[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]


 
         EXAMINING GAO'S REVIEW OF SELECTED HEAD START GRANTEES 

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

                                HEARING

                               before the

                              COMMITTEE ON
                          EDUCATION AND LABOR

                     U.S. House of Representatives

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

              HEARING HELD IN WASHINGTON, DC, MAY 18, 2010

                               __________

                           Serial No. 111-62

                               __________

      Printed for the use of the Committee on Education and Labor


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                    COMMITTEE ON EDUCATION AND LABOR

                  GEORGE MILLER, California, Chairman

Dale E. Kildee, Michigan, Vice       John Kline, Minnesota,
    Chairman                           Senior Republican Member
Donald M. Payne, New Jersey          Thomas E. Petri, Wisconsin
Robert E. Andrews, New Jersey        Howard P. ``Buck'' McKeon, 
Robert C. ``Bobby'' Scott, Virginia      California
Lynn C. Woolsey, California          Peter Hoekstra, Michigan
Ruben Hinojosa, Texas                Michael N. Castle, Delaware
Carolyn McCarthy, New York           Mark E. Souder, Indiana
John F. Tierney, Massachusetts       Vernon J. Ehlers, Michigan
Dennis J. Kucinich, Ohio             Judy Biggert, Illinois
David Wu, Oregon                     Todd Russell Platts, Pennsylvania
Rush D. Holt, New Jersey             Joe Wilson, South Carolina
Susan A. Davis, California           Cathy McMorris Rodgers, Washington
Raul M. Grijalva, Arizona            Tom Price, Georgia
Timothy H. Bishop, New York          Rob Bishop, Utah
Joe Sestak, Pennsylvania             Brett Guthrie, Kentucky
David Loebsack, Iowa                 Bill Cassidy, Louisiana
Mazie Hirono, Hawaii                 Tom McClintock, California
Jason Altmire, Pennsylvania          Duncan Hunter, California
Phil Hare, Illinois                  David P. Roe, Tennessee
Yvette D. Clarke, New York           Glenn Thompson, Pennsylvania
Joe Courtney, Connecticut
Carol Shea-Porter, New Hampshire
Marcia L. Fudge, Ohio
Jared Polis, Colorado
Paul Tonko, New York
Pedro R. Pierluisi, Puerto Rico
Gregorio Kilili Camacho Sablan,
    Northern Mariana Islands
Dina Titus, Nevada
Judy Chu, California

                     Mark Zuckerman, Staff Director
                 Barrett Karr, Minority Staff Director



















                            C O N T E N T S

                              ----------                              
                                                                   Page

Hearing held on May 18, 2010.....................................     1

Statement of Members:
    Biggert, Hon. Judy, a Representative in Congress from the 
      State of Illinois..........................................     3
        Prepared statement of....................................     4
    Miller, Hon. George, Chairman, Committee on Education and 
      Labor......................................................     1
        Prepared statement of....................................     3
        Additional submissions:
            Letter to Head Start grantee, dated May 17, 2010, 
              from Hon. Kathleen Sebelius, Secretary, U.S. 
              Department of Health and Human Services............    43
            Letter dated May 10, 2010, to Daniel R. Levinson, 
              Inspector General, U.S. Department of Health and 
              Human Services, from Hon. John Kline, Senior 
              Republican Member, Committee on Education and Labor    45
            Letter to Secretary Sebelius, dated May 3, 2010......    46
            Letter from Timothy J. Menke, Deputy Inspector 
              General, U.S. Department of Health and Human 
              Services, to Messrs. Miller and Kline..............    47

Statement of Witnesses:
    Kutz, Gregory D., Managing Director, GAO Forensic Audits and 
      Special Investigations.....................................     6
        Prepared statement of....................................     8
    Nazario, Carmen R., Assistant Secretary for Children and 
      Families, U.S. Department of Health and Human Services.....    23
        Prepared statement of....................................    25


                       EXAMINING GAO'S REVIEW OF
                      SELECTED HEAD START GRANTEES

                              ----------                              


                         Tuesday, May 18, 2010

                     U.S. House of Representatives

                    Committee on Education and Labor

                             Washington, DC

                              ----------                              

    The committee met, pursuant to call, at 1:40 p.m., in room 
2175, Rayburn House Office Building, Hon. George Miller 
[chairman of the committee] presiding.
    Present: Representatives Miller, Kildee, Payne, Scott, 
Tierney, Davis, Courtney, Shea-Porter, Biggert, and Guthrie.
    Staff Present: Andra Belknap, Press Assistant; Jody 
Calemine, General Counsel; Patrick Findlay, Investigative 
Counsel; Denise Forte, Director of Education Policy; Ruth 
Friedman, Deputy Director of Education Policy; Jose Garza, 
Deputy General Counsel; David Hartzler, Systems Administrator; 
Ryan Holden, Senior Investigator; Broderick Johnson, Staff 
Assistant; Mike Kruger, Online Outreach Specialist; Bryce 
McKibben, Staff Assistant, Education; Alex Nock, Deputy Staff 
Director; Lillian Pace, Policy Advisor, Subcommittee on Early 
Childhood, Elementary and Secondary Education; Meredith Regine, 
Junior Legislative Associate, Labor; Alexandria Ruiz, 
Administrative Assistant to Director of Education Policy; 
Melissa Salmanowitz, Press Secretary; Michael Zola, Chief 
Investigative Counsel; Mark Zuckerman, Staff Director; Kirk 
Boyle, Minority General Counsel; Allison Dembeck, Minority 
Professional Staff Member; Angela Jones, Minority Executive 
Assistant; Susan Ross, Minority Director of Education and Human 
Services Policy; Mandy Schaumburg, Minority Education Policy 
Counsel; and Linda Stevens, Minority Chief Clerk/Assistant to 
the General Counsel.
    Chairman Miller. A quorum being present the committee will 
come to order, and I want to welcome all of the members of the 
committee who are participating today and thank our witnesses 
for their agreement to appear before the committee.
    We are here today to learn about what appears to be serious 
fraudulent behavior uncovered by the Government Accountability 
Office during its investigation into the enrollment and 
eligibility process at some Head Start programs. We will also 
hear about what actions the Department of Health and Human 
Services is taking to strengthen its oversight and 
accountability of the Head Start programs.
    I am very disappointed that there are Head Start programs 
and employees at the center of these allegations of fraud. Upon 
learning of this investigation, I immediately wrote a letter to 
the Secretary of Health and Human Services, Secretary Kathleen 
Sebelius, urging her to take swift action to review the claims 
of fraudulent activities among some Head Start employees. 
Secretary Sebelius and I agree that we have an obligation to 
ensure Head Start is held to the highest standards, which 
starts with people who enroll the children in the program. One 
in five children under the age of 5 live in poverty in America, 
and less than 50 percent of the children who are eligible for 
Head Start are able to attend this critical program. So it is 
vital that Head Start enrollment procedures are followed and 
that taxpayer dollars are used as intended.
    Unfortunately, the GAO has found that some Head Start 
employees are betraying the integrity of the program. The 
behavior on the part of some Head Start employees that we are 
going to hear about today is reprehensible and completely 
unacceptable, and I want to thank the GAO for bringing it to 
our attention.
    I believe the Head Start community will likewise be 
outraged at this behavior, because the majority of the 
employees that work in Head Start represent the program with 
integrity and with a deep commitment to help the future of this 
country. We know if you invest in children before they enter 
the kindergarten classroom, they will have a much better chance 
of success in elementary school and throughout their lives.
    Head Start receives bipartisan support for billions in 
Federal financial assistance. It is imperative that these 
programs be transparent, ethical, accountable, and maintain the 
confidence of the taxpayers. We intend to continue our 
oversight of this program to ensure prompt and effective 
enforcement by the Department and put a stop to the fraudulent 
conduct.
    Head Start works for our children, and we are here today to 
help make sure that it will continue to do so.
    I want to thank our witnesses and look forward to hearing 
about what can be and will be done to fix this problem. And I 
want to again thank them for being here today.
    I want to say as an aside that when we had allegations of 
fraud, maybe embezzlement of funds back was in--was it 2004--in 
2003, this committee responded under the leadership of 
Congressman, then-chairman, John Boehner, and we responded in a 
bipartisan fashion to deal with those issues of program 
integrity. And I want to thank Congressman Kline and the 
Republican staff and others for helping us to work on this 
problem when we were alerted to it. And we have been talking 
back and forth, and this hearing is proceeding along lines with 
suggestions and recommendations by Congressman Kline and the 
staff.
    This program has had, as I have noted, tremendous 
bipartisan support both in administrations and throughout the 
Congress. And it is important that we do what we have to do to 
maintain the integrity of this. But I want to thank the staffs 
on both sides of the aisle and Congressman Kline for his 
response to this problem when he and I became aware of it.
    [The statement of Mr. Miller follows:]

   Prepared Statement of Hon. George Miller, Chairman, Committee on 
                          Education and Labor

    Good afternoon.
    We're here today to learn about what appears to be serious, 
fraudulent behavior uncovered by the Government Accountability Office 
during its investigation into the enrollment and eligibility process at 
some Head Start programs.
    We will also hear what actions the Department of Health and Human 
Services is taking to strengthen its oversight and accountability of 
Head Start programs.
    I am very disappointed that there are Head Start programs and 
employees at the center of these allegations of fraud.
    Upon learning of this investigation, I immediately wrote a letter 
to Secretary of Health and Human Services Kathleen Sebelius urging her 
to take swift action to review the claims of fraudulent activities 
among some Head Start employees.
    Secretary Sebelius and I both agree that we have an obligation to 
ensure Head Start is held to the highest standard, which starts with 
the people who enroll children in the program.
    One in five children under the age of five live in poverty in 
America, and less than 50 percent of the children who are eligible for 
Head Start are able to attend this critical program.
    So it is vital that Head Start enrollment procedures are followed 
and that taxpayer dollars are used as intended.
    Unfortunately, GAO has found that some Head Start employees are 
betraying the integrity of the program.
    The behavior on the part of some Head Start employees that we are 
going to hear about today is reprehensible and completely unacceptable. 
I want to thank the GAO for bringing it to our attention.
    I believe the Head Start community will likewise be outraged by 
this behavior because the majority of employees that work at Head Start 
represent the program with integrity and with a deep commitment to help 
the future of this country.
    We know that if you invest in children before they enter the 
kindergarten classroom, they will have a much higher chance at success 
in elementary school and through their lives.
    Head Start receives bipartisan support for billions in federal 
financial assistance. It is imperative that the program be transparent, 
ethical, accountable and maintain the confidence of taxpayers.
    We intend to continue our oversight of this program to ensure 
prompt, effective enforcement by the Department puts a stop to this 
fraudulent conduct.
    Head Start works for our kids and we are here today to help make 
sure that it will continue to do so.
    I want to thank our witnesses and look forward to hearing about 
what can and will be done to fix this problem.
    Thank you for being here today.
                                 ______
                                 
    Chairman Miller. With that, I want to recognize 
Congresswoman Judy Biggert, the senior Republican today.
    Mrs. Biggert. Thank you, Chairman Miller, and thank you to 
the witnesses who are here this afternoon to discuss this 
extremely important and extremely troubling topic. As the name 
indicates, the Head Start program is designed to give our 
neediest children a head start before enrolling in school, 
because children who lag behind when they start school tend to 
remain behind. Head Start is supposed to help close the 
readiness gap between low-income children and their more 
affluent peers.
    After my clerking for a judge at the U.S. court of appeals 
and before starting another job, I volunteered for a summer at 
the Head Start program in Chicago, at Hull House, the very 
first year that this program was offered. So I saw firsthand 
the value of early intervention in the lives of those that are 
in need and underprivileged children.
    So that is why I was so disturbed to hear about the recent 
findings of the Government Accountability. At that time, I was 
rushing home every evening to turn on Sesame Street so I could 
learn a little more Spanish before I went back the next day to 
be with these wonderful children.
    But today we will hear about deliberate efforts to 
circumvent the program's income limitations, including 
compelling evidence of Head Start centers disregarding proof of 
income in order to pad their enrollment, absorb funding for 
children who are never served, and continue collecting a larger 
share of Head Start resources than they were due.
    And this is not a victimless crime. Every dollar that goes 
to higher-income children or to centers not serving as many 
children as they claim is a dollar that cannot be used for the 
low-income children this program is meant to serve.
    The GAO sampled but a few of the roughly 1,600 Head Start 
grantees across the Nation. Based on these preliminary 
findings, it is clear that further review is necessary. Indeed 
it is my understanding that investigations by GAO and other 
authorities are ongoing. For that reason, I believe that this 
is important to go on record to express reservations about the 
potential consequences of a public hearing.
    The cases we will review this afternoon are part of an 
undercover investigation, and in such case, it is important 
that neither the identity of those who are targeted in the 
investigation nor the identities of undercover agents posing as 
prospective enrollees be compromised. We have received 
assurances from Chairman Miller that steps are being taken 
today to conceal individual identities and localities. And with 
those assurances, we are able to move forward today.
    I think that we can all agree that additional congressional 
oversight, including future hearings, will be in order once 
these investigations are complete and the full results of GAO's 
work can be revealed. It is vital for Congress to expose and 
root out any of this type of waste, fraud and abuse, but I do 
not believe that any of us wishes to jeopardize an ongoing or 
potentially criminal investigation.
    In fact, I and many others were so troubled by these 
preliminary findings that we believe the investigations into 
these specific incidents and the investigative authorities 
ought to be broadened. Upon being informed of the GAO's 
preliminary findings, Congressman John Kline, this committee's 
senior Republican member, wrote to the Department of Health and 
Human Services Inspector General to request a comprehensive 
investigation into the vulnerability of Head Start's 
verification processes to fraud and abuse. And I echo his 
concerns. The GAO has brought to light a disturbing pattern of 
abuse in a program designed to serve our most vulnerable 
children. And I expect the GAO will continue its important work 
in this area. And I am pleased its investigation will be 
bolstered by many more comprehensive reviews by the agency's 
independent watchdog. And I will insert the balance into the 
record.
    Chairman Miller. Thank you very much.
    [The statement of Mrs. Biggert follows:]

 Prepared Statement of Hon. Judy Biggert, a Representative in Congress 
                       From the State of Illinois

    Thank you Chairman Miller, and thank you to the witnesses who are 
here this afternoon to discuss this extremely important--and extremely 
troubling--topic.
    As the name indicates, the Head Start program is designed to give 
our neediest children a ``head start'' before enrolling in school. 
Because children who lag behind when they start school tend to remain 
behind, Head Start is supposed to help close the ``readiness gap'' 
between low-income children and their more affluent peers.
    After leaving law school, I volunteered at the Head Start program 
in the Chicago Hull House--the very first year that the program was 
offered. I saw first-hand the value of early intervention in the lives 
of these underprivileged children. That's why I was so disturbed to 
hear the recent findings of the Government Accountability Office.
    We will hear today about deliberate efforts to circumvent the 
program's income limitations, including compelling evidence of Head 
Start centers discarding proof of income in order to pad their 
enrollment, absorb funding for children who were never served, and 
continue collecting a larger share of Head Start resources than they 
were due.
    This is not a victimless crime. Every dollar that goes to higher-
income children--or to centers not serving as many children as they 
claim--is a dollar that cannot be used for the low-income children this 
program is meant to serve.
    The GAO investigation sampled but a few of the roughly 1,600 Head 
Start grantees across the nation. Based on these preliminary findings, 
it is clear that further review is necessary. Indeed, it is my 
understanding that investigations by GAO and other authorities are 
ongoing. For that reason, I believe that it is important to go on 
record to express reservations about the potential consequences of a 
public hearing.
    The cases we'll review this afternoon are part of an undercover 
investigation. In such cases, it is important that neither the 
identities of those who are targeted in the investigation--nor the 
identities of the undercover agents posing as prospective enrollees--be 
compromised. We have received assurances from Chairman Miller that 
steps are being taken today to conceal individual identities and 
localities--and with those assurances, we are able to move forward 
today.
    However, I think that we can all agree that additional 
congressional oversight--including future hearings--will be in order 
once these investigations are complete and the full results of GAO's 
work can be revealed. It is vital for Congress to expose and root out 
this type of waste, fraud, and abuse, but I do not believe that any of 
us wishes to jeopardize an ongoing and potentially criminal 
investigation.
    In fact, I and many others were so troubled by these preliminary 
findings that we believe the investigation into these specific 
incidents--and the investigating authorities--ought to be broadened. 
Upon being informed of the GAO's preliminary findings, Congressman John 
Kline--this committee's Senior Republican Member--wrote to the 
Department of Health and Human Services' Inspector General to request a 
comprehensive investigation into the vulnerability of Head Start's 
verification processes to fraud and abuse.
    I echo his concerns. The GAO has brought to light a disturbing 
pattern of abuse in a program designed to serve our most vulnerable 
children. I expect the GAO will continue its important work in this 
area, and I'm pleased its investigation will be bolstered by a more 
comprehensive review by the agency's independent watchdog. I also 
appreciate the steps announced yesterday by HHS Secretary Kathleen 
Sebelius to intensify program oversight.
    The IG was quick to respond to Ranking Member Kline's request for a 
broader investigation, recognizing the severity of this issue and 
agreeing to expand the investigation to determine whether there are 
systemic vulnerabilities that victimize both the taxpayers and the low-
income children and families Head Start is intended to serve.
    As lawmakers, we need to have confidence that the programs we 
authorize and the dollars we appropriate are serving their intended 
purpose. Today's hearing is an important first step to determine 
whether the public trust has been broken and whether it can be restored 
to ensure that Head Start fulfills its mission of serving low-income 
children and families. Thank you, and I yield back.
                                 ______
                                 
    Chairman Miller. I would like now to introduce our panel of 
witnesses for this hearing. Gregory Kutz is the managing 
director of the GAO's Forensic Audits and Special 
Investigations Unit. Mr. Kutz joined GAO in 1991 after 8 years 
at KPMG Peat Marwick. He previously served as a senior 
executive in GAO where he testified over 80 times at 
congressional hearings on matters related to fraud, waste and 
abuse and other special investigations. Mr. Kutz graduated from 
the Pennsylvania State University in 1983. He is a certified 
public accountant and certified fraud examiner.
    Carmen Nazario is the assistant secretary for the 
Administration of Children and Families within the Department 
of Health and Human Services. During the Clinton 
administration, she first served as associate commissioner of 
child care in the Administration for Children, Youth and 
Families. Ms. Nazario has held a number of leadership roles, 
including vice president of the board of directors of the 
American Public Welfare Association, president of the National 
Council of Local Public Welfare Administrators, secretary to 
the National Council of Human Service Administrators. Ms. 
Nazario graduated from the University of Puerto Rico in 1967 
and was awarded her master's in social work degree from the 
Virginia Commonwealth University School of Social Work in 1993.
    Welcome, and thank you for your willingness to be here 
today. And as you know the lighting system, Mr. Kutz, Ms. 
Nazario, we will put on a green light and a yellow light. This 
is a little unusual, your testimony, other parts, so take the 
time that you deem necessary to fully explain the case to us 
and we will make, likewise, time available to you, Ms. Nazario, 
so you can testify in the manner you are most comfortable. 
Thank you again. Mr. Kutz.

 STATEMENT OF GREGORY D. KUTZ, MANAGING DIRECTOR, GAO FORENSIC 
               AUDITS AND SPECIAL INVESTIGATIONS

    Mr. Kutz. Mr. Chairman and members of the committee, thank 
you for the opportunity to discuss the Head Start program. 
Today's testimony highlights the results of our investigation 
into allegations of fraud and abuse. My testimony has two 
parts. First, I will discuss the results of our investigation; 
and second, I will discuss the consequence of fraud and abuse 
in this program.
    First, we are investigating allegations of fraud and abuse 
that we received on our hotline related to two nonprofit grant 
recipients. Specifically, 11 informants provided us with 
numerous allegations of fraud and abuse. It is important to 
note that enrollment of children from families with incomes 
over 130 percent of the poverty level is generally limited to 
10 percent. Thus, with some exceptions, 90 percent of families 
must be under this income level, which, in 2009, was about 
$24,000 for a family of three.
    A key allegation is that grant recipients are manipulating 
records to enroll over-income children into under-income slots. 
This is being done to fill open slots that were intended for 
children from families with incomes below the 130 percent 
level.
    Key findings to date for these two cases include at one 
grantee, staff encouraging parents to apply as homeless, which 
results in automatic enrollment; 353 of 1,587 children at this 
grantee are enrolled as homeless, or 22 percent of all 
children. For the other grantee, 63 children were moved between 
centers so that they could be double-counted. The incentive for 
management here was to boost enrollment so that they would not 
lose any of their $13 million of Head Start grants.
    Based on these two allegations, we decided to perform 
undercover testing across the country to look into this issue. 
The primary scenario that we used was to provide evidence to 
centers showing that our bogus children and families were over 
the 130 percent of poverty level. We refer to these as our 
over-income tests.
    Using bogus children and fabricated documents, our 
undercover testing was done in centers in California, Texas, 
Wisconsin, Pennsylvania, New Jersey, Maryland, and Washington, 
D.C. Seven centers in four of these States and D.C. 
fraudulently enrolled our over-income children into under-
income slots.
    We also successfully enrolled children using bogus 
documents showing that we were under-income. These tests 
clearly show that the Head Start program is vulnerable not only 
to grantee fraud but also to beneficiary fraud.
    Here are two examples of what we found. First, as you can 
see on the two monitors, on the top, you see the W-2 we 
provided for our fictitious parent, Vinnie. Notice on the 
bottom that, rather than record the $23,000 of wages, Vinnie 
was recorded in center records as being unemployed. Exclusion 
of this $23,000 of income made Vinnie and his family under-
income.
    In the next case, the monitors show on the top left $23,000 
of wages for our fictitious grandfather, Gary. On the top right 
you see the $9,500 of wages for Grandma. Once again, the 
$23,000 of wages for Gary were excluded from center records. As 
you see on the bottom, the only income recorded in center 
records was the $9,500 of wages for Grandma. In this case the 
Head Start employee who perpetrated this fraud agreed with our 
undercover agent that, and I quote, ``Grandma wins,'' end of 
quote.
    At the end of my presentation, as was mentioned, we will 
play audio excerpts showing Head Start employees facilitating 
the fraudulent enrollment of bogus over-income children into 
under-income slots.
    Moving on to my second point, 450 of the 550 Head Start 
centers that we contacted had waiting lists. The parents we 
spoke to on these wait lists, assuming they were truthful, were 
generally under income. Some were unemployed, while others were 
making $200 to $300 a week.
    My concern is that over-income families, fraudulently 
enrolled, are being served while the poorest children in our 
country are on wait lists. Without Head Start, the parents on 
these wait lists told us that they cannot work. They fear that 
their children will enter kindergarten substantially behind 
their peers. This, Mr. Chairman, is the answer to our ``so 
what'' question today.
    In conclusion, the victims of fraud and abuse in the Head 
Start program are not only taxpayers but, more importantly, 
children from the very poorest families in our country.
    I fear that enrollment fraud is not the only fraud in the 
Head Start program.
    Mr. Chairman I look forward to working with you and this 
committee and HHS to prevent future fraud in the Head Start 
program.
    I will now play audio excepts from several of the 
undercover visits to Head Start centers. You will see the 
transcription of the conversations on the monitor as you watch.
    [Video shown.]
    Mr. Chairman, that ends my statement and I look forward to 
your questions.
    Chairman Miller. Thank you.
    [The statement of Mr. Kutz follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
        
                                ------                                

    Chairman Miller. Secretary Nazario.

     STATEMENT OF CARMEN R. NAZARIO, ASSISTANT SECRETARY, 
 ADMINISTRATION FOR CHILDREN AND FAMILIES, U.S. DEPARTMENT OF 
                   HEALTH AND HUMAN SERVICES

    Ms. Nazario. Chairman Miller, members of the committee, I 
am pleased to have this opportunity to appear before you today 
to discuss GAO's review of selected Head Start grantees. I 
appreciate this committee's longstanding support for the Head 
Start program. I know that you, like me, are deeply disturbed 
by GAO's report. According to GAO, employees in approximately 
eight Head Start programs appear to have determined children 
eligible for services, despite evidence that their income 
exceeded the eligibility limits. The Head Start program is 
designed to move our Nation's low-income children along the 
road of school success.
    Diverting funds to children who are less needy is quite 
literally stealing away that opportunity from children who need 
it most. I want to assure the committee that we take these 
allegations very seriously.
    As soon as we were given the names of the grantees, we 
referred the cases to the inspector general. The OIG has 
directed ACF to refrain from taking action against these 
grantees while they the investigation is pending.
    I want to assure this committee that we are partnering with 
both GAO and the OIG.
    In the meantime, we have taken immediate actions to bolster 
our program integrity efforts. Yesterday the Secretary sent a 
letter to every Head Start grantee to underscore the serious 
nature of these allegations and notify them that the Department 
is intensifying its oversight and enforcement actions.
    On May 10, the Office of Head Start issued a program 
instruction designed to remind grantees of their obligation to 
verify income and encourage them to retain copies of 
verification documents for review and provide annual training 
to all employees responsible for income verification.
    In addition, we will take a number of actions in the coming 
weeks to strengthen Federal oversight, including conducting 
unannounced monitoring visits; creating a Web-based hotline 
that will allow those with information of impropriety to report 
directly to me; developing new regulations that promote program 
integrity; increasing oversight, particularly of grantees with 
identified risk factors; issuing proposed regulations to 
implement a new system for recompeting grants to improve 
quality and ensure integrity; implementing an important reform 
enacted in the Head Start reauthorization; and continuing our 
partnership with the inspector general to conduct in-depth 
reviews of high-risk grantees.
    At the same time, we are in the process of conducting a 
top-to-bottom review of our program monitoring, erroneous 
payment study, and risk management process to determine how we 
can improve program oversight.
    While we have significant oversight and data collection 
mechanisms already in place, they can be strengthened to fight 
fraud and promote program integrity more effectively.
    These efforts represent one aspect of our overall Head 
Start roadmap to excellence and effectiveness. This road map is 
designed to raise the bar on quality in the Head Start program. 
Additional elements of the road map include strengthening the 
Head Start performance standards and improving our training and 
technical assistance systems.
    The Department's commitment to strengthening program 
integrity is not limited to reacting to fraud allegations in a 
particular program, but it is a broad-based priority for 
preventing, detecting and prosecuting, as appropriate, fraud in 
all our programs.
    Last week, the Secretary announced the formation of the 
Secretary's Council on Program Integrity to look systematically 
across all parts of HHS to determine how we can strengthen our 
fraud and error-fighting efforts.
    I share the Secretary's commitment. A core part of ACF's 
strategic mission has been promoting a culture of integrity 
from the highest levels at ACF to the local level where 
children and families are served. I am establishing an ACF 
Office of Program Integrity chartered to strengthen internal 
procedures and improve grantee financial management and fiscal 
integrity in all ACF-funded programs.
    Each year, Head Start programs provide almost 1 million of 
our country's most vulnerable children with a much-needed 
chance at success. ACF is committed to ensuring that all 
program resources are used appropriately and that every slot is 
filled with an eligible child in need.
    We are eager to work with the GAO, Congress, and our 
grantees to ensure that we capitalize on every possible 
opportunity to strengthen Head Start and to help eligible, low-
income children prepare for success in school and in life. I am 
confident that we can achieve these goals together.
    Thank you. I would be happy to answer any questions.
    Chairman Miller. Thank you very much.
    [The statement of Ms. Nazario follows:]

   Prepared Statement of Carmen R. Nazario, Assistant Secretary for 
  Children and Families, U.S. Department of Health and Human Services

    Chairman Miller, Ranking Member Kline, and members of the 
Committee, I am pleased to have this opportunity to appear before you 
today to discuss the Government Accountability Office's (GAO) review of 
selected Head Start grantees.
    Just over 45 years ago, in the Rose Garden of the White House, 
Project Head Start was announced--a program dedicated to fighting the 
war on poverty so that millions of children could get a ``head start'' 
on their future by receiving the education, health, and social services 
they need to be prepared fully to enter Kindergarten ready to learn. 
Over the last four decades, over 26 million children and their families 
have participated in the Head Start program. This program is vital to 
the Administration's strategic focus on early learning and I share 
Secretary Sebelius' sentiments that ``* * * for Head Start to achieve 
its full potential, we must improve its quality and promote high 
standards. * * *''
    I appreciate this Committee's long-standing strong support for the 
Head Start program and know that you, like me, are deeply disturbed by 
GAO's report that employees in approximately eight Head Start programs 
appear to have determined children eligible for Head Start despite 
being given evidence that their income exceeded the eligibility limits. 
The Head Start program is designed to move our nation's low-income 
children along the road of school success. Diverting funds to children 
who are less needy is, quite literally, stealing away that opportunity 
from children who need it most. I want to assure the Committee that we 
take these allegations very seriously. The matter was immediately 
referred to the Department's Inspector General. More broadly, we are 
taking steps to root out fraud and errors program-wide and ensure that 
every Head Start slot is used to serve an eligible child. I now will 
discuss our response to the GAO investigation, our broader efforts to 
bolster program integrity in Head Start, and Secretary Sebelius' 
Department-wide program integrity initiative.
Response to GAO's Investigation Findings
    While I have only seen GAO's statement for today's hearing, I 
understand that during its investigation undercover investigators posed 
as parents or grandparents with preschool age children in 15 different 
situations and allegedly uncovered approximately eight instances in 
which a Head Start employee made a determination that a child was 
eligible for services despite evidence that the family's income 
exceeded the eligibility limit.
    As soon as the Department was given the names of the grantees that 
GAO alleges to have engaged in fraudulent eligibility practices, we 
referred the cases to the HHS Inspector General, the Department's 
investigative arm. The OIG has directed the Administration for Children 
and Families (ACF) to refrain from taking investigatory or disciplinary 
actions against any individuals or organizations implicated in the GAO 
study while the investigation is pending. The OIG--a law enforcement 
body--does not want our actions to interfere with their efforts. We 
must respect their judgment and support law enforcement in making sure 
they have the ability to determine whether there are potentially 
criminal acts warranting prosecution. To this end, we are fully 
cooperating with both GAO and the OIG while continuing to pursue broad 
program integrity enhancements to reduce any potential risks of fraud 
or abuse within Head Start.
    We will await completion of the OIG and GAO investigations before 
taking specific steps in these cases. Depending on the evidence and the 
findings by either the OIG or the Office of Head Start (OHS), a grantee 
may face a summary suspension leading to termination. If the OIG 
uncovers possible fraud or program violations, but does not develop 
sufficient evidence to support suspension or termination, then the 
Department will immediately conduct in-depth reviews of these grantees 
to gather additional data in the areas of enrollment, recruitment, 
selection, eligibility and attendance (ERSEA). If this additional 
evidence does not support suspension and termination (for example, if 
there are isolated instances of individual workers acting fraudulently 
rather than a systemic breakdown), we can require immediate corrective 
actions, including requiring grantees to pay back funds that were 
misspent.
Bolstering Broader Head Start Program Integrity Efforts
    Since learning of the GAO review, we have taken immediate actions 
to bolster our broader program integrity efforts. Yesterday, the 
Secretary sent a letter to every Head Start grantee in the country to 
underscore the serious nature of these allegations and notify them that 
the Department is intensifying its oversight and enforcement actions.
    On May 10, the Office of Head Start issued a Program Instruction 
(PI), entitled ``Income Eligibility for Enrollment in Head Start and 
Early Head Start Programs,'' designed to remind grantees of their 
obligation to verify income and other factors of eligibility. The PI 
reinforces the requirements related to income verification and the 
consequences should an employee knowingly sign a verification form that 
contains false information. The PI also encourages grantees to use the 
Head Start Eligibility Verification Form, to retain copies of 
verification documents for review, and to provide annual training to 
all employees responsible for income verification. To highlight the 
importance of this PI, the Director of the Office of Head Start will 
hold a web cast with all Head Start grantees.
    We are in the process of conducting a top-to-bottom review of our 
program monitoring, Erroneous Payment Study, and risk management 
process to determine how we can improve program oversight and modify 
regulatory requirements to assure compliance with the Head Start Act. 
While this review is ongoing, we will take a number of actions in the 
coming weeks and months to strengthen federal oversight of Head Start 
programs. These actions will include:
     Conducting unannounced monitoring visits to Head Start 
grantees. In the past, we have typically provided grantees with notice 
before coming to conduct monitoring or other onsite visits. We will 
increase our use of unannounced visits to ensure that we are able to 
review how Head Start programs operate on a daily basis.
     Creating and publicizing a web-based ``hotline'' that will 
allow those with information of impropriety of any kind to report it 
directly to me. We know that fraud is often detected and reported by 
scrupulous employees who stand up and do the right thing and, thus, we 
will ensure that all Head Start employees are informed about this 
hotline.
     Developing new regulations that promote program integrity. 
We are developing new regulations that will address verification 
requirements and staff training on eligibility criteria and procedures.
     Increasing oversight, particularly of grantees with 
identified risk factors. Each year, ACF conducts an assessment with 
grantees to identify programs at risk for program violations or 
management problems. ACF, in partnership with the grantees, develops 
and implements action plans to mitigate the risk factors. Our staff 
will be scrutinizing programs more carefully in the risk assessment 
process and the action plan phase.
     Recompeting grants when questions arise about whether 
grantees are offering high-quality services or have management lapses. 
We soon will issue proposed regulations that articulate which grantees 
will be required to compete for continued Head Start funding--
implementing an important reform enacted by Congress in the Head Start 
for School Readiness Act of 2007. The goal of the regulations is to 
promote program integrity and strengthen the quality of services that 
Head Start provides.
    The improvements to the monitoring system, risk assessment system, 
and the role of recompetition are discussed in more detail below.
Partnership with the Office of Inspector General
    Before this GAO investigation was made public, we already were 
working with the OIG to combat fraud in Head Start. Since 2007, OHS and 
the OIG Office of Audit Services (OIG-OAS) have had an ongoing 
partnership. In 2007, the OIG-OAS conducted an in-depth review of one 
grantee and notified OHS that the grantee was not in compliance with 
Federal Health and Safety regulations and Financial Management 
requirements. Based on the information, OHS stopped funding this 
grantee.
    This success led to a more robust partnership with the OIG. In 
2009, OIG-OAS and OHS partnered to conduct 24 Health and Safety Reviews 
and an additional 24 Capability Audits of existing grantees that were 
deemed high risk by OHS. The OIG audits led to one relinquishment, 
increased oversight of three high risk grantees that entailed 
restrictions on use of funds, and initiation of termination proceedings 
against two grantees.
    In 2010, this partnership shifted to focus on funding from the 
American Recovery and Reinvestment Act. OHS and OIG-OAS partnered to 
review pre-award Early Head Start applicants to ensure that funds were 
only provided to viable organizations. Applicants who did not 
demonstrate the capacity to properly account for and manage Federal 
funds were not awarded ARRA grants.
    In 2011, OHS again will identify high risk grantees using program 
monitoring and risk management data and refer them to the OIG for in-
depth audits.
Tools for Improving Program Integrity
    While we have significant monitoring operations already in place 
that include triennial onsite reviews of every grantee, more frequent 
onsite monitoring of programs where problems have been identified, and 
significant data collection, we can do better. We look to GAO's review 
to help inform our efforts to improve Head Start program integrity.
    The following are oversight mechanisms in place or called for in 
the statute that can be strengthened to fight fraud and promote program 
integrity more effectively: the monitoring system, Risk Management 
Process, the Erroneous Payment Study, the Redesignation Renewal System, 
Performance Standards, and Training and Technical Assistance.
Monitoring System
    The Head Start monitoring system is the most comprehensive tool 
currently available for ensuring accountability of Head Start grantees. 
All grantees receive an on-site review at least once every three years. 
New grantees are reviewed immediately after completion of their first 
year of providing services. Follow-up reviews are conducted for 
grantees that fail to meet any requirements identified during a review. 
Additionally, reviews may be initiated whenever an issue is identified 
that requires immediate attention.
    On February 28, 2005 the GAO issued a report entitled, ``Head 
Start: Comprehensive Approach to Identifying and Addressing Risks Could 
Help Prevent Grantee Financial Management Weaknesses'' (GAO-05-176). 
Based on recommendations from this report, we took steps to strengthen 
the monitoring system in FY 2006 by centralizing the elements of 
quality control and setting a uniform set of standards and verification 
for validating the expertise and capacity of each reviewer.
    The review teams include experts in fiscal, early childhood 
education, program management, health and nutrition services, mental 
health, social services, and health and safety. The expertise of all 
team members is verified using reference checks, degree checks, 
comprehensive screenings, and interviews. Reviewer performance in the 
field is monitored through a standardized assessment tool, as well as 
by analyzing the quality of the evidence collected.
    When a review team finds areas in which Head Start programs are not 
in compliance, in all cases the grantee must demonstrate timely 
corrective actions. More severe instances of noncompliance--called 
``immediate deficiencies''--must be corrected in 30 days or less while 
less serious problems--called ``noncompliances''--generally must be 
corrected within 120 days. Regional Office staff as well as Training 
and Technical Assistance providers support the grantee in their efforts 
to correct the findings. When a deficiency is identified that requires 
immediate corrective action, OHS works to ensure that the grantee takes 
immediate corrective action to ensure that: 1) staff and/or children 
are removed from imminent harm or immediate danger; or 2) threats to 
integrity of Federal funds are removed.
    Follow-up reviews are conducted for all grantees that have one or 
more areas of noncompliance or a deficiency. An area of noncompliance 
that remains uncorrected within the timeframe specified will become 
categorized as a deficiency. Deficiencies that remain uncorrected will 
result in termination of the grant.
    While the monitoring reviews are in-depth and expose areas of 
noncompliance as well as more serious deficiencies, we think the 
process can be strengthened. This summer, we will begin conducting 
unannounced monitoring visits. This will help us ensure that we are 
reviewing Head Start programs as they operate on a daily basis. We also 
intend to step up our monitoring visits of programs that are not 
performing up to our standards. Moreover, we are going to look more 
carefully at certain aspects of programs' operations during monitoring 
reviews, including whether grantees are providing regular training to 
employees who verify eligibility income and whether grantees have 
waiting lists that include relevant eligibility information.
    Following my confirmation in September 2009, we began an analysis 
of the Head Start Monitoring protocol and guidance to improve the 
quality of information collection; stimulate more comprehensive program 
analysis; and maintain transparency in the monitoring system. We will 
continue those efforts with more vigor to be certain our programs are 
held to the highest standards and grantees are provided the assistance 
they need to run successful Head Start programs.
The Risk Management Process
    In the same 2005 report referenced above, GAO found that ACF had 
not undertaken a comprehensive assessment of risks which might limit 
Head Start's ability to meet its objectives. In response, in 2008 HHS 
implemented a Risk Management Process (RMP) through which staff 
conducts a risk assessment of each Head Start grantee annually and 
works with grantees to develop action plans to mitigate areas where the 
grantee is at risk of failing to meet program requirements. The action 
plan may include changes that the grantee will make as well as training 
and technical assistance that OHS will provide.
    The RMP is used to address a range of issues throughout the year, 
including post-monitoring concerns; progress in meeting goals or 
sustaining improvements for grantees at high risk; grantees with under-
enrollment; and program expansion. We are reviewing the Risk Management 
Process to determine how to strengthen the process to ensure that staff 
correctly identify grantees with problems and develop effective action 
plans to mitigate those problems.
Erroneous Payment Study
    The Office of Head Start conducts an annual Erroneous Payment (EP) 
study which entails a review of documentation related to children's 
eligibility in 50 Head Start grantees. During regularly scheduled 
monitoring visits, these grantees' eligibility files are reviewed. The 
objective of the EP study is to produce a nationally representative 
error rate that represents the share of children served in Head Start 
or Early Head Start who did not meet eligibility criteria. The study is 
conducted to comply with the Improper Payments Information Act of 2002 
and the Office of Management and Budget (OMB) requirements that Federal 
programs susceptible to payment errors report annually on erroneous 
payments in their programs.
    A payment error in the Head Start program is defined as 
``enrollment of more than the allowed percentage of children whose 
family income exceeds the income eligibility guidelines.'' The study 
has yielded a relatively low error rate in recent years, but it is 
important to note that the design would not uncover many types of 
errors or intentional fraud. The study examines whether the program met 
the administrative requirements regarding eligibility determinations--
namely, the monitors review whether the program staff signed the form 
certifying that each child is eligible for the program. This study, as 
currently conducted, cannot identify cases where a program has 
intentionally certified an ineligible child as eligible or where a 
program has not correctly verified income and, thus, unintentionally 
made an incorrect eligibility determination. We recognize the limited 
utility of this methodology, and we are considering different options, 
including revising the study design to be certain we are attaining the 
most benefit from this study.
Redesignation Renewal System
    Another key program integrity and quality initiative involves 
implementation of the new Redesignation Renewal System. Since 1965 
there have been few opportunities to introduce competition into the 
Head Start grant process. If an entity was awarded a Head Start grant 
and complied with the standards (or, at a minimum, corrected 
deficiencies when they arose), it has been able to keep the grant in 
perpetuity. Compared to the many other Federal grant programs, this is 
highly unusual.
    In their 2005 report, the GAO criticized ACF because it did not 
recompete the grants of poorly performing grantees. GAO stated, ``When 
grants are allowed to remain with poorly performing grantees, children 
being served may not be getting the ``head start'' they deserve because 
the grantees continuously fail to meet program and financial management 
standards.''
    Congress, and this Committee in particular, addressed this issue in 
the 2007 Head Start reauthorization by establishing that Head Start 
grantees will be awarded grants for a five-year period and only 
grantees determined to be delivering high-quality services will be 
given another five-year grant non-competitively. The Act also provided 
HHS with the authority to recompete grants and required the Secretary 
of HHS to develop and implement a system for designation renewal to 
determine if a Head Start agency is delivering a high-quality and 
comprehensive Head Start program. We have been working to develop a 
vigorous recompetition plan that will leverage competition to improve 
quality program-wide and ensure program integrity. We anticipate 
publishing the Notice of Proposed Rulemaking describing the designation 
renewal system and our transition plans from continuous grants to five-
year grants this summer
    Vigorously implementing the Redesignation Renewal System is one 
aspect of our overall Head Start Roadmap to Excellence and 
Effectiveness. This roadmap is designed to raise the bar on quality in 
the Head Start program. Additional elements of the roadmap include 
strengthening the Head Start performance standards and improving our 
training and technical assistance system.
Head Start Performance Standards
    The Head Start Program Performance Standards provide a standard 
definition of quality services for all Head Start grantees. We are in 
the process of revising the Head Start Program Performance Standards 
regulations to reflect the changes made in the 2007 reauthorization and 
the latest research on quality services for children and families. The 
revised program performance standards will incorporate best practices 
in the field of early education and child development to ensure that 
Head Start programs meet the educational, health and nutritional needs 
of the children and families they serve, along with improving program 
integrity and fiscal management.
Training and Technical Assistance
    While we hold grantees to the highest standard, it is our 
responsibility to provide the training and technical assistance needed 
to achieve those standards. OHS has a State Training and Technical 
Assistance (T&TA) System that builds program capacity by providing 
comprehensive, individualized technical support to Head Start grantees. 
Currently, we are working to modify the State T&TA System to improve 
teacher training and prepare children to enter school ready to learn 
and create a National Training and Technical Assistance System that 
would provide targeted information, resources, and assistance to 
individual Head Start grantees to promote positive, sustained child 
outcomes. Under the new integrated system, trainers and practitioners 
specialized in early education and child development will provide 
support to improve classroom practice and promote family engagement to 
support their children's learning.
    Also this summer, we will establish five new National Centers of 
Early Childhood Excellence designed to provide targeted information on 
critical aspects of the Head Start program. The five new National 
Centers include: National Center on Program Management and Fiscal 
Operations that will focus on fiscal accountability, management 
oversight, and training; National Center on Parent, Family, and 
Community Engagement that will focus on strengthening training provided 
directly to staff at the local level addressing a range of issues 
including verifying income eligibility, recruitment and selection; 
National Center on Quality Teaching and Learning; National Center on 
Cultural and Linguistic Responsiveness; and National Center on Health, 
Nutrition, Dental, and Mental Health. These five centers, along with 
the existing Early Head Start National Resource Center, will provide 
experts who can offer training and resources regarding best practices 
to assist local Head Start programs along with State efforts to build a 
quality early childhood and development infrastructure for local early 
childhood providers.
Program Integrity at HHS
    The Department's commitment to strengthening program integrity is 
not limited to reacting to fraud allegations in a particular program, 
but is a broad-based priority for preventing, detecting, and 
prosecuting as appropriate fraud in all of our programs. Recently, 
Secretary Sebelius unveiled her Secretarial priorities and identified 
strengthening program integrity as one of nine priority areas. Last 
week, the Secretary announced the formation of the Secretary's Council 
on Program Integrity to look systematically across all parts of HHS to 
determine how we can strengthen our fraud and error-fighting efforts, 
from Medicare and Medicaid, to Head Start and LIHEAP, to medical 
research and public health grants. This effort is critical because the 
success of all of the important work we do--from providing 
comprehensive preschool to poor children or health benefits to 
seniors--depends on making sure that taxpayers' dollars are used 
wisely, efficiently, and according to the law.
    I share the Secretary's commitment. Since my arrival last year, a 
core part of ACF's strategic mission has been promoting a culture of 
integrity from the highest levels of ACF to the local level where 
children and families are served. I also am in the process of 
establishing an ACF Office of Program Integrity chartered to strengthen 
internal procedures and improve grantee financial management and fiscal 
integrity in all ACF funded programs. Stamping out any fraud or 
erroneous payments in Head Start is a key priority.
Conclusion
    Each year, Head Start programs provide almost one million of our 
country's most vulnerable children with a much-needed chance at 
success. ACF is committed to ensuring that all program resources are 
used appropriately, and that every slot is filled with an eligible 
child in need. I hope my testimony has provided the Committee with a 
clearer picture of our continued and aggressive commitment to eliminate 
fraud and strengthen the quality of Head Start. We are eager to work 
with the GAO, Congress, and our grantees to ensure we capitalize on 
every possible opportunity to strengthen Head Start and help eligible, 
low-income children prepare for success in school and in life. I am 
confident that we can achieve these goals together.
    Thank you. I would be happy to answer any questions.
                                 ______
                                 
    Chairman Miller. I will say to members who may have joined 
us, this panel may not be able to answer some questions that 
members have at this stage of the investigation, because this 
investigation has been referred to the Office of Inspector 
General, and the committee is working to be cooperative with 
GAO finishing its study and the Inspector General's 
investigation and the Department. And Secretary Sebelius has 
made it very clear that she intends to pursue this in a very 
forceful way.
    So, again, members should feel free to ask whatever 
questions they want, but it may be that either the witnesses 
defer for the moment because of that investigation and, again, 
we have talked to Congressman Kline and staff about this.
    If I might, the universe of your investigation is programs 
without a waiting list; is that correct, Mr. Kutz?
    Mr. Kutz. For the undercover testing to look for programs 
without a wait list, yes, at the time we did this, which was 
between September 2009 and March 2010. The other rush period of 
June, July, August, we did not test during that period. There 
would be a lot more places with wait lists then or open spots.
    Our testing started in September, the undercover testing of 
2009 through March of 2010, so I think a lot of the evidence we 
have seen is the big rush to recruit and get kids into the 
program happens right before the school year starts in the 
June, July, August time frame, so I think there were more 
centers with openings then, but we looked at places that, 
between between September and March, had openings at that time.
    Chairman Miller. What you presented on the audiotape are 
people, various people at different programs appearing to 
doctor the income requirements; is that correct?
    Mr. Kutz. I would say they didn't appear to. They did. They 
did commit fraud.
    Chairman Miller. I don't know how you want to handle these 
questions. But we don't know at this stage anything about what 
is behind that; is that correct? We have these actions on----
    Mr. Kutz. Correct. With respect to the undercover testing, 
we do not know whether management instructed these employees to 
do it. At the two case studies we have from our hotline 
allegations, part of that allegation was management was 
pressuring staff to boost enrollment through various 
fraudulence.
    Chairman Miller. That was the unsolicited call on the 
hotline?
    Mr. Kutz. Correct. The two hotlines. The other one, they 
didn't know who we were, what we were doing. We don't know the 
motivation behind it, except there were wait lists and open 
slots.
    Chairman Miller. The other one was that it appeared that 
from reading your report that documentation to support the 
decisions to make somebody eligible or not, that documentation, 
those files weren't complete; it may be that income records had 
disappeared. Do you want to explain that?
    Mr. Kutz. The requirements were fairly loose, and I assume 
they are tightening them up as part of the discussion here 
today. But in this cases of Vinnie, for example, they 
disregarded a W-2 showing $23,000 of income. That was a 
common----
    Chairman Miller. So it is not just they chose Grandma or 
they disregarded Vinnie's income, the documentation 
disappeared?
    Mr. Kutz. For the income that was excluded, correct. It was 
not in the filing. In fact, they went in, Mr. Chairman, and 
actually checked that Vinnie was unemployed. We saw that in 
numerous cases. So they made the income go away and they wrote 
in the file ``unemployed.''
    Chairman Miller. These files are kept on computers? These 
files are kept in paper folders?
    Mr. Kutz. These appear to be handwritten enrollment files 
that are there for the applicants being made. We went back in 
after we did our undercovers as GAO, and asked for the records 
related to the bogus children, and we enrolled as if we were 
investigating the children and their parents, and that is how 
we got the evidence after the undercovers showing that our 
children were enrolled and that the parents had had income 
excluded and that they were checked off in some cases, for 
example, as being unemployed.
    Chairman Miller. But those are not computerized files?
    Mr. Kutz. Most of them looked like they are hand-filled-out 
application forms in the center.
    Chairman Miller. The question came also as to whether or 
not children were being double enrolled. As I read your report, 
I don't know whether or not one center could check that 
enrollment against a master enrollment role of that region or 
city, or how they do it, whether there is any ability to do 
that or not.
    Mr. Kutz. That is an excellent question and one of the 
reasons it is so difficult, is they don't keep Social Security 
numbers for these children. So you have very little information 
in the files about who the children actually are. So it would 
be difficult to determine in some cases whether children were 
being double counted.
    But one of the cases we got on our hotline, we 
substantiated at least 63 children were counted twice, meaning 
the government paid for them twice effectively, or they 
justified their grants from two different funding streams.
    Chairman Miller. Thank you.
    Secretary Nazario, you point out in your testimony, I am 
looking at page 13, I don't know if that comports with your 
version, but this question of recompeting programs has been 
around the Head Start community for a long time. And it came up 
again, as you point out, in 2005 because we had these incidents 
in 2003-2004 and the general discussion about competition 
within the programs. And then in 2007, again as you point out 
in your testimony, this committee in particular and on a 
bipartisan basis was insistent on the recompetition of some of 
these programs as part of that reauthorization. So this kind of 
incident raises questions about how we will then decide that 
provision of reauthorization.
    And I raise this not to get a definitive answer from you, 
but you point out in your testimony later that you anticipate 
publishing a notice of proposed rulemaking describing the 
designation of renewal system in our transition plans for 
continuous grants on a 5-year basis.
    As is explained today, and I am not taking this as a final 
conclusion, but as explained today it appears that the system 
is not set up to detect fraud, and we don't know enough about 
whether children are being double counted, or we don't require 
sufficient documentation of income--or at least it appears that 
it can disappear. I don't know if that is in violation--we 
don't know whether that is in violation of requirements, or 
that is just done, or what have you.
    But if we are going to talk about whether or not a program 
is required to be recompeted and whether or not it is 
sufficient for it to compete and win again or to be awarded the 
grant, or what others are competing, again, I think we have to 
look in light of this investigation, whatever its outcome, it 
raises some very serious red flags about the requirements for 
program integrity as part of that recompetition.
    And unfortunately, most of the money taken out of Medicare 
fraud comes through doctors' offices. And it is not people 
going in to get a shot or a hip replacement voluntarily. They 
get charged for it, but it doesn't happen. So here we have 
people running the program, apparently involved in the fraud. 
And we are talking about tightening up and making this program 
more competitive to hopefully get better programs into the 
program and perhaps better alternatives for those grants.
    I just would, before we rush to publish this summer, I 
would raise that concern. And I don't know if you want to 
respond. You are certainly welcome to.
    Ms. Nazario. We absolutely agree with you, Mr. Chairman, on 
all of these counts. The system right now--this is why we are 
so grateful for this information, because we are going to now 
work to find out where it is happening, how much it is 
happening, and stop it.
    We do intend to issue two sets of regulations. One is to 
strengthen what we just issued now as a program instruction. In 
the program instruction we are encouraging grantees to maintain 
the source documents; because you are absolutely right, because 
the current regulations do not require them to maintain the 
source documents. So it is not a violation of the requirements 
not to keep it. It is a violation of the requirements to lie 
and ignore it.
    Right now what the grantee has to maintain is a form; that 
is, the verification form where the Head Start associate 
certifies that they have looked at the income source documents, 
but they are not required to keep the source document. The new 
regulations will indeed require them to maintain the source 
documents. And that is a separate rule that the one on 
recompetition, which we are also working on, that is long 
overdue in terms of being able to weed out the nonperforming 
programs so that the high-quality programs will be certified as 
Head Start grantees.
    Chairman Miller. And like all Members of Congress I am 
going to put competing agendas here. We obviously want the 
program integrity part of this, and we don't want recompetition 
to go without it. But we also want recompetition. It was a very 
serious matter and a very heated debate, as you know, in this 
Congress; and for this committee it was a very serious matter. 
We want that recompetition in place as soon as possible, but 
clearly this has to accompany it.
    Ms. Nazario. Absolutey.
    Chairman Miller. Thank you. Mrs. Biggert.
    Mrs. Biggert. Thank you, Mr. Chairman.
    Director Kutz, your testimony talks about a number of 
investigations, I think it was around 15, and that there were 
eight that were found to result in misrepresentation or fraud. 
That seems to be certainly a high rate of fraud for a limited 
sample. But is there anything that these results tell us about 
the system in general or about under-enrollment programs in 
particular?
    Mr. Kutz. Yes. I believe that, by design, it appears that 
the system is vulnerable to fraud. And you mentioned the 
grantee fraud. But also the beneficiary fraud; some of our 
enrollments just walked in with basic counterfeit documents, 
saying that we were under-income, and there were no questions 
asked. They checked the boxes and they said, You can start 
tomorrow. So I think that the system is vulnerable to both 
grantee fraud and beneficiary fraud.
    Mrs. Biggert. And it seems like most all of the paperwork 
was handwritten. There were no computers that were used to keep 
records of anything?
    Mr. Kutz. I can't say all, but most of the documents that I 
reviewed that we got back were handwritten, yes.
    Mrs. Biggert. Would that be something as far as having 
maybe a standard program that has to be filled out for all of 
these enrollees?
    Mr. Kutz. Perhaps. And, again, certain things now are only 
voluntary or encouraged. They are not mandatory. So if you want 
consistency across centers, you are going to have to mandate 
certain requirements.
    Mrs. Biggert. And you stated in the investigation that 
began in October of 2008--do you know how far back the alleged 
misconduct goes?
    Mr. Kutz. At one of the two centers, it is back 4 years; 
the other one is several years. So this potentially goes back 
into the 2006, 2007, 2008 time frame.
    Mrs. Biggert. When we did the reauthorization, was there 
anything that we did that, I don't want to say incentivized 
doing this, because it is absolutely wrong, but made it easier 
for such fraud?
    Mr. Kutz. I don't know. I mean one of the things that came 
up I mentioned is the homeless issue and the definition of 
homeless, and they were actually 22 percent of people at one 
grantee--which is a large grantee, with 1,500 or so children--
are in that center as being homeless. Now, I believe part of 
that is perhaps fraud, part of it may be the need to tighten up 
the definition of what constitutes homeless. Homeless in these 
cases is not people who are not living in a home; it might be a 
single mother living with her boyfriend who may be making 
$100,000 a year, but because they are called homeless, they are 
automatically shown as effectively under-income.
    Mrs. Biggert. Thank you.
    Secretary Nazario, in your testimony you mentioned that you 
can require immediate corrective action for a Head Start center 
if the evidence does not support termination of the grant. Can 
you elaborate on what actions might be included and how often 
any of the remedies have been utilized in the past?
    Ms. Nazario. I was looking at the last 3 years, and we have 
had about 10 centers per year where they have been terminated 
as a result of corrective action going back 2008, 2009 and 
2010. We can reprogram the money. We can recover the money from 
the grantee, money that has been misspent. We can, if it is 
simply a matter of under-enrollment, we can give them technical 
assistance so they can convert into an early Head Start center, 
or that they begin a longer school day or school year. But if 
it is mismanagement, we take disciplinary action and either 
terminate or suspend them.
    Mrs. Biggert. You stated that since you learned of the GAO 
review, HHS has taken immediate action to bolster the integrity 
of the programs. When did you first learn of this investigation 
and when did the first action to bolster the program integrity 
occur?
    Ms. Nazario. The first briefing I believe was April 22.
    Mrs. Biggert. Of?
    Ms. Nazario. Of 2010. We already had a partnership with the 
IG's Office where they do in-depth review of grantees that we 
consider to be high risk. And we provide them--this has been 
going on since 2007 with just a couple of cases. And then in 
2009 they began working on 25 percent--I am sorry, 25 cases of 
the grantees that the staff considered to be high risk. And so 
we have that, even prior to this investigations starting.
    But from when we knew about the investigation, we 
immediately issued a program instruction to remind grantees of 
their obligation to verify income. And the Secretary, as I 
said, has sent letters to every Head Start grantee. We 
developed a Web-based mechanism--it is called Strengthen Head 
Start--so that grantees can share ideas on how to promote sound 
management, and that is already in place.
    So those are things we have already done. But in the very 
short term, we are doing to do a Webcast to go over the program 
instruction that we have issued so that grantees understand 
very well the income verification, PI, and we are going to do a 
Web hotline so that that is overall for all of ACF programs, in 
addition to the Head Start program, to collaborate in fraud and 
mismanagement notification directly to me, to my office.
    And as I said, in the summer we plan to issue the 
regulations. And we are very cognizant and agree with the 
chairman that they have to be inclusive of the fraud and 
mismanagement.
    Mrs. Biggert. Thank you. My time has expired.
    Mr. Kildee [presiding]. Thank you very much.
    When this program started 45 years ago, many of the poverty 
programs were using maybe state-of-the-art at that time, which 
are quite archaic now, but if we had better technology, could 
we not centralize and spot maybe an inordinate number of 
homeless people in a program? Would that be of some help?
    Mr. Kutz. Absolutely. And not only for the HHS to have that 
visibility, but for Congress to have that visibility. That 
would seem to be something you and your staff might want to see 
various information across the country about wait lists, 
homelessness rates, children with disabilities enrolled. Just 
you can see across the country what is going on. I think that 
information would help not only from a management perspective 
but from a fraud perspective, because I don't think 23 percent 
passes the giggle test anywhere.
    Mr. Kildee. Because I think with our technology you could 
ring some bells, literally, when you saw certain numbers that 
seem to be not ordinary numbers; and you could check maybe they 
were appropriate, maybe they were not. But I think we might 
want to look into better technology for this.
    How much of this was due to that agency fear of losing 
dollars for their agency? And was there any evidence of 
sweetheart arrangements, any significant arrangements of 
sweetheart arrangements, bringing people in who they knew did 
not qualify but said, By the way, there is a good program over 
here? Either one of you. How much was just to fill out the 
slots that were assigned to that agency to serve and to receive 
dollars for that?
    Mr. Kutz. Well, the allegations we received and what we see 
is the incentive to boost enrollment so that they do not lose 
any of their grant money. And so it is all about the dollars 
and it is all about--almost like Head Start and head count, and 
making sure you have enough people to fill the slots, even if 
you don't. And that is where the pressure came in where you did 
see--I saw e-mails, for example, from management, saying we 
have got to look at some of these over-income and see if we can 
turn them into under-income. Let's call some parents and see if 
they are willing to say they are under-income, things like 
that. So there is pressure especially, perhaps in the time 
leading up to the September period when you are trying to get 
enrolled for the beginning of the year. But even after that, 
you see some of the centers where they were trying to fill 
their slots, it was almost the middle of September, late 
September. They almost panicked and said, Hey, we are short 10 
or 15 kids, we have to do something about it.
    Mr. Kildee. You indicated that not only did you detect 
enrollment fraud, but other types of fraud. Could you go into 
that further with us?
    Mr. Kutz. Yes. There were a lot of allegations, almost too 
many to investigate in a lifetime, because you never know which 
ones are credible. But the boosting of enrollment seemed to be 
the most prevalent.
    But let me give you some other examples. And I mentioned we 
substantiated the moving children around to double-count 
between two separate funding streams, intimidation of staff to 
get them to do this kind of boosting of enrollment, 
manipulation of the in-kind contribution. That is where the 
centers have to come up with in-kind matching contributions.
    One of the allegations was they were using the hours 
parents used at home to help their kids do school work as an 
in-kind contribution. For example, allegations of family 
vacations taken with Head Start money. You name it, there were 
a lot of different allegations out there. But the most 
prevalent were related to the boosting of enrollment with 
ineligible children.
    Mr. Kildee. To what degree at this point are criminal 
charges being pursued in this area of Head Start?
    Mr. Kutz. As with any investigation, we do dozens of these 
investigations for committees across Congress. We identify 
hundreds of thousands of cases of fraud. We refer these to law 
enforcement. And in this case, the HHS OIG will get an official 
referral from us and all evidence that we have collected to 
provide this investigation to Congress will be provided to the 
inspector general, which is what we always do. And typically 
these things result in action.
    Whether anyone can get a prosecution out of this depends on 
whether a U.S. attorney is interested or not. But that doesn't 
mean the fraud wasn't committed. Fraud is fraud. Very little 
fraud is ever identified. Very little fraud is ever actually 
taken to a U.S. attorney and actually prosecuted successfully. 
So, hopefully, in several of these cases we will see some 
consequences.
    And one fear I have is that the employees will be the ones 
blamed in these cases, and management will claim they had 
nothing to do with it. And what you saw in the videos there, I 
have to believe management knew what was going on and perhaps 
encouraged those people to do that to fill their rolls
    Mr. Kildee. To what degree could the change in regulations 
by the Department help minimize what is going on now with 
fraud?
    Mr. Kutz. The current change or the 2007 changes.
    Mr. Kildee. The changes that you could implement now.
    Mr. Kutz. I think that what they have put on their letter--
and again the devil is in the details--but we agree that a 
hotline for management would be one way for them to weed out 
bad actors and get information from employees or parents where 
there is fraud. We certainly believe going in on a surprise 
basis, the unannounced Federal reviews, is important, because 
again the allegations are--they know when these people are 
coming, weeks and months in advance, and so there are 
allegations that they are doctoring their records up for the 
Federal review. One way to perhaps deal with that is to show up 
on a surprise basis. And, of course, the undercover visits that 
we made, there is nothing that says management can't do a 
little of that on their own to keep people straight out there.
    Mr. Kildee. Mr. Scott.
    Mr. Scott. Thank you, Mr. Chairman.
    Mr. Kutz, as I understand it, you have mentioned a lot of 
different allegations. The only allegations you actually 
investigated involved enrollment fraud; is that correct?
    Mr. Kutz. Primarily enrollment fraud, and there was a 
little bit on personal use of automobiles that, although it 
doesn't appear to be a lot of money, it appears to be 
substantiated at this point.
    Mr. Scott. The tests were done only at programs where 
there, in fact, was no waiting list; is that right?
    Mr. Kutz. There were open slots, correct.
    Mr. Scott. Is there any evidence that the fraud, enrollment 
fraud, involved the enrichment of employees; that is, that the 
employee involved in the fraud made money?
    Mr. Kutz. We saw no evidence of that.
    Mr. Scott. Did you see any evidence that the fraud resulted 
in favoritism so that the relatives, friends, or associates of 
the Head Start employees benefited to the detriment of others?
    Mr. Kutz. I believe there were allegations of that, but we 
have not substantiated that.
    Mr. Scott. Because the only places that you investigated in 
fact had waiting lists?
    Mr. Kutz. The two Head Start centers that came in through 
our hotline, there was some allegations of that, but we have 
seen no evidence.
    Mr. Scott. I am talking about the ones you investigated.
    Mr. Kutz. The undercover ones, we did not do anything 
except the undercover visits.
    Mr. Scott. So you have no evidence based on investigations 
that any Head Start employee looked out for their relatives, 
friends, or associates to the detriment of anybody else?
    Mr. Kutz. No. We have come up with no evidence of that 
ourselves, no.
    Mr. Scott. Ms. Nazario, can you tell me how much money is 
stolen in Medicare and Medicaid fraud?
    Ms. Nazario. I know it is a substantial amount, 
Congressman, but I don't know.
    Mr. Scott. Round numbers, more than the total Head Start 
budget? Probably?
    Mr. Kutz. Most people estimate it is double digits, low 
double digits, and that would be more than the Head Start 
program substantially.
    Mr. Scott. Good. Now that these irregularities have been 
made known to the Department, you mentioned that you are going 
to be doing professional development to make sure that the 
programs know that this is serious?
    Ms. Nazario. Yes, sir.
    Mr. Scott. And will you be doing random checks and audits 
to be make sure the programs are complying?
    Ms. Nazario. Yes, sir. We do that routinely, every 3 years. 
At least every 3 years, every program is audited in depth. We 
will now increase the monitoring and conduct unannounced 
visitation.
    Mr. Scott. And that the programs will be warned that they 
could lose their program, they will not be renewed, if they are 
caught with these irregularities?
    Ms. Nazario. Yes. We will instruct them of the consequences 
of fraud and mismanagement.
    Mr. Scott. And do you feel that the irregularities, which 
seem to be widespread based on the random checks, can be fixed 
with this professional development, random checks and warnings 
about funding?
    Ms. Nazario. We will absolutely look at every possible way, 
and we will have that Web site for other ideas to correct the 
situation, including recoupment of funds from the grantee.
    Mr. Scott. And do you think this will be--the things that 
you are doing will be sufficient to fix the problem?
    Ms. Nazario. We are going to stop it. We are going to find 
the mechanism to be sure that this is not occurring, so that 
slots are not taken away from poor children who do need it.
    Mr. Scott. Thank you, Mr. Chairman.
    Mr. Kildee. Thank you. Mr. Tierney.
    Mr. Tierney. Thank you Mr. Chairman.
    Well, thank both of you for your testimony here today; Mr. 
Kutz, for your good work in a number of different areas in the 
GAO whom we rely on so often.
    Ms. Nazario, how long have you been in your position?
    Ms. Nazario. I arrived September 26, 2009.
    Mr. Tierney. The system that you have in place now for 
program oversight, is that something that was inherited by you 
or is that something you have implemented on your own?
    Ms. Nazario. The system was in place. What we have been 
doing since I arrived and since the new Head Start director, 
Yvette Sanchez Fuentes, arrived, is to, as I said, do a top-to-
bottom review. And we established the Head Start Road Map to 
Excellence, which is looking at everything Head Start: 
standards, monitoring, technical assistance. We are turning the 
tables upside down in how we do technical assistance. So we are 
looking at revamping the entire system. We call it the ``new 
Head Start.''
    Mr. Tierney. How many people would you say are in your 
integrity department, in the departments responsible for the 
integrity of this program, the monitoring of the funds?
    Ms. Nazario. We have, I would say--I have to count, but I 
can get you the exact number. But we have 60 people in grants 
management and we have a total staff of Head Start. Around 229 
Head Start staff.
    Mr. Tierney. How many Head Start programs around the 
country?
    Ms. Nazario. We have 1,600 grantees and approximately 3,300 
programs.
    Mr. Tierney. Three thousand three hundred programs with 60 
people that are monitoring them?
    Ms. Nazario. This is grants management; am I correct? 
Ballpark? And 229 Head Start. That includes regional program 
specialists. We also have contractors who assist in technical 
assistance.
    Mr. Tierney. I guess my question is, how many people on 
your staff dealing with program integrity are actually 
available to go out and implement some sort of a system that 
would make sure this doesn't happen, the complaints that we 
received today?
    Ms. Nazario. It is hard to say, full-time, because the way 
we operate is that for the monitor and review, we build teams 
who then go to the grantees and spend a week with the grantee 
looking at--and these are not people who are full-time on 
integrity but are pulled to do the reviews in addition to the 
fiscal accountability staff.
    Mr. Tierney. When you took over and started your top-to-
bottom review, did you consult the GAO or any other 
investigative-type body for how you might go about setting up 
systems that would prevent this kind of abuse?
    Ms. Nazario. We have not to my knowledge consulted GAO, but 
we consult the inspector general and have an ongoing 
partnership with the inspector general.
    Mr. Tierney. Did the IG make recommendations to you as to 
what standards or systems you might put in place to help you 
make sure this didn't happen?
    Ms. Nazario. One of the things that we have already put in 
place tried to address that, but there is a lot more that we 
can do and will do. As we have received this information, we 
have uncovered even more things that can be done. And we will 
put them in place.
    Mr. Tierney. Do you think you have the personnel that will 
enable you to do the type of job that is necessary to stop this 
kind of behavior and ensure Congress that it won't happen with 
any regularity in the future?
    Ms. Nazario. As of this moment, we have not identified the 
need for additional personnel, but we will be looking at that 
and we will submit requests accordingly.
    Mr. Tierney. And will you be relying on GAO for any advice 
and counsel in this process?
    Ms. Nazario. Yes, absolutely. We want to partner with both 
the IG and GAO.
    Mr. Tierney. The point of my questioning is that we have a 
special resolution here that, when we have money in trust, as 
we do, for a program that people on both sides of the aisle 
have confidence it has the potential to lift people out of a 
bad situation and provide a service, we have a special 
obligation to make sure the money just doesn't go south on us. 
We neglect enough with the Department of Defense, which is only 
about $296 billion overspending on just 93 programs; and we do 
it, as Mr. Scott mentioned, on Medicaid and Medicare or 
whatever. But people are always looking sometimes for the 
narrowest little areas on that.
    So we have to make sure we are resolute and get this in 
place. And so I urge you--and I congratulate you, first of all, 
for doing your top-to-bottom review. I understand it takes 
time. But let's make sure we nail it down so we don't spend our 
time debating this but, rather, debating how the program is 
implemented and whether or not it is working and whom it is 
benefiting. And that would be appreciated on that.
    And I really do think you should use GAO in an advice and 
counsel role in addition to the IG. They have the systems in 
place and they have the way to help you through that. And it is 
important that we do it.
    Ms. Nazario. We completely concur, sir.
    Mr. Tierney. Thank you. I yield back.
    Mr. Kildee. Thank you very much. And I yield to the 
gentleman from Kentucky, Mr. Guthrie.
    Mr. Guthrie. Thank you, Mr. Chairman. I appreciate that.
    And, Mr. Kutz, I have been watching and looking at the 
testimony. One of the concerns, you said 8 of 15 undercover 
investigations of Head Start employees actively encourage 
undercover investigators, posing as parents or guardians, to 
misrepresent their eligibility; and in four of those cases, the 
information that was provided had been doctored by Head Start 
employees to remove income information that had been provided. 
And I know that is correct, what you said, and the question is 
you said at least four, and I was wondering if there were more 
than four.
    And you had a more than 50 percent--I wouldn't say success 
rate--but your undercover investigators, 50 percent of them 
were able to enroll fraudulently. And in your experience as an 
investigator, is this typical in these kinds of environments? 
Is that high? Can you extrapolate what this means pervasively? 
And then, finally, just how widespread do you think this may 
be?
    Mr. Kutz. It is hard to tell whether widespread-wise, I 
think as I mentioned earlier, the system is vulnerable to not 
only grantees doing what we are talking about, but some of the 
undercover tests we did we went in actually with documents 
showing we were eligible. They were just bogus documents, and 
they would have bought our story. We could have walked in and 
said we were unemployed, and they would have bought that. So it 
is vulnerable to beneficiary fraud in addition to the grantees 
on their own, without our prompting, telling us, ``Hey, you are 
over-income, here is what we do to make you under-income. Give 
me that one pay stub and I will pretend I didn't see it.'' So 
you had both of those things ongoing.
    So the system is vulnerable. There is no way to tell how 
widespread this is, but it is particularly vulnerable for those 
places trying to fill empty slots so they can maintain their 
grant funding. So that would be--we were looking at this 
between September 2009 and March 2010 in the undercover piece. 
Many of the schools were part of the places that were already 
full, probably, by the beginning of September. You probably 
have another period of vulnerability coming up in the next few 
months, so the timing of this hearing and the actions here are 
very good because the rush to recruit and enroll is coming up 
this summer for the next year.
    Mr. Guthrie. Well, there is a difference, in my mind, if an 
investigator presented fraudulent documents and said, I'm 
eligible to have this and presented documents. They were so, 
and Head Start accepted that. Versus the Head Start employee 
helping you be fraudulent in your submission. So they are 
vulnerable for the--did you just say, I'm unemployed, and they 
took that for your word? Or you are saying you submitted 
fraudulent unemployment documents?
    Mr. Kutz. Just fraudulent pay stubs, or said we were 
unemployed or we were under-income in several cases. Most of 
our tests were on the over-income, because that was really the 
primary focus. But we also wanted to see if there were--any due 
diligence done, if they ever asked us for Social Security 
numbers any of that kind of thing. And, again, there was very 
little requirement for any of that type of documentation.
    I will say there was a lot of requirements for dental 
records, medical records, things like that. And so that gets 
into the nonfraud issues which are also very important to the 
program.
    Mr. Guthrie. Well, just in my mind, it is a little 
different for the Head Start employee if you present something 
and they take it. Are they required to go two or three steps 
further? Are they meeting the requirements and the problem is 
the system.
    Mr. Kutz. Absolutely. I don't think they are required to 
verify anything. They are required to get paper. It is a paper 
process. You get paper, or someone tells you something, you 
write it down, and you move forward.
    Mr. Guthrie. That is a problem with the system, but not 
necessarily a problem with the employee. But it is a problem 
with the employee if they are telling you not to submit pay 
stubs and so forth.
    Mr. Kutz. Yes. That is fraud.
    Mr. Guthrie. Thank you.
    Mr. Kildee. Thank you, Mr. Guthrie. Mrs. Davis.
    Mrs. Davis. Thank you, Mr. Chairman, and thank you to both 
of you for being here.
    I wanted to go back to the recompetition requirements, I 
think you were speaking to the chairman about that earlier, and 
try to understand some of the issues, particularly for those 
grantees who have had a longstanding record, and then there are 
a number of issues that are coming forward.
    Could you just expand on the pending regulations, then, 
that are part of the authorization passed in 2007, talking 
about the automatic indicators and what will change in light of 
these GAO findings now?
    Ms. Nazario. We will issue regulations that will take into 
account public comments and we will take those public comments 
very seriously. We want to issue regulations that are fair, but 
that also provide for swift action for recompetition, so the 
poorly performing programs are weeded out and the high-
performing programs remain; because when you allow programs to 
continue to serve indefinitely, then the children are not 
receiving the best care possible.
    So we want to be sure that grantees meet performing 
standards in terms of quality, and, at the same time, 
performing in terms of financial management standards.
    Mrs. Davis. The automatic indicators that you are looking 
at now, as a result of some of the work that you have been 
sharing with us today, do you see those changes? Those have 
more to do with management, or more to do with performance, or 
is it both?
    Ms. Nazario. I think both, a combination. I will be happy 
to get you a statement for the record as to what those will be, 
but we should be issuing the rule very soon.
    Mrs. Davis. Okay. And you think--when are those coming 
forward again?
    Ms. Nazario. In the summer.
    Mrs. Davis. In the summer. Okay. Could you talk a little 
bit more about some of the deficiencies that could cause a 
grant to be rebid? What sorts of things are we talking about?
    Ms. Nazario. Right now, or under the new rule? I think I 
will get a statement for you for the record.
    Mrs. Davis. Okay. All right.
    You are talking about both performance and both management, 
correct?
    Ms. Nazario. Yes.
    Mrs. Davis. Is that something that is not known to people? 
When you are saying you are going to get it----
    Ms. Nazario. The new rule is still being developed, so I 
hesitate to speak about it. But when it comes out, it will come 
out for substantial public comment.
    Mrs. Davis. Do you think that grantees are going to be able 
to understand why that might be new indicators? Is that 
something that is going to come as a surprise, do you think, or 
is it something that they would recognize pretty easily?
    Ms. Nazario. I think they will recognize it. First of all, 
we already have issued a program instruction that gives very 
clear indications of where we are going. We will then also 
issue a rule that makes the program instruction mandatory. Then 
we will issue the redesignation rule. So by this time, we will 
be doing Webcasts and we will be doing training, so it should 
not be a surprise.
    Mrs. Davis. Do you think that that discussion that would be 
held with grantees, whether on line or otherwise, would it 
address trying to get at fraud and abuse in this system?
    Ms. Nazario. Absolutely.
    Mrs. Davis. Directly, in terms of why something is being 
done?
    Ms. Nazario. Yes. And it will give indications as to what 
are the actions that will result from a worker on their own 
doing something, and what we can expect from the grantee to 
correct it. And we will require swift directive action on the 
part of the grantee, even if it is a rogue worker.
    Mrs. Davis. Is it likely that there will be more 
recompetition as a result of this across-the-board for 
grantees?
    Ms. Nazario. Yes. Absolutely. Like the chairman said, we 
will be sure that it is included.
    Mrs. Davis. Just very, very quickly, you mentioned keeping 
track of the information. It just struck me: Why we are not 
doing that now? You said it wasn't required that they keep some 
of the information that is presented, some of the paperwork, et 
cetera.
    Ms. Nazario. Well, you know, I wasn't here when these rules 
were developed, but we always are struggling in public 
services, particularly in social services, to walk the line 
between being responsive to people's needs and maintaining the 
same administration. So the way it has been developed up to now 
is that they have to look at the eligibility documents, but 
they were not required to keep them in the record.
    Mrs. Davis. Do you think it is going to be difficult for 
them to do that? Will they be able to computerize that so that 
they really have all that at their fingertips, essentially.
    Ms. Nazario. Well, at this point, we haven't looked into 
the details of whether it is going to be computerized files or 
manual files, but, at any rate, they will have something. Right 
now, they should be able--they will be able, both the grantee 
and the parents, to furnish the documents. They have to have 
them in order to apply. So they will have the documents and the 
grantees can even scan them, which is now very commonplace.
    Mrs. Davis. Thank you very much, Mr. Chairman.
    Mr. Kildee. Thank you, Ms. Davis.
    First of all, I want to thank both of you. I know that HHS 
is very angry over this. That is good. You should be angry, 
because this is a program that you supervise and that you care 
a great deal for. Thank God for the GAO. I have been in 
Congress for 34 years, and I have learned more when GAO gets 
involved with the other parts of the government to make sure 
that the taxpayers' dollars and those dollars meant for, in 
this instance, poor children are used properly.
    So I am sure that with the attitude both of you have and 
the beliefs that both you have, that we are going to get to the 
bottom of this and take those reforms that are necessary to 
make sure that this program reaches the goals that were set 45 
years ago.
    The last official action I had with Ted Kennedy, I was 
chief sponsor of the reauthorization of this bill, and Ted and 
I went over to the White House with Mr. Enzi and George Miller. 
And George Bush signed the bill. We felt very proud. And it was 
only about a month later that Ted Kennedy discovered that he 
had that fatal illness, and I think one of the greatest 
tributes we can pay to his memory is to make sure we get this 
back to where it should be, and I know both of you want to do 
that, and I appreciate that.
    Without objection, members will have 14 days to submit 
additional material or questions for the hearing record.
    [Additional submissions of Mr. Miller follow:]

                                      Washington, DC, May 17, 2010.
    Dear Head Start Grantee: I am writing to address fraud and 
mismanagement in Head Start and to notify you of the steps the 
Department of Health and Human Services will be taking to strengthen 
program integrity in the Head Start Program. Recently, I was informed 
of an investigation initiated by the Government Accountability Office 
(GAO) into potentially fraudulent eligibility determination procedures 
and other types of misconduct. According to GAO, individuals employed 
by approximately eight Head Start grantees determined that certain 
children were eligible for Head Start services despite being given 
evidence that their families' incomes were above the eligibility limit. 
Our Office of Inspector General is now following up on these 
allegations. If proven, these actions not only violate Head Start's 
rules and regulations, but would represent serious breaches of the 
public trust.
    As you know, Head Start is designed to put our nation's low-income 
children on a road to opportunity. Allowing ineligible children to 
enroll in the program is a blatant violation of Head Start's rules and 
it steals opportunity from children who need it most. This Department 
will not stand for it.
    On May 10, the Office of Head Start issued a Program Instruction 
entitled, ``Income Eligibility for Enrollment'' (ACF-PI-HS-10-02), 
which reminds grantees of their obligations to verify income 
eligibility and determine eligibility in accordance with the Head Start 
statute and regulations. This was just the first step in our efforts to 
strengthen program integrity in the Head Start program.
    The following are additional concrete steps that we are undertaking 
to ensure that every Head Start slot is reserved for a child eligible 
for the program.
     Refer fraud allegations to the HHS Inspector General. When 
HHS discovers potential fraud, those cases are referred to the 
Department's Inspector General who can pursue a criminal investigation. 
Knowingly falsifying documents and determining a child eligible for 
Head Start when the child does not meet the eligibility criteria can 
lead to criminal charges.
     Move to suspend and terminate grantees where pervasive 
fraud or misuse of funds is found. The Head Start statute provides us 
with ample authority to suspend and then terminate grants in such 
instances.
     Require grantees that have inadequate controls to prevent 
errors in eligibility or other critical lapses in program management to 
take swift, decisive corrective action. This could include firing 
employees that are found to be knowingly violating Head Start rules, as 
well as tightening eligibility determination procedures.
     Conduct unannounced monitoring visits to Head Start 
grantees. In the past, we have typically provided grantees with notice 
before coming to conduct monitoring or other onsite visits. We will 
increase our use of unannounced visits to ensure that we are able to 
review how your programs operate on a daily basis.
     Create and publicize a web-based ``hotline'' that will 
allow those with information of impropriety of any kind to report it 
directly to me. When this hotline is up and running, we will issue 
guidance to you about how to access the site. I expect that every 
grantee will ensure that all Head Start employees are informed about 
this hotline. We know that fraud is often detected and reported by 
scrupulous employees who stand up and do the right thing.
     Increase oversight and reviews of programs with identified 
risk factors. Each year, the Administration for Children and Families 
(ACF) conducts a risk assessment with every grantee to identify risks 
for program violations or management problems. ACF, in partnership with 
the grantee, develops and implements an action plan to mitigate the 
risk factors. Program specialists will be scrutinizing programs more 
carefully in the risk management process and the action plan phase.
     Develop new regulations that promote program integrity. We 
are developing new regulations that will address verification 
requirements and staff training on eligibility criteria and procedures.
     Recompete grants when questions arise about whether 
grantees are offering high-quality services or have management lapses. 
We will soon issue proposed regulations that articulate which grantees 
will be required to compete for continued Head Start funding--
implementing an important reform enacted by Congress in the Head Start 
for School Readiness Act of 2007. The goal of the regulations is to 
promote program integrity and strengthen the quality of services that 
Head Start provides.
    As these initiatives gear up, you will be kept fully apprised of 
new requirements and changes in our operating procedures. Now that you 
know of our increased focus on program integrity, I hope you will 
immediately review your own oversight and quality assurance mechanisms 
and begin to develop ways to strengthen your own programs. If we work 
together, we can build an even stronger Head Start program.
    I know our Head Start grantees can be a source of good ideas for 
how to promote sound management and ensure that this program meets the 
highest possible program integrity standards. If you have an idea, 
please send it to [email protected]. You are our 
partners in this important program, and we want to hear your thoughts 
and ideas.
    Program integrity is one of my key priorities and goes well beyond 
Head Start. I recently established the Council on Program Integrity, 
which will look at all areas within the Department from Medicare and 
Medicaid, to Head Start and LIHEAP, to medical research and the public 
health grants--to conduct risk assessments of programs or operations 
most vulnerable to waste, fraud, or abuse; enhance existing program 
integrity initiatives or create new ones; share best program integrity 
practices throughout HHS; and measure the results of our efforts. I 
look forward to partnering with you as part of this Department-wide 
initiative.
    I know the great majority of people who work at Head Start centers 
are dedicated professionals who make tremendous efforts to provide 
quality care and early education to more than 900,000 children and 
carry out their work each day with great integrity. We--grantees and 
federal officials alike--cannot allow a few unscrupulous individuals or 
grantees to get in the way of the services that Head Start provides to 
our nation's low-income children.
            Sincerely,
                                         Kathleen Sebelius.
                                 ______
                                 
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    [Additional submission of Messrs. Miller and Kline 
follows:]

             Department of Health & Human Services,
                               Office of Inspector General,
                                                    Washington, DC.
Hon. George Miller, Chairman; Hon. John Kline, Senior Republican 
    Member,
Committee on Education and Labor, U.S. House of Representatives, 
        Washington, DC.
    Dear Chairman Miller and Ranking Member Kline: I am writing 
regarding the hearing, scheduled for Tuesday May 18, 2010, before the 
House Education and Labor Committee, to examine an investigation by the 
Government Accountability Office (GAO) of allegedly fraudulent behavior 
by certain Head Start grantees regarding enrollment and eligibility. As 
you know, the Office of Inspector General, Department of Health & Human 
Services (OIG), recently opened an investigation stemming from 
preliminary information provided by GAO regarding allegations of 
enrollment fraud in certain Head Start programs. As part of its 
investigation, GAO conducted undercover operations at a number of Head 
Start centers. The operations yielded video and audio tapes of 
interactions between Head Start employees and GAO investigators.
    Last week, GAO informed us that it anticipates making a formal 
referral to OIG of its findings within the next 10 days. After 
reviewing that investigative material, our office will be in a better 
position to evaluate the allegations and finalize an investigative 
plan.
    Earlier today, Assistant Inspector General for Investigations 
Gerald Roy and OIG Chief Counsel Lewis Morris met with your staff to 
view excerpts of four of the GAO video tapes. During that meeting your 
staff asked that OIG apprise the Committee whether display of the video 
tapes during the hearing would adversely impact OIG's investigation. 
Upon review, we have determined that if the Committee shows the four 
video tapes during the hearing or otherwise makes them available to the 
public, it would be problematic. Although we have not received a formal 
referral of this matter from GAO and therefore cannot speak to the 
merits of the allegations or where an investigation may lead, we are 
concerned that disclosure of identifying information, such as witness 
identity or Head Start location, could compromise OIG's ongoing 
investigation. Thank you for your consideration of these concerns.
            Sincerely,
                                          Timothy J. Menke,
                       Deputy Inspector General for Investigations.
                                 ______
                                 
    Mr. Kildee. Without objection, the hearing is adjourned.
    [Whereupon, at 2:47 p.m., the committee was adjourned.]

                                 
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