different  terms used by federal assistance programs add to the confusion. A  reconsideration of how best to publicly report on federal agency plans and  actions led to OMB’s decision to continue the existing requirement to  report on the federal status of funds in the Weekly Financial and Activity  Reports and eliminate a planned Monthly Financial Report. The Formula  and Block Grant Allocation Report has been replaced and renamed the  Funding Notification Report. This expanded report includes all types of  awards, not just formula and block grants, and is expected to better  capture the point in the federal process when funds are made available.
We Recommend: To foster timely and efficient communications, the  Director of OMB should develop an approach that provides dependable  notification to (1) prime recipients in states and localities when funds are  made available for their use, (2) states, where the state is not the primary  recipient of funds, but has a state-wide interest in this information, and (3)  all non-federal recipients, on planned releases of federal agency guidance  and, if known, whether additional guidance or modifications are expected.
Mr. Chairman, Senator Collins, and Members of the Committee, this  concludes my statement. I would be pleased to respond to any questions  you may have.
section_title: Contact
paragraphs: For further information on this testimony, please contact J. Christopher  Mihm on (202) 512-6806 or mihmj@gao.gov.
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