Recovery Act
States' and Localities' Current and Planned Uses of Funds While Facing Fiscal Stresses Gao ID: GAO-09-908T September 10, 2009This testimony is based largely on GAO's July 8, 2009 report, in response to a mandate under the American Recovery and Reinvestment Act of 2009 (Recovery Act). This testimony provides selected updates, including the status of federal Recovery Act outlays. The report addresses: (1) selected states' and localities' uses of Recovery Act funds, (2) the approaches taken by the selected states and localities to ensure accountability for Recovery Act funds, and (3) states' plans to evaluate the impact of Recovery Act funds. GAO's work for the report is focused on 16 states and certain localities in those jurisdictions as well as the District of Columbia--representing about 65 percent of the U.S. population and two-thirds of the intergovernmental federal assistance available. GAO collected documents and interviewed state and local officials. GAO analyzed federal agency guidance and spoke with Office of Management and Budget (OMB) officials and with program officials at the Centers for Medicare and Medicaid Services, and the Departments of Education, Energy, Housing and Urban Development, Justice, Labor, and Transportation.
Across the United States, as of August 28, 2009, Treasury had outlayed about $45 billion of the estimated $49 billion in Recovery Act funds projected for use in states and localities in fiscal year 2009. More than three quarters of the federal outlays have been provided through the increased Medicaid Federal Medical Assistance Percentage (FMAP) and the State Fiscal Stabilization Fund (SFSF) administered by the Department of Education. GAO's work focused on nine federal programs that are estimated to account for approximately 87 percent of federal Recovery Act outlays in fiscal year 2009 for programs administered by states and localities. All 16 states and the District have drawn down increased Medicaid FMAP grant awards of just over $19.6 billion for October 1, 2008, through September 4, 2009, which amounted to almost 84 percent of such funds available to them. All states and the District experienced enrollment growth in this period. Several states noted that the increased FMAP funds were critical in their efforts to maintain coverage at current levels. States and the District reported they are planning to use the increased federal funds to cover their increased Medicaid caseload and to maintain current benefits and eligibility levels. As of September 1, the Department of Transportation (DOT) had obligated approximately $11 billion for almost 3,800 highway infrastructure and other eligible projects in the 16 states and the District and had reimbursed these 17 jurisdictions about $604 million. Across the nation, almost half of the obligations have been for pavement improvement projects because they did not require extensive environmental clearances, were quick to design, obligate and bid on, could employ people quickly, and could be completed within 3 years. Officials from most states considered project readiness, including the 3-year completion requirement, when making project selections and only later identified to what extent these projects fulfilled the economically distressed area requirement. We found substantial variation in how states identified economically distressed areas and how they prioritized project selection for these areas. FHWA issued clarifying guidance to address our recommendation in August 2009. As of September 1, 2009, the District and 15 of the 16 states covered by our review had received approval from Education for their initial SFSF funding applications. Pennsylvania had submitted an application to Education, but it had not yet been approved. As of August 28, 2009, Education has made $21 billion in SFSF grants for Education available to the 15 states and the District--of which over $7.7 billion had been drawn down as of August 28, 2009. School districts said they would use SFSF funds to maintain current levels of education funding, particularly for retaining staff and current education programs. They also told us that SFSF funds would help offset state budget cuts. Overall, states reported using Recovery Act funds to stabilize state budgets and to cope with fiscal stresses. The funds helped them maintain staffing for existing programs and minimize or avoid tax increases as well as reductions in services. States have implemented various internal control programs; however, federal Single Audit guidance and reporting does not fully address Recovery Act risk. The Single Audit reporting deadline is too late to provide audit results in time for the audited entity to take action on deficiencies noted in Recovery Act programs. Moreover, current guidance does not achieve the level of accountability needed to effectively respond to Recovery Act risks. Direct recipients of Recovery Act funds, including states and localities, are expected to report quarterly on a number of measures, including the use of funds and estimates of the number of jobs created and retained.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-09-908T, Recovery Act: States' and Localities' Current and Planned Uses of Funds While Facing Fiscal Stresses
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Testimony:
Before the Committee on Homeland Security and Governmental Affairs,
U.S. Senate:
United States Government Accountability Office:
GAO:
For Release on Delivery:
Expected at 10:00 a.m. EDT:
Thursday, September 10, 2009:
Recovery Act:
States' and Localities' Current and Planned Uses of Funds While Facing
Fiscal Stresses:
Statement of J. Christopher Mihm:
Managing Director:
Strategic Issues:
GAO-09-908T:
GAO Highlights:
Highlights of GAO-09-908T a testimony before the Committee on Homeland
Security and Governmental Affairs, U.S. Senate.
Why GAO Did This Study:
This testimony is based largely on GAO‘s July 8, 2009 report, in
response to a mandate under the American Recovery and Reinvestment Act
of 2009 (Recovery Act). This testimony provides selected updates,
including the status of federal Recovery Act outlays. The report
addresses: (1) selected states‘ and localities‘ uses of Recovery Act
funds, (2) the approaches taken by the selected states and localities
to ensure accountability for Recovery Act funds, and (3) states‘ plans
to evaluate the impact of Recovery Act funds. GAO‘s work for the report
is focused on 16 states and certain localities in those jurisdictions
as well as the District of Columbia”representing about 65 percent of
the U.S. population and two-thirds of the intergovernmental federal
assistance available. GAO collected documents and interviewed state and
local officials. GAO analyzed federal agency guidance and spoke with
Office of Management and Budget (OMB) officials and with program
officials at the Centers for Medicare and Medicaid Services, and the
Departments of Education, Energy, Housing and Urban Development,
Justice, Labor, and Transportation.
What GAO Found:
Across the United States, as of August 28, 2009, Treasury had outlayed
about $45 billion of the estimated $49 billion in Recovery Act funds
projected for use in states and localities in fiscal year 2009. More
than three quarters of the federal outlays have been provided through
the increased Medicaid Federal Medical Assistance Percentage (FMAP) and
the State Fiscal Stabilization Fund (SFSF) administered by the
Department of Education.
GAO‘s work focused on nine federal programs that are estimated to
account for approximately 87 percent of federal Recovery Act outlays in
fiscal year 2009 for programs administered by states and localities.
The following figure shows the distribution by program of anticipated
federal Recovery Act spending in fiscal year 2009 for the nine programs
discussed in the July report.
Figure: Programs in July Review, Estimated Federal Recovery Act Outlays
to States and Localities in Fiscal Year 2009 as a Share of Total:
[Refer to PDF for image: illustration]
Medicaid: 63%;
State Fiscal Stabilization Fund: 13%; Highways: 6%; Other Selected
programs: 5%:
* IDEA, Parts B and C, 1%;
* WIA Youth Programs, 1%;
* ESEA, Title i, Part A: 1%;
* Less than 1%:
- Byrne Grants;
- Weatherization Assistance Program;
- Public Housing Capital Fund;
Other programs not in study: 13%.
Source: GAO analysis of data from CBO and Federal Fund Information for
States.
[End of figure]
Increased Medicaid FMAP Funding:
All 16 states and the District have drawn down increased Medicaid FMAP
grant awards of just over $19.6 billion for October 1, 2008, through
September 4, 2009, which amounted to almost 84 percent of such funds
available to them. All states and the District experienced enrollment
growth in this period. Several states noted that the increased FMAP
funds were critical in their efforts to maintain coverage at current
levels. States and the District reported they are planning to use the
increased federal funds to cover their increased Medicaid caseload and
to maintain current benefits and eligibility levels. Due to the
increased federal share of Medicaid funding, most state officials also
said they would use freed-up state funds to help cope with fiscal
stresses.
Highway Infrastructure Investment:
As of September 1, the Department of Transportation (DOT) had obligated
approximately $11 billion for almost 3,800 highway infrastructure and
other eligible projects in the 16 states and the District and had
reimbursed these 17 jurisdictions about $604 million. Across the
nation, almost half of the obligations have been for pavement
improvement projects because they did not require extensive
environmental clearances, were quick to design, obligate and bid on,
could employ people quickly, and could be completed within 3 years.
Officials from most states considered project readiness, including the
3-year completion requirement, when making project selections and only
later identified to what extent these projects fulfilled the
economically distressed area requirement. We found substantial
variation in how states identified economically distressed areas and
how they prioritized project selection for these areas. Therefore, GAO
recommended that the Secretary of Transportation develop clear guidance
on identifying and giving priority to economically distressed areas and
more consistent procedures for the Federal Highway Administration
(FHWA) to use in reviewing and approving states‘ criteria. FHWA issued
clarifying guidance to address our recommendation in August 2009.
State Fiscal Stabilization Fund:
As of September 1, 2009, the District and 15 of the 16 states covered
by our review had received approval from Education for their initial
SFSF funding applications. Pennsylvania had submitted an application to
Education, but it had not yet been approved. As of August 28, 2009,
Education has made $21 billion in SFSF grants for Education available
to the 15 states and the District”of which over $7.7 billion had been
drawn down as of August 28, 2009. School districts said they would use
SFSF funds to maintain current levels of education funding,
particularly for retaining staff and current education programs. They
also told us that SFSF funds would help offset state budget cuts.
Overall, states reported using Recovery Act funds to stabilize state
budgets and to cope with fiscal stresses. The funds helped them
maintain staffing for existing programs and minimize or avoid tax
increases as well as reductions in services.
Accountability:
States have implemented various internal control programs; however,
federal Single Audit guidance and reporting does not fully address
Recovery Act risk. The Single Audit reporting deadline is too late to
provide audit results in time for the audited entity to take action on
deficiencies noted in Recovery Act programs. Moreover, current guidance
does not achieve the level of accountability needed to effectively
respond to Recovery Act risks. Finally, state auditors need additional
flexibility and funding to undertake the added Single Audit
responsibilities under the Recovery Act. OMB is vetting a pilot program
for early written communication of internal control deficiencies for
Recovery Act programs that, if properly scoped to achieve sufficient
coverage of Recovery Act programs, could address our concerns about the
timeliness of single audit reporting.
Impact:
Direct recipients of Recovery Act funds, including states and
localities, are expected to report quarterly on a number of measures,
including the use of funds and estimates of the number of jobs created
and retained. The first of these reports is due in October 2009. OMB”in
consultation with a range of stakeholders”issued additional
implementing guidance for recipient reporting on June 22, 2009, that
clarifies some requirements and establishes a central reporting
framework.
In addition to employment-related reporting, OMB requires reporting on
the use of funds by recipients and nonfederal subrecipients receiving
Recovery Act funds.
The tracking of funds is consistent with the Federal Funding
Accountability and Transparency Act (FFATA). Like the Recovery Act,
FFATA requires a publicly available Web site [hyperlink,
http://www.USAspending.gov] to report financial information about
entities awarded federal funds. Yet, significant questions have been
raised about the reliability of the data on [hyperlink,
http://www.USAspending.gov], primarily because what is reported by the
prime recipients is dependent on the unknown data quality and reporting
capabilities of subrecipients.
GAO‘s Recommendations:
Accountability and Transparency: To leverage Single Audits as an
effective oversight tool for Recovery Act programs, the Director of OMB
should:
* develop requirements for reporting on internal controls during 2009
before significant Recovery Act expenditures occur, as well as for
ongoing reporting after the initial report;
* provide more direct focus on Recovery Act programs through the Single
Audit to help ensure that smaller programs with high risk have audit
coverage in the area of internal controls and compliance;
* evaluate options for providing relief related to audit requirements
for low-risk programs to balance new audit responsibilities associated
with the Recovery Act;
* develop mechanisms to help fund the additional Single Audit costs and
efforts for auditing Recovery Act programs; and;
* take steps to achieve sufficient participation and coverage in the
single audit pilot program that provides for early written
communication of internal control deficiencies to achieve the objective
of more timely accountability over Recovery Act funds.
Matter for Congressional Consideration: Congress should consider a
mechanism to help fund the additional Single Audit costs and efforts
for auditing Recovery Act programs.
Reporting on Impact: The Director of OMB should work with federal
agencies to provide recipients with examples of the application of OMB‘
s guidance on recipient reporting of jobs created and retained. In
addition, the Director of OMB should work with agencies to clarify what
new or existing program performance measures are needed to assess the
impact of Recovery Act funding.
Communications and Guidance: To strengthen the effort to track funds
and their uses, the Director of OMB should continue efforts to ensure
more direct communication with key state officials, and in addition,
(1) provide a long range time line on issuing federal guidance, (2)
clarify what constitutes appropriate quality control and reconciliation
by prime recipients, and (3) specify who should best provide formal
certification and approval of the data reported.
What GAO Recommends:
GAO makes recommendations and a matter for congressional consideration
discussed on the next page. The report draft was discussed with federal
and state officials who generally agreed with its contents. OMB
officials generally agreed with GAO‘s recommendations to OMB. DOT
agreed to and has since addressed GAO‘s recommendation.
View [hyperlink, http://www.gao.gov/products/GAO-09-908T], [hyperlink,
http://www.gao.gov/products/GAO-09-829] or key components. For state
summaries, see [hyperlink, http://www.gao.gov/products/GAO-09-830SP].
For more information, contact J. Christopher Mihm at (202) 512-6806 or
mihmj@gao.gov.
[End of section]
Mr. Chairman, Ranking Member Collins, and Members of the Committee:
I am pleased to be here today to discuss our work examining the uses
and planning by selected states and localities for funds made available
by the American Recovery and Reinvestment Act of 2009 (Recovery Act).
[Footnote 1] As federal funds provided by the Recovery Act flow into
the U.S. economy, state fiscal conditions continue to be stressed.
Actual declines in sales, personal income, and corporate income tax
revenues influenced state actions to begin to fill an estimated $230
billion in budget gaps for fiscal years 2009 through 2011.[Footnote 2]
The national unemployment rate also increased to 9.5 percent in June
2009, and high unemployment can place greater stress on state budgets
as demand for services, such as Medicaid, increases. Some economists
have pointed to signs of economic improvement, although associations
representing state officials have also reported that state fiscal
conditions historically lag behind any national economic recovery.
The Recovery Act specifies several roles for GAO, including conducting
bimonthly reviews of selected states' and localities' use of funds made
available under the act.[Footnote 3] The report that we issued on July
8th, the second in response to the act's mandate, addressed the
following objectives: (1) selected states' and localities' uses of
Recovery Act funds, (2) the approaches taken by the selected states and
localities to ensure accountability for Recovery Act funds, and (3)
states' plans to evaluate the impact of the Recovery Act funds they
received.[Footnote 4] The report provides overall findings, makes
recommendations, and discusses the status of actions in response to the
recommendations we made in our April 2009 report.[Footnote 5]
Individual summaries for the 16 selected states and the District of
Columbia (District) are accessible through GAO's recovery page at
[hyperlink, http://www.gao.gov/recovery]. In addition, all of the
summaries have been compiled into an electronic supplement, GAO-09-
830SP.
As reported in our April 2009 review, to address these objectives, we
selected a core group of 16 states and the District that we will follow
over the next few years.[Footnote 6] Our bimonthly reviews examine how
Recovery Act funds are being used and whether they are achieving the
stated purposes of the act. These purposes include:
* to preserve and create jobs and promote economic recovery;
* to assist those most impacted by the recession;
* to provide investments needed to increase economic efficiency by
spurring technological advances in science and health;
* to invest in transportation, environmental protection, and other
infrastructure that will provide long-term economic benefits; and:
* to stabilize state and local government budgets, in order to minimize
and avoid reductions in essential services and counterproductive state
and local tax increases.
The states selected for our bimonthly reviews contain about 65 percent
of the U.S. population and are estimated to receive collectively about
two-thirds of the intergovernmental federal assistance funds available
through the Recovery Act. We selected these states and the District on
the basis of federal outlay projections, percentage of the U.S.
population represented, unemployment rates and changes, and a mix of
states' poverty levels, geographic coverage, and representation of both
urban and rural areas. In addition, we visited a nonprobability sample
of more than 175 local entities within the 16 selected states and the
District.[Footnote 7]
GAO's work for this report focused on nine federal programs primarily
because they have begun disbursing funds to states or have known or
potential risks.[Footnote 8] These risks can include existing programs
receiving significant amounts of Recovery Act funds or new programs. We
collected documents from and conducted semistructured interviews with
executive-level state and local officials and staff from state offices
including governors' offices, "recovery czars," state auditors, and
controllers. In addition, our work focused on federal, state, and local
agencies administering the selected programs receiving Recovery Act
funds. We analyzed guidance and interviewed officials from the federal
Office of Management and Budget (OMB). We also analyzed other federal
agency guidance on programs selected for this review and spoke with
relevant program officials at the Centers for Medicare and Medicaid
Services (CMS), the U.S. Departments of Education, Energy, Housing and
Urban Development, Justice, Labor, and Transportation. Where attributed
to state officials, we did not review state legal materials for this
report, but relied on state officials and other state sources for
description and interpretation of relevant state constitutions,
statutes, legislative proposals, and other state legal materials. The
information obtained from this review cannot be generalized to all
states and localities receiving Recovery Act funding. A detailed
description of our scope and methodology can be found in appendix 1 of
the full report.
We conducted this performance audit from April 21, 2009 to July 2,
2009, and selectively updated data, where available, for this statement
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.
Background:
Our analysis of initial estimates of Recovery Act spending provided by
the Congressional Budget Office (CBO) suggested that about $49 billion
would be outlayed to states and localities by the federal government in
fiscal year 2009, which runs through September 30. However, our
analysis of actual federal outlays reported on [hyperlink,
http://www.recovery.gov][Footnote 9] at the time of our bimonthly
review indicated that in the 4 months since enactment, the federal
Treasury had paid out approximately $29 billion to states and
localities, which was about 60 percent of the payments estimated for
fiscal year 2009. Since the release of our July report, an additional
$16 billion in Recovery Act funds has been outlayed to states and
localities during that period for a total of almost $45 billion as of
August 28, 2009. Although this pace of spending may not continue for
the remainder of the fiscal year, at present spending is slightly ahead
of the original estimates. Figure 1 shows the original estimate of
federal outlays to states and localities under the Recovery Act
compared with actual federal outlays as reported by federal agencies on
[hyperlink, http://www.recovery.gov]. More than three quarters of the
$45 billion in federal outlays has been provided through the increased
Federal Medical Assistance Percentage (FMAP) grant awards and the State
Fiscal Stabilization Fund administered by the Department of Education.
Figure 1 shows actual federal outlays as of August 28, 2009 and the
original estimate. According to the Office of Management and Budget
(OMB), an estimated $149 billion in Recovery Act funding will be
obligated to states and localities in fiscal year 2009.
Figure 1: Projected versus Actual Federal Outlays to States and
Localities under the Recovery Act:
[Refer to PDF for image: vertical bar graph]
Fiscal year: 2009;
Projected outlay: $48.9 billion;
Actual outlay: $44.8 billion (as of August 28, 2009).
Fiscal year: 2010;
Projected outlay: $107.7 billion.
Fiscal year: 2011;
Projected outlay: $63.4 billion.
Fiscal year: 2012;
Projected outlay: $23.3 billion.
Fiscal year: 2013;
Projected outlay: $14.4 billion.
Fiscal year: 2014;
Projected outlay: $9.1 billion.
Fiscal year: 2015;
Projected outlay: $5.7 billion.
Fiscal year: 2016;
Projected outlay: $2.5 billion.
Source: GAO analysis of CBO, Federal Funds Information for States, and
Recovery.gov data.
[End of figure]
Our work for our July bimonthly report focused on nine federal
programs, selected primarily because they have begun disbursing funds
to states and include programs with significant amounts of Recovery Act
funds, programs receiving significant increases in funding, and new
programs. Recovery Act funding of some of these programs is intended
for further disbursement to localities. Together, these nine programs
are estimated to account for approximately 87 percent of federal
Recovery Act outlays to state and localities in fiscal year 2009.
Figure 2 shows the distribution by program of anticipated federal
Recovery Act spending in fiscal year 2009 to states and localities.
Figure 2: Programs in July Review, Estimated Federal Recovery Act
Outlays to States and Localities in Fiscal Year 2009 as a Share of
Total:
[Refer to PDF for image: illustration]
Medicaid: 63%;
State Fiscal Stabilization Fund: 13%;
Highways: 6%;
Other Selected programs: 5%:
* IDEA, Parts B and C, 1%;
* WIA Youth Programs, 1%;
* ESEA, Title i, Part A: 1%;
* Less than 1%:
- Byrne Grants;
- Weatherization Assistance Program;
- Public Housing Capital Fund;
Other programs not in study: 13%.
Source: GAO analysis of data from CBO and Federal Fund Information for
States.
[End of figure]
States and Localities Are Using Recovery Act Funds for Purposes of the
Act and to Help Address Fiscal Stresses:
Increased FMAP Has Helped States Finance Their Growing Medicaid
Programs, but Concerns Remain about Compliance with Recovery Act
Provisions:
The Recovery Act provides eligible states with an increased FMAP for 27
months between October 1, 2008, and December 31, 2010.[Footnote 10] On
February 25, 2009, CMS made increased FMAP grant awards to states, and
states may retroactively claim reimbursement for expenditures that
occurred prior to the effective date of the Recovery Act.
For the third quarter of fiscal year 2009, the increases in FMAP for
the 16 states and the District of Columbia compared with the original
fiscal year 2009 levels are estimated to range from 6.2 percentage
points in Iowa to 12.24 percentage points in Florida, with the FMAP
increase averaging just over 10 percentage points. When compared with
the first two quarters of fiscal year 2009, the FMAP in the third
quarter of fiscal year 2009 increased in 12 of the 16 states and the
District.[Footnote 11]
From October 2007 to May 2009, overall Medicaid enrollment in the 16
states and the District increased by 7 percent.[Footnote 12] In
addition, each of the states and the District experienced an enrollment
increase during this period, with the highest number of programs
experiencing an increase of 5 percent to 10 percent. However, the
percentage increase in enrollment varied widely ranging from just under
3 percent in California to nearly 20 percent in Colorado.
Since our July report and with regard to the states' receipt of the
increased FMAP, all 16 states and the District had drawn down increased
FMAP grant awards of just over $19.6 billion for the period of October
1, 2008 through September 4, 2009, which amounted to almost 84 percent
of funds available. In addition, except for the initial weeks that
increased FMAP funds were available, the weekly rate at which the
sample states and the District have drawn down these funds has remained
relatively constant.
States reported that they are using or are planning to use the funds
that have become freed up as a result of increased FMAP for a variety
of purposes. Most commonly, states reported that they are using or
planning to use freed-up funds to cover their increased Medicaid
caseload, to maintain current benefits and eligibility levels, and to
help finance their respective state budgets. Several states noted that
given the poor economic climate in their respective states, these funds
were critical in their efforts to maintain Medicaid coverage at current
levels.
While officials from several states spoke positively about CMS's
guidance related to FMAP requirements, over half of the states and the
District reported they wanted CMS to provide additional guidance
regarding how they report monthly on increased FMAP spending and
whether certain programmatic changes would affect their eligibility for
funds. For example, Medicaid officials from several states told us they
were hesitant to implement minor programmatic changes, such as changes
to prior authorization requirements, pregnancy verifications, or
ongoing rate changes, out of concern that doing so would jeopardize
their eligibility for increased FMAP. In addition, at least three
states raised concerns that glitches related to new or updated
information systems used to generate provider payments could affect
their eligibility for these funds.
Due to the variability of state operations, funding processes, and
political structures, CMS has worked with states on a case-by-case
basis to discuss and resolve issues that arise. Specifically,
communications between CMS and several states indicate efforts to
clarify issues related to the contributions to the state share of
Medicaid spending by political subdivisions or to rainy-day funds.
Since we issued our July report, on July 30, 2009, CMS published new
guidance for states regarding the prompt payment requirement. The
guidance describes the method states should use to calculate days
during a quarter that states have either met or not met the prompt
payment requirement in the Medicaid statute; and how a state could
obtain a waiver from the requirement. More recently, CMS published new
guidance clarifying the maintenance of eligibility requirements under
the Recovery Act, which includes a discussion of programmatic changes
that could affect states' eligibility for the increased FMAP.[Footnote
13]
States Are Using Highway Infrastructure Funds Mainly for Pavement
Improvements and Are Generally Complying with Recovery Act
Requirements:
The Recovery Act provides funding to the states for restoration,
repair, and construction of highways and other eligible surface
transportation projects. The act requires that 30 percent of these
funds be suballocated, primarily based on population, for metropolitan,
regional, and local use.[Footnote 14] In March 2009, $26.7 billion was
apportioned to all 50 states and the District of Columbia (District)
for highway infrastructure and other eligible projects. More recently,
as of September 1, 2009, $18 billion of the funds had been obligated
[Footnote 15] for almost 7,000 projects nationwide, and approximately
$11 billion had been obligated for almost 3,800 projects in the 16
states and the District that are the focus of GAO's review.
Almost half of Recovery Act highway obligations nationwide have been
for pavement improvements. Specifically, $8.7 billion of the $ 18
billion obligated nationwide is being used for projects such as
reconstructing or rehabilitating deteriorated roads. Many state
officials told us they selected a large percentage of resurfacing and
other pavement improvement projects because they did not require
extensive environmental clearances, were quick to design, could be
quickly obligated and bid, could employ people quickly, and could be
completed within 3 years. In addition, $3 billion, or about 16 percent
of Recovery Act funds nationally, has been obligated for pavement-
widening projects and around 10 percent has been obligated for the
replacement, improvement or rehabilitation of bridges.[Footnote 16]
As of September 1, 2009, $1.4 billion had been reimbursed nationwide by
the Federal Highway Administration (FHWA) and $604 million had been
reimbursed in the 16 states and the District. States are just beginning
to get projects awarded so that contractors can begin work, and U.S.
Department of Transportation (DOT) officials told us that although
funding has been obligated for almost 7,000 projects, it may be months
before states can request reimbursement. Once contractors mobilize and
begin work, states make payments to these contractors for completed
work, and may request reimbursement from FHWA. FHWA told us that once
funds are obligated for a project, it may take 2 or more months for a
state to bid and award the work to a contractor and have work begin.
According to state officials, because an increasing number of
contractors are looking for work, bids for Recovery Act contracts have
come in under estimates. State officials told us that bids for the
first Recovery Act contracts were ranging from around 5 percent to 30
percent below the estimated cost. Several state officials told us they
expect this trend to continue until the economy substantially improves
and contractors begin taking on enough other work.
Funds appropriated for highway infrastructure spending must be used as
required by the Recovery Act. States are required to do the following:
* Ensure that 50 percent of apportioned Recovery Act funds are
obligated within 120 days of apportionment (before June 30, 2009) and
that the remaining apportioned funds are obligated within 1 year. The
50 percent rule applies only to funds apportioned to the state and not
to the 30 percent of funds required by the Recovery Act to be
suballocated, primarily based on population, for metropolitan,
regional, and local use. The Secretary of Transportation is to withdraw
and redistribute to other states any amount that is not obligated
within these time frames.[Footnote 17]
* Give priority to projects that can be completed within 3 years and to
projects located in economically distressed areas. These areas are
defined by the Public Works and Economic Development Act of 1965, as
amended.[Footnote 18] According to the act, to qualify as economically
distressed, an area must have (1) a per capita income that is 80
percent or less than the national average or (2) an unemployment rate
that is, for the most recent 24-month period for which data are
available, at least 1 percent greater than the national average.
[Footnote 19] For areas that do not meet one of these two criteria, the
Secretary of Commerce has the authority to determine that an area has
experienced or is about to experience a "special need" arising from
actual or threatened severe unemployment or economic adjustment
problems.
* Certify that the state will maintain the level of spending for the
types of transportation projects funded by the Recovery Act that it
planned to spend the day the Recovery Act was enacted. As part of this
certification, the governor of each state is required to identify the
amount of funds the state plans to expend from state sources from
February 17, 2009, through September 30, 2010.[Footnote 20]
All states have met the first Recovery Act requirement that 50 percent
of their apportioned funds are obligated within 120 days. Of the $18.7
billion nationally that is subject to this provision, 75 percent was
obligated as of September 1, 2009.
The second Recovery Act requirement is to give priority to projects
that can be completed within 3 years and to projects located in
economically distressed areas. While officials from almost all of the
states we reviewed said that they considered project readiness,
including the 3-year completion requirement, when making project
selections, there was substantial variation in the extent to which
states prioritized projects in economically distressed areas and how
they identified these areas. Many states based their project selections
on other factors and only later identified whether these projects were
in economically distressed areas. We reported in July that DOT and FHWA
had not provided clear guidance--while officials emphasized the
importance of giving priority to these areas, it did not define what
giving priority meant, and thus did not ensure that the act's priority
provisions would be consistently applied. We also found instances of
states developing their own eligibility requirements for economically
distressed areas using data or criteria not specified in the Public
Works and Economic Development Act. For example, one state identified
these areas based in part on home foreclosure rates--data not specified
in the Public Works Act. In each of the cases we identified, the states
informed us that FHWA approved the state's use of alternative criteria.
However, FHWA did not consult with or seek the approval of the
Department of Commerce, and it was not clear under what authority FHWA
approved these criteria. As a result we recommended that the Secretary
of Transportation, in consultation with the Secretary of Commerce,
develop (1) clear guidance on identifying and giving priority to
economically distressed areas, and (2) more consistent procedures for
FHWA to use in reviewing and approving states' criteria for designating
distressed areas.
In response to the recommendation in our July report, FHWA, in
consultation with the Department of Commerce, developed guidance that
addresses our recommendation. In particular, FHWA's August 2009
guidance directs states to give priority to projects that are located
in an economically distressed area and can be completed within the 3-
year timeframe over other projects. In the guidance, FHWA also directs
states to maintain information as to how they identified, vetted,
examined, and selected projects located in economically distressed
areas. In addition, FHWA's guidance sets out criteria that states may
use to identify economically distressed areas based on "special need."
The criteria aligns closely with criteria used by the Department of
Commerce's Economic Development Administration (EDA) in designating
special needs areas in its own grant programs, including factors such
as actual or threatened business closures (including job loss
thresholds), military base closures, and natural disasters or
emergencies. According to EDA, while the agency traditionally approves
special needs designations on a case-by-case basis for its own grant
program, it does not have the resources to do so for the purpose of
Recovery Act highway funding.[Footnote 21] Rather, in supplemental
guidance issued August 24, 2009, FHWA required states to document their
reliance on "special need" criteria and provide the documentation to
FHWA Division Offices, thereby making the designation of new "special
need" areas for the for Recovery Act highway funding "self executing"
by the states, meaning the states will apply the criteria laid out in
the guidance to identify these areas. We plan to continue to monitor
FHWA's and the states' implementation of the economically distressed
area requirement, including the states' application of the special
needs criteria, in our future reviews.
Finally, the states are required to certify that they will maintain the
level of state effort for programs covered by the Recovery Act. With
one exception, the states have completed these certifications, but they
face challenges. Maintaining a state's level of effort can be
particularly important in the highway program. We have found that the
preponderance of evidence suggests that increasing federal highway
funds influences states and localities to substitute federal funds for
funds they otherwise would have spent on highways.[Footnote 22] As we
previously reported, substitution makes it difficult to target an
economic stimulus package so that it results in a dollar-for-dollar
increase in infrastructure investment.[Footnote 23]
Most states revised the initial certifications they submitted to DOT.
As we reported in April, many states submitted explanatory
certifications--such as stating that the certification was based on the
"best information available at the time"--or conditional
certifications, meaning that the certification was subject to
conditions or assumptions, future legislative action, future revenues,
or other conditions. On April 22, 2009, the Secretary of Transportation
sent a letter to each of the nation's governors and provided additional
guidance, including that conditional and explanatory certifications
were not permitted, and gave states the option of amending their
certifications by May 22. All states and the District have submitted
their certifications. According to DOT officials, the department has
concluded that the form of each certification is consistent with the
additional guidance. While DOT has concluded that the form of the
revised certifications is consistent with the additional guidance, it
is evaluating the states' method of calculating the amounts they
planned to expend for the covered programs and the reasonableness of
these numbers.
States face drastic fiscal challenges, and most states are estimating
that their fiscal year 2009 and 2010 revenue collections will be well
below estimates. In the face of these challenges, some states told us
that meeting the maintenance-of-effort requirements over time poses
significant challenges. For example, federal and state transportation
officials in Illinois told us that to meet its maintenance-of-effort
requirements in the face of lower-than-expected fuel tax receipts, the
state would have to use general fund or other revenues to cover any
shortfall in the level of effort stated in its certification.
Mississippi transportation officials are concerned about the
possibility of statewide, across-the-board spending cuts in 2010.
According to the Mississippi transportation department's budget
director, the agency will try to absorb any budget reductions in 2010
by reducing administrative expenses to maintain the state's level of
effort.
Most States We Visited Have Received State Fiscal Stabilization Funds
and Have Planned to Allocate Most Education Stabilization Funds to
LEAs:
The Recovery Act created a State Fiscal Stabilization Fund (SFSF) in
part to help state and local governments stabilize their budgets by
minimizing budgetary cuts in education and other essential government
services, such as public safety.[Footnote 24] Beginning in March 2009,
the Department of Education issued a series of fact sheets, letters,
and other guidance to states on the SFSF. Specifically, a March fact
sheet, the Secretary's April letter to Governors, and program guidance
issued in April and May mention that the purposes of the SFSF include
helping stabilize state and local budgets, avoiding reductions in
education and other essential services, and ensuring LEAs and public
IHEs have resources to "avert cuts and retain teachers and professors."
The documents also link educational progress to economic recovery and
growth and identify four principles to guide the distribution and use
of Recovery Act funds: (1) spend funds quickly to retain and create
jobs; (2) improve student achievement through school improvement and
reform; (3) ensure transparency, public reporting, and accountability;
and (4) invest one-time Recovery Act funds thoughtfully to avoid
unsustainable continuing commitments after the funding expires, known
as the "funding cliff."
After meeting assurances to maintain state support for education at
least at fiscal year 2006 levels, states are required to use the
education stabilization fund to restore state support to the greater of
fiscal year 2008 or 2009 levels for elementary and secondary education,
public IHEs, and, if applicable, early childhood education programs.
States must distribute these funds to school districts using the
primary state education formula but maintain discretion in how funds
are allocated to public IHEs. If, after restoring state support for
education, additional funds remain, the state must allocate those funds
to school districts according to the Elementary and Secondary Education
Act of 1965 (ESEA), Title I, Part A funding formula. On the other hand,
if a state's education stabilization fund allocation is insufficient to
restore state support for education, then a state must allocate funds
in proportion to the relative shortfall in state support to public
school districts and public IHEs. Education stabilization funds must be
allocated to school districts and public IHEs and cannot be retained at
the state level.
Once education stabilization funds are awarded to school districts and
public IHEs, they have considerable flexibility over how they use those
funds. School districts are allowed to use education stabilization
funds for any allowable purpose under ESEA, the Individuals with
Disabilities Education Act (IDEA), the Adult Education and Family
Literacy Act, or the Carl D. Perkins Career and Technical Education Act
of 2006 (Perkins Act), subject to some prohibitions on using funds for,
among other things, sports facilities and vehicles. In particular,
Education's guidance states that because allowable uses under the
Impact Aid provisions of ESEA are broad, school districts have
discretion to use education stabilization funds for a broad range of
things, such as salaries of teachers, administrators, and support
staff, and purchases of textbooks, computers, and other equipment. The
Recovery Act allows public IHEs to use education stabilization funds in
such a way as to mitigate the need to raise tuition and fees, as well
as for the modernization, renovation, and repair of facilities, subject
to certain limitations. However, the Recovery Act prohibits public IHEs
from using education stabilization funds for such things as increasing
endowments; modernizing, renovating, or repairing sports facilities; or
maintaining equipment. Education's SFSF guidance expressly prohibits
states from placing restrictions on LEAs' use of education
stabilization funds, beyond those in the law, but allows states some
discretion in placing limits on how IHEs may use these funds.
The SFSF provides states and school districts with additional
flexibility, subject to certain conditions, to help them address fiscal
challenges. For example, the Secretary of Education is granted
authority to permit waivers of state maintenance-of-effort (MOE)
requirements if a state certified that state education spending will
not decrease as a percentage of total state revenues. Education issued
guidance on the MOE requirement, including the waiver provision, on May
1, 2009. Also, the Secretary may permit a state or school district to
treat education stabilization funds as nonfederal funds for the purpose
of meeting MOE requirements for any program administered by Education,
subject to certain conditions.
States have broad discretion over how the $8.8 billion in the SFSF
government services fund are used. The Recovery Act provides that these
funds must be used for public safety and other government services and
that these services may include assistance for education, as well as
modernization, renovation, and repairs of public schools or IHEs.
On April 1, 2009, Education made at least 67 percent of each state's
SFSF funds[Footnote 25] available, subject to the receipt of an
application containing state assurances, information on state levels of
support for education and estimates of restoration amounts, and
baseline data demonstrating state status on each of the four education
reform assurances. If a state could not certify that it would meet the
MOE requirement, Education required it to certify that it will meet
requirements for receiving a waiver--that is, that education spending
would not decrease relative to total state revenues. In determining
state level of support for elementary and secondary education,
Education required states to use their primary formula for distributing
funds to school districts but also allowed states some flexibility in
broadening this definition. For IHEs, states have some discretion in
how they establish the state level of support, with the provision that
they cannot include support for capital projects, research and
development, or amounts paid in tuition and fees by students. In order
to meet statutory requirements for states to establish their current
status regarding each of the four required programmatic assurances,
Education provided each state with the option of using baseline data
Education had identified or providing another source of baseline data.
Some of the data provided by Education was derived from self-reported
data submitted annually by the states to Education as part of their
Consolidated State Performance Reports (CSPR), but Education also
relied on data from third parties, including the Data Quality Campaign
(DQC), the National Center for Educational Achievement (NCEA), and
Achieve.[Footnote 26]
Education has reviewed applications as they arrive for completeness and
has awarded states their funds once it determined all assurances and
required information had been submitted. Education set the application
deadline for July 1, 2009. On June 24, 2009, Education issued guidance
to states informing them they must amend their applications if there
are changes to the reported levels of state support that were used to
determine maintenance of effort or to calculate restoration amounts.
As an update to our July report, as of September 1, 2009, the District
and 15 of the states covered by our review had received approval from
Education for their initial SFSF funding applications. Pennsylvania had
submitted an application to Education but it had not yet been approved.
As of August 28, 2009, Education had made $21 billion in SFSF grants
for Education available to the 15 states and the District. As of August
28, 2009, 14 of these states had drawn down SFSF Recovery Act funds. In
total, over $7.7 billion, or about 36 percent of available funds had
been drawn down by these states as of August 28, 2009.
Three of the selected states--Florida, Massachusetts, and New Jersey--
said they would not meet the maintenance-of-effort requirements but
would meet the eligibility requirements for a waiver and that they
would apply for a waiver. Most of the states' applications show that
they plan to provide the majority of education stabilization funds to
LEAs, with the remainder of funds going to IHEs. Several states and the
District of Columbia estimated in their application that they would
have funds remaining beyond those that would be used to restore
education spending in fiscal years 2009 and 2010. These funds can be
used to restore education spending in fiscal year 2011, with any amount
left over to be distributed to LEAs.
States have flexibility in how they allocate education stabilization
funds among IHEs but, once they establish their state funding formula,
not in how they allocate the funds among LEAs. Florida and Mississippi
allocated funds among their IHEs, including universities and community
colleges, using formulas based on factors such as enrollment levels.
Other states allocated SFSF funds taking into consideration the budget
conditions of the IHEs.
Regarding LEAs, most states planned to allocate funds based on states'
primary funding formulae. Many states are using a state formula based
on student enrollment weighted by characteristics of students and LEAs.
For example, Colorado's formula accounts for the number of students at
risk while the formula used by the District allocates funds to LEAs
using weights for each student based on the relative cost of educating
students with specific characteristics. For example, an official from
Washington, D.C. Public Schools said a student who is an English
language learner may cost more to educate than a similar student who is
fluent in English.
States may use the government services portion of SFSF for education
but have discretion to use the funds for a variety of purposes.
Officials from Florida, Illinois, New Jersey, and New York reported
that their states plan to use some or most of their government services
funds for educational purposes. Other states are applying the funds to
public safety. For example, according to state officials, California is
using the government services fund for it corrections system, and
Georgia will use the funds for salaries of state troopers and staff of
forensic laboratories and state prisons.
Officials in many school districts told us that SFSF funds would help
offset state budget cuts and would be used to maintain current levels
of education funding. However, many school district officials also
reported that using SFSF funds for education reforms was challenging
given the other more pressing fiscal needs.
Although their plans are generally not finalized, officials in many
school districts we visited reported that their districts are preparing
to use SFSF funds to prevent teacher layoffs, hire new teachers, and
provide professional development programs. Most school districts will
use the funding to help retain jobs that would have been cut without
SFSF funding. For example, Miami Dade officials estimate that the
stabilization funds will help them save nearly two thousand teaching
positions. State and school district officials in eight states we
visited (California, Colorado, Florida, Georgia, Massachusetts,
Michigan, New York, and North Carolina) also reported that SFSF funding
will allow their state to retain positions, including teaching
positions that would have been eliminated without the funding. In the
Richmond County School System in Georgia, officials noted they plan to
retain positions that support its schools, such as teachers,
paraprofessionals, nurses, media specialists and guidance counselors.
Local officials in Mississippi reported that budget-related hiring
freezes had hindered their ability to hire new staff, but because of
SFSF funding, they now plan to hire. In addition, local officials in a
few states told us they plan to use the funding to support teachers.
For example, officials in Waterloo Community and Ottumwa Community
School Districts in Iowa as well as officials from Miami-Dade County in
Florida cited professional development as a potential use of funding to
support teachers.
Although school districts are preventing layoffs and continuing to
provide educational services with the SFSF funding, most did not
indicate they would use these funds to pursue educational reform.
School district officials cited a number of barriers, which include
budget shortfalls, lack of guidance from states, and insufficient
planning time. In addition to retaining and creating jobs, school
districts have considerable flexibility to use these resources over the
next 2 years to advance reforms that could have long-term impact.
However, a few school district officials reported that addressing
reform efforts was not in their capacity when faced with teacher
layoffs and deep budget cuts. In Flint, Michigan, officials reported
that SFSF funds will be used to cope with budget deficits rather than
to advance programs, such as early childhood education or repairing
public school facilities. According to the Superintendent of Flint
Community Schools, the infrastructure in Flint is deteriorating, and no
new school buildings have been built in over 30 years. Flint officials
said they would like to use SFSF funds for renovating buildings and
other programs, but the SFSF funds are needed to maintain current
education programs.
Officials in many school districts we visited reported having
inadequate guidance from their state on using SFSF funding, making
reform efforts more difficult to pursue. School district officials in
most states we visited reported they lacked adequate guidance from
their state to plan and report on the use of SFSF funding. Without
adequate guidance and time for planning, school district officials told
us that preparing for the funds was difficult. At the time of our
visits, several school districts were unaware of their funding amounts,
which, officials in two school districts said, created additional
challenges in planning for the 2009-2010 school year. One charter
school we visited in North Carolina reported that layoffs will be
required unless their state notifies them soon how much SFSF funding
they will receive. State officials in North Carolina, as well as in
several other states, told us they are waiting for the state
legislature to pass the state budget before finalizing SFSF funding
amounts for school districts.
IHEs Plan to Use SFSF Funds for Faculty Salaries and Other Purposes and
Expect the Funds to Save Jobs and Mitigate Tuition Increases:
Although many IHEs had not finalized plans for using SFSF funds, the
most common expected use for the funds at the IHEs we visited was to
pay salaries of IHE faculty and staff.[Footnote 27] Officials at most
of the IHEs we visited told us that, due to budget cuts, their
institutions would have faced difficult reductions in faculty and staff
if they were not receiving SFSF funds. Other IHEs expected to use SFSF
funds in the future to pay salaries of certain employees during the
year.
Several IHEs we visited are considering other uses for SFSF funds.
Officials at the Borough of Manhattan Community College in New York
City want to use some of their SFSF funds to buy energy saving light
bulbs and to make improvements in the college's very limited space such
as, by creating tutoring areas and study lounges. Northwest Mississippi
Community College wants to use some of the funds to increase e-learning
capacity to serve the institution's rapidly increasing number of
students. Several other IHEs plan to use some of the SFSF funds for
student financial aid.
Because many IHEs expect to use SFSF funds to pay salaries of current
employees that they likely would not have been able to pay without the
SFSF funds, IHEs officials said that SFSF funds will save jobs.
Officials at several IHEs noted that this will have a positive impact
on the educational environment such as, by preventing increases in
class size and enabling the institutions to offer the classes that
students need to graduate. In addition to preserving existing jobs,
some IHEs anticipate creating jobs with SFSF funds. Besides saving and
creating jobs at IHEs, officials noted that SFSF monies will have an
indirect impact on jobs in the community. IHE officials also noted that
SFSF funds will indirectly improve employment because some faculty
being paid with the funds will help unemployed workers develop new
skills, including skills in fields, such as health care, that have a
high demand for trained workers. State and IHE officials also believe
that SFSF funds are reducing the size of tuition and fee increases.
Other Selected Programs:
Our report provides additional details on the use of Recovery Act funds
for these three programs in the 16 selected states and the District. In
addition to Medicaid FMAP, Highway Infrastructure Investment, and SFSF,
we also reviewed six other programs receiving Recovery Act funds. These
programs are:
* Title I, Part A of the Elementary and Secondary Education Act of 1965
(ESEA):
* Parts B and C of the Individuals with Disabilities Education Act
(IDEA):
* Workforce Investment Act (WIA) Youth Program:
* Public Housing Capital Fund:
* Edward Byrne Memorial Justice Assistance Grant (JAG) Program:
* Weatherization Assistance Program:
Additional detail regarding the states' and localities' use of funds
for these programs is available in the full report, [hyperlink,
http://www.gao.gov/products/GAO-09-829]. Individual state summaries for
the 16 selected states and the District are accessible through GAO's
recovery page at [hyperlink, http://www.gao.gov/recovery] and in an
electronic supplement, [hyperlink,
http://www.gao.gov/products/GAO-09-830SP].
Recovery Act Funding Helped States Address Budget Challenges:
State revenue continued to decline and states used Recovery Act funding
to reduce some of their planned budget cuts and tax increases to close
current and anticipated budget shortfalls for fiscal years 2009 and
2010.[Footnote 28] Of the 16 states and the District, 15 estimate
fiscal year 2009 general fund revenue collections will be less than in
the previous fiscal year.[Footnote 29] For two of the selected states -
-Iowa and North Carolina--revenues were lower than projected but not
less than the previous fiscal year. As shown in figure 3, data from the
Bureau of Economic Analysis (BEA) also indicate that the rate of state
and local revenue growth has generally declined since the second
quarter of 2005, and the rate of growth has been negative in the fourth
quarter of 2008 and the first quarter of 2009.[Footnote 30]
Figure 3: Year-Over-Year Change in State and Local Government Current
Tax Receipts:
[Refer to PDF for image: line graph]
Year: 2001, Q1;
Percentage change: 4.4.
Year: 2001, Q2;
Percentage change: 4.4.
Year: 2001, Q3;
Percentage change: 0.5.
Year: 2001, Q4;
Percentage change: 0.8.
Year: 2002, Q1;
Percentage change: -1.
Year: 2002, Q2;
Percentage change: -2.3.
Year: 2002, Q3;
Percentage change: 4.5.
Year: 2002, Q4;
Percentage change: 4.7.
Year: 2003, Q1;
Percentage change: 4.3.
Year: 2003, Q2;
Percentage change: 4.4.
Year: 2003, Q3;
Percentage change: 5.8.
Year: 2003, Q4;
Percentage change: 7.2.
Year: 2004, Q1;
Percentage change: 8.6.
Year: 2004, Q2;
Percentage change: 9.2.
Year: 2004, Q3;
Percentage change: 7.4.
Year: 2004, Q4;
Percentage change: 8.3.
Year: 2005, Q1;
Percentage change: 9.8.
Year: 2005, Q2;
Percentage change: 10.5.
Year: 2005, Q3;
Percentage change: 9.4.
Year: 2005, Q4;
Percentage change: 8.6.
Year: 2006, Q1;
Percentage change: 7.9.
Year: 2006, Q2;
Percentage change: 8.
Year: 2006, Q3;
Percentage change: 6.6.
Year: 2006, Q4;
Percentage change: 5.1.
Year: 2007, Q1;
Percentage change: 5.3.
Year: 2007, Q2;
Percentage change: 5.2.
Year: 2007, Q3;
Percentage change: 4.9.
Year: 2007, Q4;
Percentage change: 4.6.
Year: 2008, Q1;
Percentage change: 2.4.
Year: 2008, Q2;
Percentage change: 2.4.
Year: 2008, Q3;
Percentage change: 1.9.
Year: 2008, Q4;
Percentage change: -2.3.
Year: 2000, Q1;
Percentage change: -4.3.
Source: GAO analysis of BEA data.
[End of figure]
Officials in most of the selected states and the District expect these
revenue trends to contribute to budget gaps (estimated revenues less
than estimated disbursements) anticipated for future fiscal years. All
of the 16 states and the District forecasted budget gaps in state
fiscal year 2009-2010 before budget actions were taken.
Consistent with one of the purposes of the act, states' use of Recovery
Act funds to stabilize their budgets helped them minimize and avoid
reductions in services as well as tax increases. States took a number
of actions to balance their budgets in fiscal year 2009-2010, including
staff layoffs, furloughs, and program cuts. The use of Recovery Act
funds affected the size and scope of some states' budgeting decisions,
and many of the selected states reported they would have had to make
further cuts to services and programs without the receipt of Recovery
Act funds. For example, California, Colorado, Georgia, Illinois,
Massachusetts, Michigan, New York, and Pennsylvania budget officials
all stated that current or future budget cuts would have been deeper
without the receipt of Recovery Act funds.
Recovery Act funds helped cushion the impact of states' planned budget
actions but officials also cautioned that current revenue estimates
indicate that additional state actions will be needed to balance future-
year budgets. Future actions to stabilize state budgets will require
continued awareness of the maintenance-of-effort (MOE) requirements for
some federal programs funded by the Recovery Act. For example,
Massachusetts officials expressed concerns regarding MOE requirements
attached to federal programs, including those funded through the
Recovery Act, as future across-the-board spending reductions could pose
challenges for maintaining spending levels in these programs. State
officials said that MOE requirements that require maintaining spending
levels based upon prior-year fixed dollar amounts will pose more of a
challenge than upholding spending levels based upon a percentage of
program spending relative to total state budget expenditures. In
addition, some states also reported accelerating their use of Recovery
Act funds to stabilize deteriorating budgets.
Many states, such as Colorado, Florida, Georgia, Iowa, New Jersey, and
North Carolina, also reported tapping into their reserve or rainy-day
funds in order to balance their budgets. In most cases, the receipt of
Recovery Act funds did not prevent the selected states from tapping
into their reserve funds, but a few states reported that without the
receipt of Recovery Act funds, withdrawals from reserve funds would
have been greater.[Footnote 31] Officials from Georgia stated that
although they have already used reserve funds to balance their fiscal
year 2009 and 2010 budgets, they may use additional reserve funds if,
at the end of fiscal year 2009, revenues are lower than the most recent
projections. In contrast, New York officials stated they were able to
avoid tapping into the state's reserve funds due to the funds made
available as a result of the increased Medicaid FMAP funds provided by
the Recovery Act.
Approaches to Developing Exit Strategies for End of Recovery Act
Funding Influenced by Nature of State Budget Processes:
States' approaches to developing exit strategies for the use of
Recovery Act funds reflect the balanced-budget requirements in place
for all of our selected states and the District. Budget officials
referred to the temporary nature of the funds and fiscal challenges
expected to extend beyond the timing of funds provided by the Recovery
Act. Officials discussed a desire to avoid what they referred to as the
"cliff effect" associated with the dates when Recovery Act funding ends
for various federal programs.
Budget officials in some of the selected states are preparing for the
end of Recovery Act funding by using funds for nonrecurring
expenditures and hiring limited-term positions to avoid creating long-
term liabilities. A few states reported that although they are
developing preliminary plans for the phasing out of Recovery Act funds,
further planning has been delayed until revenue and expenditure
projections are finalized.
States Have Implemented Various Internal Control Programs: However,
Single Audit Guidance and Reporting Does Not Adequately Address
Recovery Act Risk:
Given that Recovery Act funds are to be distributed quickly, effective
internal controls over use of funds are critical to help ensure
effective and efficient use of resources, compliance with laws and
regulations, and in achieving accountability over Recovery Act
programs. Internal controls include management and program policies,
procedures, and guidance that help ensure effective and efficient use
of resources; compliance with laws and regulations; prevention and
detection of fraud, waste, and abuse; and the reliability of financial
reporting. Management is responsible for the design and implementation
of internal controls and the states in our sample have a range of
approaches for implementing their internal controls.
Some states have internal control requirements in their state statutes
and others have undertaken internal control programs as management
initiatives. In our sample, 7 states--California, Colorado, Florida,
Michigan, Mississippi, New York, and North Carolina--have statutory
requirements for internal control programs and activities. An
additional 9 states--Arizona, Georgia, Illinois, Iowa, Massachusetts,
New Jersey, Ohio, Pennsylvania, and Texas--have undertaken various
internal control programs. In addition, the District of Columbia has
taken limited actions related to its internal control program. An
effective internal control program helps manage change in response to
shifting environments and evolving demands and priorities, such as
changes related to implementing the Recovery Act.
Risk assessment and monitoring are key elements of internal controls,
and the states in our sample and the District have undertaken a variety
of actions in these areas.
* Risk assessment involves performing comprehensive reviews and
analyses of program operations to determine if internal and external
risks exist and to evaluate the nature and extent of risks which have
been identified. Approaches to risk analysis can vary across
organizations because of differences in missions and the methodologies
used to qualitatively and quantitatively assign risk levels.
* Monitoring activities include the systemic process of reviewing the
effectiveness of the operation of the internal control system. These
activities are conducted by management, oversight entities, and
internal and external auditors. Monitoring enables stakeholders to
determine whether the internal control system continues to operate
effectively over time. Monitoring also provides information and
feedback to the risk assessment process.
Challenges Exist in Tracking Recovery Act Funds:
States and localities are responsible for tracking and reporting on
Recovery Act funds.[Footnote 32] OMB has issued guidance to the states
and localities that provides for separate identification--"tagging"--
of Recovery Act funds so that specific reports can be created and
transactions can be specifically identified as Recovery Act funds.
[Footnote 33] The flow of federal funds to the states varies by
program, the grantor agencies have varied grants management processes
and grants vary substantially in their types, purposes, and
administrative requirements.[Footnote 34]
Several states and the District of Columbia have created unique codes
for their financial systems in order to tag the Recovery Act funds.
Most state and local program officials told us that they will apply
existing controls and oversight processes that they currently apply to
other program funds to oversee Recovery Act funds.
In addition to being an important accountability mechanism, audit
results can provide valuable information for use in management's risk
assessment and monitoring processes. The single audit report, prepared
to meet the requirements of the Single Audit Act,[Footnote 35] as
amended (Single Audit Act), is a source of information on internal
control and compliance findings and the underlying causes and risks.
The report is prepared in accordance with OMB's implementing guidance
in OMB Circular No. A-133, Audits of States, Local Governments, and Non-
Profit Organizations,[Footnote 36] which provides guidance to auditors
on selecting federal programs for audit and the related internal
control and compliance audit procedures to be performed.
In our April 23, 2009 report, we reported that the guidance and
criteria in OMB Circular No. A-133 do not adequately address the
substantial added risks posed by the new Recovery Act funding. Such
risks may result from (1) new government programs, (2) the sudden
increase in funds or programs that are new to the recipient entity, and
(3) the expectation that some programs and projects will be delivered
faster so as to inject funds into the economy. With some adjustment,
the single audit could be an effective oversight tool for Recovery Act
programs, addressing risks associated with all three of these factors.
Our April 2009 report on the Recovery Act included recommendations that
OMB adjust the current audit process to:
* focus the risk assessment auditors use to select programs to test for
compliance with 2009 federal program requirements on Recovery Act
funding;
* provide for review of the design of internal controls during 2009
over programs to receive Recovery Act funding, before significant
expenditures in 2010; and:
* evaluate options for providing relief related to audit requirements
for low-risk programs to balance new audit responsibilities associated
with the Recovery Act.
Since April, although OMB has taken several steps in response to our
recommendations, these actions do not sufficiently address the risks
leading to our recommendations. To focus auditor risk assessments on
Recovery Act-funded programs and to provide guidance on internal
control reviews for Recovery Act programs, OMB is working within the
framework defined by existing mechanisms--Circular No. A-133 and the
Compliance Supplement. In this context, OMB has made limited
adjustments to its single audit guidance and is planning to issue
additional guidance later this month.
Focusing Auditors' Program Risk Assessments on Programs with Recovery
Act Funding:
On May 26, OMB issued the 2009 edition of the Circular A-133 Compliance
Supplement. The new Compliance Supplement is intended to focus auditor
risk assessment on Recovery Act funding by, among things (1) requiring
that auditors specifically ask auditees about and be alert to
expenditure of funds provided by the Recovery Act, and (2) providing an
appendix that highlights some areas of the Recovery Act impacting
single audits. The appendix adds a requirement that large programs and
program clusters with Recovery Act funding cannot be assessed as low-
risk for the purposes of program selection without clear documentation
of the reasons they are considered low risk. It also calls for
recipients to separately identify expenditures for Recovery Act
programs on the Schedule of Expenditures of Federal Awards.
OMB issued Compliance Supplement Addendum No. 1 on August 6, 2009 to
provide additional guidance for programs (including clusters of
programs with expenditures of Recovery Act funds). This addendum
modifies the 2009 Compliance Supplement by indicating the new Recovery
Act programs and new program clusters, providing new cross-cutting
provisions related to the Recovery Act programs, and adding additional
compliance requirements for existing programs as a result of Recovery
Act funding.
OMB Circular A-133 relies heavily on the amount of federal expenditures
in a program during a fiscal year and whether findings were reported in
the previous period to determine whether detailed compliance testing is
required for that year. Although OMB is using clusters for single audit
selection to make it more likely that Recovery Act programs would be
selected as major programs subject to internal control and compliance
testing, the dollar formulas for determining major programs have not
changed. This approach may not provide sufficient assurance that
smaller, but nonetheless significant, Recovery Act-funded programs
would be selected for audit.
Steps Toward More Timely Reporting on Internal Controls over Recovery
Act-funded Programs:
To provide additional focus on internal control reviews, OMB issued
guidance in early August that emphasizes the importance of prompt
corrective action by management. This guidance also encourages early
communication by auditors to management and those charged with
governance of identified control deficiencies related to Recovery Act
funding that are, or are likely to be, significant deficiencies or
material weaknesses. Such early communication is intended to allow
management to expedite corrective action and mitigate the risk of
improper expenditure of federal awards.
In our July report, we stated that OMB was encouraging communication of
weaknesses to management early in the audit process, but did not add
requirements for auditors to take these steps. This step was
insufficient and did not address our concern that internal controls
over Recovery Act programs should be reviewed before significant
funding is expended. Under the current single audit framework and
reporting timelines, the auditor evaluation of internal control and
related reporting will occur too late--after significant levels of
federal expenditures have already occurred.
OMB is currently vetting a proposed pilot project under which a limited
number of voluntarily participating auditors performing the single
audits for states would communicate in writing internal control
deficiencies noted in the single audit within six months of the 2009
fiscal year-end, rather than the nine months required by the Single
Audit Act. As currently envisioned, an auditor participating in the
pilot would report internal control deficiencies identified in the
course of the single audit to state and federal officials within six
months of the end of the audited entity's fiscal year in order to
achieve more timely accountability for selected Recovery Act-funded
programs. Most states have a June 30 fiscal year-end; consequently most
of the preliminary internal control communications would be due by
December 31, 2009. Participating auditors would be required to focus
audit procedures on Recovery Act-funded programs in accordance with
guidelines prescribed by OMB. OMB would offer to waive Circular A-133's
requirement for risk assessment for smaller programs as an inducement
to participate. OMB is moving ahead with the pilot and plans to
identify the participating auditors and the programs that will be
included by the end of September 2009. GAO believes that, if the pilot
is properly implemented and achieves sufficient coverage of Recovery
Act-funded programs, it may be effective in addressing concerns about
the timeliness of single audit reporting related to internal control
weaknesses in Recovery Act programs. The pilot is, however, still in
its early stages and many surrounding issues are yet to be resolved. It
is important to note that the pilot project is dependent on voluntary
participation, which could impact OMB's ability to achieve sufficient
scope and coverage for the project to meet its objectives.
Providing relief to Balance Expected Increased Workload:
While OMB has noted the increased responsibilities falling on those
responsible for performing single audits, it has not issued any
proposals or plans to address this recommendation to date. A recent
survey conducted by the staff of the National State Auditors'
Association (NSAA) [Footnote 37] highlighted the need for relief to
over-burdened state audit organizations that have experienced staffing
reductions and furloughs.
In addition, states volunteering to participate in OMB's proposed pilot
program will be granted some relief in the workload because the auditor
will not be required to perform risk assessments of smaller federal
programs. Auditors conduct these risk assessments as part of the
planning process to identify which federal programs will be subject to
detailed internal control and compliance testing. We believe that this
step alone will not provide sufficient relief to balance out additional
audit requirements for Recovery Act programs. Without action now audit
coverage of Recovery Act programs will not be sufficient to address
Recovery Act risks and the audit reporting that does occur will be
after significant expenditures have already occurred.
Congress is considering a bill that could provide some financial relief
to auditors lacking the staff capacity necessary to handle the
increased audit responsibilities associated with the Recovery Act. S.
1064 which is currently before this Committee and its companion bill
that was passed by the House, H.R. 2182, would amend the Recovery Act
to provide for enhanced state and local oversight of activities
conducted pursuant to the Act. One key provision of the legislation
would allow state and local governments to set aside 0.5 percent of
Recovery Act funds, in addition to funds already allocated to
administrative expenditures, to conduct planning and oversight. We
support these efforts to provide financial support to auditors to meet
their responsibilities associated with the Recovery Act. This Committee
should be commended for its leadership on this matter.
Single Audit Reporting Will Not Facilitate Timely Reporting of Recovery
Act Program Findings and Risks:
The single audit reporting deadline is too late to provide audit
results in time for the audited entity to take action on deficiencies
noted in Recovery Act programs. The Single Audit Act requires that
recipients submit their Single Audit reports to the federal government
no later than nine months after the end of the period being audited.
[Footnote 38] As a result an audited entity may not receive feedback
needed to correct an identified internal control or compliance weakness
until the latter part of the subsequent fiscal year. For example,
states that have a fiscal year end of June 30th have a reporting
deadline of March 31st, which leaves program management only 3 months
to take corrective action on any audit findings before the end of the
subsequent fiscal year. For Recovery Act programs, significant
expenditure of funds could occur during the period prior to the audit
report being issued.
The timing problem is exacerbated by the extensions to the 9 month
deadline that are routinely granted by the awarding agencies,
consistent with OMB guidance. For example, 13 of the 17 states in our
sample have a June 30 fiscal year end and 7 of these 13 states
requested and received extensions for their March 31, 2009 submission
requirement of their fiscal year 2008 reporting package.[Footnote 39]
The Health and Human Services Office of Inspector General (HHS OIG) is
the cognizant agency for most of the states, including all of the
states selected for review under the Recovery Act. According to a HHS
OIG official, beginning in May 2009 HHS IG adopted a policy of no
longer approving requests for extensions of the due dates for single
audit reporting package submissions. OMB officials have stated that
they plan to eliminate allowing extensions of the reporting package,
but have not issued any official guidance or memorandum to the
agencies, OIGs, or federal award recipients.
In order to realize the single audit's full potential as an effective
Recovery Act oversight tool, OMB needs to take additional action to
focus auditors' efforts on areas that can provide the most efficient,
and most timely, results. As federal funding of Recovery Act programs
accelerates in the next few months, we are particularly concerned that
the Single Audit process may not provide the timely accountability and
focus needed to assist recipients in making necessary adjustments to
internal controls so that they achieve sufficient strength and capacity
to provide assurances that the money is being spent as effectively as
possible to meet program objectives.
As discussed in the previous section, OMB is currently vetting a
proposed pilot project under which a limited number of voluntarily
participating auditors performing the single audits for states would
communicate in writing internal control deficiencies noted in the
single audit within six months of the 2009 fiscal year-end, rather than
the nine months required by the Single Audit Act. If the pilot is
properly implemented and achieves sufficient coverage of Recovery Act-
funded programs, it may be effective in addressing concerns about the
timeliness of single audit reporting related to internal control
weaknesses in Recovery Act programs.
GAO's Review of Allegations of Fraud, Waste, and Abuse Submitted to
FraudNet:
As of September 2, 2009, GAO's FraudNet has received 80 Recovery Act-
related allegations that were considered credible enough to warrant
further review. Our Forensic Audits and Special Investigations unit is
pursuing 8 of these allegations, which include wasteful and improper
spending, conflicts of interest, supplanting of Recovery Act funds, and
contract fraud. Of the remaining 72 allegations, 12 are pending further
review by GAO criminal investigators and 38 were found to not address
waste, fraud, or abuse; lacked specificity; were not Recovery Act-
related; or reflected only a disagreement with how Recovery Act funds
are being disbursed. We consider these allegations to be resolved and
no further investigation is necessary. An additional 22 allegations
were referred to the appropriate agency Inspectors General for further
review and investigation. We will continue to monitor these referrals
and will inform the Committee when outstanding allegations are
resolved.
Efforts to Assess the Impact of Recovery Act Spending:
As recipients of Recovery Act funds and as partners with the federal
government in achieving Recovery Act goals, states and local units of
government are expected to invest Recovery Act funds with a high level
of transparency and to be held accountable for results under the
Recovery Act. Under the Recovery Act, direct recipients of the funds,
including states and localities, are expected to report quarterly on a
number of measures including the use of funds and an estimate of the
number of jobs created and the number of jobs retained. These measures
are part of the recipient reports required under section 1512(c) of the
Recovery Act and will be submitted by recipients starting in October
2009. OMB guidance described recipient reporting requirements under the
Recovery Act's section 1512 as the minimum performance measures that
must be collected, leaving it to federal agencies to determine
additional information that would be required for oversight of
individual programs funded by the Recovery Act, such as the Department
of Energy Weatherization Assistance Program and the Department of
Justice Edward Byrne Memorial Justice Assistance Grant (JAG) Program.
In general, states are adapting information systems, issuing guidance,
and beginning to collect data on jobs created and jobs retained, but
questions remained about how to count jobs and measure performance
under Recovery Act-funded programs. Over the last several months OMB
met regularly with state and local officials, federal agencies, and
others to gather input on the reporting requirements and implementation
guidance. OMB also worked with the Recovery Accountability and
Transparency Board to design a nationwide data collection system that
will reduce information reporting burdens on recipients by simplifying
reporting instructions and providing a user-friendly mechanism for
submitting required data. OMB will be testing this system in July.
In response to requests for more guidance on the recipient reporting
process and required data, OMB, after soliciting responses from an
array of stakeholders, issued additional implementing guidance for
recipient reporting on June 22, 2009.[Footnote 40] In addition to other
areas, the new OMB guidance clarifies that recipients of Recovery Act
funds are required to report only on jobs directly created or retained
by Recovery Act-funded projects, activities, and contracts. Recipients
are not expected to report on the employment impact on materials
suppliers ("indirect" jobs) or on the local community ("induced" jobs).
The OMB guidance also provides additional instruction on estimating the
number of jobs created and retained by Recovery Act funding. OMB's
guidance on the implementation of recipient reporting should be helpful
in addressing answers to many of the questions and concerns raised by
state and local program officials. However, federal agencies may need
to do a better job of communicating the OMB guidance in a timely manner
to their state counterparts and, as appropriate, issue clarifying
guidance on required performance measurement.
OMB's guidance for reporting on job creation aims to shed light on the
immediate uses of Recovery Act funding; however, reports from
recipients of Recovery Act funds must be interpreted with care. For
example, accurate, consistent reports will only reflect a portion of
the likely impact of the Recovery Act on national employment, since
Recovery Act resources are also made available through tax cuts and
benefit payments.[Footnote 41] OMB noted that a broader view of the
overall employment impact of the Recovery Act will be covered in the
estimates generated by the Council of Economic Advisers (CEA) using a
macro-economic approach. According to CEA, it will consider the direct
jobs created and retained reported by recipients to supplement its
analysis.[Footnote 42]
Concluding Observations and Recommendations:
Since enactment of the Recovery Act in February 2009, OMB has issued
three sets of guidance--on February 18, April 3 and, most recently,
June 22, 2009[Footnote 43]--to, among other things, assist recipients
of federal Recovery Act funds in complying with reporting requirements.
OMB has reached out to Congress, federal, state, and local government
officials, grant and contract recipients, and the accountability
community to get a broad perspective on what is needed to meet the high
expectations set by Congress and the administration. Further, according
to OMB's June guidance they have worked with the Recovery
Accountability and Transparency Board to deploy a nationwide data
collection system at [hyperlink, http://www.federalreporting.gov].
As work proceeds on the implementation of the Recovery Act, OMB and the
cognizant federal agencies have opportunities to build on the early
efforts by continuing to address several important issues.
These issues can be placed broadly into three categories, which have
been revised from our last report to better reflect evolving events
since April: (1) accountability and transparency requirements, (2)
reporting on impact, and (3) communications and guidance.
Accountability and Transparency Requirements:
Recipients of Recovery Act funding face a number of implementation
challenges in this area. The act includes new programs and significant
increases in funds out of normal cycles and processes. There is an
expectation that many programs and projects will be delivered faster so
as to inject funds into the economy, and the administration has
indicated its intent to assure transparency and accountability over the
use of Recovery Act funds. Issues regarding the Single Audit process
and administrative support and oversight are important.
Single Audit: The Single Audit process needs adjustments to provide
appropriate risk-based focus and the necessary level of accountability
over Recovery Act programs in a timely manner.
In our April 2009 report, we reported that the guidance and criteria in
OMB Circular No. A-133 do not adequately address the substantial added
risks posed by the new Recovery Act funding. Such risks may result from
(1) new government programs, (2) the sudden increase in funds or
programs that are new to the recipient entity, and (3) the expectation
that some programs and projects will be delivered faster so as to
inject funds into the economy. With some adjustment, the Single Audit
could be an effective oversight tool for Recovery Act programs because
it can address risks associated with all three of these factors.
April report recommendations: Our April report included recommendations
that OMB adjust the current audit process to focus the risk assessment
auditors use to select programs to test for compliance with 2009
federal program requirements on Recovery Act funding; provide for
review of the design of internal controls during 2009 over programs to
receive Recovery Act funding, before significant expenditures in 2010;
and evaluate options for providing relief related to audit requirements
for low-risk programs to balance new audit responsibilities associated
with the Recovery Act.
Status of April report recommendations: OMB has taken some actions and
has other planned actions to help focus the program selection risk
assessment on Recovery Act programs and to provide guidance on
auditors' reviews of internal controls for those programs. However, we
remain concerned that OMB's planned actions would not achieve the level
of accountability needed to effectively respond to Recovery Act risks
and does not provide for timely reporting on internal controls for
Recovery Act programs. Therefore, in our July report, we re-emphasized
our previous recommendations in this area.
To help auditors with single audit responsibilities meet the increased
demands imposed on them by Recovery Act funding, we recommend that the
Director of OMB take the following four actions:
* Consider developing requirements for reporting on internal controls
during 2009 before significant Recovery Act expenditures occur as well
as ongoing reporting after the initial report.
* Provide more focus on Recovery Act programs through the Single Audit
to help ensure that smaller programs with high risk have audit coverage
in the area of internal controls and compliance.
* Evaluate options for providing relief related to audit requirements
for low-risk programs to balance new audit responsibilities associated
with the Recovery Act.
* To the extent that options for auditor relief are not provided,
develop mechanisms to help fund the additional Single Audit costs and
efforts for auditing Recovery Act programs.
Status of Recommendations: OMB is currently vetting a proposed pilot
project under which a limited number of voluntarily participating
auditors performing the single audits for states would communicate in
writing internal control deficiencies noted in the single audit within
six months of the 2009 fiscal year-end, rather than the nine months
required by the Single Audit Act. If the pilot is properly implemented
and achieves sufficient coverage of Recovery Act-funded programs, it
may be effective in addressing concerns about the timeliness of single
audit reporting related to internal control weaknesses in Recovery Act
programs. Because the sufficiency of scope and coverage from this pilot
program is uncertain, we are making an additional recommendation to
OMB.
September recommendation: In order to achieve the objective of more
timely reporting of internal control deficiencies over Recovery Act
programs, the Director of OMB should take steps to achieve sufficient
participation and coverage in the single audit pilot program that
provides for early written communication of internal control
deficiencies.
Matter for Congressional Consideration:
Because a significant portion of Recovery Act expenditures will be in
the form of federal grants and awards, the Single Audit process could
be used as a key accountability tool over these funds. However, the
Single Audit Act, enacted in 1984 and most recently amended in 1996,
did not contemplate the risks associated with the current environment
where large amounts of federal awards are being expended quickly
through new programs, greatly expanded programs, and existing programs.
The current Single Audit process is largely driven by the amount of
federal funds expended by a recipient in order to determine which
federal programs are subject to compliance and internal control
testing. Not only does this model potentially miss smaller programs
with high risk, but it also relies on audit reporting 9 months after
the end of a grantee's fiscal year--far too late to preemptively
correct deficiencies and weaknesses before significant expenditures of
federal funds. Congress is considering a legislative proposal in this
area and could address the following issues:
* To the extent that appropriate adjustments to the Single Audit
process are not accomplished under the current Single Audit structure,
Congress should consider amending the Single Audit Act or enacting new
legislation that provides for more timely internal control reporting,
as well as audit coverage for smaller Recovery Act programs with high
risk.
* To the extent that additional audit coverage is needed to achieve
accountability over Recovery Act programs, Congress should consider
mechanisms to provide additional resources to support those charged
with carrying out the Single Audit act and related audits.
Administrative Support and Oversight:
States have been concerned about the burden imposed by new
requirements, increased accounting and management workloads, and
strains on information systems and staff capacity at a time when they
are under severe budgetary stress.
April report recommendation: In our April report, we recommended that
the director of OMB clarify what Recovery Act funds can be used to
support state efforts to ensure accountability and oversight,
especially in light of enhanced oversight and coordination
requirements.
* Status of April report recommendation: On May 11, 2009, OMB released
a memorandum[Footnote 44] clarifying how state grantees could recover
administrative costs of Recovery Act activities.
Reporting on Impact:
Under the Recovery Act, responsibility for reporting on jobs created
and retained falls to nonfederal recipients of Recovery Act funds. As
such, states and localities have a critical role in identifying the
degree to which Recovery Act goals are achieved.
Performance reporting is broader than the jobs reporting required under
section 1512 of the Recovery Act. OMB guidance requires that agencies
collect and report performance information consistent with the agency's
program performance measures. As described earlier in this report, some
agencies have imposed additional performance measures on projects or
activities funded through the Recovery Act.
April report recommendation: In our April report, we recommended that
given questions raised by many state and local officials about how best
to determine both direct and indirect jobs created and retained under
the Recovery Act, the Director of OMB should continue OMB's efforts to
identify appropriate methodologies that can be used to (1) assess jobs
created and retained from projects funded by the Recovery Act; (2)
determine the impact of Recovery Act spending when job creation is
indirect; (3) identify those types of programs, projects, or activities
that in the past have demonstrated substantial job creation or are
considered likely to do so in the future and consider whether the
approaches taken to estimate jobs created and jobs retained in these
cases can be replicated or adapted to other programs.
Status of April report recommendation: OMB has been meeting on a
regular basis with state and local officials, federal agencies, and
others to gather input on reporting requirements and implementation
guidance and has worked with the Recovery Accountability and
Transparency Board on a nationwide data collection system. On June 22,
OMB issued additional implementation guidance on recipient reporting of
jobs created and retained. This guidance is responsive to much of what
we said in our April report. It states that there are two different
types of jobs reports under the Recovery Act and clarifies that
recipient reports are to cover only direct jobs created or retained.
"Indirect" jobs (employment impact on suppliers) and "induced" jobs
(employment impact on communities) will be covered in Council of
Economic Advisers (CEA) quarterly reports on employment, economic
growth, and other key economic indicators. Consistent with the
statutory language of the act, OMB's guidance states that these
recipient reporting requirements apply to recipients who receive
funding through discretionary appropriations, not to those receiving
funds through either entitlement or tax programs or to individuals. It
clarifies that the prime recipient and not the subrecipient is
responsible for reporting section 1512 information on jobs created or
retained. The June 2009 guidance also provides detailed instructions on
how to calculate and report jobs as full-time equivalents (FTE). It
also describes in detail the data model and reporting system to be used
for the required recipient reporting on jobs.
The guidance provided for reporting job creation aims to shed light on
the immediate uses of Recovery Act funding and is reasonable in that
context. It will be important, however, to interpret the recipient
reports with care. As noted in the guidance, these reports are only one
of the two distinct types of reports seeking to describe the jobs
impact of the Recovery Act. CEA's quarterly reports will cover the
impact on employment, economic growth, and other key economic
indicators. Further, the recipient reports will not reflect the impact
of resources made available through tax provisions or entitlement
programs.[Footnote 45]
Recipients are required to report no later than 10 days after the end
of the calendar quarter. The first of these reports is due on October
10, 2009. After prime recipients and federal agencies perform data
quality checks, detailed recipient reports are to be made available to
the public no later than 30 days after the end of the quarter. Initial
summary statistics will be available on [hyperlink,
http://www.recovery.gov]. The guidance explicitly does not mandate a
specific methodology for conducting quality reviews. Rather, federal
agencies are directed to coordinate the application of definitions of
material omission and significant reporting error to "ensure
consistency" in the conduct of data quality reviews. Although
recipients and federal agency reviewers are required to perform data
quality checks, none are required to certify or approve data for
publication. It is unclear how any issues identified under data quality
reviews would be resolved and how frequently data quality problems
would have been identified in the reviews. We will continue to monitor
this data quality and recipient reporting requirements.
July report recommendations: To increase consistency in recipient
reporting or jobs created and retained, the Director of OMB should work
with federal agencies to have them provide program-specific examples of
the application of OMB's guidance on recipient reporting of jobs
created and retained. This would be especially helpful for programs
that have not previously tracked and reported such metrics.
Because performance reporting is broader than the jobs reporting
required by section 1512, the Director of OMB should also work with
federal agencies--perhaps through the Senior Management Councils--to
clarify what new or existing program performance measures--in addition
to jobs created and retained--that recipients should collect and report
in order to demonstrate the impact of Recovery Act funding.[Footnote
46]
In addition to providing these additional types of program-specific
examples of guidance, the Director of OMB should work with federal
agencies to use other channels to educate state and local program
officials on reporting requirements, such as Web-or telephone-based
information sessions or other forums.
Status of July report recommendations: In recent weeks, federal
agencies have issued additional guidance that builds on the OMB June
22nd recipient reporting guidance for their specific programs. This
guidance is in the form of frequently asked questions (FAQs), tip
sheets, and more traditional guidance that builds on what was provided
on June 22. We have not assessed the sufficiency of this additional
guidance at this time. Federal agencies have also taken steps to
provide additional education and training opportunities for state and
local program officials on recipient reporting including web-based
seminars.
In addition to the federal agency efforts, OMB has issued
clarifications and FAQs on Recovery Act reporting requirements. OMB is
also preparing to deploy regional federal employees to serve as
liaisons to state and local recipients in large population centers. The
objective is to provide onsite assistance and to direct questions to
the appropriate federal official. OMB is also establishing a call
center for entities that do not have an on-site federal liaison.
Communications and Guidance:
Funding notification and program guidance: State officials expressed
concerns regarding communication on the release of Recovery Act funds
and their inability to determine when to expect federal agency program
guidance. Once funds are released there is no easily accessible, real-
time procedure for ensuring that appropriate officials in states and
localities are notified. Because half of the estimated spending
programs in the Recovery Act will be administered by nonfederal
entities, states wish to be notified when funds are made available to
them for their use as well as when funding is received by other
recipients within their state that are not state agencies.
OMB does not have a master timeline for issuing federal agency
guidance. OMB's preferred approach is to issue guidance incrementally.
This approach potentially produces a more timely response and allows
for mid-course corrections; however, this approach also creates
uncertainty among state and local recipients responsible for
implementing programs. We continue to believe that OMB can strike a
better balance between developing timely and responsive guidance and
providing a longer range time line that gives some structure to states'
and localities' planning efforts.
April report recommendation: In our April report, we recommended that
to foster timely and efficient communications, the Director of OMB
should develop an approach that provides dependable notification to (1)
prime recipients in states and localities when funds are made available
for their use, (2) states--where the state is not the primary recipient
of funds but has a statewide interest in this information--and (3) all
nonfederal recipients on planned releases of federal agency guidance
and, if known, whether additional guidance or modifications are
recommended.
Status of April recommendation: OMB has made important progress in the
type and level of information provided in its reports on Recovery.gov.
Nonetheless, OMB has additional opportunities to more fully address the
recommendations we made in April. By providing a standard format across
disparate programs, OMB has improved its Funding Notification reports,
making it easier for the public to track when funds become available.
Since we issued our July report, OMB has announced that beginning
August 28, OMB expects federal agencies to notify recovery coordinators
in states, the District of Columbia, Commonwealths, and Territories
within 48 hours of an award to a grantee or contractor in their
jurisdiction. OMB has taken the additional step of disaggregating
financial information, i.e., federal obligations and outlays by
Recovery Act programs and by state in its Weekly Financial Activity
Report. Both reports, along with agency contract and grant awardee
information by location, are available on [hyperlink,
http://www.recovery.gov].
Our recommendation: The Director of OMB should continue to implement
OMB's approach to providing easily accessible, real-time notification
to (1) prime recipients in states and localities when funds are made
available for their use, and (2) states--where the state is not the
primary recipient of funds but has a statewide interest in this
information. In addition, OMB should provide a long range time line for
the release of federal guidance for the benefit of nonfederal
recipients responsible for implementing Recovery Act programs.
Recipient financial tracking and reporting guidance: In addition to
employment related reporting, OMB's guidance calls for the tracking of
funds by the prime recipient, recipient vendors, and subrecipients
receiving payments. OMB's guidance also allows that "prime recipients
may delegate certain reporting requirements to subrecipients." Either
the prime or sub-recipient must report the D-U-N-S number (or an
acceptable alternative) for any vendor or sub-recipient receiving
payments greater than $25 thousand. In addition, the prime recipient
must report what was purchased and the amount, and a total number and
amount for sub-awards of less than $25 thousand. By reporting the DUNS
number, OMB guidance provides a way to identify subrecipients by
project, but this alone does not ensure data quality.
The approach to tracking funds is generally consistent with the Federal
Funding Accountability and Transparency Act (FFATA). Like the Recovery
Act, the FFATA requires a publicly available Web site--USAspending.gov--
to report financial information about entities awarded federal funds.
Yet, significant questions have been raised about the reliability of
the data on USAspending.gov, primarily because what is reported by the
prime recipients is dependent on the unknown data quality and reporting
capabilities of their subrecipients.
For example, earlier this year, more than 2 years after passage of
FFATA, the Congressional Research Services (CRS) questioned the
reliability of the data on USAspending.gov. We share CRS's concerns
associated with USAspending.gov, including incomplete, inaccurate, and
other data quality problems. More broadly, these concerns also pertain
to recipient financial reporting in accordance with the Recovery Act
and its federal reporting vehicle, [hyperlink,
http://www.FederalReporting.gov], currently under development.
Our recommendation: To strengthen the effort to track the use of funds,
the Director of OMB should (1) clarify what constitutes appropriate
quality control and reconciliation by prime recipients, especially for
subrecipient data, and (2) specify who should best provide formal
certification and approval of the data reported.
Agency-specific guidance: DOT and FHWA have yet to provide clear
guidance regarding how states are to implement the Recovery Act
requirement that economically distressed areas are to receive priority
in the selection of highway projects for funding. We found substantial
variation both in how states identified areas in economic distress and
how they prioritized project selection for these areas. As a result, it
is not clear whether areas most in need are receiving priority in the
selection of highway infrastructure projects, as Congress intended.
While it is true that states have discretion in selecting and
prioritizing projects, it is also important that this goal of the
Recovery Act be met.
Our recommendation: To ensure states meet Congress's direction to give
areas with the greatest need priority in project selection, the
Secretary of Transportation should develop clear guidance on
identifying and giving priority to economically distressed areas that
are in accordance with the requirements of the Recovery Act and the
Public Works and Economic Development Act of 1965, as amended, and more
consistent procedures for the Federal Highway Administration to use in
reviewing and approving states' criteria.
Agency Comments and Our Evaluation:
We received comments on a draft of our July report from the U.S. Office
of Management and Budget (OMB) and the U.S. Department of
Transportation (DOT) on our report recommendations.
U.S. Office of Management and Budget: OMB concurs with the overall
objectives of our recommendations made to OMB in our report. OMB
offered clarifications regarding the area of Single Audit and did not
concur with some of our conclusions related to communications. What
follows summarizes OMB's comments and our responses.
Single Audit Act:
OMB agreed with the overall objectives of our recommendations. OMB also
noted it believes that new requirements for more rigorous internal
control reviews will yield important short-term benefits and the steps
taken by state and local recipients to immediately initiate controls
will withstand increased scrutiny later in the process. OMB is vetting
a proposed pilot project under which a limited number of voluntarily
participating auditors performing the single audits for states would
communicate in writing internal control deficiencies noted in the
single audit within six months of the 2009 fiscal year-end, rather than
the nine months as required by the Single Audit Act. In recent
discussions about the pilot program, OMB officials agreed that
sufficient coverage of Recovery Act-funded programs will be needed to
address concerns about the timeliness of single audit reporting related
to internal control weaknesses in Recovery Act programs.
OMB commented that it has already taken and is planning actions to
focus program selection risk assessment on Recovery Act programs and to
increase the rigor of state and local internal controls on Recovery Act
activities. OMB issued guidance in early August 2009 that provides
additional guidance for programs with expenditures of Recovery Act
funds. OMB has taken steps to achieve audit coverage of Recovery Act
programs. However, smaller, but significantly risky programs under the
Recovery Act may not receive adequate attention and scrutiny under the
current Single Audit process.
OMB acknowledged that acceleration of internal control reviews could
cause more work for state auditors, for which OMB and Congress should
explore potential options for relief. States volunteering to
participate in OMB's proposed pilot program will be granted some relief
in workload because the auditor will not be required to perform risk
assessments of smaller federal programs.
Communications:
OMB has made important progress relative to some communications. In
particular, we agree with OMB's statements that it requires agencies to
post guidance and funding information to agency Recovery Act websites,
disseminates guidance broadly, and seeks out and responds to
stakeholder input. In addition, OMB has held a series of interactive
forums to offer training and information to Recovery Act recipients on
the process and mechanics of recipient reporting and they could also
serve as a vehicle for additional communication. Finally OMB has
improved Funding Notification reports by providing a standard format
across disparate programs, making it easier for the public to track
when funds become available. OMB recently established an approach for
notifying key state officials no later than 48 hours after an award is
made within their state. Although it is too soon to tell, this latest
effort may provide the real-time notification we recommend. We will
continue to monitor the situation and will report on the effectiveness
of OMB's approach in a future report.
Moving forward and building on the progress it has made, OMB can take
the following additional step to provide a long range time line for the
release of federal agency guidance. In an attempt to be responsive to
emerging issues and questions from the recipient community, OMB's
preferred approach is to issue guidance incrementally. Since our July
report, OMB has issued periodic FAQs as an approach to clarifying
existing OMB guidance and providing additional information. This
approach potentially produces a more timely response and allows for mid-
course corrections; however, this approach also creates uncertainty
among state and local recipients. State and local officials expressed
concerns that this incremental approach hinders their efforts to plan
and administer Recovery Act programs. As a result, we continue to
believe OMB can strike a better balance between developing timely and
responsive guidance, such as its FAQs, and providing some degree of a
longer range time line so that states and localities can better
anticipate which programs will be affected and when new federal agency
guidance is likely to be issued. OMB's consideration of a master
schedule and its acknowledgement of the extraordinary proliferation of
program guidance in response to Recovery Act requirements seem to
support a more structured approach. We appreciate that a longer range
time line would need to be flexible so that OMB and federal agencies
could also continue to issue guidance and clarifications in a timely
manner as new issues and questions emerge.
Mr. Chairman, Senator Collins, and Members of the Committee this
concludes my statement. I would be pleased to respond to any questions
you may have.
Contacts:
For further information on this testimony, please contact J.
Christopher Mihm, Managing Director for Strategic Issues, on (202) 512-
6806 or mihmj@gao.gov.
For issues related to WIA, SFSF and other education programs: Cynthia
M. Fagnoni, Managing Director of Education, Workforce, and Income
Security, (202) 512-7215 or fagnonic@gao.gov.
For issues related to Medicaid and FMAP programs: Dr. Marjorie Kanof,
Managing Director of Health Care, (202) 512-7114 or kanofm@gao.gov.
For issues related to highways and other transportation programs:
Katherine A. Siggerud, Managing Director of Physical Infrastructure,
(202) 512-2834 or siggerudk@gao.gov.
For issues related to energy and weatherization: Patricia Dalton,
Managing Director of Natural Resources and Environment, (202) 512-3841
or daltonp@gao.gov.
For issues related to the Edward Byrne Memorial Justice Assistance
Grant Program: Cathleen A. Berrick, Managing Director of Homeland
Security and Justice, (202)-512-3404 or berrickc@gao.gov.
For issues related to public housing: Richard J. Hillman, Managing
Director of Financial Markets and Community Investment, (202) 512-9073
or hillmanr@gao.gov.
For issues related to internal controls and Single Audits: Jeanette M.
Franzel, Managing Director of Financial Management and Assurance, (202)
512-9471 or franzelj@gao.gov.
For issues related to contracting and procurement: Paul L. Francis,
Managing Director of Acquisition Sourcing Management, (202) 512-2811 or
francisp@gao.gov.
[End of section]
Footnotes:
[1] Pub. L. No. 111-5, 123 Stat. 115 (February 17, 2009).
[2] The estimated budget gaps are reported by associations representing
state officials. See The National Governors Association and the
National Association of State Budget Officers, The Fiscal Survey of
States (Washington, D.C., June 2009).
[3] Recovery Act, div. A, title IX, §901.
[4] GAO, Recovery Act: States' and Localities' Current and Planned Uses
of Funds While Facing Fiscal Stresses, [hyperlink,
http://www.gao.gov/products/GAO-09-829] (Washington, D.C.: Jul. 8,
2009).
[5] GAO, Recovery Act: As Initial Implementation Unfolds in States and
Localities, Continued Attention to Accountability Issues Is Essential,
[hyperlink, http://www.gao.gov/products/GAO-09-580] (Washington, D.C.:
Apr. 23, 2009).
[6] The states we are following as part of our analysis are Arizona,
California, Colorado, Florida, Georgia, Illinois, Iowa, Massachusetts,
Michigan, Mississippi, New Jersey, New York, North Carolina, Ohio,
Pennsylvania, and Texas.
[7] This total includes two entities in the District of Columbia that
received direct federal funding that was not passed through the
District government.
[8] For this report, GAO reviewed states' and localities' uses of
Recovery Act funds for the (1) Medicaid Federal Medical Assistance
Percentage (FMAP), (2) the State Fiscal Stabilization Fund (SFSF), (3)
the Federal-Aid Highway Surface Transportation Program, (4) Public
Housing Capital Fund, (5) Title I, Part A of the Elementary and
Secondary Education Act of 1965 (ESEA); (6) Parts B and C of the
Individuals with Disabilities Education Act (IDEA); (7) Weatherization
Assistance Program; (8) Edward Byrne Memorial Justice Assistance Grant
(JAG) Program; and (9) Workforce Investment Act (WIA) Youth Program.
[9] The Web site [hyperlink, http://www.recovery.gov] is mandated by
the Recovery Act to foster greater accountability and transparency in
the use of the act's funds. The Web site is required to include plans
from federal agencies; information on federal awards of formula grants
and awards of competitive grants; and information on federal
allocations for mandatory and other entitlement programs by state,
county, or other appropriate geographical unit. The Web site is
maintained by the Recovery Accountability and Transparency Board.
[10] Recovery Act, div. B, title V, § 5001. Medicaid is a joint federal-
state program that finances health care for certain categories of low-
income individuals, including children, families, persons with
disabilities, and persons who are elderly. The federal government
matches state spending for Medicaid services according to a formula
based on each state's per capita income in relation to the national
average per capita income. The rate at which states are reimbursed for
Medicaid service expenditures is known as the FMAP, which may range
from 50 percent to no more than 83 percent. Generally, for fiscal year
2009 through the first quarter of fiscal year 2011, the increased FMAP,
which is calculated on a quarterly basis, provides for (1) the
maintenance of states' prior year FMAPs, (2) a general across-the-board
increase of 6.2 percentage points in states' FMAPs, and (3) a further
increase to the FMAPs for those states that have a qualifying increase
in unemployment rates. The increased FMAP available under the Recovery
Act is for state expenditures for Medicaid services. However, the
receipt of this increased FMAP may reduce the funds that states would
otherwise have to use for their Medicaid programs, and states have
reported using these available funds for a variety of purposes.
[11] In an August 4, 2009, Federal Register Notice, HHS published a
change to the methodology it uses to calculate the increased FMAP
rates. Under this methodology, HHS calculates preliminary FMAP rates
prior to the start of each quarter using Bureau of Labor Statistics
preliminary unemployment estimates, and CMS uses these FMAP rates to
determine adjustments to the quarterly increased FMAP grant awards.
Once final unemployment numbers become available, HHS publishes the
final FMAP rates and CMS awards are adjusted, as necessary. Under the
new methodology, the FMAP rate for the third quarter of fiscal year
2009 increased in 4 of our 17 sample states.
[12] The percentage increase is based on actual state enrollment data
for October 2007 to April 2009 and projected enrollment data for May
2009, with the exception of New York, which provided projected
enrollment data for March, April and May 2009. Three states--Florida,
Georgia, and Mississippi--did not provide projected enrollment data for
May 2009. We estimated enrollment for these states for May 2009 to
determine the total change in enrollment for October 2007 to May 2009.
[13] As of September 4, 2009, these publications were available on the
CMS website; see [hyperlink,
http://www.cms.hhs.gov/SMDL/SMD/list.asp?sortByDID=1a&submit=Go&filterTy
pe=none&filterByDID=-99&sortOrder=ascending&intNumPerPage=10].
[14] Highway funds are apportioned to the states through federal-aid
highway program mechanisms, and states must follow the requirements of
the existing program, which include ensuring the project meets all
environmental requirements associated with the National Environmental
Policy Act (NEPA), paying a prevailing wage in accordance with federal
Davis-Bacon requirements, 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 America program requirements. However, the maximum
federal fund share of highway infrastructure investment projects under
the Recovery Act is 100 percent, while the federal share under the
existing federal-aid highway program is generally 80 percent.
[15] The U.S. Department of Transportation has interpreted the term
obligation of funds to mean the federal government's contractual
commitment to pay for the federal share of the project. This commitment
occurs at the time the federal government signs a project agreement.
[16] Data are as of July 10, 2009.
[17] Recovery Act, Pub. L. No. 111-5, div. A, title XII, 123 Stat. 115,
206 (Feb. 17, 2009).
[18] Id.
[19] 42 U.S.C. § 3161(a). Eligibility must be supported using the most
recent federal data available or, in the absence of recent federal
data, by the most recent data available through the government of the
state in which the area is located. Federal data that may be used
include data reported by the Bureau of Economic Analysis, the Bureau of
Labor Statistics, the Census Bureau, the Bureau of Indian Affairs, or
any other federal source determined by the Secretary of Commerce to be
appropriate (42 U.S.C. § 3161((c)).
[20] Recovery Act, div. A, title XII, § 1201.
[21] FHWA's guidance specifies that special needs determinations will
be solely for Recovery Act highway funding and will not apply to EDA
grant programs.
[22] In 2004, we estimated that during the 1983 through 2000 period,
states used roughly half of the increases in federal highway funds to
substitute for funding they would otherwise have spent from their own
resources and that the rate of substitution increased during the 1990s.
The federal-aid highway program creates the opportunity for
substitution because states typically spend substantially more than the
amount required to meet federal matching requirements. As a
consequence, when federal funding increases, states are able to reduce
their own highway spending and still obtain increased federal funds.
The federal share under the existing federal-aid highway program is
generally 80 percent and the matching requirement for states is usually
20 percent. In 2004, we reported that in 2002, states and localities
contributed 54 percent of the nation's capital investment in highways,
while the federal government contributed 46 percent (in 2001 dollars).
GAO, Federal-Aid Highways: Trends, Effect on State Spending, and
Options for Future Program Design, [hyperlink,
http://www.gao.gov/products/GAO-04-802] (Washington, D.C.: Aug. 31,
2004).
[23] GAO, Physical Infrastructure: Challenges and Investment Options
for the Nation's Infrastructure, [hyperlink,
http://www.gao.gov/products/GAO-08-763T] (Washington, D.C.: May 8,
2008).
[24] Stabilization funds for education distributed under the Recovery
Act must be used to alleviate shortfalls in state support for education
to school districts and public institutions of higher education (IHEs).
The U.S. Department of Education (Education), the federal agency
charged with administration and oversight of the SFSF, distributes the
funds on a formula basis, with 81.8 percent of each state's allocation
designated for the education stabilization fund for local educational
agencies (LEA) and public IHEs. The remaining 18.2 percent of each
state's allocation is designated for the government services fund for
public safety and other government services, which may include
education. Consistent with the purposes of the Recovery Act--which
include, in addition to stabilizing state and local budgets, promoting
economic recovery and preserving and creating jobs--the SFSF can be
used by states to restore cuts to state education spending. In return
for SFSF funding, a state must make several assurances, including that
it will maintain state support for education at least at fiscal year
2006 levels. In order to receive SFSF funds, each state must also
assure it will implement strategies to advance education reform in four
specific ways as described by Education: 1) Increase teacher
effectiveness and address inequities in the distribution of highly
qualified teachers; 2)Establish a pre-K-through-college data system to
track student progress and foster improvement; 3) Make progress toward
rigorous college-and career-ready standards and high-quality
assessments that are valid and reliable for all students, including
students with limited English proficiency and students with
disabilities; and 4) Provide targeted, intensive support and effective
interventions to turn around schools identified for corrective action
or restructuring. Schools identified for corrective action have missed
academic targets for 4 consecutive years and schools implementing
restructuring have missed academic targets for 6 consecutive years.
Along with these education reform assurances, additional state
assurances must address federal requirements concerning accountability,
transparency, reporting, and compliance with certain federal laws and
regulations.
[25] This was phase I funding. A state will receive the remaining
allotment of its SFSF allocation in phase II after Education approves
the state's comprehensive plan for making progress with respect to the
four education reform assurances.
[26] DQC is a national collaborative effort involving more than 50
organizations working to encourage and support state policymakers to
improve the availability and use of high-quality education data to
improve student achievement. NCEA, a nonprofit organization owned by
ACT Inc.--a company that develops and markets assessments--focuses on
raising student achievement based on higher college and career
readiness standards. Achieve, created in 1996 by the nation's governors
and corporate leaders, is an independent, bipartisan, nonprofit
education reform organization focused on raising academic standards and
graduation requirements, improving assessments, and strengthening
accountability.
[27] During our review, we met with IHEs and state officials
responsible for IHE oversight in 8 states--California, Florida,
Georgia, Illinois, Mississippi, New York, North Carolina, and Ohio.
[28] According to the National Association of State Budget Officers
(NASBO), most states have balanced-budget requirements for general
funds, which may include requirements such as (1) requiring governors
to submit a balanced budget, (2) mandating that their legislatures pass
a balanced budget, (3) directing governors to sign a balanced budget,
or (4) requiring governors to execute a balanced budget. According to
NASBO, all of the states we visited have balanced-budget requirements.
(In its report, NASBO did not provide information on the District of
Columbia's balanced budget requirements.) See NASBO, Budget Processes
in the States (Washington, D.C.: Summer 2008).
[29] Michigan--along with the District of Columbia--has a fiscal year
that begins October 1. New York's fiscal year begins April 1, and the
fiscal year for Texas begins on September 1. All other states we
visited have fiscal years beginning July 1.
[30] Recent reports provide additional details regarding revenue
declines beyond our selected states. For example, see The National
Governors Association and the National Association of State Budget
Officers (NASBO), The Fiscal Survey of States (Washington, D.C., June
2009); National Conference of State Legislatures, Budget Update: April
2009 (Washington, D.C., April 2009); Lucy Dadayan and Donald J. Boyd,
The Nelson A. Rockefeller Institute of Government, April is the
Cruelest Month: Personal Income Tax Revenues Portend Deepening Trouble
for Many States (Albany, N.Y., June 18, 2009).
[31] According to NASBO, the selected states have varying legal
requirements regarding contributions to and withdrawals from various
types of reserve funds.
[32] Recovery Act, div. A, title XV, § 1512.
[33] OMB memoranda, M-09-10, Initial Implementing Guidance for the
American Recovery and Reinvestment Act of 2009, February 18, 2009, and
M-09-15, Updated Implementing Guidance for the American Recovery and
Reinvestment Act of 2009, April 3, 2009.
[34] GAO, Grants Management: Additional Actions Needed to Streamline
and Simplify Process, [hyperlink,
http://www.gao.gov/products/GAO-05-335] (Washington, D.C.: April 2005).
[35] The Single Audit Act requires states, local governments, and
nonprofit organizations expending over $500,000 in federal awards in a
year to obtain an audit in accordance with requirements set forth in
the Act. A single audit consists of (1) an audit and opinions on the
fair presentation of the financial statements and the Schedule of
Expenditures of Federal Awards; (2) gaining an understanding of and
testing internal control over financial reporting and the entity's
compliance with laws, regulations, and contract or grant provisions
that have a direct and material effect on certain federal programs
(i.e., the program requirements); and (3) an audit and an opinion on
compliance with applicable program requirements for certain federal
programs.
[36] The auditor identifies the applicable federal programs, including
"major programs," based on risk criteria, including minimum dollar
thresholds, set out in the Single Audit Act and OMB Circular No. A-133.
Guidance on identifying compliance requirements for most large federal
programs is set out in the Compliance Supplement to OMB Circular No. A-
133. OMB has 14 requirements that generally are to be tested for each
major federal program to opine on compliance and report on significant
deficiencies in internal control over compliance with each applicable
compliance requirement.
[37] NSAA's mission is to unite state auditors by encouraging and
providing opportunities for the free exchange of information and ideas
between auditors on the state, federal and local levels.
[38] Single Audit Act Section 7502(b)(2). The guidance provides that
under certain conditions, Single Audit auditees may be audited
biennially instead of annually. For entities that are audited
biennially, it is longer before internal control and compliance
weaknesses are identified and remediated.
[39] Department of Health and Human Services is the cognizant agency
for the 16 states and District of Columbia that are included in our
study. According to OMB Circular No. A-133 §.400(a)(2), if an entity
needs an extension for submission of their single audit report, the
cognizant agency must consider auditee requests for extension to the
report submission due date.
[40] OMB memoranda, M-09-21, Implementing Guidance for the Reports on
Use of Funds Pursuant to the American Recovery and Reinvestment Act of
2009 (June 22, 2009).
[41] The recipient reporting requirement only covers a defined subset
of the Recovery Act's funding. The reporting requirements apply to
recipients who receive funding through discretionary appropriations,
not recipients receiving funds through entitlement programs, such as
Medicaid, or tax programs. Recipient reporting also does not apply to
individuals.
[42] Executive Office of the President, Council of Economic Advisers,
Estimates of Job Creation From the American Recovery and Reinvestment
Act of 2009 (May 2009).
[43] OMB Memorandum M-09-15, Updated Implementing Guidance for the
American Recovery and Reinvestment Act of 2009 (Apr. 3, 2009). This
guidance supplements, amends, and clarifies the initial guidance issued
by OMB on February 18, 2009. OMB memoranda, M-09-21, Implementing
Guidance for the Reports on Use of Funds Pursuant to the American
Recovery and Reinvestment Act of 2009 (June 22, 2009).
[44] OMB memoranda, M-09-18, Payments to State Grantees for
Administrative Costs of Recovery Act Activities (May 11, 2009).
[45] Consistent with GAO's past work showing that tax expenditures
receive less scrutiny than outlay programs (e.g., GAO, Government
Performance and Accountability: Tax Expenditures Represent a
Substantial Federal Commitment and Need to Be Reexamined, [hyperlink,
http://www.gao.gov/products/GAO-05-690] (Washington, D.C.: Sept. 23,
2005), we have begun work to determine the level of transparency and
oversight that will be provided for the Recovery Act tax provisions.
Administration officials are formulating plans for what information
will be collected, analyzed, and reported for the tax provisions. See
also: GAO, American Recovery and Reinvestment Act: GAO's Role in
Helping to Ensure Accountability and Transparency, [hyperlink,
http://www.gao.gov/products/GAO-09-453T] (Washington, D.C.: Mar. 5,
2009).
[46] According to OMB guidance, rather than establishing a new council,
agencies are encouraged to leverage their existing Senior Management
Councils to oversee Recovery Act performance across the agency,
including risk management. The Senior Management Council should be
composed of the Chief Financial Officer, Senior Procurement Executive,
Chief Human Capital Officer, Chief Information Officer, Performance
Improvement Officer, and managers of programmatic offices. The agency's
Senior Accountable Official should also participate and assume a
leadership role. Agencies should also consider having their Office of
General Counsel and Office of Inspectors General serve in advisory
roles on the Senior Management Council.
[End of section]
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