New Federal Initiatives on Enforcement NACTEI PreConference May

“New Federal Initiatives on Enforcement” NACTEI Pre-Conference May 16, 2006 Palm Springs, CA Michael Brustein & Manasevit 3105 South Street, NW Washington, DC 20007 Mbrustein@bruman. com 1

SEAs must use a risk-based plan to assess and monitor all LEAs to ensure that they have systems in place to properly account for, and adequately document and support, claims submitted for reimbursement. -OIG 2

SEAs must ensure that monitoring teams include financial personnel to look at financial issues and check for compliance with financial requirements. -OIG 3

Significant Cultural Shift at ED to “Internal Controls” 4

Definition of “internal Controls” An integral component of organization’s management that provides reasonable assurance of: 1. Effectiveness & Efficiency of operations 2. Reliability of reporting 3. Compliance with applicable laws and regulations -GAO 5

States and locals scheduled for monitoring from now on can expect much closer examinations of financial records 6

Such financial records must detail: 1. Flow of funds to locals 2. Audit findings and corrective action plans 3. Procurement, distribution, equipment -James Evans OCFO 7

OCFO Subject to: 1. Improper Payments Information Act 2. Federal Managers Financial Integrity Act Holds ED managers legally accountably for internal controls of federal programs 8

n OCFO now assesses the risk that federal funds are being spent erroneously. n OCFO ensures effective internal controls are in place and adhered to at the state and local level 9

Issues n How long did the transfer take from state to local? n How does the state document the obligations over the 27 months? n Are carryover provisions implemented correctly? 10

How well does the state monitor corrective action plans developed in response to audits? 11

Equipment 16 of 17 states and districts visited did not maintain accurate equipment inventory 12

Equipment OCFO will select a piece of equipment from inventory list and then see if they can find it. 13

Procurement 11 of 17 states visited lacked adequate controls over the processing and payment of vendor invoices 14

2006 OIG Workplan 1) SEA monitoring of LEAs 15

Audits n Corrective action plans to address audit findings in the A-133 single audit reports were either unavailable for review, improperly prepared, or prepared in an untimely manner (8) n Management and internal control letters addressing A-133 and financial statement audit reports were unavailable for review (2) n No documentation provided to indicate that A 133 audits had been conducted or copies were not available for review (2) 16

Procurement & Disbursement Controls n Inadequate controls over purchase orders (13) n Inadequate controls over processing and payment of n n vendor invoices (11) Lack of adequate controls over the distribution of Title I finds by SEA and/or LEA (10) Inadequate controls over funds distribution documents (FDDs) and P 638 draw down forms (4) Inadequate controls over SEA/LEA contracts issued to vendors (3) Inadequate controls over travel advances and travel payment vouchers (3) 17

Procurement & Disbursement Controls cont… n Inadequate documentation to demonstrate proper n n n application of indirect cost principles (2) Lack of documentation for the approval function in an automated procurement system (2) Lack of supporting documentation for journal entries (2) Lack of documented competitive bidding process (1) Lack of documentation to support use of Title I funds for payroll (1) Inadequate controls over the purchase card process (1) Student lunch applications used for eligibility not complete (1) 18

Equipment n Title I equipment inventory not available (16) n Lack of adequate controls to account for location and custody of Title I equipment (7) n No property tags on equipment (3) n The capitalization threshold for Title I equipment exceeds $5, 000 (2) n Inadequate procedures for recording the transfer of Title I equipment (2) n Inadequate controls to ensure that Title I funds are not used to purchase equipment for the exclusive use of other programs (1) 19

A-133 Common Audit Findings 1. Cash Management n Minimize time elapsing between drawing down federal cash and disbursing it. 20

2. Property records 80. 32(d)(1) Make sure all required data elements are maintained 1. Description of the property 2. Identification number 3. Source of property 4. Who holds the title 5. Acquisition date 6. Cost 7. Percent of federal participation 8. Location of the property 9. Use & condition of the property 10. Ultimate dispositionn Date of disposal n Sale price 21

3. Equipment Inventory n Inventory all equipment purchased with federal funds at least once every two years n Control system to safeguard against loss or damage 22

4. Noncompetitive Procurement n If contracts awarded on a sole source basis, prepare a written justification, e. g. n emergency n no responses to solicitation 23

5. Obtain Prior Written Approval If grant agreement states that an administrative act requires prior approval, make sure you get it in writing from the grantor agency. 24

6. Timely Accurate Financial & Performance Reports Late or inaccurate reports are a “red flag” of weakness in the system – often invites greater scrutiny. 25

7. Cost Transfers Shifts of costs between programs invites audit scrutiny. -Supplanting -Allocability 26

8. Time & Effort Reports This is the most frequently cited violation. 27

THE KEY: Aligning Effort and Funding 28

Audit inquiries may commence with focus on funding side (federal grants received) or effort side (payroll distribution records or P. D. ’s) 29

Attendance Records are NOT the Equivalent of Effort Records 30

A-87 / A-21 Distribution of salaries must be based on payrolls documented in accord with the generally accepted practices of the agency. 31

There is no single best method for documenting the distribution of effort. 32

n But the method must recognize the principle of “after-the-fact” confirmation, so that charges to a grant reflect actual charges. n Budgets do not reflect actual charges. 33

Confirmation must be done by employee under A-87 or “responsible person with suitable means of verification” under A-21 34

While charges may be made initially on the basis of estimates before the services are performed, changes in the work activity must be entered into the payroll distribution system. 35

Where employees are expected to work solely on a single cost objective, salaries must be supported by semiannual certification signed by employee or supervisor. 36

Where employees work on more than one cost objective, use either PARS or substitute systems 37

Elements of PARS 1. After the fact distribution of actual activity of each employee 2. Account for total activity for which employee is compensated 3. Prepared at least monthly 4. Signed by the employee 38

Questions on Time and Effort Is the distinction between single or multiple cost objectives based on how employees are paid? NO! 39

Questions on Time and Effort cont… If employee is paid with nonfederal funds, but effort is counted toward a match, are T/E records required? YES! 40

Questions on Time and Effort cont… What if the employee works only a brief time on an activity unrelated to the federal cost objectives? 41

If deviations between budget estimates and actual costs are less than 10% are adjustments required? 42

Questions on Time and Effort cont… If the employee works on an activity that is allowable under more than one program, must the time be allocated? NO! 43

Substitute Systems 1. Lamar Alexander Guidance 1992 2. The Florida, North Carolina, Michigan Models 44

Substitute Systems 1. Account for actual effort weekly for 2. 3. 4. 5. three representative months; Actual effort is within 10% of projected effort; Regardless of deviation, adjustments required; Then account for effort weekly for two representative months; Adjustments required. 45

Substitute Systems 1. ED approves SEA process 2. SEA approves LEA process 3. LEA may use substitute system even if SEA does not 46

Consequences for Legally Deficient System 47

Reconstruction of Documents n Not a substitute for contemporaneous records n But often accepted by OALJ on appeal 48

Reconstruction n Affidavits of employees with first hand knowledge n Work product n Calendars n Schedules 49

Where to Find Federal Education Grants Management Requirements n Program Rules: www. ed. gov Statutes n Regulations n Guidance n n General Education Provisions Act (GEPA): http: //straylight. law. cornell. edu/uscode/html/uscode 2 0/usc_sup_01_20_10_31. html n Education Department General Administrative Regulations (EDGAR): http: //www. ed. gov/policy/fund/reg/edgar. Reg/edgar. h tml 50

Where to Find Federal Education Grants Management Requirements n Office of Management & Budget Circulars http: //www. whitehouse. gov/omb/circulars/ n OMB Circulars A-21, A-87, A-122 Cost Principles n OMB Circular A-133 Single Audit n OMB Circular A-133 Compliance Supplement n Note – for audits performed after June 30, 2004, must look at 2004 AND 2005 Supplements n 51

Federal Cost Principles 52

Federal Cost Principles n A-21 Educational Institutions n A-87 State, Local & Indian Tribal Governments n A-122 Non-Profit Organizations n 48 CFR pt. 31 For-Profit Organizations 53

Cost Principles: Basic Guidelines n All Costs Must Be: n Necessary n Reasonable n Allocable n Legal under state and local law 54

Cost Principles: Basic Guidelines n In addition, all costs must: n Conform with federal law & grant terms n Consistently treated n In accordance with GAAP n Not included as match n Net of applicable credits n Adequately documented 55

Basic Guidelines (cont. ) n Adequately documented n n n n Amount of funds under grant How the funds are used Total cost of the project Share of costs provided by other sources Records that show compliance Records that show performance Other records to facilitate an effective audit 56

A-87, Attachment B– Selected Items of Costs n 43 specific costs detailed n Listed in alphabetical order 57

EDGAR Overview n Education Department General Administrative Regulations: 34 CFR pts. 74 -99 n Part 74: Admin. of Grants to Institutions of Higher Ed, Hospitals, and other Nonprofit Organizations n Part 75: Direct Grant Programs n Part 76: State-Administered Programs n Part 77: Definitions n Part 80: Uniform Administrative Requirements for Grants and Cooperative Agreements to State and Local Governments 58

Financial Management 34 CFR 80. 20 & 34 CFR 74. 21 n Fiscal control and accounting procedures must be sufficient to: n Prepare reports n Trace funds to a level of expenditure adequate to show funds spent properly 59

Matching/Cost Sharing 34 CFR 80. 24 & 34 CFR 74. 23 n Costs must be allowable under the grant n Includes: n Grantee expenditures (cash contribution) n Donations (in-kind contribution) n Must be verifiable from records 60

Program Income 34 CFR 80. 25 & 34 CFR 74. 24 Income directly generated by a grant supported activity or earned only as a result of the grant agreement, includes income from: n Fees for services performed n Use of property acquired under grant n Sale of commodities or items fabricated under a grant agreement n Payments of principal and interest on loans made with grant funds 61

Program Income – cont. Royalties Generally, revenue from: n Royalties n License fees n Patents Is not considered program income unless specifically identified in the grant agreement 62

Use of Program Income n Deducted from total allowable costs and used for allowable expenses n Added to the total grant award and used for allowable expenses n Used to meet cost sharing or matching requirements 63

Changes to Approved Budget 34 CFR 80. 30 & 34 CFR 74. 25 n Must report deviations from budget and program plans n Must request prior approval: n Change in scope or objective n Change in key personnel n Authority to bring in 3 rd party contractor n Certain budget transfers 64

EDGAR Part 80. 36 Procurement Competition 80. 36(c). All procurement transactions must be conducted with full and open competition. 65

Equipment 34 CFR 80. 32 & 34 CFR 74. 34 n Title vests in the grantee n May use for other projects as long as no interference n Must ensure adequate maintenance 66

Equipment (cont. ) n Property acquired under the grant must be recorded in an inventory management system n Property records (description, serial number or other ID, title info, acquisition date, cost, percent of Federal participation, location, use and condition, and ultimate disposition) n Physical inventory (at least every two years) n Control system to prevent loss, damage, theft (all must be investigated) 67

Disposition n When no longer needed: n Property may be used for other activities currently or previously supported with federal funds n Otherwise, must dispose according to regulations n 34 CFR 80. 32(e) 68

Copyrights 34 CFR 80. 34 & 34 CFR 74. 36 n Grantee may copyright work that was developed for or purchased under federal grant n Federal government may reproduce, publish, or otherwise use the copyright in any work developed under the grant n Federal government does not need to pay royalties 69

Record Retention 34 CFR 80. 42 & 34 CFR 74. 53 n Must retain records that show: Amount of funds under by grant or subgrant n How the state or subgrantee uses funds n Total cost n Share of costs provided from other sources n Compliance with program requirements n Other records to facilitate and audit n n Federal: 3 years n Statute of limitations: 5 years 70

Cash Management Requirements 71

Period of Availability 34 CFR 80. 23 & 34 CFR 74. 28 n Tydings Amendment n Does not apply to all grants n Funds are available to state for 27 months: n 15 months under the grant award (July 1, 2005 – September 30, 2006) n Plus 12 months (October 1, 2006 – September 30, 2007) n State may limit period of availability! n Check award notice 72

Definition of Obligation Under Federal Law Acquisition of Property Date of binding written commitment Personal Services by Employee When services are performed Personal Services by Contractor Date of binding written commitment Travel When travel is taken 73

Liquidations n Federal regulations: Must liquidate all obligations within 90 days after the end of the period of availability n Example: n Period of availability: July 1 – September 30 n Liquidation period ends: December 30 n ED may extend this deadline n State may limit the period! n Check award notice 74

“Lapsing” of Perkins Funds Sclafani September 2, 2005 memo 75

Supplement, Not Supplant 76

Supplement Not Supplant n Cannot use federal funds to pay for services, staff, programs, or materials that would otherwise be paid with state or local funds n Always ask: “What would have happened in the absence of federal funds? ” 77

Supplement Not Supplant (cont. ) n A-133 Compliance Supplement presumes supplanting in 3 situations: 1. Used federal funds to provide services the SEA or LEA is required to make available under other federal, state or local laws 2. Used federal funds to provide services the SEA or LEA provided with state or local funds in the prior year 78

Supplement Not Supplant (cont. ) n Presumption may be rebutted: n If SEA or LEA demonstrates it would not have provided the services with state or local funds if the federal funds were not available 79

Questions? ? ? 80

This presentation is intended solely to provide general information and does not constitute legal advice. Attendance at the presentation or later review of these printed materials does not create an attorney-client relationship with Brustein & Manasevit. You should not take any action based upon any information in this presentation without first consulting legal counsel familiar with your particular circumstances. 81