[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]




 
                 WASTE, FRAUD, ABUSE, AND MISMANAGEMENT

=======================================================================

                                HEARINGS

                               before the

                             TASK FORCE ON
                         EDUCATION AND TRAINING

                                 of the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

        HEARINGS HELD IN WASHINGTON, DC: MAY 24 & JUNE 14, 2000

                               __________

                            Serial No. 10-3


           Printed for the use of the Committee on the Budget

                               ----------

                     U.S. GOVERNMENT PRINTING OFFICE
64-702cc                     WASHINGTON : 2000
                        COMMITTEE ON THE BUDGET

                     JOHN R. KASICH, Ohio, Chairman
SAXBY CHAMBLISS, Georgia,            JOHN M. SPRATT, Jr., South 
  Speaker's Designee                     Carolina,
CHRISTOPHER SHAYS, Connecticut         Ranking Minority Member
WALLY HERGER, California             JIM McDERMOTT, Washington,
BOB FRANKS, New Jersey                 Leadership Designee
NICK SMITH, Michigan                 LYNN N. RIVERS, Michigan
JIM NUSSLE, Iowa                     BENNIE G. THOMPSON, Mississippi
PETER HOEKSTRA, Michigan             DAVID MINGE, Minnesota
GEORGE P. RADANOVICH, California     KEN BENTSEN, Texas
CHARLES F. BASS, New Hampshire       JIM DAVIS, Florida
GIL GUTKNECHT, Minnesota             ROBERT A. WEYGAND, Rhode Island
VAN HILLEARY, Tennessee              EVA M. CLAYTON, North Carolina
JOHN E. SUNUNU, New Hampshire        DAVID E. PRICE, North Carolina
JOSEPH PITTS, Pennsylvania           EDWARD J. MARKEY, Massachusetts
JOE KNOLLENBERG, Michigan            GERALD D. KLECZKA, Wisconsin
MAC THORNBERRY, Texas                BOB CLEMENT, Tennessee
JIM RYUN, Kansas                     JAMES P. MORAN, Virginia
MAC COLLINS, Georgia                 DARLENE HOOLEY, Oregon
ZACH WAMP, Tennessee                 KEN LUCAS, Kentucky
MARK GREEN, Wisconsin                RUSH D. HOLT, New Jersey
ERNIE FLETCHER, Kentucky             JOSEPH M. HOEFFEL III, 
GARY MILLER, California                  Pennsylvania
PAUL RYAN, Wisconsin                 TAMMY BALDWIN, Wisconsin
PAT TOOMEY, Pennsylvania
                                 ------                                

                  Task Force on Education and Training

                   PETER HOEKSTRA, Michigan, Chairman
MARK GREEN, Wisconson Vice Chairman  LYNN N. RIVERS, Michigan,
VAN HILLEARY, Tennessee                Ranking Minority Member
MAC COLLINS, Georgia                 BOB CLEMENT, Tennessee
                                     DARLENE HOOLEY, Oregon
                                     RUSH D. HOLT, New Jersey
                                 ------                                

                           Professional Staff

                    Wayne T. Struble, Staff Director
       Thomas S. Kahn, Minority Staff Director and Chief Counsel
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held in Washington, DC, May 24, 2000: Education 
  Department Fails Accounting 101................................     1
    Statement of:
        Edward P. Moore, CFP, President, Edelman Financial 
          Services, Inc..........................................     3
        Daniel J. Murrin, Partner, Ernst & Young LLP.............     7
        Lorraine Pratte Lewis, Inspector General, U.S. Department 
          of Education...........................................    10
        Gloria L. Jarmon, Director, Health, Education, and Human 
          Services, Accounting and Financial Management Issues; 
          Gary T. Engel, Associate Director, Governmentwide 
          Accounting and Financial Management Issues, U.S. 
          General Accounting Office..............................    16
    Prepared statement of:
        Mr. Moore................................................     5
        Mr. Murrin...............................................     8
        Ms. Lewis................................................    12
        Ms. Jarmon and Mr. Engel.................................    18
                              ----------                              

Hearing held in Washington, DC, June 24, 2000: Smothering 
  Education Reform: How Washington Stifles Innovation............    41
    Statement of:
        Hon. Tim Hutchinson, a United States Senator from the 
          State of Arkansas......................................    44
        Eugene W. Hickok, Secretary of Education, State of 
          Pennsylvania...........................................    53
        Susan Sclafani, Chief of Staff, Educational Services, 
          Houston Independent School District....................    60
    Prepared statement of:
        Hon. Peter Hoekstra, a Representative in Congress from 
          the State of Michigan..................................    42
        Senator Hutchinson.......................................    47
        Mr. Hickok...............................................    56
        Ms. Sclafani.............................................    63


               EDUCATION DEPARTMENT FAILS ACCOUNTING 101

                              ----------                              


                        WEDNESDAY, MAY 24, 2000

                  House of Representatives,
                           Committee on the Budget,
                      Task Force on Education and Training,
                                                    Washington, DC.
    The Task Force met, pursuant to call, at 10:22 a.m. In room 
210, Cannon House Office Building, Hon. Peter Hoekstra 
(chairman of the Task Force) presiding.
    Mr. Hoekstra. Good morning. The task force will come to 
order.
    Let me just give a little bit of an overview, and then Ms. 
Rivers has a comment.
    Thank you for coming this morning as we take a look at the 
financial management practices at the Department of Education 
and the results of the Department's two failed audits.
    This is the third time that a number of today's witnesses 
will be testifying before Congress on these issues. However, it 
is the first time that the Budget Committee will have the 
opportunity to hear about the potential, and even documented, 
fraud, waste and abuse at the Department. While we already know 
that the Department has been unable to produce a clean audit 
for fiscal years 1998 and 1999, a few recent incidents 
illustrate the effects of this financial mismanagement.
    Recently, a Bell Atlantic employee pleaded guilty to 
conspiring with Department of Education employees to steal more 
than $1 million in equipment and in false overtime billing. 
Items were ordered under a Bell Atlantic contract but delivered 
to the homes of Department employees and their families. These 
items included computers, telephones, televisions and compact 
disk players.
    That is not all. In return for allowing the Bell Atlantic 
employees to bill the Department of Education for overtime 
never performed, these contractors performed personal errands 
for the Department employee, even driving to Baltimore to get 
her crab cakes for lunch.
    This scheme went on for at least 2 year, in part because 
the Department of Education does not have the proper management 
procedures in place to track inventory. In 1985, in an 
Inspector General report, the Department was criticized for 
having weak controls over the safeguarding of office equipment 
and the recording of items received. In November 1994, the IG 
issued an Investigation Advisory Program Report that described 
deficiencies in the Department's property management and 
provided 21 recommendations for improvement. The IG provided 
follow-up reports in March 1997, October 1997, November 1998, 
that concluded that the weaknesses still persisted. So it is 
not surprising that we see these kinds of difficulties.
    This theft ring may only be the tip of the iceberg. 
According to the Inspector General, of the 139 recommendations 
made by auditors in the past 5 years, 111 remain open, and only 
28 are closed. Who knows what kind of waste or fraud may be 
occurring in these areas due to the inaction of the Department 
of Education?
    Let's take a close look at some of the other management 
problems at the Department. For at least 3 consecutive fiscal 
years, the Department has made duplicative payments to 
grantees. Last December alone, the Department issued duplicate 
payments to more than 52 schools totaling more than $6.7 
million.
    In one recent academic year, $177 million in Pell grants 
were improperly awarded because students failed to meet income 
requirements. More recently, the Department awarded 39 Jacob 
Javits scholarships to students who were supposed to be 
alternates for the award. What was the cost of this mistake? 
Nearly $4 million.
    The Department of Education has a grantback account that in 
1996 contained $750 million. Very little of this money was 
legitimately in the account and had been returned to the 
Department by grantees. The Department has still not been able 
to document where the money in the grantback account came from 
and where it is supposed to go.
    Is a clean audit an unreasonable goal for a Federal agency? 
No. In fact, many Federal agencies are able to produce a clean 
audit year after year. A clean audit and proper financial 
controls are the first steps toward preventing fraud, waste and 
abuse. Any business owner will tell you the importance of a 
clean audit is to maintain the confidence of investors and to 
prevent stock from being delisted.
    Actions have consequences. So does inaction. What I hope to 
make clear today is that the Department's failure to address 
its financial management problems can lead directly to fraud, 
waste and abuse. For at least 15 years the Department failed to 
address the lack of controls over inventory and now we have 
documented theft in this area.
    We know what needs to be done. The Department of Education 
must make financial stewardship one of their top priorities. 
Until it does, the taxpayers' investment in the education of 
America's youth is not going to reap anything close to its 
maximum return. Thank you.
    Ms. Rivers.
    Ms. Rivers. Thank you, Mr. Chairman. I join you in thanking 
our speakers for attending today. I am very anxious to hear 
their views on the long-standing problems at the Department of 
Education.
    I was interested when I saw Ms. Jarmon's testimony that 
this has gone on for many years and there has been a 10-year 
effort to reform but we have not made the progress that we 
would hope. I would hope that we not just hear the problems 
that exist but also solutions that can be pursued to bring the 
Department of Education into compliance. Particularly I would 
be interested in hearing any legislative solutions that have to 
be put in place in order to help the Department of Education do 
what it needs to do. I look forward to your testimony.
    Mr. Hoekstra. Thank you.
    Mr. Clement.
    Mr. Clement. Thank you, Mr. Chairman and Ms. Rivers, Mr. 
Holt, panel. It is a pleasure to have you here today.
    These are serious charges and serious allegations. And 
being a former college president--I was a college president for 
4\1/2\ years before I was elected to the United States Congress 
so I worked on education issues for a long, long time. I worked 
with Secretary Riley on many education issues.
    We sure want to correct these problems. I believe in the 
Department of Education. In many ways, it has served us well, 
but we surely want to bring about reform. We surely want to 
operate efficiently. And taxpayers expect us to make sure that 
every dollar is accounted for and that those that are going to 
receive help receive the help under the guidelines and 
restrictions we have. I want to know what the problem is so we 
can correct it once and for all. Hopefully, now we have turned 
the corner.
    Thank you.
    Mr. Hoekstra. Mr. Collins, do you have a statement?
    Mr. Collins. No.
    Mr. Hoekstra. Mr. Holt.
    Mr. Holt. Thank you, Mr. Chairman.
    Of course, we have some responsibility as stewards here; 
and we want to make sure that taxpayers' money is well spent; 
and to the extent that there has been waste or mismanagement we 
want to get to it. But the problem is not so much because it is 
taxpayers' money. The problem is because it is dealing with our 
most important undertaking as a society, which is the education 
of our children. We want to make sure that is done in the best 
possible way. I do hope that, as this group moves forward and 
as the witnesses provide us information, the emphasis will not 
be on fingerpointing but will be on ways that we can provide an 
efficient, excellent education for all our children.
    Mr. Hoekstra. Thank you very much.
    With us this morning we have Edward Moore, who is the 
President of Edelman Financial Services, Inc. We have Daniel 
Murrin, who is a partner with Ernst & Young; Gloria Jarmon and 
Gary Engel, who are with GAO; and Lorraine Lewis, who is the 
Inspector General of the Department of Education.
    Welcome to each of you today.

STATEMENT OF EDWARD P. MOORE, CFP, PRESIDENT, EDELMAN FINANCIAL 
                         SERVICES, INC.

    Mr. Hoekstra. We will begin with Mr. Moore.
    Mr. Moore. Good morning. I am honored to be appearing 
before this task force today. It is very encouraging to see 
that the task force has sought input from someone like me, 
someone who works every day to help both individual consumers 
and corporations regarding their personal finances and money 
management.
    As a father of two children enrolled in public elementary 
schools, I see firsthand the challenges, successes and failures 
of our public education system at the local level. But I am not 
here today to review all that faces the Department of 
Education, there are others here with greater expertise in that 
area than me.
    Instead, I speak to you today as a certified financial 
planner, one whose primary role is to show American families 
and businesses how to secure their financial futures. As the 
President of Edelman Financial Services, Inc., in Fairfax, 
Virginia, I oversee a planning practice that is perhaps the 
largest in the Washington, D.C., metropolitan area, and along 
with our firm's founder and chairman, Ric Edelman, I appear 
frequently on local and national media to share our knowledge 
with the consumers from coast to coast. Indeed, consumer 
education in the field of personal finance is a primary focus 
of our activities.
    And that is what brings me here today. I was asked to give 
the task force the answer to one fundamental question: Do the 
finances of a government entity--in this case the Department of 
Education--bear any similarity to the finances of an individual 
or corporation? To learn the answer, I will discuss the 
importance of following the basics of financial planning for 
both an individual and a corporation.
    For an individual or family, the financial planning process 
involves the following basic, fundamental steps:
    First, we help an individual identify their goals and 
objectives. At what point would they like to retire? What 
income do they need at that time? Do they want to send their 
kids to college, buy a home, build a nest egg? We help them 
identify, clarify and then define what they want for the 
future.
    Next, we help them identify the resources they have 
available. How are they currently spending their money? What 
are they saving? Where is that money being invested? Do they 
have retirement plans with their employers? Are they 
participating to the maximum? We help them identify what they 
currently have access to and what they are currently taking 
advantage of.
    Next, we help them direct their actions. As financial 
planners, we make specific recommendations in all areas of an 
individual's financial life. For example, how can they maximize 
the potential that is available to them? How can they protect 
their family and build toward the future?
    Planning and budgeting are keys to financial success, 
whether for a 10-year-old child with a weekly allowance or 
corporate America, responsible who not just to one, but to 
many. The principles are the same, only the magnitude of the 
process differs.
    Managing the finances of a business is equally important. 
When we are examining companies for our clients to consider as 
investments, the manner in which it is run financially is one 
of the key elements of our investigation. If a company has 
questionable financial records, our clients are told to steer 
clear of that company.
    Although it is not always the case, in the private sector 
today clean financial records are generally assumed. Companies 
that are publicly traded on the stock market are required to 
have their financial records audited annually to assure that 
they are following generally accepted accounting principles. As 
long as a company has clean records, we are able to do our 
analysis, based on the company's strengths and weaknesses, to 
determine if we feel it is an appropriate investment for our 
clients.
    A recent case in point of a company that did not manage its 
finances effectively is a Virginia company just outside the 
Washington Beltway. This company, which has been in the news 
quite a bit recently, saw its stock price drop from over $300 a 
share to under $25 a share in just the last 2 months. That 
means if an investor had $100,000 invested in this company in 
March, they now have less than $10,000. The primary reason for 
the 92 percent drop in that company's stock price was the way 
in which their books were kept. They did not track their income 
and expenses in a way that was acceptable to regulators. 
Tracking finances is one of the most fundamental aspects of 
running a business, and this company failed miserably. In this 
case, bad books equals a bad investment.
    Does any of this pertain to the Department of Education? 
Absolutely. As with an individual or corporation, the 
Department does not have unlimited funding each year, so it 
must pay close attention to its finances. As a taxpayer, 
financial adviser and father of two children in elementary 
school, I think it is reasonable to ask a Federal agency to 
keep clean and complete records of where its money goes. By 
keeping clean books and accurate records, the Department and 
Congress can continue actually evaluating where it is spending 
its money to help it make better decisions in the future--
decisions that will further improve the quality of education 
that our Nation's children receive. Higher quality education 
means a better, stronger America.
    By carefully managing its money, the Department of 
Education can deliver maximum benefits to our Nation's 
children, while spending less money than it otherwise might. 
Such savings could translate to smaller budgets, which result 
in less government spending. This can bring about lower taxes 
for working-class citizens and greater economic prosperity for 
all Americans. But if the Department of Education is not in 
control of its spending, if the Department is not concerned 
with where its money is going, then its effectiveness shrinks, 
it opens itself up for possible fraud or abuse, with fewer 
benefits reaching our children. In that case, no one wins.
    Thank you again for giving me the honor of speaking with 
you here today.
    Mr. Hoekstra. Thank you.
    [The prepared statement of Edward Moore follows:]

    Prepared Statement of Edward P. Moore, CFP, President, Edelman 
                        Financial Services, Inc.

    I am honored to be appearing before this Task Force today. It is 
very encouraging to see that the Task Force has sought input from 
someone like me, someone who works every day to help both individual 
consumers and corporations regarding their personal finances and money 
management.
    As the father of two children enrolled in public elementary 
schools, I see first-hand the challenges, successes and failures of our 
public education system at the local level. But I am not here today to 
review all that faces the Department of Education, there are others 
here with greater expertise in that area than me.
    Instead, I speak to you today as a Certified Financial Planner, one 
whose primary role is to show American families and businesses how to 
secure their financial futures. As the President of Edelman Financial 
Services Inc. in Fairfax, Virginia, I oversee a planning practice that 
is perhaps the largest in the Washington, DC metropolitan area and, 
along with our firm's founder and Chairman, Ric Edelman, I appear 
frequently on local and national media to share our knowledge with 
consumers from coast to coast. Indeed, consumer education in the field 
of personal finance is a primary focus of our activities.
    And that is what brings me here today. I was asked to give the Task 
Force the answer to one fundamental question: Do the finances of a 
government entity-in this case the Department of Education-bear any 
similarity to the finances of an individual or corporation? To learn 
the answer, I will discuss the importance of following the basics of 
financial planning for both an individual and a corporation.
    For an individual or family, the financial planning process 
involves the following basic, fundamental steps:
     Identify goals and objectives: At what point would they 
like to retire? What income do they need at that time? Do they want to 
send their kids to college? Buy a home? Build a nest egg? We help them 
identify, clarify, and then define what they want for the future.
     Identify resources available: How are they currently 
spending their money? What are they saving? Where is that money being 
invested? Do they have retirement plans with employers? Are they 
participating to the maximum? We help them identify what they are 
currently have access to and what they are currently taking advantage 
of.
     Direct actions: As financial planners, we make specific 
recommendations in all areas of an individual's financial life; for 
example, how they can maximize the potential that is available to them, 
protect their family, and build toward the future.
    Planning and budgeting are key to financial success, whether for a 
10 year old child, with a weekly allowance, or corporate America, 
responsible not just to one, but to many. The principles are the same, 
only the magnitude of the process differs.
    Managing the finances of a business is equally important. When we 
are examining companies for our clients to consider as investments, the 
manner in which it is run financially is one of the key elements of our 
investigation. If a company has questionable financial records, our 
clients are told to steer clear of that company.
    Although it is not always the case, in the private sector today, 
clean financial records are generally assumed. Companies that are 
publicly traded on the Stock Market are required to have their 
financial records audited annually to assure they are following 
generally accepted accounting principles. As long as a company has 
clean records, we are able to do our analysis, based on the company's 
strengths and weaknesses, to determine if we feel it is an appropriate 
investment for our clients.
    A recent case in point of a company that did not manage it's 
finances effectively is a Virginia company just outside the Washington 
Beltway. This company, which has been in the news quite a bit recently, 
saw its stock price drop from over $300 a share to under $25 a share in 
the last 2 months. That means if an investor had $100,000 in that stock 
in March, they now have less than $10,000. The primary reason for the 
92% drop in the company's stock price was the way in which their books 
were kept. They did not track their income and expenses in a way that 
was acceptable to regulators. Tracking finances is one of the most 
fundamental aspects of running a business, and this company failed 
miserably. In this case, Bad Books = A Bad Investment.
    Does any of this pertain to the Department of Education? 
Absolutely. As with an individual or corporation, the Department does 
not have unlimited funding each year, so it must pay close attention to 
its finances. As a taxpayer, Financial Advisor, and father of two 
children in elementary school, I think it is reasonable to ask a 
Federal agency to keep clean and complete records of where its money 
goes. By keeping clean books and accurate records, the Department and 
Congress can continually evaluate where it is spending its money to 
help it make better decisions in the future-decisions that will further 
improve the quality of education that our nation's children receive. 
Higher quality education means a better, stronger America.
    By carefully managing its money, the Department of Education can 
deliver maximum benefits to our nation's children, while spending less 
money than it otherwise might. Such savings could translate to smaller 
budgets, which result in less government spending. This can bring about 
lower taxes for working-class citizens and greater economic prosperity 
for all Americans. But if the Department of Education is not in control 
of its spending, if the Department is not concerned with where its 
money is going, then its effectiveness shrinks, it opens itself up for 
possible fraud or abuse, with fewer benefits reaching our children. In 
that case, no one wins.
    Thank you again for giving me the honor of speaking to you here 
today.

    Mr. Hoekstra. Mr. Murrin.

   STATEMENT OF DANIEL J. MURRIN, PARTNER, ERNST & YOUNG LLP

    Mr. Murrin. My name is Dan Murrin. I am a partner with 
Ernst & Young LLP and national director of public sector 
services for that firm. I have been in public accounting for 20 
years, with a specialty in the Public Sector--Federal 
Government.
    The Education Task Force of the Committee on the Budget has 
requested that Ernst & Young testify with respect to our 
recommendations for improving the financial management at the 
Department of Education; and our recommendations which were 
first given on March 1, 2000, before the Committee on Education 
and the Workforce's Subcommittee on Oversight and 
Investigations.
    The Office of Inspector General, for the Department of 
Education, engaged Ernst & Young to conduct the audits of the 
Department's fiscal year 1998 and 1999 financial statements.
    My testimony will focus on recommendations for improving 
financial management at the Department of Education, provide 
information on areas that may warrant further analysis as well 
as suggestions for additional work at the Department that may 
be required.
    By way of an overview of our fiscal year 1999 audit 
reports, and we testified on this on March 1, with respect to 
the Report of Independent Auditors for the Department of 
Education for fiscal year 1999, Ernst & Young issued a 
qualified opinion on four of those statements and disclaimed an 
opinion on the fifth statement.
    Regarding the Report on Internal Control, we detailed four 
material weaknesses and four reportable conditions. We included 
a total of 24 recommendations in the Report on Internal Control 
to assist the Department in addressing its internal control 
deficiencies.
    We had some additional recommendations for improving 
financial management drawn from those reports and discussed to 
some extent in our testimony on March 1. The Department has 
said they are moving forward with preparing interim financial 
statements. We have recommended that, they have an independent 
review of those interim financial statements performed.
    We have emphasized reconciliations as being a critical 
aspect of internal control and suggested that they be performed 
monthly and subject to follow-ups.
    The Department has ongoing efforts to identify duplicate 
payments. We have suggested that an independent review be 
performed of this process once it has been concluded so that we 
can identify whether there are any additional controls that 
should be implemented as a result of these projects. It is our 
understanding that the Office of Inspector General is also 
looking at this issue.
    We understand that the Department plans to complete a 
comprehensive physical inventory of its furniture and fixtures 
and is currently conducting an inventory of its 
telecommunications and computer equipment. We have suggested 
that an independent process be involved to review the results 
of that.
    The Department may also benefit from independent 
confirmations of financial data with grant recipients at the 
award level--for example, available funds, obligations and cash 
drawdowns.
    The Department may also want to consider ongoing efforts to 
review the accuracy of data in the National Student Loan Data 
System.
    In addition, in our reports we did make two overarching 
recommendations. We have recommended that the Department review 
the current organizational structure to update and more clearly 
define roles and responsibilities and to ensure that financial 
reporting objectives established by management are being 
achieved. Such a review may also include evaluating the 
recruiting, training and retention of accountants and financial 
management personnel, which is critically important.
    We recommend that the Department develop an implementation 
plan for replacement of the general ledger software package to 
ensure that the transition will occur in a timely and 
documented manner. And, finally, we also recommend that the 
Department ensure that the new general ledger package will meet 
its financial reporting needs.
    I will be pleased to answer any questions that you may 
have.
    [The prepared statement of Mr. Murrin follows:]

   Prepared Statement of Daniel J. Murrin, Partner, Ernst & Young LLP

                              introduction
    My name is Daniel J. Murrin. I am the National Director of Public 
Sector Services for Ernst & Young LLP, a public accounting firm. I have 
been in public accounting for over 20 years, with a specialty in the 
Public Sector--Federal Government. The Education Task Force of the 
Committee on the Budget has requested that Ernst & Young testify with 
respect to our recommendations for improving the financial management 
at the Department of Education which were given on March 1, 2000 
testimony before the Committee on Education and the Workforce's 
Subcommittee on Oversight and Investigations.
    The Office of Inspector General, for the Department of Education, 
engaged Ernst & Young to conduct the audits of the Department's fiscal 
year 1999 and 1998 financial statements.
               overview of fiscal year 1999 audit reports
    As you may be aware from our prior testimony, regarding the 
``Report of Independent Auditors,'' for the Department of Education for 
fiscal year 1999, Ernst & Young issued a qualified opinion on four of 
the five required financial statements and disclaimed an opinion on the 
fifth statement. The ``Report on Internal Control,'' detailed four 
material weaknesses and four reportable conditions. We included a total 
of 24 recommendations in our Report on Internal Control to assist the 
Department in addressing its internal control deficiencies. Our 
``Report on Compliance with Laws and Regulations'' cited noncompliance 
with the Federal Financial Management Improvement Act (FFMIA), the 
Information Technology Management Reform Act (the Clinger-Cohen Act), 
and the Federal Credit Reform Act.
    Our Report on Internal Control documents the following eight 
reportable conditions, the first four of which were material 
weaknesses:
     Financial Reporting Needs to Be Strengthened (Repeat 
Condition\1\--Material Weakness)
---------------------------------------------------------------------------
    \1\ Repeat condition means the issue was also included in the FY 
1998 Report on Internal Control.
---------------------------------------------------------------------------
     Reconciliations Need to Be Improved (Repeat Condition--
Material Weakness)
     Improvement of Credit Reform Reporting is Needed (Material 
Weakness)
     Controls Surrounding Information Systems Need Enhancement 
(Repeat Condition--Material Weakness)
     Documentation Supporting Obligations, Undelivered Orders 
and Unobligated Balances Needs to be Improved (Modified Repeat 
Reportable Condition)
     Communication and Coordination Efforts Need to be Improved 
for Financial Management
     Documentation Supporting Accounts Payable, Accrued 
Liabilities and Expenditures Needs to be Improved (Modified Repeat 
Reportable Condition)
     Reporting and Monitoring of Property and Equipment Needs 
to be Improved
    The four most serious of these weaknesses were: the accounting 
system's inability to perform a year-end closing process or produce 
automated consolidated financial statements; the lack of proper or 
timely reconciliations of the accounting records; failure to manage its 
financial operations in accordance with the requirements of the Federal 
Credit Reform Act of 1990; and deficiencies in controls surrounding 
information systems.
           recommendations for improving financial management
    Pursuant to the Task Force's request, my testimony will focus on 
Ernst & Young's recommendations for improving financial management at 
the Department of Education. I will provide information on areas that 
may warrant further analysis, as well as suggestions for additional 
work that could be performed concerning the Department's financial 
management. The items identified below are in addition to or an 
expansion of procedures that were performed as part of our audit.
    Interim financial statements--The Department has informed us that 
it intends to prepare interim financial statements for fiscal years 
2000 and beyond. We recommend that the Department also consider 
conducting a review of the interim financial statements to provide 
early identification of departures from generally accepted accounting 
principles (GAAP), if any, that might impact the year-end financial 
statements, as well as any other issues that could be addressed on an 
interim basis. This practice of having the interim financial statements 
reviewed is followed by publicly held companies. The scope of the 
annual financial statement audit that we have been engaged to perform 
does not encompass a review of interim financial statements in 
accordance with the AICPA Statement on Auditing Standards No. 71, 
Interim Financial Information.
    Reinforce reconciliation efforts--Reconciliations should be 
performed on a monthly basis with regards to (a) Fund Balance with 
Treasury, including the grantback account; (b) GAPS to FMSS; (c) 
budgetary to proprietary accounts; (d) accounts payable and related 
disbursements-in-transit; (e) suspense accounts; and (f) accounts 
receivable/guaranty agency reserves. As part of the interim financial 
statement reviews discussed above, the Department may benefit from 
having additional independent reviews of these reconciliations to 
improve the accuracy, completeness and timeliness of the 
reconciliations.
    Study duplicate payment issues--The Department has ongoing efforts 
to identify potential duplicate payments in the grant programs and the 
direct loan program in order to assess the need for additional controls 
to prevent occurrences of this nature in the future. We suggest that an 
independent review be performed of the process that was utilized by the 
Department to identify potential duplicates and of any additional 
controls implemented as a result of these projects. The Office of 
Inspector General has informed us that they are also looking at this 
issue.
    Inventory of Fixed Assets--The Department plans to complete a 
comprehensive physical inventory count of all fixed assets, including 
furniture and fixtures. We understand that the Department is currently 
conducting an inventory of all computer and telecommunications 
equipment. We suggest that, upon completion of these physical 
inventories, an independent review of the inventory results be 
performed to ensure that the process provided a complete and reliable 
inventory and to assess the significance of any issues identified as a 
part of conducting the inventory. The Office of Inspector General has 
informed us that they are also looking at this issue.
    Confirm Grant Data--The Department may benefit from independent 
confirmations of financial data with grant recipients at the award 
level (such as available funds, obligations, and cash drawdowns). 
Confirmations would help ensure that the Department's records are in 
balance with internal records maintained by the grant recipients.
    Perform Ongoing Reviews of the National Student Loan Data System 
(NSLDS)--The Department may want to consider ongoing efforts to review 
the accuracy of data in its Student Loan Database. NSLDS is a database 
which includes loan-level data for all student loans. The data is 
received from many entities which participate in the loan programs, 
such as the guaranty agencies. Data is used as the basis for 
determining the loan liability in the financial statements, and to 
provide information for management analysis and decisions. Because the 
accuracy and completeness of this data is important for making informed 
decisions, we suggest that efforts be focused on ensuring that the 
database continues to be a complete and reliable source of information.
    In addition, in our reports to the Department of Education we 
identified a number of specific actions that the Department could take 
to further improve its financial management. Several of the more 
overarching recommendations are as follows:
    Assess Organizational Structure--We recommended that the Department 
review the current organizational structure to update and more clearly 
define roles and responsibilities, and to ensure that financial 
reporting objectives established by management are achieved. Such a 
review may include evaluating the recruiting, training and retention of 
accountants and financial management personnel.
    Assess Financial System Requirements--We recommended that the 
Department develop an implementation plan for the replacement of the 
general ledger software package to ensure the transition will occur in 
a timely and documented manner. In addition, we recommended that the 
Department ensure that the new general ledger software package will 
meet its financial reporting needs. The Department will need to give 
consideration to both short-term and long-term needs.
    Grant Liability Estimation Process--We recommended that the 
Department develop a formal policy to further refine the methodology 
for estimating the year-end grant liability accrual. Implementation of 
a policy should facilitate consistency with reporting of financial 
information, as well as review by management for adherence to the 
Department's policy.

  STATEMENT OF LORRAINE PRATTE LEWIS, INSPECTOR GENERAL, U.S. 
                    DEPARTMENT OF EDUCATION

    Ms. Lewis. Mr. Chairman and members of the task force, I 
appreciate the opportunity to present testimony to you today.
    I will address our work in identifying fraud, waste and 
abuse at the Department. I will discuss the guilty plea of a 
Bell Atlantic employee working under a service agreement with 
the Department of Education, Pell grant fraud, and improper 
student loan forgiveness. I will also discuss the need for an 
environment with strong internal controls which are necessary 
to maintain the integrity of the Department's programs.
    We are conducting an investigation of individuals who, for 
approximately 3 years, made equipment purchases with Federal 
funds for nonbusiness-related purposes, billed the Department 
for hours not worked and received goods for personal use. Two 
individuals have pled guilty to their involvement in the case. 
The first, Joseph Morgan, pled guilty to one count of receiving 
stolen property. The second, Robert Sweeney, pled guilty to one 
count of conspiracy and one count of theft of government 
property. Much of the following information was reported by the 
U.S. Attorney's Office for the District of Columbia as part of 
the plea agreement with Mr. Sweeney.
    Mr. Sweeney was an employee of Bell Atlantic who had been 
assigned full time to the Department to install telephone lines 
and telephones. Mr. Sweeney and a second Bell Atlantic 
technician reported to a Telecommunications Specialist in the 
Office of the Chief Information Officer. The Specialist began 
asking Mr. Sweeney to order materials under the Bell Atlantic 
service agreement that were unrelated to official Department 
business. These items began with additional telephones and 
answering machines. Mr. Sweeney would deliver the items, which 
were paid for by the Department, to the Specialist, who would 
then distribute them to co-workers and family members for 
personal use.
    Over time, the Specialist's requests for items began to 
include more expensive items. For example a 61-inch television 
was ordered and delivered to the Specialist's son's house. 
Eight Gateway computers were picked up by Mr. Sweeney and 
delivered to the Specialist's house or to locations that she 
designated.
    From 1997 to 1999, the Specialist requested numerous items 
that were unrelated to the service agreement, including 
computers, printers, computer software, scanners, cordless 
telephones, a 61-inch television, Palm Pilots, walkie-talkies, 
compact disk players and many other items. The total cost of 
these items to the Department was over $300,000.
    Mr. Sweeney also performed numerous personal tasks for the 
Telecommunications Specialist. In exchange for that assistance 
with her personal requests, Mr. Sweeney was permitted to 
falsely claim overtime hours. It is estimated that between 
January, 1997, and November, 1999, approximately $634,000 in 
unworked hours was fraudulently charged to the Department by 
Mr. Sweeney and the other Bell Atlantic technician.
    Our contractors, Ernst & Young, have identified numerous 
Department internal control deficiencies in their Report on 
Internal Control for the fiscal year 1999 financial statement 
audit. A sound internal control environment provides management 
with a reasonable but not absolute assurance that assets are 
safeguarded against loss from unauthorized use or disposition. 
The lack of a sound internal control environment heightens the 
risk that the Department will not be able to safeguard its 
assets and accurately record, process and summarize financial 
data.
    OIG investigations and audits have disclosed patterns of 
fraud against the Pell grant program. The most common fraud 
scheme involved ineligible or nonexistent applicants who 
falsified FAFSAs and other documents to obtain Pell grants for 
which they or their institutions were not entitled. I have 
detailed a number of those investigations in my longer 
statement for the record.
    To help combat one of these patterns of Pell grant fraud, 
the 1998 Higher Education Act Amendments included a provision 
authorizing the Department, in cooperation with the Treasury 
Department, to confirm with the IRS key pieces of information 
on the Federal income tax returns of applicants and their 
parents. Without specific authorization in the Internal Revenue 
Code, however, the IRS indicates that it must obtain written 
taxpayer consent before individual income information may be 
released to the Department. We recommend that Congress enact 
any necessary additional legislation to address this matter.
    In the interim, the Department just completed the first of 
two planned test-match studies with the IRS. The Department 
will use the statistical information from the test match to 
identify the types of students who are most likely to 
underreport their income. The Department also intends to use 
the IRS information to better evaluate the extent of income 
underreporting and to support its desire to conduct a full-
scale data match with the IRS.
    OIG audit and investigative work has also identified 
concerns with the discharge of loans due to disability or 
death. Since October, 1999, OIG investigative work on 
fraudulent disability discharges resulted in more than $1 
million in loans being reinstated by the holders of the loans, 
which is either the Department or the guaranty agency. Again, I 
have provided some examples in my statement for the record.
    In our June, 1999, audit, ``Improving the Process for 
Forgiving Student Loans,'' we recommended that several steps be 
taken to enhance the current discharge determination 
procedures. The Department modified its disability form to 
incorporate our recommendations, and OMB approved that form. 
Also, the Department now requires that a death discharge be 
based only on an original or certified copy of the death 
certificate.
    In order to identify fraudulent death discharges, we 
conducted a data match with the Social Security 
Administration's Death Index to identify persons who received 
loan discharges based upon death but who do not appear in the 
Death Index. Working with a sample of these data and with 
information filed by those who obtained substantial discharges 
from Sallie Mae and a number of guaranty agencies, our 
investigators are pursuing leads generated by the match. In the 
area of disability discharge fraud, we are working with the 
guaranty agencies to identify potential fraud cases and 
following up on leads developed from the data.
    A key factor in improving accountability and minimizing 
operational problems within the Department is the 
implementation of appropriate internal controls. Recently, GAO 
updated its standards for internal control in government. The 
GAO standards address the areas of control environment, risk 
assessment, control activities, communication and monitoring.
    Currently, we are reviewing existing internal controls over 
the procurement of goods and services. We are conducting 
interviews with procurement personnel and senior managers in 
each principal office within the Department and performing 
transaction testing to verify the Department's internal control 
procedures. To date, we have found internal control 
deficiencies in the Department's use of the government purchase 
card and third-party checks. At the completion of our review, 
we will have delivered an individual report to each principal 
office and a report containing summary recommendations to the 
Department.
    Ultimately, the design and implementation of any internal 
control must be based on an analysis of costs and benefits. 
Even well-designed and implemented internal controls cannot 
provide absolute assurance against fraud, waste, and abuse. 
There always will be factors such as human mistakes and acts of 
collusion that will be outside the control or influence of 
management. That is why we need to remain vigilant and maintain 
a credible deterrence through, among other things, a regular 
program of management reviews, an active hotline function, and 
vigorous audit and investigative operations.
    I am happy to answer any questions that you may have.
    Mr. Hoekstra. Thank you.
    [The prepared statement of Ms. Lewis follows:]

     Prepared Statement of Lorraine Lewis, Inspector General, U.S. 
                        Department of Education

    Good morning, Mr. Chairman and members of the Task Force. I 
appreciate the opportunity to present testimony to you today. I will 
address our work in identifying waste, fraud and abuse at the 
Department of Education. Specifically, I will discuss the recent guilty 
plea of a Bell Atlantic employee working under a service agreement with 
the Department of Education, Pell grant fraud and improper student loan 
forgiveness. I will also talk about the need for an environment with 
strong internal controls, which are necessary to maintain the integrity 
of our Education programs.

                         Inventory Control Case

    We are conducting an investigation of individuals who, for 
approximately 3 years, made equipment purchases with Federal funds for 
non-business related purposes, billed the Department for hours not 
worked, and received goods for personal use. At present, two 
individuals have pled guilty to their involvement in the case. The 
first, Joseph Dennis Morgan, pled guilty to one count of receiving 
stolen property. Mr. Morgan illegally received approximately $14,000 in 
electronic equipment since 1998. The second individual, Robert J. 
Sweeney, pled guilty to one count of conspiracy and one count of theft 
of government property. Much of the following information was reported 
by the U.S. Attorney's Office for the District of Columbia, as part of 
the plea agreement for Mr. Sweeney.
    Mr. Sweeney was an employee of Bell Atlantic who had been assigned 
full-time to the Department to install telephone lines and telephones. 
Mr. Sweeney and a second Bell Atlantic technician reported to a 
Telecommunications Specialist in the Department's Office of the Chief 
Information Officer. Approximately 3 years ago, the Department's 
Telecommunications Specialist began asking Mr. Sweeney to order 
materials under the Bell Atlantic service agreement that were unrelated 
to official Department business. These items began with additional 
telephones and answering machines. Mr. Sweeney would deliver the items, 
which were paid for by the Department, to the Telecommunications 
Specialist, who would then distribute them to co-workers and family 
members for personal use.
    Over time, the Telecommunications Specialist's requests escalated 
and began to include more expensive items. For example, a 61-inch 
television was ordered under the Bell Atlantic service agreement and 
delivered by Mr. Sweeney and another Department employee to the 
Telecommunications Specialist's son's house. Additionally, eight 
Gateway computers ordered from Bell Atlantic were picked up by Mr. 
Sweeney and delivered to the Telecommunications Specialist's house or 
to locations that she designated.
    Overall, from 1997 through 1999, the Telecommunications Specialist 
requested numerous items from Bell Atlantic that were unrelated to the 
service agreement, including computers, printers, computer software, 
scanners, cordless telephones, a 61-inch television, Palm Pilots, 
walkie-talkies, compact disc players, and many other items. The total 
cost of these items to the Department was over $300,000.
    Mr. Sweeney also performed numerous personal tasks for the 
Telecommunications Specialist.
    In exchange for Mr. Sweeney's assistance with the 
Telecommunications Specialist's personal requests, Mr. Sweeney was 
permitted to falsely claim overtime hours. For example, Mr. Sweeney was 
permitted to turn in time sheets while he was on vacation showing that 
he had worked his regular schedule as well as overtime hours. It is 
estimated that, between January 1, 1997 and November 30, 1999, 
approximately $634,000 in unworked hours was fraudulently charged to 
the Department by Mr. Sweeney and the other Bell Atlantic technician.
    Our contractors, Ernst & Young, identified numerous Department 
internal control deficiencies in their ``Report on Internal Control'' 
for the fiscal year 1999 financial statement audit. A sound internal 
control environment provides management with reasonable, but not 
absolute, assurance that assets are safeguarded against loss from 
unauthorized use or disposition. The lack of a sound internal control 
environment heightens the risk that the Department will not be able to 
safeguard its assets and accurately record, process and summarize 
financial data.

                    Federal Pell Grant Program Fraud

    OIG investigations and audits have disclosed patterns of fraud 
against the Pell grant program. The most common fraud scheme involved 
ineligible or non-existent applicants who falsified Free Applications 
for Federal Student Aid (FAFSAs) and other documents to obtain Pell 
grants for which they or their institutions were not entitled. For 
example:
     In October 1999, four New York men were sentenced for 
their roles in a Pell grant fraud scheme. The defendants were convicted 
on an indictment charging conspiracy, program fraud, false statements, 
wire fraud, mail fraud and tax fraud in connection with postsecondary 
programs that they falsely claimed to be administering. Judge Barbara 
Jones noted that the serious and sophisticated long-term fraud 
committed against the Department warranted substantial periods of 
incarceration and also ordered the men to make restitution of $11 
million to the Department. Judge Jones stated that the $11 million loss 
to the Department's Pell grant program was a very conservative estimate 
since it related to losses associated with only one of the fraudulent 
educational programs administered by the defendants. The defendants 
were also charged with and convicted of defrauding the Small Business 
Administration and the ``Section 8'' rental subsidy program of the 
Department of Housing and Urban Development.
     On February 28, 2000, the Director of the Orange, 
California, branch campus of Travel and Trade Career Institute was 
sentenced to 5 months in jail, 5 months confinement in a community 
halfway house, $83,000 restitution, $50 special assessment, and 3 years 
supervised release. The Director conducted a scheme in which he drew 
down approximately $83,000 in Federal Pell grants on behalf of students 
that did not exist. He used the money for his own personal gain and 
miscellaneous school expenses.
     On April 18, 2000, a Federal Grand Jury in the Northern 
District of Illinois returned indictments against three former school 
officials of the now defunct American Career Training school in 
Chicago, Illinois. The three individuals were indicted on conspiracy 
and financial aid fraud for falsifying student eligibility documents 
that made ineligible students appear to be eligible to receive Pell 
grant funds during 1993 through 1996. They received in excess of 
$250,000 in Pell grant funds. The school officials created GED 
certificates, falsified Ability-to-Benefit test results, created 
Internal Revenue Service documents and created fraudulent letters from 
lenders and the U.S. Department of Education's Debt Collection Service.
     On April 26, 2000, the Director of the PSC School for 
Careers was arrested based upon allegations that she engaged in the 
submission of false claims for Pell grants and New York State Tuition 
Assistance Program grants. The criminal complaint alleges that the 
Director instructed school employees to create fictitious attendance 
records.
     On May 1, 2000, a former school owner, the school owner's 
daughter and a former instructor pled guilty to conspiring to steal and 
misapply more than $1.4 million in Federal Pell grant funds. The funds 
were fraudulently obtained by forging and creating false documents and 
submitting fraudulent grant applications to the Department of Education 
for nonexistent or noneligible students. The three defendants used some 
of the funds for student operations and converted the rest to their own 
personal use, including the purchase of jewelry, real estate, furniture 
and an automobile.
     On July 15, 1998, a self-employed financial aid consultant 
was sentenced on one count of fraud against the Department, was ordered 
to serve 21 months in Federal prison and then placed on 2 years of 
supervised release. He was also ordered to pay restitution in the 
amount of $5,000 plus an assessment of $50. The consultant offered a 
fee to assist parents and students with their applications for Title IV 
funds to attend postsecondary institutions. The investigation was 
initiated based on information from a confidential informant who 
alleged that the consultant falsified various Federal financial aid 
documents, including tax returns, to assist parents and students in 
obtaining Title IV funds. A preliminary review of 1,200 seized customer 
files revealed that the consultant had approximately 700 parent/student 
files covering a period of 5 years. His account ledgers for 1995 
reflected an income of $51,188 based on 228 separate customer entries. 
Included in the seized customer files were completed Free Applications 
for Federal Student Aid, Student Aid Reports, tax forms and fraudulent 
tax forms prepared in the name of the consultant's clients. A 
preliminary review of several files revealed that clients' incomes were 
lowered on numerous FAFSAs and tax forms. These alterations had the 
effect of increasing the students' chances of receiving Federal 
financial aid. Another finding of the file review revealed that 
numerous student files reflected that some students were listed as 
orphans or wards of the court. This caused the students to be 
considered independent, which substantially increased their chance of 
receiving financial aid. The consultant usually charged a fee of 10 
percent of a Pell grant, or approximately $230, for his services.
     On November 30, 1999, a student at Mid-State College was 
sentenced for her role in defrauding the Pell grant and Federal Family 
Education Loan programs. She was sentenced to 6 months incarceration to 
be followed by a 3-year period of supervised probation, ordered to make 
$6,062 in restitution to the Department and pay a $900 fine. The 
student made multiple false statements regarding her marital status and 
her husband's income on her Free Application for Federal Student Aid.
     On March 15, 2000, a student at Pacific Lutheran 
University was indicted for allegedly falsifying financial aid 
applications to receive Pell grants. She also allegedly falsified 
information on Social Security applications to receive Supplemental 
Security Income (SSI) benefits. Her scheme involved falsifying her 
marital status as ``separated'' to avoid having to report her spouse's 
income on the applications. Our investigation found evidence that she 
was living with her spouse during the entire period she received SSI 
benefits and student financial aid benefits. The total amount of fraud 
was $68,475.
    To help combat one of these patterns of Pell grant fraud, the 
Higher Education Act (HEA) Amendments of 1998 (P.L. 105-244) included a 
provision authorizing the Department, in cooperation with the Treasury 
Department, to confirm with the Internal Revenue Service (IRS) key 
pieces of information on the Federal income tax returns of applicants 
and their parents. Without specific authorization in the Internal 
Revenue Code, however, the IRS indicates that it must obtain written 
taxpayer consent before individual income information may be released 
to the Department. We recommend that the Congress enact any necessary 
additional legislation to address this matter.
    In the interim, the Department just completed the first of two 
planned test-match studies with the IRS. The Department will use the 
statistical information from the test match to identify the types of 
students who are most likely to under-report their income. The 
Department also intends to use the IRS information to better evaluate 
the extent of income under-reporting and to support its desire to 
conduct a full-scale data match with the IRS.

                   Improper Student Loan Forgiveness

    OIG audit and investigative work has also identified concerns with 
the discharge of loans due to disability or death. Since October 1999, 
OIG investigative work on fraudulent disability discharges resulted in 
more than $1,000,000 in loans being reinstated by the holders of the 
loans, which is either the Department or a guaranty agency. For 
example:
     On January 13, 2000, an individual was sentenced to 6 
months home detention, 5 years probation and was ordered to pay $37,743 
in restitution. The individual had submitted a fraudulent disability 
form to the Department of Education stating that he suffered from 
chronic paranoid schizophrenia and that he had a poor prognosis to be 
gainfully employed. As a result, he was relieved of his obligation to 
repay five student loans.
     On May 8, 2000, a doctor pled guilty to charges of student 
loan fraud and health care fraud. The next day, his brother, who is 
also a doctor, pled guilty to charges of misprision of the felonies of 
student loan fraud and health care fraud. Both doctors agreed to make 
restitution for the total amount obtained through their fraud schemes. 
The doctors mailed fraudulent total and permanent disability claims to 
several Federal student loan guaranty agencies and lenders to have 
their medical student loan obligations discharged. One doctor had two 
student loans discharged, totaling $32,548, including $4,366 refunded 
directly to him. The other doctor had two student loans discharged 
totaling $11,992, including $4,098 refunded directly to him. A third 
loan discharge for the second doctor in the amount of approximately 
$15,000 was prevented as a result of this investigation. Our 
investigation revealed that the first brother submitted false 
disability claims stating that he and his brother were house confined 
and/or wheelchair-bound. However, OIG agents observed the brothers 
riding bicycles and swimming at a beach. Our investigation also 
revealed that the disability claims were certified by a non-existent 
physician and were often accompanied by letters from a non-existent 
attorney.
    In our June 1999 audit entitled Improving the Process for Forgiving 
Student Loans, which was requested by the Department, we recommended 
that several steps be taken to enhance the current discharge 
determination procedures. These include revising the disability form to 
include, at a minimum, the doctor's professional license number and 
office telephone number, and requiring certified copies of death 
certificates. The Department modified its disability form to 
incorporate our recommendations and OMB approved the form. Also, the 
Department now requires that a death discharge be based only on an 
original or certified copy of the death certificate.
    Our office continues to pursue this matter. In order to identify 
fraudulent death discharges, we conducted a data match with the Social 
Security Administration's Death Index to identify persons who received 
loan discharges based upon death, but who do not appear in the Social 
Security Death Index. Working with a sample of these data and with 
information filed by those who obtained substantial discharges from 
Sallie Mae and a number of guaranty agencies, our investigators are 
pursuing leads generated by the match. In the area of disability 
discharge fraud, we are working with the guaranty agencies to identify 
potential fraud cases and following up on leads developed from the 
data.

                           Internal Controls

    A key factor in improving accountability and minimizing operational 
problems within the Department is the implementation of appropriate 
internal controls. Recently, the General Accounting Office (GAO) 
updated its standards for internal control in government. The standards 
provide a framework for establishing and maintaining internal control 
and for identifying and addressing management challenges and areas 
susceptible to fraud, waste and abuse. The GAO standards address the 
areas of control environment, risk assessment, control activities, 
communication and monitoring.
    Currently, we are reviewing existing internal controls over the 
procurement of goods and services. Our review is based on the GAO 
standards. We are conducting interviews with procurement personnel and 
senior managers in each principal office within the Department and 
performing transaction testing to verify the Department's internal 
control procedures. To date, we have found internal control 
deficiencies in the Department's use of the government purchase card 
and third party checks. At the completion of our review, we will have 
delivered an individual report to each principal office and a report 
containing summary recommendations to the Department.

                               Conclusion

    Ultimately, the design and implementation of any internal control 
must be based on an analysis of costs and benefits. Even well designed 
and implemented internal controls cannot provide absolute assurance 
against fraud, waste and abuse. There always will be factors such as 
human mistakes and acts of collusion that will be outside the control 
or influence of management. That is why we need to remain vigilant and 
maintain a credible deterrence through, among other things, a regular 
program of management reviews, an active hotline function, and vigorous 
audit and investigative operations.
    This concludes my prepared testimony. I am happy to answer any 
questions you or other members of the Task Force may have on these 
issues.

    Mr. Hoekstra. Ms. Jarmon and Mr. Engel.

STATEMENT OF GLORIA L. JARMON, DIRECTOR, HEALTH, EDUCATION, AND 
  HUMAN SERVICES, ACCOUNTING AND FINANCIAL MANAGEMENT ISSUES; 
 GARY T. ENGEL, ASSOCIATE DIRECTOR, GOVERNMENTWIDE ACCOUNTING 
AND FINANCIAL MANAGEMENT ISSUES, U.S. GENERAL ACCOUNTING OFFICE

    Ms. Jarmon. We are pleased to be here today to talk about 
the financial management at the Department of Education.
    With me today is Gary Engel, the Associate Director 
responsible for GAO's work on Education's grantback account.
    We will focus on three issues: first, the financial 
statement audit results for fiscal year 1999; secondly, the 
potential that the reported weaknesses have to create fraud, 
waste and abuse; and, third, the results of our review of the 
Department's grantback account. Much of our testimony today 
reflects our March 1 testimony on these issues.
    The bottom line on Education's financial audit results is 
that Education still faces severe internal control and 
financial management systems weaknesses. These weaknesses have 
been very similar from year to year, starting with Education's 
first agency-wide audit for fiscal year 1995. They make it 
extremely difficult for Education to give timely, reliable 
financial information to decisionmakers both inside and outside 
the agency.
    Education's financial staff and its contractors worked very 
hard to put together their fiscal year 1999 statements, and the 
auditors' opinion on these statements improved over fiscal year 
1998. In addition, the fiscal year 1999 audit was the first 
time that the Department's statements were issued on time.
    However, as part of the audit, the Department's auditors 
looked at Education's internal controls and reported four 
material weaknesses. They are weaknesses in the financial 
reporting process, weaknesses in reconciling financial 
accounting records, weaknesses in controls over information 
systems, and weaknesses in accounting for certain loan 
transactions.
    In addition to its continued internal control problems, 
Education also failed to fully comply with three laws in fiscal 
year 1999. They are, first, the Federal Financial Management 
Improvement Act; secondly, the Clinger-Cohen Act; and, third, 
the Federal Credit Reform Act.
    The internal control weaknesses in the auditor's report 
need to be addressed to reduce the potential for fraud, waste 
and abuse at Education. For example, the information systems 
control weaknesses could increase the risk of unauthorized 
access or disruption in services and make Education's sensitive 
grant and loan data vulnerable to inadvertent or deliberate 
misuse, fraudulent use, improper disclosure or destruction. 
These types of vulnerabilities were discussed in more detail in 
the report issued by the Department's IG in late February.
    In addition, Ms. Lewis's statement today shows that the 
lack of a sound internal control environment heightens the risk 
that the Department will not be able to safeguard its assets 
and accurately record, process and summarize financial data.
    Finally, regarding the grantback account, which is part of 
the Education's Fund Balance with Treasury, its auditors 
reported that Education could not readily say where and to 
which appropriations the assets funds belonged.
    As you know, we recently completed our review of this 
account and found that, although it was established for 
grantback activities, Education also used it as an suspense 
account for hundreds of million of dollars of activity related 
to grant reconciliation efforts. We found that Education could 
not provide adequate documentation to support the validity of 
certain adjustments related to the reconciliation efforts and 
other activity in the grantback account.
    For those transactions for which Education provided 
adequate documentation to enable us to conclude that such 
transactions were valid, we did not identify identifications of 
fraud. However, given the significant number of transactions 
for which we were not provided adequate support and that we did 
not perform a fraud audit, we cannot provide assurance that 
fraud has not taken place.
    As a result of financial management systems deficiencies, 
inadequate systems of financial control and manual internal 
control weaknesses, which we and other auditors identified, 
there is increased risk of fraud, waste and mismanagement of 
grant funds, as well as increased risk of noncompliance with 
the requirements of the Anti-Deficiency Act.
    In closing, we would like to stress that the weaknesses 
identified by our grantback work and by Education's auditors as 
part of the financial audit are serious financial management 
weaknesses, and it is critical that Education continue to work 
hard to resolve these weaknesses. Achieving all aspects of a 
strategic objective partly depends on reliable financial 
management information and effective internal controls.
    Mr. Chairman, this concludes my statement. We would be 
happy to answer any questions from you or any other members of 
the task force.
    Mr. Hoekstra. Thank you very much.
    [The prepared statement of Ms. Jarmon and Mr. Engel 
follows:]

 Prepared Statements of Gloria L. Jarmon, Director, Health, Education, 
and Human Services, Accounting and Financial Management Issues; Gary T. 
  Engel, Associate Director, Governmentwide Accounting and Financial 
           Management Issues, U.S. General Accounting Office

    Mr. Chairman and members of the Task Force, we are pleased to be 
here today to discuss first, the Department of Education's fiscal year 
1999 financial audit results\1\ in the context of related work we have 
performed, second, the relationship between the audit findings and the 
potential for waste, fraud, and abuse, and third, the results of our 
review of the Department's grantback account. Much of the testimony 
today reflects our March 1, 2000, testimony on these issues.\2\
---------------------------------------------------------------------------
    \1\ Department of Education, Fiscal Year 1999 Consolidated 
Financial Statements, Ernst & Young LLP, February 2000.
    \2\ Financial Management: Education Faces Challenges in Achieving 
Financial Management Reform (GAO/T-AIMD-00-106, March 1, 2000).
---------------------------------------------------------------------------
    The Department's financial activity is important to the Federal 
Government because Education is the primary agency responsible for 
overseeing the more than $75 billion annual Federal investment in 
support of educational programs for U.S. citizens and eligible 
noncitizens. The Department is also responsible for collecting about 
$175 billion owed by students. In fiscal year 1999, more than 8.1 
million students received over $53 billion in Federal student financial 
aid through programs administered by Education.
    The Department's stewardship over these assets has been under 
question as the agency has experienced persistent financial management 
weaknesses. Beginning with its first agencywide financial audit effort 
in fiscal year 1995,\3\ Education's auditors have each year reported 
largely the same serious internal control weaknesses, which have 
affected the Department's ability to provide reliable financial 
information to decision makers both inside and outside the agency.
---------------------------------------------------------------------------
    \3\ For fiscal year 1995, a year before the Government Management 
Reform Act (GMRA) requirements became effective, the Department's 
Inspector General (IG) hired a contractor to perform its first 
agencywide financial audit.
---------------------------------------------------------------------------

                               Background

    Federal decision makers need reliable and timely financial 
management information to ensure adequate accountability, manage for 
results, and make timely and well-informed decisions. However, 
historically, such financial management information has not been 
available across the government. Agency IG reports, independent public 
accountants' reports, and our own work have identified persistent 
limitations in the availability of quality financial data for decision 
making. Audits have shown that Federal financial management is in 
serious disrepair, which results in incorrect financial information 
being provided to the Congress and the administration. Without reliable 
financial information, government leaders do not have the full facts 
necessary to make investments of scarce resources or direct programs. 
Creating a government that runs more efficiently and effectively has 
been a public concern for decades.
    Over the past 10 years, dramatic changes have occurred in Federal 
financial management in response to the most comprehensive management 
reform legislation of the past 40 years. The combination of reforms 
ushered in by (1) the Chief Financial Officers (CFO) Act of 1990, (2) 
the Government Management Reform Act of 1994, (3) the Federal Financial 
Management Improvement Act (FFMIA) of 1996, (4) the Government 
Performance and Results Act (GPRA) of 1993, and (5) the Clinger-Cohen 
Act of 1996 will, if successfully implemented, provide the necessary 
foundation to run an effective, results-oriented government. Efforts to 
continue to build the foundation for generating accurate financial 
information through lasting financial management reform are essential. 
Only by generating reliable and useful information can the government 
ensure adequate accountability to taxpayers, manage for results, and 
help decision makers make timely, well-informed judgments.
    Education's fiscal year 1999 audit was conducted by Ernst & Young 
LLP, independent auditors contracted for by the Education Inspector 
General. We reviewed the independent auditors' reports and workpapers. 
We shared a draft of this statement with Education officials, who 
provided technical comments. We have incorporated their comments where 
appropriate. Our work was conducted in accordance with generally 
accepted government auditing standards.

                     Fiscal Year 1999 Audit Results

    The Office of Management and Budget's (OMB) implementation guidance 
for audited financial statements requires the 24 CFO Act agencies to 
receive three reports from their auditors annually: first, an opinion 
or report on the agencies' financial statements, second, a report on 
the agencies' internal controls, and third, a report on the agencies' 
compliance with laws and regulations. We recently reported\4\ that 13 
of the 24 CFO Act agencies received ``clean'' or unqualified opinions 
on their fiscal year 1999 financial statements.\5\ The Department of 
Education did not receive such an opinion because of its financial 
management weaknesses.
---------------------------------------------------------------------------
    \4\ Letter to the Congress highlighting our conclusions on the 
Fiscal Year 1999 Financial Report of the United States Government (GAO/
AIMD-00-131, March 31, 2000).
    \5\ As of May 15, 2000, the Department of State had not issued its 
audit report. Since our last report, the Department of Interior's (DOI) 
Office of Inspector General issued an unqualified opinion on DOI's 
fiscal year 1999 financial statements.
---------------------------------------------------------------------------
    As reported in December,\6\ and again in March,\7\ the Department 
issued its fiscal year 1998 financial statements over 8 months late and 
was one of six CFO Act agencies that received disclaimers-meaning that 
the auditors were unable to express an opinion-on their financial 
statements for that fiscal year.\8\ Pervasive weaknesses in the design 
and operation of Education's financial management systems, accounting 
procedures, documentation, recordkeeping, and internal controls, 
including computer security controls, prevented Education from reliably 
reporting on the results of its operations for fiscal year 1998.
---------------------------------------------------------------------------
    \6\ Financial Management: Financial Management Weaknesses at the 
Department of Education (GAO/T-AIMD-00-50, December 6, 1999).
    \7\ Financial Management: Education Faces Challenges in Achieving 
Financial Management Reform (GAO/T-AIMD-00-106, March 1, 2000).
    \8\ In addition to the 6 agencies that received disclaimers in 
fiscal year 1998, 4 agencies received qualified opinions, 2 agencies 
received mixed opinions, and 12 agencies received unqualified or 
``clean'' opinions.
---------------------------------------------------------------------------

                   Report on the Financial Statements

    While Education's financial staff and its contractors worked very 
hard to prepare Education's fiscal year 1999 financial statements 
before the March 1, 2000, deadline, and the auditors' opinion on the 
financial statements improved over that of fiscal year 1998, serious 
internal control and financial management systems weaknesses continued 
to plague the agency. For fiscal year 1999, Education made significant 
efforts to work around these weaknesses and produce financial 
statements. These efforts enabled its auditors to issue qualified 
opinions\9\ on four of its five required financial statements and a 
disclaimer on the fifth statement. Its auditors' qualified opinion 
states that except for the effect of the matters to which the 
qualification relates, the financial statements present fairly, in all 
material respects, financial position, net costs, changes in net 
position, and budgetary resources in conformity with generally accepted 
accounting principles. The auditors stated the following reasons or 
matters for their qualification:
---------------------------------------------------------------------------
    \9\ Such an opinion is expressed when first, there is a lack of 
sufficient competent evidential matter or there are restrictions on the 
scope of the audit that have led the auditor to conclude that he or she 
cannot express an unqualified opinion and he or she has concluded not 
to disclaim an opinion or second, the auditor believes, on the basis of 
his or her audit, that the financial statements contain a departure 
from generally accepted accounting principles, the effect of which is 
material, and he or she has concluded not to express an adverse 
opinion.
---------------------------------------------------------------------------
     The Department had significant systems weaknesses during 
fiscal year 1999 affecting its financial management systems. The new 
accounting system, implemented in fiscal year 1998, had several 
limitations, including an inability to perform a year-end closing 
process or produce automated consolidated financial statements. Through 
its efforts and those of its contractors, Education was able to 
partially compensate for, but did not correct, certain aspects of the 
material weaknesses in its financial reporting process. In addition, 
during fiscal year 1999, Education experienced significant turnover of 
financial management staff, which also contributed to the overall 
weakness in financial reporting.
     Education was unable to provide adequate support for about 
$800 million reported in the September 30, 1999, net position balance 
in its financial statements, and the auditors were unable to perform 
other audit procedures to satisfy themselves that this amount was 
correct.
     Education processed many transactions from prior fiscal 
years as fiscal year 1999 transactions and manually adjusted its 
records in an effort to reflect the transactions in the proper period; 
however, the auditors could not determine if these adjustments for 
certain costs and obligations were correct.
     The auditors were unable to determine whether beginning 
balances for accounts payable and related accruals were accurate.
    In addition, as in the prior year, the auditors did not issue an 
opinion (referred to as a disclaimer of an opinion) on the Department's 
Statement of Financing. The Statement of Financing provides a 
reconciliation or ``translation'' from the budget to the financial 
statements. The statement is intended to help those who work with the 
budget to understand the financial statements and the cost information 
they provide. The auditors stated that the reason for this disclaimer 
was that the Department did not perform adequate reconciliations and 
present support for amounts on the Statement of Financing in a timely 
manner.
    To the extent that Education was able to improve the opinion it 
received on its financial statements for fiscal year 1999, it was 
generally the result of first, time-consuming manual procedures, 
second, various automated tools to ``work around'' the system's 
inability to close the books and generate financial statements, and 
third, significant reliance on external consultants to assist in the 
preparation of additional reconciliations and the financial statements. 
This approach does not produce the timely and reliable financial and 
performance information Education needs for decision making on an 
ongoing basis, which is the desired result of the CFO Act.

                      Report on Internal Controls

    The Department also receives annually from its auditors a report on 
internal controls. This report is significant for highlighting the 
agency's internal control weaknesses that increase its risk of 
mismanagement that can sometimes result in waste, fraud, and abuse. In 
this report for fiscal year 1999, the Department's auditors reported 
four material\10\ internal control weaknesses-three continuing from 
fiscal year 1998 and one additional one for fiscal year 1999-and that 
long-standing internal control weaknesses persist.
---------------------------------------------------------------------------
    \10\ A material internal control weakness is a reportable condition 
that precludes the entity's internal controls from providing reasonable 
assurance that material misstatements in the financial statements or 
material noncompliance with applicable laws or regulations will be 
prevented or detected on a timely basis. In addition to these material 
internal control weaknesses, the independent auditors also reported 
four reportable conditions. Reportable conditions are matters coming to 
the auditors' attention that, in their judgment, should be communicated 
because they represent significant deficiencies in the design or 
operation of internal controls that could adversely affect the 
organization's ability to meet the objectives of reliable financial 
reporting and compliance with applicable laws and regulations.
---------------------------------------------------------------------------
    The specific material internal control weaknesses cited by the 
independent auditors for fiscal year 1999 were first, weaknesses in the 
financial reporting process, second, inadequate reconciliations of 
financial accounting records, and third, inadequate controls over 
information systems. The independent auditors also identified a new 
material internal control weakness related to accounting for certain 
loan transactions. Summaries of the material internal control 
weaknesses follow:
     As in prior years, Education did not have adequate 
internal controls over its financial reporting process. Its general 
ledger system was not able to perform an automated year-end closing 
process and directly produce consolidated financial statements as would 
normally be expected from such systems. Because of these weaknesses, 
Education had to resort to a costly, labor-intensive, and time-
consuming process involving manual and automated procedures to prepare 
financial statements for fiscal year 1999. In addition, Education had 
to rely heavily on contractor services to help perform reconciliations 
among the various data sources used. In one instance, Education 
reported a balance of approximately $7.5 billion for its cumulative 
results of operations. However, the majority of this amount, which 
pertains to the Federal Family Education Loan Program (FFELP), should 
have been reported as a payable to Treasury rather than as cumulative 
results of operations. As a result of the independent auditors' work, 
an adjustment was made to reclassify the $7.5 billion to the proper 
account. When such errors occur and are not detected by the 
Department's controls, there are increased risks that the Department 
could retain funds inappropriately that should be returned to Treasury.
     Education again did not properly or promptly reconcile its 
financial accounting records during fiscal year 1999 and could not 
provide sufficient documentation to support some of its financial 
transactions. Weaknesses in the Department's internal controls over the 
reconciliation process prevented timely detection and correction of 
errors in its underlying accounting records. In some instances, 
Education adjusted its general ledger to reflect the balance per the 
subsidiary records, without sufficiently researching the cause for 
differences. Also, as indicated in prior audits, Education has not been 
able to identify and resolve differences between its accounting records 
and cash transactions reported by the Treasury. For example, for fiscal 
year 1999, Education adjusted its Fund Balance with Treasury, due to a 
difference between its general ledger and the Treasury, by a net amount 
of about $244 million. Reconciling agencies' accounting records with 
relevant Treasury records is required by Treasury policy and is 
analogous to individuals reconciling their checkbooks to monthly bank 
statements.
     During fiscal year 1999, Education did not properly 
account for its funds disbursed under FFELP. Specifically, it did not 
return about $2.7 billion in net collections specific to its 
liquidating account to Treasury as required by the Credit Reform Act of 
1990. The liquidating account is used to record transactions for loans 
originated prior to fiscal year 1992. Any unobligated balances in this 
account at fiscal year end are unavailable for obligations in 
subsequent fiscal years and must be transferred to the general fund. 
Further, Education did not sufficiently analyze the balances reflected 
on the financial statements to ensure that the FFELP balances agreed 
with relevant balances in the Department's budgetary accounts. The 
auditors stated that this situation resulted in an unexplained 
difference of about $700 million between the FFELP Fund Balance with 
Treasury account and related budgetary accounts as of September 30, 
1999. By not properly accounting for and analyzing its FFELP 
transactions as required by the Federal Credit Reform Act of 1990, 
Education cannot be assured that its financial or budgetary reports are 
accurate.
     Education had information systems control deficiencies in 
first, implementing user management controls, such as procedures for 
requesting, authorizing, and revalidating access to computing 
resources, second, monitoring and reviewing access to sensitive 
computer resources, third, documenting the approach and methodology for 
the design and maintenance of its information technology architecture, 
and fourth, developing and testing a comprehensive disaster recovery 
plan to ensure the continuity of critical system operations in the 
event of disaster. The Department places significant reliance on its 
financial management systems to perform basic functions, such as making 
payments to grantees and maintaining budget controls. Consequently, 
continued weaknesses in information systems controls increase the risk 
of unauthorized access or disruption in services and make Education's 
sensitive grant and loan data vulnerable to inadvertent or deliberate 
misuse, fraudulent use, improper disclosure, or destruction, which 
could occur without being detected.
    Our work in this area has shown that other agencies have improved 
their financial audit report results but are also facing material 
internal control weaknesses. A number of other agencies have focused 
their efforts primarily on trying to develop short-term stop-gap 
measures designed to produce year-end balances rather than on the 
fundamental solutions that are needed to address the management 
challenges they face. As a result, these agencies continue to 
experience pervasive material weaknesses in the design and operation of 
their financial management and related operational systems, accounting 
procedures, documentation, recordkeeping, and internal controls, 
including computer security controls. Consequently, these agencies rely 
on costly, time-consuming ad hoc procedures to determine year-end 
balances. This approach does not produce the timely and reliable 
financial and performance information needed for decision making on an 
ongoing basis. This approach is also inherently incapable of addressing 
the underlying financial management and operational issues that 
adversely affect these agencies' ability to fulfill their missions.

             Report on Compliance with Laws and Regulations

    The third report that the auditors issue annually is a report on 
agency compliance with laws and regulations. Specifically, the 
Department's auditors reported that it was not in full compliance with 
three laws as noted below.
     For fiscal year 1999, the independent auditors found that 
Education was again not in compliance with FFMIA because it lacked 
adequate, integrated financial management systems, reports, and 
oversight to prepare timely and accurate financial statements. The 
Department was 1 of 21 CFO Act agencies whose financial systems did not 
comply with the requirements of FFMIA in fiscal year 1998. Because many 
agencies have significant financial management systems weaknesses, 
these results did not change significantly in fiscal year 1999-2000 of 
23\11\ agencies' systems did not comply with FFMIA. However, it is 
imperative that these problems be resolved so that agencies can produce 
needed financial information on a day-to-day basis in a timely and 
accurate manner. FFMIA requires that agency financial management 
systems substantially comply with first, Federal financial management 
systems requirements,\12\ second, Federal accounting standards, and 
third, the U.S. Government Standard General Ledger\13\ at the 
transaction level. We are working with OMB and the agencies to evaluate 
their progress in resolving these significant weaknesses.
---------------------------------------------------------------------------
    \11\ As of May 15, 2000, the Department of State had not issued its 
audit report.
    \12\ The financial management systems requirements have been 
developed by the Joint Financial Management Improvement Program, which 
is a joint and cooperative undertaking of the Department of the 
Treasury, OMB, GAO, and the Office of Personnel Management.
    \13\ The Standard General Ledger provides a standard chart of 
accounts and standardized transactions that agencies are to use in all 
their financial systems.
---------------------------------------------------------------------------
     The Department had neither fully implemented a capital 
planning and investment process nor performed an assessment of the 
information resource management knowledge and skills of agency 
personnel, including a plan to correct identified deficiencies, as 
required by the Clinger-Cohen Act of 1996. A key goal of the Clinger-
Cohen Act is that agencies should have processes and information in 
place to help ensure that information technology (IT) projects are 
being implemented at acceptable costs and within reasonable and 
expected time frames and that they are contributing to tangible, 
observable improvements in mission performance. By not fully 
implementing the plans called for under the act, Education was not 
maximizing the value and assessing and managing the risks of its IT 
investments.
     The Department did not transfer its excess funds related 
to FFELP, specifically the $2.7 billion of net collections previously 
mentioned, to Treasury as required by the Federal Credit Reform Act of 
1990.

                 Potential for Fraud, Waste, and Abuse

    Education continues to be plagued by serious internal control and 
system deficiencies that hinder its ability to achieve lasting 
financial management improvements. The internal control weaknesses 
discussed above and in more detail in the auditors' report need to be 
addressed to reduce the potential for waste, fraud, and abuse in the 
Department. Some of the vulnerabilities identified in the audit report 
include weaknesses in the financial reporting process, inadequate 
reconciliations of financial accounting records, information systems 
weaknesses, and property management weaknesses. Specific examples of 
vulnerabilities related to these weaknesses follow:
     The material internal control weakness related to 
financial reporting highlights the fact that managers do not receive 
accurate and timely financial information, such as information on 
disbursements made and amounts collected, that could be used to 
identify unusual activity and other anomalies.
     Some of the known duplicate payments mentioned by the 
auditors in their report on internal controls could have been 
identified earlier if proper reconciliations had been performed. The 
auditors stated that the Department has procedures in place that should 
detect duplicate payments and correct them within a reasonable time 
frame. We have not reviewed these procedures.
     The auditors stated that because the Department has not 
developed formal policies and procedures to reconcile grant 
expenditures between its payments system and its general ledger system, 
there is increased risk that material errors or irregularities could 
occur and not be detected on a timely basis. This is significant 
because the volume of grant transactions is over $30 billion per year.
     The information systems weaknesses highlight some of the 
computer security vulnerabilities, such as the lack of an effective 
process to monitor security violations on all critical systems of the 
Department. Information systems control weaknesses increase the risk of 
unauthorized access or disruption in services and make Education's 
sensitive grant and loan data vulnerable to inadvertent or deliberate 
misuse, fraudulent use, improper disclosure, or destruction, which 
could occur without being detected. A report issued by the Department's 
Inspector General in February\14\ emphasizes the need for the 
Department to focus on addressing its computer security 
vulnerabilities. In addition, earlier this year, the White House 
recognized the importance of strengthening the nation's defenses 
against threats to public and private sector information systems that 
are critical to the country's economic and social welfare when it 
issued its National Plan for Information Systems Protection.\15\ In the 
aftermath of the recent attack by the ``ILOVEYOU'' virus, which 
disrupted operations at large corporations, governments, and media 
organizations worldwide, we recently testified\16\ about the need for 
Federal agencies to promptly implement a comprehensive set of security 
controls.
---------------------------------------------------------------------------
    \14\ Review of Security Posture, Policies and Plans (ED-OIG/A11-
90013) February 2000.
    \15\ Defending America's Cyberspace: National Plan for Information 
Systems Protection: Version 1.0: An Invitation to a Dialogue, released 
January 7, 2000, the White House.
    \16\ Information Security: ``ILOVEYOU'' Computer Virus Emphasizes 
Critical Need for Agency and Governmentwide Improvements (GAO/T-AIMD-
00-171, May 10, 2000).
---------------------------------------------------------------------------
     The auditors reported that Education had not taken a 
complete, comprehensive physical inventory of property and equipment 
for at least the past 2 years. Comprehensive inventories improve 
accountability for safeguarding the government's assets, such as 
computer software and hardware, and establish accurate property 
records. Without such an inventory, property or equipment could be 
stolen or lost without detection or resources could be wasted by 
purchasing duplicate equipment already on hand. An alleged equipment 
theft is currently under investigation by the OIG.
    In addition, vulnerabilities in the Department's student financial 
assistance programs have led us since 1990 to designate this a high-
risk\17\ area for waste, fraud, abuse, and mismanagement. As we 
reported in our high-risk series update in January 1999, our audits as 
well as those by the Department's IG have found instances in which 
students fraudulently obtained grants and loans.
---------------------------------------------------------------------------
    \17\ High Risk Series: An Update (GAO/HR-99-1, January 1999).
---------------------------------------------------------------------------

                    Review of the Grantback Account

    The grantback account holds certain funds recovered from grant 
recipients following an audit determination that the recipients had 
made an expenditure of funds that was not allowable or failed to 
account properly for the funds. A portion of these funds could be 
returned to the recipients if and when the problem that led to the 
recovery of the funds has been corrected. Any amounts not returned to 
the grant recipients should revert to Treasury. For the grantback 
account, which is part of Education's Fund Balance with Treasury, its 
auditors reported that approximately 97 percent of the balance at 
September 30, 1998, was composed of adjustments that had accumulated 
since fiscal year 1993 for reconciling differences of various 
appropriations that could not be identified with any specific program. 
The auditors also reported for fiscal year 1999 that Education could 
not readily determine to which appropriations the adjustments balance 
belongs. Education's general ledger as of September 30, 1999, showed 
approximately $314 million in Fund Balance with Treasury related to the 
grantback account, of which approximately $297 million related to the 
adjustments. In January 2000, Education returned to Treasury 
approximately $146 million of the adjustments balance. The auditors 
reported that Education is working with Treasury to determine the 
appropriate accounting for the remaining adjustments balance.
    Mr. Chairman, at your request and that of the Vice Chairman of the 
Subcommittee on Oversight and Investigations of the House Committee on 
Education and the Workforce, we reviewed Education's grantback account. 
We briefed you and Education officials on our findings earlier this 
month and plan to issue our detailed report in the near future.
    In our review of the grantback account, we found that although the 
account was established for grantback activities, Education also used 
it as a suspense account for hundreds of millions of dollars of 
activity related to grant reconciliation efforts. We also found that 
Education could not provide adequate documentation to support the 
validity of certain adjustments related to the reconciliation efforts 
and other activity in the grantback account. For example, out of a 
sample of 92 grantback transactions totaling $128 million, Education 
could not locate or provide any documentation to support the validity 
of 39 of these transactions totaling $47 million. In addition, out of 
20 adjustment transactions we selected for testing, Education could not 
provide adequate documentation to support the validity of 6 
transactions.
    Further, Education did not maintain adequate detailed records for 
certain grantback account activity by the applicable fiscal year and 
appropriation. Such detailed records are needed to have an adequate 
system of funds control and help protect against Anti-Deficiency Act 
violations. For example, an adjustment we tested totaling $111 million 
reduced the grantback account balance and increased the balance of six 
appropriations to ensure that projected negative balances for such 
appropriations did not occur. However, Education could not provide any 
documentation to show that the increases to the appropriation accounts 
to prevent the negative balances were valid. As a result of financial 
management systems deficiencies, inadequate systems of funds control, 
and manual internal control weaknesses, which we and other auditors 
identified, there is increased risk of fraud, waste, and mismanagement 
of grant funds, as well as increased risk of noncompliance with the 
requirements of the Anti-Deficiency Act.
    We noted in our briefing that Education had taken or plans to take 
actions to address the grantback account issues. In addition, our 
briefing included recommendations to Education to strengthen internal 
controls related to documentation and policies and procedures for grant 
reconciliations and to develop and implement a formal, detailed plan to 
eliminate the remaining portion of the adjustments balance.
    In summary, Education needs to be able to generate reliable, 
useful, and timely information on an ongoing basis to ensure adequate 
accountability to taxpayers, manage for results, and help 
decisionmakers make timely, well-informed judgments. While Education 
has planned and begun implementing many actions to resolve its 
financial management problems, it is too early to tell whether they 
will be successful. It is critical that Education rise to the 
challenges posed by its financial management weaknesses because its 
success in achieving all aspects of its strategic objectives depends in 
part upon reliable financial management information and effective 
internal controls. It is also important to recognize that several of 
the financial management issues that have been raised in reports 
emanating from reviews of Education's financial statements directly or 
indirectly affect Education's ability to meet its obligations to its 
loan and grant recipients and responsibilities under law.
    Mr. Chairman, this concludes our statement. We would be happy to 
answer any questions you or other members of the Task Force may have.

    Mr. Hoekstra. In the high-tech world, we can't get our 
little red, yellow and green light bulbs to work today.
    I appreciate your timeliness to adhere to the 5 minutes. I 
am not sure that we can always say that about members. We are 
going to go with a low-tech Timex here and see how we control 
member's time. We will go on the 5-minute rule.
    Mr. Moore, the reason that we wanted somebody from the 
financial sector and financial investing area to come today was 
just to establish that what we are asking for from the 
Department of Education is not a high hurdle. This is where the 
private sector begins, isn't that correct, with a publicly held 
company?
    Mr. Moore. This is the same thing that every company in 
America has to do, account for its income and how it is 
spending its money.
    Mr. Hoekstra. And if a company does not do that, the impact 
is very, very significant.
    The company that you highlighted has lost 90 percent of its 
market value, not necessarily because of proven fraud, waste 
and abuse, but because they could not produce accurate 
financial statements; is that correct?
    Mr. Moore. That is correct. Their methods by some were 
considered OK, but by generally accepted practices they are not 
considered OK.
    Mr. Hoekstra. And the typical reason when you see such a 
dramatic action in the private sector is that it basically 
makes it very difficult for investors to make any kind of 
reasonable decisionmaking because the risks are too high, 
because they don't know how money that they are investing is 
actually is going to be used or how it is going to be reported?
    Mr. Moore. That is correct.
    Going further, that may be the tip of the iceberg, is what 
many investors may assume. If this is uncovered, what else 
hasn't been uncovered yet?
    Mr. Hoekstra. Mr. Murrin, I don't know if you want to add 
to that. In the private sector, I think you are right. It is 
viewed as a symptom. If they can't do the basics, what else is 
going wrong? If you don't have the proper financial controls in 
place, you create an environment where fraud, waste and abuse 
can exist.
    Mr. Murrin. I think it is fair to say that good financial 
management is applauded in the financial community as it is in 
the public sector.
    Mr. Hoekstra. And it is highly penalized if it is not 
there?
    Mr. Murrin. That is correct.
    Mr. Hoekstra. I applaud the IG and the Justice Department 
for the work they have done in the inventory and overtime 
scams, but it shouldn't be a surprise that these scams can 
happen at the Department of Education. For a number of years, 
it has been repeatedly brought to the Department's attention 
that they lack adequate inventory controls, and year after year 
we have seen little action to fix this problem. Such inaction 
sends a message to potential thieves that no one is guarding 
the store.
    Mr. Lewis, you went through the end result of what happened 
without proper inventory controls. You outlined a list of 
everything from a 61-inch television, to Gateway computers, 
phones and disc players, in all inventory totaling more than 
$300,000, and discussed the more than $600,000 in false 
overtime billing. Based on the testimoney we've heard today, it 
is sad to say that none of this should be surprising.
    Ms. Lewis, you also outlined a number of other areas where 
you are currently investigating or identifying fraud, waste, 
and abuse. Some of the numbers may seem small in the context of 
the Department's overall budget, but a million here and a 
million there adds up rather quickly.
    Ms. Jarmon's testimony highlighted some issues that present 
long-term concerns. The Department's grantback account is 
plagued by a lack of documentation or inappropriate designation 
of funds controlled by that account. In the case of a grantback 
account we are talking about hundreds of millions of dollars, 
is that correct?
    Mr. Engel. Yes, that is correct.
    Mr. Hoekstra. And we don't know if fraud has occurred or 
has not occurred, we basically just don't have the information?
    Mr. Engel. That is true. In our testing that we have 
performed for about half of the transactions that we had 
selected for testing, we were unable to be provided with 
adequate documentation to determine whether those transactions 
themselves were valid. So for an instance like that, I can't 
speak to whether it is fraud or not because there is no 
documentation to speak to.
    For the ones where we were provided the adequate 
documentation, we did not see indications of fraud. But in our 
work we did identify numerous instances of weaknesses in 
controls, lack of approval requirements, lack of effective 
reconciliation procedures which increased the potential for 
fraud, waste and abuse to take place.
    Mr. Hoekstra. Just in wrapping up for my colleagues, 
tomorrow the Education and Workforce Committee will mark up a 
piece of legislation which I am anticipating will have 
bipartisan support. It will move to the top of the priority 
list for GAO the task of performing a more comprehensive fraud 
audit. The goal of the audit is to identify if there is 
additional fraud happening in the Department based on what we 
found today.
    The standard we are asking for is not unreasonable. There 
have been a number of documented cases of fraud, waste and 
abuse within the Department of Ed. There are still many 
questions that need to be answered from our standpoint on the 
Education and Workforce Committee. It is a high priority to get 
a handle on this issue and bring it under control.
    Ms. Rivers.
    Ms. Rivers. Thank you, Mr. Chairman.
    Mr. Moore, are you a CPA?
    Mr. Moore. No, a CFP.
    Ms. Rivers. Have you ever been a government auditor?
    Mr. Moore. No.
    Ms. Rivers. Do you have any firsthand accounts with the 
Department of Education?
    Mr. Moore. No.
    Ms. Rivers. Mr. Murrin, when Ernst & Young did their review 
of the Department of Education, you folks didn't catch the 
$300,000 scheme that was going on. How come?
    Mr. Murrin. That is correct, we did not. We were not 
engaged to perform a forensic or fraud audit. We were engaged 
to perform an audit of the financial statements of the 
Department.
    Ms. Rivers. Did it have anything to do with the size of the 
scheme?
    Mr. Murrin. That would play a role in how readily the item 
is detected.
    Ms. Rivers. How?
    Mr. Murrin. The range that is discussed for the grantback 
account is large enough that it becomes identified as an issue 
that would get discussed and potentially discussed in a forum 
like this. It is considerably less likely that a $300,000 item 
would have appeared on the radar screen for that kind of 
discussion.
    Ms. Rivers. So even though that is a whole lot of money to 
people like us, in the scheme of what the Department does, 
$300,000 is a hard number to track?
    Mr. Murrin. Within the context of a financial audit of the 
Department, the $300,000 would not necessarily show up on the 
radar screen.
    Ms. Rivers. Ms. Jarmon or Mr. Engel, the grantback account, 
some people have referred to that as a slush fund. Could the 
Department of Education--could they or is there any indication 
that they did use money from that account to purchase things, 
to spend in other accounts, to do anything outside of the law 
with that account?
    Mr. Engel. We did not find any evidence, in the 
transactions for which we had received support, that the 
transactions were anything but related to grant activity. We 
didn't see, for instance, a purchase of a car or anything. But, 
again, I would point out that for half of the transactions that 
we had selected for testing we were never provided any 
documentation.
    Ms. Rivers. I see that under the law the IRS is supposed to 
share information with the Department of Education to track 
compliance information, and they are unwilling to do that. Why 
is it that the IRS is not giving the information that the law 
requires?
    Ms. Lewis. The Higher Education Act Amendments of 1998 
authorize the Department to receive this information, and 
coordinate with the Treasury.
    In terms of implementing that, the IRS has indicated, as we 
indicated at your February hearing here in the Budget 
Committee, that they feel that there legally needs to be a very 
explicit amendment to the Internal Revenue Code to allow them, 
without taxpayer consent, to share the information on tax forms 
so that the Education Department can compare it to the FAFSAs. 
So the Office of Inspector General has specifically recommended 
that Congress pass whatever additional legislation is 
necessary.
    Ms. Rivers. How long ago did you recommend that?
    Ms. Lewis. We supported the amendment when it was first 
considered in Congress and then----
    Ms. Rivers. And how long ago was that?
    Ms. Lewis. It became effective with the 1998 amendments to 
the HEA. And in the implementation process there have been 
discussions by OMB, the Department of Education, Treasury and 
the IRS, and this issue of a legal impediment has arisen. In 
our semiannual reports and in testimony we have indicated that 
if this is the case, then hopefully there can be some 
clarification in the Internal Revenue Code because the 
Department and the OIG are very desirous of that.
    Ms. Rivers. When did you first make that recommendation?
    Ms. Lewis. Since 1998.
    Ms. Rivers. And yet Congress has not taken any action?
    Ms. Lewis. I know that it has been considered. It was a 
subject of discussion of the committee back in February.
    Ms. Rivers. Thank you, Mr. Chair.
    Mr. Hoekstra. Mr. Moran and myself are currently waiting 
for the legislative language to come back from legislative 
counsel. I think it is kind of tricky to craft it, and they are 
busy writing amendments for the appropriations bills. We wanted 
to do that in a bipartisan way, and at the last hearing Mr. 
Moran indicated a willingness to work with us, and so we are 
trying to work out the exact language necessary to address this 
issue.
    Ms. Lewis. Yes.
    Mr. Hoekstra. Mr. Green.
    Mr. Green. Thank you, Mr. Chairman. My questions are fairly 
simple and fairly basic ones.
    Mr. Murrin, obviously, your firm, your office, has to have 
a great deal of experience in dealing not only with the 
Department of Education but with some major employers and major 
companies. One thing that we constantly hear is that the 
Department of Education and other agencies, other departments, 
are unable to do rudimentary audits because somehow their 
operations are so complex and so complicated that they can't do 
that. Can you give us some sort of context here comparing the 
types of functions that they are involved with and, on the 
other hand, a Fortune 500 company and its operations in terms 
of complexity? Does it make sense that these U.S. Federal 
departments can't--will always be unable to audit their books 
because they are so complicated? How does that compare with 
what goes on in the private sector?
    Mr. Murrin. I think there are parallels between the largest 
private sector entities, and it certainly would be with the 
largest private sector entities, and with public sector 
entities. I do not share a view that the agencies should never 
be able to get clean opinions and should never be able to get 
rid of material weaknesses and reportable conditions.
    I guess our view would be that they have come from very far 
back in the pack, from a 100-year history of never having had 
financial audits. They are moving forward with the passage of 
the CFO Act and the extension of financial auditing to other 
agencies, and moving forward to get the audit discipline in 
place, but in many cases, they have a long way to go. And to 
the extent that the financial management systems that they are 
dealing with were never put in place with the idea that someone 
would rigorously come and check the way that a financial audit 
process does every year. As to how the numbers are pulled 
together, and ask questions as to whether I have the detect 
controls, whether you have the prevent controls, they are 
finding it difficult to achieve that early on. But the 
parallels with the largest private sector entities would exist, 
and eventually a very large multinational company with 
locations across the country or across the world faces some 
similar things to what those public sector do and have to 
address those issues and have successfully addressed those 
issues.
    Mr. Green. Obviously many of those companies are going well 
beyond the basic auditing requests that we have made.
    Let me shift everyone's attention and thinking and posture. 
I would like each of the witnesses, if you could, if you had to 
offer one single thing, one single principle that you would 
like to see implemented at the Department of Education to try 
to rapidly move us toward compliance, what would it be? And I 
toss that out to each of the panelists. What is it that should 
be done? What one step would you recommend?
    Mr. Murrin. Since I have a microphone, of the points that 
we have raised in our testimony today and have raised in our 
reports and sort of a mantra that I have, it would be some of 
the key detect controls, and within the Department and within 
many of the agencies, it is really a toss-up which of the key 
detect controls you would focus on first. But reconciliation 
processes would be very high on that list of things. If you can 
get a good subsidiary record listing of all of the assets that 
you can, reconciling to a total, to the general ledger, and 
report it in a set of financial records and do some comparisons 
between the detail and what you actually expect to see, 
confirming loans or looking for fixed assets, that would be the 
key item we would focus on.
    Ms. Lewis. I would concur. Focus on the internal control 
report. While it is a very important goal to achieve a clean 
financial statement opinion, simultaneously focus and use the 
internal control report as a blueprint for how you can fix 
systemic issues. When there are documentation gaps and there 
are untimely or long times between reconciliations, it leads to 
problems at the end. You are looking to insert internal 
controls up front so that you can attempt to prevent those 
problems coming in at the end.
    Ms. Jarmon. I would agree with Ms. Lewis and Mr. Murrin. 
The internal control issues need to be focused on, but I would 
like to add that a lot of weaknesses at the Department of 
Education, and I believe the auditors have always stated, 
relate to human resource issues and financial systems problems. 
I know that the Department has had a lot of turnover in its 
CFO's office. The right people in the office, and proper 
training of the financial managers, and good understanding and 
implementation of the system that they have recently purchased 
are critical.
    Mr. Engel. Just adding on to what the other witnesses have 
said, I would probably also add that because of the magnitude 
of transactions that go through the Department, through its 
computers, and you are involving payments and everything being 
accounted for through the computer systems, that it should be 
emphasizing and making sure that it has appropriate access 
controls over the computer so that someone cannot access the 
system and divert funds.
    Mr. Moore. I would tend to look at a control board as was 
looked at with D.C. When you have a problem which has been as 
pervasive and as long-term, I think the leadership in terms of 
the control and accounting functions and that which filters 
down through the employees would be key to turning it around.
    Mr. Green. So you would favor some kind of outside board to 
come in and take control and make the systemic changes?
    Mr. Moore. I am not qualified to answer that question 
necessarily, but I think that has to be considered. If it is 
continued and repeated, then clearly it is not getting done 
within the walls or within the Department itself.
    Mr. Green. Thank you.
    Mr. Chairman, before I turn it over, I would like to ask 
unanimous consent that all written statements submitted by 
Members be included for the record.
    Mr. Hoekstra. Without objection, so ordered. Thank you.
    You all talked about the reconciliations and their 
importance. Has the Department been doing monthly 
reconciliations with Treasury? Has that started yet?
    Ms. Lewis. I am going to have to get back with you on that. 
I know when we testified in March, that was certainly the 
intention. But I must admit I need to get back to you on the 
record, unless GAO knows for certain.
    [The information referred to follows:]

  Response by Ms. Lewis to Frequency of Cash Reconciliations Question

    According to the Department's Office of the Chief Financial 
Officer (OCFO), monthly reconciliations were performed starting 
with the March 2000 data. The Department states that the 
Treasury Department provides matching data by the 23rd of the 
following month. The Department also indicates it is in the 
process of reconciling April 2000 data, and ongoing work is 
being conducted to reconcile prior year data.

    Mr. Engel. I believe right now they are being done on a 
quarterly basis, and I know that they have been working to 
develop a process--I think they have acquired some software 
that they are using to try to assist them in their 
reconciliation process.
    Mr. Hoekstra. For those not familiar with it, the 
reconciliation is between Treasury and the Department of 
Education. There has been an inability to reconcile what the 
Department of Education says that they wrote checks for and the 
Treasury Department says that they have cashed. I am also 
assuming that if they are moving to a quarterly basis, they are 
not yet to the point where they are preparing interim financial 
statements on a quarterly basis. Are they doing that? Have they 
done that this year?
    Ms. Lewis. It is my understanding from the Department that 
in June the goal, or plan, is to produce the first interim 
statements.
    Mr. Hoekstra. OK. So that would be a 6-month statement.
    Ms. Lewis. It is my understanding that it would run from 
the first of the fiscal year through the halfway point of the 
fiscal year, and I believe--if I can make sure that is--by 
getting back to you to confirm that.
    Mr. Hoekstra. Thank you.
    [The information referred to follows:]

     Response by Ms. Lewis to Interim Financial Statement Question

    Yes, thus far, the Department has prepared two interim 
statements; one for the month of February and one for the month 
of March. It is our understanding that full interim statements 
and supporting schedules for the period ending in March 2000 
will be delivered to Ernst and Young on June 15 and that 
information through June 2000 will be delivered in August.

    Mr. Hoekstra. Ms. Hooley.
    Ms. Hooley. Yes, thank you, Mr. Chairman.
    The question, Mr. Murrin, is for you. Their failure to have 
a clean opinion on the audit, financial management; not having 
a clean opinion, does that reflect fraud and mismanagement or 
just problems with integration of the financial management 
systems?
    Mr. Murrin. It is an initial indicator of problems with the 
system. It is not a direct indicator that fraud, waste and 
abuse is actually occurring.
    Ms. Hooley. I am just curious. You have done other audits, 
I am assuming, with other government agencies or outside 
agencies. How long does it generally take for an organization 
to come up with all of the tools and put the systems in place 
that they need to put in place before they can have a clean 
opinion? Just give me an estimate of how long this should take, 
this whole process.
    Mr. Murrin. You know, it is really difficult to say. It 
depends on the management of the organization, the resources 
that the organization has and can devote to a particular 
problem, and really the process that is used to address those 
recommendations over time. I can't address that on average.
    Ms. Jarmon. GAO does the governmentwide audit, and this 
year when we testified on March 31 on the results of the fiscal 
year 1999 24 CFO Act agencies, 13 of the 24 had received clean 
audit reports for fiscal year 1999. Most of those agencies were 
not required to do agencywide audits for the first time until 
fiscal year 1996. So 13 of the 24, and I just heard yesterday 
that the Department of Interior got a clean opinion, and so now 
it is 14 of the 24 have clean opinions.
    Ms. Hooley. Do we have enough personnel and resources to 
make this happen as quickly as we would like them to do this; 
do you know?
    Ms. Jarmon. It is probably a different answer for different 
departments. Some departments are probably doing fine. There 
are some which are having more problems with personnel and 
human resources. So it is different on a department-by-
department basis.
    Ms. Hooley. How does this audit compare to the previous 
audits?
    Mr. Murrin. The 1999 audit, which had four statements that 
had qualifications and one disclaimer, was issued on a more 
timely basis than prior audits. The audit for the immediately 
preceding year, for 1998, had a disclaimer on all of the 
statements. And the audit for 1997, I believe, was one of 
unqualified on all of the statements.
    Ms. Hooley. What are some of the improvements that the 
Department has made in management of the student loan program, 
which I know has been troublesome, and are the default rates 
going up, down? What is happening in that area with student 
loans?
    Ms. Lewis. I can indicate what I know. Obviously the 
Department would be in a position to speak particularly to some 
of the issues.
    For example, as I mentioned in my testimony, in the area of 
death and disability discharges, the regulations changed around 
1995 to basically allow persons who had a discharge of their 
loan obligation to reapply for loans.
    It is my understanding that the Department noticed a spike 
in those types of borrowers and asked the Office of Inspector 
General to conduct an audit to review the situation, which 
involved the match of NSLDS data and Social Security 
Administration data. The OIG looked at discharges in a certain 
time period and subsequently looked at the earnings date from 
Social Security to see if persons who were presumably dead or 
permanently and totally disabled were showing through the 
Social Security records that they were earning income. And we 
did find matches. In other words, a population that showed 
income earnings after the discharge.
    Again, the Department requested that work. We issued the 
results in June 1999, just before I got to the Department, and 
made some very specific recommendations to change the form, 
making the recordkeeping so that they needed to show that there 
was actually a doctor with a medical license number filling out 
the form, and requiring an original or certified copy of the 
death certificate. Those recommendations were implemented.
    We have worked with the Department and with the guaranty 
agencies to try to find particulars to do the match. Part of 
the agreement for the match was that there would be no 
particular indicators--no particular information that came out 
of the match to identify a particular person. So we have had to 
go back and do additional work. That would be one case I am 
personally familiar with where significant improvement, 
tightening of controls, did take place.
    Ms. Hooley. And have the default rates now gone down?
    Ms. Lewis. That was a borrower situation, death and 
disability. So they are not related.
    Ms. Hooley. But there has been a tightening?
    Ms. Lewis. In that area, in death and disability, yes.
    Ms. Hooley. Thank you.
    Mr. Hoekstra. Mr. Collins.
    Mr. Collins. Thank you, Mr. Chairman. It has been mentioned 
trying to get some language together for the IRS to share 
information with the Department of Education. I think we better 
be careful with such requirements or mandates, particularly for 
an agency that can't conduct its own business. The information 
that is reported to the IRS is very confidential. It is not 
shared with anyone, not even a Member of Congress much less an 
agency which is under the authorization of a Member of 
Congress. Does the Department of Education write checks, or 
does the Treasury Department?
    Ms. Lewis. I'm sorry?
    Mr. Collins. Does the Department of Education actually 
write checks, or does the Treasury Department pay the bills for 
the Department of Education?
    Ms. Lewis. There definitely is a function at the Department 
of Education where checks are written. For example, 
reimbursement checks for travel is one example where checks are 
written and certain vendors are paid with checks. And then 
there are many, many other transactions that take place through 
the Treasury Department mechanisms.
    Mr. Collins. Do you have a breakdown in dollars, one versus 
the other?
    Ms. Lewis. No, sir, I'm sorry. I don't.
    [The information referred to follows:]

  Response by Ms. Lewis to Question on Whether Or Not the Department 
                             Writes Checks

    The majority of funds go out directly from the Federal 
Reserve, at the Department's direction via wire transfers or 
Treasury checks. The Department does issue checks for employee 
reimbursements, payments to field readers, payment of the 
centrally billed travel account and the purchase of supplies 
when purchase cards are not feasible. According to the 
Department, in fiscal year 1999, approximately 22,700 third 
party draft checks were issued, totaling $25 million or less 
than 1 percent of the Department's expenditures for the year.

    Mr. Collins. Who would audit that, you or the GAO?
    Ms. Lewis. As part of the financial statement audit, which 
looks at large transactions and five particular statements that 
the Department prepares, there is information in those 
statements that the currently engaged auditor, Ernst & Young, 
would look at.
    Mr. Collins. Do we do a cash flow chart, operating 
statement, balance sheet or all?
    Ms. Lewis. I will ask Mr. Murrin to explain the financial 
statement.
    Mr. Murrin. There are five statements that the Department 
of Education prepares which we audit. Of the statements you are 
referring to, there are statements that do reflect, in effect, 
the cash transactions, the cash that goes out the door to 
grantees and others.
    Mr. Collins. That is part of your operating statement?
    Mr. Murrin. Correct.
    Mr. Collins. Income and expenses?
    Mr. Murrin. A parallel, yes.
    Mr. Engel. Regarding the disbursement authority, the 
Department of Education does have disbursing authority to write 
their own checks. Unfortunately, I don't know the volume of 
checks they write on their own, which then still would clear 
through the Federal Reserve and Treasury would get involved, 
versus the checks where they send basically a tape of what they 
want to have disbursed, which is what a lot of agencies do, to 
Treasury, and then Treasury actually prepares the checks and 
sends them out.
    Mr. Collins. I know that Social Security checks are 
prepared by Treasury.
    How many employees are in the Department of Education when 
it comes to the accounting department?
    Ms. Lewis. I don't know. I will have to get back with you 
on that. The Department would have the answer. I don't have it 
in my head.
    [The information referred to follows:]

  Response by Ms. Lewis to Question About the Department's Accounting 
                                 Staff

    According to OCFO, its ceiling is 87 FTE and 74 FTE are 
currently on-board.

    Mr. Collins. OK. In the loan forgiveness, that seems to be 
an area of problem. How do you verify disability?
    Ms. Lewis. There is a form. It is a governmentwide approved 
form that is sent to the individual who is seeking a discharge 
for a permanent and total disability, and it is the obligation 
of that individual to submit that, either to the guaranty 
agency or to the Department depending on which type of loan 
they completed. And, for example, when we did the audit, one of 
the things that the auditors did was go to the guaranty agency 
and look at some of those forms. Some of them were illegible. 
There did not seem to be a lot of controls. There was no box 
for ensuring that there was a medical license number. And 
basically it appeared that the information was accepted at face 
value, which is why we made the recommendations that that 
process should be tightened up.
    The form was rewritten. OMB approved it. I think the new 
form took effect in January. And so now there is more 
information required on the form. Also the guaranty agencies 
were issued what is called a ``Dear Partner'' letter in 
November. The Department issued the letter to give more 
specific guidance to the guaranty agencies when they saw an 
application for a discharge and they had questions about it, 
specifically whom in the Department they could speak to, what 
their ability would be to question and to go back, and what 
requirements were in place. So there have been some tightening 
of the procedures.
    Mr. Collins. Well, I noticed that you cross-check with 
Social Security on death certificates.
    Ms. Lewis. Subsequently, we look to do a match with the 
Social Security Death Index because in the match in the 
original audit that we did, we were not in a position to use 
any individual data to follow up. While we got information from 
the match indicating that there were persons who appeared to be 
earning income after a death, there was no name or Social 
Security number. That was part of the agreement for the match. 
So we have looked to go with the Social Security Administration 
to have a match.
    There is a law, I think it is called the Computer Matching 
and Privacy Act, which was passed in the late 1980's by 
Congress to set the requirements any time government agencies 
do matches. There is also something called the Data Integrity 
Board which exists within each agency, and there are specific 
requirements for that which have to be met by each agency, as 
they may seek to match some of the data that they have in their 
systems with data from another agency.
    Mr. Collins. Would it not be true, though, that most people 
who would have a permanent disability would also file for 
disability insurance, for Social Security, and you could cross-
check that with Social Security also?
    Ms. Lewis. We did make a recommendation, as part of the 
audit, for the Department to consider working with Social 
Security's processes and information since it appeared that 
they had a model that might provide some helpful guidance. That 
was one of the recommendations that the Department did not--I 
think it was the recommendation that the Department did not 
agree with in terms of piggybacking onto the Social Security 
system that is already in place. This is under negotiated 
rulemaking.
    All of the recommendations that are implemented, proposed 
and then finalized as part of the Higher Education Act go 
through a process of negotiated rulemaking. So procedures and 
requirements related to death and disability discharges are 
currently under negotiation with the public as part of 
negotiated rulemaking. Any additional tightening or other 
changes to the system, whether it be the definition or 
requirements to reinstate loans should someone ultimately be 
determined to have inappropriately been given a discharge, 
those are all matters that are being discussed with the public 
as part of the negotiated rulemaking process. This is my 
understanding from information I have from the Department.
    Mr. Collins. Well, I find it odd that they would cross-
check to see if a person is still alive, but don't cross-check 
to see if they are drawing disability. Something doesn't come 
together here. When you have a department that can't account 
for all of its money, I am not surprised.
    Let me ask you one other thing. In your investigation did 
you find the slack in the operation in career employees or 
appointees?
    Ms. Lewis. The Telecommunications Specialist is a--I 
believe--is a career employee. But obviously I am very much 
mindful that the Justice Department has indicated which aspects 
of the investigation we can speak about, which have basically 
been made public through the plea agreement with Mr. Sweeney 
and is from what I formed my testimony. The Telecommunications 
Specialist to whom I referenced was a career employee.
    Mr. Collins. He was one out of how many?
    Ms. Lewis. I am not at liberty to say.
    Mr. Hoekstra. I believe public reports indicate that there 
are six or seven additional employees from the Department.
    Ms. Lewis. There are five other employees who have been 
suspended without pay, and one is on administrative leave that 
is proposed to be suspended without pay. You are correct, Mr. 
Chairman.
    Mr. Collins. Let me just finish with one more comment. It 
appears when it gets down to the fact that you can't account 
for all of the checks that they are writing, that they are of 
the opinion that as long as they have checks, they have money. 
Thank you.
    Mr. Hoekstra. Just a couple of questions. I am glad we are 
doing this in the Budget Committee because I think there are 
some things that we can share from the Education and the 
Workforce Committee. One thing that kind of drives a little bit 
of our frustration on this is the theft ring or the 
embezzlement, whatever we want to call it, started when, at 
least that we know about, the earliest that we know about?
    Ms. Lewis. We have looked back at records to the beginning 
of 1997.
    Mr. Hoekstra. So it is something that went on for 
potentially 2\1/2\ to 3 years. The duplicative payments issue 
first came up when; again, that we are aware of? I believe 
Lockheed was going to testify last week had a duplicative 
payment back from when?
    Ms. Lewis. From information from the Department, it is my 
understanding that there are at least nine instances of 
duplicative payments. That is, nine occasions when it happened. 
Within that there could be a number of either vendors or 
grantees.
    Mr. Hoekstra. The first one occurring?
    Ms. Lewis. I think in fiscal year 1998, according to 
information that we have gotten from the Department--1998, 1999 
and 2000.
    Mr. Hoekstra. And the last one was as recent as January of 
2000. There was a payment of $5.9 million in January of 2000, 
and there were 51 duplicative payments or 51 schools that were 
affected in December?
    Ms. Lewis. The information that I have shows four instances 
involving grantees or SFA schools totaling approximately $150 
million in fiscal year 2000. I can look more specifically.
    Mr. Hoekstra. How much money for duplicative payments?
    Ms. Lewis. From the Department for fiscal year 2000, four 
instances involving either grantees or SFA schools totaling 
$150 million.
    Mr. Hoekstra. Wow. That is new information; $150 million in 
duplicative payments this year. OK. This has been an ongoing 
problem. That number shows no indication of subsiding.
    The third thing is the grantback account, there has been 
some talk about that, and I think in the report that you are 
going to be issuing, the money that actually went back in the 
grantback account, that tied directly to the purpose of the 
grantback account, is less than 10 percent, right?
    Mr. Engel. The account was established in 1991. They 
started to record adjustment activity, the suspense activity in 
1993. Every year since 1993, the actual balance related to what 
the account was set up for was less than 5 percent for every 
year thereafter.
    Mr. Hoekstra. Before you said a lot of money had to do with 
grants, but specifically what that account was set up for, only 
5 percent of the funds could be documented as being in that 
fund specifically for the purpose that the fund was set up for.
    Mr. Engel. That is true.
    Mr. Hoekstra. And that started in 1991.
    I think the frustrating thing for us on the Education and 
the Workforce Committee, and I hope that those frustrations are 
shared on the Budget Committee, these are not new problems. The 
duplicative payments have been going since at least 1998, the 
grantback problem since 1993. Depending on your definition, it 
might have been gone back to 1991. These are systemic problems 
over a long period of time and not just one-time occurrences. I 
think that is the frustrating thing that we can't get a handle 
on that.
    And I think, with the check-dispensing authority of the 
Department, the Department of Education has a different kind of 
relationship than a number of the other agencies have with 
Treasury, correct?
    Mr. Engel. That is correct.
    Mr. Hoekstra. And that allows a greater degree of autonomy 
in spending and issuing checks?
    Mr. Engel. There are other agencies, Defense, but you are 
right, the majority of the agencies do not write their own 
checks.
    Mr. Hoekstra. Ms. Lewis.
    Ms. Lewis. Just looking again, it is our understanding from 
information provided that there were nine instances over the 
three fiscal years. All of the money has been returned of the 
amounts identified as duplicative payments, except there is 
continuing disagreement about approximately $44,000 involving 
two vendors. We have contacted the Office of General Counsel to 
ask what happens now if there is continuing disagreement, what 
steps--to bring to the General Counsel's attention.
    You had previously mentioned, Mr. Chairman, some open audit 
recommendations that we testified to at the March hearing. As 
you know, we have been working on these open audit 
recommendations. The Department provides a corrective action 
plan. Just for the record, the total for fiscal years 1995 to 
1999 was 139 recommendations. At present there are 67 open, 72 
closed; 46 of the 67 are nonrepetitive. So we are also in a 
dialogue about that, but just to update that for the record.
    Mr. Hoekstra. I just want to say one more thing. I am not 
worried about the duplicative payments that we found where we 
got the money back. Once we find them and go back to those 
vendors or schools and ask for our money back, I would expect 
to get it. What concerns me are the ones that we may not have 
found.
    Ms. Lewis. Since we spoke on this subject in November, my 
office has obtained GAPS data, for the initial 3-month period 
that the data went into GAPS. We have also been working with 
the Federal Reserve to acquire other data. For a period from 
mid-1998 through mid-1999, my auditors are looking to see if 
there are any other anomalies in the GAPS system that might be 
duplicative payments or anything else. We are still in the 
process of conducting that work.
    Mr. Hoekstra. Ms. Rivers.
    Ms. Rivers. Thank you, Mr. Chair. I have a couple of 
questions.
    Mr. Murrin, in the time that you have done the audits and 
made recommendations to the Department of Education, have you 
encountered any unwillingness on the part of the Department to 
accept your recommendations, or have you come across any 
specific instances where the Department has been obstinate or 
deliberatively noncompliant toward recommendations?
    Mr. Murrin. To my knowledge, no.
    Ms. Rivers. Ms. Lewis, you mentioned an investigation you 
did was because of a Department of Education referral. So as we 
look through your testimony----
    Ms. Lewis. That was our audit work, yes.
    Ms. Rivers. When we use prosecutions pursued or evidences 
of wrongdoing, those can be the result of your internal 
investigation, or it can come from the Department of Education 
finding problems on its own and referring them to you?
    Ms. Lewis. We do have a hotline function, for any 
individual, the public or within the Department. And, as in any 
OIG office, that is a very important part of any internal 
control system. We also get referrals from offices within the 
Department and from the General Counsel's office for matters 
for us to follow up on.
    Ms. Rivers. Have you encountered any specific instances of 
reluctance in pursuing an investigation when there is evidence 
of criminal activity or any unwillingness to prosecute once 
information has come to the attention of the agency?
    Ms. Lewis. We work with the Justice Department, mainly the 
local U.S. attorney's offices, and we, along with very well-
trained investigators and their agent-in-charge, will present 
their findings to date and the attorney's office will determine 
if they feel that the case should be opened.
    In our experience we have had cooperation from the 
Department, the leadership of the Department and managers in 
the Department in terms of providing us information to help us 
do our investigation, and then understanding that our requests 
to follow up with more specific information or additional 
material oftentimes comes at the direction of an assistant U.S. 
attorney.
    Ms. Rivers. Given what we know about the personnel problems 
within the Department and their software difficulties over 
time, do you think that the Department has given a less than 
good faith effort to comply with your recommendations?
    Ms. Lewis. I have been there since last June and had a very 
difficult experience in terms of the 1998 audit. That was not a 
timely audit. The Department--everyone started late. The 
financial statements were provided late. This was Ernst & 
Young's first year. The Department, OIG auditors and Ernst & 
Young worked to try to bring that to closure with a result of a 
disclaimer, and there are many lessons to be learned from that. 
This was why we very much set the absolute unbreakable goal of 
ensuring that for the very first time, the Department would 
achieve its audit for 1999 in a timely fashion, and it did so.
    Ms. Rivers. I am interested in whether or not their efforts 
represented less than a good faith attempt to comply with what 
you were recommending. Did you feel that they were unwilling or 
being obstinate or being noncompliant deliberatively?
    Ms. Lewis. I have no indication of any deliberate 
noncompliance. We push very hard to see that recommendations 
that we feel are appropriate, that come out of our audit work 
or from Ernst & Young, such as the 1994 document that the 
Chairman spoke of in his opening statement, was indeed a 
document that arose from some information we had from an 
investigation. It is called an IPAR. So it is important, but 
the property management issues have been on the Department's 
Federal Managers' Financial Integrity Act list since 1994. And 
it is very important that efforts that would yield results take 
place. We are living in the era of results.
    Ms. Rivers. Do you think that results have not been 
achieved because of bad faith on the part of the Department?
    Ms. Lewis. No, I don't have any indication of bad faith or 
willful noncompliance, but in large part it is the importance 
of getting to the result.
    Ms. Rivers. Ms. Jarmon or Mr. Engel, do you have any 
experience which indicates that the Department was unwilling or 
noncompliant with your recommendations as they have moved 
through this process with software?
    Ms. Jarmon. No, we have not had any indications where they 
have been willfully noncompliant, but it has taken some time. 
Many of the recommendations have been repeated from year to 
year since the first audit.
    Ms. Rivers. Thank you, Mr. Chairman.
    Mr. Hoekstra. Mr. Collins.
    Mr. Collins. I just want to re-ask one of my questions.
    Did you find the slack in the Department in career or 
appointees? You gave an example of a career who had actually 
committed a felony there, but is the overall administration of 
the Department, down to each department within the Agency, is 
it run by career or appointees?
    Ms. Lewis. It differs across the offices. There are some 
offices that are headed by Assistant Secretaries who are, as 
you know, Presidential, Senate-confirmed, political appointees 
and then there are some offices that are headed by career 
appointees.
    The organization has changed over time. Years ago the CFO 
and CIO offices were merged with one individual running the 
office. Those offices are now currently broken out, and there 
are two career executives running those offices. So over time 
the structure changes.
    As Mr. Chairman reminded me, the seven individuals who were 
Department of Education employees who have been identified for 
suspension without pay, and I just need to clarify, there are 
allegations concerning the Telecommunications Specialist. The 
Telecommunications Specialist has not been found guilty or pled 
to any crime, so I just wanted, Mr. Collins, to make that 
clear, if I didn't make that clear before. The person has been 
identified and is being investigated, but has not pled or been 
convicted of any Federal or other crime.
    But the seven are employees in the ranks--were previously 
employees in the ranks of the Department, in the staff ranks.
    Mr. Collins. I think it is important to know who is doing 
the best job, who is administering the best oversight. Is it 
career or appointees? Then you can make a determination how you 
want to set your different departments up.
    Ms. Lewis. We are taking all of the information that we 
have from the investigation, and we have asked some of our 
auditors to go in and do some follow-on looks, such as at other 
contracts and other issues that have arisen. We are going to 
bundle that information up and put it together, analyze it, and 
we are going to be presenting it to the current head the chief 
information officer, the new head--he arrived last September--
in terms of identifying any lessons learned and our 
recommendations for internal control improvements that need to 
be made.
    And I will, Mr. Collins, make sure that all of the 
information that we have there is shared appropriately with the 
rest of the Department, very senior officials, to try to 
prevent other mistakes. It is the very process that we are 
doing now on third-party checks and the purchase cards. We are 
going office by office, and we are doing internal control 
testing based on GAO's new standards, and we are meeting with 
the Assistant Secretary or the head of the office, and we are 
presenting them with our findings. We will also do a cap 
report. There will be about 13 or 14 products. As we go into an 
office, we are also identifying other areas to follow up on. So 
the office-by-office approach is one that we are looking to 
adopt, Mr. Collins.
    Mr. Collins. Thank you, Mr. Chairman.
    Mr. Hoekstra. I thank the witnesses for being here today. 
With that, the Task Force will be adjourned.
    [Whereupon, at 11:52 a.m., the Task Force was adjourned.]


     SMOTHERING EDUCATION REFORM: HOW WASHINGTON STIFLES INNOVATION

                              ----------                              


                        WEDNESDAY, JUNE 14, 2000

                  House of Representatives,
                           Committee on the Budget,
                      Task Force on Education and Training,
                                                    Washington, DC.
    The Task Force met, pursuant to call, at 2 p.m. in room 
210, Cannon House Office Building, Hon. Peter Hoekstra 
(chairman of the Task Force) presiding.
    Chairman Hoekstra. Good afternoon. The Task Force on 
Education and Training for the House Budget Committee will come 
to order. A few weeks ago, this Task Force held its first 
hearing. At that time we heard testimony about the Department 
of Education's inability to balance its books and some inherent 
weaknesses. Yesterday the House acted on that by passing a 
comprehensive fraud audit bill through the House of 
Representatives, which is now on its way to the Senate, asking 
the General Accounting Office to do a fraud audit within the 
Department of Education to identify those areas where there may 
be fraud or those areas that may be susceptible to fraud.
    Today we will be discussing a different kind of 
inefficiency: resources that we believe should be going to our 
kids, but may get siphoned away to feed the bureaucracy or 
worse; federally created programs that are out of step with the 
priorities and needs of local school districts. Too often the 
net effect of creating hundreds of programs administered in 
Washington is that it burdens and stifles education reform and 
initiatives rather than facilitating them.
    Many of the problems we will discuss today can be explored 
in more detail in the Education at a Crossroads report. This 
report was produced by the Subcommittee on Oversight and 
Investigations, which held 22 hearings across the country and 
here in Washington. We have heard from hundreds of students, 
parents, educators, community leaders and business owners. We 
sifted through thousands of documents to learn more about the 
effectiveness of Federal education programs.
    The recommendations that came out of the Education at a 
Crossroads, was to get effective learning, we need to empower 
parents, return control back to the local level, send dollars 
to the classroom and not to bureaucracy, and at the local level 
you improve education when you focus on basic academics. I 
believe that is what we heard at one of the hearings in Central 
High School in Little Rock, AR, hosted by Senator Hutchinson.
    I think today we have got witnesses who can talk about the 
effectiveness or the lack of effectiveness of Federal education 
programs at the State and the local level, and that is what we 
are here to find out about.
    I will submit the balance of my statement for the record 
and yield to Ms. Rivers.
    [The prepared statement of Peter Hoekstra follows:]

Prepared Statement of Hon. Peter Hoekstra, a Representative in Congress 
                       From the State of Michigan

    A few weeks ago, this Task Force held its first hearing. At that 
time, we heard testimony about the Department of Education's inability 
to balance its books. When an agency can't account for its money, 
waste, fraud, and abuse thrive. Not surprisingly, we heard example 
after example of abuse of our Federal education dollars, including the 
allegations of Department employees spending hundreds of thousands of 
taxpayer dollars on large screen televisions and electronics for 
themselves and their relatives.
    Today we will be discussing a different kind of waste. Resources 
that should be going to our kids, but get siphoned away to feed a 
massive bureaucracy, or worse, federally created programs that are out 
of step with the priorities and needs of local districts. Too often, 
the net affect of creating hundreds of programs administered in 
Washington is that it burdens and stifles education reform and 
initiatives rather than facilitates them.
    Many of the problems we will discuss today can be explored in more 
detail in the Education at a Crossroads Report. The report was produced 
by the Subcommittee on Oversight and Investigations, which held 22 
hearings across the country and here in Washington. We heard from 
hundreds of students, parents, educators, community leaders and 
business owners. We sifted through thousands of documents to learn more 
about the effectiveness of Federal education programs.
    What we learned in the Education at a Crossroads project should 
concern every American:
     Too few of our students are learning what they should be 
learning--despite the fact that the Federal Government spends more than 
$100 billion a year on education.
     Too few Federal education programs have produced any 
evidence that they have helped children.
     Too many Federal dollars are tied up in bureaucracy, 
administration and programs that do not spend dollars to the classroom.
    The Federal response to the rising tide of mediocrity in American 
schools has been to build bureaucracies, not a better education system.
    We have to ask--isn't there a better way?
    What we learned is that what works has little to do with federally 
designed ``one-size-fits-all'' programs. What we do here in Washington 
to improve education should reflect an understanding of what works. And 
what we learned by listening to people on the front lines of education 
around the country is that we need a Federal education policy that 
will:
     Empower parents.
     Return control to the local level.
     Send dollars directly to the classroom--not bureaucracy.
     Focus on basic academics.
    We are fortunate to have with us today, witnesses who can talk 
about what works.
    What we found as part of our review of Federal education programs 
is a system that does not focus on supporting what works. It is a 
system fraught with bureaucracy and ineffective programs. We found:
     There are more than 760 Federal education programs. The 
Subcommittee assembled the most comprehensive list of Federal education 
programs to date. At least 39 Federal agencies oversee more than 760 
education programs, at a cost of $100 billion a year to taxpayers.
     Even after accounting for recent reductions, the U.S. 
Department of Education still requires over 48.6 million hours worth of 
paperwork per year--or the equivalent of 25,000 employees working full-
time.
     The State of Ohio completed a study that found that 50 
percent of their paperwork was attributable to Federal programs, even 
though they only received 6 percent of their funds from the Federal 
Government.
     States like Georgia and Florida have found that it takes 
four to six times as many employees to administer a Federal dollar as 
it does a State dollar.
     As little as 65 to 70 cents of each Federal education 
dollar actually reaches the classroom. According to several studies, 
about 85 cents out of every Federal education dollar is returned to 
local school districts. Although these studies provided information not 
previously available on Federal education spending, they only examined 
what was returned to school districts. This is still several layers of 
bureaucracy away from the classroom. Given the 48.6 million paperwork 
hours required to receive Federal education dollars, not to mention the 
cost of State and local administration of programs, it is not 
unreasonable to assume that another 15 to 20 cents is spent outside of 
the classroom. This would mean a net return of 65 to 70 cents to the 
classroom.
     It takes 487 steps to approve grant applications. In 1993, 
Vice President Gore's National Performance Review discovered that the 
Department of Education's discretionary grant process lasted 26 weeks 
and took 487 steps. The Department over the last few years has been 
attempting to ``streamline'' this to 216 steps, but the process is not 
complete.
    What these numbers tell us is that the Federal bureaucracy is out 
of control. Past Democrat Congresses have attempted to solve every 
problem with a program. Then, after a program was created and funded, 
no one ever asked whether it worked, whether it should continue to 
exist, or whether the money would be best spent elsewhere.
    There is an incredible amount of overlap and duplication in Federal 
education programs. For example, we found that there are 11 drug 
education programs, 14 literacy programs and 63 math and science 
programs. GAO looked at what programs target at-risk and delinquent 
youth, and found that there are more than 127 Federal programs 
targeting these children, with little or no coordination. Moreover, the 
Department of Education only contains a little more than a third of all 
education programs. Even the Department of Energy has an education 
office, with its own task force.
    Every time this Congress and future Congresses address the issue of 
education and every time we consider legislative action, we must ask a 
few simple questions, questions that I hope can be addressed by a few 
of our witnesses today.
    1. Are we empowering parents and families by giving them a larger 
role in the education of their children or are we giving more power to 
bureaucrats?
    2. Are we empowering teachers and principals to make the right 
decisions for their local school or are we giving more power to 
faceless administrators far removed from the classroom?
    3. Are we sending dollars to classrooms where learning actually 
occurs or are we paying for paperwork?
    4. Are we focusing on basic academics and achievement or 
politically correct social programs of unproven effectiveness?
    The answers to these questions will guide us to craft solutions 
that help rather than hinder children. These are common-sense 
questions, but they have been ignored in Washington, DC, for too long.
    I hope the witnesses today will be able to give us in Washington 
some additional insight into how the education bureaucracy is taking 
precious resources away from our children.

    Ms. Rivers. Thank you, Mr. Chair, and I want to thank the 
witnesses for participating today. After serving for the better 
part of a decade on a local school board, I am interested in 
hearing the different experiences. I can remember as a board 
member a lot of debate about the various programs that we 
provided in that local school district, but my recollection is 
only about 7 percent of the money that came to the schools I 
represented came from the Federal Government, and most of the 
programs and decisions that we made at the local school 
district level had to do with local or State money. I also 
remember that we had more regulations coming down from the 
State than we ever contemplated coming from the Federal 
Government. And I also recognize that some members of the 
school board had difficulty determining the difference between 
State and Federal regulation, and we often talked about a 
regulatory burden without trying to differentiate where that 
burden might be coming from.
    So one of the things that I am interested in today is how 
school districts are using the 93 percent of the money that 
comes from other sources relative to the 7 percent that comes 
from the Federal Government; what regulations are actually 
stifling or smothering innovations; and how that 7 percent 
funding is causing the kinds of problems that are being 
suggested; and where regulation is coming from, from the 
Federal Government, State or local decisionmaking, and I look 
forward to your comments and an opportunity to ask questions.
    Chairman Hoekstra. Today's first witness, is Senator Tim 
Hutchinson, who made history when he was sworn in as the first 
Republican Senator ever to be popularly elected from Arkansas. 
Senator Hutchinson brings a unique perspective to Congress as 
one of the few Members with a background in small business and 
education. His career in public service began with his election 
to the Arkansas House of Representatives where he serve for 8 
years. In 1992 he was elected to represent Arkansas' Third 
Congressional District in the U.S. House of Representatives 
where he served two terms.
    He is a dedicated advocate for American families. He was 
the original author of the $500-per-child tax credit, was one 
of the main proponents of welfare reform. He has also taken 
really the lead on the Senate side on many of the educational 
initiatives that we are also working here in the House, whether 
it is Dollars to the Classroom, Straight As and those types of 
things. A former history teacher, he also co-owned and managed 
KBCV Radio in Bentonville, Arkansas.
    I have got another page but I will submit that for the 
record.
    Mr. Hutchinson. Can I take the extra time if you stop?
    Chairman Hoekstra. That is right.
    The second witness is Eugene Hickok, who is the secretary 
of eeucation for the State of Pennsylvania. He is chairman of 
the Educational Leaders Council. He was selected to help bring 
Pennsylvania's education system into the 21st century. He has 
been working hard to send Pennsylvania's education system to 
the head of the national class.
    I have also got an extra page and a half on you which will 
be submitted for the record. Our next witness is Dr. Susan 
Sclafani, chief of staff for educational services in the 
Houston Independent School District. In that position she 
represents the superintendent on educational issues and 
coordinates activities of the departments directly involved in 
the education of children. In addition to her hands-on duties, 
she supervises the Department of Research and Accountability, 
and she is responsible for district development and board 
services.
    I also have another page on you. But we will put those all 
in the record, and, Senator Hutchinson, we will begin with you.

 STATEMENT OF TIM HUTCHINSON, A UNITED STATES SENATOR FROM THE 
                       STATE OF ARKANSAS

    Senator Hutchinson. I am honored to be on this panel with 
some distinguished leaders in education, and I am honored to 
appear before your committee. I have long admired and 
appreciated the work that you have done in the budget and 
education area, and you have combined them on this Task Force, 
and you are to be commended. And we will remember with fondness 
your visit to Arkansas as part of your Crossroads project and 
your visit to Central High School, and we hope that contributed 
to the results of that project.
    I am here today to discuss the issue of education reform 
and the appropriate Federal role in encouraging that reform and 
innovation. As a Member of the Senate Health, Education, Labor 
and Pensions Committee, I have been working on this issue for 
the past year and a half as we have been attempting to 
reauthorize the Elementary and Secondary Education Act, and we 
spent 2 weeks debating that on the floor of the Senate after 
having marked it up and sent it out of our education committee.
    The Federal Government currently funds a very small 
percentage of the local education budget, but with that small 
percentage wields a great deal of influence. It is my opinion 
after looking at this for the past year and a half that the 
Federal Government funds systems, not students. Instead of 
requiring real results in student learning from our schools, 
the Federal Government gives them funding and then just asks 
only that they spend it in the required way. In doing so we are 
mandating enormous amounts of paperwork and applications to 
abide by this so-called accountability.
    In Florida it takes six times as many employees to 
administer a Federal education dollar as a State dollar. 
Florida has 297 State employees administering $1 billion in 
Federal funds and 374 employees overseeing $7 billion in State 
funds. Unfortunately that kind of ratio of what it costs to 
administer State and Federal funds is not the exception, but is 
the rule.
    As I have traveled around my home State of Arkansas 
visiting schools, I heard many stories about the numerous hoops 
that schools must jump through in order to receive Federal 
funding. This is of particular interest to me since Arkansas 
has a large number of small rural school districts that do not 
have the time or resources to fill out paperwork to comply with 
Federal rules and regulations.
    Today I would like to talk about several examples from my 
State of ways that schools are affected by the laws that we 
pass in Congress. I recently visited an elementary school in 
North Little Rock and talked to a classroom of fourth-graders 
about American government. For 45 minutes we did a give and 
take. They asked me questions, and I asked them questions. It 
was a very bright group of kids. I was inspired by their 
understanding. They knew more about American government than 
most high school civics classes that I have spoken to. The key 
to this inspirational classroom was not any Federal program, 
but it was their remarkable teacher. The more schools I visit, 
the more I am convinced that the key to a good education is 
having a good principal and good teachers who are excited about 
their job and want to convey knowledge to their students.
    After I talked to this fourth-grade class, the principal 
half jokingly introduced me to one whom he described as his 
boss. He said, ``Meet my boss, the Title I coordinator for our 
schools.'' While his comment was meant to be funny, it revealed 
a truth about the Federal influence in our schools. The Federal 
Government provides only about 7 percent of education funding 
in this country, yet in a school in North Little Rock, 
Arkansas, the Title I coordinator wields as much influence as 
the principal.
    I also visited another school in Arkansas where the 
principal had identified a specific need in her school that 
they wanted to address. This was in Van Buren, Arkansas, up in 
the northwest part of the State, my brother's district. She 
wanted to implement a concept known as point-in-time 
remediation to help underachieving students before they fall 
irreversibly behind. To do this she wanted to hire a teacher 
who would spend each day working to assist struggling students 
before they were forced to attend summer school.
    In her desire to do what was best for her children, she 
applied for a Federal grant. The Title I coordinator rewrote 
her grant as a request to hire a teacher to reduce class size 
under the Federal Class Size Reduction Program, and the grant 
was approved. To get her grant approved, she had to commit to 
using this new teacher for a purpose that the Federal 
Government had predetermined, reducing class size. However, the 
school did not have a class size problem. Instead of being able 
to flexibly use Federal dollars to address the needs of her 
school, she had to apply for a prescriptive one-size-fits-all 
grant. The principal had to make a choice, either she fudges 
and cheats on the application, or she cheats her children from 
getting the additional help they need at the time they need it.
    This is just another example of the ``Washington knows 
best'' style of governing that has been occurring in recent 
years. Washington did not provide innovation in this school; 
the innovation came from the principal. Instead of allowing her 
to address the needs of her school, the Federal rules and 
regulations constrained what she was legally able to do with 
the Federal dollars. Instead of having accountability to help 
every child learn, the Federal Government only requires funding 
to be spent in the correct way.
    One last dramatic example of the accountability that we 
have under current law was my visit to the school in Holly 
Grove, Arkansas, in the Mississippi Delta region. This school 
houses Head Start through 12th grade all in one building. The 
Delta region is the poorest area of Arkansas, and the poorest 
area of the United States. There is a large minority 
population, and the school building is about 50 years old. The 
area has a very low property tax base, so additional money that 
the school gets is sorely needed.
    We took a few photos at Holly Grove school down in the 
Mississippi Delta, and this is a picture of some of the 
ceiling, and you can see the run-down conditions. You can see 
the flood damage where the water has leaked. It is just about 
as bad as any school as you could ever see in the inner city. 
The ceilings are 12 feet high, so it is hard to heat. The 
lighting is poor. The ceilings are collapsing. You saw the 
water stains. The outside of the school looks just as bad as 
the inside. The paint is peeling, and the windows are broken.
    Then as the principal, a very fine man, dedicated to his 
students, as he gave me a tour of his school, I stumbled onto 
what was a very interesting sight. As I walked by one of the 
rooms in the school, I noticed that it was full of state-of-
the-art exercise equipment: new treadmills, Stairmasters, and 
Nautilus equipment, weight equipment filling this very run-down 
school. After seeing the disparity between the condition of the 
building and this room filled with new exercise equipment, 
state-of-the-art, brand new exercise equipment, I asked the 
principal where he got the money to buy all of this state-of-
the-art equipment. He answered that he received a Federal grant 
for $239,000 and that he was using this money for the allowable 
uses under the grant, health and nutrition programs. School 
renovation, however, is not an allowable use under the grant he 
received. So instead of addressing the most pressing need that 
his school had, he was forced to address a need identified at 
the Federal level.
    And he told me, he said, Senator Hutchinson, I would much 
rather have used that $239,000 for renovations, lowering the 
ceilings, painting the building, making it a better environment 
for education, but that wasn't one of the allowable uses under 
the prescriptive Federal grant. That is not to say that the 
exercise equipment was not needed. However, in the principal's 
mind and certainly in mine, there were more pressing needs that 
could not be addressed because of the current nature of funding 
of the Federal education program.
    Instead of solving this program by creating a new Federal 
program with new paperwork required, the Federal Government, I 
believe, should be promoting innovation at the local level with 
few Federal strings other than the most important requirement 
that we could have, and that is increases in student 
achievement.
    Principals and teachers should not be hindered from 
addressing pressing needs in their schools because of rules and 
regulations from the Federal Government. Instead Federal 
funding should be used to foster the exciting innovations that 
are already occurring in many schools all across this country.
    Mr. Chairman, again I want to thank you for this 
opportunity to share my thoughts with the committee and express 
my appreciation to the committee for your willingness to take a 
look at this important issue facing America today.
    Chairman Hoekstra. Thank you.
    [The prepared statement of Tim Hutchinson follows:]

Prepared Statement of Hon. Tim Hutchinson, a United States Senator From 
                         the State of Arkansas

    Mr. Chairman, members of the committee, I am pleased to be here 
today to discuss the issue of education reform and the appropriate 
Federal role in encouraging that reform and innovation. As a member of 
the Senate Health, Education, Labor, and Pensions Committee, I have 
been working on this issue for the past year and a half as we attempt 
to reauthorize the Elementary and Secondary Education Act (ESEA).
    The Federal Government currently funds systems, not students. 
Instead of requiring real results in student learning from our schools, 
the Federal Government gives them funding and then just asks that they 
spend it in the required way. In doing so, we are mandating enormous 
amounts of paperwork and applications to abide by this so-called 
``accountability.'' In Florida it takes six times as many employees to 
administer a Federal education dollar as a State dollar. Florida has 
297 State employees administering $1 billion in Federal funds, and 374 
employees overseeing $7 billion in State funds. Unfortunately, Florida 
is not an exception, but the rule.
    As I have traveled around my home State of Arkansas visiting 
schools, I have heard many stories about the numerous hoops that 
schools must jump through in order to receive Federal funding. This is 
of particular interest to me, since Arkansas has a large number of 
small, rural school districts that do not have the time or resources to 
fill out paperwork to comply with Federal rules and regulations. Today 
I would like to talk about several examples from my State of ways that 
schools are affected by the laws that we pass in Congress.
    I recently visited an elementary school in North Little Rock and 
talked to a classroom of fourth graders about American government. For 
45 minutes we did a give-and-take. They asked me questions, and I asked 
them questions. This was a very smart group of kids, and I was inspired 
by their understanding. The key to this inspirational classroom was not 
any Federal program, but their remarkable teacher. The more schools I 
visit, the more I am convinced that the key to a good education is good 
principals and good teachers who are excited about their job and convey 
that to their students.
    After I talked to this fourth-grade class, the principal of the 
school half-jokingly introduced me to one whom he described as ``his 
boss.'' He said, ``Meet my boss, the Title I coordinator for our 
schools.'' While this comment was meant to be funny, it reveals a truth 
about the Federal influence in our schools. The Federal Government 
provides only 7 percent of education funding in this country, yet in a 
school in North Little Rock, Arkansas, the Title I coordinator wields 
as much influence as the principal.
    I also visited another school in Arkansas just recently where the 
principal had identified a specific need in her school that she wanted 
to address. She wanted to implement a concept known as point-in-time 
remediation to help underachieving students before they fall 
irreversibly behind. To do this, she wanted to hire a teacher who would 
spend each day working in different classrooms to assist struggling 
students before they are forced to attend summer school. In her desire 
to do what was best for her children, she applied for a Federal grant. 
The Title I coordinator rewrote her grant as a request to hire a 
teacher to reduce class size under the Federal class-size reduction 
program, and this grant was approved.
    To get her grant approved, she had to commit to using this new 
teacher for a purpose that the Federal Government had determined--
reducing class size. However, the school did not have a class size 
problem. Instead of being able to flexibly use Federal dollars to 
address the needs of her school, she had to apply for a prescriptive, 
one-size-fits-all grant. The principal had to make a choice: either she 
fudges and cheats on the application, or she cheats her children from 
getting the additional help they need at the time they need it. This is 
just another example of the Washington-knows-best style of governing 
that has been occurring in recent years. Washington did not provide 
innovation in this school; the innovation came from the principal. 
Instead of allowing her to address the needs of her school, the Federal 
rules and regulations constrained what she was legally able to do with 
the Federal dollars.
    Instead of having accountability to help every child learn, the 
Federal Government only requires funding to be spent in the correct 
way. One last dramatic example of the accountability that we have under 
current law was my visit to the school in Holly Grove, Arkansas, in the 
Mississippi Delta region. This school houses Head Start through the 
12th grade all in one building. The Delta region is the poorest area of 
Arkansas, and the poorest area of the United States. There is a large 
minority population, and the school building is about fifty years old. 
The area has a low property tax base, so any additional money that the 
school gets is sorely needed.
    As I toured this school, I could not help but notice the run-down 
conditions. It is just as bad as any school in the inner-city that I 
have ever seen or heard about. The ceilings are 12 feet high, so it is 
hard to heat. The lighting is poor. The ceilings are collapsing, and 
you can see water stains in these pictures. The outside of the school 
looks just as bad. Paint is peeling, windows are broken.
    Then, I stumbled upon an interesting site. As I walked by one of 
the rooms of the school, I noticed that it was full of state-of-the-art 
exercise equipment. New treadmills, stairmasters, and nautilus 
equipment filled the room. After seeing the disparity between the 
condition of the building and this room filled with new exercise 
equipment, I asked the principal where he got the money to buy this 
equipment. He answered that he received a Federal grant for $239,000, 
and that he was only using this money for the allowable uses under the 
grant--health and nutrition programs. School renovation, however, is 
not an allowable use under the grant he received, so instead of 
addressing the most pressing need that his school had, he was forced to 
address a need identified at the Federal level.
    This is not to say that the exercise equipment was not needed. 
However, there were other more pressing needs that could not be 
addressed. Instead of solving this problem by creating a new Federal 
program, with new regulations and new paperwork required, the Federal 
Government should be promoting innovation at the local level, with few 
Federal strings other than the most important requirement that we could 
have--increases in student achievement. Principals and teachers should 
not be hindered from addressing pressing needs in their schools because 
of rules and regulations from the Federal Government. Instead, Federal 
funding should be used to foster the exciting innovations that are 
already occurring in schools all across this country.
    Mr. Chairman, again I want to thank you for this opportunity to 
share my thoughts with the Committee regarding the education of our 
kids. If our local officials are capable of thinking outside the box, 
then there is no reason Congress and the President cannot do the same.

    Chairman Hoekstra. The Senator is on a schedule and asked 
that we just have a few questions, and then he needs to leave.
    Under the version of the Straight As proposal, we are 
combining a number of programs and giving schools the 
flexibility to spend that money. On the Senate side would you 
advocate putting some form of school construction as an 
allowable use in there?
    Senator Hutchinson. Yes. Under the Senate version it would 
be an allowable use. While we would never--we would not 
prescribe to a State that they had to consolidate programs, 
stick with the current system, they would certainly be willing 
to do that. It ended up being watered down to a 15-State 
demonstration program. We would have allowed them to move funds 
from one program to another or to use funds for needed 
educational efforts at the local level with the condition being 
a performance contract to be signed with the Federal Department 
of Education that they are going to narrow the gap between 
disadvantaged and advantaged students and see achievement 
increase for all students. We would provide them maximum 
flexibility in doing that.
    Rather than having a Federal school construction program 
which would be moving just the opposite way, it would be 
another prescriptive program where we determine up here that 
the great need in the country is this, and therefore we 
establish a new program with Federal funds, are you spending it 
the way that you said that you would, when true accountability 
would be are the kids learning and are the achievement scores 
going up.
    So, yes, that money should be allowable to use that for 
school renovation if that is what is determined at the local 
level to be the greatest need.
    Chairman Hoekstra. I will yield to Ms. Rivers.
    Ms. Rivers. Thank you.
    I have a couple of questions. I was interested in the 
comment you made about the administrative workload associated 
with the Federal programs, because a 1999 GAO study looked 
specifically at this and found that in general that is very 
overstated. In fact, they found that of the people who had 
responsibilities for Title I, they had about 8 hours during an 
entire year. Do you have any evidence to suggest that that 
number is incorrect?
    Senator Hutchinson. Well----
    Ms. Rivers. The administrative load is about 8 hours for 
the entire year.
    Senator Hutchinson. I don't really disagree with what you 
said in your opening statement, that the greater administrative 
load comes from the State, but I think that problem has to be 
addressed by the States, and it is far easier to make an 
influence upon the State legislature or the Governor in 
reforming the workload that they may experience there.
    How do I answer as to GAO? I would love to have the budget 
to do the kind of study that they did. My sense is from my own 
experience. I have taught in the classroom. My sister teaches 
fourth grade, and I visited schools in the State of Arkansas 
last August, and I continually heard that complaint.
    Ms. Rivers. From teachers?
    Senator Hutchinson. Both teachers and administrators. 
Teachers find time that they would like to be spending in class 
preparation, having to spend it on grants. In Arkansas, and I 
don't know where GAO did their study, we have perhaps the 
highest number--I think it is the highest number of school 
districts per capita in the Nation. We have over 300 school 
districts. Most of those school districts are very small, and 
so if there is going to be an application for Federal grants, 
it is teachers doing it, teachers taking time out of the 
classroom or taking time out of curriculum preparation in 
filling out applications because they don't have the money to 
hire full-time grant preparers.
    Ms. Rivers. You mentioned the grant regarding the exercise 
equipment. My understanding is that that principal specifically 
asked for exercise equipment when he filled out the grant. He 
did not try to get something else?
    Senator Hutchinson. That is not my understanding at all.
    Ms. Rivers. I can get that and put it in the record.
    Chairman Hoekstra. Without objection, so ordered.
    [The information referred to follows:]
    
    
 Excerpts of Holly Grove School District Application for 21st Century 
                         Learning Centers Grant

    * * * 3. Need 3. To provide access to a quality, supervised 
recreational program. With the exception of a very limited summer 
recreational program sponsored by the city, there are no recreational 
activities within the district. Children and youth need to be 
supervised after the school day is over, weekends, and in the summer. 
These persons also need to be able to take part in appropriate and safe 
leisure-time activities. In addition, the adults of the community need 
to be able to take part in leisure-time activities appropriate to them. 
The percent of youth involved in arrest in the county increased from 6 
percent to 22 percent within the past 5 years. Problems are further 
evidenced by observations of local law enforcement officers and by 
complaints from local citizens. This need will be addressed by 
providing a highly organized and structured recreational program after-
school, on Saturday, and in the summer. Activities will be geared for 
young children, older youth, young adults, and older persons of the 
community. The activities will range from organized team sports to 
games for older persons and will include individual sports, games, and 
other activities planned by participants. The program will be designed 
as learning activities that will boost self-esteem, confidence, and 
morale to reduce alcohol and drug use and violence.

    * * * 5. SUPPLIES

  a. Instructional Supplies for Education/Cultural.........     $500.00
  b. Recreational Supplies.................................    6,500.00
  c. Computer Software (Games, adult material).............      500.00
  d. General Office Supplies Administer Program............    1,000.00
                                                       ---------------

                        Total Supplies.....................   $8,500.00

    Senator Hutchinson. I did talk to the principal. What often 
happens at the local level, they put down on the grant 
application what they have to put down to get approval. They 
did--in that particular school somebody told me she was the one 
who filled out the grant application. He didn't even know what 
the grant was. He didn't know what it was called, and we came 
back and did, as I assume you did, to research it. But he 
certainly told me, and I don't know whether you talked to the 
principal. He told me, this is not what we need, and I would 
rather have spent this money on other things. This is what I 
can get the money for.
    Ms. Rivers. So it was just get the money?
    Senator Hutchinson. I would suggest to you local schools 
all over this country do just that. A school district as poor 
as Holly Grove is going to look for Federal funds wherever they 
can.
    Ms. Rivers. The other grant that you mentioned, the school 
district dishonestly filled out its request. They were not 
asking for a teacher to reduce class size, they were asking for 
reading support staff, correct?
    Senator Hutchinson. I wouldn't say that they dishonestly 
filled it out. They face that kind of dilemma. The principal 
expressed to their Title I coordinator what she wanted, what 
she felt that she needed. The Title I coordinator filled out an 
application that resulted in a classroom reduction grant, not 
what the principal said that she needed. She, in my visit to 
the school, expressed her frustration that what they really 
needed, they were unable to get; that the approval for the 
grant did not allow them with the kind of flexibility to meet 
the needs that she saw.
    Ms. Rivers. But the grant application specifies what you 
are asking for. They are not slotted. You ask for what you want 
at the outset.
    Senator Hutchinson. You ask for what you can get, and that 
is what they can get. They knew that it was going to be a 
classroom reduction, and the Title I coordinator said you have 
to use it in compliance with that grant. But the principal's 
frustration was, that is not what she needed.
    Ms. Rivers. In either of these instances where there was 
articulated needs of the school districts that could not be met 
by the 7 percent of money that comes from the Federal 
Government, did either of the school districts use any of their 
93 percent State and local funds to address this concern?
    Senator Hutchinson. Ms. Rivers, I just wish you could visit 
the Holly Grove School. It is so desperately poor, their 93 
percent is not sufficient to meet the basic educational needs 
of those students. They have a very low tax base. I suspect 
that they are using it as best they can, but they also are 
looking and trying any way they can for that additional 7 
percent. Unfortunately, they couldn't use it where it was 
really needed because it is so prescriptive.
    Chairman Hoekstra. We will also send a document over which 
I think reinforces some information that we have from the 
Education at a Crossroads project--two things, the number of 
States that have given us the same information that you have, 
the State of Ohio that says that we get 7 percent of our money 
and 50 percent of our paperwork and 50 percent of our 
bureaucracy from getting the information from local school 
districts, not because we necessarily want it, but because it 
is mandated by the Federal Government that we collect it.
    The other thing that we will do, which I think builds 
directly on what you were talking about, is that there is a 
cottage industry in Washington that has put together an 
overview of all of the different Federal programs that we have 
here in Washington that specifically is targeted to help local 
school districts find out what pots of money there are 
available here so that they can write the grants to get the 
money; not necessarily say, here is what we need, can we get 
that. There is actually a cottage industry that has formed here 
to, as we like to describe it, help local school districts mine 
for Federal dollars, not necessarily improve their education.
    My two colleagues do not have questions for you today, 
Senator.
    Senator Hutchinson. Thank you, Mr. Chairman.
    I want to say it struck me as so horrendous to visit a 
school where anybody with a half of grain of sense would say 
the number one priority in that school is not putting 
Stairmasters in, and the principal and everybody knew it. They 
were looking--just as you said, they were looking for Federal 
money that they could get it, and that is the kind of grant 
program that we have. We need more flexibility for local school 
districts to put money where they need it.
    Chairman Hoekstra. Thank you very much for being here.
    Mr. Hickok.

STATEMENT OF EUGENE W. HICKOK, SECRETARY OF EDUCATION, STATE OF 
                          PENNSYLVANIA

    Mr. Hickok. Thank you very much, Mr. Chairman. I will 
submit my formal testimony for the record and really try to 
refrain from reading too much of it. I look forward to sharing 
Pennsylvania's view of how Pennsylvania and other States might 
work with the Federal Government, more of a partnership in 
improving the education bottom line.
    I speak as secretary of education for Pennsylvania. We have 
about 1.8 million students and 501 school districts, over 3,000 
public schools. I speak as chairman of the Education Leaders 
Council, which is a group of reform-minded State education 
chiefs from a number of States which are listed in the 
testimony. They have about 30 percent of the Nation's K through 
12 public school students, and I think we share a common 
concern that much of what needs to be done needs to be driven 
at the State and local level where public education takes 
place.
    Rather than going on with more formal testimony, let me lay 
the larger picture out from where I sit both as a former school 
board member and now as a secretary of education.
    I believe it is very important to place the Federal role in 
formulating and implementing education policy in its proper 
context, if we could. And that context is shaped primarily 
through the constitutional principle of federalism. In a day 
and an age in which it is both fashionable and somewhat 
lamentable for policymakers everywhere in this country to turn 
to Washington for both answers to public policy problems as 
well as funds to solve those problems, it is very important to 
try to anchor public policy in long-term principles. The 
principle of federalism, simply stated, asserts that most 
public policy issues are best understood as State or local 
issues.
    I am a student of the Constitution, and James Madison wrote 
in Federalist 45, ``The powers delegated by the proposed 
Constitution to the Federal Government are few and defined. 
Those which are to remain in the State governments are numerous 
and indefinite. The former will be exercised principally on 
external objects as war, peace, negotiations, foreign commerce; 
with which last the power of taxation will, for the most part, 
be connected. The powers reserved to the several States will 
extend to all the objects which, in the ordinary course of 
affairs, concern the lives, liberty and properties of the 
people, and the internal order, improvement, and prosperity of 
the State.''
    What Madison outlines in this essay is a constitutional 
principle and a management principle, and both apply with 
particular significance to the field of education. As a 
constitutional principle, education is first and foremost a 
State issue, and if you look at any State budget, you will see 
it consumes most of the State budget. This is not to say that 
education is not a national priority or that securing a good 
education for all Americans is not in the national interest. It 
is certainly not to say that there is no national role for 
education policy and administration.
    But what the framers recognized, and I think it is well 
worth our remembering, is that some issues truly are national 
in scope, maybe even international in significance, and thereby 
require a national response. Other issues may be local or 
regional, and thereby are more appropriately resolved at a 
lower level. And some issues may indeed be national in scope, 
yet still best addressed regionally or locally.
    Education is one of those national issues, in the national 
interest, many would argue a national security interest, that 
is best addressed at State and local and regional levels where 
a great variety of policy options might be formulated and 
pursued giving rise to a great diversity in education that 
might enrich the lives of all Americans while ensuring that the 
national interest is indeed served. Over the years, however, 
and it has been over a great number of years, the idea that 
national issues might better be explored and resolved through 
State, local and regional activities has been shoved aside as 
more and more Americans are taught that Washington does indeed 
have the answers.
    With all due respect, and I mean this sincerely, the answer 
to what ails education in this country is probably not going to 
be found in this building or this town. Instead, it can be 
found in the talent, energy and the wisdom of the American 
people. And the best goal of national education policy should 
be to free up that talent, that energy and creativity and to 
tap into that wisdom. The best role for the U.S. Department of 
Education is to facilitate education decisionmaking at the 
State and local level; provide good, solid, objective research 
on what works; and help find ways for States to replicate that 
where they need to--and what does not work--so that we can find 
out how to avoid those problems; most importantly for 
empowering the States, find ways to empower the States to seek 
new ways to respond to challenges in education; at the same 
time hold them accountable for those successful strategies.
    It seems to me as I look at the role of the Federal 
Government and the impact it has in Pennsylvania and, I would 
argue, with many of my colleagues across the country, it is 
sometimes a very difficult thing to measure, but it is there. 
It was argued earlier whether or not Federal regulations stifle 
locals. Perhaps they don't stifle much as they tend to shut 
them down or turn them off. I can give you countless 
superintendents and principals that tell me, we didn't think it 
was worth going through the process to try to get what we can 
get, or it was such an overwhelming process to consider, that 
we felt we shouldn't attempt to.
    That leads to a second observation, and that is this 
overwhelming, overwhelming emphasis on just that: process, 
paper, signatures, making sure that all of the, quote, 
stakeholders sign on, and very little emphasis on what matters 
most or should matter most in education, and that is results, 
impact, what difference it makes. Rather than spend time 
filling out forms--and I can show you forms that every district 
has to get to get Federal funding, filling out forms that tell 
me how many students receive support, how much money was spent, 
how many hours, how much faculty, staff. If we need forms, 
let's make sure that they focus on what all of that money does 
in terms of educational impact. That is what this is about, 
educational results.
    The third observation is that the Federal Government and 
the States as well really force school districts into sort of a 
Willie Sutton syndrome. They go where the money takes them. As 
pointed out by the Senator and others, if the money is 
available for this, and you need money, you go for this. Rather 
than letting the locals and the States kind of define where 
their needs are and to move resources to support those needs, 
it is far more what the Federal Government says we will make 
available to support, and you decide whether or not that is 
something that you want to get money for. You go where the 
money is.
    I would argue that the class size initiative is another 
good example of that to an extent. We can debate the efficacy 
on class size. The research is mixed. But regardless of that, 
when I polled our superintendents in Pennsylvania a couple of 
years ago about if they had the money from the class size 
initiative, if they could choose to spend that money for 
something else, would they want to, and almost 50 percent said, 
we have other needs than class size. We would like to be able 
to spend it on those other needs, and obviously at that time 
they could not. They need the money, but they could have used 
it for their own priorities.
    Next I guess I would--I would offer the observation that 
Ed-Flex, for example, is an important first step. I think it 
makes a difference, and Pennsylvania has its Ed-Flex 
application before the Department as we speak, and I don't want 
to minimize the potential impact of that. In Pennsylvania we 
have tried to double or leverage that impact, because now in 
Pennsylvania every school district in Pennsylvania can come to 
the Department of Education to request waiver from State 
mandates, so the very least we can do is send the message that 
we want to get out of the way and free up your energy as much 
as we can, and we hope that the Federal Government will do the 
same thing.
    Having said that, it strikes me, and I guess this is my 
background in federalism, it is a bit turning things on their 
head when you have States requesting from the Federal 
Government permission to do things differently because they 
have particular needs and a strategy to succeed; turning things 
on their head because the proper response should be that the 
Federal Government should follow the lead of the States, and it 
should be the exception rather than the rule that the Federal 
Government tells the States what to do.
    Surely as long as the Federal Government can hold the 
States accountable, and I think that is critical, we in 
Pennsylvania at the State level have a responsibility to every 
resident of the State to make sure we spend their money in a 
way that makes an educational difference, and the State has a 
responsibility when it receives Federal funds to do the same 
thing for you, but how we do that and why we do that makes a 
great deal of difference.
    Finally, I would argue that the observation on Title I and 
the impact of an administration probably differs by district. I 
can take you to some rural districts in Pennsylvania that are 
doing some great things that have relatively modest Title I or 
any Federal programs. And I can take you to some school 
districts where the Title I money is critically important and 
has a great deal of influence, and the Title I coordinator is 
probably one of the most powerful people in the school 
district.
    Let's make sure that we know what a difference Title I 
makes. If there is a way to loosen up the way that we do Title 
I or any of the Federal programs so there is an educational 
bottom line, allow the States to do that. Hold the States 
accountable. And I think a partnership between Washington and 
Harrisburg and the other States is a partnership that will 
redefine education, which is what is really needed in this 
country in the 21st century.
    Thank you, Mr. Chairman.
    Chairman Hoekstra. Thank you very much.
    [The prepared statement of Eugene W. Hickok follows:]

 Prepared Statement of Hon. Eugene W. Hickok, Secretary of Education, 
                         State of Pennsylvania

    Congressman Hoekstra, members of the committee, thank you for the 
opportunity to testify today. I will share with you Pennsylvania's 
perspectives on the Federal role in education and how we can work 
together to ensure that the Federal Government is a partner, rather 
than an obstacle, in making sure America's children receive the 
education they need to succeed.
    I also speak to you today as chairman of the Education Leaders 
Council (ELC), a national organization of reform-minded State education 
chiefs from Pennsylvania, Arizona, Colorado, Florida, Georgia, 
Michigan, Texas and Virginia. In our eight member States, we oversee 
the education of more than 14 million children--more than 30 percent of 
the nation's K-12 public school students. Our growing membership also 
includes State education boards, individual State and local board 
members, and other officials from 31 States.
    ELC members believe that education initiatives, policies and 
practices are most effective when generated closest to the children 
they aim to serve. Education policies fail when imposed upon 
communities by Federal mandates and regulations, which focus more on 
compliance with inflexible formulas and categories rather than 
improving student achievement.
    ELC States have led the way in setting high expectations for all 
children by creating challenging standards and rigorous assessments set 
at the local level; increasing educational options available to parents 
(nearly 60 percent of the nation's charter schools are in the eight ELC 
States); and pursuing innovative ways to improve teacher quality.
    I believe it is important to place the national role in formulating 
and implementing education policy in its proper context. That context 
is shaped primarily through the constitutional principle of Federalism.
    In a day and age in which it is both fashionable and lamentable for 
policymakers everywhere to turn to Washington for both answers to 
public problems and funds to solve them, it is very important to try to 
anchor public policy in long-term principles. The principle of 
Federalism, simply stated, asserts that most public-policy issues are 
best understood as State or local issues.
    James Madison, writing in Federalist #45, stated it eloquently more 
than 200 years ago. In my opinion, his wisdom remains both timeless and 
timely: ``The powers delegated by the proposed Constitution to the 
Federal Government are few and defined. Those which are to remain in 
the State governments are numerous and indefinite. The former will be 
exercised principally on external objects, as war, peace, negotiations, 
and foreign commerce; with which last the power of taxation will, for 
the most part, be connected. The powers reserved to the several States 
will extend to all the objects which, in the ordinary course of 
affairs, concern the lives, liberty and properties of the people, and 
the internal order, improvement, and prosperity of the State.''
    What Madison outlines here is both a Constitutional principle and a 
management principle, and both apply with particular significance to 
education. As a Constitutional principle, education is first and 
foremost a State issue. This is not to say education is not a national 
priority, or that securing a good education for all Americans is not in 
the national interest. And, it is not to say that there is no national 
role in education policy and administration.
    It is worth exploring the special wisdom embraced in the idea of 
Federalism. The Framers recognized--and we would do well to remember--
that some issues truly may be of national (or international) 
significance and thereby require a national response. Some issues may 
be local or regional, and thereby be more appropriately addressed at 
that level. And some issues may indeed be national in scope, yet best 
addressed regionally or locally. Education is one of those national 
issues best addressed at the State and local level, where a great 
variety of policy options might be formulated and pursued, giving rise 
to great diversity in education that might enrich the lives of all 
Americans, while ensuring the national interest is served.
    Over the years, however, the idea that national issues might better 
be explored and resolved through State, local and regional activities 
has been shoved aside as more and more Americans are taught that 
Washington has the answers. With all due respect, the answer to what 
ails education in this country cannot be found in this room or in this 
town. Instead, it can be found in the talent, energy, creativity and 
wisdom of the American people. The best goal of national education 
policy should be to free up that talent, energy and creativity and to 
tap into that wisdom. The best role for the U.S. Department of 
Education is to facilitate education decision-making at the State and 
local level; provide objective research of what works and what does 
not; and develop ways to empower the States to seek new ways to respond 
to the education challenges of the 21st Century, while holding them 
accountable for the success of the strategies they pursue.
    I firmly believe that the Federal Government should tailor these 
programs around what already is working in the States, instead of a 
top-down approach that stifles creativity and innovation in education. 
Education is a $14 billion enterprise in Pennsylvania, with just over 
95 percent of the funds coming from State and local sources and just 3 
percent coming from the Federal Government. Clearly, education must 
remain the purview of State and local officials.
    In Pennsylvania, Gov. Tom Ridge has implemented a reform agenda 
that sets high standards for students, teachers and schools, and holds 
them accountable for results; respects local control; rewards results 
and holds districts accountable for failure; empowers parents and 
communities to become more involved in their children's education; 
harnesses the power of technology to improve student learning and 
streamline bureaucracy; and eliminates bureaucratic hurdles wherever 
possible.
    Indeed, I believe these are the essential ingredients to 
substantive and lasting education reforms that will make a positive 
difference in our children's lives and prepare them for a lifetime of 
success.
    How can the Federal Government be our partner in implementing these 
reforms?
    First, you should be mindful of the limited role of the Federal 
Government in education. Education is the responsibility of the States 
and local school districts. Recognizing that the Federal Government 
will play some role in education, however, I believe you should create 
programs and craft guidelines with an eye toward what is being done by 
State reformers like Gov. Ridge and others.
    The Federal Government can work to empower States like we are 
empowering our school districts, including our most academically 
challenged ones, with unprecedented new authority to make dramatic 
improvements.
    Gov. Ridge's top legislative priority this year--the Education 
Empowerment Act--identified 11 school districts, including 
Philadelphia, where half or more of the students essentially are 
failing reading and math despite per pupil spending in excess of both 
State and national averages and as high as $10,000 per pupil. These 11 
districts now have new tools, more flexibility, and more targeted 
resources to implement programs to turn themselves around and ensure 
that every child receives a quality education.
    In each distressed district, local Empowerment Teams, which include 
teachers, administrators, school board members, business and civic 
leaders, and other concerned citizens, will develop new improvement 
plans--plans that reflect a new way of doing business in a new century.
    The districts could choose to hire talented new leaders who don't 
have traditional backgrounds in education to run their schools, or 
transform any or all schools into charter schools or independent 
schools, where the power to change is in the hands of building leaders, 
not a central bureaucracy. They could contract with for-profit 
companies to provide educational services to students. The 
possibilities are limited only by the creativity and innovation of 
local leaders. If after 3 years the districts are unable to turn 
themselves around, the State would take over.
    While I'm not advocating that the Federal Government become as 
dramatically involved in the day-to-day operations of local school 
districts, you can work with the States to establish consequences for 
districts that are failing to give their children even a mediocre 
education.
    This new Pennsylvania law also gives every school district the 
chance to apply for waivers from mandates they believe hinder their 
efforts. We'll protect the health, safety and civil rights of our 
students, but nearly everything else is on the table.
    We will ensure that our mandate-relief program and application 
process are consistent with Ed-Flex, making it easier and more 
efficient for school districts to apply for relief, receive it, and 
invest their energies and resources doing what they do best: teaching 
our children.
    Under Ed-Flex, we will be able to free local districts from red 
tape and burdensome requirements, allowing them to focus on their needs 
and priorities rather than on strict Federal mandates. Ed-Flex 
represents an important first step in giving States the flexibility to 
improve their education systems, and is one more tool in the arsenal 
that will make it easier and quicker to implement State and local 
reform initiatives. It will enhance our ability to make Federal 
programs an integral part of our reform efforts instead of an obstacle.
    For example, because of rigid Federal guidelines for Title I, some 
schools where students needed additional assistance in reading were not 
able to use Federal funds, while others in the same district could. In 
one of our urban school districts, three schools didn't quite meet the 
criteria necessary to be eligible for Title I funds. The result: more 
than 300 poor children in these schools were unable to get the 
additional help they needed.
    Under Ed-Flex, this school district and others, working with the 
State department of education, will be able to better manage the 
Federal funds so that all children will receive the extra help they 
need.
    Ed-Flex also will enable Pennsylvania to expand professional 
development opportunities for teachers.
    Historically, Federal rules limited Title II professional 
development funds for math and science teachers. Because of Ed-Flex, 
school districts will be able to target Title II funds for professional 
development for all teachers.
    While Ed-Flex is an important step forward, other Federal programs 
make for great sound bites but will do very little to improve 
educational opportunities for our children.
    For example, I believe the Federal class-size reduction initiative 
is a flawed, misguided program. It's a one-size-fits-all approach that 
doesn't respect local control and forces districts to hire new staff 
while their needs might be elsewhere. It has been touted by some as a 
cure-all for what ails public education in America. It subscribes to 
the notion that if we hire 100,000 new teachers, then student 
performance will rise dramatically. This logic is flawed in two ways.
    First, contrary to the rhetoric of many education-establishment 
groups, research on class size is mixed. I have yet to see evidence 
that conclusively demonstrates the success of class-size reduction 
initiatives elsewhere. Just last week, the Heritage Foundation released 
a study that found being in a small class does not increase the 
likelihood that a student will attain a higher score on the NAEP 
reading test, and that children in the smallest classes do not score 
higher than students in the largest classes. Based on other solid 
research studies, we do know that there is a direct correlation between 
a teacher's knowledge and mastery of his or her subject and the 
performance of students. That's why States like Pennsylvania have 
implemented tougher standards for teachers.
    Next, especially in a diverse State like Pennsylvania, class size 
doesn't appear to be a major concern for many of our superintendents. 
Almost half of the superintendents who responded to a department survey 
said they would prefer to have more Federal funds for special education 
than for class size reduction. More recently, other district leaders 
have said that they plan to refuse any future Federal funds for class 
size reduction, in part because the funds are only good for 1 year and 
because they would be forced to continue to pay for a teacher 
regardless of whether or not one is needed. One official even referred 
to this program as ``false advertising.''
    Our superintendents and other school officials continue to grapple 
with special education. In Pennsylvania, we have made historic 
increases to help offset the significant costs, and I applaud Congress 
for its steps this year to move toward full funding of the Individuals 
with Disabilities Education Act (IDEA). Every year, the Republican-led 
Congress increased spending for special education beyond the Clinton 
Administration's proposal. With this spring's action, the House again 
has delivered for these special-needs children. If the Federal 
Government meets its responsibilities, more funds will be available to 
States and local districts to implement programs to meet their needs--
from hiring new teachers to developing programs for at-risk students to 
purchasing more technology to reducing property taxes.
    The States are doing what they can to ensure our special needs 
children receive the education they need and deserve. But funding isn't 
the only concern. Our schools often are hamstrung by the paperwork that 
is required.
    For example, the U.S. Department of Education's Office of Special 
Education Programs (OSEP) calls for a personnel data collection system, 
even though Congress removed that provision during the reauthorization 
of IDEA in 1997.
    Other offices within the Department of Education ask for virtually 
identical data about special-needs students, although in different 
formats.
    The result: local school officials spend less time on instruction, 
and more time completing mountains of paperwork--pushing paper rather 
than educating children.
    All Federal agencies, especially education, can learn from 
Pennsylvania's successful eGrant program. We're using technology to 
streamline the application process for the State and Federal grants 
that we administer. This first-of-its-kind system enables schools to 
apply for grants online; make changes or corrections; and follow their 
applications through the approval process. The results: virtually 
flawless applications reviewed more quickly, allowing funds to be 
invested in the classroom sooner.
    We also have harnessed the power of technology to hold our schools 
accountable and, for the first time, identify an academic bottom line.
    Pennsylvania was one of the first States in the nation to publish 
online school report cards, or profiles, containing important 
information about our public schools. In April, our school profiles Web 
site received more than 500,000 hits--proof positive that 
Pennsylvanians are taking full advantage of this powerful resource. 
And, we implemented this initiative without any Federal intervention 
whatsoever.
    I know that there were efforts this year to strengthen the 
accountability measures of Title I by adding additional reporting 
requirements to our State and local report cards. While I do support 
stronger accountability for Federal programs, I'm concerned that some 
of these approaches make decisions about State accountability systems 
in Washington instead of giving State agencies the opportunity to 
develop their own accountability model that best serves the needs of 
the individual State.
    We must be careful to stay away from multiple report cards that 
lead to confusion for parents who could receive a number of progress 
reports about the performance of students in their State. Often, these 
multiple cards provide duplicative or even conflicting information on 
school performance. States, working with local officials, parents and 
teachers are in the best position to develop report cards that meet 
their needs.
    In addition, a recent report by the National Governors Association 
shows that many States are being forced to maintain two accountability 
systems. The first system is an accountability system that States have 
established for all students, and the second is the required Federal 
accountability system for only Title I students. States should be 
permitted to use their State accountability system for all kids and not 
be required to use an additional system for Title I students if the 
State's accountability requirements are substantially similar to the 
Title I accountability requirements.
    Pennsylvania also will be one of the first States in the nation to 
implement Standard and Poor's School Evaluation Service (SES). This 
powerful tool will take disparate ``inputs'' from variety of sources--
State, local and federal; analyze it; and identify strengths and 
weaknesses in each district. Pennsylvania's 501 school districts will 
be able to compare themselves to similar districts; to others within 
their region; and to districts statewide. State-level officials will be 
able to better identify strengths and develop and target programs to 
shore-up our weaknesses. All this will be done using existing resources 
and without imposing new mandates on local districts--a critical aspect 
of the program.
    States also are working to strengthen the nation's teaching force. 
In Pennsylvania, Gov. Ridge's teacher-quality plan calls for all 
teachers to engage in training and professional development to keep 
their certificates. It also calls for future teachers to earn higher 
grades to enter and graduate from colleges of education; take more 
rigorous courses in the subjects they want to teach; and score higher 
on certification exams. We also are implementing a new test for veteran 
teachers, which will be used to target professional development where 
the needs are greatest.
    The Federal Government can partner with the States by providing 
incentives to help States continue to strengthen their teacher-
preparation programs. Federal funds can be targeted to States that 
develop programs that have as their goal proven strategies that 
increase student learning, rather than simply funding existing 
programs.
    Empowerment, accountability, results--the tenets of successful 
education reforms. The nation's children will be best served if you 
empower Governors and State legislatures, working with parents, 
teachers, school boards and concerned citizens at the grassroots, to 
direct Federal resources where they are needed most. Let us tailor our 
education policies to meet our unique and individual needs while 
furthering national educational objectives. And, hold us accountable 
for prudent and responsible use of funds, and work to ensure that the 
dollars deliver results.

    Chairman Hoekstra. Dr. Sclafani.

   STATEMENT OF SUSAN SCLAFANI, CHIEF OF STAFF, EDUCATIONAL 
         SERVICES, HOUSTON INDEPENDENT SCHOOL DISTRICT

    Ms. Sclafani. Yes. Thank you very much, Mr. Chairman and 
members of the committee. I am delighted to have an opportunity 
to speak to you today.
    As I sit here, I am struck by the fact that one's 
perspective is so determined by one's position. I would argue 
for the local level in the same way perhaps that Dr. Hickok 
would argue for the State level and others might argue for the 
Federal level.
    We have seen a lot of progress in the Federal funding in 
the grant programs over the years, and we are delighted to see 
that some of the disincentives that were the unintended 
consequences of Federal grants have been removed. The fact that 
Title I used to penalize school districts for improving 
performance of children because then they would be dropped from 
the program is gone.
    In special ed, the fact that we were funded on the number 
of children that we identified in special education rather than 
using our funds to prevent children from having to be in a 
special education program by doing early intervention; and now 
that we are funded on a percent, that enables us to do that. We 
like, too, the Ed-Flex waivers, and this is where the 
perspective comes in. We don't see why it should have to go to 
the State to approve our local waivers. If indeed we are 
interested in local control and local accountability, then we 
believe that ought to happen from the school district level. 
And the other problem with Ed-Flex is that it does not apply to 
special education so that our regulations there are continuing.
    The challenges that we have, and we do have a staff for our 
Title I program, we are a school district of approximately 
210,000 children; 74 percent of them qualify for free and 
reduced lunch. We are a district of minority children, 53 
percent Hispanic, 35 percent African American, 3 percent Asian 
and 9 percent white. We have about 11 percent of our students 
in special education programs, and we are hoping to reduce that 
through our opportunities to do early intervention. We are very 
interested in the Elk Grove model and have done a similar thing 
in our district, and where we have piloted that program, we 
have seen a major reduction in the number of children who are, 
in fact, qualified for special education.
    We get about $73 million a year in Federal funds, and out 
of a $1.2 billion budget, clearly that is not the major funding 
of any of our programs, but it does give us additional funds 
with which to target our most at-risk and needy children.
    Our issue with Title I is really the issues of maintenance 
and effort and comparability, and the kind of detailed 
accounting that has to be done in order to maintain that from 1 
year to the next. We find that in our own district, that we 
have people who have to do that on a daily basis, a weekly 
basis, a monthly basis, because to wait until the end of the 
year to figure it means you are stuck if you are not there. And 
as staff people move from school to school, we have 288 
schools, we find that changes those calculations, and so we 
have to do them on a regular basis.
    The other piece of that is that one of the ironies of some 
of the grants being tied to the Title I characteristics, the 
school improvement funds, for example, are based on data that 
is at least 2 to 3 years old because that is how frequently the 
data can be updated at the national level. So we now are giving 
funds to schools that are no longer low-performing that are 
designated for schools that are low-performing because they 
have moved out of that area. We talk about this is going to 
help you maintain your efforts, but the time lag is an issue.
    The reading excellence is another example where we were 
able to fund the school with the largest number of students who 
are economically disadvantaged, the school with the largest 
percent of children who were economically disadvantaged, and 
then any low-performing schools. With 182 elementary schools, 
that meant that we were able to fund 11 schools through this 
grant process. That is, the most, highest, number of students, 
the highest percent was equivalent across our State, which 
meant that we, too, had two schools that qualified under that 
category, as did every school in our State, and it didn't 
really target those funds to where we are.
    We believe very strongly in the importance of reading, and 
we fund about $4 million in extra staff and services to our 
schools specifically for reading out of our local funds, but it 
would have been better if we could have had the reading 
excellence funds working along with those dollars at the 
schools at which they were most needed.
    We see that in special education the regulations have 
become really the weapons of battle between parents and schools 
in many cases. The letter of the law becomes what is held to, 
and it is because parents and teachers and principals are not 
working together in the best interests of children.
    So while I understand the fight to maintain regulations 
there to serve children well, I really wish that we could have 
fewer regulations and only raise that as an issue where school 
districts are clearly not serving the needs of children, as 
evidenced by requests for due process to the State level and 
the kind of litigation that is going on.
    If there is a problem in a school district, certainly then 
there needs to be a requirement, a higher level of monitoring 
to ensure that the regulations are followed.
    The bottom line for us is that schools do need the money 
for educating their children, and they do go where the money 
is. They do find the grants that are able to fund them, and I 
don't think that is a matter of being dishonest, it is a matter 
of saying, if I can fund this portion of my need with my 
Federal funds, that frees up other funds on my campus to use 
for other purposes. I think that is what they are trying to do.
    But if we could reduce the amount of regulation and the 
time spent on compliance, in special education, as many of you 
know, we go through a process on an annual basis where the 
State comes in to audit our records because they are going to 
be audited by the Federal Government, and any single 
discrepancy in any single file is the fatal flaw, and the 
district fails on that principle.
    Well, as I said, we have 188 elementary schools. We have 
288 schools all together. It may be that on 1 day in one 
meeting someone makes an error, and yet that puts the whole 
school district into a compliance mode that is not really worth 
the amount of time that is put into it.
    In Texas we have had an accountability system in place. We 
started in 1984 with a curriculum that was set statewide. We 
moved from there into testing and then into an accountability 
system that holds school districts accountable for the 
performance of their schools. Our district has one as well that 
adds to the concept of a snapshot of performance credit for the 
progress that a school is making because we feel that it is so 
critical to give schools credit for where they started and 
where they are now, and not just the snapshot of where they are 
at the moment.
    We have been working on decentralizing authority and 
funding to our schools. We are moving to a weighted per-pupil 
funding basis for the 2000-2001 school year, which means all 
dollars from the district are going to schools based on a 
formula that says if you have the average child, you get credit 
for one. We add a 10th of a student funding if the child is 
bilingual. We add another 10th if the child is economically 
disadvantaged, so we are able to give to the schools the 
dollars generated by the children that they have. That, we 
believe, will enable them to better serve the children than our 
formerly saying, you have 22 children, you get one teacher. Our 
schools are finding that those who have the neediest children 
need the additional dollars with which to provide the services, 
and we think then that Title I will, in fact, become on top of 
the supplement a better funded program because of that.
    But we are also giving them the accountability, and we are 
saying that there are specific performance indicators that they 
have to meet. We have 5-year goals and annual goals, and our 
schools know that that needs to happen. If they are not able to 
meet those, we have changed principals because we feel very 
often it is an issue of leadership, we have changed groups of 
teachers where there is kind of a negative synergy where this 
group doesn't believe that change is possible or improved 
achievement by the students they have is possible, and in some 
cases--in one case we restaffed the entire school because they 
were not working for children, they were working and fighting 
among themselves as adults.
    I would like to see the Federal Government fund, even if it 
is just the 50 largest school districts in the Nation, directly 
rather than through the States. Give it to us as a block fund, 
hold us accountable for our results, and then have a process, a 
contract, to say this is what the consequences will be if you 
are not able to improve the performance of your students.
    That is the bottom line. And as we know, what gets done is 
what gets measured. If everyone is focused on improving the 
achievement of children, we found in our district that it has 
been a straight-line improvement in the quality of education 
offered to our children and the quality of achievement that has 
resulted.
    Perhaps it is a more radical thing to suggest, but right 
now what happens is the funding goes to the State; the State 
monitors us. The Federal Government comes in to audit the 
State, and, of course, audits because we are the largest 
district, and it funds all of the very large districts to be 
sure that the State has audited appropriately. So we end up 
with double audits, and those dollars could be done by the 
single audit directly by the Federal Government to the large 
school districts and leave us the additional dollars as a block 
grant. We would like the flexibility of being able to say this 
year we need more money in this program than in that, and to be 
able to do that to meet the priorities of the district. Thank 
you.
    Chairman Hoekstra. Thank you very much.
    [The prepared statement of Susan Sclafani follows:]

   Prepared Statement of Susan Sclafani, Chief of Staff, Educational 
             Services, Houston Independent School District

    Mr. Chairman and members of the House Budget Committee's Education 
Task Force, I am here today to speak with you on behalf of Larry 
Marshall, President of the Board of Trustees and Dr. Rod Paige, 
Superintendent of Schools of the Houston Independent School District 
(HISD). We appreciate the opportunity to come before you today to 
provide testimony about a subject that we have very strong convictions 
about, the delivery of educational services to our children.
    The Houston Independent School District is the largest district in 
Texas and the seventh largest in the United States. It serves 211,000 
students who are predominantly minority-53 percent Hispanic, 35 percent 
African American and 12 percent White and Asian. Seventy-one percent 
qualify for the Free and Reduced Price Meal Program, and 11 percent are 
served in special education programs. The Houston Independent School 
District received approximately $72,635,000 from categorical and 
competitive Federal programs in 1998-99. Of this, $1.4 million came 
from competitive grants under Title VII Bilingual. The largest 
component of categorical funding was Title I funding at nearly $55 
million, followed by Individuals with Disabilities Education Act funds 
of over $8.5 million.
    I would like to talk with you today about the financial burdens 
placed on school districts by Federal programs. I have divided the 
issues into two categories: the first category is the issue of unfunded 
mandates created by Federal departments and the second is the issue of 
the method of funding Federal grant programs.

                           Unfunded Mandates

     individuals with disabilities education act and american with 
                            disabilities act
    In 1975, the United States Congress passed the Individuals with 
Disabilities Education Act (IDEA) that requires school districts to 
provide education related health and medical services to students with 
disabilities and to develop individual education plans (IEP) for 
service delivery. Congress passed IDEA without providing adequate or 
additional special education funding; this consequently left school 
districts ill-equipped to meet the funding demands of IDEA 
requirements. When the program was first announced, districts were told 
that the Federal Government would fund 40 percent of the costs. The 
district currently spends between $70-$80 million per year to fund the 
costs of special education programs. To date, the Federal funding has 
never provided more than 12 percent of the costs. While we believe that 
all students should attend school in the least restrictive environment, 
the costs of the program for small classes, additional staff, and 
specialized transportation services are a significant burden for the 
district.
    To meet the regulatory requirements of IDEA, school districts find 
that they have to employ or contract for speech therapists, speech 
pathologists, nurses, audiologists, diagnosticians, psychologists, 
physical therapists, occupational therapists, and other clinicians as 
required for students enrolled with special needs. In many cases, 
parents have taken school districts to court and sued under the 
provisions of IDEA and the Americans with Disabilities Act (ADA) to 
provide additional or more comprehensive clinical services to their 
disabled children. While the MEDICAID program reimburses school 
districts for part of these costs, it does not come close to the full 
costs of those additional medical services.
    The American with Disabilities Act (ADA) requires that school 
districts renovate buildings to enable all persons, regardless of 
disabling conditions, to have access to all parts of the building. 
Older facilities require significant renovations, such as ramps to 
entrances, widened doorways, revised seating arrangements in 
auditoriums, elevators, lifts for stages, added plumbing, and other 
similar changes. As much as $100 million in local funds has been spent 
over the last 15 years to accomplish these improvements, yet no 
assistance came with the Federal mandates for action.
                                asbestos
    The district has spent over $100 million for abatement of asbestos 
in district facilities. The requirements for this program are extensive 
and costly, yet the current wisdom is that in some cases the materials 
would have been better left where it was. There was no assistance from 
the Federal Government in meeting this unfunded mandate. It should also 
be noted that the AHERA (Asbestos Hazard Emergency Response Act) 
program was never applied to any public buildings other than school 
districts.
           environmental protection agency (epa) requirements
    The EPA has established programs to reduce emissions from district 
vehicles. While the district agrees that clean air is important, no 
funds are available for retrofitting current vehicles or for higher 
costs to meet the new requirements. In urban districts such as Houston 
where 70 percent of the funding comes from local taxpayers, it is 
difficult to maintain a fleet of new vehicles that meet current 
standards. The average age of our vehicles is over 10 years. The new 
standards are far more stringent than those in place when the oldest 
vehicles were purchased. In Houston, there is a proposal for 
construction work to begin after 6 o'clock and go through the night in 
order to reduce emissions from heavy equipment. The voters of Houston 
have approved over $675 million in renovations and new construction to 
be completed over the next 3 years. Implementation of such a mandate 
would greatly increase the cost of district construction programs.
                    agriculture department programs
    The Agriculture Department implemented an after-school snack 
program this last year. The district was pleased to see that a snack 
program could be added to the district's program, but the district 
quickly discovered that the Agriculture Department reduced our Free and 
Reduced Price Meals (FRPM) funding by rounding down the reimbursement 
rate to the next lower whole penny (resulting in a loss of about .8 
cents ) per student to help fund the snacks program. The district is 
now offering both programs, but receives no more dollars than it used 
to receive from the FRPM program.

                             Grant Programs

                     class-size reduction teachers
    The Class-Size Reduction Program provided an opportunity for school 
districts to add teachers to reduce class sizes. The district was 
delighted to participate in this program, and it is one we endorse. 
However, the regulations attached required that school districts hire 
first year teachers for those positions. Since the district believed 
that this requirement did not serve students well, our school district 
hired experienced teachers and assumed the costs of the additional 
funding required between new teachers and the experienced teachers.
                    funding for bilingual education
    This has become a major issue in our district's budget. Over the 
last decade the increased immigrant population in Houston has more than 
doubled the percentage of Hispanic students in our district. This 
increase has added costs for the recruitment of bilingual and English 
as a Second Language (ESL) program teachers, additional materials 
required to offer instruction in both English and Spanish, and stipends 
paid to ensure the retention of trained bilingual and ESL teachers. The 
only Federal funds available to address the results of the Federal 
immigration policy are provided on a competitive basis. Thus despite 
the needs of the students in Houston, the funds may go to an innovative 
proposal from a school district with fewer limited English proficient 
(LEP) students or districts with higher local funding levels than ours.
                        title one and title six
    Title I, Part A has provided funding to schools that assisted 
schools to accomplish the following academic growth, as measured by the 
State-mandated Texas Assessment of Academic Skills (TAAS):
     TAAS scores increased from 78.53 percent passing in 
reading for 1996-97 to 81.00 percent in 1997-98;
     TAAS scores increased from 75.30 percent passing in 
mathematics for 1996-97 to 80.96 percent in 1997-98; and
     TAAS scores increased from 82.96 percent passing in 
writing for 1996-97 to 86.51 percent in 1997-98.
     Overall TAAS results for students in Title I schools 
increased over and above the scores for students districtwide as 
follows:
     In reading, Title I students averaged 84.51 percent 
compared to districtwide students averaging 81.00 percent.
     In mathematics, Title I students averaged 80.94 percent 
compared to districtwide students averaging 78.00 percent.
     In writing, Title I student average 86.51 percent compared 
to districtwide students averaging 82.08 percent.
    Changes made in the last reauthorization of Title I were 
improvements in a number of ways. Current guidelines:
     Provide more programmatic and financial flexibility for 
schools and districts;
     Require improved academic accountability;
     Allow more local control;
     Impact more students because of the schoolwide concept;
     Support the ex-flex waivers process; and
     Support school reform.
    These changes have enabled the district to use the funds as it sees 
fit and have resulted in the achievements cited above.
    While the Federal Government has allowed local education agencies 
greater latitude in developing individual district programs based on 
local needs assessments over the last decade, congressional 
reauthorization of programs involves a great deal of compromise and 
attention to the goals of special interest groups. This results in 
mandates and requirements included to ``protect'' students whose rights 
might otherwise be at risk in local districts. This process of 
political program design requires all districts to spend time in 
documenting compliance with rules that were unnecessary in the first 
place.
    For example, the district currently spends a minimum of three 
mandays per month creating the documentation of use of Federal funds as 
a supplement to district funds, rather than supplanting. To demonstrate 
comparability-that the district is not spending less in local funds in 
Title I schools than it spends in non-Title I schools-the accounting 
department staff must compute every expenditure for staff, materials, 
equipment, and contracted services. With staffing, this is particularly 
difficult to do on a monthly basis, since one must forecast stipends 
that are paid annually or semi-annually as part of the equation. 
However, it must be done monthly so that if a discrepancy is discovered 
it can be remedied over the rest of the year. If that does not happen, 
the total dollars spent for the year will not demonstrate the desired 
maintenance of effort and the district will be out of compliance. Since 
actual salaries of individual teachers are used, the whole equation is 
thrown off whenever a teacher leaves one school and is replaced by a 
teacher with more or less experience. In a large urban district, this 
happens frequently, forcing the accounting department to recalculate 
their year-to-date figures and intervene to recreate the desired 
balance.
    Clearly, this procedure has nothing to do with the district's 
commitment to equity nor does it ensure increased levels of student 
achievement. An alternative would be to allocate the dollars according 
to the numbers of eligible students and hold the districts responsible 
for results. If a particular district cannot demonstrate improved 
student achievement, the State would be required to audit the programs 
serving the specific students and place the district under a technical 
assistance requirement until results improve. Otherwise the district 
would be able to apply the funds to programs and not to staff 
completing forms to demonstrate compliance. If this option were in 
place, fewer dollars would need to be allocated to State departments of 
education and central offices, and more would go directly to student 
services.
    The Title 6 program stands in contrast to the Title I program. 
Title 6 makes a significant difference in the lives of over 212,000 
students in Houston ISD and over 13,000 students in surrounding 
nonprofit private schools and neglected and delinquent facilities. The 
program provides on-going professional development to 15,000 teachers. 
Title 6 provides services to ten local district reform programs and 
projects, as well as fifty-four nonprofit private schools and 
facilities within the Houston Independent School District's boundaries. 
The major emphasis of the Title 6 program is to provide for services 
that support reform efforts through innovative education program 
strategies consistent with the eight National Education Goals and the 
GOALS 2000: Educate America Act under Public Law 103-382. District 
approved programs and projects were easily funded under these 
parameters.
    Title 6 funds have provided a mechanism to influence and provide 
opportunities for advancement in nationally identified areas such as 
technology, readiness skills, parental involvement, curriculum, school 
improvement, higher order thinking skills, combating illiteracy, and 
increased professional development for teachers and parents. All Title 
6 funded programs have been designed specifically to improve overall 
student achievement.
    The majority of the programs funded through Title 6 are unique to 
Houston and several include on-going assessment, for example, an 
initial pre-test to determine needs, measurable activities for growth, 
and on-going assessment of progress. These programs are designed to 
improve teaching and learning as well as meet the educational needs of 
students from all ethnic and learning backgrounds.
    As one compares the Title I and Title 6 programs, it becomes clear 
that Title 6 is effective in raising student achievement without all of 
the compliance requirements of Title I. One can deduce from that that 
the time spent complying with Title I requirements could be better 
spent focusing on improving student achievement. The Federal Government 
should identify those districts where student achievement is not 
improving and use the manpower currently dedicated to managing 
compliance to assist those districts in more effective planning and 
implementation. Successful districts could dedicate the 3 days per 
month spent on comparability and maintenance of effort documentation to 
providing more effective services to schools.

                            Recommendations

    Local school districts are responsible for the quality of education 
provided to students. Districts use the funds available from local 
taxpayers, State government, and the Federal Government to create the 
best programming possible to meet the needs of their students. Federal 
funds are certainly a welcome source of funding for meeting the needs 
of educationally disadvantaged students, special education students, 
immigrant students, limited English proficient students, and others. 
However, local school districts can best design those programs when the 
regulations are limited to expressions of the intent of Congress in 
making the funds available. The Federal Government should make the 
funds available and hold districts accountable for the performance of 
all of its students.
    The goal of Congress is to ensure an educated citizenry. It can do 
that best by establishing the parameters, providing the funding and 
leaving the program details to the practitioners. Each district has a 
local school board elected to ensure the effectiveness and efficiency 
of the system. Local school boards are ready and able to be held 
accountable for the performance of their students. That should be the 
measure of whether school districts have used the funds effectively.
    If the Federal Government wanted to ensure the maximum application 
of Federal dollars to meet the educational needs of students, it could 
make block grants to the large urban school districts. Such block 
grants would reduce the amount of money spent to regulate the Federal 
dollars provided to the school districts. At the present time, Federal 
grants go first to the States, who take 10-15 percent off the top for 
review and regulation. The State establishes a monitoring system to 
ensure effective use of the funds. However, when the Federal Government 
comes into a State to audit the State's effectiveness in using Federal 
funds, it always audits the largest school districts as well. That 
means that large school districts are audited by both the State and 
Federal Government, a duplication of effort and a major intrusion on 
the time school districts could be spending refining their programs to 
better serve students.
    The Federal mandates for school districts are based on the need to 
protect citizens from dangers identified in the environment or from 
infringements on citizens' rights. School districts understand these 
demands, but they are forced to address them with the dollars which 
were provided for and which should be used to educate all students to 
high levels. It is not possible to spend the same dollars in such 
different ways and expect the results in student achievement this 
nation requires for a productive future. School districts are willing 
to assume responsibility for doing what they do best-educating 
students. If they are to also undo societal problems, clean up the 
environment, and renovate educational facilities, they must receive 
assistance from the entities mandating the changes. We are ready to do 
our best to meet the many demands upon us, but we need the assistance 
of Congress in ensuring that our funds are used first and foremost to 
educate our students.

    Chairman Hoekstra. Mr. Hilleary.
    Mr. Hilleary. Thank you both for testifying, and, of 
course, you are both singing our song, the Chairman's and my 
song, and a lot of us who really want to see the Federal 
Government have fewer strings with a lot of things that we do 
in education.
    Three questions really for both of you, and if you could 
both address all three. One is do you use statistical value-
added analysis with your children as they go through the 
grades? And if so, if you do have that analysis available; how 
do you utilize it?
    Ms. Sclafani. We do not do the Sanders model of value-added 
assessment, no. We are considering doing it in our school 
district. The State is not doing that. We still look at the 
snapshot of how students are doing by grade level each year.
    May I mention that we do give our principals a longitudinal 
look by teacher so they are able to help teachers plan their 
professional development. So if all of the children in a 
particular classroom consistently miss specific objectives over 
the years, it is probably the teaching methodology as opposed 
to the children. So we do provide that kind of longitudinal 
data to work as an aid to the professional development of our 
teachers.
    Mr. Hilleary. But you are considering the Sanders model?
    Ms. Sclafani. Yes.
    Mr. Hilleary. Do you see merit in that?
    Ms. Sclafani. Yes.
    Mr. Hickok. There is great merit in the Sanders model. We 
have started a variation on it with regard to a performance 
incentive program for schools. That is, as a school is 
evaluated over time through a series of Pennsylvania tests 
based on the academic standards of Pennsylvania, as it improves 
upon its performance over time, the value added, if it is over 
and above a predicted improvement, then the school itself 
receives a cash award from the State to be spent on an 
educational product or service or event.
    So the goal here is to find ways to create an incentive not 
for schools to compete with one another, but for schools to 
compete with themselves over time. As that is fully 
implemented, that will give more of a value-added study because 
you will be testing the same students as they go through the 
process.
    Mr. Hilleary. One of the things that I found when I met 
with Dr. Sanders, if the same student got a teacher who is in 
that bottom 10 percent 3 years in a row, they were basically 
lost; 2 years it was hard to recover them. I am a big fan of 
it.
    Do either one of you, I assume you don't, have any site-
based management in your individual schools to the extent that 
a local principal has the authority to hire and fire? I am 
assuming you don't, but do you?
    Ms. Sclafani. We have shared decisionmaking at our 
campuses, and we have a State law that says only the principal 
can hire. He can fire with documentation as well. We do have 
that within our school system in our State.
    Mr. Hickok. I think you can find examples of it in 
Pennsylvania. We have a traditional approach to public 
education. I think you will see more of that flexibility in our 
charter schools, which provide more autonomy for management 
decisions in the building principal or the chartering 
organization.
    Mr. Hilleary. Lastly, we have talked a lot about Federal 
intervention that is not helpful. We all agree, I think, that 
money is helpful. Is there anything besides money, in other 
words, is there any Federal involvement, any strings, any 
requirements, is there a function other than providing money, 
including coming up with a program or whatever, that you all 
would think would be extremely useful that the Federal 
Government is uniquely qualified, or at least adequately 
qualified, to perform? I am of the opinion that it is hard to 
find something like that, but is there something that we could 
be doing that would be actually helpful? And, of course, when 
we start out being helpful, we often move to being unhelpful 
fairly quickly. Is there something that you can think of that 
we could be doing programmatically or otherwise? Forget the 
money; I know that you want money.
    Ms. Sclafani. We find the information provided by OERI is 
helpful to us. Taking a look at the data nationally gives us a 
better perspective as to where we stand as a local district and 
as a State. The opportunity to see the research on the various 
programs that are available and in use around the country saves 
us the time of having to implement and do the research 
ourselves and determine whether that is, in fact, an effective 
program.
    Mr. Hickok. I would share that observation. I think the 
Federal Government in education should provide information on 
what works, a clearinghouse for data and things like that 
because of where they sit over all the system. The further away 
you get from the day-to-day decisionmaking of a school 
building, the more difficult it is to make the good decisions. 
That is the geometry where the Federal Government sits right 
now.
    Mr. Hilleary. Thank you very much, both of you.
    Chairman Hoekstra. Ms. Rivers.
    Ms. Rivers. Thank you, Mr. Chair.
    I have served at all levels, the local school board, the 
State level and the Federal level. The local school board is 
the most difficult job because that is where the hands-on work 
has to be done, and that is where the community interacts.
    One of the things that I have carried with me as a legacy 
from my time on the school board is the tremendous unhappiness 
with the bad rap that educators get in this country, and I 
would be curious if you think for the most part that public 
educators don't have any creativity, no ingenuity, are 
satisfied with the status quo? These are some of the 
allegations that are put forward. What do you think in your 
day-to-day jobs about people who are dedicated to education?
    Ms. Sclafani. First of all, they are dedicated to 
education. We have people who are spending their lives, not 
just 8 to 3:00, working for the education of children.
    I think that the surveys are so difficult to understand. 
When we do surveys of parents, the results are glowing. Eighty-
five, ninety percent of them are delighted with their schools, 
even when the schools are not doing as much as we think that 
they ought to be doing for their children.
    I think that there is a difficulty in our society of 
undervaluing educators which is causing us a great deal of 
difficulty in recruitment and maintenance of people in the 
education field.
    I think if there is one thing I could ask the Federal 
Government to do, it would be to help the public understand how 
critical it is to have qualified educators in every classroom, 
and to give them the respect that they deserve for the hard 
work that they do.
    Ms. Rivers. What do you think about no ingenuity, no 
creativity, satisfied with the status quo?
    Mr. Hickok. My Pennsylvania experience, 90 percent plus, 
educators, teachers, teachers' assistants, administrators are 
highly motivated, highly entrepreneurial, if you will, skilled, 
innovative and excited. The problem is in far too many cases, 
in far too many places we have a system that tends to blunt 
those very talents that made those people good in the classroom 
to begin with. In many way it makes them into bureaucrats as 
opposed to the vital educators that they once were and wanted 
to be.
    Ms. Rivers. Who would be the best determinant, in your 
mind, of what the local school districts need? Would it be the 
local school districts or the State or Federal Government?
    Mr. Hickok. I think it would be the citizens who are the 
clients of the school districts. Everything in Pennsylvania 
that we do is an attempt to find out what the people of 
Pennsylvania look to and need in education. We feel that our 
clients, in addition to those individuals, are all the citizens 
of Pennsylvania, and they are the ones who both should have 
more information so they can make wise decisions on what works 
and what doesn't, and have more authority over deciding what 
works and what doesn't.
    Ms. Rivers. Ms. Sclafani, who do you think is the best 
determinant in terms of what local school districts need?
    Ms. Sclafani. Standards need to be set, and I am happy to 
have them set at the State level; but I think the decisions 
have to be made at the local schools. One of the reasons that 
we have gone to the weighted per-pupil funding and saying to 
schools, you figure out how to create the programs that will 
enable your children to learn to their highest levels, is that 
we believe that that is the only place that it can happen, and 
if you engage people around the notion that they can design the 
programs that best meet the needs of their children, they will 
come up with programs that work.
    Ms. Rivers. Mr. Chairman, I would like to insert into the 
record an article from The Washington Post from March 27 of 
this year, 2000, entitled ``As School Aid Is Relaxed, So Is the 
Response of Many States.'' I am particularly interested in 
quotes from Chairman Goodling of the Education and Labor 
Committee first where he says he was disappointed, but not 
entirely surprised at the limited interest in Ed-Flex requests, 
because he says, ``If you don't have any ingenuity, if you 
don't have any creativity, if you are just satisfied with the 
status quo, it is much easier to do what the Federal Government 
wants.''
    Later when he was read accounts of State and local 
officials who said that they didn't need any increased 
flexibility, he says--sounded irritated, the article says--``To 
say you are getting all of the flexibility you need is 
nonsense. That must be all they want.'' thank you.
    Chairman Hoekstra. Without objection, so ordered.
    [The information referred to follows:]

               [From the Washington Post, March 27, 2000]

        As School Aid Is Relaxed, So Is Response of Many States

                          By Kenneth J. Cooper

    A new law designed to ease restrictions on Federal school aid has 
not attracted nearly as much interest from the States as was expected 
when Congress approved the high-profile legislation a year ago. Passed 
with huge bipartisan majorities, the Education Flexibility Partnership 
Act was the first substantive legislation Congress enacted after the 
midterm election and was meant to highlight Republican interest in 
education as well as the party's emphasis on local control of schools.
    Last April, President Clinton signed the bill, which was endorsed 
by every Governor and was described by Sen. James M. Jeffords (R-VT), 
chairman of the Health, Education, Labor and Pensions Committee, as 
offering ``a deal no one can refuse.''
    But most States immediately affected by the law either aren't 
interested or haven't made plans to apply. So far only one State, North 
Carolina, has applied to the Education Department--although a dozen 
more indicate they intend to do so.
    The ``Ed-Flex'' law, as it is commonly known, lets States relax 
rules for Federal education programs--for the entire State or for 
individual school districts--in exchange for adopting a statewide plan 
to lift the achievement of disadvantaged students served by the Title I 
remedial program. States are required to monitor test scores carefully 
and take ``corrective action'' if disadvantaged students do not perform 
better.
    North Carolina, for instance, may seek to get around limits on how 
much Federal money can be spent to train teachers in reading, writing 
and other subjects besides science and mathematics. Pennsylvania 
intends to apply partly because the State wants to spread remedial 
education funds to rural schools with relatively few poor children, 
instead of spending Title I money only in schools with the biggest 
concentrations of disadvantaged students.
    But among States not interested in Ed-Flex, most say they already 
have the slack needed to make Federal programs flexible enough to suit 
them. ``I can get the flexibility I want under the current 
opportunities,'' said Peter McWalters, Rhode Island's education 
commissioner.
    The lukewarm response from States has raised questions about the 
political appeal of the central Republican message on education and, 
more fundamentally, the presumed demand among States and local school 
districts for relief from burdensome Federal regulations. In the 
presidential campaign, presumptive GOP nominee and Texas Gov. George W. 
Bush on Friday called for giving States the kind of freedom from 
Federal regulation that his State has had in an Ed-Flex pilot project 
underway since 1995.
    ``States are not rushing to apply for Ed-Flex,'' said Michael 
Cohen, assistant secretary for elementary and secondary education. 
``It's not like local people are beating up on States, saying, `Why 
haven't you applied for Ed-Flex?' ''
    Rep. William F. Goodling (R-Pa.), chairman of the House Committee 
on Education and the Workforce, said he was disappointed but not 
entirely surprised at the limited interest. ``If you don't have any 
ingenuity, if you don't have any creativity, if you're just satisfied 
with the status quo, it's just much easier to do what the Federal 
Government says,'' said Goodling, a former school superintendent.
    The Governors may have unanimously supported the legislation, but 
top State education officials have been less enthusiastic--and it is 
they who must submit applications to the Education Department.
    ``I think people are playing this flexibility stuff higher than it 
needs to be,'' said Stephen Barr, Federal liaison for Missouri's 
Education Department. ``Everybody wants to blame bureaucracy, paperwork 
and everything else for inertia.''
    Under the new law, a State can receive the power to waive certain 
rules for seven Federal programs, including Title I, the largest. 
Besides producing an academic improvement plan, States have to agree to 
waive similar State rules and laws.
    The Federal law extends to 38 States and the District the authority 
that a dozen States, including Maryland, have had in the pilot project. 
Participating States have used their new power most often to make 
academic programs funded by Title I--a new curriculum or reading lab, 
for instance--available not just to disadvantaged students but to an 
entire school where less than half the student body is impoverished.
    Interviews with officials in eligible States indicate that 15 of 
them do not intend to apply and that 10 have no current plans to do so. 
That is about twice as many as the 12 that say they will definitely 
sign up.
    Neither the District nor Virginia plans to seek the broad waiver 
authority. Maryland, along with Texas, is widely praised as a model 
program from the pilot project.
    ``We actually find the current legislation pretty flexible as it 
is,'' said Mary Elizabeth Beach, an assistant superintendent of D.C. 
schools.
    Cynthia Cave, policy director for the Virginia Department of 
Education, said: ``Up to now, we've applied for specific waivers and 
they've been approved, so there hasn't been a lot of pressure for us to 
go to Ed-Flex.''
    In contrast, North Carolina has been in a hurry to shake off 
Federal regulation.
    ``Our feeling is, decisions about North Carolina schools ought to 
be made down here in North Carolina,'' said Bill McGrady, the State's 
director of compensatory education. ``Ed-Flex is something we wanted to 
go after, and go after quickly
    I just can't picture that other people aren't jumping on it.''
    Nancy Keenan, Montana's school superintendent, indicated that there 
is a simple reason her State hasn't applied. ``I don't think we need to 
waive anything,'' she said.
    Goodling sounded irritated about States reaching that conclusion. 
``To say you're getting all the flexibility you need--it's nonsense,'' 
he said. ``It may be all that they want.''
    California and New York, citing a different reason, say they won't 
bother to apply because they're too busy implementing their own 
education reforms.
    ``Basically, districts are saying we don't need one more new 
program, not even if it streamlines what we're doing,'' said Delaine 
Eastin, California's superintendent of public instruction. ``They're 
not hankering to do this.''
    And there are States that have decided it takes too much red tape 
to obtain the power to cut red tape. Florida, for instance, has chafed 
at having to produce detailed reports on the test scores of students 
attending every school that receives Title I funds. Several States 
indicated that their legislators would not diminish their own authority 
by granting State education officials the power to waive State laws.
    Cohen, the assistant education secretary, acknowledged that the new 
law is stricter than the pilot project in requiring academic 
improvement plans for Title I. Despite the tepid response so far, Cohen 
said the Ed-Flex law sent a ``symbolically important'' message to 
States that Federal rules need not stand in the way of innovative, 
results-oriented reforms.
    Kevin Noland, Kentucky's interim commissioner of education, said 
the law would allow the State to waive a rule that prevents districts 
from providing federally funded vocational education to sixth-graders. 
Currently, those funds cannot be used for students below seventh grade.
    Goodling predicted that more States would be interested in pending 
legislation, originally dubbed ``Super Ed-Flex,'' which would cover 
twice as many Federal education programs and permit States to combine 
separate funding streams. The Clinton administration and congressional 
Democrats have denounced that bill as creating block grants that would 
allow States to neglect the educational needs of disadvantaged 
students.

    Chairman Hoekstra. A couple of questions or a question for 
the two of you. Secretary Hickok, I think you expressed concern 
about proposals to send Federal dollars to the local districts 
or the classrooms rather than the States. In your view, this 
would do more in the long run to nationalize education policy 
than anything Washington has done heretofore.
    I would like to--that is one of the issues that we wrestle 
with in our other subcommittee. We have had people come in, and 
we have had a hearing in Chicago where the people in Chicago 
have said, you know, what we really need to do is we need to 
have Washington treat the school district of Chicago just like 
the State has treated Chicago, which is basically demandating 
it, and just giving us two checks, one for general operations 
and one for special education.
    Your view on that, and then, Dr. Sclafani, if you would 
expand on what you were talking about as saying perhaps for the 
largest 50 school districts, the Federal Government ought to 
send the money directly to those 50 school districts, bypassing 
the State.
    Mr. Hickok. Yes, I think this is a view on which there is a 
lot of good commonsense disagreement.
    There is a certain appeal, I think, and I certainly 
understand the appeal, to the notion that money goes directly 
to the school district for the delivery of services, cutting 
out the middleman, the State, for lack of a better word. I have 
a constitutional argument against that, and is that the States 
are the appropriate actors through which that funding ought to 
go. But on a more pragmatic management level, if districts look 
to Washington for both funding and direction on how that 
funding is being spent directly, then gradually that will lead 
to the kind of Washington-directed public education system in 
our public schools that, whether we like it or not, and maybe 
we do want this, will nationalize curriculum and educational 
programming.
    So my argument is that it is very important for the reasons 
that I presented in my testimony that the States remain the 
critical actors. Now we have got to do a better job as States 
to make sure that we are not part of the problem, and I would 
agree with Representative Rivers a lot of States create a lot 
of burdens. A lot of school boards do so in terms of the 
contracts they negotiate. So you want to make sure that the 
States are not part of the problem. But States are uniquely 
situated to facilitate educational improvement within a State; 
to look at what is going on in Pennsylvania, using Federal and 
State money and just good old-fashioned bully pulpit to try to 
improve education through State leverage.
    I disagree with the idea that money in our larger urban 
districts going from Washington directly to the urban district, 
there is a certain appeal to it, and having a couple of major 
urban districts in Pennsylvania that are having their problems, 
I sometimes feel I wish they would secede. I am saying that 
jokingly. But on a more serious note, you have to remember in 
those districts the vast majority of the money being spent to 
educate those kids is State taxpayer dollars and local taxpayer 
dollars, and so it seems to me there is a local and State 
fiduciary responsibility that needs to be met, and I want to 
make sure that is allowed to take place rather than 
nationalizing Philadelphia or Pittsburgh because it has a 
certain management appeal to it.
    Chairman Hoekstra. Doctor?
    Ms. Sclafani. I think the State can set the standards for 
the curriculum. It can set standards for fiduciary 
responsibility. But having the dollars come directly to the 
school district, it simply gives us the additional funding with 
which to do that.
    When I think about a block grant particularly, what I see 
is that it is not a nationalized curriculum, it is not a 
nationalized set of expectations. Each school, each school 
district is still responsible to its State for its 
accreditation, for its survival.
    In a city like Houston, 70 percent of the dollars are paid 
by our local taxpayers, 23 percent by the State and 3 percent 
by the Federal Government. So the vast majority of our dollars 
are coming from our local taxpayers who elect our school board 
and are being well-served by their school board. So I think the 
arguments against it can be met with simply having requirements 
for fiduciary responsibility and accountability for student 
performance, which are the two areas that the State rightly 
must ensure for all of the school districts within its State.
    Chairman Hoekstra. Thank you.
    Mr. Holt.
    Mr. Holt. Thank you, Mr. Chairman.
    I am trying to understand whether the problem that you are 
describing here is more a problem of restrictions on the funds 
or accountability and reporting that goes along with it. I 
guess maybe the best way I can get at this is to ask if each of 
you could describe several specific things that you would do 
but you can't do with the Federal funds?
    Mr. Hickok. I will be glad to try to respond to your first 
point. I think it is a little bit of both, frankly. At least 
that is what I am trying to get at in the sense that there are 
strings attached on limits, on discretion on how you use 
Federal funding, so it uses the decisionmaking on the local 
level to go to where the money is.
    On the local aspects I don't think that we are opposed to 
make sure that we can report how money is spent to the Federal 
Government. I think we have an obligation to do that. What is 
onerous is the number of times that we have to fill out similar 
forms for different programs asking the same questions. So in 
other words, if there is a way to consolidate the gathering of 
this information so that a Gettysburg school district doesn't 
have to have almost a full-time employee doing nothing but 
filling out various reports, all of them important, but all of 
them asking the same question, there is a way that you can get 
around that problem that makes sense.
    And secondly, if it is reporting a function that focuses on 
results and not just data, spending and clients and things like 
that, I guess one thing that I would like to see the Federal 
Government do is pick up on something that we have started in 
Pennsylvania, and it goes back, again, to a combination of 
accessing money and forms. We have the e-grant. It is a totally 
Web-based application for all of our State grants. And any 
school district in Pennsylvania doesn't have to have a 
sophisticated grants writer. You can look at examples of 
successful grants, and we have boilerplate language, so almost 
anyone can follow the grant through the approval process.
    The grants are a very Byzantine process, and we have tried 
to make it user-friendly. With Federal grants, it is a tough 
road to hoe. It is tough enough to get the money; it is really 
tough when it takes 26 weeks or 500 signatures to get it 
approved.
    If there is a way that Federal Government could use the e-
grant as a model, I think that is basically a winner for 
everybody. I also think that it would be a winner for the 
Federal Government because it would be a state-of-the-art way 
to do things.
    Mr. Holt. Dr. Sclafani.
    Ms. Sclafani. Three examples that have come up in the last 
month, we used to be able under Title II to provide training in 
the summer for our math teachers, but also to provide kits that 
had all of the manipulatives and the materials that they would 
need to go back and teach this to their children. We are no 
longer allowed to fund the kits. We can do the training and the 
stipends, but not the kits anymore.
    A second example, we met with some local community 
leaders----
    Mr. Holt. And that is because----
    Ms. Sclafani. They prohibit the use of funds for that 
purpose. They prohibit the use of funds for food, and we 
understand that. We don't want taxpayer dollars to buy a cookie 
for a teacher, although it makes a big difference to a teacher 
going through a long day of in-service that somebody cared 
enough to provide a cookie. But in any case, we will deal with 
that with our local funds.
    The second example is that a group came to us saying that 
they had seen materials that had been developed by Anheuser-
Busch to combat alcoholism and to get students to recognize 
that they should not be drinking at early ages at all, and that 
they needed to leave that out until they were adults.
    We said, sounds great, we would like to do it, good 
materials. We sent them to our people in a safe and drug-free 
schools program, and they said if we were to use anything 
produced in collaboration with an alcohol purveyor or a tobacco 
purveyor, we will jeopardize our grant because we agree in our 
grant for safe and drug-free schools that we will not use any 
materials produced by anyone who is a seller of alcohol or 
drugs. So that went out the window.
    It seemed like a perfectly reasonable opportunity for us. 
Certainly we were not going to jeopardize 2.4 million, and we 
had to go back to the community leaders and say, we are sorry, 
we are not able to do that as part of the regulations for our 
Federal funds.
    As a third example--I have forgotten. They are similar 
little things where you want to say, why is this important to 
anybody, and yet we are prohibited from doing them.
    Mr. Holt. I have one other question, if I may. Let me just 
comment on those two answers.
    Mr. Hickok, I can understand why an administrator, a 
superintendent, those in management would be concerned about 
the inefficiencies and the expense of having to have an entire 
grant writer devoted or a recordkeeper devoted to that, but 
that has little to do with education and creativity at the 
teacher's level. We certainly should look for electronic filing 
procedures and ways to streamline reporting and all of that, 
but what we are talking about today is whether we are 
fundamentally affecting the educational system.
    And, Dr. Sclafani, the examples you give I can see would 
also be annoying to a teacher, but hardly rise to the level, I 
think, of a Federal issue. What we were talking about here in 
the Federal Government was making sure that major needs are met 
that haven't been met. That is why Title I was created, and 
historically I think it is undeniable that there were needs 
that were not being met in various cities and States around the 
country, and the Federal Government had to step in. Now, we can 
talk about how efficiently it worked or whether it worked at 
all, but if we are going to have those programs, it seems to me 
that we have to have some level of accountability.
    Ms. Sclafani. Absolutely. There is no disagreement on the 
issue of accountability at all. We believe that ought to be the 
basis for continued grants. We believe very strongly that the 
dollars that are provided by the Federal Government have 
enabled us to improve the quality of instruction to our 
children. That is the basic bottom-line issue, and that is why 
I was suggesting earlier that if they could simply give us the 
dollars, allow them to use them as the priorities within our 
district dictate, and hold us accountable for the results for 
every child--and as you probably know, in Texas we disaggregate 
all of our data all of the time. So we are looking at how our 
ESL students do as compared to our non-ESL students, how our 
economically disadvantaged students compared to others, and how 
each ethnic group does in comparison with each other.
    So we are willing to lay all of the data out there and say 
we will be accountable school by school and districtwide for 
the quality of instruction that we provide for our children. 
Don't ask us to spend the time on the smaller detailed 
regulations. And I mentioned at the beginning of my talk about 
the two that really take a lot of time and efforts, the 
maintenance of effort and comparability. We will take care of 
all of our children, and we will see that in the results, but 
rather than having to prove those two.
    Mr. Holt. My time has expired. Be careful what you are 
asking for. If you are asking for block grants, what you might 
get is a block grant that decreases by 10 percent next year and 
10 percent the following year, and you will end up with less to 
work with.
    Mr. Hickok. If I can respond briefly, it seems to me you 
make my point, and that is one of the reasons that we are so 
frustrated at the State and local level, we spend an inordinate 
amount of time on forms and regulations and surveys and studies 
which have nothing to do with education. If we can spend more 
time on education and less time on those things, through 
electronic analysis or something else, we would be better off. 
But the reason that you hear folks in the States saying, please 
free us up, we would like to be freed up to use resources to 
educate kids, not to fill out forms.
    Chairman Hoekstra. I think that is what we have heard a lot 
as we have gone around the country, get us from focusing on 
process and paperwork, and allow us to have a dialogue with 
Washington or with the State about results, which is really the 
model. And we can talk, I am sure, over the next couple of 
years about the relationship with the large city schools in 
Washington, but that is really what has happened in Chicago, 
where the dialogue between the Chicago Public Schools in 
Illinois went from process to one about funding and 
accountability. That discussion is about how much money you are 
getting for special ed and the general operating funds for the 
schools, and as soon as that discussion is over, the rest of 
the 11 months and 29 days and 23 hours is focused on talking 
about the results that we get for those dollars. I think that 
is directly where we need and want to go.
    Ms. Rivers.
    Ms. Rivers. I understand from the perspective of both the 
State and the local government the best way to get these 
Federal funds is unencumbered, just cash. That is not likely to 
happen, and I have to ask whether you would really want to--
what I would like to ask you, there are other ways of 
approaching this problem. One is for the dollars to come 
unencumbered, which I don't believe will happen, and the other 
is for the Federal Government to get out of the education 
business, period; to say, we are going to leave it to the 
States and the localities to collect and spend their money any 
way that they wish.
    If we did that, do you feel comfortable that your States 
and municipalities will indeed step up and pass the dollars to 
retain the programs that you are currently giving your children 
at the same rate if there is no Federal money?
    Mr. Hickok. If there is no Federal money for education, and 
that money used to go for education, it is going to go back to 
education.
    Ms. Rivers. It is not taken from the taxpayers.
    Mr. Hickok. I tend to have a whole lot more confidence in 
the people to govern their schools than a lot of people do, at 
least a lot of people in this town. I think the States get a 
bad rap, and that is not to say that there are not mistakes and 
inefficiency out there, but I lay down the working record at 
least of Pennsylvania, certainly of any State, and certainly 
the Federal Government with regard to education. I think the 
citizens of Pennsylvania place a high priority----
    Ms. Rivers. You are not having the national problem of not 
being able to pass millages?
    Mr. Hickok. I am not saying that we don't have a political 
problem on tax increases and things like that, but part of that 
is driven by additional costs that are driven by Federal 
regulations we have no control over. Special education is an 
example.
    One last comment, but I am not one of those who argues that 
there is no Federal role for education.
    Ms. Rivers. Dr. Sclafani, would your community step up and 
replace the dollars?
    Ms. Sclafani. Not all of them, and for a couple of reasons, 
I think. One of the challenges that urban districts face is 
that in many cases the people who live in the city for the most 
part have no children in the public schools. We are down to 
probably 15 percent of our citizens that----
    Ms. Rivers. That is true everywhere.
    Ms. Sclafani. Exactly. It is sometimes more difficult, 
particularly when your children don't look much like your 
citizens, to convince them this is in their long-term best 
interests. So we believe that the Federal Government dollars 
help us ensure that we are providing equity to all children.
    I really was not asking that we stop the Federal dollars. I 
was simply saying if Title I could come to us for Title I 
purposes and the others could be grouped together so we could 
move moneys from one place to another within them, that that 
would save us a lot of time and effort.
    Ms. Rivers. I understand that you were not saying that, and 
most people are not. What they are saying is we would like the 
cash, but without the qualifications that the Federal 
Government is asking for. I am suggesting that there is another 
way to do it, and that is to leave the burden at the local and 
State levels to fund the programs.
    My last question, do you believe that it is in the best 
interests of the Nation for us to step away from some of the 
educational mandates that exist? Do you think that we should 
eliminate the Special Education Act and the obligation under 
it, eliminate Title I and the obligations under it, eliminate 
the Child Nutrition Program and the obligations under it, 
eliminate the Education for Homeless Children Act and the 
obligations under it, and any environmental mandates that apply 
to local school districts? Is that in our best interests?
    Ms. Sclafani. I don't think that it is in our best 
interests to abandon them. I think it is simply a matter of 
working more collaboratively to reduce the amount of accounting 
that has to be done in order to ensure that people are 
complying with the regulation, as opposed to doing the intent 
of the program, which is to educate children, to provide 
education and the additional services to the children of the 
homeless, and to ensure that children do have the nutrition 
necessary.
    We worry about our children in the summer because even with 
the opportunities for citywide programs, we know that our 
children don't eat dinner. They each breakfast and lunch with 
us, and they don't eat dinner. We certainly understand the need 
for those funds and for those programs. It is just if we could 
work together more collaboratively so we could better serve 
children.
    Ms. Rivers. Do you think it is in our best interests to 
eliminate those programs, Mr. Hickok?
    Mr. Hickok. I think those are national priorities that have 
long been in place and need to still be in place. The goal is 
to make sure that those priorities are met, not necessarily 
those programs are funded. If there are others way to ensure 
that those priorities are achieved, either through Federal, 
State or local policy, what matters is the results, not the 
programs.
    Ms. Rivers. Thank you.
    Chairman Hoekstra. Thank you very much to our witnesses for 
the information that you have provided today. We appreciate it. 
That will help us as we move forward in what I think will be a 
continued and very vigorous and energetic debate. Thank you 
very much. And with that, the Task Force will be adjourned.
    [Whereupon, at 3:30 p.m., the Task Force was adjourned.]

                                
