- RECENT IMPROVEMENTS OF FINANCIAL MANAGEMENT PRACTICES AT THE U.S. DEPARTMENT OF EDUCATION

[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]

RECENT IMPROVEMENTS OF
FINANCIAL MANAGEMENT PRACTICES AT THE
U.S. DEPARTMENT OF EDUCATION

HEARING

BEFORE THE
SUBCOMMITTEE ON SELECT EDUCATION
OF THE
COMMITTEE ON EDUCATION AND
THE WORKFORCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION

HEARING HELD IN WASHINGTON, DC, MARCH 12, 2003

Serial No. 108-8

Printed for the use of the Committee on Education
and the Workforce

____________________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800 FAX: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001

COMMITTEE ON EDUCATION AND THE WORKFORCE
JOHN A. BOEHNER, Ohio, Chairman

THOMAS E. PETRI, Wisconsin GEORGE MILLER, California
CASS BALLENGER, North Carolina DALE E. KILDEE, Michigan
PETER HOEKSTRA, Michigan MAJOR R. OWENS, New York
HOWARD P. "BUCK" McKEON, California DONALD M. PAYNE, New Jersey
MICHAEL N. CASTLE, Delaware ROBERT E. ANDREWS, New Jersey
SAM JOHNSON, Texas LYNN C. WOOLSEY, California
JAMES C. GREENWOOD, Pennsylvania RUBE?N HINOJOSA, Texas
CHARLIE NORWOOD, Georgia CAROLYN McCARTHY, New York
FRED UPTON, Michigan JOHN F. TIERNEY, Massachusetts
VERNON J. EHLERS, Michigan RON KIND, Wisconsin
JIM DeMINT, South Carolina DENNIS J. KUCINICH, Ohio
JOHNNY ISAKSON, Georgia DAVID WU, Oregon
JUDY BIGGERT, Illinois RUSH D. HOLT, New Jersey
TODD RUSSELL PLATTS, Pennsylvania SUSAN A. DAVIS, California
PATRICK J. TIBERI, Ohio BETTY McCOLLUM, Minnesota
RIC KELLER, Florida DANNY K. DAVIS, Illinois
TOM OSBORNE, Nebraska ED CASE, Hawaii
JOE WILSON, South Carolina RAU?L M. GRIJALVA, Arizona
TOM COLE, Oklahoma DENISE L. MAJETTE, Georgia
JON C. PORTER, Nevada CHRIS VAN HOLLEN, Maryland
JOHN KLINE, Minnesota TIMOTHY J. RYAN, Ohio
JOHN R. CARTER, Texas TIMOTHY H. BISHOP, New York
MARILYN N. MUSGRAVE, Colorado
MARSHA BLACKBURN, Tennessee
PHIL GINGREY, Georgia
MAX BURNS, Georgia

Paula Nowakowski, Chief of Staff
John Lawrence, Minority Staff Director
__________

SUBCOMMITTEE ON SELECT EDUCATION

PETER HOEKSTRA, Michigan, Chairman

JON C. PORTER, Nevada, Vice Chairman RUBE?N HINOJOSA, Texas
JAMES C. GREENWOOD, Pennsylvania SUSAN A. DAVIS, California
CHARLIE NORWOOD, Georgia DANNY K. DAVIS, Illinois
PHIL GINGREY, Georgia TIMOTHY J. RYAN, Ohio
MAX BURNS, Georgia

TABLE OF CONTENTS

OPENING STATEMENT OF CHAIRMAN PETE HOEKSTRA, SUBCOMMITTEE ON
SELECT EDUCATION, COMMITTEE ON EDUCATION AND THE WORKFORCE, U.S.
HOUSE OF REPRESENTATIVES, WASHINGTON, D.C. ............................... 1

STATEMENT OF WILLIAM D. HANSEN, DEPUTY SECRETARY, U.S. DEPARTMENT
OF EDUCATION, WASHINGTON, D.C. ............................................5

STATEMENT OF THOMAS A. CARTER, DEPUTY INSPECTOR GENERAL, OFFICE OF
INSPECTOR GENERAL, U.S. DEPARTMENT OF EDUCATION, WASHINGTON, D.C. ........14

STATEMENT OF LINDA CALBOM, DIRECTOR, DIVISION OF FINANCIAL
MANAGEMENT AND ASSURANCE, GENERAL ACCOUNTING OFFICE,
WASHINGTON, D.C. .........................................................16

APPENDIX A -- WRITTEN OPENING STATEMENT OF CHAIRMAN PETE HOEKSTRA,
SUBCOMMITTEE ON SELECT EDUCATION, COMMITTEE ON EDUCATION AND THE
WORKFORCE, U.S. HOUSE OF REPRESENTATIVES, WASHINGTON, D.C. ...............23

APPENDIX B -- WRITTEN STATEMENT OF WILLIAM D. HANSEN, DEPUTY
SECRETARY, U.S. DEPARTMENT OF EDUCATION, WASHINGTON, D.C. ................27

APPENDIX C -- WRITTEN STATEMENT OF THOMAS A. CARTER, DEPUTY
INSPECTOR GENERAL, OFFICE OF INSPECTOR GENERAL, U.S. DEPARTMENT OF
EDUCATION, WASHINGTON, D.C. ..............................................37

APPENDIX D -- WRITTEN STATEMENT OF LINDA CALBOM, DIRECTOR, DIVISION
OF FINANCIAL MANAGEMENT AND ASSURANCE, GENERAL ACCOUNTING
OFFICE, WASHINGTON, D.C. Table of Indexes ................................47

Table of Indexes .........................................................65

HEARING ON RECENT IMPROVEMENTS OF

FINANCIAL MANAGEMENT PRACTICES AT

THE U.S. DEPARTMENT OF EDUCATION
____________________________________________________

WEDNESDAY, MARCH 12, 2003

U.S. HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON SELECT EDUCATION,

COMMITTEE ON EDUCATION AND THE WORKFORCE,

WASHINGTON, D.C.

The subcommittee met, pursuant to notice, at 2:00 p.m., in Room 2261, Rayburn House Office Building, Hon. Peter Hoekstra [chairman of the subcommittee] presiding.

Present: Representatives Hoekstra, Porter, Burns, Hinojosa, Davis, and Ryan.

Staff Present: Kevin Frank, Professional Staff Member; Cindy Herrle, Senior Budget Analyst; Alexa Marrero, Press Secretary; Deborah Samantar, Committee Clerk/Intern Coordinator; Kathleen Smith, Professional Staff Member; Holli Traud, Legislative Assistant; Cheryl Johnson, Minority Counsel; Ricardo Martinez, Minority Legislative Associate, Education; and Joe Novotny,
Minority Clerk/Staff Assistant, Education.

OPENING STATEMENT OF CHAIRMAN PETE HOEKSTRA,
SUBCOMMITTEE ON SELECT EDUCATION, COMMITTEE ON
EDUCATION AND THE WORKFORCE, U.S. HOUSE OF
REPRESENTATIVES, WASHINGTON, D.C.

Chairman Hoekstra. A quorum being present, the Subcommittee on Select Education will come to order.

We are meeting today to hear testimony on recent improvements of financial management practices at the U.S. Department of Education.

Under committee rule 12(b), opening statements are limited to the chairman and the ranking minority member of the subcommittee. Therefore, if other members have statements, they may be included in the hearing record. With that, I ask unanimous consent for the hearing record to remain
open 14 days to allow members' statements and other extraneous material referenced during the hearing to be submitted in the official hearing record.

Without objection, so ordered. Thank you.

This is the first hearing of the subcommittee for this session of Congress. I look forward to working with Mr. Hinojosa and the Democrats on the committee, and my colleagues on the Republican side of the aisle, to have a very effective subcommittee.

We have already passed two of the bills out of full committee that this subcommittee has jurisdiction over. I thank my colleagues on the other side of the aisle for supporting that legislation and already moving one bill through the House, and I think very soon moving the second bill through the House.

We will, I think, however, have some heavy lifting to do in terms of the Corporation for National and Community Service, and we hope that we can continue the past experience of trying to get that done in a bipartisan way. So I look forward to trying to make that happen.

The hearing that we have today I think has been a series of hearings over the last number of years, including beginning with the work on the oversight subcommittee, and then, under Mr. Boehner, when we reorganized jurisdictions and that, moving the responsibility for oversight for the financial performance of the Department of Education to the Subcommittee on Select Education.

But I think this is something like the eighth or ninth hearing over a period of five or six years.

The first thing I want to do is congratulate the Department of Education. We established a bar, not full accountability, because full accountability, as the President has talked about, is making sure that no child is left behind and that every child learns, and we will move and have assessments in that area over the coming years.

But the bar that was established a number of years ago was for an agency and a department that spends $40 billion a year or has responsibility for $40 billion a year at least give us some kind of assurance that the money is being spent and spent appropriately, or at least as appropriately as
defined by accounting standards.

So, please, let's move to establish the threshold that we want a clean audit. And as we've found over the last couple of years, having inappropriate and inefficient control mechanisms within a department, we not only ended up with not having a clean audit; we also ended up, under both the Clinton administration and this administration, uncovering cases of waste, fraud, and abuse.

I applaud the management at the Department of Ed for taking the steps necessary to enable us to get to a clean audit and I'm sure there are other issues that need to be addressed. However, that goal that was established has been achieved and now we'll keep monitoring that measurement, but we can also start talking about other issues since we have reached this first critical and
important step.

Our first witness today is Deputy Secretary Hansen. I just know him as Bill. Congratulations, I know you guys have spent a tremendous amount of time and energy. The folks that work for you at the department have invested a significant amount of time and energy on getting to a clean audit, as well as doing all of the other things that you need to do there, including passing No Child Left Behind.

So congratulations for being able to run a number of parallel tracks and making sure that this issue, which is not a very glamorous issue, you don't get a lot of kudos for saying you got a clean audit; it is sort of expected.

But you grabbed the issue, you resolved the issue, and you have a clean audit. We had you guys up here and we had folks from the Clinton administration up here often enough, asking them why there was not a clean audit and when they were going to get it resolved. We only thought it appropriate for you to have the opportunity to share with us the success that you' have had and where you go from here.

With that, I will turn it over to my ranking member, Mr. Hinojosa.

WRITTEN OPENING STATEMENT OF CHAIRMAN PETE HOEKSTRA, SUBCOMMITTEE
ON SELECT EDUCATION, COMMITTEE ON EDUCATION AND THE WORKFORCE, U.S.
HOUSE OF REPRESENTATIVES, WASHINGTON, D.C. � SEE APPENDIX A

OPENING STATEMENT OF RANKING MINORITY MEMBER, RUBEN
HINOJOSA, SUBCOMMITTEE ON SELECT EDUCATION, COMMITTEE
ON EDUCATION AND THE WORKFORCE, U.S. HOUSE OF
REPRESENTATIVES, WASHINGTON, D.C.

Mr. Hinojosa. Thank you very much, Chairman Hoekstra.

I want to say good afternoon and welcome to all of our witnesses and our public attendees here today. This is my first hearing as ranking member of this subcommittee, and I am looking forward to working with Chairman Hoekstra during the 108th Congress.

I want to make some real improvements to the American educational system, and I know it can be done if we can work together.

The comments that he made about the clean audit, and I have learned about some of the problems that the past Administration had with actions taken by some people working in the Department of Education, and I was informed, by having listened to the folks from the Department of Justice, about those things that were done just because we probably did not have appropriate
separation of accounting functions in the offices where the procurement and approval of vouchers and so forth were made.

So I hope that my getting involved in this position that I am in now, having a background in accounting and in business, a master's in business, I think that I can certainly be asking that there be accountability to us so that we can avoid those kinds of problems.

Last Congress, my predecessor, Congressman Tim Roemer, and the other Democrats on this Select Education Committee, took the position that oversight of Education Department financial management practices was very important and appropriate. We shall continue this year on that same premise.

I want to start out by recognizing the efforts of Secretary Paige in managing the Department of Education. He has been to my district. I have a good relationship with him, and I look forward to working with him and his staff.

With a large staff and huge budget, many problems could arise on various fronts on a daily basis. Today, however, we congratulate him on achieving a clean audit for the first time in a number of years, as our chairman stated earlier.

As we are all aware, the department failed to receive that clean audit, as he pointed out. The fiscal year 2000 audit reported a qualified opinion, and all these things that he has already mentioned I will skip over.

Today we will hear how some federal employees perpetuated waste, fraud, and abuse while discharging their duties in the department. We understand that a number of these non-federal individuals were also implicated in these actions.

On the larger scale, we will also hear about the success, as well as the continuing management problems regarding the student financial aid systems.

Our Democratic and Republican colleagues have been briefed by the Inspector General's office of the Department of Education prior to this hearing, and we all look forward to listening to the witnesses so that we may follow up with more specific questions.

Managing a $50 billion grant and loan program on an annual basis brings tremendous challenges. Since 1998, both the Congress and the department have been more specifically focused on accountability.

The creation of the Office of Federal Student Aid, as a performance-based organization, has brought progress, as well as some growing pains. Today the General Accounting Office will note some success and I am sure will alert us to the areas that require some continued vigilance and sound management monitoring. The Inspector General's office will update us on specific cases and some issues that are yet to be resolved with these particular cases.

In closing, Mr. Chairman, I want to say that we Democrats look forward to hearing from our panelists and we also look forward to working with you and our Republican colleagues on other oversight matters.

I yield the balance of my time.

Chairman Hoekstra. Thank you. I didn't know you had an MBA. The department is in trouble with two of us with MBAs looking over your shoulder every day.

Like I said, our first witness is Deputy Secretary Hansen. Most of us know him as Bill. He is the chief operating officer for the Department of Ed.

Congratulations. We will submit the entire background on you for the record, and we will let you move forward with your testimony.

Welcome. Thanks for being here.

STATEMENT OF WILLIAM D. HANSEN, DEPUTY SECRETARY, U.S.
DEPARTMENT OF EDUCATION, WASHINGTON, D.C.

Mr. Hansen. Thank you, Mr. Chairman, and thank you, Mr. Hinojosa, for your comments and observations.

First of all, I would like to thank this committee for its oversight responsibilities and its roles over the last several years. I think it is very instrumental in the achievements of where we are today, so thank you for your leadership and your oversight responsibilities.

I testified before this subcommittee a year ago and since then, I am very proud of the success that we have made in moving toward our management challenges.

Secretary Paige, just a couple of months after assuming office in 2001, discovered that there were some very serious management problems in the department. The first was that there had not been a clean audit in the department for many years.

The Inspector General and General Accounting offices had identified literally hundreds, in fact, we tabulated and there was over a thousand problems that needed immediate attention.

There were hundreds of thousands of dollars in false overtime that had been charged to the department by contractors and a theft ring inside the department that used several more hundreds of thousands of dollars to buy and then steal electronic equipment.

In addition, $1.9 million in impact aid funds that were intended for school children in South Dakota had been diverted to buy real estate and luxury SUVs.

We also found that $450 million was just simply missing, and there was widespread abuse of purchase cards in the department.

Even though these and other problems occurred prior to Secretary Paige coming to the department, he promised that one of his top priorities would be to identify and correct all of the management problems that were preventing the department from operating at its peak performance.

I am proud to say that the Secretary has kept his promise. Most importantly, the department has received its first unqualified or clean independent audit opinion since 1997 and only the second in its history. This is a critical milestone in our effort to address concerns surrounding the
department's financial reporting, reconciliation of financial records, and control of all of our information systems.

I also proud to report that the Office of Management and Budget had given the department its seal of approval, as well. The department has received the highest progress score possible, green lights for each of the government-wide management improvement initiatives and program specific initiatives identified in the President's management agenda.

In addition, the fraud issues that plagued the department when the Secretary first arrived have been addressed. Four people have been arrested and indicted on federal charges for stealing the money that was intended for the school children in South Dakota. Nineteen other people have either pled guilty to federal charges or were convicted after a federal trial for their involvement in a massive theft ring, and we have located and accounted for the $450 million in missing moneys.

These are all critical steps forward in our efforts to inject accountability into everything we do at the Department of Education. I am proud of the employees at the department who have worked with dedication and diligence to ensure that the taxpayers' hard-earned dollars are spent
wisely and that our children in our nation's schools are served effectively.

The department reached this point by setting out to accomplish three short-term and six long-term goals.

Our short-term goals were to install new leadership in the financial and management areas of the department; to assemble a task force of career department leaders to identify and address the management issues; and, to solicit the counsel and advice of our external advisors.

The new leadership at the department is represented here. Jack Martin is our chief financial officer. This position had been left vacant for over three years before Jack got here about a year
ago.

Bill Leidinger is our assistant secretary for management.

Chairman Hoekstra. You couldn't have done it without people from Michigan, right?

Mr. Hansen. First priority, sir.

Chairman Hoekstra. Jack is from Michigan.

Mr. Hansen. Bill Leidinger is our assistant secretary for management, who has also been here for about a year, and that position had been vacant for about five years.

Terri Shaw is our chief operating officer, she is sitting right behind me, of the office that Mr. Hinojosa mentioned, the performance based organization over in the student financial aid office.

It should also be noted that we have also installed and the Senate confirmed a new inspector general last fall. We have a new deputy inspector general that you will hear from later this afternoon, and, also, within the student aid office, we have a new CIO and a new CFO in that office. So we have really assembled a new team and I fully expect that the results that we have this year are just really the beginning of greater achievements into the future.

Also, now we have done this with the work of our career civil servants. The SWAT team that constituted the management improvement team consisted of all civil servants, and I think we plucked out the 12 brightest and most aggressive minds in the department to get these issues identified, so that when these folks got to the department, we were able to hit on all cylinders.

So I much appreciate the great work of our senior career executives at the department, as well.

Our long-term goals, as outlined on the chart over here, were, first and foremost, to get this clean opinion; second, to establish effective internal controls; to create a culture of accountability; to create a structure for measuring progress; to modernize our student aid delivery systems; and, to remove the student financial assistance programs from the GAO high risk list.

We have accomplished each and every one of these activities, except for the removal of the student financial aid programs off the GAO high-risk list. And I put a clock up there because there was a timing issue here. When GAO came out with their latest report at the end of January, it preceded us by a couple of weeks before our clean audit was out there, and we hope that this is the last significant barrier to getting off the GAO high-risk list.

In getting the clean opinion, we have implemented a very serious new financial management system with our Oracle federal financials. We have improved reconciliation analysis and reporting capabilities.

We prepared our financial statements on a quarterly basis for the first time, and we have improved communication within the department and with our auditors.

All of these efforts led to the first clean opinion in five years, but I also, Mr. Chairman, want to point out that this is the beginning. In fact, I would like to give three new goals for you today that we would be able to address hopefully this time next year.

First, is that we want to get our one remaining material weakness that was still on the audit, which was associated with reconciliation of our financial records, cleaned up.

We also want to issue our 2003 financial statements by November 15th of this year, which meets the new accelerated schedule one year early, and we are very much committed to that, and, also, to ensure that we do have another clean audit in FY-2003, as well.

On internal controls, we have issued a revised set of policies and procedures for purchase card and travel cards. The Office of Management and Budget has referred to the purchase card policies and procedures as one of the best practices for other agencies to consider.

We eliminated the use of third party drafts. We established specific annual targets for the reduction or elimination of erroneous payments.

We've developed new policies and procedures for our inventory process and conducted a nationwide inventory review, which resulted in our independent auditors removing this issue as a reportable condition in our recent audit.

We also have required all of our employees to take online internal control training and information technology security training.

In terms of achieving a culture of accountability, we have established a culture of accountability team, consisting of our senior and our career managers; developed a report that addressed our employees' concerns.

We've provided value-based ethics training for all of our managers, in addition to providing compliance-based ethics training. We provided training to our managers on how to develop performance standards and we are tying 100 percent of our performance agreements to our strategic plans, goals, and objectives.

In terms of modernizing the student aid delivery system, we have met our system modernization and integration goals for FY-2002. We have exceeded our default recovery target set for 2002, and we have proposed legislation, back in August of last year, that the Office of Management and Budget and the Secretary of Treasury jointly sent up to Congress with us to reduce the erroneous payments in the Pell Grant program.

In terms of getting the student aid programs off the high-risk list, this is an important priority for us. Secretary Paige met with Comptroller General David Walker in August of 2001 to try to make sure we had very firm goal posts, to know exactly what GAO was expecting from us to get off the high risk list, and we have had continued meetings and conversations with them and
have exchanged letters and feel very comfortable about our working relationship with them and hope that we can get this achieved in the coming year.

Secretary Paige has said that the bottom line of all of this is to make sure that we have the confidence of the U.S. Congress, as you authorize our programs, and, also, the American public, as we administer our programs, especially laws like the No Child Left Behind law.

We want to make sure that no money that ought to be spent on children and on improving our education system is being wasted.

The number one priority of the department is educating our children and closing the achievement gap, so no child is left behind.

I believe that you will find our efforts over the last two years demonstrate our commitment to making the Department of Education a model agency of program and management excellence.

I will give you one more goal that we set for ourselves, and that is that this time next year, we hope that one of the objectives in our strategic plan of earning the President's quality award will be something that we can come and present to this committee that we have achieved.

Mr. Chairman, thank you for this opportunity. I look forward to answering any questions you might have.

WRITTEN STATEMENT OF WILLIAM D. HANSEN, DEPUTY SECRETARY, U.S.
DEPARTMENT OF EDUCATION, WASHINGTON, D.C. � SEE APPENDIX B

Chairman Hoekstra. Is that a monetary award?

Mr. Hansen. Is that what?

Chairman Hoekstra. A monetary award.

Mr. Hansen. Not for me.

Chairman Hoekstra. It's probably not for us, either. Bill, thank you. Also, thank you for highlighting the fact that the career folks at the department had much to do with bringing about this improved performance.

I think when we were going through this over the last couple of years with the different incidents, with fraud within the department, it's a small number of employees, but it cast a black eye over the entire department and all of the employees that are working there. And the number of indictments and convictions is more than what we would want it to be, but it is a small number compared to the number of folks and contractors that are working to implement the department, and I think you are absolutely right. All the employees now should share in the credit for the work that's happened over the last couple of years.

I really don't have any questions. I think the issue of the financial aid programs and moving those off the high risk, you and I have talked about that. We will hear some more testimony on that.

I think you are committed on getting that done. The nice thing is that you guys do have a performance record. I think you also stole our slogan from the State of Michigan. Have you ever seen that one before? Promises made, promises kept. I think we've heard that one before, as well.

So we will, as Mr. Hinojosa said, continue working with you and anything that we can do legislatively to improve the performance. Sometimes the obstacles that you have for getting the performance that you want are there because we' have made it more complicated and more difficult for you to do business than what might be practical.

So we are looking forward to working with the department, addressing these last outstanding issues, and then, most importantly, focus on the accountability of how the dollars are impacting the learning with our kids.

So that is the most important. But we have to pass this very important threshold. So congratulations.

With that, I will yield to Mr. Hinojosa.

Mr. Hinojosa. Mr. Chairman, I know that Secretary Hansen has to leave after his presentation. I wanted to ask him a question as it refers to my state and the Texas Education Agency.

Do you have any problem if I do that?

Chairman Hoekstra. That's fine. Absolutely.

Mr. Hinojosa. I was looking at the material that was given to us before the meeting and in the presentation that Thomas Carter makes and he makes reference to TEA. I served on the Texas State Board of Education for ten years and I am very familiar with TEA and the magnitude of the budget that they deal with.

But in that testimony, he makes reference to the problem to the expenditure of funds for students. Specifically, he mentioned that TEA could not report to the department how many children were served under priority of services, and, consequently, the department could not determine whether the $53 million allocated to TEA had been used correctly.

Can you tell me the status of that?

Mr. Hansen. Yes, sir. The migrant education program in the department that oversees this activity asked for assistance from the Inspector General's office to help them identify compliance with the provisions, which is called the priority for services clause in the program.

The implementation of this clause has been a challenge in many states, not just Texas. There are others, as well. In fact, we have three other states that have identical problems that they are trying to work through.

The new language that was put in the Migrant Education Act, as part of the No Child Left Behind law that was signed into law a year ago, clarified the requirements and is helping to make the compliance by the states more straightforward, and we are working with the states in that regard.

The department has been working with TEA, even before this audit was issued, to help them improve the sub-grant formula.

TEA has accepted the findings that the Inspector General has come up with and is moving forward to monitor its sub-grantees at the local education agency level and to obtain accurate counts of eligible children for funding formulas for the delivery of these services.

I think it needs to be noted that this 50 million was spent and it was spent on children. It just needs to be made sure what we're trying to drill down is to make sure it's been spent on the priority children that the law is calling for, and that is what we are working with the states to ensure.

Mr. Hinojosa. Then the last comment that I wanted to make, or question to you, is that, and I will be asking some of the members of the next panel.

In all the material made available to us, I never saw any references to what sanctions were directed at corporations for their participation in the fraud and abuse that the audits uncovered.

For example, the government received $2 million from Verizon in compensation. However, was this to avoid the triple damages in a trial? Are they still your contractor, with no break in eligibility?

Mr. Hansen. We did enter, just about a month ago, into a settlement with Verizon for $2 million, which we think was a very reasonable amount that was more than what was misused by their employees. So we feel very confident about the settlement agreement that we've reached with them.

I think it needs to be noted that this was, like Mr. Hoekstra said, about a couple of bad employees at the department. It was also about a couple of bad employees in Verizon.

All of the employees have been fired from Verizon, just like none of the employees that were part of this effort at the department are, any longer, working at the department; all of these employees either at Verizon or at the department have been convicted or sentenced for their respective roles in this.

So we, I think, have sent a very clear signal to Verizon with the settlement agreement that this will not be tolerated and there has been new control processes put in place to ensure that it never happens again.

Mr. Hinojosa. Well, I disagree with you. I think that had we gone to court, we could have gotten the 1 million in triple damages for what they did, which would have been 4 million, and that sure would have been good to put back into the coffers after all that has been uncovered.

The other thing that concerned me is that I saw where you did not remove them from eligibility of bidding on continuing services, and somebody who was as neglectful as this in their supervision and top management, who are responsible for those people working for them, should be made to understand that we are serious about spending the money on the children and that they
should not be allowed to bid on continuing contracts, at least for a period of two to three years.

Why did you all not do that?

Mr. Hansen. Mr. Hinojosa, we felt that the punishment fit the crime in terms of the $2 million settlement agreement, which, again, was double, which were the actual costs that were incurred, and we also felt that the company, as a whole, we've sent very strong signals with our new oversight working relationship with them that this will never happen again.

Any activities they do have with us, they do have to compete with the competitors for any future services with the department.

Mr. Hinojosa. Well, there are other federal agencies that take the position that I have taken, and that is that you remove them from eligibility, and that sends a very loud message to lots of other corporations that they had better pay close attention when they deal with the Federal government, and especially the Department of Education.

So I respect what you did and what the secretary approved as far as the punishment, but I do want to say that I disagree with not having removed them from the eligibility list of providers of services or goods.

With that, I think I'm going to stop my questions to the secretary.

Chairman Hoekstra. Thank you. The nice thing I like about Bill, when he hears a good suggestion, quite often it gets implemented.

That's not a bad suggestion.

Mr. Hansen. It's a good suggestion, sir. Thank you.

Chairman Hoekstra. And I would hope that the department would consider it as feasible. The Education and Workforce Committee has, over the past last number of years, have had issues about blacklisting. Where folks might be banned from access to government contracts based on the allegations of wrongdoing or violating OSHA, and we have never implemented anything like that
and or tried to stop it.

But it may be appropriate to take a look at if there is a private sector organization that has been proven to violate and abuse the opportunity of doing business with the Department of Education or actually with the Federal government, that, for a period of time, they lose the opportunity to bid and participate in those contracts.

Mr. Hansen. We are not the repository of all good ideas. So we very much appreciate this advice and this counsel.

Chairman Hoekstra. That's why I'm sure when Bill comes back next year, they will have a new rule and regulation in place that they maybe don't do that anymore.

Mr. Hinojosa. Good. Then we won't have to take any action similar to what I a suggesting from the committee. But if you don't, we will.

Chairman Hoekstra. There was excitement just to get many of these things behind us, and now we can take a look at the policies and the practices that we need to put in place moving into the future.

Mr. Porter?

Mr. Porter. First, my congratulations and job well done. I do have a question.

How can the proposed IRS data match legislation assist the department in reducing the amount of improper payments in the student aid programs, and do you believe that there are any issues standing in the way of this becoming a law?

Mr. Hansen. Thank you for that question, congressman. In the 1998 re-authorization of the Higher Education Act, this committee put the authority into the act to allow us to use the IRS to crosscheck some of the income verification data elements that are on the student aid application.

Back in 1995 and 1996, there was a study done by the Inspector General and our program office that showed that there was a $177 million in over-awards made because wrong income numbers were reported on the student aid application.

In 2001, in fact, we took a look at this again and think that the number is over $300 million in erroneous Pell Grant payments. So this is a significant amount of money, and we want to make sure that the right students are getting the right amount of aid to go to college.

I think it should also be noted that the IG, in March of 2001, also demonstrated that there were 26 people charged in 23 separate criminal cases that fraudulently obtained more than $2.6 million in federal grants, work study, and loans, and the way they did this was that they were using
bogus tax forms to justify what they put on their student aid application.

So we think that this legislation is very important however, the authorization that this committee gave us in 1998 needs to be coupled with amending the tax code, as well, to allow the IRS to allow us to very carefully and surgically use this data as a cross-check, and we think this is
very important.

It is embedded in the president's 2004 budget request, as well, to make sure that we can stop these erroneous payments in the Pell Grant program.

Mr. Porter. Thank you.

Chairman Hoekstra. Is that it?

Mr. Porter. That's great. Thank you.

Chairman Hoekstra. Boy, you got off easy today.

Mr. Hansen. Wait till next year.

Chairman Hoekstra. Wait till next year. No. Actually, like I said, congratulations on doing that. As we've talked about, we wanted to bring this to a close and deal with some of the other issues, and we want to get it on the record that you made a promise and you kept it.

So congratulations, and we will continue working on this and, also, some of the other issues that are out there, but take the message back to the secretary and to the careerists and all the other employees, thank you for getting the job done. We appreciate it.

Mr. Hansen. Thank you for your leadership, Mr. Chairman.

Chairman Hoekstra. Thank you. With that, we are ready for the second panel.

Let me introduce the second panel. First, we have Mr. Carter, who is the Deputy Inspector General of the U.S. Department of Education. He has served in a variety of staff and management positions with the Office of the Inspector General since 1985. Prior to serving at the department, Mr. Carter was with the Interstate Commerce Commission for 12 years as an auditor, cost analyst, and systems accountant.

We also have Ms. Calbom. Welcome. She is the Director of the Division of Financial Management and Assurance at the General Accounting Office, responsible for GAO's financial management work at many federal civil agencies, a certified public accountant and a certified government financial manager.

Welcome to the two of you. We are looking forward to your testimony and suggestions and ideas and your analysis of where we are. We'll begin with Mr. Carter. Thank you.

STATEMENT OF THOMAS A. CARTER, DEPUTY INSPECTOR
GENERAL, OFFICE OF INSPECTOR GENERAL, U.S. DEPARTMENT OF
EDUCATION, WASHINGTON, D.C.

Mr. Carter. Mr. Chairman and members of the subcommittee. I am pleased to provide the OIG's review on the status of financial management at the department, and I thank the subcommittee for this opportunity and for its continued focus on this important topic.

The department has made significant improvements in its financial management and progress toward the secretary's goal of accountability throughout the department's programs and operations.

Much work remains and we look forward to continuing our efforts to help the department improve and protect all of its programs and operations.

OIG has contracted for five years with Ernst & Young for the audits of the department's financial statements. For fiscal year 2002, E&Y noted that the department made progress in some areas of financial management, such as implementing a new general ledger system at the department level and a new financial management system within federal student aid.

E&Y also reported that the department has improved financial reporting related to credit reform. These improvements led the department to reach its goal of earning an unqualified opinion on its fiscal year 2002 financial statements. The auditor's report on internal control identified one, material weakness, financial management, reconciliations, and account analysis need to be strengthened, and, two, reportable conditions, improvement of financial reporting related to credit reform is needed and controls surrounding the information systems need enhancement.

The report on compliance with laws and regulations noted that the department's financial management systems did not substantially comply with the Federal Financial Management Improvement Act.

The department faces several critical challenges in continuing its progress in financial management. First, it needs to improve its processes for reconciliations and account analysis.

Having reliable financial data that is reported in interim and final financial statements must be the culmination of a rigorous and disciplined accounting process.

Second, the department needs to ensure it has the capacity to produce interim and final financial statements for OMB on an accelerated schedule.

As you heard, the department has established a goal for itself to meet the November 15 date in the year 2003 rather than 2004.

Finally, the department needs to improve controls to safeguard the security of its financial management systems.

Two other areas I would like to mention today are the importance of obtaining accurate data from program recipients and monitoring.

First, the accuracy of data. Performance and results are being increasingly linked to financial reporting and to budget and funding decisions at the federal and grant recipient levels.
When program performance and results have financial consequences, there is a greater risk of improper reporting of performance information.

Therefore, having controls in place to reasonable ensure the accuracy and reliability of performance data used to measure program performance at the grantee level is critical to the financial management and performance of federal programs.

My formal statement contains several examples of our work in this area.

The second area is monitoring. We continue to focus attention on monitoring, an essential component of financial management and program success. Vigorous monitoring of programs and contracts help ensure that federal education dollars will be administered and used in the most
efficient and effective manner.

Program visits and reviews of annual audits are critical for effective monitoring. The results of our audit work over the past few years show that the department needs to improve its monitoring of both internal and external programs and operations.

Again, my formal statement provides several examples.

In conclusion, to realize the secretary's goal of accountability, the department must continue its focus on financial management, system security, and increase its monitoring of programs and operations, and we look forward to continuing to contribute to this effort.

I would be happy to answer any questions.

WRITTEN STATEMENT OF THOMAS A. CARTER, DEPUTY INSPECTOR GENERAL,
OFFICE OF INSPECTOR GENERAL, U.S. DEPARTMENT OF EDUCATION,
WASHINGTON, D.C. � SEE APPENDIX C

Chairman Hoekstra. Thank you, Mr. Carter. We're going to wait for questions until Ms. Calbom has a chance to testify.

STATEMENT OF LINDA CALBOM, DIRECTOR, DIVISION OF FINANCIAL
MANAGEMENT AND ASSURANCE, GENERAL ACCOUNTING OFFICE,
WASHINGTON, D.C.

Ms. Calbom. Thank you, Mr. Chairman, and thank you, Mr. Carter.

As you know, in January, GAO issued our performance and accountability series on management challenges and program risks at major agencies, including the Department of Education.

The report for education focused on a number of management challenges and continued the high-risk designation for student aid programs.

You asked me to focus my testimony today on two areas in that report. These are the Department of Education's efforts to reduce fraud, waste, abuse, and mismanagement in its student aid programs, and, secondly, to improve it's financial management to help build a high performing agency.

As Deputy Secretary Hansen just discussed, the Department of Education has spent significant time and effort in addressing these challenges and has been very successful in making real management improvements across the agency.

However, while the department has made significant progress, internal control and systems weaknesses remain both in the student aid program and in financial management overall that will require continued commitment and vigilance on the part of the department's management to resolve.

Let me first talk about the student aid programs. The Department of Education has faced four key challenges in this area. The first had to do with systems integration issues.

The department has spent millions of dollars to integrate and modernize its many financial aid systems in an effort to provide more information and better service to students, parents, institutions, and lenders. However, the department still needs to complete development of an
institutional blueprint for how it will carry out these activities, which is commonly called enterprise architecture.

This is really the key to ensuring that you have consistent design and compatibility across the organization.

The second key challenge has been reducing fraud and error in student aid application and disbursement processes. As Mr. Hansen discussed, in a major effort to address this issue, the department has instituted pilot programs with the IRS to match income reported on student aid applications with federal tax returns and continues to work to achieve legislative action needed to implement these efforts on a broader scale.

The third challenge is minimizing and collecting defaulted student loans. Again, the department has made great strides in this area, but it needs to communicate its progress by issuing timely and complete performance reports to the Congress.

Finally, like other federal agencies, education must address serious human capital issues. In 2002, the department issues a comprehensive five-year human capital plan that outlines steps and time frame for improving human capital management, and it will be important that the department focus continuously on implementation of the plan to make sure they achieve the desired results.

Now, I'd like to talk a little bit about overall financial management. Weaknesses in the department's financial management and information systems have limited its ability to achieve one of its key goals, which is improving financial management to help build a high performing agency.

Significant progress towards this goal was made recently when the department received an unqualified, or clean opinion, as we say, on its financial statements. While this is a very important milestone for the department, significant internal control and systems weaknesses remain that must be addressed for the department to meet the end goal of timely, relevant, reliable information to manage the agency on a day-to-day basis.

The department has taken many actions over the last several years to improve its financial management and to address the weaknesses identified in previous financial statement audits.

The department auditors recently reported that several new processes were implemented during fiscal year 2002 to improve financial management and that a new general ledger system was installed, and these represent key steps in achieving the end goal.

However, the auditors also reported that inadequate internal controls continued to impair the department's ability to accumulate, analyze, and present reliable financial information.

While improvements were noted in the latter part of the fiscal year, the auditor reported that the department needs to place additional focus on reconciliation procedures, account analysis, and its financial reporting process.

This will be especially critical when, beginning with fiscal year 2004, the Department of Education and other major agencies will be required to produce audited financial statements within 45 days after the end of the fiscal year, compared to a 120 days currently, and, as Mr. Hansen
stated, their goal is to implement that requirement this coming fiscal year.

In closing, I would like to commend Education management for their dedication and persistence in addressing major challenges related to student aid programs and financial management.

I would also like to encourage them to remain steadfast in their efforts to reach the end goal of producing timely, relevant, reliable information to efficiently and effectively management the agency and provide full accountability to stakeholders.

That concludes my statement. I'll be happy to answer any questions.

WRITTEN STATEMENT OF LINDA CALBOM, DIRECTOR, DIVISION OF FINANCIAL
MANAGEMENT AND ASSURANCE, GENERAL ACCOUNTING OFFICE, WASHINGTON,
D.C. � SEE APPENDIX D

Chairman Hoekstra. Thank you very much. We appreciate your testimony. Do you have any questions you would like to ask at this time?

Mr. Hinojosa. Yes. Mr. Carter, I remember seeing your testimony and you seem to have a great deal of knowledge about the migrant education programs in my State of Texas.

What are your thoughts about the moneys that you refer to there at TEA under the migrant program, since you did so much of the work?

Mr. Carter. Well, first of all, the credit for the knowledge of the program goes to the audit staff that was working on that audit, and I will pass on your compliment to them.

Basically, what we found, Mr. Congressman, was that we had no way of knowing to what extent that those funds were used for the high priority immigrant children.

The State of Texas had not put out procedures and they had not followed up down at the LEA level, and one of the results is, no doubt, it was then reported up through the various LEAs to the state Board of Education.

Consequently, the state was unable to report to the Department of Education on how many of these students received special care or special programs.

Now, what this doesn't mean is that immigrant children did not receive the benefit of the funds. It's just that those that were specifically targeted, we don't know to what extent they received a benefit.

Mr. Hinojosa. Was any part of that under the Head Start program, Head Start migrant children?

Mr. Carter. I can't answer that, Mr. Congressman. We can certainly get back to you on that.

Mr. Hinojosa. I know that there are some Head Start programs that are run through TEA. The biggest part of Head Start programs is run under HHS funding, and we have subcontractors that bid on those. They are non-profit organizations and they are the ones who manage the Head Start program for the lion's share of the children who are served.

But I would be interested, because there is a proposal that we're going to be looking at during re-authorization of Head Start on whether to leave it under HHS or to transfer it to the Department of Education, and it would be helpful for me to know if any of these moneys were for the Head Start migrant children.

If I could get an answer to that, I would like to have it in writing.

Mr. Carter. We will provide that, Mr. Congressman.

Mr. Hinojosa. I have no questions of Ms. Calbom, but I was pleased to hear the idea of developing and having by this coming year the enterprise architecture that would make sure that we have the steps to be able to have the controls, the business controls, and that there would be ongoing monitoring so that we could, I guess, avoid the same things that occurred in the past that are being
corrected now.

I was very pleased about you calling those improvements milestones made in these first two years of Secretary Rod Paige's tenure and hope that that will be a continuing story throughout his service as the Secretary of Education.

So, again, thank you for your report.

Mr. Porter [presiding]. Any additional questions?

Being the vice chairman and being a new member, I have a whole list of questions. So I will start over again at the beginning. Not really. I appreciate your testimony, but I do have a question, Mr. Carter.

You did touch upon, of course, the areas of waste, fraud, and abuse. What areas are the most susceptible, in your broad overview, and what more can we be doing to help?

Mr. Carter. Well, just looking at the size of programs, you would have to look at the federal student aid programs as being an area where certainly the dollars at risk would be greatest.

You, also, there, have a program there that, with the loan programs, for example, you're dealing with people who don't have a credit history, that often don't have jobs, and so on. So there is risk there.

There are very complicated programs. There are two loan programs covering millions of students over payment periods extending out many, many years.

There is also a lot of trust build into those programs. I just filled out a financial aid form myself and as I was going through it, it's just incredible how easy it would be, without an IRS match type program, to lie and basically steal from the program.

On the non-post-secondary education programs, the state and local, excuse me, the elementary and secondary programs, we do not get into a lot of compliance type of work there. We are starting to develop some concerns about the quality of the data that's being reported on those programs, because there are going to be decisions made on funding and when you have the money
going one place or another based on performance, I think you do have to be concerned about the controls over how that data is being produced and used.

Mr. Porter. Thank you. Any additional questions? I would say the biggest challenge, and I know Mr. Hansen isn't here, but the biggest challenge is to do this again.

This is a great, great thing, I think, for the country, but we appreciate the testimony today and thank you all for being here.

I'd like to ask if there's anyone in the audience who has anything they would like to add today.

Hearing none, we will adjourn the meeting. Thank you all for being here.

[Whereupon, at 3:00 p.m., the subcommittee was adjourned.]

APPENDIX A -- WRITTEN OPENING STATEMENT OF CHAIRMAN PETE
HOEKSTRA, SUBCOMMITTEE ON SELECT EDUCATION, COMMITTEE
ON EDUCATION AND THE WORKFORCE, U.S. HOUSE OF
REPRESENTATIVES, WASHINGTON, D.C.

APPENDIX B -- WRITTEN STATEMENT OF WILLIAM D. HANSEN,
DEPUTY SECRETARY, U.S. DEPARTMENT OF EDUCATION,
WASHINGTON, D.C.

APPENDIX C -- WRITTEN STATEMENT OF THOMAS A. CARTER,
DEPUTY INSPECTOR GENERAL, OFFICE OF INSPECTOR GENERAL,
U.S. DEPARTMENT OF EDUCATION, WASHINGTON, D.C.

APPENDIX D -- WRITTEN STATEMENT OF LINDA CALBOM, DIRECTOR,
DIVISION OF FINANCIAL MANAGEMENT AND ASSURANCE, GENERAL
ACCOUNTING OFFICE, WASHINGTON, D.C.

TABLE OF INDEXES

Chairman Hoekstra, 1, 5, 6, 9, 10, 12, 13, 14, 16, 18
Mr. Carter, 14, 19, 20
Mr. Hansen, 5, 6, 7, 9, 10, 11, 12, 13, 14
Mr. Hinojosa, 3, 10, 11, 12, 13, 18, 19
Mr. Porter, 13, 14, 20
Ms. Calbom, 16

xlvii