Performance audit, Arizona Department of Education, administration and allocation of funds

              Performance Audit
Arizona Department
of Education–
Administration and Allocation of Funds
Performance Audit Division
Debra K. Davenport
Auditor General
AUGUST • 2006
REPORT NO. 06 – 06
A REPORT
TO THE
ARIZONA LEGISLATURE
The is appointed by the Joint Legislative Audit Committee, a bipartisan committee composed of five senators
and five representatives. Her mission is to provide independent and impartial information and specific recommendations to
improve the operations of state and local government entities. To this end, she provides financial audits and accounting services
to the State and political subdivisions, investigates possible misuse of public monies, and conducts performance audits of
school districts, state agencies, and the programs they administer.
The Joint Legislative Audit Committee
Representative Laura Knaperek, Chair Senator Robert Blendu, Vice Chair
Representative Tom Boone Senator Ed Ableser
Representative Ted Downing Senator Carolyn Allen
Representative Pete Rios Senator John Huppenthal
Representative Steve Yarbrough Senator Richard Miranda
Representative Jim Weiers (ex-officio) Senator Ken Bennett (ex-officio)
Audit Staff
Melanie Chesney, Director
Lisa Eddy, Manager and Contact Person
Sean Borzea
Copies of the Auditor General’s reports are free.
You may request them by contacting us at:
Office of the Auditor General
2910 N. 44th Street, Suite 410 • Phoenix, AZ 85018 • (602) 553-0333
Additionally, many of our reports can be found in electronic format at:
www.azauditor.gov
DEBRA K. DAVENPORT, CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
WILLIAM THOMSON
DEPUTY AUDITOR GENERAL
2910 NORTH 44th STREET • SUITE 410 • PHOENIX, ARIZONA 85018 • (602) 553-0333 • FAX (602) 553-0051
August 10, 2006
Members of the Arizona Legislature
The Honorable Janet Napolitano, Governor
Mr. Tom Horne, State Superintendent of Public Instruction
Arizona Department of Education
Transmitted herewith is a report of the Auditor General, A Performance Audit of the Arizona
Department of Education—Administration and Allocation of Funds. This report is in
response to Arizona Revised Statutes (A.R.S.) §41-2958 and was conducted under the
authority vested in the Auditor General by A.R.S. §41-1279.03. I am also transmitting with this
report a copy of the Report Highlights for this audit to provide a quick summary for your
convenience.
As outlined in its response, the Department of Education disagrees with one of the
findings and plans to implement all of the recommendations.
My staff and I will be pleased to discuss or clarify items in the report.
This report will be released to the public on August 11, 2006.
Sincerely,
Debbie Davenport
Auditor General
Enclosure
The Office of the Auditor General has conducted a performance audit of the Arizona
Department of Education (ADE), pursuant to the provisions of Arizona Revised
Statutes (A.R.S.) §41-2958. This audit was conducted under the authority vested in
the Auditor General by A.R.S. §41-1279.03. This is the second in a series of three
reports regarding ADE. This audit focuses on specific aspects of ADE’s
administration and allocation of state and federal funds to Local Education Agencies
(LEAs), which are primarily school districts and charter schools. The other two audit
reports address ADE’s accountability programs and information management
function.
ADE operates under the direction of the Superintendent of Public Instruction to
execute the policies set by the State Board of Education and the State Board for
Vocational and Technological Education. ADE provides direct services, such as
funding, training, and technical assistance, to approximately 1,430 schools in 244
locally governed school districts and 503 charter schools. ADE is responsible for
administering and distributing state and federal education monies to LEAs.
According to the State of Arizona Appropriations Report for fiscal year 2006, ADE was
estimated to receive about $5 billion in total funding for fiscal year 2006, including
approximately $3.5 billion appropriated from the General Fund and $1.4 billion from
federal and other funds. Over 97 percent of the total funding was designated as
pass-through monies to LEAs, including over 99 percent of ADE’s General Fund
appropriation.
This audit reviewed ADE’s processes relating to two areas involving LEA funding. For
state education funds, ADE collects student attendance data from the LEAs. ADE
uses this data to calculate the LEAs’ Average Daily Membership (ADM), which it then
uses in accordance with state statutes to calculate the appropriate level of state
funding that each LEA receives. ADE also helps ensure that LEAs use federal grant
monies so they are not returned to the federal government.
Office of the Auditor General
SUMMARY
page i
ADE should implement a comprehensive system to
ensure the accuracy of LEAs’ attendance data state-wide
(see pages 7 through 13)
ADE should develop a comprehensive system to ensure the accuracy of LEAs’
attendance data state-wide.1 As the State’s education agency, ADE is ultimately
responsible not only for allocating General Fund monies to the LEAs, but for ensuring
that these monies are allocated properly. The amount of state aid LEAs receive is tied
directly to attendance data, so this data’s accuracy is critical to ensure that the LEAs
receive the proper level of funding. However, neither ADE nor any other entity verifies
that this data is accurate state-wide, and several indicators point to many
inaccuracies in the data, including limited reviews conducted by certified public
accountants (CPAs), a special study conducted previously by the Auditor General’s
Office, and audits conducted by ADE’s own staff.
Since the accuracy of LEAs’ attendance data is so critical to ensuring proper
payment of state aid to the LEAs, ADE should implement a comprehensive system
to ensure that the data is accurate. If it is determined to be inaccurate, ADE should
recover any overpayments and distribute any underpayments to the LEAs. There are
different options that ADE could choose to implement, and other states have already
implemented systems to better ensure the accuracy of their schools’ attendance
data. For example, ADE could seek statutory changes to have the CPA firms assess
the accuracy of the attendance data as part of their financial reviews of the LEAs.
Another approach could be for ADE’s own audit unit to expand the work it currently
performs, similar to the Texas Education Agency.
ADE’s approach to identifying and administering federal
grant monies generally appropriate (see pages 15
through 19)
ADE generally appears to have an appropriate process for obtaining and
administering federal grant monies. While ADE receives and administers both
formula (or entitlement) and discretionary (or competitive) grant monies from various
federal agencies, about 99 percent of the nearly $800 million in grant monies ADE
spent or passed through the LEAs in fiscal year 2005 is from formula grants from the
U.S. Departments of Education and Agriculture. The federal government allocates
formula grants to the State based on certain factors, such as the number of children
in poverty, and these grants are administered by ADE to LEAs. In contrast,
discretionary grants are awarded to ADE through a competitive federal application
State of Arizona
page ii
1 Attendance data in this finding is defined as an LEA’s electronic or paper attendance records.
process. ADE appears to be appropriately applying for and receiving all formula
grant monies to which it is entitled. Similarly, ADE’s process for identifying and
obtaining discretionary grants also appears adequate based on auditors’ review of
this process. However, ADE should obtain, maintain, and use available feedback on
unsuccessful grant applications. This information could help ADE make more
informed decisions about whether to apply for the same or similar grants in the future.
In addition to appropriately obtaining federal grant monies, ADE ensures that the
federal monies it distributes to LEAs are used rather than returned to the federal
government. For calendar years 2002 through 2005, the amount of unspent federal
grant monies from the U.S. Department of Education was well below 1 percent of
total monies awarded. ADE’s use of its online Grants Management Enterprise system
for administering the federal grant monies, in conjunction with other grant-tracking
reports, provides an effective process to ensure the use of these monies.
Office of the Auditor General
page iii
State of Arizona
page iv
Office of the Auditor General
TABLE OF CONTENTS
1
7
7
8
10
13
15
15
16
17
18
19
16
19
Introduction & Background
Finding 1: ADE should implement a comprehensive
system to ensure the accuracy of LEAs’ attendance
data state-wide
ADE needs accurate attendance data to properly allocate funding
Limited reviews of state-wide LEA attendance data identify
inaccuracies
ADE should take additional action to ensure accuracy of LEAs’
attendance data state-wide
Recommendations
Finding 2: ADE’s approach to identifying and
administering federal grant monies generally
appropriate
ADE receives and administers federal grant monies
ADE’s process for administering and maximizing formula grants
appears appropriate
ADE’s discretionary grants process could benefit from minor
improvement
ADE helps ensure LEAs use grant monies
Recommendation
Agency Response
Tables:
1 Arizona Department of Education Expenditures
By Dollars Received from Federal Agencies
Fiscal Year 2005
2 Unspent Federal Grant Monies
Calendar Years 2002 through 2005
As of January 31, 2006
page v
State of Arizona
page vi
The Office of the Auditor General has conducted a performance audit of the Arizona
Department of Education (ADE), pursuant to the provisions of Arizona Revised
Statutes (A.R.S.) §41-2958. This audit was conducted under the authority vested in
the Auditor General by A.R.S. §41-1279.03. This is the second in a series of three
reports regarding ADE. This audit focuses on specific aspects of ADE’s
administration and allocation of state and federal funds to Local Education
Agencies (LEAs), which are primarily school districts and charter schools.
The other two audit reports address ADE’s accountability programs and
information management function.
ADE operates under the direction of the Superintendent of Public Instruction,
who has the duty to oversee Arizona schools and to execute the policies set
by the State Board of Education and the State Board for Vocational and
Technological Education. As of November 2005, ADE reports providing direct
services such as funding, training, and technical assistance to 1,430 schools
in 244 locally governed school districts and 503 charter schools. ADE implements
state academic standards; administers state-wide assessments; disseminates
information; administers and allocates federal and state funds; and provides
program improvement assistance to LEAs.
ADE administers and distributes state and federal
education monies to LEAs
ADE is responsible for administering and distributing state and federal education
monies to LEAs. According to the State of Arizona Appropriations Report for fiscal
year 2006, ADE was estimated to receive about $5 billion in total funding for fiscal
year 2006, including approximately $3.5 billion appropriated from the General Fund
and $1.4 billion from federal and other funds. Over 97 percent of this funding was
designated as pass-through monies to LEAs, including over 99 percent of ADE’s
General Fund appropriations. ADE calculates most LEA funding using statutorily
prescribed financial formulas. The funding formulas vary between districts and
charter schools, but both formulas rely heavily upon an LEA’s Average Daily
Office of the Auditor General
INTRODUCTION
& BACKGROUND
page 1
Local Education Agency
(LEA)—School districts,
charter schools, or any
administrative unit at the local
level that exists primarily to
operate schools or to contract
for educational services.
Membership (ADM). ADE calculates ADM using enrollment minus withdrawals of
each school day, usually through the first 100 days in session. An LEA’s ADM is then
multiplied by specific weights that take into consideration the relative associated cost
of educating certain classifications of students. These weights take into account
factors such as grade level, the LEA’s size and location, and specific student needs,
such as those for special education students. ADE then multiplies an LEA’s weighted
ADM by an amount set by the Legislature, called the base support level, to determine
the LEA’s funding.
For districts, this funding formula is intended to equalize per-pupil funding in
maintenance and operation (see below), reduce disparities in tax rates, and
decrease reliance on local property taxes to fund schools. ADE uses formulas in
three key funding calculations for school districts:
􀁺􇩍 Maintenance & Operation (M&O)—The M&O budget is the budget for much of
the LEA’s day-to-day expenditures, including employee salaries and benefits,
supplies, utilities, and maintenance.
􀁺􇩃 Capital Outlay Revenue Limit (CORL)—Capital-related funds include
expenditures for acquisitions by purchase or lease of long-term capital items,
such as land, buildings, and furniture.
􀁺􇩓 Soft Capital Allocation (SCA)—Districts can spend soft capital monies only for
short-term capital items that are required to meet academic standards, such as
technology, textbooks, and library resources.
Charter schools, which are more dependent on state revenues than school districts
because they do not receive property taxes or county revenues, also receive state
funding based on student enrollment and reported attendance. According to ADE, in
fiscal year 2005, 83 percent of charter school funding came from the State. In
contrast, 45 percent of district funding came from the State.
Additionally, ADE also administered and distributed federal grant monies to the LEAs
(see Finding 2, page 15). In fiscal year 2005, ADE spent or passed through to LEAs
nearly $800 million in federal grant monies, about 99 percent of which came from the
U.S. Departments of Education and Agriculture. While ADE administers a limited
amount of federal grant monies that come through competitive discretionary grants,
about 99 percent of the monies are from formula grants or entitlement grants. If the
grant monies are either not used by ADE or the LEAs do not use the grant monies
within 27 months, the monies are returned to the federal government.
State of Arizona
page 2
ADE calculates ADM
using LEA attendance
data from each school
day, typically through
the first 100 days in
session.
ADE’s Division of Business, Information, and Finance
Services distributes monies to LEAs
ADE’s Division of Business, Information, and Finance Services administers and
allocates state and federal funds to LEAs for public education. The Division consists
of the following units and, according to ADE, as of March 14, 2006, had 64 FTEs with
11 vacancies:
􀁺􇩓 School Finance (28 FTEs with 3 vacancies) handles all state-funding formula
payments to schools. Because this unit is the main contact for schools, it
provides extensive customer service to the LEAs.
􀁺􇩆 Financial Services (21 FTEs with 2 vacancies) maintains every account other
than payroll for ADE, including all state and federal revolving funds. It also
processes all cash receipts and claims, and performs all accounting functions
for all ADE programs.
􀁺􇩓 Strategic Planning & Budget (7 FTEs with 2 vacancies) works with all program
areas at ADE to assist in developing their budgets.
􀁺􇩇 Grants Management (2 FTEs) oversees the Grants Management Enterprise
system, which allows LEAs to identify and apply for federal grant monies
available through ADE.
􀁺􇩁 Audit Resolution (6 FTEs with 4 vacancies) conducts ADM audits of LEAs. As
part of its fiscal year 2007 budget, ADE received funding for four additional ADM
auditors. According to ADE, the four new ADM auditors will conduct ADM audits
and help ADE to recover overpayments or erroneous payments to LEAs, and
reduce the potential for fraud, waste, and abuse.
Scope and methodology
This audit reviewed ADE’s efforts to ensure accurate attendance data from the LEAs,
and ADE’s efforts to obtain and track the LEAs’ use of federal grant monies. The audit
includes the following findings and associated recommendations:
􀁺􇩁 ADE should implement a comprehensive system to ensure the accuracy of
LEAs’ attendance data state-wide.
􀁺􇩁 ADE’s approach to identifying and administering federal grant monies is
generally appropriate.
Audit Resolution
conducts ADM audits of
LEAs.
Office of the Auditor General
page 3
Auditors used several methods to review the issues addressed in this audit.
Specifically, auditors reviewed ADE’s statutes, 2005 annual report, strategic plan, and
Web site. Auditors also reviewed the Joint Legislative Budget Committee’s 2006
Appropriations Report, and interviewed ADE management and staff. Additionally, to
perform more specific audit steps, auditors used the following methods:
􀁺􇩔 To identify the potential for errors in schools’ attendance data, auditors reviewed
the results of the fiscal year 2004 audits conducted by independent certified
public accounting firms on 158 districts and ADM audits conducted by ADE’s
Audit Resolution Unit, the results of ADE’s Audit Resolution Unit’s ADM audits
from 2002 through 2005, and the Auditor General’s 2004 report on two Joint
Technological Education Districts. Auditors also analyzed the Arizona State
Board for Charter Schools’ results of the fiscal year 2004 audits conducted by
independent certified public accounting firms on 334 charter schools. To identify
how other states’ departments of education verify the accuracy of their
attendance data, auditors interviewed officials and reviewed documents from
two other states—Michigan and Texas.1 To assess how certified public
accounting (CPA) firms that currently perform limited reviews of Arizona schools’
attendance data could significantly expand their work to ensure accuracy of all
schools’ attendance data, auditors interviewed partners from two of these firms.2
Additionally, to obtain ADE’s perspective and the extent to which ADE’s own
audit unit could perform sufficient audits to ensure the accuracy of Arizona
schools’ attendance data, auditors discussed these issues with several ADE
officials.
􀁺􇩔 To determine whether the Department is receiving all available federal grant
money, auditors interviewed ADE staff and U.S. Department of Education staff
and reviewed Web sites that list all available federal grants. Auditors then
compared the list of available federal grants to the fiscal year 2005 Schedule of
Expenditures of Federal Awards (SEFA), which lists federal grants to ADE. To
determine whether ADE was effective in helping LEAs use their grant monies so
they are not returned to the federal government, auditors reviewed the U.S.
Department of Education Grant Administration and Payment System (GAPS)
Award Balance Report for 2002 to 2005, which shows available balances on
federal grants that ADE received. Additionally, auditors reviewed reports and
processes, including those used as a part of ADE’s Grants Management
Enterprise system, to determine how ADE helps to ensure the use of federal
grant monies passed through to LEAs.
State of Arizona
page 4
1 These states were selected based on input from ADE and information that these states had implemented approaches
somewhat different from ADE for ensuring the accuracy of student attendance data.
2 These two CPA firms combined conduct over 80 percent of the LEA reviews. Each of them has been conducting these
audits since about 1986. As of June 2006, the larger firm had about 35 professional staff, while the smaller firm had
about 14 professional staff.
􀁺􇩉 In addition, auditors obtained and reviewed unaudited budget and staffing
documents that ADE provided for this Introduction and Background.
The audit was conducted in accordance with government auditing standards.
The Auditor General and staff express appreciation to the State Superintendent of
Public Instruction and the staff of the Department of Education for their cooperation
and assistance throughout this audit.
Office of the Auditor General
page 5
State of Arizona
page 6
ADE should implement a comprehensive system
to ensure the accuracy of LEAs’ attendance data
state-wide
ADE should develop and implement a comprehensive system to ensure the
accuracy of LEAs’ attendance data state-wide. ADE, as the State’s education
agency, is ultimately responsible not only for allocating General Fund monies to the
LEAs, but for ensuring that these monies are allocated properly. The amount of state
aid LEAs receive is tied directly to attendance data, so its accuracy is critical to
ensure that the LEAs receive the proper level of funding. However, while there are
limited reviews, neither ADE nor other entities verify that the attendance data at the
LEAs is accurate, and several indicators point to many inaccuracies in the data,
including limited reviews conducted by independent certified public accounting
(CPA) firms, a special study conducted previously by the Auditor General’s Office,
and audits conducted by ADE’s own staff. ADE should implement a comprehensive
system that ensures that the LEAs’ attendance data state-wide is accurate and that
when inaccuracies are identified, ADE should recover any overpayments to the LEAs
and distribute additional monies to LEAs that were underpaid.
ADE needs accurate attendance data to properly
allocate funding
Accurate attendance data is important to ADE because it affects billions of dollars in
state financial assistance to LEAs. Appropriations to ADE represent the largest single
allotment of the State’s General Fund. ADE allocates the majority of its General Fund
appropriation to the LEAs. According to the State of Arizona Appropriations Report for
fiscal year 2006, ADE was estimated to receive about $5 billion in total funding for
fiscal year 2006, including approximately $3.5 billion appropriated from the General
Fund and $1.4 billion from federal and other funds. Over 97 percent of this funding
Office of the Auditor General
page 7
FINDING 1
In fiscal year 2006, ADE
distributed about 99
percent of its $3.5 billion
General Fund
appropriation to LEAs.
Attendance data—paper or electronic
attendance records at an LEA.
1 According to A.R.S. §15-902.02, LEAs that offer at least 200 days of instruction have the option of using the average of
the first 200 days of the school year.
2 The actual difference in funding would probably be greater than $49.9 million because each full-time student usually
counts for more than one ADM, and M&O is only one of the funding formulas that uses ADM in their calculations (see
Introduction and Background, page 2).
State of Arizona
page 8
was designated as pass-through monies to LEAs, including over 99 percent of ADE’s
General Fund appropriation.
ADE uses the LEAs’ attendance data to calculate Average Daily Membership (ADM),
which in turn determines the amount of aid each LEA receives. ADE calculates ADM
by averaging the LEAs’ attendance data from the first 100 or 200 days of the school
year.1 ADE then weights the data using statutory adjustments and then totals the
weighted data by LEA to calculate the funds. Since LEA funding relies heavily on
ADM data, even a small error in state-wide attendance data can have a multi-million-dollar
impact. ADE reports that in fiscal year 2005, state-wide ADM was 970,985, and
total Maintenance & Operation (M&O) expenditures were $4,993,584,885. Therefore,
if the ADM data was overstated or understated by just 1 percent (9,710), the funding
error would have totaled at least $49.9 million of M&O expenditures.2
Limited reviews of state-wide LEA attendance data
identify inaccuracies
Although billions of dollars in aid are allocated to Arizona’s LEAs based on their
attendance data, ADE lacks a comprehensive process for verifying that the LEAs’
attendance data state-wide is accurate. Several elements of a process are in place
and they point to inaccuracies in the data. Specifically, limited reviews conducted by
CPA firms, a special study conducted previously by the Auditor General’s Office, and
audits conducted by ADE’s own staff have all identified inaccuracies in attendance
data. However, while these reviews have revealed accuracy problems with the data,
such reviews are limited by both their purpose and small sample size of LEAs’
attendance data. None of these reviews was intended to assess the accuracy of
LEAs’ attendance data on a state-wide basis.
􀁺􇩌 Limited reviews by CPA firms—CPA firms conduct limited reviews of controls
over attendance data as part of their overall financial audits of LEAs. A.R.S. §15-
914(G) requires these reviews to be conducted to determine whether the
attendance data is reported in compliance with state law and the Uniform
System of Financial Records for School Districts and Charter Schools. In
performing their work, the Auditor General requires CPA firms to review small
samples—a minimum of 3 to 15 students—at the LEA to determine compliance.
In performing their reviews of the LEAs’ controls over their attendance data, the
CPA firms frequently identify problems, many of which suggest that internal
controls may not be adequate to ensure accurate reporting of attendance data.
CPA firms conduct
limited reviews of
controls over
attendance data.
The CPA firms reported that for fiscal year 2004, 149 out of the 158 school
districts reviewed had at least one noncompliance issue, with a total of 681
noncompliance issues found. For fiscal year 2004, 765 attendance
noncompliance issues were identified at 235 charter schools, according to an
official from the Arizona State Board for Charter Schools.
Many of the noncompliance issues at the school districts involved differences
between the information in the LEAs’ data system and the supporting detail for
entry, withdrawal, and partial absences. For example, the CPA firms sometimes
identify that the LEA staff fail to properly withdraw a student once the student has
10 consecutive unexcused absences. The LEA may show the student as
enrolled during the 10-day period, rather than going back and recording a
withdrawal as of the first of the 10 days. This error allows the LEA to improperly
receive funding for those 10 days.
While these limited reviews by the CPA firms show that the potential for errors
exists at the LEAs, they do not measure the extent to which errors are actually
occurring. Further, the CPA firms make no attempt to calculate any amounts of
over- or underpayments.
􀁺􇩓 Special study by the Auditor General’s Office—In December 2004, the Auditor
General published a special study on two Joint Technological Education
Districts (JTEDs): the East Valley Institute of Technology and the Northern
Arizona Vocational Institute of Technology. Each of these districts is an LEA. The
study found that these JTEDs overstated their attendance numbers, which
resulted in an overstatement of their funding by about $2 million and $320,000,
respectively, in fiscal year 2004 alone.
ADE was unable to recover these overpayments since a 2005 statutory change
disallowed it from doing so.
􀁺􇩁 Audits by ADE staff—ADE’s Audit Resolution Unit (ARU) conducts ADM audits
of about 8 LEAs each year. According to ADE’s records, ARU has identified
approximately $1.75 million in overpayments from May 2002 to October 2005. A
review of ARU’s records showed that overpayments were found in 13 of the 26
audits conducted.
However, although some of these audits identified inaccuracies in the data, they
are designed to focus on certain sites at a school district or charter holder for
which there is a high level of risk for reporting errors. According to its audit
manual, ARU samples about 30 students from each of these high-risk sites in
order to identify potential over- and underpayments. For example, students in
12th grade are more likely to be enrolled in both high school and community
college courses at the same time or otherwise be part-time high school
students, which raises concerns about how attendance for these students is
Office of the Auditor General
page 9
ADE’s audits focus on
groups of students with
high risk for attendance
errors.
State of Arizona
page 10
counted. This can lead to inaccuracies, which can cause improper funding
amounts to be allocated to that LEA. If ARU identifies an overstated attendance
count at the LEA, it converts it into a dollar value, which it then subtracts from
the LEA’s future funding. However, the amount calculated is based only on the
30 or so students actually sampled, and neither the overstated attendance
amount nor the overstated funding amount identified by the audit can be
generalized to the LEA’s entire student population.
ADE should take additional action to ensure accuracy of
LEAs’ attendance data state-wide
Since the accuracy of LEAs’ attendance data is so critical to ensuring proper
payment of state aid to the LEAs, ADE should implement a comprehensive system
to ensure that the data is accurate state-wide. If it is determined to be inaccurate,
ADE should recover any overpayments and distribute any underpayments to the
LEAs. There are different options that ADE could choose to implement, and other
states have already implemented systems to ensure the accuracy of their schools’
attendance data. For example, ADE could seek statutory changes to require CPA
firms to assess the accuracy of attendance data as part of their financial reviews of
the LEAs. Another alternative is for ADE’s own audit unit to expand the work it
currently performs. Regardless of the system ADE chooses to implement, once ADE
has ensured the accuracy of the LEAs’ attendance data, ADE should then determine
if any adjustments need to be made to the LEAs’ funding.
CPA firms could assess accuracy of LEAs’ attendance data—By
statute, the reviews conducted by the CPA firms focus on whether the LEAs are
complying with statutes and the Uniform System of Financial Records for School
Districts and Charter Schools. However, the reviews do not assess the accuracy of
the attendance data reported or calculate any over- or underpayments. ADE could
seek the necessary changes in statute to require the CPA firms to perform more
extensive reviews of the accuracy of the LEA attendance data with the intent of
identifying over- or underpayments. ADE could then work with the Office of the
Auditor General to define new requirements for the CPA firms. These reviews could
take one of two forms: 1) to conduct enough work so that a total over- or
underpayment amount could be calculated for the total attendance data submitted
by the LEA, or 2) to conduct less-extensive work and calculate an over- or
underpayment amount only for the data sampled. Specifically:
􀁺􇨠 To be able to review a sufficient amount of attendance data to allow
generalization to the LEA, the CPA firms’ reviews would need to include much
larger samples of students than they currently use. The exact number required
to assess the accuracy of an LEA’s attendance data is specific to each school
ADE could seek statutory
changes to increase the
scope of the CPA firms’
attendance data reviews.
Office of the Auditor General
page 11
and would need to be determined by the CPA firm according to a number of
risk factors, such as the particular type of schools in the LEA and the type of
students served by the LEA. According to two CPA firms’ representatives
whose reviews make up over 80 percent of LEA reviews in the State, their firms
would be able to accomplish this work, although the reviews would take
longer and cost more. The firms are paid for their services by the school
districts, who in turn recover the nonfederal portion of the cost of the audits
through a mix of additional state aid and property taxes. However, the overall
costs to perform this additional work could be reduced if the reviews were
conducted on a rotational basis with a certain number of LEAs reviewed every
year.
􀁺􇩁 Another approach could require the CPA firms to perform less extensive work,
which could result in smaller samples. Although reviewing smaller samples
would not allow generalization to the entire student population, it would at least
give ADE some better knowledge about the accuracy of that LEA’s
attendance data. Additionally, ADE could use the results to calculate over- or
underpayments to that LEA for that sample. If ADE chose to implement this
approach, it could require the CPA firms to target specific student populations
based on potential risk of attendance data inaccuracies. For example, it could
require that the firms determine if a particular grade of students appears to
have particularly high or low attendance, which could potentially indicate
inaccuracies.
Michigan’s 760 LEAs have the option to either use their own auditors or use
CPA firms to perform attendance data audits. According to an official from the
Michigan Department of Education (MDE), the auditors review samples of
about 2 to 20 percent of three different populations of students depending on
whether the risk associated with their attendance data is classified as low,
moderate, or high. However, auditors cannot generalize their results to the
entire population of students within the LEA. When auditors identify
inaccuracies, they make adjustments to the student counts, which allows
MDE to modify the amount of funding allotted to the LEA. Additionally,
according to an MDE official, MDE’s auditors conduct quality control reviews
of the LEA’s work on a 3-year cycle.
ADE’s audit unit could ensure accuracy of LEAs’ attendance data—
Another option ADE could implement to ensure the accuracy of the LEAs’
attendance data is expanding the size and coverage of its Audit Resolution Unit.
This could be done by either 1) requiring ARU to assume the primary role of
auditing the attendance data of all LEAs rather than the CPA firms, or 2) requiring
ARU to conduct more extensive audits of those LEAs found by the CPA firms to
have the most problematic attendance data.
Relying on ARU to audit all LEAs may not be feasible simply because of the sheer
number of audits to be performed. According to ARU’s audit director, as of March
ADE could require CPA
firms to target student
populations at greater
risk for attendance errors.
State of Arizona
page 12
2006, ARU had 2 audit staff whose primary function was performing audits of
attendance data. However, to audit all of the 244 school districts and 368 charter
holders in Arizona, ARU would need to be significantly expanded.1 ADE received
funding for 4 additional audit staff as part of its fiscal year 2007 budget.
Additionally, ARU is funded for 4 other staff who can perform attendance data
audits in addition to their other responsibilities. However, according to ARU’s
director, ARU would require 12 additional audit staff in order to provide audit
coverage state-wide, auditing each school district and charter holder once every 4
years. Further, if ARU wanted to calculate the total over- or underpayment for an
LEA, it would need to review much larger samples than it currently uses as part of
its limited audits, which would also require more resources.
A second option would be for ARU to coordinate its audit work with the results of
the audits performed by the CPA firms. For example, if the CPA firms were
conducting audits using smaller samples, or performing the audits on a rotational
basis, ARU could conduct more extensive and more frequent audits of those LEAs
found by the CPA firms to have the most inaccurate attendance data.
The Texas Education Agency (TEA) uses its 9 audit staff to audit about 10 percent
of the state’s approximately 1,200 LEAs annually. According to an official at TEA,
the audits are either conducted on-site at the schools or are “desk audits,” which
are equivalent to on-site audits except that the auditors conduct the audits at TEA
and the schools send the auditors the necessary documentation. According to
TEA, about 10 percent of its 125 annual audits are on-site and the remainder are
desk audits. If the audits identify inaccuracies, TEA makes adjustments to the
district’s future funding. According to TEA personnel, TEA recovered
approximately $30 million in 2005. Texas, like Arizona, has a large database of
student data, which auditors use to identify higher-risk schools that will be audited.
Specifically, TEA’s Division of Financial Audits identifies schools with attendance
reporting anomalies for each school year by running automated queries against
automated attendance records for each district.
ADE should implement a system to ensure the accuracy of schools’
attendance data—Whatever approach it chooses, ADE should develop and
implement a comprehensive system to ensure that schools’ attendance data is
correct and make funding adjustments based on the results. In March 2006, ADE
put together a group of stakeholders from the districts and ADE to study the issue
and develop recommendations for ADE to consider. The goal is to have final
recommendations to ADE management by the fall of 2006.
Once ADE has implemented a comprehensive system to determine that the LEAs’
attendance data is accurate, ADE should use the results to make needed payment
adjustments. If an LEA was overpaid for student membership, ADE would need to
reduce that LEA’s future funding. Conversely, if an LEA was underpaid for its
student membership, ADE would need to increase that LEA’s future funding or
distribute additional monies to it.
1 The term charter holder refers to the administrative entity serving one or more charter schools and is similar to a school
district.
Recommendations:
1. ADE should implement a comprehensive system to ensure the accuracy of
schools’ attendance data state-wide. ADE should consider:
a. Seeking statutory revisions to require that CPA firms, as part of their
financial audits of LEAs, determine the accuracy of attendance data, and
work with the Office of the Auditor General to define the new requirements;
and/or
b. Expanding the number of attendance data audits conducted by its Audit
Resolution Unit.
2. Once it has implemented a comprehensive system to ensure the accuracy of
LEAs’ attendance data state-wide, ADE should make state aid payment
adjustments based on the results.
Office of the Auditor General
page 13
State of Arizona
page 14
ADE’s approach to identifying and administering
federal grant monies generally appropriate
ADE’s approach to identifying and administering federal grant monies—both formula
and discretionary—is generally appropriate. ADE’s process for obtaining federal
formula grants appears appropriate in that it is receiving all of the grants it is eligible
for. ADE also competes for a limited number of discretionary federal grants, and its
process is generally adequate. However, ADE can make a relatively minor
improvement to this discretionary grant process by obtaining and maintaining
additional records concerning past grant activities to help it make
more informed decisions about similar grants in the future and
generally improve future grant applications. Additionally, ADE
ensures that LEAs use the U.S. Department of Education federal
grant monies it receives to avoid returning them to the federal
government.
ADE receives and administers federal grant
monies
ADE’s financial management duties include obtaining and
administering state and federal grant monies. As shown in Table 1
(see page 16), ADE received and administered federal grants totaling nearly $800
million during fiscal year 2005. While ADE receives federal grant monies from a
variety of sources, most of its funds come from the U.S. Department of Education
and the U.S. Department of Agriculture.
The majority of ADE’s grant money is from formula grants, which make up over 99
percent of the nearly $800 million ADE received in federal funds in fiscal year 2005.
In general, ADE passes formula grant monies to the LEAs, aiding them in delivering
various services to Arizona’s children. In fiscal year 2005, the largest formula grant
ADE received was the Title I-A Improving Basic Programs grant for $229,883,044
from the U.S. Department of Education. This grant is designed to improve the
Office of the Auditor General
page 15
Almost all of ADE’s grants
are formula grants from
the U.S. Departments of
Education and
Agriculture.
FINDING 2
Federal Grant Types
Formula—Also known as entitlement
grants, these grants are awarded to states or
other entities based on certain factors, such
as the number of children in poverty.
Discretionary—These are awarded to states
or other entities on a competitive basis
based on information submitted in an
application to the granting agency; for
example, the U.S. Department of Education.
State of Arizona
page 16
teaching and learning of students who are failing (or are at risk of failing) to meet state
academic standards. By contrast, an example of a discretionary grant is the
Transition to Teaching grant that ADE was awarded for $377,868, which is designed
“to support the recruitment, training and placement of talented individuals from other
fields into teaching positions in K-12 classrooms and support them during their first
years in the classroom.”
ADE’s process for administering and maximizing formula
grants appears appropriate
ADE’s process for obtaining federal formula grants appears appropriate in that ADE
is receiving all of the federal formula grants it is eligible for. The federal government
Table 1: Arizona Department of Education Expenditures
By Dollars Received from Federal Agencies
Fiscal Year 2005
Federal Agency
Percentage
of Total Dollars
Number of
Awards Amount
Education 66.89%
Formula 25 $529,352,638
Discretionary 10 2,609,009
Total 35 531,961,647
Agriculture 32.58
Formula 8 258,981,850
Discretionary 2 106,599
Total 10 259,088,449
Labor 0.36
Formula 3 2,837,838
Discretionary - -
Total 3 2,837,838
Health and Human Services 0.06
Formula - -
Discretionary 2 499,581
Total 2 499,581
Corporation for National and
Community Service 0.06
Formula - -
Discretionary 1 438,369
Total 1 438,369
Interior 0.05
Formula - -
Discretionary 1 390,998
Total 1 390,998
Totals
Formula 36 791,172,326
Discretionary 16 4,044,556
Total 100.00% 52 $795,216,882
Source: Auditor General staff analysis of Arizona’s Fiscal Year 2005 Schedule of Expenditures of
Federal Awards (SEFA).
appropriates and allocates grant monies to states or other entities based on certain
factors, such as the number of children in poverty. In order to receive the formula
grant monies, a state must submit proper documentation to the granting federal
agency and receive approval. Internally, ADE then channels these monies to the
specific program areas responsible for the programs associated with the grant
monies. These program areas then make the formula grant monies available to the
LEAs in the form of various state-level formula and discretionary grants as
determined by federal guidelines. LEAs must then apply for these grant monies
through ADE. ADE coordinates the LEAs’ application process using its online Grants
Management Enterprise (GME) system.1
To determine whether there may be additional federal formula grants that ADE is
eligible for but not receiving, auditors searched the Catalog of Federal Domestic
Assistance and the U.S. Department of Education’s Guide to Education Programs for
formula grants that ADE is eligible to receive and compared the list with grants listed
in Arizona’s 2005 Schedule of Expenditures of Federal Awards (SEFA). While there
appeared to be a few formula grants that ADE was eligible for but not receiving,
auditors determined that these grants were already being obtained and administered
by other state agencies. For example, the grant “Special Education—Grants to
Infants and Families with Disabilities,” provided by the U.S. Department of Education,
with an average award of more than $8 million for each state, is obtained and
administered by the Arizona Department of Economic Security. Auditors’ analysis did
not identify any formula grants that ADE is eligible for but not receiving.
ADE’s discretionary grants process could benefit from
minor improvement
While ADE appears to have an appropriate process for obtaining federal
discretionary grants, it can make a minor process improvement by obtaining and
using information from past grant applications to improve its effectiveness in
applying for similar future grants. ADE uses a multifaceted approach for identifying
which discretionary grants to apply for. ADE has one full-time position—the Federal
Relations Liaison—dedicated to this process. Fulfilling grant application
requirements can be a complex and lengthy process, including activities such as
establishing partnerships with LEAs or other state agencies, developing programs,
planning for evaluation, and coordinating responsibilities within ADE. As such, it is
important for ADE to identify potential grants to apply for early on. According to ADE’s
Federal Relations Liaison, in identifying potential grants to apply for, ADE focuses on
the U.S. Department of Education’s Forecast of Funding Opportunities (Forecast),
which provides a forecast of virtually all potential grant opportunities offered by the
U.S. Department of Education, often before the application period is open. This
allows ADE to plan for potential grants before the actual application period begins.
Office of the Auditor General
page 17
1 This does not apply to USDA grants, which are not included in the GME system.
LEAs apply to ADE for
federal grant monies.
In addition to the Forecast, ADE uses a second source—the Web site and e-mail
notification service Grants.gov—to identify other potential grant opportunities,
including those offered by agencies other than the U.S. Department of Education. All
federal agencies are required to post grant opportunities on Grants.gov, providing a
“common face” for potential grantees to identify discretionary grant opportunities.
ADE’s Federal Relations Liaison receives an automatic e-mail notification of new
federal grant opportunities through Grants.gov, helping to ensure that ADE is aware
of other available federal grants in addition to those offered by the U.S. Department
of Education.
A second component of ADE’s process is its procedure for deciding which grants to
pursue. According to ADE personnel, out of the pool of potential grants,
management and staff of each program area determine which grants the programs
are eligible to apply for and discuss these possibilities with the Federal Relations
Liaison. In deciding whether to pursue a particular grant, several factors are
considered. These include whether ADE has the staff resources available to
implement the grant, the dollar amount and number of potential awards, federal
requirements, whether a partnering agency is required, whether the grant would
make provisions for administrative costs associated with implementing the grant,
and whether the grant requires any matching state dollars. ADE has decided not to
pursue grants requiring any matching state dollars to avoid additional state
spending. Once grants are awarded to ADE, discretionary grant monies are
administered in various ways based on the stipulations of the individual grants, rather
than being generally disbursed or awarded to LEAs similar to formula grants. For
example, a discretionary grant may require a partnership between ADE and one or
more specific LEAs.
While generally effective in carrying out its discretionary grants program, ADE should
obtain and maintain additional records concerning past grant activities and use them
to make better decisions about future grant applications. Such information could
include information about why it chose not to pursue grants it was eligible to apply
for, and especially why it was turned down for any grants it applied for. This
information could help ADE to make more informed decisions about whether to apply
for similar grants in the future and generally improve future grant applications.
Although it does track the names of such grants, it does not keep detailed or
consistent records or notes about these grants, or request feedback from a granting
agency on denied applications.
ADE helps ensure LEAs use grant monies
ADE uses a multi-faceted approach in helping LEAs use their formula and
discretionary grant monies from the U.S. Department of Education. According to ADE
staff, all federal grants administered at ADE, except USDA grants, are managed in its
State of Arizona
page 18
ADE does not regularly
request information on
grant applications that
were denied.
Office of the Auditor General
page 19
online grants management system, the GME system. This GME system has several
uses:
􀁺􇩉 It helps LEAs identify, apply for, receive, and use federal grant money available
through ADE.
􀁺􇩉 It enables LEAs to log on to a network and manage grants accounts from their
own location.
􀁺􇩉 It allows ADE to monitor LEAs’ usage of the available grant monies, including
whether they are applying for and using monies made available through ADE.
ADE uses several methods to help ensure that the LEAs use their grant monies. First,
ADE uses its GME system to identify LEAs who have not applied for federal grant
monies or who are not using available grant monies quickly enough before the 27-
month close date for U.S. Department of Education Grants.
Additionally, ADE uses phone calls and e-mails to notify
specific LEAs of the need to use the available money.
Further, ADE has developed grant-tracking reports to aid in
determining the dollar amounts available for U.S.
Department of Education grants awarded. These reports,
the GME system, and the policy of spending the older
money first appear to help ADE to ensure that the grant
money is used within the 27-month period allowed by the
U.S. Department of Education before the grant is closed.1
As illustrated by Table 2, less than 1 percent of federal grant
monies awarded by the U.S. Department of Education went
unspent for calendar years 2002 through 2005. The unspent
amounts were either never “drawn down” (requested) from
the federal government for use by ADE, or were drawn
down and subsequently returned because they were not
actually spent by either ADE or an LEA.
Recommendation:
1. In carrying out its discretionary grants program, ADE should obtain and maintain
additional records concerning past grant activities and use them to make better
decisions about future grant applications.
1 If ADE does not use or obligate the grant money within the 27 months, the grant closes and ADE can generally no longer
use the money.
Table 2: Unspent Federal Grant Monies
Calendar Years 2002 through 2005
As of January 31, 2006
Year
Amount
Awarded1
Amount
Unspent
Percentage
Unspent
2002 $365,973,829 $968,225 0.26%
2003 327,853,668 545,259 0.17
2004 453,865,921 655,555 0.14
2005 532,682,058 550,485 0.10
1 These amounts reflect grants that closed during the years presented.
Source: Auditor General staff analysis of U.S. DOE Grant
Administration and Payment System (GAPS) Report, as
of January 31, 2006.
State of Arizona
page 20
Office of the Auditor General
AGENCY RESPONSE
State of Arizona
04-06 Department of Environmental
Quality—Waste Programs
Division
04-07 Department of Environmental
Quality—Air Quality Division
04-08 Department of Environmental
Quality—Sunset Factors
04-09 Arizona Department of
Transportation, Motor Vehicle
Division— State Revenue
Collection Functions
04-10 Arizona Department of
Transportation, Motor Vehicle
Division—Information Security
and E-government Services
04-11 Arizona Department of
Transportation, Motor Vehicle
Division—Sunset Factors
04-12 Board of Examiners of Nursing
Care Institution Administrators
and Assisted Living Facility
Managers
05-L1 Letter Report—Department
of Health Services—
Ultrasound Reviews
05-01 Department of Economic
Security—Division of
Employment and
Rehabilitation Services—
Unemployment Insurance
Program
05-02 Department of Administration—
Financial Services Division
05-03 Government Information
Technology Agency (GITA) &
Information Technology
Authorization Committee (ITAC)
05-04 Department of Economic
Security—Information Security
05-05 Department of Economic
Security—Service Integration
Initiative
05-06 Department of Revenue—Audit
Division
05-07 Department of Economic
Security—Division of
Developmental Disabilities
05-08 Department of Economic
Security—Sunset Factors
05-09 Arizona State Retirement
System
05-10 Foster Care Review Board
05-11 Department of Administration—
Information Services Division
and Telecommunications
Program Office
05-12 Department of Administration—
Human Resources Division
05-13 Department of Administration—
Sunset Factors
05-14 Department of Revenue—
Collections Division
05-15 Department of Revenue—
Business Reengineering/
Integrated Tax System
05-16 Department of Revenue
Sunset Factors
06-01 Governor’s Regulatory Review
Council
06-02 Arizona Health Care Cost
Containment System—
Healthcare Group Program
06-03 Pinal County Transportation
Excise Tax
06-04 Arizona Department of
Education—Accountability
Programs
06-05 Arizona Department of
Transportation—Aspects of
Construction Management
Performance Audit Division reports issued within the last 24 months
Future Performance Audit Division reports
Arizona Department of Education—Information Management Function
Arizona Supreme Court—Administrative Office of the Courts—Information Technology and
FARE Program