Major Management Challenges and Program Risks: Department of Education
(Letter Report, 01/01/2001, GAO/GAO-01-245).

This report, part of GAO's high risk series, discusses the major
management challenges and program risks facing the Department of
Education. These challenges include (1) ensuring access to postsecondary
education, (2) encouraging states to improve performance information,
(3) promoting coordination with other federal agencies and school
districts, (4) and improving financial management.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GAO-01-245
     TITLE:  Major Management Challenges and Program Risks: Department
	     of Education
      DATE:  01/01/2001
   SUBJECT:  Internal controls
	     Risk management
	     Accountability
	     Financial management
	     Aid for education
	     Interagency relations
	     Education program evaluation
IDENTIFIER:  High Risk Series 2001
	     GAO High Risk Program
	     Upward Bound Program
	     Federal Family Education Loan Program
	     William D. Ford Federal Direct Loan Program

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Testimony.                                               **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO-01-245

Performance and Accountability Series

January 2001 Major Management Challenges and Program Risks

Department of Education

GAO- 01- 245

Lett er

January 2001 The President of the Senate The Speaker of the House of
Representatives

This report addresses the major performance and accountability challenges
facing the Department of Education as it seeks to ensure equal access to
education and to promote educational excellence throughout the nation. It
includes a summary of actions

that Education has taken and that are under way to address these challenges.
It also outlines further actions that GAO believes are needed. This analysis
should help the new Congress and administration carry out their
responsibilities and improve government for the benefit of the American
people.

This report is part of a special series, first issued in January 1999,
entitled the Performance and Accountability Series: Major Management
Challenges

and Program Risks. In that series, GAO advised the Congress that it planned
to reassess the methodologies and criteria used to determine which federal
government operations and functions should be highlighted and which should
be designated as “high risk.” GAO completed the assessment,
considered comments provided on a publicly available exposure draft, and
published its guidance document ,

Determining Performance and Accountability Challenges and High Risks (GAO-
01- 159SP), in November 2000. This 2001 Performance and Accountability
Series contains separate reports on 21 agenciescovering each cabinet
department, most major independent agencies, and the U. S. Postal Service.
The series also

includes a governmentwide perspective on performance

and management challenges across the federal government. As a companion
volume to this series, GAO is issuing an update on those government
operations

and programs that its work identified as “high risk” because of
either their greater vulnerabilities to waste, fraud, abuse, and
mismanagement or major challenges associated with their economy, efficiency,
or effectiveness.

David M. Walker Comptroller General

of the United States

Overview Americans rank education as a top national priority. The Department
of Education (Education) is the primary agency responsible for overseeing
the investment of the federal government in support of U. S. education.
However, with a budget of $38 billion per year, Education provides a small
portionabout 7 percentof the resources used for elementary and secondary
education. State and local agencies are responsible for elementary and
secondary education, and Education supports and encourages their efforts to
promote educational excellence. In addition, through a combination of direct
loans and guarantees of private

sector loans to students and their parents, as well as through grants,
Education provides billions of dollars of financial aid for postsecondary
education. To achieve its

mission and improve the management of its programs, Education has
established several strategic goals: (1) to ensure access to postsecondary
education and lifelong learning, (2) to help all children reach challenging
academic standards, (3) to build a solid foundation of learning for all
children, and (4) to make Education a high- performing agency. However, to
achieve these goals, the Department must find ways to meet several
performance and accountability challenges.

Ensure access to postsecondary education while reducing the vulnerability of
student aid programs to fraud, waste, error, and mismanagement

? Encourage states to improve performance information and upgrade federal
evaluations used to assess how well all children reach challenging academic
standards

? Promote coordination with other federal agencies and school districts to
help build a solid foundation of learning for all children

? Improve financial management to help build a high- performing agency

Federal Financial To ensure access to postsecondary education and Aid

lifelong learning, Education administers federal grant and loan programs
that help finance the higher education of millions of students. Annually,
these student financial aid programs provide more than $50 billion in
federal loans and grants. While these programs have been successful in
providing students with access to money for postsecondary education, they
have been less successful in protecting the financial interests of the

federal government and U. S. taxpayers. Although the student loan default
rate had declined to 6. 9 percent in fiscal year 1998, student loan defaults
still cost the federal government billions of dollars each year $4. 3
billion in fiscal year 1999 alone and more than

$28 billion in the last 10 years. 1 In addition, with the exception of
fiscal year 1997, Education has not received an unqualifiedor
“clean” opinion on its

financial statements since its first agencywide audit in 1995. Since 1990,
we have considered Education's student financial aid programs at high risk
for fraud, waste, abuse, or mismanagement.

These programs today continue to be at risk primarily because Education
lacks the financial and management information needed to manage these
programs effectively and the internal controls needed to maintain the
integrity of their operations. For example, because Education did not
properly account for and analyze

transactions for its guaranteed student loan program or properly reconcile
related accounting and budgetary accounts, Education could not be assured
that its financial or budgetary reports were accurate. In addition,
continued weaknesses in information systems

controls increase the risk of disruption in services and make Education's
loan data vulnerable to unauthorized access, inadvertent or deliberate
misuse, fraudulent use,

improper disclosure, or destruction, all of which could occur without
detection.

Because of these conditions, in June 2000, GAO concluded that Education must
continue to improve its ability to protect U. S. taxpayers from borrowers
who fail to meet their obligations to repay their federal student loans and
reduce the vulnerability of these programs to fraud, waste, abuse, and
mismanagement. Also in June 2000, we reported that Education's 1999
performance

report and fiscal year 2001 performance plan have no goals or objectives
that directly address the reduction of fraud, waste, and error in student
assistance programs. We concluded that Education should include in these 1
Some default costs may have been recovered through collections of previously
defaulted amounts.

plans measures to improve the management and oversight of these programs.
After we issued our report, Education revised its strategic plan to include
a performance objective of improving the integrity of the financial aid
program. For that objective, the Department identified a number of
strategies that have the potential to address our concerns, such as
increasing oversight efforts, continuing to work on the feasibility of
matching application and tax data, and demonstrating enhanced financial
management. In addition, in the last 4 fiscal years (1997 through 2000),
Education's Office of Inspector General (OIG) opened 1,030 fraud
investigative cases and achieved 737 closures, including

268 convictions. 2 Improving State and local program flexibility and
limitations in Children's

Education's research and evaluation have made it Education difficult for the
Department to gather information about outcomes in elementary and secondary
education programs. Education must address these challenges to achieve the
goal of assessing how well all children reach challenging academic standards
by encouraging states to improve performance information and by upgrading

federal evaluations. In pursuing this goal, Education must continually
balance state and local agencies' need for program flexibility with its own
need for information about these programs to ensure accountability.
Collecting comparable information on the outcomes of elementary and
secondary education programs is difficult because

2 During the same period, OIG also reported that its investigations resulted
in filing 261 indictments and informations. An information is a formal
criminal charge made by a prosecutor without a grand- jury indictment.

state and local agencies are primarily responsible for these programs and
states have much flexibility in how federal funds are used and what
information is reported. As a result, it is difficult to form a national
picture using the information available. Department- sponsored program
evaluations could provide another source of information about Education's
programs, but our

reviews of several evaluations indicated that the quality of evaluation
designs and the usefulness of evaluation information vary. For example,
Education's evaluation

of the Upward Bound program used a rigorous design that yielded reliable,
valid, and useful information about the effect of the program. However, its
ongoing national evaluation of title I, Education's largest elementary and
secondary education programfunded at $7. 9 billionhas a variety of technical
problems, such as

the use of a small, nonrepresentative sample and the absence of a comparison
group, which will limit its usefulness in assessing title I, education
reform, or instructional practices. We concluded that agreement on the
purpose of the study is needed before researchers can develop an adequate
study design.

To help states improve the quality of state student assessment data and meet
a federal mandate to report these data by six categories of children, in
June 2000,

GAO recommended that Education conduct additional activities to facilitate
the exchange of information among states and improve the quality,
timeliness, and specificity of state assessment data. These activities

could help the Congress and state decisionmakers determine the extent to
which various groups of children, including those who are economically
disadvantaged, are reaching state standards. Education is considering
options to accomplish this. We also recommended that Education implement
additional measures to improve research on the effectiveness of specific
services provided under title I. Education agreed with this recommendation
and stated that it will initiate these activities in developing its next
title I

evaluation plan. Further, in October 1999, we recommended that Education
include in its research and evaluation plans studies that measure the
outcomes of the migrant education program to determine the extent to which
funds are helping migrant children reach challenging academic standards. In
response, Education has initiated a study to assess the feasibility of
including a special sample of migrant children as part of the 2002

National Assessment of Educational Progress. Interagency

To build a sound foundation for learning, Education has Coordination

to coordinate with other agencies to help ensure that children receive
needed services. Although Education has primary responsibility for
administering the federal investment in Education, other federal agencies
may fund many of the services; for example, Health and Human Services (HHS)
funds $8 billion of the $9 billion federal investment in early education and
child care. Importantly, education is primarily a state and local
responsibility in the United States. As a result, Education must coordinate
with states and local

agencies and other federal agencies to improve the services children receive
and reduce the chance that children face gaps in service. For example, in
several recent studies, we identified early education and migrant education
as two areas where Education could improve coordination to better serve
children.

Although Education administers many of the 29 programs specifically
authorized to provide early childhood education and care as a primary
purpose, HHS funds almost 90 percent of the federal investment in early
childhood care and education. For example, HHS administers Head Start, the
largest federal early childhood education program. In March 1999, we pointed
out that, although Education said it planned to coordinate with other
agencies, particularly HHS, it did not describe in detail how it would do
so. In response to our work in this area, Education and HHS officials have

collaborated to develop shared outcome indicators and measures for
preschool- aged children served by title I and Head Start; however, it is
too soon to determine if these activities will result in improved services
for children.

Coordination among agencies and schools is also critical to ensure that
children of migrant agricultural workersmany of whom are at high risk of
educational failure and need services from multiple agenciescontinue to
receive appropriate services when they move from one school to another. We
reported in October 1999 that differences in Education's and HHS'
eligibility requirements for programs targeting migrant children create
service gaps and recommended that HHS harmonize its definition of migrant
children with Education's to help close these gaps. We also concluded that
gaps in coordination between school districts could disrupt services for
migrant children. Such disruptions include creating delays in providing
needed services or causing children to receive unnecessary repeated
immunizations to meet school registration requirements when the districts
receiving the children do not have the children's records or

information about whom to contact for records. To correct this problem, we
recommended that Education work with states to develop nationwide systems to
transmit essential information about migrant students as they move between
school districts. Education agreed with this recommendation and has reserved
funding to support the technical and operational aspects of an
interconnected system.

Financial Weaknesses in Education's financial management Management

systems limit Education's ability to build a highperforming agency. At this
time, the Department continues to face serious financial management
challenges that hinder its ability to (1) obtain timely and complete
financial information; (2) decrease

vulnerability to fraud, waste, and mismanagement; (3) ensure adequate
accountability to taxpayers; (4) manage for results; and (5) help
decisionmakers make timely and informed judgements. For example, beginning
with Education's first agencywide audit in

1995, auditors have repeatedly identified significant financial management
weaknesses. Education's fiscal year 1999 financial statement audit disclosed
continuing weaknesses that have prevented the agency from receiving a
“clean” audit opinion. In addition, weaknesses in the financial
management system affect the Department's student financial aid programs by,
for example, hindering the timely detection and correction of errors in the
student financial aid database and the

production of reliable and useful information on student financial aid. In
August 2000, we reported that Education grant funds were increasingly
vulnerable to fraud, waste, and mismanagement because of weaknesses in its
financial management systemspecifically, inadequate fund control mechanisms,
weak internal controls, and the inappropriate use of a deposit fund. We
concluded that Education has planned and begun implementing many actions to
resolve its financial management weaknesses, such as purchasing a new
general ledger system,

acquiring new software tools, improving internal controls, and establishing
a process to return excess funds to the Treasury. However, it is too soon to
determine if these measures will be effective.

Major Performance and Accountability Challenges

Americans rank education as a top national priority. The Department of
Education leads the federal government's efforts to promote educational
excellence and to ensure equal access to education throughout the nation.
With a staff of about 4, 700 and a budget of about $38 billion per year,
Education has some 175 programs that support activities for individuals from
infancy throughout adulthood. Although its programs have the potential to
influence all students in the United States, as shown in figure 1, federal
sources provide less than 7 percent of the total government resources used
nationwide for

public elementary and secondary education. State and local agencies are
primarily responsible for elementary and secondary education.

Figure 1: Public Elementary and Secondary Education Revenues by Source,
School Year 1996- 1997

6.6% Federal Sources

48.0% 45.4% Local and Intermediate Sources

State Sources Source: United States Department of Education

In addition, through a combination of direct loans and guarantees of private
sector loans to students and their parents, as well as through grants,
Education provides billions of dollars of financial aid for postsecondary
education and thus has increased access to postsecondary education for
millions of students.

Ensure Access to Through federal grant and loan programs administered
Postsecondary

by Education, millions of students who might not Education While otherwise
have had access to higher education have Reducing the been able to enroll in
postsecondary educational

Vulnerability of programs of their choice. These federal programs are

Student Aid the largest source of student aid in the United States,

Programs to currently providing a total of about $53 billion in federal

Fraud, Waste, student aid grants and loans to nearly 8. 1 million

students and parents. Error, and Mismanagement

These student aid programs, however, continue to be at high risk for fraud,
waste, error, and mismanagement because Education lacks the financial and
management information needed to manage these programs effectively and the
internal controls needed to maintain the integrity of their operations (see
the discussion of financial management, below). For example, because

Education did not properly account for and analyze transactions for its
guaranteed student loan program or properly reconcile related accounting and
budgetary

accounts, Education could not be assured that its financial or budgetary
reports were accurate. In addition, continued weaknesses in information
systems

controls increase the risk of disruption in services and make Education's
loan data vulnerable to unauthorized access, inadvertent or deliberate
misuse, fraudulent use,

improper disclosure, or destruction, all of which could occur without
detection. With the exception of fiscal year 1997, Education has not
received an unqualifiedor “clean” opinion on its financial
statements since its first agencywide audit in 1995.

Moreover, these programs operate independently with different rules,
processes, and data systems and involve millions of students, thousands of
schools, and thousands of lenders, guaranty agencies, third- party
servicers, and contractors. Because of problems related to these long-
standing conditions, in 1990 we designated Education's financial aid
programs at high risk for fraud, waste, abuse, or mismanagement. This high-
risk designation remains.

Although serious weaknesses remain, Education has addressed many of the
issues we discussed in our series of reports on high- risk programs. For
example, the national student loan default rate is the lowest ever

6. 9 percent for fiscal year 1998, the most recent year for which data are
available. This lower default rate is especially noteworthy considering that
the dollar amount of loans has tripled and the number of loans has

doubled since 1990. The lower default rate has been attributed to a robust
economy, better management by Education, tougher enforcement tools
authorized by the Congress, and stepped up efforts by colleges, lenders,
guaranty agencies, and other participants in the federal loan program.
Education has also been pursuing those

suspected of defrauding the federal government. For example, in the last 4
fiscal years (1997 through 2000) Education's OIG opened 1,030 fraud
investigative cases and achieved 737 closures, including 268 convictions and
pleas. 1 Despite the reduction in default rates, the risk of default
continues to place taxpayers at risk, and the downward turn in default rates
may not continue if economic conditions decline. Further, the annual costs
of defaults remain substantial. In fiscal year 1999, the default cost

for the Federal Family Education Loan Program 1 During the same period, the
OIG also reported achieving 261 indictments and informations.

(FFELP) and Federal Direct Loan Program (FDLP) was about $4. 3 billion; the
default cost since 1990 has been more than $28 billion. 2

In July 1999, we reported that the method used by Education to calculate
schools' default rates 3 understates the default rate, and we proposed an
alternative, more appropriate method. We suggested that the Congress may
wish to consider amending the Higher Education Act of 1965 to exclude from
the annual calculation of school default rates borrowers who have loans in
deferment or forbearance by the end of the 2- year cohort default period (a
cohort consists of a group of borrowers who began repaying their loans

during a given fiscal year). Further, we suggested that the Congress may
wish to require that borrowers excluded from a cohort's default rate
calculation due to an authorized deferment or forbearance are included in a
future cohort after they have resumed making payments on their loans.
Education has improved its databases containing information about students
receiving financial aid and its process for certifying schools to
participate in federal student aid programs. However, Education's OIG has
recently noted that the Department's process for recertifying foreign
schools is ineffective. Also, in a separate study of the case management and
oversight of all participating institutions, the OIG has recently found

that proper controls were not in place to ensure the 2 Some default costs
may have been recovered through collections of previously defaulted amounts.
3 The issue involves borrowers who have temporary approval through their
lenders or loan servicers for “deferment” or
“forbearance,” that is, they can delay payments on their loans.
In Education's calculation

of a school's default rate, these borrowers are not counted as defaulters,
but they do count as a part of the total number of borrowers. The number of
borrowers in default is divided by a number larger than the total number of
borrowers who are actually repaying their loans. As a result, the default
rate is understated.

effective use of program reviews. These program reviews are intended to
monitor and improve institutional performance and compliance with title IV
requirements. The outcome of such reviews may determine whether an
educational institution is

recertified to participate in federal student aid programs. The Department
is improving its procedure for obtaining and verifying the eligibility
information used to prevent student loan fraud. However, further
improvements to prevent fraud are needed. As we reported in September 2000,
the problem is that neither Education nor

individual institutions such as colleges and universities that check the
accuracy of student financial aid applications have access to third- party
data sources to independently verify most applicants' family income before
disbursing loan and grant payments. Education's

OIG, which traced a sample of income data from applications that
institutions had verified, documented weaknesses in the verification
process. While Education's verification procedures- such as computer checks
to identify error- prone applications- are reasonable for detecting and
correcting mistakes on applications, they cannot identify students who
intentionally underreport family income. In the 1998 amendment to Title IV
of the Higher Education Act, the Congress instructed Education and the
Internal Revenue Service (IRS) to cooperate in verifying students' income to
prevent loan fraud. Subsequently, in September 2000, we determined that
Education could obtain eligibility information by matching automated
computer files and accessing online databases from the IRS. The two agencies
are currently conducting two pilot projects to match

Education and IRS data. If the pilots are successful and if IRS grants
Education permission to receive summary taxpayer information for use in
verifying data provided on loan applications, Education could use enhanced

data sharing to make more timely and accurate eligibility determinations.
While Education's performance plans for fiscal year 1999 through fiscal year
2001 address most of the Department's key outcomes, none of its goals or
objectives directly address fraud, waste, and mismanagement in its financial
management system or the high- risk status of its student financial aid
programs.

Because these vulnerabilities potentially pose high costs to the federal
government and America's taxpayers, we concluded in a June 2000 report that
Education should develop performance goals, objectives, and measures

that directly relate to the management and oversight of its financial system
and student loan programs. After we issued our report, Education revised its
strategic plan to include a performance goal of improving the integrity of
the financial aid program. For that goal, the Department has not developed
objectives and measures although it has identified a number of strategies
that have the potential to address our concerns, such as increasing
oversight efforts, continuing to work on the feasibility of matching
application and tax data, and educating the foreign school community about
program requirements.

Key Contact Cornelia M. Ashby, Director Education, Workforce, and

Income Security Issues (202) 512- 7215 ashbyc@ gao. gov

Encourage States Education continues to face significant challenges in to
Improve demonstrating whether its programs are meeting their

Performance goals and, consequently, cannot always provide to the
Information and

Congress and other decisionmakers the information Upgrade Federal

they need to make decisions about how well these Evaluations Used programs
operate and the level at which they should be to Assess How funded. These
challenges stem, in part, from the Well All Children flexibility that state
and local agencies have in determining how federal funds are used for
elementary Reach Challenging and secondary education and what information is
Academic reported. In addition, states have different standards Standards

and assessment systems and test students at different times of the year and
at different grade levels. Consequently, it is difficult for Education to
collect comparable information about programs and combine information from
the states into a national picture. The lack of comparable state data
underscores the

importance of federal program evaluations to assess program outcomes, but in
our review of three large- scale evaluations, we have found that the
usefulness of the

information provided by these evaluations varies. Useful information about
large federal programs, such as title I, is particularly important. However,
several states have experienced difficulty collecting and reporting
information about their students' performance

in the manner required by law. Funded at $7. 9 billion, title I is the
Department's largest elementary and secondary program. Title I legislation
requires states to collect assessment results separately for six specific

categories of children (by gender group, racial and ethnic group, migrant
status, disability status, English proficiency status, and economic status)
by the 20002001 school year. State and Education officials plan to use these
data to demonstrate the extent to which all

children, including children belonging to groups that are at risk of
educational failure, are meeting state standards. Although some information
on student achievement will soon be available from most states,

some states have experienced difficulty in collecting and reporting data by
the six categories.

To help states improve the timeliness and specificity of their assessment
data, the collection and reporting of disaggregated data, and the clarity of
their criteria for adequate progress, in June 2000, we recommended that
Education conduct additional activities to facilitate the exchange of
information and best practices among states. As a result, Education is
reviewing options to improve its technical assistance to states and is

considering ways to facilitate the exchange of student assessment
information. Because of the challenges in gathering comparable data on
program outcomes from states, Education routinely funds large- scale program
evaluations. Given that both Education and Congress depend on these
evaluations

for information about how programs are working on a national level, it is
incumbent on the Department to ensure that these studies are well designed
and produce useful information. Our reviews of several of these

evaluations indicated that the usefulness of their results depended on how
well they were designed.

For example, in September 2000, we reported that Education's evaluation of
its Upward Bound program provided reliable and valid information that
deepened the Department's understanding of how the program was working. This
evaluation incorporated sound design strategies, such as the use of a
control group to make comparisons between participating students and
nonparticipating students, as well as random selection, so that the effects
of the program could be determined. We also reported that the results of
this evaluation could be used to make decisions about who is targeted for
this

program and the length of their participation.

In addition, at the request of the Congress, we examined two studies that
gathered information on title I students. The first, Prospects: The
Congressionally Mandated Study of Educational Growth and Opportunity, was
conducted to help Congress with the 1994 reauthorization of title I, which
was completed in 1997. The second, the ongoing Longitudinal Evaluation of
School Change and Performance (LESCP), is currently being conducted to help
with the impending reauthorization.

As we reported in August 2000, Prospects had a rigorous and comprehensive
design and collected information that allowed decisionmakers to draw
conclusions about the effects of title I. In contrast, we emphasized that
limitations of the design of the LESCP studyparticularly the study's small,
nonrepresentative samplewill restrict decisionmakers' ability to draw strong
conclusions from its data. We further explained

how the lack of agreement about LESCP's purpose created unclear expectations
for the study and will make it difficult to predict the degree to which the
final report will be useful in assessing title I, education reform, or
instructional practices. We concluded that agreement on the purpose of the
study is needed before researchers can develop an adequate study design that

will allow efficient data collection, appropriate analyses, and
generalizable results.

In June 2000, we recommended that Education implement additional actions to
improve research on the effectiveness of specific services in title I
schoolwide and targeted assistance programstwo different approaches to
serving children in schools eligible for title I. We said that such actions
could include expanding and improving current data collection efforts or

designing an evaluation for a study or set of studies of educational
services. Education agreed with this recommendation and stated that it will
initiate these activities in developing its next title I evaluation plan.

In another example, Education has no data on the outcomes of its migrant
education program, which serves children who are extremely vulnerable for
educational failure. In 1996, the migrant program provided direct services
to more than 600,000 students.

In our October 1999 review of migrant education programs, we recommended
that Education include studies to measure outcomes of its migrant education
program as part of ongoing national data collection. We acknowledged that
the cost of studies that include

nationally representative samples of migrant students might be prohibitive.
However, we explained to Education that the majority of migrant students are
located in a small number of states where they reside for considerable
periods of time. We recommended that Education's future data collection
activities include a special sample of migrant children in these states.
Education agreed with our recommendation and is exploring strategies to
assess a special sample of

migrant children as part of the 2002 National Assessment of Educational
Progress. Key Contact Marnie S. Shaul, Director

Education, Workforce, and Income Security Issues (202) 512- 7215 shaulm@
gao. gov Promote Education is the lead federal agency on education but is
Coordination to only one of many federal, state, and local agencies

Help Build a Solid supporting education. To improve the services children

Foundation of receive and reduce the chance that children face gaps in
Learning for All service, Education needs to promote coordination

Children among federal agencies and with states and local

agencies. This is especially important when other federal agencies fund most
of the services. For example, HHS funds almost 90 percent of the federal
investment in early education and care. Coordination with states

and local entities is also critical because education is primarily a state
and local responsibility. Education has improved its interagency
coordination; however, in several recent studies, we identified early
education and migrant education as two areas where Education could improve
coordination to better serve children. Education's ability to play a
leadership role in coordinating early childhood education is complicated
because most of the resources that support these

programs come from other agencies. Although Education administers most of
the 29 federal programs that are authorized to provide early education and
care as their primary purpose, HHS administers most of the funding. Of the
$9 billion that the federal government invests in early childhhood education
and care, $8 billion is allocated to HHS to support three of its
programsHead Start, Child Care and Development Fund (CCDF), and Temporary
Assistance for Needy Families (TANF) block grants. Education has highlighted
early childhood programs as a major area of departmental concern because
early learning opportunities for children have consequences for long- term
success; research on early brain development reveals that if some learning
experiences are not introduced to children at an early age, the children
will find learning more difficult later; children who enter school ready to
learn are more likely to achieve high standards than children who are

inadequately prepared; and high- quality preschool and child care are
integral in preparing children adequately for school. In March 1999, we
pointed out that although Education said it planned to coordinate with other
agencies, particularly HHS, it did not describe in detail how it would do
so. In response to our work in this area, Education and HHS officials have
collaborated to

develop shared outcome indicators (e. g., children will leave kindergarten
ready to learn to read) and measures (e. g., identifying every letter of the
alphabet) for preschool- aged children served by title I and Head Start, but
it is too soon to tell if these efforts are sufficient to improve services
for children. Migrant education is another area where Education can promote
coordination to improve services for children. In 1999, Education became
involved in an interagency

group comprised of the federal directors of programs that work with migrant
education, health, and labor issues. This group was formed to increase
coordination and collaboration among programs serving migrant children and
their families. Although this interagency effort holds promise and includes
both HHS and the Department of Labor, coordination challenges remain. Our
October 1999 report on education programs for migrant children illustrated
how differences in Education's and HHS' eligibility requirements for
programs targeting migrant children create service gaps, impede service
coordination, and complicate transitions

between programs. We recommended that HHS harmonize its Migrant Head Start
eligibility requirements with those of the Migrant Education Program.

Because states and local governments bear major responsibilities and provide
most of the educational funding for these students, in October 1999, we
recommended that Education work with states to help them develop a
nationwide system to permit the

exchange of essential data about migrant children as they move from school
to school. Such a system would reduce the risks of migrant children
receiving unneeded duplicative immunizations to meet school entrance
requirements and experiencing disruptions in needed services. Education
agreed with this recommendation

and has reserved funding to support technical and operational aspects of an
interconnected system.

Key Contact Marnie S. Shaul, Director Education, Workforce, and

Income Security Issues (202) 512- 7215 shaulm@ gao. gov Improve Financial

Weaknesses in Education's financial management and Management to

information systems limit the Department's ability to Help Build a
HighPerforming achieve one of its key goals- improving financial management
to help build a high- performing agency. Agency

Beginning with the Department's first agencywide audit in 1995, Education's
auditors have repeatedly identified significant financial management
weaknesses. Education's fiscal year 1999 financial statement audit disclosed
continuing weaknesses that have prevented the agency from receiving a
“clean” audit opinion. The

range of Education's internal control weaknesses hampers its ability to
generate reliable, useful, and timely information on an ongoing basis to
ensure accountability to taxpayers. Although Education has

planned and begun implementing many actions to resolve its financial
management weaknesses, it is too soon to determine if these will prove
effective or if the Department will continue to face serious financial
management challenges.

Specifically, auditors reported material internal control weaknesses
relating to (1) the inability to prepare routine financial reports, (2) the
lack of proper or timely reconciliation of accounting records, (3) failure
to return about $2. 7 billion in net collections from FFELP to the Treasury
in accordance with the Federal Credit Reform Act (FCRA) of 1990, (4)
vulnerabilities in information systems that could result in unauthorized

access to sensitive information and disruption in services, and (5) the
inappropriate manner in which the agency used a deposit fund established to
return funds to grant recipients. For fiscal year 1999, as in prior years,
Education did not have adequate internal controls over its financial

reporting process. Education's financial reporting weaknesses can be
attributed primarily to several limitations of a new accounting system that
Education implemented during fiscal year 1998. A significant limitation of
this new accounting system was its general ledger system, which was unable
to perform an automated year- end closing process and directly produce
consolidated financial statements. Because of these system weaknesses,
Education had to resort to a labor- intensive and time- consuming process
involving automated and manual procedures to prepare its fiscal year 1999
financial statements. Additionally, during fiscal year 1999, Education did
not perform an adequate or timely reconciliation of the differences between
its financial accounting records and cash transactions reported by Treasury.
Treasury policy requires agencies to reconcile their accounting records with
relevant Treasury records, similar to the way in which individuals reconcile
their checkbooks to monthly bank statements. For fiscal year 1999, there

was a $244 million difference between Treasury's and Education's records;
Education adjusted its “Fund Balance with Treasury” account
without determining the causes of the differences. Weaknesses in Education's
internal controls over the reconciliation process prevented timely detection
and correction of errors in its underlying accounting records. Without
reliable timely data in its accounting records, the risk of fraud, waste,
and mismanagement of funds is increased.

Because it did not properly account for and analyze its FFELP transactions
or properly reconcile related accounting and budgetary accounts consistent
with FCRA, Education could not be assured that its financial or budgetary
reports were accurate. These problems

diminish the potential that these reports will help the Congress and others
understand how Education spent program funds. For example, during fiscal
year 1999, Education did not transfer about $2. 7 billion in unobligated
balances in its liquidating account for FFELP loans to the Treasury's
general fund as required by FCRA. Further, Education did not sufficiently
analyze the balances reflected on the financial statements to ensure that
the FFELP balances agreed with relevant balances in the Department's
budgetary accounts. For

the liquidating account, the auditors identified an unexplained difference
of about $700 million between the FFELP and budgetary accounts as of
September 30, 1999. Further, Education's auditors reported that the
Department had deficiencies in its information systems controls. These
controls included (1) implementing user management controls, such as
procedures for requesting, authorizing, and revalidating access to computing
resources; (2) monitoring and reviewing access to sensitive computer
resources; (3) documenting approach and methodology for the design and
maintenance of its information technology architecture; and (4) developing
and testing a comprehensive disaster recovery plan to ensure the continuity
of critical system operations in the event of disaster. Continued weaknesses
in information systems

controls increase the risk of disruption in services and make Education's
sensitive grant and loan data vulnerable to unauthorized access, inadvertent
or

deliberate misuse, fraudulent use, improper disclosure, or destruction, all
of which could occur without detection.

Education also did not perform routine reconciliations of its grant payments
system with the general ledger. Although no improper payments were
identified, the auditors noted that reconciliations were not routinely
performed because Education had not developed adequate policies and
procedures for doing so. As a result, we reported in August 2000 that there
was

increased risk that material errors or irregularities could occur and would
not be detected in a timely manner. In addition, Education has not
maintained adequate records in cases where grant funds are returned to the
Department. Grant recipients who meet certain thresholds 4 are audited to
test their compliance with grant requirements. If audits identify certain
types of noncompliance, recipients must repay Education the amount related
to the noncompliance; that is, they have to give the grant funds back to
Education. These funds-

from all grantsare put in one account, called the grantback account. 5 We
found that Education was not managing the grantback account properly. For
example, we found that, beginning in 1993, Education inappropriately used
the grantback account as a suspense account to hold hundreds of millions of
dollars

worth of transactions. Because Education did not maintain adequate detailed
records for certain grantback activity, Education could not readily identify
the specific grants from which the various grantback transactions came. Such
documentation is needed as a part of a funds control system to ensure
compliance

with the Anti- Deficiency Act, which requires agencies to prevent possible
overobligation or overexpenditures 4 The requirements apply to grant
recipients who annually expend

federal awards of $300,000 or more (or receive awards of $100,000 or more
prior to June 1997).

5 The grantback account was established to retain funds to make grantback
payments and to account for grantback activity. If the grant recipient meets
certain conditions, including correcting the noncompliance, Education may
return up to 75 percent of the amount recovered in the form of grantback
payments.

and to report to the President and the Congress if these conditions occur.
Education has taken various corrective actions in response to the material
financial management weaknesses identified in its fiscal year 1999 financial
statement audit. Key corrective actions include purchasing a new general
ledger system, acquiring a

software tool to help automate the reconciliation process, improving
controls over access to computer resources, and establishing a process to
return certain excess FFELP funds to Treasury. While Education actively has
taken steps to reduce its financial management problems, it is too early to
tell whether the Department will be successful. It is critical that
Education resolve these challenges to generate reliable,

useful, and timely information on an ongoing basis to ensure adequate
accountability to taxpayers, manage for results, and help congressional and
program decisionmakers make timely, well- informed decisions. Furthermore,
it is also essential that Education recognize the importance of a continuing
strong commitment to attain a “clean” or unqualified audit
opinion on its financial statements. Acquiring an unqualified audit opinion
is the first step in achieving sound financial management.

Key Contacts Linda M. Calbom, Director Financial Management and Assurance
Group (202) 512- 8341 calboml@ gao. gov Cornelia M. Ashby, Director

Education, Workforce, and Income Security Issues (202) 512- 7215 ashbyc@
gao. gov

Related GAO Products Federal Financial

Higher Education: Trustee Arrangements Serve Useful Aid Purpose in Student
Loan Market (GAO/ HEHS- 00- 170, Sept. 25, 2000).

Benefit and Loan Programs: Improved Data Sharing Could Enhance Program
Integrity (GAO/ HEHS- 00- 119, Sept. 13, 2000). Student Loans: Default Rates
Need to Be Computed More Appropriately (GAO/ HEHS- 99- 135, July 28, 1999).

Department of Education: Resolving Discrimination Complaints Has Improved
With New Processing System (GAO/ HEHS- 99- 47R, Mar. 23, 1999). Direct
Student Loans: Overpayments During the Department of Education's Conversion
to a New Payment System (GAO/ HEHS- 99- 44R, Feb. 17, 1999). Student Loans:
Improvements in the Direct Loan Consolidation Process (GAO/ HEHS- 99- 19R,
Nov. 10, 1998).

Improving Program Evaluation: Studies Helped Agencies Measure

Children's or Explain Program Performance (GAO/ GGD- 00- 204,

Education Sept. 29,1999).

Education for Disadvantaged Children: Research Purpose and Design Features
Affect Conclusions Drawn From Key Studies (GAO/ HEHS- 00- 168, Aug. 31,
2000). Title I Program: Stronger Accountability Needed for Performance of
Disadvantaged Students (GAO/ HEHS- 00- 89, June 1, 2000).

Migrant Children: Education and HHS Need to Improve the Exchange of
Participant Information (GAO/ HEHS- 00- 4, Oct. 15, 1999).

Ed- Flex Program: Increase in Flexibility Useful but Limited by Scope of
Waiver Authority (GAO/ T- HEHS- 99- 67, Feb. 25, 1999). Interagency

Early Education and Care: Overlap Indicates Need to Coordination Access
Crosscutting Programs (GAO/ HEHS- 00- 78, Apr. 28, 2000).

Education and Care: Early Childhood Programs and Services for Low- Income
Families (GAO/ HEHS- 00- 11, Nov. 15, 1999).

Migrant Children: Education and HHS Need to Improve the Exchange of
Participant Information (GAO/ HEHS- 00- 4, Oct. 15, 1999).

Preschool Education: Federal Investment for LowIncome Children Significant
but Effectiveness Unclear (GAO/ T- HEHS- 00- 83, Apr. 11, 2000).

Results Act: Using Agency Performance Plans to Oversee Early Childhood
Programs (GAO/ T- HEHS- 99- 93, Mar. 25, 1999).

Financial Financial Management: Review of Education's

Management Grantback Account (GAO/ AIMD- 00- 228, Aug. 18, 2000).
Education's FY 1999 Performance Report and FY 2001

Performance Plan (GAO/ HEHS- 00- 128R, June 30, 2000). Financial Management:
Education's Financial Management Problems Persist (GAO/ T- AIMD- 00- 180,
May 24, 2000).

Education Discretionary Grants: Awards Process Could Benefit From Additional
Improvements (GAO/ HEHS- 0055, Mar. 30, 2000). Financial Management:
Education Faces Challenges in Achieving Financial Management Reform (GAO/ T-
AIMD00- 106, Mar. 1, 2000).

Performance and Accountability Series

Major Management Challenges and Program Risks: A Governmentwide Perspective
(GAO- 01- 241)

Major Management Challenges and Program Risks: Department of Agriculture
(GAO- 01- 242)

Major Management Challenges and Program Risks: Department of Commerce (GAO-
01- 243)

Major Management Challenges and Program Risks: Department of Defense (GAO-
01- 244)

Major Management Challenges and Program Risks: Department of Education (GAO-
01- 245)

Major Management Challenges and Program Risks: Department of Energy (GAO-
01- 246)

Major Management Challenges and Program Risks: Department of Health and
Human Services (GAO- 01- 247)

Major Management Challenges and Program Risks: Department of Housing and
Urban Development (GAO- 01- 248)

Major Management Challenges and Program Risks: Department of the Interior
(GAO- 01- 249)

Major Management Challenges and Program Risks: Department of Justice (GAO-
01- 250)

Major Management Challenges and Program Risks: Department of Labor (GAO- 01-
251)

Major Management Challenges and Program Risks: Department of State (GAO- 01-
252)

Major Management Challenges and Program Risks: Department of Transportation
(GAO- 01- 253)

Major Management Challenges and Program Risks: Department of the Treasury
(GAO- 01- 254)

Major Management Challenges and Program Risks: Department of Veterans
Affairs (GAO- 01- 255)

Major Management Challenges and Program Risks: Agency for International
Development (GAO- 01- 256)

Major Management Challenges and Program Risks: Environmental Protection
Agency (GAO- 01- 257)

Major Management Challenges and Program Risks: National Aeronautics and
Space Administration (GAO- 01- 258)

Major Management Challenges and Program Risks: Nuclear Regulatory Commission
(GAO- 01- 259)

Major Management Challenges and Program Risks: Small Business Administration
(GAO- 01- 260)

Major Management Challenges and Program Risks: Social Security
Administration (GAO- 01- 261)

Major Management Challenges and Program Risks: U. S. Postal Service (GAO-
01- 262)

High- Risk Series: An Update (GAO- 01- 263)

GAO United States General Accounting Office

Page 1 GAO- 01- 245 Education Challenges

Contents Letter 3 Overview 6 Major Performance and Accountability Challenges

14 Related GAO Products

31 Performance and Accountability Series

34

Page 2 GAO- 01- 245 Education Challenges

Comptroller General of the United States

Page 3 GAO- 01- 245 Education Challenges United States General Accounting
Office

Washington, D. C. 20548

Page 4 GAO- 01- 245 Education Challenges

Page 5 GAO- 01- 245 Education Challenges

Page 6 GAO- 01- 245 Education Challenges

Overview Page 7 GAO- 01- 245 Education Challenges

Overview Page 8 GAO- 01- 245 Education Challenges

Overview Page 9 GAO- 01- 245 Education Challenges

Overview Page 10 GAO- 01- 245 Education Challenges

Overview Page 11 GAO- 01- 245 Education Challenges

Overview Page 12 GAO- 01- 245 Education Challenges

Overview Page 13 GAO- 01- 245 Education Challenges

Page 14 GAO- 01- 245 Education Challenges

Major Performance and Accountability Challenges Page 15 GAO- 01- 245
Education Challenges

Major Performance and Accountability Challenges Page 16 GAO- 01- 245
Education Challenges

Major Performance and Accountability Challenges Page 17 GAO- 01- 245
Education Challenges

Major Performance and Accountability Challenges Page 18 GAO- 01- 245
Education Challenges

Major Performance and Accountability Challenges Page 19 GAO- 01- 245
Education Challenges

Major Performance and Accountability Challenges Page 20 GAO- 01- 245
Education Challenges

Major Performance and Accountability Challenges Page 21 GAO- 01- 245
Education Challenges

Major Performance and Accountability Challenges Page 22 GAO- 01- 245
Education Challenges

Major Performance and Accountability Challenges Page 23 GAO- 01- 245
Education Challenges

Major Performance and Accountability Challenges Page 24 GAO- 01- 245
Education Challenges

Major Performance and Accountability Challenges Page 25 GAO- 01- 245
Education Challenges

Major Performance and Accountability Challenges Page 26 GAO- 01- 245
Education Challenges

Major Performance and Accountability Challenges Page 27 GAO- 01- 245
Education Challenges

Major Performance and Accountability Challenges Page 28 GAO- 01- 245
Education Challenges

Major Performance and Accountability Challenges Page 29 GAO- 01- 245
Education Challenges

Major Performance and Accountability Challenges Page 30 GAO- 01- 245
Education Challenges

Page 31 GAO- 01- 245 Education Challenges

Related GAO Products Page 32 GAO- 01- 245 Education Challenges

Related GAO Products Page 33 GAO- 01- 245 Education Challenges

Page 34 GAO- 01- 245 Education Challenges

Performance and Accountability Series

Page 35 GAO- 01- 245 Education Challenges

Ordering Information

The first copy of each GAO report is free. Additional copies of reports are
$2 each. A check or money order should be made out to the Superintendent of
Documents. VISA and MasterCard credit cards are accepted, also. Orders for
100 or more copies to be mailed to a single address are discounted 25
percent.

Orders by mail:

U. S. General Accounting Office P. O. Box 37050 Washington, DC 20013

Orders by visiting:

Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U. S. General
Accounting Office Washington, DC

Orders by phone:

(202) 512- 6000 fax: (202) 512- 6061 TDD (202) 512- 2537

Each day, GAO issues a list of newly available reports and testimony. To
receive facsimile copies of the daily list or any list from the past 30
days, please call (202) 512- 6000 using a touchtone phone. A recorded menu
will provide information on how to obtain these lists.

Orders by Internet:

For information on how to access GAO reports on the Internet, send an e-
mail message with “info” in the body to: info@ www. gao. gov or
visit GAO's World Wide Web home page at: http:// www. gao. gov

To Report Fraud, Waste, or Abuse in Federal Programs

Contact one:

? Web site: http:// www. gao. gov/ fraudnet/ fraudnet. htm ? e- mail:
fraudnet@ gao. gov ? 1- 800- 424- 5454 (automated answering system)

United States General Accounting Office Washington, D. C. 20548- 0001

Official Business Penalty for Private Use $300

Address Correction Requested Bulk Mail

Postage & Fees Paid GAO Permit No. GI00
*** End of document. ***