Recovery Act: States' and Localities' Current and Planned Uses of Funds While Facing Fiscal Stresses
Published: 2009-07-08T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: This testimony is based on a GAO report being released today--the second in response to a mandate under the American Recovery and Reinvestment Act of 2009 (Recovery Act). The report addresses: (1) selected states' and localities' uses of 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 Recovery Act funds. GAO's work for the report is focused on 16 states and certain localities in those jurisdictions as well as the District of Columbia--representing about 65 percent of the U.S. population and two-thirds of the intergovernmental federal assistance available. GAO collected documents and interviewed state and local officials. GAO analyzed federal agency guidance and spoke with Office of Management and Budget (OMB) officials and with program officials at the Centers for Medicare and Medicaid Services, and the Departments of Education, Energy, Housing and Urban Development, Justice, Labor, and Transportation.
section_title: What GAO Found
paragraphs: Across the United States, as of June 19, 2009, Treasury had outlayed about $29 billion of the estimated $49 billion in Recovery Act funds projected for use in states and localities in fiscal year 2009. More than 90 percent of the $29 billion in federal outlays has been provided through the increased Medicaid Federal Medical Assistance Percentage (FMAP) and the State Fiscal Stabilization Fund (SFSF) administered by the Department of Education. GAO's work focused on nine federal programs that are estimated to account for approximately 87 percent of federal Recovery Act outlays in fiscal year 2009 for programs administered by states and localities. Increased Medicaid FMAP Funding All 16 states and the District have drawn down increased Medicaid FMAP grant awards of just over $15 billion for October 1, 2008, through June 29, 2009, which amounted to almost 86 percent of funds available. Medicaid enrollment increased for most of the selected states and the District, and several states noted that the increased FMAP funds were critical in their efforts to maintain coverage at current levels. States and the District reported they are planning to use the increased federal funds to cover their increased Medicaid caseload and to maintain current benefits and eligibility levels. Due to the increased federal share of Medicaid funding, most state officials also said they would use freed-up state funds to help cope with fiscal stresses. Highway Infrastructure Investment As of June 25, DOT had obligated about $9.2 billion for almost 2,600 highway infrastructure and other eligible projects in the 16 states and the District and had reimbursed about $96.4 million. Across the nation, almost half of the obligations have been for pavement improvement projects because they did not require extensive environmental clearances, were quick to design, obligate and bid on, could employ people quickly, and could be completed within 3 years. State Fiscal Stabilization Fund As of June 30, 2009, of the 16 states and the District, only Texas had not submitted an SFSF application. Pennsylvania recently submitted an application but had not yet received funding. The remaining 14 states and the District had been awarded a total of about $17 billion in initial funding from Education--of which about $4.3 billion has been drawn down. School districts said that they would use SFSF funds to maintain current levels of education funding, particularly for retaining staff and current education programs. They also said that SFSF funds would help offset state budget cuts. Accountability States have implemented various internal control programs; however, federal Single Audit guidance and reporting does not fully address Recovery Act risk. The Single Audit reporting deadline is too late to provide audit results in time for the audited entity to take action on deficiencies noted in Recovery Act programs. Moreover, current guidance does not achieve the level of accountability needed to effectively respond to Recovery Act risks. Finally, state auditors need additional flexibility and funding to undertake the added Single Audit responsibilities under the Recovery Act. Impact Direct recipients of Recovery Act funds, including states and localities, are expected to report quarterly on a number of measures, including the use of funds and estimates of the number of jobs created and the number of jobs retained. The first of these reports is due in October 2009. OMB--in consultation with a broad range of stakeholders--issued additional implementing guidance for recipient reporting on June 22, 2009, that clarifies some requirements and establishes a central reporting framework.

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). As  federal funds provided by the Recovery Act flow into the U.S. economy,  state fiscal conditions continue to be stressed. Actual declines in sales,  personal income, and corporate income tax revenues influenced state  actions to begin to fill an estimated $230 billion in budget gaps for fiscal  years 2009 through 2011. The national unemployment rate also increased  to 9.5 percent in June 2009, and high unemployment can place greater  stress on state budgets as demand for services, such as Medicaid,  increases. Some economists have pointed to signs of economic  improvement, although associations representing state officials have also  reported that state fiscal conditions historically lag behind any national  economic recovery.
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. The report that is being released today, the  second in response to the act’s mandate, addresses the following  objectives: (1) selected states’ and localities’ uses of 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. The report provides  overall findings, makes recommendations, and discusses the status of  actions in response to the recommendations we made in our April 2009  report. Individual summaries for the 16 selected states and the District of  Columbia (District) are accessible through GAO’s recovery page at  www.gao.gov/recovery. In addition, all of the summaries have been  compiled into an electronic supplement, GAO-09-830SP.
As reported in our April 2009 review, to address these objectives, we  selected a core group of 16 states and the District that we will follow over  the next few years. Our bimonthly reviews examine how Recovery Act  funds are being used and whether they are achieving the stated purposes  of the act. These purposes include  to preserve and create jobs and promote economic recovery;  to assist those most impacted by the recession;  to provide investments needed to increase economic efficiency by  spurring technological advances in science and health;  to invest in transportation, environmental protection, and other  infrastructure that will provide long-term economic benefits; and  to stabilize state and local government budgets, in order to minimize  and avoid reductions in essential services and counterproductive state  and local tax increases.
The states selected for our bimonthly reviews 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  federal 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, we visited a nonprobability sample of more than 175 local  entities within the 16 selected states and the District.
GAO’s work for this report focused on nine federal programs primarily  because they have begun disbursing funds to states or have known or  potential risks. These risks can include existing programs receiving  significant amounts of Recovery Act funds or new programs. We collected  documents from and conducted semistructured interviews with executive- level state and local officials and staff from state offices including  governors’ offices, “recovery czars,” state auditors, and controllers. In  addition, our work focused on federal, state, and local agencies  administering the selected programs receiving Recovery Act funds. We  analyzed guidance and interviewed officials from the federal Office of  Management and Budget (OMB). We also analyzed other federal agency  guidance on programs selected for this review and spoke with relevant  program officials at the Centers for Medicare and Medicaid Services  (CMS), the U.S. Departments of Education, Energy, Housing and Urban  Development, Justice, Labor, and Transportation. Where attributed to  state officials, 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. The information obtained from  this review cannot be generalized to all states and localities receiving  Recovery Act funding. A detailed description of our scope and  methodology can be found in appendix 1, of the report being released  today.
We conducted this performance audit from April 21, 2009, to July 2, 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.
subsections: section_title: Background
paragraphs: Our analysis of initial estimates of Recovery Act spending provided by the  Congressional Budget Office (CBO) suggested that about $49 billion would  be outlayed to states and localities by the federal government in fiscal year  2009, which runs through September 30. However, our analysis of the  latest information available on actual federal outlays reported on  www.recovery.gov indicates that in the 4 months since enactment, the  federal Treasury has paid out approximately $29 billion to states and  localities, which is about 60 percent of payments estimated for fiscal year  2009. Although this pattern may not continue for the remaining 3-1/2  months, at present spending is slightly ahead of estimates. More than 90  percent of the $29 billion in federal outlays has been provided through the  increased Federal Medical Assistance Percentage (FMAP) grant awards  and the State Fiscal Stabilization Fund administered by the Department of  Education. Figure 1 shows the original estimate of federal outlays to states  and localities under the Recovery Act compared with actual federal  outlays as reported by federal agencies on www.recovery.gov. According  to the Office of Management and Budget (OMB), an estimated $149 billion  in Recovery Act funding will be obligated to states and localities in fiscal  year 2009.
Our work for our July bimonthly report focused on nine federal programs,  selected primarily because they have begun disbursing funds to states and  include programs with significant amounts of Recovery Act funds,  programs receiving significant increases in funding, and new programs.  Recovery Act funding of some of these programs is intended for further  disbursement to localities. Together, these nine programs are estimated to  account for approximately 87 percent of federal Recovery Act outlays to  state and localities in fiscal year 2009. Figure 2 shows the distribution by  program of anticipated federal Recovery Act spending in fiscal year 2009  to states and localities.
section_title: States and Localities Are Using Recovery Act Funds for Purposes of the Act and to Help Address Fiscal Stresses
subsections: section_title: Increased FMAP Has Helped States Finance Their Growing Medicaid Programs, but Concerns Remain about Compliance with Recovery Act Provisions
paragraphs: 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.
For the third quarter of fiscal year 2009, the increases in FMAP for the 16  states and the District of Columbia compared with the original fiscal year  2009 levels are estimated to range from 6.2 percentage points in Iowa to  12.24 percentage points in Florida, with the FMAP increase averaging  almost 10 percentage points. When compared with the first two quarters of  fiscal year 2009, the FMAP in the third quarter of fiscal year 2009 is  estimated to have increased in 12 of the 16 states and the District.
From October 2007 to May 2009, overall Medicaid enrollment in the 16  states and the District increased by 7 percent. In addition, each of the  states and the District experienced an enrollment increase during this  period, with the highest number of programs experiencing an increase of 5  percent to 10 percent. However, the percentage increase in enrollment  varied widely ranging from just under 3 percent in California to nearly 20  percent in Colorado.
With regard to the states’ receipt of the increased FMAP, all 16 states and  the District had drawn down increased FMAP grant awards totaling just  over $15.0 billion for the period of October 1, 2008 through June 29, 2009,  which amounted to 86 percent of funds available. In addition, except for  the initial weeks that increased FMAP funds were available, the weekly  rate at which the sample states and the District have drawn down these  funds has remained relatively constant.
States reported that they are using or are planning to use the funds that  have become freed up as a result of increased FMAP for a variety of  purposes. Most commonly, states reported that they are using or planning  to use freed-up funds to cover their increased Medicaid caseload, to  maintain current benefits and eligibility levels, and to help finance their  respective state budgets. Several states noted that given the poor  economic climate in their respective states, these funds were critical in  their efforts to maintain Medicaid coverage at current levels.
Medicaid officials from many states and the District raised concerns about  their ability to meet the Recovery Act requirements and, thus, maintain  eligibility for the increased FMAP. While officials from several states  spoke positively about CMS’s guidance related to FMAP requirements, at  least nine states and the District reported they wanted CMS to provide  additional guidance regarding (1) how they report daily compliance with  prompt pay requirements, (2) how they report monthly on increased  FMAP spending, and (3) whether certain programmatic changes would  affect their eligibility for funds. For example, Medicaid officials from  several states told us they were hesitant to implement minor  programmatic changes, such as changes to prior authorization  requirements, pregnancy verifications, or ongoing rate changes, out of  concern that doing so would jeopardize their eligibility for increased  FMAP. In addition, at least three states raised concerns that glitches  related to new or updated information systems used to generate provider  payments could affect their eligibility for these funds. Specifically,  Massachusetts Medicaid officials said they are implementing a new  provider payment system that will generate payments to some providers  on a monthly versus daily basis and would like guidance from CMS on the  availability of waivers for the prompt payment requirement. A CMS official  told us that the agency is in the process of finalizing its guidance to states  on reporting compliance with the prompt payment requirement of the  Recovery Act, but did not know when this guidance would be publicly  available. However, the official noted that, in the near term, the agency  intends to issue a new Fact Sheet, which will include questions and  answers on a variety of issues related to the increased FMAP.
Due to the variability of state operations, funding processes, and political  structures, CMS has worked with states on a case-by-case basis to discuss  and resolve issues that arise. Specifically, communications between CMS  and several states indicate efforts to clarify issues related to the  contributions to the state share of Medicaid spending by political  subdivisions or to rainy-day funds.
section_title: States Are Using Highway Infrastructure Funds Mainly for Pavement Improvements and Are Generally Complying with Recovery Act Requirements
paragraphs: The Recovery Act provides funding to the states for restoration, repair,  and construction of highways and other eligible surface transportation  projects. The act requires that 30 percent of these funds be suballocated  for projects in metropolitan and other areas of the state. In March 2009,  $26.7 billion was apportioned to all 50 states and the District of Columbia  (District) for highway infrastructure and other eligible projects. As of June  25, 2009, $15.9 billion of the funds had been obligated for over 5,000  projects nationwide, and $9.2 billion had been obligated for nearly 2,600  projects in the 16 states and the District that are the focus of GAO’s  review.
Almost half of Recovery Act highway obligations nationwide have been for  pavement improvements. Specifically, $7.8 billion of the $ 15.9 billion  obligated nationwide as of June 25, 2009 is being used for projects such as  reconstructing or rehabilitating deteriorated roads, including $3.6 billion  for road resurfacing projects. Many state officials told us they selected a  large percentage of resurfacing and other pavement improvement projects  because they did not require extensive environmental clearances, were  quick to design, could be quickly obligated and bid, could employ people  quickly, and could be completed within 3 years. In addition, $2.7 billion, or  about 17 percent of Recovery Act funds nationally, has been obligated for  pavement-widening projects and around 10 percent has been obligated for  the replacement, improvement or rehabilitation of bridges.
As of June 25, 2009, $233 million had been reimbursed nationwide by the  Federal Highway Administration (FHWA) and $96.4 million had been  reimbursed in the 16 states and the District. States are just beginning to get  projects awarded so that contractors can begin work, and U.S. Department  of Transportation (DOT) officials told us that although funding has been  obligated for more than 5,000 projects, it may be months before states can  request reimbursement. Once contractors mobilize and begin work, states  make payments to these contractors for completed work, and may request  reimbursement from FHWA. FHWA told us that once funds are obligated  for a project, it may take 2 or more months for a state to bid and award the  work to a contractor and have work begin.
According to state officials, because an increasing number of contractors  are looking for work, bids for Recovery Act contracts have come in under  estimates. State officials told us that bids for the first Recovery Act  contracts were ranging from around 5 percent to 30 percent below the  estimated cost. Several state officials told us they expect this trend to  continue until the economy substantially improves and contractors begin  taking on enough other work.
Funds appropriated for highway infrastructure spending must be used as  required by the Recovery Act. States are required to do the following:    Ensure that 50 percent of apportioned Recovery Act funds are  obligated within 120 days of apportionment (before June 30, 2009) and  that the remaining apportioned funds are obligated within 1 year. The  50 percent rule applies only to funds apportioned to the state and not  to the 30 percent of funds required by the Recovery Act to be  suballocated, primarily based on population, for metropolitan,  regional, and local use. The Secretary of Transportation is to withdraw  and redistribute to other states any amount that is not obligated within  these time frames.
Give priority to projects that can be completed within 3 years and to  projects located in economically distressed areas. These areas are  defined by the Public Works and Economic Development Act of 1965,  as amended. According to this act, to qualify as an economically  distressed area, an area must meet one or more of three criteria related  to income and unemployment based on the most recent federal or  state data.
Certify that the state will maintain the level of spending for the types of  transportation projects funded by the Recovery Act that it planned to  spend the day the Recovery Act was enacted. As part of this  certification, the governor of each state is required to identify the  amount of funds the state plans to expend from state sources from  February 17, 2009, through September 30, 2010.
All states have met the first Recovery Act requirement that 50 percent of  their apportioned funds are obligated within 120 days. Of the $18.7 billion  nationally that is subject to this provision, 69 percent was obligated as of  June 25 2009. The percentage of funds obligated nationwide and in each of  the states included in our review is shown in figure 3.
The second Recovery Act requirement is to give priority to projects that  can be completed within 3 years and to projects located in economically  distressed areas. Officials from most states reported they expect all or  most projects funded with Recovery Act funds to be completed within 3  years. We found that due to the need to select projects and obligate funds  quickly, many states first selected projects based on other factors and only  later identified to what extent these projects fulfilled the requirement to  give priority to projects in economically distressed areas. According to the  American Association of State Highway and Transportation Officials, in  December 2008, states had already identified more than 5,000 “ready-to- go” projects as possible selections for federal stimulus funding, 2 months  prior to enactment of the Recovery Act. Officials from several states also  told us they had selected projects prior to the enactment of the Recovery  Act and that they only gave consideration to economically distressed areas  after they received guidance from DOT.
States also based project selection on other priorities. State officials we  met with said they considered factors based on their own state priorities,  such as geographic distribution and a project’s potential for job creation or  other economic benefits. The use of state planning criteria or funding  formulas to distribute federal and state highway funds was one factor that  we found affected states’ implementation of the Recovery Act’s  prioritization requirements. According to officials in North Carolina, for  instance, the state used its statutory Equity Allocation Formula to  determine how highway infrastructure investment funds would be  distributed. Similarly, in Texas, state officials said they first selected  highway preservation projects by allocating a specific amount of funding  to each of the state’s 25 districts, where projects were identified that  addressed the most pressing needs. Officials then gave priority for funding  to those projects that were in economically distressed areas.
We also found some instances of states developing their own eligibility  requirements using data or criteria not specified in the Public Works and  Economic Development Act, as amended. According to the act, the  Secretary of Commerce, not individual states, has the authority to  determine the eligibility of an area that does not meet the first two criteria  of the act. In each of these cases, FHWA approved the use of the states’  alternative criteria, but it is not clear on what authority FHWA approved  these criteria. For example:    Arizona based the identification of economically distressed areas on  home foreclosure rates and disadvantaged business enterprises—data  not specified in the Public Works Act. Arizona officials said they used  alternative criteria because the initial determination of economic  distress based on the act’s criteria excluded three of Arizona’s largest  and most populous counties, which also contain substantial areas that,  according to state officials, are clearly economically distressed and  include all or substantial portions of major Indian reservations and  many towns and cities hit especially hard by the economic downturn.
Illinois based its classification on increases in the number of  unemployed persons and the unemployment rate, whereas the act  bases this determination on how a county’s unemployment rate  compares with the national average unemployment rate. According to  FHWA, Illinois opted to explore other means of measuring recent  economic distress because the initial determination of economic  distress based on the act’s criteria did not appear to accurately reflect  the recent economic downturn in the state. Illinois’s use of alternative  criteria resulted in 21 counties being identified as economically  distressed that would not have been so classified following the act’s  criteria.
In commenting on a draft of our report, DOT agreed that states must give  priority to projects located in economically distressed areas, but said that  states must balance all the Recovery Act project selection criteria when  selecting projects including giving preference to activities that can be  started and completed expeditiously, using funds in a manner that  maximizes job creation and economic benefit, and other factors. While we  agree with DOT that there is no absolute primacy of economically  distressed area projects in the sense that they must always be started first,  the specific directives in the act that apply to highway infrastructure are  that priority is to be given to projects that can be completed in 3 years, and  are located in economically distressed areas. DOT also stated that the  basic approach used by selected states to apply alternative criteria is  consistent with the Public Works and Economic Development Act and its  implementing regulations on economically distressed areas because it  makes use of flexibilities provided by the Act to more accurately reflect  changing economic conditions. However the result of DOT’s interpretation  would be to allow states to prioritize projects based on criteria that are not  mentioned in the highway infrastructure investment portion of the  Recovery or the Public Works Acts without the involvement of the  Secretary or Department of Commerce. We plan to continue to monitor  states’ implementation of the economically distressed area requirements  and interagency coordination at the federal level in future reports.
Finally, the states are required to certify that they will maintain the level of  state effort for programs covered by the Recovery Act. With one  exception, the states have completed these certifications, but they face  challenges. Maintaining a state’s level of effort can be particularly  important in the highway program. We have found that the preponderance  of evidence suggests that increasing federal highway funds influences  states and localities to substitute federal funds for funds they otherwise  would have spent on highways. As we previously reported, substitution  makes it difficult to target an economic stimulus package so that it results  in a dollar-for-dollar increase in infrastructure investment.
Most states revised the initial certifications they submitted to DOT. As we  reported in April, many states submitted explanatory certifications—such  as stating that the certification was based on the “best information  available at the time”—or conditional certifications, meaning that the  certification was subject to conditions or assumptions, future legislative  action, future revenues, or other conditions. On April 22, 2009, the  Secretary of Transportation sent a letter to each of the nation’s governors  and provided additional guidance, including that conditional and  explanatory certifications were not permitted, and gave states the option  of amending their certifications by May 22. Each of the 16 states and  District selected for our review resubmitted their certifications. According  to DOT officials, the department has concluded that the form of each  certification is consistent with the additional guidance, with the exception  of Texas. Texas submitted an amended certification on May 27, 2009,  which contained qualifying language explaining that the Governor could  not certify any expenditure of funds until the legislature passed an  appropriation act. According to DOT officials, as of June 25, 2009, the  status of Texas’ revised certification remains unresolved. Texas officials  told us the state plans to submit a revised certification letter, removing the  qualifying language. For the remaining states, while DOT has concluded  that the form of the revised certifications is consistent with the additional  guidance, it is currently evaluating whether the states’ method of  calculating the amounts they planned to expend for the covered programs  is in compliance with DOT guidance.
States face drastic fiscal challenges, and most states are estimating that  their fiscal year 2009 and 2010 revenue collections will be well below  estimates. In the face of these challenges, some states told us that meeting  the maintenance-of-effort requirements over time poses significant  challenges. For example, federal and state transportation officials in  Illinois told us that to meet its maintenance-of-effort requirements in the  face of lower-than-expected fuel tax receipts, the state would have to use  general fund or other revenues to cover any shortfall in the level of effort  stated in its certification. Mississippi transportation officials are  concerned about the possibility of statewide, across-the-board spending  cuts in 2010. According to the Mississippi transportation department’s  budget director, the agency will try to absorb any budget reductions in  2010 by reducing administrative expenses to maintain the state’s level of  effort.
section_title: Most States We Visited Have Received State Fiscal Stabilization Funds and Have Planned to Allocate Most Education Stabilization Funds to LEAs
paragraphs: The Recovery Act created a State Fiscal Stabilization Fund (SFSF) in part  to help state and local governments stabilize their budgets by minimizing  budgetary cuts in education and other essential government services, such  as public safety. Beginning in March 2009, the Department of Education  issued a series of fact sheets, letters, and other guidance to states on the  SFSF. Specifically, a March fact sheet, the Secretary’s April letter to  Governors, and program guidance issued in April and May mention that  the purposes of the SFSF include helping stabilize state and local budgets,  avoiding reductions in education and other essential services, and  ensuring LEAs and public IHEs have resources to “avert cuts and retain  teachers and professors.” The documents also link educational progress to  economic recovery and growth and identify four principles to guide the  distribution and use of Recovery Act funds: (1) spend funds quickly to  retain and create jobs; (2) improve student achievement through school  improvement and reform; (3) ensure transparency, public reporting, and  accountability; and (4) invest one-time Recovery Act funds thoughtfully to  avoid unsustainable continuing commitments after the funding expires,  known as the “funding cliff.”
After meeting assurances to maintain state support for education at least  at fiscal year 2006 levels, states are required to use the education  stabilization fund 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 Elementary  and Secondary Education Act of 1965 (ESEA), Title I, Part A funding  formula. On the other hand, 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 school districts and public IHEs. Education stabilization funds  must be allocated to school districts and public IHEs and cannot be  retained at the state level.
Once education 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 education stabilization funds for  any allowable purpose under ESEA, the Individuals with Disabilities  Education Act (IDEA), the Adult Education and Family Literacy Act, or the  Carl D. Perkins Career and Technical Education Act of 2006 (Perkins Act),  subject to some prohibitions on using funds for, among other things,  sports facilities and vehicles. In particular, Education’s guidance states  that because allowable uses under the Impact Aid provisions of ESEA are  broad, school districts have discretion to use education stabilization funds  for a broad range of things, such as salaries of teachers, administrators,  and support staff, and purchases of textbooks, computers, and other  equipment. The Recovery Act allows public IHEs to use education  stabilization 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 education stabilization funds for such  things as increasing endowments; modernizing, renovating, or repairing  sports facilities; or maintaining equipment. Education’s SFSF guidance  expressly prohibits states from placing restrictions on LEAs’ use of  education stabilization funds, beyond those in the law, but allows states  some discretion in placing limits on how IHEs may use these funds.
The SFSF provides states and school districts with additional flexibility,  subject to certain conditions, to help them address fiscal challenges. For  example, the Secretary of Education is granted authority to permit waivers  of state maintenance-of-effort (MOE) requirements if a state certified that  state education spending will not decrease as a percentage of total state  revenues. Education issued guidance on the MOE requirement, including  the waiver provision, on May 1, 2009. Also, the Secretary may permit a  state or school district to treat education stabilization funds as nonfederal  funds for the purpose of meeting MOE requirements for any program  administered by Education, subject to certain conditions. Education, as of  June 29, 2009, has not provided specific guidance on the process for states  and school districts to apply for the Secretary’s approval.
States have broad discretion over how the $8.8 billion in the SFSF  government services fund are used. The Recovery Act provides that these  funds must be used for public safety and other government services and  that these services may include assistance for education, as well as  modernization, renovation, and repairs of public schools or IHEs.
On April 1, 2009, Education made at least 67 percent of each state’s SFSF  funds available, subject to the receipt of an application containing state  assurances, information on state levels of support for education and  estimates of restoration amounts, and baseline data demonstrating state  status on each of the four education reform assurances. If a state could not  certify that it would meet the MOE requirement, Education required it to  certify that it will meet requirements for receiving a waiver—that is, that  education spending would not decrease relative to total state revenues. In  determining state level of support for elementary and secondary  education, Education required states to use their primary formula for  distributing funds to school districts but also allowed states some  flexibility in broadening this definition. For IHEs, states have some  discretion in how they establish the state level of support, with the  provision that they cannot include support for capital projects, research  and development, or amounts paid in tuition and fees by students. In order  to meet statutory requirements for states to establish their current status  regarding each of the four required programmatic assurances, Education  provided each state with the option of using baseline data Education had  identified or providing another source of baseline data. Some of the data  provided by Education was derived from self-reported data submitted  annually by the states to Education as part of their Consolidated State  Performance Reports (CSPR), but Education also relied on data from third  parties, including the Data Quality Campaign (DQC), the National Center  for Educational Achievement (NCEA), and Achieve.
Education has reviewed applications as they arrive for completeness and  has awarded states their funds once it determined all assurances and  required information had been submitted. Education set the application  deadline for July 1, 2009. On June 24, 2009, Education issued guidance to  states informing them they must amend their applications if there are  changes to the reported levels of state support that were used to  determine maintenance of effort or to calculate restoration amounts.
As of June 30, 2009, of the 16 states and the District of Columbia covered  by our review, only Texas had not submitted an SFSF application.  Pennsylvania recently submitted an application but had not yet received  funding. The remaining 14 states and the District of Columbia had  submitted applications and Education had made available to them a total  of about $17 billion in initial funding. As of June 26, 2009, only 5 of these  states had drawn down SFSF Recovery Act funds. In total, about 25  percent of available funds had been drawn down by these states.
Three of the selected states—Florida, Massachusetts, and New Jersey— said they would not meet the maintenance-of-effort requirements but  would meet the eligibility requirements for a waiver and that they would  apply for a waiver. Most of the states’ applications show that they plan to  provide the majority of education stabilization funds to LEAs, with the  remainder of funds going to IHEs. Several states and the District of  Columbia estimated in their application that they would have funds  remaining beyond those that would be used to restore education spending  in fiscal years 2009 and 2010. These funds can be used to restore education  spending in fiscal year 2011, with any amount left over to be distributed to  LEAs.
States have flexibility in how they allocate education stabilization funds  among IHEs but, once they establish their state funding formula, not in  how they allocate the funds among LEAs. Florida and Mississippi allocated  funds among their IHEs, including universities and community colleges,  using formulas based on factors such as enrollment levels. Other states  allocated SFSF funds taking into consideration the budget conditions of  the IHEs.
Regarding LEAs, most states planned to allocate funds based on states’  primary funding formulae. Many states are using a state formula based on  student enrollment weighted by characteristics of students and LEAs. For  example, Colorado’s formula accounts for the number of students at risk  while the formula used by the District allocates funds to LEAs using  weights for each student based on the relative cost of educating students  with specific characteristics. For example, an official from Washington,  D.C. Public Schools said a student who is an English language learner may  cost more to educate than a similar student who is fluent in English.
States may use the government services portion of SFSF for education but  have discretion to use the funds for a variety of purposes. Officials from  Florida, Illinois, New Jersey, and New York reported that their states plan  to use some or most of their government services funds for educational  purposes. Other states are applying the funds to public safety. For  example, according to state officials, California is using the government  services fund for it corrections system, and Georgia will use the funds for  salaries of state troopers and staff of forensic laboratories and state  prisons.
Officials in many school districts told us that SFSF funds would help offset  state budget cuts and would be used to maintain current levels of  education funding. However, many school district officials also reported  that using SFSF funds for education reforms was challenging given the  other more pressing fiscal needs.
Although their plans are generally not finalized, officials in many school  districts we visited reported that their districts are preparing to use SFSF  funds to prevent teacher layoffs, hire new teachers, and provide  professional development programs. Most school districts will use the  funding to help retain jobs that would have been cut without SFSF  funding. For example, Miami Dade officials estimate that the stabilization  funds will help them save nearly two thousand teaching positions. State  and school district officials in eight states we visited (California, Colorado,  Florida, Georgia, Massachusetts, Michigan, New York, and North Carolina)  also reported that SFSF funding will allow their state to retain positions,  including teaching positions that would have been eliminated without the  funding. In the Richmond County School System in Georgia, officials  noted they plan to retain positions that support its schools, such as  teachers, paraprofessionals, nurses, media specialists and guidance  counselors. Local officials in Mississippi reported that budget-related  hiring freezes had hindered their ability to hire new staff, but because of  SFSF funding, they now plan to hire. In addition, local officials in a few  states told us they plan to use the funding to support teachers. For  example, officials in Waterloo Community and Ottumwa Community  School Districts in Iowa as well as officials from Miami-Dade County in  Florida cited professional development as a potential use of funding to  support teachers.
Although school districts are preventing layoffs and continuing to provide  educational services with the SFSF funding, most did not indicate they  would use these funds to pursue educational reform. School district  officials cited a number of barriers, which include budget shortfalls, lack  of guidance from states, and insufficient planning time. In addition to  retaining and creating jobs, school districts have considerable flexibility to  use these resources over the next 2 years to advance reforms that could  have long-term impact. However, a few school district officials reported  that addressing reform efforts was not in their capacity when faced with  teacher layoffs and deep budget cuts. In Flint, Michigan, officials reported  that SFSF funds will be used to cope with budget deficits rather than to  advance programs, such as early childhood education or repairing public  school facilities. According to the Superintendent of Flint Community  Schools, the infrastructure in Flint is deteriorating, and no new school  buildings have been built in over 30 years. Flint officials said they would  like to use SFSF funds for renovating buildings and other programs, but  the SFSF funds are needed to maintain current education programs.
Officials in many school districts we visited reported having inadequate  guidance from their state on using SFSF funding, making reform efforts  more difficult to pursue. School district officials in most states we visited  reported they lacked adequate guidance from their state to plan and report  on the use of SFSF funding. Without adequate guidance and time for  planning, school district officials told us that preparing for the funds was  difficult. At the time of our visits, several school districts were unaware of  their funding amounts, which, officials in two school districts said, created  additional challenges in planning for the 2009-2010 school year. One  charter school we visited in North Carolina reported that layoffs will be  required unless their state notifies them soon how much SFSF funding  they will receive. State officials in North Carolina, as well as in several  other states, told us they are waiting for the state legislature to pass the  state budget before finalizing SFSF funding amounts for school districts.
subsections: section_title: IHEs Plan to Use SFSF Funds for Faculty Salaries and Other Purposes and Expect the Funds to Save Jobs and Mitigate Tuition Increases
paragraphs: Although many IHEs had not finalized plans for using SFSF funds, the  most common expected use for the funds at the IHEs we visited was to  pay salaries of IHE faculty and staff. Officials at most of the IHEs we  visited told us that, due to budget cuts, their institutions would have faced  difficult reductions in faculty and staff if they were not receiving SFSF  funds. Other IHEs expected to use SFSF funds in the future to pay salaries  of certain employees during the year.
Several IHEs we visited are considering other uses for SFSF funds.  Officials at the Borough of Manhattan Community College in New York  City want to use some of their SFSF funds to buy energy saving light bulbs  and to make improvements in the college’s very limited space such as, by  creating tutoring areas and study lounges. Northwest Mississippi  Community College wants to use some of the funds to increase e-learning  capacity to serve the institution’s rapidly increasing number of students.  Several other IHEs plan to use some of the SFSF funds for student  financial aid.
Because many IHEs expect to use SFSF funds to pay salaries of current  employees that they likely would not have been able to pay without the  SFSF funds, IHEs officials said that SFSF funds will save jobs. Officials at  several IHEs noted that this will have a positive impact on the educational  environment such as, by preventing increases in class size and enabling  the institutions to offer the classes that students need to graduate. In  addition to preserving existing jobs, some IHEs anticipate creating jobs  with SFSF funds. Besides saving and creating jobs at IHEs, officials noted  that SFSF monies will have an indirect impact on jobs in the community.  IHE officials also noted that SFSF funds will indirectly improve  employment because some faculty being paid with the funds will help  unemployed workers develop new skills, including skills in fields, such as  health care, that have a high demand for trained workers. State and IHE  officials also believe that SFSF funds are reducing the size of tuition and  fee increases.
section_title: Other Selected Programs
paragraphs: Our report provides additional details on the use of Recovery Act funds for  these three programs in the 16 selected states and the District. In addition  to Medicaid FMAP, Highway Infrastructure Investment, and SFSF, we also  reviewed six other programs receiving Recovery Act funds. These  programs are:    Title I, Part A of the Elementary and Secondary Education Act of 1965  (ESEA)
Parts B and C of the Individuals with Disabilities Education Act (IDEA)    Workforce Investment Act (WIA) Youth Program    Public Housing Capital Fund    Edward Byrne Memorial Justice Assistance Grant (JAG) Program    Weatherization Assistance Program Additional detail regarding the states’ and localities’ use of funds for these  programs is available in the full report also being released today,  GAO-09-829. Individual state summaries for the 16 selected states and the  District are accessible through GAO’s recovery page at  www.gao.gov/recovery and in an electronic supplement, GAO-09-830SP.
section_title: Recovery Act Funding Helped States Address Budget Challenges
paragraphs: State revenue continued to decline and states used Recovery Act funding  to reduce some of their planned budget cuts and tax increases to close  current and anticipated budget shortfalls for fiscal years 2009 and 2010.  Of the 16 states and the District, 15 estimate fiscal year 2009 general fund  revenue collections will be less than in the previous fiscal year.  For two  of the selected states —Iowa and North Carolina—revenues were lower  than projected but not less than the previous fiscal year. As shown in  figure 4, data from the Bureau of Economic Analysis (BEA) also indicate  that the rate of state and local revenue growth has generally declined since  the second quarter of 2005, and the rate of growth has been negative in the  fourth quarter of 2008 and the first quarter of 2009.
Officials in most of the selected states and the District expect these  revenue trends to contribute to budget gaps (estimated revenues less than  estimated disbursements) anticipated for future fiscal years. All of the 16  states and the District forecasted budget gaps in state fiscal year 2009-2010  before budget actions were taken.
Consistent with one of the purposes of the act, states’ use of Recovery Act  funds to stabilize their budgets helped them minimize and avoid  reductions in services as well as tax increases. States took a number of  actions to balance their budgets in fiscal year 2009-2010, including sta layoffs, furloughs, and program cuts. The use of Recovery Act funds  affected the size and scope of some states’ budgeting decisions, and many of the selected states reported they would have had to make further cuts  to services and programs without the receipt of Recovery Act funds. For  example, California, Colorado, Georgia, Illinois, Massachusetts, Michig New York, and Pennsylvania budget officials all stated that current or  future budget cuts would have been deeper without the receipt of  Recovery Act funds.
Recovery Act funds helped cushion the impact of states’ planned budget  actions but officials also cautioned that current revenue estimates indicate  that additional state actions will be needed to balance future-year budgets.  Future actions to stabilize state budgets will require continued awareness  of the maintenance-of-effort (MOE) requirements for some federal  programs funded by the Recovery Act. For example, Massachusetts  officials expressed concerns regarding MOE requirements attached to  federal programs, including those funded through the Recovery Act, as  future across-the-board spending reductions could pose challenges for  maintaining spending levels in these programs. State officials said that  MOE requirements that require maintaining spending levels based upon  prior-year fixed dollar amounts will pose more of a challenge than  upholding spending levels based upon a percentage of program spending  relative to total state budget expenditures. In addition, some states also  reported accelerating their use of Recovery Act funds to stabilize  deteriorating budgets.
Many states, such as Colorado, Florida, Georgia, Iowa, New Jersey, and  North Carolina, also reported tapping into their reserve or rainy-day funds  in order to balance their budgets. In most cases, the receipt of Recov Act funds did not prevent the selected states from tapping into their reserve funds, but a few states reported that without the receipt of  Recovery Act funds, withdrawals from reserve funds would have been  greater. Officials from Georgia stated that although they have already  used reserve funds to balance their fiscal year 2009 and 2010 budgets, they  may use additional reserve funds if, at the end of fiscal year 2009, revenues  are lower than the most recent projections. In contrast, New York officials  stated they were able to avoid tapping into the state’s reserve funds due to  the funds made available as a result of the increased Medicaid FMAP funds  provided by the Recovery Act.
subsections: section_title: Approaches to Developing Exit Strategies for End of Recovery Act Funding Influenced by Nature of State Budget Processes
paragraphs: States’ approaches to developing exit strategies for the use of Recovery  Act funds reflect the balanced-budget requirements in place for all of our  selected states and the District. Budget officials referred to the temporary  nature of the funds and fiscal challenges expected to extend beyond the  timing of funds provided by the Recovery Act. Officials discussed a desire  to avoid what they referred to as the “cliff effect” associated with the dates  when Recovery Act funding ends for various federal programs.
Budget officials in some of the selected states are preparing for the end of  Recovery Act funding by using funds for nonrecurring expenditures and  hiring limited-term positions to avoid creating long-term liabilities. A few  states reported that although they are developing preliminary plans for the  phasing out of Recovery Act funds, further planning has been delayed until  revenue and expenditure projections are finalized.
section_title: States Have Implemented Various Internal Control Programs: However, Single Audit Guidance and Reporting Does Not Adequately Address Recovery Act Risk
paragraphs: Given that Recovery Act funds are to be distributed quickly, effective  internal controls over use of funds are critical to help ensure effective and  efficient use of resources, compliance with laws and regulations, and in  achieving accountability over Recovery Act programs. 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. Management is responsible for the  design and implementation of internal controls and the states in our  sample have a range of approaches for implementing their internal  controls.
Some states have internal control requirements in their state statutes and  others have undertaken internal control programs as management  initiatives. In our sample, 7 states - California, Colorado, Florida, Michigan,  Mississippi, New York, and North Carolina –have statutory requirements  for internal control programs and activities. An additional 9 states –  Arizona, Georgia, Illinois, Iowa, Massachusetts, New Jersey, Ohio,  Pennsylvania, and Texas – have undertaken various internal control  programs. In addition, the District of Columbia has taken limited actions  related to its internal control program. An effective internal control  program helps manage change in response to shifting environments and  evolving demands and priorities, such as changes related to implementing  the Recovery Act.
Risk assessment and monitoring are key elements of internal controls, and  the states in our sample and the District have undertaken a variety of  actions in these areas.
Risk assessment involves performing comprehensive reviews and  analyses of program operations to determine if internal and external  risks exist and to evaluate the nature and extent of risks which have  been identified. Approaches to risk analysis can vary across  organizations because of differences in missions and the  methodologies used to qualitatively and quantitatively assign risk  levels.
Monitoring activities include the systemic process of reviewing the  effectiveness of the operation of the internal control system. These  activities are conducted by management, oversight entities, and  internal and external auditors. Monitoring enables stakeholders to  determine whether the internal control system continues to operate  effectively over time. Monitoring also provides information and  feedback to the risk assessment process.
subsections: section_title: Challenges Exist in Tracking Recovery Act Funds
paragraphs: States and localities are responsible for tracking and reporting on  Recovery Act funds. OMB has issued guidance to the states and localities  that provides for separate identification—”tagging”—of Recovery Act  funds so that specific reports can be created and transactions can be  specifically identified as Recovery Act funds. The flow of federal funds to  the states varies by program, the grantor agencies have varied grants  management processes and grants vary substantially in their types,  purposes, and administrative requirements.
Several states and the District of Columbia have created unique codes for  their financial systems in order to tag the Recovery Act funds. Most state  and local program officials told us that they will apply existing controls  and oversight processes that they currently apply to other program funds  to oversee Recovery Act funds.
In addition to being an important accountability mechanism, audit results  can provide valuable information for use in management’s risk assessment  and monitoring processes. The single audit report, prepared to meet the  requirements of the Single Audit Act, as amended (Single Audit Act), is a  source of information on internal control and compliance findings and the  underlying causes and risks. The report is prepared in accordance with  OMB’s implementing guidance in OMB Circular No. A-133, Audits of  States, Local Governments, and Non-Profit Organizations, which  provides guidance to auditors on selecting federal programs for audit and  the related internal control and compliance audit procedures to be  performed.
In our April 23, 2009 report, we reported that the guidance and criteria in  OMB Circular No. A-133 do not adequately address the substantial added  risks posed by the new Recovery Act funding. Such risks may result from  (1) new government programs, (2) the sudden increase in funds or  programs that are new to the recipient entity, and (3) the expectation that  some programs and projects will be delivered faster so as to inject funds  into the economy. With some adjustment, the single audit could be an  effective oversight tool for Recovery Act programs, addressing risks  associated with all three of these factors.
Our April 2009 report on the Recovery Act included recommendations that  OMB 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.
Since April, although OMB has taken several steps in response to our  recommendations, these actions do not sufficiently address the risks  leading to our recommendations. To focus auditor risk assessments on  Recovery Act-funded programs and to provide guidance on internal  control reviews for Recovery Act programs, OMB is working within the  framework defined by existing mechanisms—Circular No. A-133 and the  Compliance Supplement. In this context, OMB has made limited  adjustments to its single audit guidance and is planning to issue additional  guidance in mid-July 2009.
section_title: Focusing Auditors’ Program Risk Assessments on Programs with Recovery Act Funding
paragraphs: On May 26, OMB issued the 2009 edition of the Circular A-133 Compliance  Supplement. The new Compliance Supplement is intended to focus auditor  risk assessment on Recovery Act funding by, among things (1) requiring  that auditors specifically ask auditees about and be alert to expenditure of  funds provided by the Recovery Act, and (2) providing an appendix that  highlights some areas of the Recovery Act impacting single audits. The  appendix adds a requirement that large programs and program clusters  with Recovery Act funding cannot be assessed as low-risk for the purposes  of program selection without clear documentation of the reasons they are  considered low risk. It also calls for recipients to separately identify  expenditures for Recovery Act programs on the Schedule of Expenditures  of Federal Awards.
However, OMB has not yet identified program groupings critical to  auditors’ selection of programs to be audited for compliance with program  requirements. OMB Circular A-133 relies heavily on the amount of federal  expenditures in a program during a fiscal year and whether findings were  reported in the previous period to determine whether detailed compliance  testing is required for that year. Although OMB is considering ways to  cluster programs for single audit selection to make it more likely that  Recovery Act programs would be selected as major programs subject to  internal control and compliance testing, the dollar formulas would not  change under this plan. This approach may not provide sufficient  assurance that smaller, but nonetheless significant, Recovery Act-funded  programs would be selected for audit.
In addition, the 2009 Compliance Supplement does not yet provide specific  auditor guidance for new programs funded by the Recovery Act, or for  new compliance requirements specific to Recovery Act funding within  existing programs, that may be selected as major programs for audit. OMB  acknowledges that additional guidance is called for and plans to address  some Recovery Act-related compliance requirements by mid-July 2009.
section_title: Reviewing the Design of Internal Controls over Recovery Act-funded Programs before Significant Expenditures in 2010
paragraphs: To provide additional focus on internal control reviews, OMB has drafted  guidance it plans to finalize in July 2009 that indicates the importance of  such reviews and encourages auditors to communicate weaknesses to  management early in the audit process, but does not add requirements for  auditors to take these steps. Addressing this recommendation through the  existing audit framework, however, would not change the reporting  timeframes and therefore would not address our concern that internal  controls over Recovery Act programs should be reviewed before  significant funding is expended. In addition, if the guidance is limited to  major programs this may not adequately consider Recovery Act program  risks. Further, if this is done within the current single audit framework and  reporting timelines, the auditor evaluation of internal control and related  reporting will occur too late—after significant levels of federal  expenditures have already occurred.
section_title: Providing relief to Balance Expected Increased Workload
paragraphs: While OMB has noted the increased responsibilities falling on those  responsible for performing single audits, it has not issued any proposals or  plans to address this recommendation to date. A recent survey conducted  by the staff of the National State Auditors’ Association (NSAA)   highlighted the need for relief to over-burdened state audit organizations  that have experienced staffing reductions and furloughs.
OMB officials told us they are considering reducing auditor workload by  decreasing the number of risk assessments of smaller federal programs.  Auditors conduct these risk assessments as part of the planning process to  identify which federal programs will be subject to detailed internal control  and compliance testing. We believe that this step alone will not provide  sufficient relief to balance out additional audit requirements for Recovery  Act programs. Without action now audit coverage of Recovery Act  programs will not be sufficient to address Recovery Act risks and the audit  reporting that does occur will be after significant expenditures have  already occurred.
Congress is currently considering a bill that could provide some financial  relief to auditors lacking the staff capacity necessary to handle the  increased audit responsibilities associated with the Recovery Act. H.R.  2182 would amend the Recovery Act to provide for enhanced state and  local oversight of activities conducted pursuant to the Act. As passed by  the House, H.R. 2182 would allow state and local governments to set aside  0.5 percent of Recovery Act funds, in addition to funds already allocated to  administrative expenditures, to conduct planning and oversight. Chairman  Towns, Ranking Member Issa, and this Committee are to be commended  for their leadership in crafting H.R. 2182.
section_title: Single Audit Reporting Will Not Facilitate Timely Reporting of Recovery Act Program Findings and Risks
paragraphs: The single audit reporting deadline is too late to provide audit results in  time for the audited entity to take action on deficiencies noted in Recovery  Act programs. The Single Audit Act requires that recipients submit their  Single Audit reports to the federal government no later than nine months  after the end of the period being audited. As a result an audited entity  may not receive feedback needed to correct an identified internal control  or compliance weakness until the latter part of the subsequent fiscal year.  For example, states that have a fiscal year end of June 30th have a  reporting deadline of March 31st, which leaves program management only  3 months to take corrective action on any audit findings before the end of  the subsequent fiscal year. For Recovery Act programs, significant  expenditure of funds could occur during the period prior to the audit  report being issued.
The timing problem is exacerbated by the extensions to the 9 month  deadline that are routinely granted by the awarding agencies, consistent  with OMB guidance. For example, 13 of the 17 states in our sample have a  June 30 fiscal year end and 7 of these 13 states requested and received  extensions for their March 31, 2009 submission requirement of their fiscal  year 2008 reporting package. The Health and Human Services Office of  Inspector General (HHS OIG) is the cognizant agency for most of the  states, including all of the states selected for review under the Recovery  Act. According to a HHS OIG official, beginning in May 2009 HHS IG  adopted a policy of no longer approving requests for extensions of the due  dates for single audit reporting package submissions. OMB officials have  stated that they plan to eliminate allowing extensions of the reporting  package, but have not issued any official guidance or memorandum to the  agencies, OIGs, or federal award recipients.
In order to realize the single audit’s full potential as an effective Recovery  Act oversight tool, OMB needs to take additional action to focus auditors’  efforts on areas that can provide the most efficient, and most timely,  results. As federal funding of Recovery Act programs accelerates in the  next few months, we are particularly concerned that the Single Audit  process may not provide the timely accountability and focus needed to  assist recipients in making necessary adjustments to internal controls so  that they achieve sufficient strength and capacity to provide assurances  that the money is being spent as effectively as possible to meet program  objectives.
section_title: Efforts to Assess the Impact of Recovery Act Spending
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. Under the Recovery Act, direct recipients of the funds, including  states and localities, are expected to report quarterly on a number of  measures including the use of funds and an estimate of the number of jobs  created and the number of jobs retained. These measures are part of the  recipient reports required under section 1512(c) of the Recovery Act and  will be submitted by recipients starting in October 2009. OMB guidance  described recipient reporting requirements under the Recovery Act’s  section 1512 as the minimum performance measures that must be  collected, leaving it to federal agencies to determine additional  information that would be required for oversight of individual programs  funded by the Recovery Act, such as the Department of Energy  Weatherization Assistance Program and the Department of Justice Edward  Byrne Memorial Justice Assistance Grant (JAG) Program.
In general, states are adapting information systems, issuing guidance, and  beginning to collect data on jobs created and jobs retained, but questions  remained about how to count jobs and measure performance under  Recovery Act-funded programs. Over the last several months OMB met  regularly with state and local officials, federal agencies, and others to  gather input on the reporting requirements and implementation guidance.  OMB also worked with the Recovery Accountability and Transparency  Board to design a nationwide data collection system that will reduce  information reporting burdens on recipients by simplifying reporting  instructions and providing a user-friendly mechanism for submitting  required data. OMB will be testing this system in July.
In response to requests for more guidance on the recipient reporting  process and required data, OMB, after soliciting responses from an array  of stakeholders, issued additional implementing guidance for recipient  reporting on June 22, 2009. In addition to other areas, the new OMB  guidance clarifies that recipients of Recovery Act funds are required to  report only on jobs directly created or retained by Recovery Act-funded  projects, activities, and contracts. Recipients are not expected to report on  the employment impact on materials suppliers (“indirect” jobs) or on the  local community (“induced” jobs). The OMB guidance also provides  additional instruction on estimating the number of jobs created and  retained by Recovery Act funding. OMB’s guidance on the implementation  of recipient reporting should be helpful in addressing answers to many of  the questions and concerns raised by state and local program officials.  However, federal agencies may need to do a better job of communicating  the OMB guidance in a timely manner to their state counterparts and, as  appropriate, issue clarifying guidance on required performance  measurement.
OMB’s guidance for reporting on job creation aims to shed light on the  immediate uses of Recovery Act funding; however, reports from recipients  of Recovery Act funds must be interpreted with care. For example,  accurate, consistent reports will only reflect a portion of the likely impact  of the Recovery Act on national employment, since Recovery Act  resources are also made available through tax cuts and benefit payments.  OMB noted that a broader view of the overall employment impact of the  Recovery Act will be covered in the estimates generated by the Council of  Economic Advisers (CEA) using a macro-economic approach. According  to CEA, it will consider the direct jobs created and retained reported by  recipients to supplement its analysis.
section_title: Concluding Observations and Recommendations
paragraphs: Since enactment of the Recovery Act in February 2009, OMB has issued  three sets of guidance—on February 18, April 3 and, most recently, June  22, 2009 —to announce spending and performance reporting  requirements to assist prime recipients and subrecipients of federal  Recovery Act funds comply with these requirements. OMB has reached  out to Congress, federal, state, and local government officials, grant and  contract recipients, and the accountability community to get a broad  perspective on what is needed to meet the high expectations set by  Congress and the administration. Further, according to OMB’s June  guidance they have worked with the Recovery Accountability and  Transparency Board to deploy a nationwide data collection system at  www.federalreporting.gov.
As work proceeds on the implementation of the Recovery Act, OMB and  the cognizant federal agencies have opportunities to build on the early  efforts by continuing to address several important issues.
These issues can be placed broadly into three categories, which have been  revised from our last report to better reflect evolving events since April:  (1) accountability and transparency requirements, (2) reporting on impact,  and (3) communications and guidance.
section_title: Accountability and Transparency Requirements
paragraphs: Recipients of Recovery Act funding face a number of implementation  challenges in this area. The act includes new programs and significant  increases in funds out of normal cycles and processes. There is an  expectation that many programs and projects will be delivered faster so as  to inject funds into the economy, and the administration has indicated its  intent to assure transparency and accountability over the use of Recovery  Act funds. Issues regarding the Single Audit process and administrative  support and oversight are important.
Single Audit: The Single Audit process needs adjustments to provide  appropriate risk-based focus and the necessary level of accountability over  Recovery Act programs in a timely manner.
In our April 2009 report, we reported that the guidance and criteria in  OMB Circular No. A-133 do not adequately address the substantial added  risks posed by the new Recovery Act funding. Such risks may result from  (1) new government programs, (2) the sudden increase in funds or  programs that are new to the recipient entity, and (3) the expectation that  some programs and projects will be delivered faster so as to inject funds  into the economy. With some adjustment, the Single Audit could be an  effective oversight tool for Recovery Act programs because it can address  risks associated with all three of these factors.
April report recommendations: Our April report included  recommendations that OMB 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.
Status of April report recommendations: OMB has taken some actions  and has other planned actions to help focus the program selection risk  assessment on Recovery Act programs and to provide guidance on  auditors’ reviews of internal controls for those programs. However, we  remain concerned that OMB’s planned actions would not achieve the level  of accountability needed to effectively respond to Recovery Act risks and  does not provide for timely reporting on internal controls for Recovery Act  programs. Therefore, we are re-emphasizing our previous  recommendations in this area.
To help auditors with single audit responsibilities meet the increased  demands imposed on them by Recovery Act funding, we recommend that  the Director of OMB take the following four actions:    Consider developing requirements for reporting on internal controls  during 2009 before significant Recovery Act expenditures occur as well  as ongoing reporting after the initial report.
Provide more focus on Recovery Act programs through the Single  Audit to help ensure that smaller programs with high risk have audit  coverage in the area of internal controls and compliance.
Evaluate options for providing relief related to audit requirements for  low-risk programs to balance new audit responsibilities associated  with the Recovery Act.
To the extent that options for auditor relief are not provided, develop  mechanisms to help fund the additional Single Audit costs and efforts  for auditing Recovery Act programs.
subsections: section_title: Administrative Support and Oversight
paragraphs: States have been concerned about the burden imposed by new  requirements, increased accounting and management workloads, and  strains on information systems and staff capacity at a time when they are  under severe budgetary stress.
April report recommendation: In our April report, we recommended  that the director of OMB 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.
Status of April report recommendation: On May 11, 2009, OMB  released a memorandum clarifying how state grantees could recover  administrative costs of Recovery Act activities.
section_title: Matter for Congressional Consideration
paragraphs: Because a significant portion of Recovery Act expenditures will be in the  form of federal grants and awards, the Single Audit process could be used  as a key accountability tool over these funds. However, the Single Audit  Act, enacted in 1984 and most recently amended in 1996, did not  contemplate the risks associated with the current environment where  large amounts of federal awards are being expended quickly through new  programs, greatly expanded programs, and existing programs. The current  Single Audit process is largely driven by the amount of federal funds  expended by a recipient in order to determine which federal programs are  subject to compliance and internal control testing. Not only does this  model potentially miss smaller programs with high risk, but it also relies  on audit reporting 9 months after the end of a grantee’s fiscal year—far too  late to preemptively correct deficiencies and weaknesses before  significant expenditures of federal funds. Congress is considering a  legislative proposal in this area and could address the following issues:    To the extent that appropriate adjustments to the Single Audit process  are not accomplished under the current Single Audit structure,  Congress should consider amending the Single Audit Act or enacting  new legislation that provides for more timely internal control  reporting, as well as audit coverage for smaller Recovery Act programs  with high risk.
To the extent that additional audit coverage is needed to achieve  accountability over Recovery Act programs, Congress should consider  mechanisms to provide additional resources to support those charged  with carrying out the Single Audit act and related audits.
section_title: Reporting on Impact
paragraphs: Under the Recovery Act, responsibility for reporting on jobs created and  retained falls to nonfederal recipients of Recovery Act funds. As such,  states and localities have a critical role in identifying the degree to which  Recovery Act goals are achieved.
Performance reporting is broader than the jobs reporting required under  section 1512 of the Recovery Act. OMB guidance requires that agencies  collect and report performance information consistent with the agency’s  program performance measures. As described earlier in this report, some  agencies have imposed additional performance measures on projects or  activities funded through the Recovery Act.
April report recommendation: In our April report, we recommended  that 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 (1) assess jobs  created and retained from projects funded by the Recovery Act; (2)  determine the impact of Recovery Act spending when job creation is  indirect; (3) 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 and consider whether the approaches taken to  estimate jobs created and jobs retained in these cases can be replicated or  adapted to other programs.
Status of April report recommendation: OMB has been meeting on a  regular basis with state and local officials, federal agencies, and others to  gather input on reporting requirements and implementation guidance and  has worked with the Recovery Accountability and Transparency Board on  a nationwide data collection system. On June 22, OMB issued additional  implementation guidance on recipient reporting of jobs created and  retained. This guidance is responsive to much of what we said in our April  report. It states that there are two different types of jobs reports under the  Recovery Act and clarifies that recipient reports are to cover only direct  jobs created or retained. “Indirect” jobs (employment impact on suppliers)  and “induced” jobs (employment impact on communities) will be covered  in Council of Economic Advisers (CEA) quarterly reports on employment,  economic growth, and other key economic indicators. Consistent with the  statutory language of the act, OMB’s guidance states that these recipient  reporting requirements apply to recipients who receive funding through  discretionary appropriations, not to those receiving funds through either  entitlement or tax programs or to individuals. It clarifies that the prime  recipient and not the subrecipient is responsible for reporting section 1512  information on jobs created or retained. The June 2009 guidance also  provides detailed instructions on how to calculate and report jobs as full- time equivalents (FTE). It also describes in detail the data model and  reporting system to be used for the required recipient reporting on jobs.
The guidance provided for reporting job creation aims to shed light on the  immediate uses of Recovery Act funding and is reasonable in that context.  It will be important, however, to interpret the recipient reports with care.  As noted in the guidance, these reports are only one of the two distinct  types of reports seeking to describe the jobs impact of the Recovery Act.  CEA’s quarterly reports will cover the impact on employment, economic  growth, and other key economic indicators. Further, the recipient reports  will not reflect the impact of resources made available through tax  provisions or entitlement programs.
Recipients are required to report no later than 10 days after the end of the  calendar quarter. The first of these reports is due on October 10, 2009.  After prime recipients and federal agencies perform data quality checks,  detailed recipient reports are to be made available to the public no later  than 30 days after the end of the quarter. Initial summary statistics will be  available on www.recovery.gov. The guidance explicitly does not mandate  a specific methodology for conducting quality reviews. Rather, federal  agencies are directed to coordinate the application of definitions of  material omission and significant reporting error to “ensure consistency”  in the conduct of data quality reviews. Although recipients and federal  agency reviewers are required to perform data quality checks, none are  required to certify or approve data for publication. It is unclear how any  issues identified under data quality reviews would be resolved and how  frequently data quality problems would have been identified in the  reviews. We will continue to monitor this data quality and recipient  reporting requirements.
Our recommendations: To increase consistency in recipient reporting or  jobs created and retained, the Director of OMB should work with federal  agencies to have them provide program-specific examples of the  application of OMB’s guidance on recipient reporting of jobs created and  retained. This would be especially helpful for programs that have not  previously tracked and reported such metrics.
Because performance reporting is broader than the jobs reporting required  by section 1512, the Director of OMB should also work with federal  agencies—perhaps through the Senior Management Councils—to clarify  what new or existing program performance measures—in addition to jobs  created and retained—that recipients should collect and report in order to  demonstrate the impact of Recovery Act funding.
In addition to providing these additional types of program-specific  examples of guidance, the Director of OMB should work with federal  agencies to use other channels to educate state and local program officials  on reporting requirements, such as Web- or telephone-based information  sessions or other forums.
section_title: Communications and Guidance
paragraphs: Funding notification and program guidance: 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 easily accessible, real-time  procedure for ensuring that appropriate officials in states and localities  are notified. Because half of the estimated spending programs in the  Recovery Act will be administered by nonfederal entities, states wish to be  notified when funds are made available to them for their use as well as  when funding is received by other recipients within their state that are not  state agencies.
OMB does not have a master timeline for issuing federal agency guidance.  OMB’s preferred approach is to issue guidance incrementally. This  approach potentially produces a more timely response and allows for mid- course corrections; however, this approach also creates uncertainty  among state and local recipients responsible for implementing programs.  We continue to believe that OMB can strike a better balance between  developing timely and responsive guidance and providing a longer range  time line that gives some structure to states’ and localities’ planning  efforts.
April report recommendation: In our April report, we recommended  that 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 statewide interest in this information—and (3) all nonfederal  recipients on planned releases of federal agency guidance and, if known,  whether additional guidance or modifications are recommended.
Status of April recommendation: OMB has made important progress in  the type and level of information provided in its reports on Recovery.gov.  Nonetheless, OMB has additional opportunities to more fully address the  recommendations we made in April. By providing a standard format  across disparate programs, OMB has improved its Funding Notification  reports, making it easier for the public to track when funds become  available. Agencies update their Funding Notification reports for each  program individually whenever they make funds available. Both reports  are available on www.recovery.gov. OMB has taken the additional step of  disaggregating financial information, i.e., federal obligations and outlays  by Recovery Act programs and by state in its Weekly Financial Activity  Report.
Our recommendation: The Director of OMB should continue to develop  and implement an approach that provides easily accessible, real-time  notification to (1) prime recipients in states and localities when funds are  made available for their use, and (2) states—where the state is not the  primary recipient of funds but has a statewide interest in this information.  In addition, OMB should provide a long range time line for the release of  federal guidance for the benefit of nonfederal recipients responsible for  implementing Recovery Act programs.
Recipient financial tracking and reporting guidance: In addition to  employment related reporting, OMB’s guidance calls for the tracking of  funds by the prime recipient, recipient vendors, and subrecipients  receiving payments. OMB’s guidance also allows that “prime recipients  may delegate certain reporting requirements to subrecipients.” Either the  prime or sub-recipient must report the D-U-N-S number (or an acceptable  alternative) for any vendor or sub-recipient receiving payments greater  than $25 thousand. In addition, the prime recipient must report what was  purchased and the amount, and a total number and amount for sub-awards  of less than $25 thousand. By reporting the DUNS number, OMB guidance  provides a way to identify subrecipients by project, but this alone does not  ensure data quality.
The approach to tracking funds is generally consistent with the Federal  Funding Accountability and Transparency Act (FFATA). Like the Recovery  Act, the FFATA requires a publicly available Web site— USAspending.gov—to report financial information about entities awarded  federal funds. Yet, significant questions have been raised about the  reliability of the data on USAspending.gov, primarily because what is  reported by the prime recipients is dependent on the unknown data quality  and reporting capabilities of their subrecipients.
For example, earlier this year, more than 2 years after passage of FFATA,  the Congressional Research Services (CRS) questioned the reliability of  the data on USAspending.gov. We share CRS’s concerns associated with  USAspending.gov, including incomplete, inaccurate, and other data quality  problems. More broadly, these concerns also pertain to recipient financial  reporting in accordance with the Recovery Act and its federal reporting  vehicle, www.FederalReporting.gov, currently under development.
Our recommendation: To strengthen the effort to track the use of funds,  the Director of OMB should (1) clarify what constitutes appropriate quality  control and reconciliation by prime recipients, especially for subrecipient  data, and (2) specify who should best provide formal certification and  approval of the data reported.
Agency-specific guidance: DOT and FHWA have yet to provide clear  guidance regarding how states are to implement the Recovery Act  requirement that economically distressed areas are to receive priority in  the selection of highway projects for funding. We found substantial  variation both in how states identified areas in economic distress and how  they prioritized project selection for these areas. As a result, it is not clear  whether areas most in need are receiving priority in the selection of  highway infrastructure projects, as Congress intended. While it is true that  states have discretion in selecting and prioritizing projects, it is also  important that this goal of the Recovery Act be met.
Our recommendation: To ensure states meet Congress’s direction to give  areas with the greatest need priority in project selection, the Secretary of  Transportation should develop clear guidance on identifying and giving  priority to economically distressed areas that are in accordance with the  requirements of the Recovery Act and the Public Works and Economic  Development Act of 1965, as amended, and more consistent procedures  for the Federal Highway Administration to use in reviewing and approving  states’ criteria.
section_title: Agency Comments and Our Evaluation
paragraphs: We received comments on a draft of our report from the U.S. Office of  Management and Budget (OMB) and the U.S. Department of  Transportation (DOT) on our report recommendations.
U.S. Office of Management and Budget: OMB concurs with the overall  objectives of our recommendations made to OMB in our report. OMB  offered clarifications regarding the area of Single Audit and did not concur  with some of our conclusions related to communications. What follows  summarizes OMB’s comments and our responses.
section_title: Single Audit Act
paragraphs: OMB agreed with the overall objectives of our recommendations and  offered clarifications regarding the areas of Single Audit. OMB also noted  it believes that the new requirements for more rigorous internal control  reviews will yield important short-term benefits and the steps taken by  state and local recipients to immediately initiate controls will withstand  increased scrutiny later in the process.
OMB commented that it has already taken and is planning actions to focus  program selection risk assessment on Recovery Act programs and to  increase the rigor of state and local internal controls on Recovery Act  activities. However, our report points out that OMB has not yet completed  critical guidance in these areas. Unless OMB plans to change the risk  assessment process conducted for federal programs under Circular A-133,  smaller, but significantly risky programs under the Recovery Act may not  receive adequate attention and scrutiny under the Single Audit process.
OMB acknowledged that acceleration of internal control reviews could  cause more work for state auditors, for which OMB and Congress should  explore potential options for relief. This is consistent with the  recommendations we make in this report. OMB also noted that our draft  report did not offer a specific recommendation for achieving acceleration  of internal control reporting. Because there are various ways to achieve  the objective of early reporting on internal controls, we initially chose not  to prescribe a specific method; however, such accelerated reporting could  be achieved in various ways. For instance, OMB could require specific  internal control certifications from federal award recipients meeting  certain criteria as of a specified date, such as December 31, 2009, before  significant Recovery Act expenditures occur. Those certifications could  then be reviewed by the auditor as part of the regular single audit process.  Alternatively, or in addition, OMB could require that the internal control  portion of the single audit be completed early, with a report submitted 60  days after the recipient’s year end. We look forward to continuing our  dialog with OMB on various options available to achieve the objective of  early reporting on internal controls. We will also continue to review OMB’s  guidance in the area of single audits as such guidance is being developed.
section_title: Communications
paragraphs: OMB has made important progress relative to some communications. In  particular, we agree with OMB’s statements that it requires agencies to  post guidance and funding information to agency Recovery Act websites,  disseminates guidance broadly, and seeks out and responds to stakeholder  input. In addition, OMB is planning a series of interactive forums to offer  training and information to Recovery Act recipients on the process and  mechanics of recipient reporting and they could also serve as a vehicle for  additional communication. Moving forward and building on the progress it  has made, OMB can take the following additional steps related to funding  notification and guidance.
First, OMB should require direct notification to key state officials when  funds become available within a state. OMB has improved Funding  Notification reports by providing a standard format across disparate  programs, making it easier for the public to track when funds become  available. However, it does not provide an easily accessible, real-time  notification of when funds are available. OMB recognized the shared  responsibilities of federal agencies and states in its April 3, 2009 guidance  when it noted that federal agencies should expect states to assign a  responsible office to oversee data collection to ensure quality,  completeness, and timeliness of data submissions for recipient reporting.  In return, states have expressed a need to know when funds flow into the  state regardless of which level of government or governmental entity  within the state receives the funding so that they can meet the  accountability objectives of the Recovery Act. We continue to recommend  more direct notification to (1) prime recipients in states and localities  when funds are made available for their use, and (2) states-where the state  is not the primary recipient of funds but has a statewide interest in this  information.
Second, OMB should provide a long range time line for the release of  federal guidance. In an attempt to be responsive to emerging issues and  questions from the recipient community, OMB’s preferred approach is to  issue guidance incrementally. This approach potentially produces a more  timely response and allows for mid-course corrections; however, this  approach also creates uncertainty among state and local recipients. State  and local officials expressed concerns that this incremental approach  hinders their efforts to plan and administer Recovery Act programs. As a  result, we continue to believe OMB can strike a better balance between  developing timely and responsive guidance and providing some degree of  a longer range time line so that states and localities can better anticipate  which programs will be affected and when new guidance is likely to be  issued. OMB’s consideration of a master schedule and its  acknowledgement of the extraordinary proliferation of program guidance  in response to Recovery Act requirements seem to support a more  structured approach. We appreciate that a longer range time line would  need to be flexible so that OMB could also continue to issue guidance and  clarifications in a timely manner as new issues and questions emerge.
U.S. Department of Transportation: DOT generally agreed to consider  the recommendation that it develop clear guidance on identifying and  giving priority to economically distressed areas and more consistent  procedures for reviewing and approving states’ criteria. DOT agreed that  states must give priority to projects located in economically distressed  areas, but said that states must balance all the Recovery Act project  selection criteria when selecting projects including giving preference to  activities that can be started and completed expeditiously, using funds in a  manner that maximizes job creation and economic benefit, and other  factors. While we agree with DOT that there is no absolute primacy of  economically distressed area projects in the sense that they must always  be started first, the specific directives in the act that apply to highway  infrastructure are that priority is to be given to projects that can be  completed in 3 years, and are located in economically distressed areas.  DOT also stated that the basic approach used by selected states to apply  alternative criteria is consistent with the Public Works and Economic  Development Act and its implementing regulations on economically  distressed areas because it makes use of flexibilities provided by the  Public Works Act to more accurately reflect changing economic  conditions. However the result of DOT’s interpretation would be to allow  states to prioritize projects based on criteria that are not mentioned in the  highway infrastructure investment portion of the Recovery or the Public  Works Acts without the involvement of the Secretary or Department of  Commerce. We plan to continue to monitor states’ implementation of the  economically distressed area requirements and interagency coordination  at the federal level in future reports.
Mr. Chairman, Representative Issa, and Members of the Committee this  concludes my statement. I would be pleased to respond to any questions  you may have.
section_title: Contacts
paragraphs: For further information on this testimony, please contact J. Christopher  Mihm, Managing Director for Strategic Issues, on (202) 512-6806 or  mihmj@gao.gov.
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