The Department of Labor required states to implement WIA’s major provisions by July 1, 2000, although six states began implementation a year earlier in July 1999. The act authorizes three separate funding streams for adults, dislocated workers, and youth. WIA’s appropriation for fiscal year 2002 was $950 million for adult, $1.1 billion for youth, and $1.5 billion for dislocated worker programs, for a total of $3.9 billion (see table 1). WIA encourages collaboration and partnerships in making a wide array of services universally accessible to these three populations and allows states broad discretion in designing their workforce investment systems. WIA requires most federally funded employment and training services to be delivered through a one-stop system overseen by newly created state and local workforce investment boards, although the services themselves may be provided by partner agencies and locally contracted service providers. In fact, WIA encourages client referrals to programs offered by one-stop partners. Once Congress appropriates WIA funds, the amount of money that flows to states and localities depends on a specific formula that takes into account unemployment. Thus, any changes in the annual appropriation or elements of the allocation formula will result in year-to-year funding fluctuations. Once the Congress appropriates funds for a given fiscal year, Labor notifies states of their annual allocation—usually in the February to March timeframe. The funds are made available to states and localities at three separate times during the year, depending on the program (see fig. 1). For youth services, all funds for the year are made available on April 1, 3 months before the beginning of the program year on July 1. This once-a- year youth allocation is designed to help states and local areas gear up for summer youth activities. The adult and dislocated worker funding allocations are distributed twice a year from two different years’ appropriations—on July 1 (1/4 of the allotment) and on October 1 (3/4 of the allotment)—with the October allocation funded from a new fiscal year’s appropriation. States and localities are required to manage their WIA programs, including spending, on a program-year basis, regardless of when funds are made available. In addition, WIA allows states 3 program years to spend their funds while local areas have 2 program years. Once WIA funds are made available, they flow from Labor to states, states to local areas, and local areas to service providers. For dislocated worker funds, the Secretary of Labor retains 20 percent of the funds in a national reserve account to be used for emergency grants, demonstrations, and technical assistance and allocates the remaining funds to the states according to a specified formula. Once states receive their allocation, the governor can reserve up to 25 percent of dislocated worker funds for rapid response activities intended to help workers faced with plant closures and layoffs to quickly transition to new employment. In addition to funds set aside for rapid response, WIA allows states to set aside up to 15 percent of the dislocated worker allotment and permits them to combine the dislocated worker set-aside with similar set-asides from their adult and youth allotments. States use the set-asides to support a variety of statewide activities such as helping establish one-stop centers, providing incentive grants to local areas, operating management information systems, and disseminating lists of organizations that can provide training. After funds are set aside for rapid response and statewide activities, the remainder—at least 60 percent for dislocated workers and 85 percent for adult and youth—is then allocated to local workforce areas, also according to a specified formula. In addition, local areas may reserve up to 10 percent from each of the three funding streams for local administrative activities (see table 2). Labor collects quarterly financial status reports from states, detailing expenditures separately for the six funding categories under WIA—two categories at the state level (governor’s set-aside and rapid response) and four at the local level (adult, dislocated worker, youth, and local administration). Appendix I depicts a sample form that states complete and submit to Labor. Because adult and dislocated worker funds for each program year are provided from two separate appropriations, Labor requires states to track financial information separately by the year in which funds are appropriated. As a result, states submit a total of 11 reports each quarter for activities funded by the current program year’s allocation, as shown in table 3. In addition, WIA gives states 3 years within which to spend their grant; consequently, states may be tracking activities that are funded by 3 different program years, thus submitting up to 33 reports each quarter (11 reports multiplied by the 3 program years in which funds are available). In completing their financial status reports, states are required to follow Labor’s guidance that identifies and defines the data elements to be reported. Labor collects “total federal obligations”—which it defines as the sum of expenditures, accruals, and unliquidated obligations—for determining how much states have already spent and how much is still available for spending. Table 4 shows the definitions of each of these terms. In addition, WIA regulations require expenditures to be reported on an accrual basis. This means states should report all cash outlays and all accruals as expenditures on their reports. As of July 2002, all states we contacted told us that they were reporting expenditures on an accrual basis. Financial reporting begins at the local service provider level and progresses through the local, state, and national levels. Figure 2 shows how WIA financial reports flow from one level to the next and the data elements that are reported. After reconciling any discrepancies, states aggregate the local reports and are required to submit a financial status report to their regional Labor office 45 days after the quarter’s end, according to Labor officials. Ten days later, after performing edit checks, regional officials told us that they certify and forward states’ reports to Labor’s national headquarters. The national office then merges information for the six funding categories into the three funding streams— adults, dislocated workers, and youth—and combines the program and fiscal year data into a single program year. Within 5 days of receiving reports from its regional offices, Labor is required to present the Congress with a single report 60 days after the end of the quarter. Labor uses states’ financial reports to determine whether there are any unspent funds that may need to be redistributed among states. Local areas have 2 years within which to spend their annual allocations while states have 3 program years. Thus, program year 2000 funds must be spent by the end of program year 2001 for localities and by the end of program year 2002 for states. If funds are not spent, WIA directs both states and Labor to recapture and, if appropriate, redistribute unspent funds according to specific criteria (see fig. 3). The recapture processes are similar at both the state and federal level. States have a two-tiered process by which they recapture available funds. First, at the end of the initial program year, states may reclaim funding from local areas with total obligations less than 80 percent of their annual allocation and redistribute these recaptured funds to those local areas that have met the criterion for total obligations. Second, at the close of local areas’ 2-year grant period, states may recapture any unexpended local funds and may reallocate the funds to other local areas that have fully expended their allocation or to statewide activities, but only in the third year the grant is available. Like local areas, states are also subject to having their funds recaptured. At the federal level, Labor may recapture funds from states with total obligations less than 80 percent of their annual allotment at the end of the first program year. Labor applies the same recapture process to the end of the second program year. At both intervals, Labor may redistribute these funds to other states that have met the requisite total obligation rate. By the end of the 3-year grant period, Labor may recapture any state funds that have not been fully expended. Because states’ WIA grants expire after 3 years, funds recaptured by Labor at the end of the third year may not be redistributed to other states. Rather, Labor must return the funds to the U.S. Treasury. Our analysis of Labor’s data shows that states are spending their WIA funds within the authorized 3-year timeframe—virtually all funds allocated for program year 1999 have been spent within the requisite 3 years and 90 percent of program year 2000 funds have been spent within 2 years. In addition, states have spent just over half of their program year 2001 allocation within the first year funds were available. By contrast, Labor’s estimate of expenditure rates suggests that states are not spending their funds as quickly because the estimate is based on all funds states currently have available—from older funds carried in from prior program years to those only recently distributed. The newest funds, which states have 2 more years to spend, comprised two-thirds of all funds states had available for program year 2001. Moreover, many of the remaining funds carried over may have already been obligated. However, states do not use the same definition for obligations and what they report to Labor on obligations differs. Lacking consistent information on how much states and local areas have committed to spend, Labor relies on expenditure data and overestimates the funds states have available to spend. Our analysis of Labor’s expenditure data shows that states are spending their WIA funds within the allowed 3-year period. Nationwide, Labor’s data show that states expended essentially all of their program year 1999 funds within the authorized 3-year period that ended with program year 2001. In addition, states have expended 90 percent of program year 2000 funds within the first two years funds were available—55 percent in the first year and another 35 percent in the second year. States have one more year to spend the remaining 10 percent of their program year 2000 funds.