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

Letter

Background

Established in 1965 as part of the Elementary and Secondary Education Act (ESEA), Title I provides grants to help schools establish and maintain programs to improve the educational opportunities of low-income and disadvantaged students. Most Title I funds are distributed by formula from Education to states. The states then pass through most of these funds to their school districts after retaining some funds—up to 1.5 percent—for state administration and state-level school improvement activities. The amount of Title I funds a school district gets is determined by a formula based on the number of students from low-income families and the state’s per pupil expenditures.

Local Flexibility

Once LEAs receive funds from the state, they have flexibility in how they allocate Title I funds to individual schools and how each school delivers Title I services. As long as priority is given to schools with the highest concentration of children from low-income families, LEAs are generally free to designate which schools, among those eligible, receive funds and how much each should get. LEAs can also select the type of framework through which they deliver Title I services. Some districts have only targeted assistance in their Title I schools, some only have schoolwide programs, and others have a mixture of both. When Title I began, all schools administered targeted assistance programs. These programs targeted funds and services—such as teachers and materials—to specific qualified students who met Title I eligibility requirements. In 1978, a limited number of schools were allowed to deliver the services in the form of schoolwide programs if 75 percent or more of their student population was poor. Schools choosing to operate schoolwide programs can combine federal resources with other funds to improve the school as a whole and help all students achieve. In subsequent reauthorizations, the schoolwide option was made available to more schools by lowering the threshold percentage of low-income children required to operate a schoolwide program. NCLB allows schoolwide programs in schools with a poverty rate of 40 percent or more.

During the mid-1990s there was a trend toward providing more flexibility to state and local recipients of federal grants so they may operate programs that best serve the needs of their communities. This trend towards flexibility is evident, not only in education programs such as Title I, but in many social service programs and health programs. In these circumstances, we have found that new approaches to ensuring accountability need to be designed to achieve a balance between flexibility and accountability for attaining certain national objectives. In 2001, we reported on some of the challenges in maintaining a federal-state fiscal partnership in welfare reform and concluded that a broad-based maintenance of effort requirement calling for states to maintain spending across a wide range of relevant programs might both limit substitution of state funds while at the same time preserve state and local flexibility better than a traditional supplement-non-supplant requirement. Specifically, we found that, once accountability shifts to the broad purposes of the grant, federal fiscal oversight needed to shift as well and focus not only on the specifics of welfare funding but also on how states used multiple funding streams—federal, state, and local—to accomplish the program’s broad goals. These findings could apply to the Title I program because schoolwide program goals are broader than the goals of a targeted assistance program and schoolwide programs combine funding streams.

Title I Fiscal Accountability Requirements

Title I contains three fiscal requirements that grantees must comply with in order to continue to receive Title I funds from one year to the next. If an SEA or LEA fails to comply with MOE, SNS, or Comparability provisions, it is required by law to return the amount of misused funds to Education.

Maintenance of effort (MOE). An LEA may receive funds if the SEA finds that the LEA’s combined fiscal effort per student or the aggregate expenditures of the LEA from state and local funds for free public education for the preceding year is not less than 90 percent of the combined fiscal effort or aggregate expenditures for the second preceding year.

Supplement-not-supplant (SNS). State and local education agencies must use federal funds to supplement, and not supplant, the amount of funds that would, in the absence of federal funds, be made available from nonfederal sources for the education of Title I students.

Comparability. State and local funds must be used to provide services in Title I schools that are “at least comparable” to services provided by state and local funds in non-Title I schools within the same LEA.

Each fiscal requirement is enforced at a different level. For example, the MOE requirement applies only to the LEA not to individual Title I schools. The Comparability requirement is evaluated at the school level because it seeks to weigh the services provided in Title I schools with those provided in non-Title I schools. In contrast, the SNS provision is applied differently depending on how Title I services are applied. It is applied to the program or the student in targeted assistance programs to ensure that those targeted programs are providing more services for a Title I student than non-Title I students receive, or it is applied to the school if it operates a schoolwide program. (See fig. 1.)

Monitoring Process

There are a variety of approaches that officials at the federal, state, and local levels take to oversee state and local education agency compliance with the fiscal accountability provisions associated with Title I, including formal monitoring systems, such as the use of the single audit, and more informal monitoring systems, such as monitoring provided by interest groups.

Formal Monitoring Systems

Education distributes Title I funds to the individual states and has primary responsibility for overseeing federal education programs and providing guidance and technical assistance to SEAs. Monitoring efforts focus on state compliance with both programmatic and fiscal requirements. Any issues of noncompliance reported at the state level are to be communicated to Education and are typically resolved through the development of an SEA corrective action plan, the implementation of which will be monitored by federal agency officials.

States are considered the primary recipient, or grantee, of federal awards like Title I and are responsible for ensuring that their subrecipients comply with all federal laws and regulations governing the grant. Since SEAs pass through most of the federal funds to the LEAs, states must have the appropriate subrecipient monitoring systems in place to track Title I spending. Program monitoring systems typically include a review of funding applications, local budgets, self-assessment documents, scheduled on-site visits to schools, and technical assistance.

Single Audits

The Single Audit Act replaced multiple audits of separate grant awards with one organizationwide audit. A single audit includes an audit of the federal grant recipient’s financial statements as well as an examination of its internal controls and its compliance with laws and regulations governing federal awards. It does not, however, cover every federal grant received by the organization. The objectives of the Single Audit Act are as follows: Promote sound financial management, including effective internal controls, with respect to federal awards administered by nonfederal entities.

Establish uniform requirements for audits of federal awards administered by nonfederal entities.

Promote the efficient and effective use of audit resources. Reduce burdens on state and local governments, Indian tribes, and nonprofit organizations.

Ensure that federal departments and agencies rely on and use audit work done pursuant to the act.

In 1994, we reported that state and local officials had reported that the single audit process had contributed to improving state and local government financial management practices.

Guidance for conducting a single audit is found in the Office of Management and Budget’s (OMB) Circular A-133 and the accompanying compliance supplement. The guidance states that the scope of the audit shall include an examination of financial statements—to determine if they are presented fairly in all material respects in conformity with generally accepted accounting principles and whether the schedule of expenditures of federal awards is presented fairly; internal controls—to obtain an understanding of internal control over federal programs sufficient to plan the audit to support a low assessed level of control risk; compliance—to determine whether the auditee has complied with laws, regulations, and the provisions of contracts or grant agreements that may have a direct and material effect on the federal program on each of its major programs; and prior audit findings—to perform procedures to assess the reasonableness of the summary schedule of prior audit findings.

Any single audit report should discuss the auditor’s analysis of these areas and include a section that specifically focuses on federal awards, including a schedule of findings and questioned costs. State and local governments and nonprofit organizations that spend $300,000 or more in federal awards in a fiscal year must undertake a single audit.

Informal Monitoring Systems

In addition to formal monitoring systems, fiscal accountability is also monitored informally by interest groups, parents groups, individuals, and the media. The public nature and easy accessibility of school district budgets, financial reports, and other fiscal information promotes budget transparency and information sharing among people outside the school system. This informal system may promote grantee compliance with applicable laws and regulations and raise red flags for the attention of the formal monitoring system.

States Used Multiple Tools to Enforce the Fiscal Accountability Provisions, but Relied Primarily on the Single Audit Process to Enforce SNS

In the states we visited, state program officials use three tools—the states’ annual financial reports, the single audit process, and limited program monitoring—to monitor Title I’s fiscal accountability requirements in their LEAs. In these states, enforcing the MOE provision is straightforward and objective. However, a number of factors made it difficult to ensure compliance with SNS.

Monitoring Compliance with MOE Presents Few Challenges

In the states we visited, verifying compliance with Title I’s MOE requirement was a straightforward mathematical exercise and relied on LEAs’ data gathered through statewide financial accounting systems. In part, monitoring and enforcing compliance with the MOE provision might have presented few challenges because until recently state and local revenues were increasing, and few grantees struggled to meet the MOE requirement. Many state and LEA officials told us that the robust economy and sound fiscal situation they experienced in the late 1990s allowed them to increase spending on education.

Each of the six states we visited has strong vested interests in the integrity of its LEAs’ financial reports because each has a large stake in education finance in their states; all of these states mandate the level of effort the local education agencies must provide each year in order to receive state funds and impose their own financial reporting requirements on local education agencies. While we did not verify the quality of the data, it is the same data used to calculate the MOE requirements.

Five of the six SEAs we visited use their annual financial reports to verify LEA compliance with the MOE requirements. In the sixth, Florida, the SEA relied on LEAs to submit a separate form verifying that they were in compliance with MOE requirements. A program official verified the form submitted against the previous year’s submission and other grant award documentation but did not independently check against the state’s accounting records. However, this check is done by auditors in separate compliance reviews. State officials in Florida said that they were considering changing their MOE verification process. They said that audited data were available from their annual financial reporting system, and they were considering streamlining the verification process to eliminate the separate reporting requirement.

Two of the states we visited, Arizona and California, do not verify LEA compliance with MOE requirements until after the current year’s grant has been awarded. This practice is due to routine delays in year-end account reconciliation and timing of audits. The Arizona Office of the Auditor General cited the state’s department of education for failing to enforce the MOE provisions before the current year’s grant was awarded. State program officials acknowledged that they complete the grant award process before the audited financial data are available to verify compliance with MOE; however, they said that verification is finished well before the funds have been disbursed. Similarly, in California the audited data are not available until 9 months after the grant has been awarded. State program officials said that, despite these delays, there were few risks that they would be unable to collect the penalties against an LEA that was out of compliance with its MOE requirements.

Many Factors Contribute to Difficulties Enforcing SNS Provision

While verifying Title I’s MOE requirement was straightforward and objective, verifying compliance with the SNS provision was more challenging. SEA officials relied primarily on the single audit process to enforce the SNS provisions. But, many state and local program officials and auditors we spoke with cited a number of factors that made it difficult to ensure that grantees were in fact using federal funds to supplement and not supplant their own funds. These factors include difficulties applying the SNS provision to unique circumstances in their school districts, reliance on the single audit to ensure compliance without understanding its scope and methodology, and limited state and local program oversight of the fiscal accountability provisions.

The SNS Provision Is Difficult to Apply in Many Circumstances

It can be difficult for auditors to establish a finding of supplantation. One of the challenges auditors face in evaluating compliance with the SNS requirement is determining the basis for the states’ and LEAs’ funding decisions. The SNS requirement generally prohibits replacing state funds with federal funds where the displaced state funds could continue to be available for their original purpose. However, under certain circumstances, where state funding is discontinued, grantees may be able to replace these eliminated funds with Title I dollars. For example, if an SEA or LEA discontinued its own support for a particular program in response to a potential budget deficit, the use of Title I funds may be permissible. The challenge for auditors in deciding if an LEA has improperly supplanted, is determining what the LEA would have done in the absence of federal funds. For example, where a state reduces its own financial support for a program and uses federal funds instead, an auditor may presume supplanting has occurred; but, a grantee could rebut that presumption by presenting evidence that fiscal stress required state budget cuts that might not have otherwise been considered. The statute also permits states to use Title I funds to replace state or local funds that had been expended for a program meeting a Title I purpose by allowing such supplemental state funds to be excluded from the SNS compliance determination. In other words, an LEA is allowed to shift funds from one state or locally funded program targeted to low-income children, substitute federal funds for that program, and move its own funds to other priorities for disadvantaged children.

Even if auditors could determine what a grantee would have done if it had not received federal funds, the way that Title I services are delivered can also make it difficult to apply the SNS provisions. Table 1 summarizes the relationships between the different ways programs are delivered— targeted assistance, schoolwide programs, and districtwide reforms and the application of the fiscal accountability provisions.

For schoolwide programs the distinction between state/local funds and federal funds—and hence the notion of supplantation—becomes unclear. In general, when services are delivered through schoolwide programs, federal, state, and local funds are pooled, making it impossible to distinguish among funding streams in an audit because a schoolwide school does not have to (1) show that Title I funds are paying for additional services, (2) demonstrate that Title I funds are used only for specific target populations, or (3) separately track federal program funds once they reach the school. While one can identify the separate funding sources going into a school one cannot identify what services they funded. Therefore, for schoolwide programs a test for SNS compliance could include either (1) a comparison from one year to the next of total— federal, state, and local—funds allocated to a Title I school or (2) a comparison of state and local funds spent in Title I schools and non-Title I schools.

However, there are problems applying either test to schoolwide programs. For example, in the Glendale (Arizona) Elementary School District, every school is a Title I school and all schools operate schoolwide programs. District officials argued that because the district met its MOE requirement (in 2000-2001 it exceeded 100 percent of its preceding years expenditures), it did not need a separate internal control procedure to test for SNS. However, auditors cited the district for not having such a procedure. Our analysis shows that, for districts such as Glendale, in order to avoid supplanting funds, the district would have to maintain the same state and local funding from year to year. In other words, in districts where every school is a Title I school and all schools operate a schoolwide program, they would have to maintain a much higher MOE requirement, 100 percent, than districts that are not in this circumstance in order to avoid supplanting funds unless they otherwise would not have spent those funds.

Moreover, comparing expenditures from one year to the next in school districts where there are both targeted assistance and schoolwide schools presents challenges. Since schoolwide program administrators can reallocate funds among programs in their schools, they can engage in budgetary practices that are not allowed in a targeted assistance school in the same district. Theoretically, the SNS provision imposes a higher expectation on schools operating schoolwide programs than it does on their targeted assistance counterparts because a year-to-year funding comparison essentially requires a schoolwide school to maintain 100 percent of its previous effort in order to comply with the SNS provision.

Furthermore, comparing the allocation of state/local funds among schools in the same year also presents challenges. For example, in Duval County (Florida) all 72 of the district’s Title I schools operate schoolwide programs but not all schools were Title I schools. Duval’s auditors assessed compliance with SNS by comparing the per pupil expenditure of state and local funds in Title I schools to the allocation in non-Title I schools within the same year. They found that in 2001, 5 of the district’s 72 Title I schools received significantly less state and local funding per pupil than the average school received, resulting in questioned costs of $2.5 million. The auditors suspected that the district may have used federal Title I funds in place of state and local funds in these schools, but district officials claimed that many mitigating factors, such as higher teacher salaries for more experienced teachers, could explain variations in the per pupil expenditures among schools in the same district. The SEA determined that the information presented in the audit report was not sufficient to determine that supplanting occurred. SEA officials told us that auditors would need to have programmatic expertise to interpret the results of the per pupil cost comparisons in order to prove that supplantation had occurred. The auditors agreed that many factors could have contributed to the observed disparity in funding among the 5 Title I schools, but they said there were limitations to what could be expected of a single audit and pointed out that ultimately the SEA should use the audit findings as a basis for determining whether the LEA is in compliance or not.

Finally, when a district engages in comprehensive districtwide reform resulting in programmatic changes, it can be difficult to make the types of comparisons necessary to determine compliance with SNS, particularly in the first year of reforms. For example, in 2000, San Diego City (California)

Unified School District (USD) began school reform that entailed financing new initiatives. As these reforms were implemented, the district and its programs were restructured in such a way that there were no longer points of comparison for determining whether the district was in compliance with the SNS provision. In other words, funding for programs in the current school year could not be compared with funding for those in the previous year, because the programs had not previously existed. The Superintendent of the San Diego City USD told us that the reform plan could not have been implemented without the flexibility to reallocate resources within and among schools.

Some Officials Rely on the Single Audit, without Understanding What Its Scope and Methodology Mean for Assessing the SNS Provision

While some auditors struggled to apply the SNS provision to the particular circumstance of districts and schools, SEA officials were frequently unaware of what the results of a single audit actually meant, potentially failing to cover key programs or provisions of law, and thus adding to the difficulty of enforcing the SNS provision. For example, numerous state and local program officials told us that they assumed that the single audit covered every LEA and every program, even though this is not what single audits are designed to do. As a result, these officials may not engage in other oversight activities that are warranted. Because only those grant recipients that spend more than $300,000 in federal awards in any given year must undertake a single audit, not all LEAs that receive Title I funds are required to undergo one. Furthermore, even if an LEA is audited, the Title I program may not be covered in the audit. The 1996 amendments to the Single Audit Act give auditors more freedom to determine which federal programs to include in their audit plan each year, allowing them to exclude some programs based on risk-based criteria and on expenditure- based criteria. Many of the auditors we spoke with assessed risk by determining whether or not there had been findings of noncompliance in recent audits. For example, if an LEA had a clean audit with respect to the Title I program for the last few years, an auditor might legitimately view the inherent risk of this program as low and exclude it from the audit in the next year. Auditors for both San Diego City (California) USD and Jefferson Parish (Louisiana) Public Schools told us that Title I probably would not be covered in the districts’ 2002 single audit since there have been no recent findings on the program.

In addition, some officials thought that the single audit examined every transaction, even though it does not. As a result, officials may think that by fixing the instances reported they are solving all the problems, when in fact those problems may be more widespread. Generally accepted government auditing standards allow statistical sampling methods and auditors often use audit sampling to evaluate compliance with applicable requirements. This involves testing less than 100 percent of the items within a group of transactions for the purpose of evaluating compliance with applicable laws and regulations. Transactions could be randomly selected from all of the auditee’s financial transactions for the year under review. While this technique allows auditors to test the population of transactions for evidence of noncompliance and internal control weaknesses, it will not identify every specific instance of noncompliance. When auditors of Douglas (Arizona) USD identified significant internal control weaknesses based on analysis of a sample of the district’s financial they reported that their review of the district’s internal controls would not necessarily disclose all instances of non-compliance. However, the SEA resolved the issue by requiring the auditee to reimburse the Title I program for the amount of the transaction under question only and did not further investigate if there were other erroneous payments made.

While there were problems with program officials understanding what single audits are and what results from the single audit meant, in general the auditors’ work plans we reviewed followed the guidance recommended by Education and OMB for single audits. However, some of the auditors could not document that they had followed their work plans. For example, audit workpapers for San Diego City (California) USD show that auditors held a discussion with a district budget official who told the auditors that they were in compliance with the SNS provision, but the workpapers did not indicate independent verification of these claims.

In five of the six states we reviewed, the SEA had a procedure in place to resolve audit findings reported through the single audit process. However, in 2001 the Louisiana Legislative Auditor reported in its statewide single audit that the SEA did not have adequate internal controls to monitor subrecipients for compliance with many federal education programs, including Title I. The SEA concurred with the auditor’s finding and has implemented policies to address the deficiencies.

Selected States Conduct Limited Program Monitoring

All of the states we visited supplemented their reviews of LEAs’ single audit reports with additional monitoring activities. While program monitoring provided a depth of coverage that cannot be achieved in single audits, these efforts were limited. Furthermore, in all of the states we visited, the primary focus of any additional monitoring activities has now centered on addressing efforts to raise the level of student achievement with considerably less focus given to fiscal accountability requirements. Informal monitoring by individuals and groups augmented the formal monitoring process.

Limited program monitoring also took place during the application review process. In all of the states we visited, the annual application process for Title I funding contains questions on historic and proposed program budget information that can be used by program officials in the SEA to oversee compliance with SNS and MOE. In addition, some states require LEAs to complete a self-assessment document in which they are asked to assess themselves on their compliance with federal program requirements. SEAs use these self-assessment documents for various purposes. For example, in Florida, annual self-assessments were used as a self- monitoring tool, but only one-quarter of the LEAs were required to actually send in the completed guide for review in any given year. In Arizona, the tool was also required annually and is designed to provide guidance in program development and to identify areas in which technical assistance may be needed. In California, LEAs must complete self- assessments once every 4 years, at which time SEA officials evaluate the self-assessment documents and use them to target their on-site monitoring activities to those LEAs that pose the highest risks.

While four of the six states we visited followed up LEAs’ self-assessments with on-site visits, the extent to which they conducted such visits varied and, in some cases, was limited. Massachusetts and Arizona have scheduled on-site monitoring visits in the LEAs at least once every 6 years.

In Louisiana, state officials said that each LEA is visited once every 3 years. In California, while each LEA must go through the review cycle every 4 years. In addition, in 2001 two of the six states we visited, Florida and Indiana, did not follow up on the self-assessments with periodic on- site program monitoring.

Several state officials highlighted the importance of informal monitoring networks, such as parents groups, in raising issues of noncompliance. These watchdog groups play an informal role in questioning inappropriate spending and submitting complaints to the school boards and, if they feel their concerns are not addressed at this level, elevating the issues to the SEA. SEA officials in both Indiana and California discussed recent inquiries that were brought to their attention, not through single audit reports or even program monitoring efforts, but rather by informal watchdog groups. In Indiana, the issues raised dealt with unallowable costs and high administrative charges to federal programs in one school; the SEA is investigating and, according to state officials, the matter is still unresolved. In California, a parents group in San Diego filed a complaint with the California Department of Education citing issues relating to, among other things, the reallocation of state and federal funding, including Title I funds, by the San Diego City (California) USD to fund its districtwide school reform strategy which, the watchdog group claimed, no longer provides a comparable level of service to all students with state and local funding. The SEA concurred and ordered the district to develop a plan to allocate the state and local supplemental funds that complies with all the federal comparability provisions. However, Education granted the district a waiver in August 2002 which will allow the district to proceed with the reform strategy under its current budget plan for 1 year.

Education’s Key Efforts to Enforce Fiscal Accountability Provisions Have Limitations

We identified three key efforts the Department of Education made to help enforce the fiscal accountability provisions but each had limitations. First, Education developed guidance and provided technical assistance to state and local officials and their auditors; but, these officials have expressed confusion regarding application of the SNS provision to their particular circumstances. Second, Education conducted limited program monitoring of its own, but these efforts did not have fiscal accountability as a primary focus. Finally, Education reviewed states’ single audit reports conducted under the Single Audit Act. But, the Inspector General of Education found that many reviewers in the department lacked knowledge about the single audit process and compliance issues. As a consequence, Education’s monitors could fail to review key programs or provisions of law. In addition, we recently reported that Education could not demonstrate it consistently worked to resolve audit findings.

Officials and Auditors Confused about Application of Fiscal Accountability Provisions to Their Particular Circumstances

Education developed guidance for its programs which appeared in the compliance supplement to OMB’s Circular A-133. This guidance was the basis for the audit plans for all the districts we visited. Education’s guidance itemizes the SNS, MOE, and the comparability requirements as separate statutory requirements. However, many state and local officials and auditors we spoke with thought the three requirements were related to each other and that, by meeting one or two of the requirements, they would automatically be in compliance with the others.

Some auditors and program officials confuse the comparability requirement with the SNS provision. While comparability is primarily used to ensure that services—not funding—is comparable across schools in the LEA, the two issues are closely related and frequently confused. For example, guidance issued by the SEA in Arizona on the comparability requirement states that comparability is used to ensure that schools within an LEA do not supplant state and local funds with federal program funds. Operating under the same misconception, Indianapolis Public Schools incorrectly used the comparability test as the internal control to ensure compliance with SNS. Moreover, the district’s auditors failed to question the appropriateness of this test to ensure compliance with SNS. A similar confusion was evident when officials in the Duval County Public Schools told auditors that they could not understand how they failed to comply with the prohibition on supplantation, given that they had not cut back on their own overall spending thereby meeting their MOE requirements and had documented meeting their comparability requirement.

Education recognizes that there is some confusion about the application of the provisions. Education officials acknowledge the challenges of writing guidance that can be understood and applied in every circumstance. Many federal program officials said that they frequently field questions from district officials and some auditors seeking technical assistance applying the provisions in local circumstances. In December 2002, Education issued new regulations that reorganized its guidance on schoolwide programs in a manner that might help address some of the confusion.

State and local education agencies and their auditors told us that they also rely on nongovernmental sources of guidance, such as workshops and materials provided by consulting firms. For example, auditors in Arizona provided us with excerpts from handbooks and other guidance on the Title I program. School officials and auditors in other districts we visited also told us they supplement federal guidance with similar nongovernmental sources of guidance.

Fiscal Accountability Is Not the Primary Focus of Education’s Program Monitoring

The fiscal accountability provisions have not been the focus of Education’s own monitoring efforts. From 1995-2001, Education used an approach to program monitoring called an integrated review approach. Its primary focus was to see how all federal grant programs, working together, supported state and local reform efforts. The Title I program was included in these reviews. However, only 1 of the 9 indicators Education’s monitors used in integrated reviews focused on fiscal issues; the rest focused on program performance, such as whether the state supported and promoted high standards for all children, and whether states used education research findings to inform decision making. Education’s Inspector General criticized this approach to program reviews in 2001 because the integrated approach allotted insufficient time to monitor specific programs for compliance with federal laws and regulations. The Inspector General also found that the various teams of reviewers lacked knowledge of the single audit process, thereby taking inconsistent approaches to doing the reviews.

In 2002 Education drafted guidelines for its monitors to use in a new approach to program monitoring, but we found that the new approach gives fiscal accountability requirements little emphasis and it does not even mention SNS. In 2002, Education developed a new monitoring strategy which it has named: Achievement Focused Monitoring (AFM). As its name implies, the AFM approach seeks to realign oversight and technical assistance for Title I to concentrate on student achievement. Education officials acknowledged that their program monitoring guide does not mention SNS and said they would provide additional guidance to their monitors on the provision for use in the future. Education’s AFM plan includes visits to 15 states—and at least one district in each state—in 2002 and 2003. By October 2002 Education had completed visits to four states.

Education’s Review of State Single Audit Reports Has Weaknesses

Education has responsibility for reviewing the audit reports of state education agencies. In 2002, we reported actions were needed to ensure that grantees correct findings identified in state single audit reports. Each state must undertake a single audit each year. Each year their auditors determine which federal programs to include in their audit plan and audit those programs for compliance with the federal laws and regulations covering those grant programs. Although Education had procedures for obtaining states’ single audit reports, distributing audit findings to appropriate audit offices, and assessing the seriousness of the findings, we found that reviewers did not demonstrate they consistently worked to resolve audit findings. Specifically, reviewers did not consistently follow- up with written management decisions on final audit resolution and did not communicate findings to senior department management.

Little Change in Federal Share from School Years 1999- 2000 to 2000-2001

We found that few changes have occurred in the relative shares of federal, state’ and local funding for education for school years (SY) 1999-2000 and 2000-2001 (the most recent data available) in the six states we reviewed. (See fig. 2.) It is too soon to tell how recent increases in federal funds for Title I and other federal education programs and the fiscal pressures facing states will affect funding for education in general and how changes, if any, in state and local financing will affect the federal share. However, this information does provide a baseline against which we can compare the impact of increases in federal funds and state and local fiscal pressures in the future.

In addition to the concern about the fiscal balance in education funding overall, questions have been raised about the federal share of operating SEAs. SEA operations include the administration of programs—primarily oversight, technical assistance, and training—related to specific federal programs operated at the local level. SEAs may also operate state-level programs, such as vocational rehabilitation. As we noted in a previous report, the level of federal support for SEA operations varied widely among states depending on the number and types of federal and state programs the SEA operates, ranging in fiscal year 1993 from about 10 to about 80 percent, with the average level of support being 41 percent. To update this information, we looked at the federal share of SEA funding in the six states we visited for school year 1999-2000. As in the past, we found the federal share varied, from 18 percent in Florida to 43 percent in Indiana. (See the shaded bars in fig. 3.)

Another way to look at the federal share of SEA operating costs is through the number of full-time equivalent positions (FTEs) that are funded by federal funds. Some states operate federal programs at the state level, such as vocational rehabilitation and disability determination. These may require many more SEA FTEs than programs operated at the local level. For example, in 2000-2001, the Florida SEA assumed responsibility for the federal vocational rehabilitation programs that were previously housed in another state department, adding more than 1,000 positions to the SEA and raising its percent of federally funded FTEs from 43 percent to 63 percent.

Finally, table 2 provides some additional context when making comparisons and contrasts among the states we visited. Per pupil expenditure calculations serve as a proxy reflecting the cost differences among states in providing education.

Conclusions

Single audits are a valuable oversight tool but they cannot be regarded as the sole tool to use in enforcing the compliance requirements. Additional oversight is always necessary to ensure that grantees are in compliance with the laws and regulations governing specific programs and grant management in general. Single audits should inform, not substitute for program monitoring. However, as we have noted, many state officials told us that they relied primarily on the single audits to oversee compliance with federal laws and regulations. Because of this reliance, state program officials responsible for overseeing this program must have a better understanding of the scope and limitations of these audits and supplement the audits with more effective and frequent oversight activities. Instances of noncompliance found in the course of a single audit should trigger a broader search to determine whether the error is systemic.

While NCLB emphasizes achieving higher student achievement levels, enforcing fiscal accountability is and will remain a critically important oversight activity. Resources for audit and evaluation activities will remain limited, and, as a result, these resources must be targeted where they will have the greatest impact. As we have noted, ensuring compliance with an MOE provision presents few challenges and requires few additional audit resources, whereas monitoring the SNS provision is very challenging and requires significant audit resources.

Maintaining the intergovernmental fiscal partnership in the education of disadvantaged and low-income students presents many challenges. Title I’s two fiscal accountability provisions—the MOE and the SNS provisions— are intended to limit the extent that grantees can use federal funds to replace their own and thereby erode the fiscal partnership. But each provision helps to maintain the fiscal balance in very different ways and at different levels—schools versus districts. The primary effect of a nonsupplant provision is to prevent the reallocation of state and local resources within a Title I school; essentially, that means that expenditures paid for with state and local resources in a Title I school in one year cannot be paid for with federal funds the next year. On the other hand, the MOE provision’s primary effect is to limit the extent to which states and LEAs can use federal funds for general fiscal relief; that is, substituting federal funds for state and local funds generally, not just in Title I schools. As noted, in schoolwide programs grantees are not required to show that Title I funds are paying for additional services or are targeted to specific students, nor are they required to separately track federal program funds with other funds once they reach the school, thus “limiting the reallocation of resources” becomes unworkable in a schoolwide setting.

An inherent tension exists between fostering a flexible grant environment and ensuring fiscal accountability. For broader purpose grants, such as schoolwide programs, the SNS provision can work to constrain local flexibility in the use of federal funds by preventing districts from reallocating the use of federal, state, and local funds. Moreover, the provision is difficult to apply and can be very challenging to monitor and enforce, primarily because it is not workable in those environments. As we have previously reported, in flexible grant environments a strong MOE provision may prove more useful than an SNS provision in limiting the degree to which grantees can use federal funds to simply reduce their overall fiscal commitments.

That different parties would have different views of the value of the nonsupplant provisions is to be expected. Some argue that allowing supplantation of any kind increases the likelihood that states could weaken their commitment to educating disadvantaged children and diminish the fiscal impact of the federal grant. Potentially, supplantation allows the SEAs and LEAs to convert the federal Title I grant into a kind of revenue sharing program with very little incremental impact on education spending. Others would point to periodic changes to the Title I program allowing more schools to participate as schoolwide programs, suggesting that the Congress may be trying to encourage more flexible use of Title I funds to improve the quality of education for disadvantaged students and raise student achievement levels for all students, including low-income students. Furthermore, in times of fiscal stress and greater needs in educating the disadvantaged, the reallocation of resources within and among schools may be the only way to finance comprehensive districtwide reform efforts. A nonsupplant provision could stymie those districts that need more flexibility to attempt such reforms.

Matters for Congressional Consideration

To better align its expectations for accountability with Title I schoolwide program goals, the Congress should consider eliminating the SNS requirement for schoolwide programs. If Congress eliminates SNS in the context of schoolwide programs, Congress may want to consider strengthening the other fiscal accountability requirement, MOE. Currently, LEAs must maintain only 90 percent of their previous years’ expenditures in order to participate in the Title I program. For example, if this requirement were increased, it would impose a higher expectation on those districts to maintain the fiscal balance and it could represent a reasonable tradeoff for those districts that want to begin more comprehensive reform efforts.

Recommendations for Executive Action

We recommend that the U.S. Department of Education enhance its technical assistance and training efforts to ensure that SEAs and Education program staff have a clearer understanding of the strengths and weaknesses of the single audit process and the role the audits can play in required oversight activities and encourage them to heighten the level of attention they give the fiscal requirements in their own monitoring efforts. In addition, we recommend that Education amend its guidance for grantees and oversight officers to address all of Title I’s fiscal requirements, including the SNS provision.

Agency Comments

We received comments from Education on a draft of this report, which are reprinted in Appendix II. Education generally agreed with our recommendations for executive action to enhance its technical assistance and training efforts on the single audit process and to amend its own guidance to address all of Title I’s fiscal accountability provisions.

On the policy issue of whether to eliminate the SNS requirement for schoolwide programs, Education is not ready to take a position. However, Education questioned the basis for the matter for congressional consideration that we propose. Education acknowledges the difficulties enforcing the SNS provision in schoolwide programs and we found that none of the districts we visited were able to develop a test for SNS that could be applied in a schoolwide setting. Education cited recent supplanting violations found by Title I monitoring staff to show that it was possible to assess supplantation in a schoolwide setting. However, according to an Education official, these findings were not for schoolwide programs.

Education says that the loss of the SNS requirement would not be completely offset by an enhanced MOE requirement because it would shift responsibility for fiscal accountability from the school to the district level. However, our review shows that the current requirement is unworkable in a schoolwide setting. As we said, while one can identify the separate funding sources going into a school, one cannot identify what services they funded in a schoolwide setting because federal, state, and local funds are pooled. In contrast, an MOE requirement is easier to measure, identify, and track, and therefore better promotes fiscal accountability in these settings. If Congress considers eliminating the SNS provision, we believe that enhancing the MOE requirement is a reasonable tradeoff. With regard to Education’s regulation governing the SNS requirement that Education said we did not discuss, we did discuss this on page 13. We have added a footnote to make the report more clear on that point.

Education said that it did not agree that the level or scope of monitoring is inadequate. However, we found that Education’s efforts to enforce the fiscal provisions have some limitations. By design, Education’s current monitoring effort is directed at the provisions on accountability for academic results, but we found that the fiscal requirements were given little attention, and the materials developed by Education to guide monitoring efforts did not even mention SNS.

Finally, with regard to Education’s review of single audit reports, this finding was published previously in our June 2002 report and specifically assessed the Title I program. The department concurred with our findings at that time and has provided us with a corrective action plan. Secretary Paige’s August 26, 2002, letter to GAO indicated that it planned to address these findings by February 28, 2003.

In addition, we provided segments of this draft report to the states and school districts we visited. We have incorporated their comments in the report as appropriate.

We are sending copies of this report to the Secretary of Education, appropriate congressional committees, and other interested parties. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov.

If you or your staff have any questions or wish to discuss this material further, please call Paul L. Posner at (202) 512-9573 or Marnie S. Shaul at (202) 512-7215. Other GAO contacts and staff acknowledgments are listed in appendix III.

Appendix I: Scope and Methodology

To determine how select states ensure compliance with maintenance of effort (MOE) and supplement-not-supplant (SNS), we interviewed state program and budget officials in six states: Arizona, California, Florida, Indiana, Louisiana, and Massachusetts. We also reviewed budgets and financial statements for school years 1999-2000 and 2000-2001, as well as state guidance on fiscal accountability requirements. We also spoke with state auditors and reviewed their audit plans and other relevant workpapers. In addition to meeting with state officials, we spoke with local program and budget officials and school district administrators in six local education agencies including Douglas Unified School District and Glendale Elementary School District in Arizona, San Diego City Unified School District in California, Duval County Public Schools in Florida, Indianapolis Public Schools in Indiana, and Jefferson Parish Public Schools in Louisiana. Again, we reviewed budgets and financial statements for school years 1999-2000 and 2000-2001 and local auditors’ audit plans and relevant workpapers.

We selected two of the states and three local school districts based on our search of the Federal Audit Clearinghouse, which is a Web-based database that we searched to identify states and school districts found out of compliance with one or more of the Title I fiscal accountability requirements in 2001. Two of the six states we selected were out of compliance with one of the fiscal accountability requirements, while the other four were not. Likewise, three of the school districts we visited were found to be out of compliance with the SNS provisions; the other three were not. Those states and local school districts without audit findings were selected to ensure variation in enrollment size, ethnic composition, economic condition, and geographic location.

To determine what efforts the U.S. Department of Education has taken to enforce the Title I fiscal accountability provisions and what limitations, if any, these efforts may have, we spoke with Education officials and reviewed Education guidance and documentation as well as recent GAO and OIG reports.

To assess what changes occurred between school years 1999-2000 and 2000-01 in the federal share of education expenditures and to what extent federal funds were used to support state education agencies’ operating expenditures, we gathered information from state program and budget officials on federal, state, and local funding streams as well as full time equivalent (FTE) and operating expenditure data. We analyzed and summarized this information and presented it in a way that provides context and comparison across the six states. Due to the limited number of states and districts selected, our findings cannot be generalized to school districts nationwide.

Appendix II: Comments from the Department of Education

Appendix III: GAO Contacts and Staff Acknowledgments

GAO Contacts

Acknowledgments

In addition to those named above Bill Keller, Jennifer Ashford, and Leah Nash made key contributions to this report. Patrick DiBattista provided exceptional editorial assistance on the content and message of the report. Behn Miller and Richard P. Burkard supplied legal advice on several complex aspects of our work. Thomas Broderick and Jacquelyn Hamilton provided technical assistance on the Single Audit Act.

Appendix IV: Related GAO Products

Education

Education School Finance: Per-Pupil Spending Differences between Selected Inner City and Suburban Schools Varied by Metropolitan Area. GAO-03-234. Washington, D.C.: December 9, 2002.

Title I: Education Needs to Monitor States’ Scoring of Assessments. GAO- 02-393. Washington, D.C.: April 1, 2002.

Title I Funding: Poor Children Benefit Though Funding Per Poor Child Differs. GAO-02-242. Washington, D.C.: January 31, 2002.

Title I Preschool Education: More Children Served, but Gauging Effect on School Readiness Difficult. GAO/HEHS-00-171. Washington, D.C.: September 20, 2000.

Title I Program: Stronger Accountability Needed for Performance of Disadvantaged Students. GAO/HEHS-00-89. Washington, D.C.: June 1, 2000.

Education Finance: Extent of Federal Funding in State Education Agencies. GAO/HEHS-95-3. Washington, D.C.: October 14, 1994.

Single Audit

Single Audit: Single Audit Act Effectiveness Issues. GAO-02-877T. Washington, D.C.: June 26, 2002.

Single Audit: Actions Needed to Ensure That Findings Are Corrected. GAO-02-705. Washington, D.C.: June 26, 2002.

Single Audit: Survey of CFO Act Agencies. GAO-02-376. Washington, D.C.: March 15, 2002.

Single Audit: Update on the Implementation of the Single Audit Act Amendments of 1996. GAO/AIMD-00-293. Washington, D.C.: September 29, 2000.

Single Audit: Refinements Can Improve Usefulness. GAO/AIMD-94-133. Washington, D.C.: June 21, 1994.

Intergovernmental Relations

Welfare Reform: Challenges in Maintaining a Federal/State Fiscal Partnership. GAO-01-828. Washington, D.C.: August 10, 2001.

Welfare Reform: Challenges in Saving for a Rainy Day. GAO-01-674T. Washington, D.C.: April 26, 2001.

Welfare Reform: Early Fiscal Effects of the TANF Block Grant. GAO/AIMD-98-137. Washington, D.C.: August 18, 1998.

Federal Grants: Design Improvements Could Help Federal Resources Go Further. GAO/AIMD-97-7. Washington, D.C.: December 18, 1996.

Block Grants: Issues in Designing Accountability Provisions. GAO/AIMD-95-226. Washington, D.C.: September 1, 1995.

Block Grants: Characteristics, Experience, and Lessons Learned. GAO/HEHS-95-74. Washington, D.C.: February 9, 1995.

Proposed Changes in Federal Matching and Maintenance of Effort Requirements. GAO/GGD-81-7. Washington, D.C.: December 23, 1980.