Recovery Act: California's Use of Funds and Efforts to Ensure Accountability
Published: 2010-03-05T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The American Recovery and Reinvestment Act of 2009 (Recovery Act) specifies several roles for GAO, including conducting bimonthly reviews of selected states' and localities' use of funds made available under the act. This testimony is based on GAO's bimonthly work in California, where the Recovery Act provided more than $85 billion--or about 10 percent of the funds available nationally--for program funding and tax relief. This testimony provides a general overview of: (1) California's use of Recovery Act funds for selected programs, (2) the approaches taken by California agencies to ensure accountability for Recovery Act funds, and (3) the impacts of these funds. This testimony focuses on selected programs that GAO has covered in previous work including the use of Recovery Act funds by the state and two localities' --City of Los Angeles and County of Sacramento, Highway Infrastructure Investment, and the Weatherization Assistance Program. GAO also updated information on three education programs with significant Recovery Act funds being disbursed--the State Fiscal Stabilization Fund (SFSF), and Recovery Act funds for Title I, Part A, of the Elementary and Secondary Education Act of 1965 (ESEA), as amended, and Part B of the Individuals with Disabilities Education Act (IDEA),. GAO provided a draft of this statement to California state and local officials and incorporated their comments where appropriate.
section_title: What GAO Found
paragraphs: (1) State and Local Budgets: Despite the influx of Recovery Act funds, California continues to face severe budgetary pressures and estimates a current shortfall of as much as $21billion --roughly one-quarter of the state's annual budget expenditures. California's cities and counties are also struggling with budget problems. According to officials from the City of Los Angeles and County of Sacramento, Recovery Act funds are helping to preserve essential services and repair infrastructure but have generally not helped stabilize their base budgets. (2) Transportation Infrastructure: According to California officials, 100 percent of California's $2.570 billion highway infrastructure Recovery Act apportionment has been obligated. The state has dedicated most of these funds for pavement improvements--including resurfacing and rehabilitating roadways. (3) Weatherization Assistance: As of January 25, 2010, California had awarded about $66 million to 35 local service providers throughout the state for weatherization activities. State and federal requirements, such as prevailing wage rates, as well as the implementation of these requirements, have delayed weatherization and, as of February 26, 2010, the state had weatherized only 849 homes--less than 2 percent of the 43,000 homes that are estimated to be weatherized with Recovery Act funds. (4) Education: As of February 19, 2010, California had distributed approximately $4.7 billion for three education programs, including the SFSF. Local education agencies plan to use more than half of these funds to retain jobs; however, a majority reported that they still expect job losses. Also, cash management issues, related to federal cash balances and the calculation and remittance of interest, remain, but the California Department of Education has taken preliminary steps to resolve them.(5) Accountability: California oversight entities and state agencies have taken various actions to oversee Recovery Act funds, including training, risk assessments, on-site monitoring, and audits. The Governor established the Recovery Task Force to ensure funds are spent efficiently and effectively, and the State Auditor and Inspector General also have key oversight roles. (6) Jobs Reporting: Recipients reported that 70,745 jobs were funded in California during the last quarter of 2009. However, about 70 percent of these jobs were in education and were not reported using the Office of Management and Budget's (OMB) latest guidance, and therefore were not calculated consistently with other jobs reported.

section_title: Letter
paragraphs: Mr. Chairman and Members of the full Committee, Madame Chairwoman  and Members of the Subcommittee:  I am pleased to be here today to discuss our work in California examining  the uses and planning for funds made available by the American Recovery  and Reinvestment Act of 2009 (Recovery Act). Congress and the  administration have fashioned a significant response to what is generally  reported to be the nation’s most serious economic crisis since the Great  Depression. The Recovery Act’s combined tax provisions and spending are  estimated to cost $862 billion, including more than $85 billion in tax relief  and additional spending in California for investments in transportation  infrastructure, education, weatherization assistance, and other programs.
The Recovery Act requires GAO, among other things, to conduct  bimonthly reviews of selected states’ and localities’ use of funds made  available under the act. We issued our fifth bimonthly report on March 3,  2010, which summarized our work on a group of 16 states including  California, the District of Columbia (the District), and selected localities.  The selected jurisdictions for our in-depth reviews contain about 65  percent of the U.S. population and are estimated to receive collectively  about two-thirds of the intergovernmental assistance available through the  Recovery Act. We have issued individual summaries for California, other  selected states, and the District four times. These summaries are  accessible through GAO’s recovery page at www.gao.gov/recovery. The  Recovery Act also mandated GAO to comment quarterly on the estimates  of jobs created or retained as reported by recipients of Recovery Act  funding from federal agencies. We issued our initial report related to  recipient reporting, including recommendations for recipient report  improvements, on November 19, 2009, and our second report with  updated information regarding the second round of recipient reports  updated information regarding the second round of recipient reports  covering activity through December 31, 2009, on March 3, 2010.
My statement today is based on our work in California and provides a  general overview of (1) California’s uses of Recovery Act funds for selected  programs, (2) the approaches taken by California agencies to ensure  accountability for Recovery Act funds, and (3) the impacts of these funds on  creating and retaining jobs. My testimony focuses on selected programs that  we have covered in our previous work including the use of Recovery Act  funds by the state and two localities—City of Los Angeles and County of  Sacramento—to help address their budget challenges, Highway  Infrastructure Investment, and the Weatherization Assistance Program. In  addition to these programs and issues, we updated information on three  education programs with significant Recovery Act funds being disbursed— the State Fiscal Stabilization Fund (SFSF), and Recovery Act funds for Title  I, Part A, of the Elementary and Secondary Education Act of 1965 as  amended, (ESEA), and the Individuals with Disabilities Education Act  (IDEA), Part B. Finally, I am discussing California’s efforts to meet reporting  requirements under section 1512 of the Recovery Act, and the information  California recipients reported, which is publicly available on the  www.recovery.gov (Recovery.gov) Web site.
We conducted performance audits for our bimonthly reviews 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: California is the nation’s most populous state and the eighth-largest  economy in the world. California is estimated to receive approximately  $85 billion in Recovery Act funds, or about 10 percent of the funds  available nationally. Nearly 80 percent of Recovery Act funding to states  and localities is projected to be distributed within the first 3 years. Peak  projected outlays are in fiscal year 2010, with outlays that year projected  to be more than twice the level of fiscal year 2009 outlays. The California  Recovery Task Force (Task Force), which was established by the  Governor in March 2009, has overarching responsibility for ensuring that  the state’s Recovery Act funds are spent efficiently and effectively and are  tracked and reported in a transparent manner. The Task Force reports on  the use and status of Recovery Act funds using the state’s recovery Web  site (www.recovery.ca.gov). In addition to the Task Force’s efforts, other  California entities with oversight responsibilities, including the State  Auditor, have expanded the scope of their work to include a focus on state  programs receiving Recovery Act funds.
As of December 9, 2009, the Task Force estimated that approximately $53  billion has been allocated to California state agencies and local  governments, nonprofits, local education agencies, and private companies  through spending programs. The remaining portion, approximately $30  billion, is being provided to individuals and businesses in the form of  direct tax relief. Approximately $33.7 billion has been awarded and $17.8  billion has been expended. As shown in figure 1, health, education, and  labor accounted for almost 96 percent of California’s Recovery Act  expenditures. The largest programs within these areas were the state  Medicaid program and SFSF.
To help measure the impact of the Recovery Act, the act contains  numerous provisions that require recipients of Recovery Act funding to  report quarterly on several measures. Nonfederal recipients of Recovery  Act funds, such as state and local governments, private companies,  educational institutions, and nonprofits, are required to submit reports  with information on each project or activity, including amounts and a  description of the use of funds and an estimate of the jobs created or  retained. To collect this information, the U.S. Office of Management and  Budget (OMB) and the Recovery Accountability and Transparency Board  created a nationwide data collection system to obtain data from recipients,  www.federalreporting.gov (FederalReporting.gov), and another site for  the public to view and download recipient reports, Recovery.gov. Shortly  before recipients could begin entering data into FederalReporting.gov for  the second quarterly reporting period, OMB issued a memorandum for the  heads of U.S. executive departments and agencies on December 18, 2009,  updating its reporting guidance on the Recovery Act, in response to  suggestions made by recipients, agencies, and our recommendations. The  updated guidance focuses on issues related to data quality, nonreporting  recipients, and reporting of job estimates, among other important  reporting requirements.
We previously reported that the Task Force, with the assistance of the  state’s Chief Information Officer (CIO), created and deployed a central  information technology system for state departments to report quarterly  recipient report data. For the first two rounds of recipient reporting,  California established a centralized reporting system, the California ARRA  Accountability Tool (CAAT), which state agencies receiving Recovery Act  funds used to report their data to the Task Force. California’s CIO, on  behalf of the Task Force, was responsible for collecting the data from  state agencies and uploading the data to FederalReporting.gov.
section_title: California’s State and Local Governments Continue to Grapple with Budget Problems, but Recovery Act Funds Have Helped Preserve Services
paragraphs: California used Recovery Act funds to help balance the state fiscal year  2009-2010 budget, when the state faced a nearly $60 billion budget gap,  and future budget shortfalls are expected. As discussed in our prior  reports, California balanced its state fiscal year 2009-2010 budget by,  among other things, making more than $31 billion in cuts, increasing taxes  by $12.5 billion, and using over $8 billion in Recovery Act funds. However,  California’s long-term fiscal prospects remain of concern. For example, in  November 2009, the Legislative Analyst’s Office (LAO) estimated the size  of the 2009-2010 and 2010-2011 budget shortfall at about $21 billion.  According to the LAO, the main reasons for the budget gaps are: the  inability of the state to achieve previous budget solutions in several areas,  the effects of several adverse court rulings and, for 2010-2011, the  expiration of various one-time and temporary budget solutions approved  in 2009. The Governor’s 2010-2011 budget proposal was somewhat more  optimistic and identified a $18.9 billion budget shortfall. Nonetheless, the  budget gap constitutes roughly one-quarter of the state’s annual budget  expenditures.
The Governor declared a fiscal emergency on January 8, 2010, calling the  legislature into special session to act on his proposed solutions to address  the budget shortfall. Those proposed solutions include reductions in state  programs, shifts of state funds to pay for general fund expenses, and  requests for additional federal funds and greater flexibility. On January 22,  2010, the state Controller urged the state legislature and Governor to  address the state’s projected budget and cash shortfalls for the remainder  of the current fiscal year, as well as the next fiscal year, in order to protect  California’s economic recovery, continue the financing of public works  projects, and prevent even greater financial hardship. Further, the  Controller stated that, if the budget situation is not resolved, the  legislature and Governor will again face the prospect of a cash crisis  beginning in July 2010.
Local city and county governments in California are also struggling with  declining revenues and budget problems. Additionally, local governments  are affected by the fiscal situation of the state as a number of revenue  sources—such as sales tax, gas tax, vehicle license, and many others— pass through the state. For example, in order to balance the California’s  fiscal year 2009-2010 budget, state leaders agreed to borrow almost $2  billion in local property tax revenue and make $877 million in local  government transportation revenue available to the state general fund for  transit debt service. Officials we met with in the City of Los Angeles (Los  Angeles) and the County of Sacramento said that they face budget  shortfalls this fiscal year due to declines in state funding for programs, tax  revenues, and fees. (Fig. 2 highlights information about the two local  governments we reviewed.) For example, a Los Angeles official told us  that, for the remainder of fiscal year 2010, they are trying to close a deficit  of $212 million and have a projected $485 million deficit for fiscal year  2011. Sacramento County officials reported that the county is facing a  nearly $14 million general fund budget shortfall for the remainder of fiscal  year 2009-2010, and faces cuts of around $149 million for next fiscal year.
According to government officials in both localities, Recovery Act funds  are helping to preserve the delivery of essential services and repair  infrastructure but have generally not helped stabilize their base budgets.
Overall, as of February 18, 2010, a Los Angeles official reported that the  city had been awarded about $597 million in Recovery Act grants, and  Sacramento County officials reported the county had been awarded about  $88 million in Recovery Act formula grants as of January 15. Most  Recovery Act funds to local governments flow through existing federal  grant programs. Some of these funds are provided directly to the local  government by federal agencies, and others are passed from the federal  agencies through state governments to local agencies. As shown in table 1,  local officials reported their governments’ use of Recovery Act funds in  program areas including public safety (Edward Byrne Memorial Justice  Assistance Grant (JAG)) and Energy Efficiency and Conservation Block  Grant (EECBG). Other Recovery Act funds received by these localities  included formula grants for prevention of Internet crimes against children,  public housing, emergency shelter, health centers, capital improvements,  airport security and improvement, transportation, and additional  competitive grant awards. Officials reported that Los Angeles has applied  for about $893 million in additional Recovery Act grants, and the County of  Sacramento has applied for an additional $330 million in competitive  grants.
section_title: Nearly All of California's Highway Funds Have Been Obligated to Pavement and Infrastructure Projects and California Continues to Take Steps to Meet Recovery Act Requirements
paragraphs: In March 2009, California was apportioned $2.570 billion in Recovery Act  funds for the restoration, repair, and construction of highways and other  activities allowed under the Federal-Aid Highway Surface Transportation  Program. As of February 16, 2010, the U.S Department of Transportation  (DOT) Federal Highway Administration (FHWA) had obligated $2.525  billion (98 percent) of California’s apportionment. Highway funds are  apportioned to states through federal-aid highway program mechanisms,  and states must follow existing program requirements, which include  ensuring each project meets all environmental requirements associated  with the National Environmental Policy Act (NEPA), complying with goals  to ensure disadvantaged businesses are not discriminated against in the  awarding of construction contracts, and using American-made iron and  steel in accordance with Buy American requirements. The Recovery Act  also required that 30 percent of these funds be suballocated, primarily  based on population, for metropolitan, regional, and local use. In  California, according to state sources, a state law enacted in late March  2009, increased the suballocation so that more—62.5 percent of the $2.570  billion ($1.606 billion)—would be allocated to local governments for  projects of their selection.
subsections: section_title: California Has Dedicated Most of Its Recovery Act Highway Funds for Pavement Projects and Continues to Monitor Federal Reimbursements
paragraphs: The majority of Recovery Act highway obligations for California have been  for pavement improvements—including resurfacing, rehabilitating, and  constructing roadways. Of the funds obligated, approximately 65 percent  ($1.643 billion) is being used for pavement widening and improvement  projects, while 32 percent ($815 million) is being used for safety and  transportation enhancements, and 3 percent ($68 million) for bridge  replacement and improvement projects. Figure 3 shows obligations in  California by the types of road and bridge improvements being made.
According to information reported on Recovery.gov, as of December 31,  2009, California funded 761 highway infrastructure projects with Recovery  Act funds. Fourteen percent, or 103 of these projects, were completed, 34  percent (268 projects) were under way, and about 51 percent (390  projects) had not yet started. Projects under way, which were in various  stages of completion, accounted for over $1 billion in obligations, and  projects that have been obligated funds but had not yet started, had an  estimated value of almost $953 million. (See fig. 4 for an example of  Recovery Act-funded pavement project.)
Under both the Recovery Act and the regular Federal-Aid Highway Surface  Transportation Program, California has considerable latitude in selecting  projects to meet its transportation goals and needs. California Department  of Transportation (Caltrans) officials reported using the state portion to  fund state highway rehabilitation and maintenance projects that would not  have otherwise been funded due to significant funding limitations. In  addition to maintenance projects, the state has allocated Recovery Act  funds to large construction projects, including one of the largest  transportation investments, approximately $197.5 million for the  construction of the Caldecott Tunnel, a new two-lane, bore tunnel  connecting Contra Costa and Alameda counties. In addition, as previously  mentioned, according to state officials, a March 2009 state law provided  more funding directly to local governments, allowing a number of locally  important projects to be funded. For example, $319 million in Recovery  Act funds were obligated for 195 local projects in the Los Angeles area that  may not have otherwise been funded in 2009, such as the Compton  Boulevard resurfacing project. This project received approximately  $750,000 in Recovery Act funds and would not have been funded for many  years without these funds.
As of February 16, 2010, $273 million of the $2.525 billion obligated to  California highway projects had been reimbursed by FHWA. Although  federal reimbursements in California have increased over time, from $22  million in September 2009 to $273 million, this rate, 11 percent, continues  to be lower than the amount reimbursed nationwide, 25 percent ($6.3  billion) of the $25.1 billion obligated. As we reported in December 2009,  Caltrans officials attributed the lower reimbursement rate to having a  majority of its projects administered by local governments, which may  take longer to reach the reimbursement phase than state projects, due to  additional steps required to approve local highway projects. For example,  highway construction contracts administered by local agencies generally  call for a local review and a local public notice period, which can add  nearly 6 weeks to the process. Additionally, Caltrans officials stated that  localities with relatively small projects tend to seek reimbursement in one  lump sum at the end of a project to minimize time and administrative cost.  Caltrans has started to monitor pending invoices submitted by local  agencies for Recovery Act projects to better assess how quickly Recovery  Act funds are being spent.
section_title: California Reported Meeting the 1-Year Obligation Deadline and Is Taking Steps to Meet Other Recovery Act Requirements
paragraphs: The Recovery Act required states to ensure that all apportioned Recovery  Act funds were obligated within 1 year after apportionment and, according  to Caltrans officials, as of February 18, 2010, 100 percent of California’s  highway infrastructure Recovery Act apportionment has been obligated.  If any states did not meet this requirement by March 2, 2010, the Secretary  of Transportation would withdraw and redistribute the unobligated  funding to other eligible states. Any Recovery Act funds that are  withdrawn and redistributed are available for obligation until September  30, 2010.
In addition to meeting the 1-year obligation deadline under the Recovery  Act, Caltrans has also been working to meet two other Recovery Act  requirements that do not exist in the regular Federal-Aid Highway Surface  Transportation Program: (1) identification of economically distressed  areas and (2) maintenance of effort.
Identifying economically distressed areas. As we reported in December  2009, Caltrans revised its economically distressed areas determination  using new guidance issued to states in August 2009 by FHWA, in  consultation with the Department of Commerce, giving more direction on  “special needs” criteria for areas that do not meet the statutory criteria in  the Public Works and Economic Development Act. As a result, the  number of counties considered distressed increased from 49 to all 58  counties. According to Caltrans officials, this new determination did not  change how it funded or administered Recovery Act projects. Caltrans  officials told us that, in selecting projects for funding, they first considered  how quickly the project could be started and its potential to create and  retain jobs, then considered the extent of need with each economically  distressed area. The Recovery Act requires states to give priority to  projects that can be completed within 3 years and to projects located in  economically distressed areas. Recently, FHWA reviewed the  documentation that California used in its application of special needs  criteria and determined that the data used were not consistent with FHWA  guidance. Caltrans has been advised that the data must show a connection  between demonstrated severe job losses and actual, identified firm  closures and restructuring. On February 24, 2010, Caltrans officials  reported that Caltrans was working to address FHWA’s data concerns by  evaluating methods to assess the job losses without the use confidential  data.
Maintaining effort. While California is still reviewing its current  maintenance-of-effort certification, it does not anticipate difficulty in  maintaining the level of spending for transportation projects funded by the  Recovery Act that it planned to spend as of February 17, 2009—the day the  Recovery Act was enacted. California, like many other states, had to  revise its initial March 5, 2009, certification, because the certification  included a conditional statement, which was not permitted by the  Recovery Act. On February 9, 2010, DOT requested that each state review  its current certification and take any corrective action with regard to the  state’s calculation of the maintenance-of-effort amount on or before March  11, 2010. Although California is reviewing its certification, Caltrans  officials maintain that California expects to meet the planned level of  spending, in part because the state reinstated a transportation bond  program worth approximately $20 billion.
section_title: Home Weatherization Was Delayed Across California, Largely Due to State and Federal Requirements
paragraphs: The Recovery Act appropriated $5 billion for the Weatherization  Assistance Program, which the Department of Energy (DOE) is  distributing to each of the states, the District, and seven territories and  Indian tribes, to be spent over a 3-year period. This program helps low- income families reduce their utility bills by making long-term energy  efficiency improvements to their homes by, for example, installing  insulation or modernizing heating or air conditioning equipment. DOE has  limited states’ access to 50 percent of these funds and plans to provide  access to the remaining funds once a state meets certain performance  milestones, including weatherizing 30 percent of all the homes in its state  plan that it estimates it will weatherize with Recovery Act funds. In  addition, the Recovery Act requires all laborers employed by contractors  and subcontractors on Recovery Act projects to be paid at least the  prevailing wage, as determined under the Davis-Bacon Act. The  Department of Labor (Labor) first established prevailing wage rates for  weatherization in all of the 50 states and the District by September 3, 2009.
DOE allocated approximately $186 million in Recovery Act funds for  weatherization in California. This represents a large increase in funding  over California’s annually appropriated weatherization program, which  received about $14 million for fiscal year 2009. By June 2009, DOE had  provided 50 percent—about $93 million—of the Recovery Act funds to the  California Department of Community Services and Development (CSD),  the state agency responsible for administering the state’s weatherization  program. In late July, the state legislature approved CSD’s use of these  funds. Of the funds received, CSD retained about $16 million to support  oversight, training, and other state activities. CSD has begun distributing  the remaining $77 million throughout its existing network of local  weatherization service providers, including nonprofit organizations and  local governments.
subsections: section_title: Home Weatherization Has Started in California, but Service Providers Are Still Being Developed for Los Angeles and the San Francisco Bay Area
paragraphs: According to CSD, as of January 25, 2010, CSD had awarded about $66  million of the $77 million to 35 local service providers throughout the state  for planning, purchasing equipment, hiring and training, and weatherizing  homes. This amount includes $14.3 million to two service providers for  three of the four service areas in the County of Los Angeles. It also  includes almost $3 million and $3.8 million, respectively, to the service  providers for Orange and Riverside counties. CSD has not yet awarded the  remaining funds—approximately $10 million—to service providers for the  remaining part of the County of Los Angeles, parts of Alameda County,  Alpine County, El Dorado County, Santa Clara County, San Francisco  County, and Siskiyou County. For these areas, CSD has been either  seeking a new service provider or is withholding funds pending the  completion of an investigation of the designated service provider. CSD  reported that, as of December 31, 2009, CSD and its service providers  spent approximately $10 million—or about 5 percent—of the Recovery Act  funds on weatherization-related activities. Also, according to CSD, 849  homes were weatherized as of February 26, 2010, which is less than 2  percent of the approximately 43,000 homes that CSD currently estimates  will be weatherized with Recovery Act funds. In particular, 7 homes have  been weatherized in the County of Los Angeles, and 0 and 20 homes have  been weatherized in Orange and Riverside counties, respectively.
section_title: State and Federal Requirements Have Delayed Weatherization in California
paragraphs: Weatherization in California has been delayed, in part, because (1) CSD  decided to wait until Labor determined the state’s prevailing wage rates,  which occurred on September 3, 2009, and (2) after the prevailing wage  rates were determined, local service providers raised concerns about an  amendment CSD is requiring them to adopt to their Recovery Act  weatherization contracts to ensure compliance with the act. CSD officials  explained that, in anticipation of additional staffing and administration  challenges for service providers, they wanted more clearly defined Davis- Bacon Act requirements, including the actual wage rates, before spending  Recovery Act funds. CSD estimates that waiting for the wage rate  determinations delayed weatherization in California for 2 to 3 months.  CSD reported to us that, although the rate determinations for two of three  weatherization-related job categories are mostly similar to what service  providers currently pay, the rates for the third category—heating,  ventilating, and air conditioning work—are much higher and will, thus,  lead to cost increases. CSD also reported that it expects that the Davis- Bacon Act administrative requirements—including expanding existing  administrative and accounting systems, updating payroll documentation  and reporting, and increasing subcontractor monitoring—will have a  substantial impact on program costs. For example, CSD must seek a  replacement service provider for three of the previously discussed  designated service areas because the existing three providers for these  areas chose not to participate in the Recovery Act-funded weatherization  activities due, in part, to concerns that the funding did not adequately  support these increased administrative requirements. CSD also reported  that its service providers have had difficulty identifying subcontractors  willing to comply with the Davis-Bacon Act requirements.
According to state officials, CSD is requiring service providers to adopt an  amendment to their Recovery Act weatherization contracts to ensure that  they comply with the Recovery Act, including certifying that they comply  with the Davis-Bacon provisions, before providing Recovery Act funds to  them to weatherize homes. Only two providers adopted the amendment by  the initial October 30 deadline. According to CSD, many providers did not  adopt the amendment because they objected to some of its provisions,  including those pertaining to compensation, cost controls, and  performance requirements. As a result, CSD entered into negotiations with  providers and formally issued a modified amendment on December 17,  2009. However, prior to December 17, CSD announced steps that providers  could take to accept the modified amendment in advance of its formal  issuance and, thus, begin weatherizing homes sooner. Twenty-six service  providers accepted the modified amendment in advance of the formal  issuance and, to date, all active service providers have adopted the  amendment. According to state officials, the amendment requires service  providers to submit a wage plan for meeting the Davis-Bacon Act  requirements before receiving any funds to weatherize homes. As of  February 24, 2010, 26 service providers have submitted wage plans, all of  which CSD has approved. Finally, CSD has plans to issue an additional  contract amendment by the end of March, 2010 to, among other things,  release new prevailing wages rates issued by Labor in December 2009. A  CSD official told us that the department does not anticipate any delays in  implementing this amendment.
section_title: Concerns Exist about California’s Ability to Timely Access and Manage Its Remaining Weatherization Funds
paragraphs: In a February 2, 2010, audit of CSD, the State Auditor reported that delays  in weatherizing homes could jeopardize CSD’s ability to meet DOE’s  performance milestones and, thus, its ability to timely access the  remaining $93 million in Recovery Act weatherization funds. Thirty  percent of all homes estimated to be weatherized in the state plans  approved by DOE must be completed before the remaining funds may be  accessed. The State Auditor also found that CSD needs to improve its  control over cash management and that it lacks written procedures for  preparing program reports. In its response to the report, CSD stated that it  plans to meet DOE’s performance milestones by redirecting funds from  areas without service providers to providers with the capacity to  weatherize more homes. CSD also outlined steps it is taking to provide  weatherization services to the previously discussed unserviced areas  where it is either seeking a new service provider or withholding funds. Our  prior reports have also highlighted delays in this program, and we plan to  continue to follow California’s progress in using Recovery Act  weatherization funds, including:    Number of homes weatherized. Although CSD has developed quarterly  targets for weatherizing enough homes to meet DOE’s performance  milestones, it is too early to assess whether service providers are meeting  these targets. However, as of February 26, 2010, CSD reported that the  state had weatherized only 849 of the 3,912 homes targeted for the first  quarter of the 2010 calendar year.
Service areas without weatherization providers. According to CSD, 6 out  of 43 designated service areas do not yet have service providers that are  ready to begin weatherizing homes with Recovery Act funds. According to  CSD’s latest estimates, these service areas account for 3,624—or over 8  percent—of the approximately 43,000 homes that it currently plans to  weatherize with Recovery Act funds.
Additional contract amendment forthcoming. In light of service  providers’ resistance to CSD’s first contract amendment process, CSD  cannot be certain that its upcoming attempt to revise contracts will not be  met with some level of resistance from providers and, therefore, lead to  additional delays in weatherizing homes.
In response to the State Auditor’s findings, the Task Force stated that it is  working with CSD to improve internal controls and streamline contract  approvals and that the Task Force is committed to ensuring that California  “does not leave one dollar of Recovery Act funding on the table.”
section_title: California Primarily Used Recovery Act Education Funds to Retain Jobs and Is Working to Address Its Cash Management Issues
paragraphs: As of February 19, 2010, California disbursed approximately $4.7 billion in  Recovery Act education funds for three programs—SFSF; ESEA Title I,  Part A, as amended; and IDEA, Part B. These funds were allocated to local  educational agencies (LEA), special education local plan areas, and  institutions of higher education (IHE). Specifically, California was  allocated $5.47 billion in SFSF funds to help state and local governments  stabilize their budgets by minimizing budgetary cuts in education and  other government services. Under the Recovery Act, states must allocate  81.8 percent of their SFSF to support education (education stabilization  funds), and the remaining 18.2 percent must be used for public safety and  other government services, which may include education programs.  California has received about $1.1 billion in SFSF government services  funds that it used for payroll costs for its corrections system and has  received about $4 billion in SFSF education stabilization funds. California  also received approximately $464 million in Recovery Act ESEA Title I,  Part A funding, which supports education for disadvantaged students and  about $286 million in IDEA funding, which supports special education  efforts.
subsections: section_title: LEAs Are Primarily Using Recovery Act Funds to Retain Jobs but Still Anticipate Job Losses
paragraphs: The majority of LEAs in California said they anticipate using more than  half of their Recovery Act funds to retain jobs. As of December 31, 2009,  the California Department of Education (CDE) reported that LEAs in the  state funded a total of nearly 50,000 education jobs—mostly teachers— with the three Recovery Act education funding programs in our review,  with approximately 39,000 of those jobs funded by SFSF. In the Los  Angeles Unified School District (LA Unified), according to district  officials, almost 6,400 jobs were funded by the three Recovery Act  programs. LA Unified officials said that, without the Recovery Act funds,  teacher layoffs could have caused increased class size, with a resulting  loss of individual attention to each student. Yet, even with SFSF funds, an  estimated 50 percent of the California LEAs reported that they expect job  losses. Recently, officials from two large California LEAs told us that their  districts anticipate teacher and other staff layoffs for the next school year  to address budget shortfalls. According to a senior LA Unified official, the  district may face teacher and support staff cuts of 7,000 to 8,000 to balance  its budget for the 2010-2011 school year.
While LEAs are using a large portion of their Recovery Act funds for jobs,  LEAs we met with told us they also planned to use funds for other eligible  activities, such as purchasing textbooks and funding deferred facility  maintenance, among other program uses. We visited two LEAs in  California—the Los Angeles Unified School District and Alvina Elementary  Charter School in Fresno County—to find out more about how they are  spending Recovery Act funds, see table 2 for a description of these uses.
LEAs also awarded contracts for services and materials using Recovery  Act funds. Although including provisions related to the Recovery Act is not  a requirement under the act, LEA officials we met with stated that  including Recovery Act provisions in contracts could have been useful in  helping vendors understand Recovery Act requirements, including  reporting requirements. However, none of the contracts we reviewed  included provisions related to Recovery Act requirements. We met with  seven LEAs that awarded contracts using either SFSF or ESEA Title I  Recovery Act funds, or both, for services, such as tutoring, professional  development for teachers, for special programs for students, and for  equipment. According to LEA officials and our review of contracts,  contract terms did not include specific Recovery Act requirements, such  as wage rate requirements, whistle blower protection, and reporting  requirements. LEA officials stated that they neither received guidance  from CDE regarding the administration of Recovery Act contracts, nor  were they aware of Recovery Act specific contract terms and conditions.  Two of the LEAs we met with told us that they plan to include Recovery  Act terms and conditions in future contracts.
section_title: California Has Taken Initial Steps to Resolve Its Ongoing Cash Management Issues
paragraphs: Our prior reports highlighted concerns related to CDE’s and LEAs’ ESEA  Title I, Part A, cash management practices—specifically CDE’s early  drawdown of ESEA Title I Recovery Act funding and the release of $450  million (80 percent) of the funds to LEAs on May 28, 2009. According to  CDE officials, the drawdown was in lieu of its normally scheduled  drawdown of school year 2008-2009 ESEA Title I funds and, therefore, the  schools would be ready to use the funds quickly. However, in August 2009,  we contacted the 10 LEAs in California that had received the largest  amounts of ESEA Title I, Part A Recovery Act funds and found that 7 had  not spent any of these funds and that all 10 reported large cash balances— ranging from $4.5 million to about $140.5 million. This raised issues about  the state’s compliance with applicable cash management requirements. In  response to cash management concerns, CDE implemented a pilot  program to help monitor LEA compliance with federal cash management  requirements. The program uses a Web-based quarterly reporting process  to track LEA cash balances. Currently, the pilot program collects cash  balance information from LEAs that receive funds under one relatively  small non-Recovery Act program. CDE officials told us that they plan to  expand the pilot to include regular and Recovery Act ESEA Title I, Part A,  and SFSF by October 2010. CDE has collected data from LEAs for two  quarters and has conducted an analysis to compare drawdown amounts  from prior fiscal years. However, CDE has not yet established  performance goals for the pilot program or developed a program  evaluation plan.
We also raised concerns about the inconsistent interest calculation and  payment remittance processes at LEAs in California. CDE has since  developed an interest calculation methodology and, on January 25, 2010,  provided guidance to all LEAs on calculating and remitting interest on  federal cash balances. CDE officials also told us that they plan to monitor  LEA remittance of interest from Recovery Act funded programs by  reviewing expenditure data LEAs submit in their quarterly recipient  reports and verifying that the LEA remitted appropriate interest amounts.  However, CDE has not yet developed mechanisms to help ensure LEAs are  using sound interest calculation methods and promptly remitting interest  earned on federal cash advances for non-Recovery Act funded programs.  We plan to continue following this cash management issue in our ongoing  bimonthly work.
section_title: Numerous State Entities and Agencies Are Engaged in Overseeing Recovery Act Funds
paragraphs: Since the Recovery Act was enacted in February 2009, California oversight  entities and state agencies have taken various actions to oversee the use of  Recovery Act funds. State oversight entities, for example, have conducted  risk assessments of internal control systems and provided guidance to  recipients of Recovery Act funds. In our previous reports on Recovery Act  implementation, we discussed the oversight roles and activities of key  entities in California for Recovery Act funds. In addition to these entities,  state agencies are responsible for, and involved in, oversight and audits of  Recovery Act programs. Although certain federal agencies and Inspectors  General also have various oversight roles, our review has focused on the  state efforts.
As mentioned in our previous reports, the Task Force was established by  the Governor to track Recovery Act funds that come into the state and  ensure that those funds are spent efficiently and effectively. The Task  Force is relying on California’s existing internal control framework to  oversee Recovery Act funds, supplemented by additional oversight  mechanisms. Several agencies and offices play key roles in overseeing  state operations and helping ensure compliance with state law and policy.  The key oversight entities are the Task Force, the state’s Recovery Act  Inspector General, and the State Auditor. Their key oversight roles are  summarized in table 3.
As California gained more experience in implementing the Recovery Act  during the past year, state oversight entities have taken actions to evaluate  and update controls and guidance related to Recovery Act funds. For  example, the Task Force prepared and issued 30 Recovery Act Bulletins to  provide instructions and guidelines to state agencies receiving Recovery  Act funds on topics ranging from recipient reporting requirements related  to jobs to appropriate cash management practices. Additionally, the  California Recovery Act Inspector General coordinated seven fraud  prevention and detection training events throughout the state for state and  local agencies and the service provider community, with presentations  from federal agencies on measures to avoid problems and prevent fraud,  waste, and abuse. Over 1,000 state and local agency staff attended training  events, which were also available through a Webinar. As of December  2009, the California State Auditor’s office published five letters or reports  on the results of early testing and/or preparedness reviews conducted on  25 Recovery Act programs at nine state departments that are administering  multiple Recovery Act programs. These audit reports resulted in numerous  recommendations to state agencies aimed at improving oversight of  Recovery Act funds.
California agency officials and internal auditors, from state departments  that manage transportation, education, and weatherization programs, are  engaged to various degrees in the oversight and auditing of Recovery Act  funds. Table 4 provides an overview of selected oversight and auditing  activities of these agencies.
section_title: California Reported That Over 70,000 Jobs Were Funded during the Last Quarter of 2009, but OMB’s New Reporting Guidance Was Not Consistently Implemented
paragraphs: As reported on Recovery.gov, as of February 23, 2010, California recipients  reported funding 70,745 jobs with Recovery Act funds during the second  quarterly reporting period ending on December 31, 2009. This was the  largest number of jobs reported by any state for this quarter. The Recovery  Act provided funding through a wide range of federal programs and  agencies. Over 30 California state agencies have or are expected to receive  Recovery Act funds and were required to report job estimates. Figure 5  shows the number and share of jobs funded by state agencies receiving  Recovery Act funds, as reported on Recovery.gov. Education programs  accounted for approximately 71 percent, about 50,000 jobs—38,924 under  SFSF, and 11,048 under other programs administered by CDE.
Task Force officials reported that new reporting guidance issued by  OMB—approximately 2 weeks before recipients were to begin reporting— was implemented by most state agencies, but the notable exception was  CDE, which continued to follow the old guidance. On December 18, 2009,  OMB updated its reporting guidance, and the Task Force advised  California recipients that there were some notable changes, specifically as  follows:    Recipients do not have to determine if a particular employee or job  classification would have been laid off without the receipt of Recovery Act  funds (i.e., retained), as they did before. If a position is being funded by  the Recovery Act, the hours should be included in the number of jobs  created;    Recipients are no longer required to sum hours across reporting quarters  or provide cumulative totals. Instead, they report jobs on a quarterly basis,  providing a quarterly snapshot; and    Recipients will find the federal reporting system open in February to  correct data reported during January.
The new OMB guidance still required recipients to report jobs as FTE, but  it further defined FTEs as the total number of hours worked and funded by  Recovery Act dollars within the reporting quarter and provided guidance  on applying the new formula. According to Task Force officials, CDE did  not instruct LEAs to recalculate job estimates using the new OMB  guidance. CDE plans to have LEAs revise job estimates reported during  the second reporting period when CDE requests data for the third report,  which will be due on March 15, 2010, to CDE. Until that time, the data  available to the public for education-related jobs in California are not  comparable to that reported by other states. Additionally, although  CDE’s uncorrected job estimates for the second reporting period remain  on the Recovery.gov Web site, the Task Force announced that it will not  include CDE’s job estimates in its reports.
In addition to not following OMB’s updated guidance on calculating FTEs,  we also found that partly due to unclear guidance from CDE, LEAs we  reviewed had collected and reported job information from vendors  inconsistently. We met with seven LEAs—including LA Unified, the  largest LEA in California—to gain an understanding of their processes for  obtaining information necessary to meet Recovery Act reporting  requirements. LEAs told us that they received reporting guidance from  CDE, including calculating teacher and administrative jobs, but did not  receive clear guidance on how to collect and report vendor jobs funded by  the Recovery Act. As a result, LEAs we reviewed had varying jobs data  collection processes. For example, one LEA that did not report vendor  jobs for the second reporting period told us that, for future quarters, they  plan to survey vendors to estimate the range of jobs created or retained  (e.g., 1-5, 6-10, 11-15 jobs). Two other LEAs told us they did not contact  vendors to collect data on jobs created or retained but reported the  number of vendors with a Recovery Act contract. For instance, if the LEA  had four contracts using Recovery Act funds during the reporting period,  the LEA reported four vendor jobs. Officials from LEAs also reported  confusion regarding CDE’s guidance to identify vendors—by reporting  their name and zip code or Dun and Bradstreet Universal Numbering  System number—that received payments of $25,000 or more in the  quarter. Some LEAs did not collect and report job estimates from  vendors with payments of less than $25,000 because they erroneously  applied CDE’s guidance on vendor identification to determine which  vendor jobs to report. According to an official from one of these LEAs,  the number of vendor jobs it reported for the second quarter would  increase from 12 to at least 77 if it collected job estimates from all of its  vendors with Recovery Act contracts. As a result, some vendor jobs  funded by the Recovery Act were not reported.
On February 23, 2010, CDE issued updated guidance to LEAs, and other  subrecipients, to assist them with the third Recovery Act reporting period.  However, this guidance neither provided LEAs additional information on  collecting and reporting vendor jobs, nor did it clarify that the vendor  identification guidance was not applicable to the Recovery Act’s jobs  reporting requirements. As the prime recipient, CDE is responsible for  ensuring Recovery Act requirements are met, including reporting vendor  jobs funded by the Recovery Act. We plan to continue to follow these  reporting issues as part of our ongoing bimonthly work.
Task Force officials stated that while OMB’s revised guidance on calculating  FTEs for the second reporting period was easier to implement compared  with the first period, other data issues made it difficult to report timely,  accurate, and complete information. For example, the Task Force received  error messages in FederalReporting.gov when the congressional district  where the Recovery Act-funded project was located did not match the  recipient address. The Task Force reported receiving more than 1,500 error  reports for data it submitted to FederalReporting.gov related to  congressional districts and zip codes, even though California’s CAAT system  had mechanisms in place to try to prevent the entry of false congressional  districts. In order to expedite these corrections, Task Force officials told us  that they decided to change their data to what FederalReporting.gov would  accept, rather than what they knew was correct in some instances. For  example, if they knew a recipient had moved and had a new zip code, but  FederalReporting.gov did not have the updated zip code for the recipient’s  new address, the Task Force used the old zip code to get the report to  upload successfully to FederalReporting.gov. Issues with zip codes also  surfaced for local agencies that reported directly to Federalreporting.gov.  For example, officials from the Los Angeles County Metropolitan  Transportation Authority said they received an error message for an  incorrect congressional district, because they initially used the  congressional district in which the project was located as opposed to the  agency’s headquarters office. Officials from the transportation authority  interpreted OMB’s guidance as the congressional district in which the  project/activity was being performed, but they later received clarification  that the congressional district should be consistent with the recipient’s  address.
Mr. Chairman and Madame Chairwoman, this concludes my prepared  statement. I would be pleased to respond to any questions that you or  other Members of the Committee or Subcommittee might have.
section_title: GAO Contact and Staff Acknowledgments
paragraphs: For further information regarding this testimony, please contact Linda  Calbom at (206) 287-4809 or calboml@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of this statement. Individuals who made key contributions to this  statement include Guillermo Gonzalez, Chad Gorman, Richard Griswold,  Susan Lawless, Gail Luna, Heather MacLeod, Emmy Rhine, Eddie  Uyekawa, and Lacy Vong.
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