[Audit Report on Operational Funding Status, Department of Education, Government of Guam]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 98-I-643

Title: Audit Report on Operational Funding Status, Department of
       Education, Government of Guam

Date:  August 28, 1998




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U.S. Department of the Interior
Office of Inspector General






AUDIT REPORT


OPERATIONAL FUNDING STATUS,DEPARTMENT OF EDUCATION,
GOVERNMENT OF GUAM


REPORT NO. 98-I-643
AUGUST 1998






MEMORANDUM


             TO:  The Secretary

           FROM:  Richard N. Reback
                  Acting Inspector General

SUBJECT SUMMARY:  Final Audit Report for Your Information - "Operational
                  Funding  Status, Department of Education, Government of
                  Guam" (No. 98-I-643)


Attached for your information is a copy of the subject final audit report.  The objective of the
review was to determine whether Guam's Departments of Education and Administration
complied with applicable laws and procedures relating to the allocation and transfer of
appropriated and encumbered funds upon the change of  Education's primary funding source
from General Fund appropriations to annual gross receipts tax collections.

We found that Education's financing of routine operations was disrupted in May 1997
because Administration transferred $5.6 million from two Education bank accounts to a
General Fund bank account without Education's knowledge or approval and, as of
February 28, 1998, had not returned unused funds of $4 million or provided Education with
an accounting of expended funds of $1.6 million.  These conditions occurred because (1) the
implementing public laws did not identify which funds Education should retain and did not
provide for a transition period to implement the mandated changes, (2) Administration and
Education did not cooperate effectively during the transition process, and (3) Administration
did not have adequate written procedures for closing bank accounts.  As a result, Education
did not have access to more than $4 million in previously available funds and was unable to
determine what financial resources would be available for fiscal year 1997.  In addition,
Education had to pay, from its new funding source, expenses of at least $2.8 million that
were incurred prior to the April 1997 transition date.

To correct the conditions noted, we recommended that (1) the Legislature revise the Standing
Rules to ensure that any future legislation which changes the method of funding a
government entity includes language on the disposition of existing funding and requires a
transition period, (2) the Director of Administration implement procedures to prevent the
closing of agency bank accounts until affected agencies have cleared all outstanding
transactions, and (3) the Director of Education request the return of the unused $4 million
and an accounting of the expended $1.6 million in funds transferred from its accounts.

The Speaker of the Guam Legislature and the Governor of Guam concurred with the
recommendations addressed to each of them.  The Board of Education and Department of
Education did not address the recommendation addressed to them.  Based on the responses,
two recommendations are considered resolved but not implemented and one recommendation
is considered unresolved.

If you have any questions concerning this matter, please contact me at (202) 208-5745.

Attachment






                                                                        N-IN-GUA-004-97-A



Ms. Gloria Nelson
Chairperson
Interim Board of Education
P.O. Box DE
Agana, Guam  96932


Subject:  Audit Report on Operational Funding Status,
          Department of Education, Government of Guam (No. 98-I-643)


Dear Ms. Nelson:

This report is the first in a series of reports on various operations of the Department of
Education, Government of Guam.  It presents the results of our review of Education's
operational funding status as of April 30, 1997.  The objective of our review was to
determine whether the Departments of Education and Administration complied with
applicable laws and budgetary and accounting procedures relating to the allocation and
transfer of appropriated and encumbered funds upon the change of the Department of
Education's primary funding source from General Fund appropriations to the Gross Receipts
Tax during April and May 1997.  The scope of the audit included the status of Education
funds as of April 30, 1997, and related financial transactions and Legislative and Executive
branch actions affecting the funds that occurred during the period of May 1997 to February
1998.

We concluded that the Government of Guam needed to make improvements in the areas of
financial legislation and financial management.  Specifically, we found that the Department
of Education's financing of routine operations was disrupted in May 1997 because the
Department of Administration transferred $5.6 million from two Education bank accounts
to a General Fund bank account without Education's knowledge or approval and, as of
February 28, 1998, had not returned $4 million in unused funds or provided Education with
an accounting of the expended funds.  Administration made these transfers as part of its
effort to comply with Public Law 24-17 to change Education's main operations funding
source.  However, the transfers were not in accordance with the intent of Public Law 24-17
or the language of Public Law 24-34, the latter of which was subsequently enacted to require
that existing accounts related to Education be transferred to the School Operations Fund.

These conditions occurred because (1) the Public Laws did not identify which funds
Education should retain and did not provide for a transition period to implement the
mandated changes, (2) the Departments of Administration and Education did not coordinate
effectively during the transition process, and (3) Administration did not have adequate
written procedures for closing bank accounts.  We determined that, as a result, Education did
not have access to more than $4 million in previously available funds and was unable to
determine exactly what financial resources would be available for fiscal year 1997
operations.  Additionally, Education had to pay $2.8 million of the expenses incurred prior
to April 29, 1997, from its gross receipts tax funding source.

To correct the conditions noted, we recommended that (1) the Legislature revise the Standing
Rules to ensure that any future legislation which changes the method of funding a
government entity includes language specifying the disposition of existing funding and
requires a transition period to ensure proper accounting of the transfer, resolve any
uncertainties, and address any legal issues related to the funding changes; (2) the Governor
of Guam require the Director of Administration to prepare written procedures to ensure that
the Treasurer of Guam does not close bank accounts or transfer bank account balances until
affected agencies determine how to clear all legal outstanding transactions; and (3) the Board
of Education require the Director of Education to make a formal written request to the
Department of Administration and the Bureau of Budget and Management Research for the
return of the unused $4 million, an accounting of the $1.6 million used by Administration
to pay Education expenses, and access to the related bank records for April and May 1997.

In the July 24, 1998, response (Appendix 3) to our draft report from the Speaker of the Guam
Legislature, the Legislature concurred with Recommendation 1 and indicated that corrective
actions would be taken.  The July 23, 1998, response (Appendix 4) from the Governor of
Guam included a July 20,1998, response from the Department of Administration, in which
Administration concurred with Recommendation 2 and indicated that corrective action would
be taken.  In the July 23, 1998, response (Appendix 5) from you, the Board and the
Department of Education expressed general concurrence with the report but disagreed with
certain statements concerning the need for better coordination with Administration to resolve
the reported funding issues.  Education did not specifically address Recommendation 3.
Based on the responses, we consider Recommendations 1 and 2 resolved but not
implemented and Recommendation 3 unresolved.  Accordingly, the unimplemented
recommendations will be referred to the Assistant Secretary for Policy, Management and
Budget for tracking of implementation, and the Board of Education is requested to provide
a response to Recommendation 3, which is unresolved (see Appendix 6).

The Inspector General Act, Public Law 95-452, Section 5(a)(3), as amended, requires
semiannual reporting to the U.S. Congress on all audit reports issued, the monetary impact
of audit findings (Appendix 1), actions taken to implement audit recommendations, and
identification of each significant recommendation on which corrective action has not been
taken.

In view of the above, please provide a response, as required by Public Law 97-357, to this
report by September 30, 1998.  The response should be addressed to our Pacific Office,
415 Chalan San Antonio, Baltej Pavilion, Suite 306, Tamuning, Guam 96911.  The response
should provide the information requested in Appendix 6.
We appreciate the assistance of management and staff of the Department of Education in the
conduct of our audit.

                                                              Sincerely,



                                                              Richard N. Reback
                                                              Acting Inspector General
                                                              N-IN-GUA-004-97-A






The Honorable Carl T.C. Gutierrez
Governor of Guam
Office of the Governor
Agana, Guam  96910


Subject:  Audit Report on Operational Funding Status,
          Department of Education, Government of Guam (No. 98-I-643)


Dear Governor Gutierrez:

This report is the first in a series of reports on various operations of the Department of
Education, Government of Guam.  It presents the results of our review of Education's
operational funding status as of April 30, 1997.  The objective of our review was to
determine whether the Departments of Education and Administration complied with
applicable laws and budgetary and accounting procedures relating to the allocation and
transfer of appropriated and encumbered funds upon the change of the Department of
Education's primary funding source from General Fund appropriations to the Gross Receipts
Tax during April and May 1997.  The scope of the audit included the status of Education
funds as of April 30, 1997, and related financial transactions and Legislative and Executive
branch actions affecting the funds that occurred during the period of May 1997 to February
1998.

We concluded that the Government of Guam needed to make improvements in the areas of
financial legislation and financial management.  Specifically, we found that the Department
of Education's financing of routine operations was disrupted in May 1997 because the
Department of Administration transferred $5.6 million from two Education bank accounts
to a General Fund bank account without Education's knowledge or approval and, as of
February 28, 1998, had not returned $4 million in unused funds or provided Education with
an accounting of the expended funds.  Administration made these transfers as part of its
effort to comply with Public Law 24-17 to change Education's main operations funding
source.  However, the transfers were not in accordance with the intent of Public Law 24-17
or the language of Public Law 24-34, the latter of which was subsequently enacted to require
that existing accounts related to Education be transferred to the School Operations Fund.

These conditions occurred because (1) the Public Laws did not identify which funds
Education should retain and did not provide for a transition period to implement the
mandated changes, (2) the Departments of Administration and Education did not coordinate
effectively during the transition process, and (3) Administration did not have adequate
written procedures for closing bank accounts.  We determined that, as a result, Education did
not have access to more than $4 million in previously available funds and was unable to
determine exactly what financial resources would be available for fiscal year 1997
operations.  Additionally, Education had to pay $2.8 million of the expenses incurred prior
to April 29, 1997, from its gross receipts tax funding source.

To correct the conditions noted, we recommended that (1) the Legislature revise the Standing
Rules to ensure that any future legislation which changes the method of funding a
government entity includes language specifying the disposition of existing funding and
requires a transition period to ensure proper accounting of the transfer, resolve any
uncertainties, and address any legal issues related to the funding changes; (2) you, as the
Governor of Guam, require the Director of Administration to prepare written procedures to
ensure that the Treasurer of Guam does not close bank accounts or transfer bank account
balances until affected agencies determine how to clear all legal outstanding transactions; and
(3) the Board of Education require the Director of Education to make a formal written
request to the Department of Administration and the Bureau of Budget and Management
Research for the return of the unused $4 million, an accounting of the $1.6 million used by
Administration to pay Education expenses, and access to the related bank records for April
and May 1997.

In the July 24, 1998, response (Appendix 3) to our draft report from the Speaker of the Guam
Legislature, the Legislature concurred with Recommendation 1 and indicated that corrective
actions  would  be  taken.  The July 23, 1998, response (Appendix 4) from you included a
July 20, 1998, response from the Department of Administration, in which Administration
concurred with Recommendation 2 and indicated that corrective action would be taken.  In
the July 23, 1998, response (Appendix 5) from the Chairperson of the Board of Education,
the Board and Education expressed general concurrence with the report but disagreed with
certain statements concerning the need for better coordination with Administration to resolve
the reported funding issues.  Education did not specifically address Recommendation 3.
Based on the responses, we consider Recommendations 1 and 2 resolved but not
implemented and Recommendation 3 unresolved.  Accordingly, the unimplemented
recommendations will be referred to the Assistant Secretary for Policy, Management and
Budget for tracking of implementation, and the Board of Education is requested  to  provide
a  response  to  Recommendation 3, which is unresolved (see Appendix 6).

The Inspector General Act, Public Law 95-452, Section 5(a)(3), as amended, requires
semiannual reporting to the U.S. Congress on all audit reports issued, the monetary impact
of audit  findings (Appendix 1), actions taken to implement audit recommendations, and
identification of each significant recommendation on which corrective action has not been
taken.

In view of the above, please provide a response, as required by Public Law 97-357, to this
report by September 30, 1998.  The response should be addressed to our Pacific Office,
415 Chalan San Antonio, Baltej Pavilion, Suite 306, Tamuning, Guam 96911.  The response
should provide the information requested in Appendix 6.

We appreciate the assistance of the Legislature and the management and staff of the
Department of Administration, the Department of Education, and the Bureau of Budget and
Management Research in the conduct of our audit.

                                                              Sincerely,



                                                              Richard N. Reback
                                                              Acting Inspector General




                                                                        N-IN-GUA-004-97-A





The Honorable Antonio R. Unpingco
Speaker, Twenty-Fourth Guam Legislature
155 Hesler Street
Agana, Guam  96910


Subject:  Audit Report on Operational Funding Status,
          Department of Education,Government of Guam (No. 98-I-643)


Dear Speaker Unpingco:

This report is the first in a series of reports on various operations of the Department of
Education, Government of Guam.  It presents the results of our review of Education's
operational funding status as of April 30, 1997.  The objective of our review was to
determine whether the Departments of Education and Administration complied with
applicable laws and budgetary and accounting procedures relating to the allocation and
transfer of appropriated and encumbered funds upon the change of the Department of
Education's primary funding source from General Fund appropriations to the Gross Receipts
Tax during April and May 1997.  The scope of the audit included the status of Education
funds as of April 30, 1997, and related financial transactions and Legislative and Executive
branch actions affecting the funds that occurred during the period of May 1997 to February
1998.

We concluded that the Government of Guam needed to make improvements in the areas of
financial legislation and financial management.  Specifically, we found that the Department
of Education's financing of routine operations was disrupted in May 1997 because the
Department of Administration transferred $5.6 million from two Education bank accounts
to a General Fund bank account without Education's knowledge or approval and, as of
February 28, 1998, had not returned $4 million in unused funds or provided Education with
an accounting of the expended funds.  Administration made these transfers as part of its
effort to comply with Public Law 24-17 to change Education's main operations funding
source.  However, the transfers were not in accordance with the intent of Public Law 24-17
or the language of Public Law 24-34, the latter of which was subsequently enacted to require
that existing accounts related to Education be transferred to the School Operations Fund.

These conditions occurred because (1) the Public Laws did not identify which funds
Education should retain and did not provide for a transition period to implement the
mandated changes, (2) the Departments of Administration and Education did not coordinate
effectively during the transition process, and (3) Administration did not have adequate
written procedures for closing bank accounts.  We determined that, as a result, Education did
not have access to more than $4 million in previously available funds and was unable to
determine exactly what financial resources would be available for fiscal year 1997
operations.  Additionally, Education had to pay $2.8 million of expenses incurred prior to
April 29, 1997, from its gross receipts tax funding source.

To correct the conditions noted, we recommended that (1) the Legislature revise the Standing
Rules to ensure that any future legislation which changes the method of funding a
government entity includes language specifying the disposition of existing funding and
requires a transition period to ensure proper accounting of the transfer, resolve any
uncertainties, and address any legal issues related to the funding changes; (2) the Governor
of Guam require the Director of Administration to prepare written procedures to ensure that
the Treasurer of Guam does not close bank accounts or transfer bank account balances until
affected agencies determine how to clear all legal outstanding transactions; and (3) the Board
of Education require the Director of Education to make a formal written request to the
Department of Administration and the Bureau of Budget and Management Research for the
return of the unused $4 million, an accounting of the $1.6 million used by Administration
to pay Education expenses, and access to the related bank records for April and May 1997.

In the July 24, 1998, response (Appendix 3) to our draft report from you, as the Speaker of
the Guam Legislature, the Legislature concurred with Recommendation 1 and indicated that
corrective actions would be taken.  The July 23, 1998, response (Appendix 4) from the
Governor of Guam included a July 20, 1998, response from the Department of
Administration, in which Administration concurred with Recommendation 2 and indicated
that corrective action would be taken.  In the July 23, 1998, response (Appendix 5) from the
Chairperson of the Board of Education, the Board and the Department of Education
expressed general concurrence with the report but disagreed with certain statements
concerning the need for better coordination with Administration to resolve the reported
funding issues.  Education did not specifically address Recommendation 3.  Based on the
responses, we consider Recommendations 1 and 2 resolved but not implemented and
Recommendation 3 unresolved.  Accordingly, the unimplemented recommendations will be
referred to the Assistant Secretary for Policy, Management and Budget for tracking of
implementation, and the Board of Education is requested  to  provide  a  response  to
Recommendation 3, which is unresolved (see Appendix 6).

The Inspector General Act, Public Law 95-452, Section 5(a)(3), as amended, requires
semiannual reporting to the U.S. Congress on all audit reports issued, the monetary impact
of audit  findings (Appendix 1), actions taken to implement audit recommendations, and
identification of each significant recommendation on which corrective action has not been
taken.

In view of the above, please provide a response, as required by Public Law 97-357, to this
report by September 30, 1998.  The response should be addressed to our Pacific Office,
415 Chalan San Antonio, Baltej Pavilion, Suite 306, Tamuning, Guam 96911.  The response
should provide the information requested in Appendix 6.

We appreciate the assistance of the Guam Legislature in the conduct of our audit.





                                                               Sincerely,



                                                               Richard N. Reback
                                                               Acting Inspector General
                           CONTENTS


                                                         Page

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . .  1

     BACKGROUND. . . . . . . . . . . . . . . . . . . . .  1
     OBJECTIVE AND SCOPE . . . . . . . . . . . . . . . .  2
     PRIOR AUDIT COVERAGE. . . . . . . . . . . . . . . .  3

FINDING AND RECOMMENDATIONS. . . . . . . . . . . . . . .  4

     OPERATIONAL FINANCING . . . . . . . . . . . . . . .  4

APPENDICES

     1. CLASSIFICATION OF MONETARY AMOUNTS . . . . . . . .9
     2. SUMMARY OF ADJUSTMENTS TO GENERAL FUND
        APPROPRIATIONS FOR THE DEPARTMENT OF EDUCATION . 10
     3. SPEAKER OF THE GUAM LEGISLATURE RESPONSE . . . . 11
     4.   GOVERNOR OF GUAM RESPONSE. . . . . . . . . . . 13
     5. CHAIRPERSON, BOARD OF EDUCATION, RESPONSE. . . . 18
     6.   STATUS OF AUDIT REPORT RECOMMENDATIONS . . . . 21


INTRODUCTION

BACKGROUND

The original (1950) version of the Organic Act of Guam (Title 48, Section 1421g(b), of the
U.S. Code Annotated) stated, "The Governor [of Guam] shall provide an adequate public
educational system of Guam, and to that end shall establish, maintain, and operate public
schools according to the laws of Guam."  The Organic Act also provided that the Governor
of Guam would appoint the members of the Territorial Board of Education, with the advice
and consent of the Legislature.  However, in 1986, the U.S. Congress amended
Section 1421g(b) by replacing the word "Governor" with the term "Government of Guam,"
thereby giving the Government of Guam the option of establishing an educational system
outside the direct control of the Governor.

On November 19, 1993, the Guam Legislature overrode the Governor's veto and enacted
Public Law No. 22-42, which repealed and enacted a new version of Title 17, Section 3101,
of the Guam Code Annotated, to establish the Department of Education within the
Government of Guam.  Section 3102 of the new version states, "The Department [of
Education] shall be administered through the Territorial Board of Education . . . which shall
be the governing and policy-making body of the Department."  Section 3102(a) states that
the Territorial Board will hire a Director and Deputy Director of Education.  On
September 19 and December 13, 1995, respectively, the Governor filed two lawsuits against
the Board of Education, alleging that (1) Public Law 22-42 "nullified the Governor's power
to supervise and control the Department of Education" and (2) the contracts the Board of
Education had executed with the Director and Deputy Director were "illegal employment
agreements."  In October 1996, the Guam Superior Court upheld the law establishing the
Board of Education and giving it the authority to issue contracts.

Prior to April 28, 1997, Education's primary funding was provided by appropriations from
the General Fund, and the Treasurer of Guam (within the Department of Administration) had
effective control, as the only signatory authority, over all Department of Education bank
accounts.  Title 5, Sections 21111 and 22101, of the Guam Code Annotated authorizes the
Treasurer of Guam to administer monies belonging to the Government of Guam, and Title 5,
Sections 4103, 4105, and 4109, of the Guam Code Annotated authorizes the Governor and
the Bureau of Budget and Management Research to administer Executive Branch  budgets
and states that planned expenditures may be modified or withheld under certain conditions,
such as when the level of revenue collections is lower than anticipated.

On April 28, 1997, Public Law 24-17 created the "School Operations Fund" and changed
Education's primary source of funding from General Fund appropriations to the Gross
Receipts Tax.  Under this law, 88 percent of the total monthly collections of gross receipts
taxes are to be transferred to the Department of Education.  Further, effective on May 21,
1997, Public Law 24-34 amended Title 11 of the Guam Code Annotated by adding
Section 26208, which designated the Director of Education as the official responsible for
receiving, accounting for, and disbursing all monies in the School Operations Fund.

On February 27, 1998, the Guam Legislature overrode the Governor's veto and passed Public
Law No. 24-142, which divided the Board of Education into four elected "District Boards
of Education" with four District Superintendents.  In addition, a restructured Department of
Education, with the Director appointed by the Governor, was created to provide guidance to
and coordinate the activities of the Districts and to "serve as the state educational agency for
purposes of Federal statutes, policies, grants, programs and regulations."  Further, Public
Law 24-142 provides for the existing school board to serve on an interim basis for a 1-year
transition period and for the election, in November 1998, of the members of the four new
District Boards of Education.  The District Boards consist of six voting members selected
by popular election, one voting member representing the high schools in the respective
district, and one nonvoting member representing the respective teachers' union.  The Boards
also have the authority to increase the number of nonvoting members.

During fiscal year 1997, the Department of Education had total revenues of $168.8 million
($152.6 million from local sources and $16.2 million from Federal sources) and total
expenditures of $167.2 million ($150.6 million from local funds and $16.6 million from
Federal funds).  During the same fiscal year, Education had 3,792 employees and
administered 36 schools with a total enrollment of 32,923 students.

OBJECTIVE AND SCOPE

The objective of our review was to determine whether the Departments of Education and
Administration complied with applicable laws and budgetary and accounting procedures
relating to the allocation and transfer of appropriated and encumbered funds upon the change
of the primary funding source for Education during April and May 1997.  The scope of audit
included reviews of applicable laws and regulations and financial records through
September 30, 1997, that reflected the results of the change in Education's primary funding
source.  We also interviewed Legislative and Executive branch officials regarding actions
taken during the period of April 1997 through February 1998 that affected the status of
Education's funding source.  We visited the offices of the Legislature of Guam, the
Department of Education, the Department of Administration (including the offices of the
Controller and the Treasurer), and the Bureau of Budget and Management Research.

Our scope was limited because, according to Education's Controller, the Department's bank
accounts had not been reconciled for at least 1 year prior to April 1997.  Additionally,
audited financial statements for the Department were not available for fiscal years 1995 and
1996.  However, Education did reconcile its new bank accounts (which were opened as a
result of Public Laws 24-17 and 24-34) for the period of May to September 1997 and has
prepared draft financial statements for fiscal year 1997.

The audit was made, as applicable, in accordance with the "Government Auditing
Standards," issued by the Comptroller General of the United States.  Accordingly, we
included such tests of records and other auditing procedures that were considered necessary
under the circumstances.

As part of the audit, we evaluated the system of internal controls related to the transition of
the funding source of the Department of Education to the extent that we considered necessary
to accomplish the audit objective.  We identified internal control weaknesses, which are
discussed in the Finding and Recommendations section of this report.  Our
recommendations, if implemented, should improve the internal controls in this area.

PRIOR AUDIT COVERAGE

During the past 5 years, neither the U.S. General Accounting Office nor the Office of
Inspector General has issued any audit reports concerning the change of primary funding
source for the Department of Education.  Additionally, although an independent public
accounting firm issued single audit reports on the Government of Guam for fiscal years 1990
through 1996, separate single audit reports and financial statements were not available for
the Department of Education.

FINDING AND RECOMMENDATIONS

OPERATIONAL FINANCING

The Department of Education's financing of routine operations was disrupted in May 1997
because the Department of Administration transferred $5.6 million from two Education bank
accounts to the General Fund and then closed these accounts without Education's knowledge
or approval.  Also, as of February 28, 1998, Administration had not returned the unused
portion of the funds or provided Education with an accounting of the use of the funds.
Administration officials said that they transferred the $5.6 million to a General Fund bank
account as part of Administration's efforts to comply with Public Law 24-17.  However, we
believe that these transfers were not in accordance with the intent of Public Law 24-17 and
the subsequent Public Law 24-34.  The transfers  occurred because (1) neither public law
identified which funds Education should retain after a change in its source of funding and did
not provide for a transition period to implement the mandated change, (2) the Departments
of Administration and Education did not cooperate effectively in the transition process, and
(3) Administration did not have adequate written procedures for closing bank accounts. As
a result, Education did not have access to $4 million (after payment by Administration of
$1.6 million in preexisting Education expenses) and was unable to determine the exact
amount of financial resources available for operating expenses for the remainder of fiscal
year 1997.  Additionally, Education had to pay, from Gross Receipt Tax revenues rather than
from  General  Fund  appropriations,  expenses  of  $2.8  million  that  were  incurred  prior
to April 29, 1997.

Transfer of Funds

Public Law 24-17 was enacted on April 28, 1997, with the Guam Legislature's override of
the Governor's veto, to provide Education with a funding source separate from the General
Fund.  Although Public Law 24-17 created the School Operations Fund, it did not address
the disposition of the existing unexpended balances of General Fund monies appropriated
for educational purposes and deposited into Education's bank accounts.  The only reference
in Public Law 24-17 to the appropriated funding for Education was the statement, "Upon the
effective date of this Section, all previous appropriations to the Department of Education for
fiscal year 1997 are repealed."  A Guam Senator told us that, to clarify this issue, on May 6,
1997, the Legislature passed Public Law 24-34 (enacted on May 21, 1997, without the
Governor's signature).  Section 9(b) of Public Law 24-34 stated, "All existing Department
of Administration accounts for the Department of Education shall be deposited or transferred
to the School Operations Fund for use by the Department of Education in fiscal year 1997."
However, between the date of passage of Public Law 24-34 (May 6, 1997) and the date of
its enactment (May 21, 1997), the Department of Administration had transferred $5.6 million
(see Appendix 2) from Education's bank accounts to the General Fund.

Two of the main Legislative sponsors of Public Law 24-17 told us that the law was intended
to ensure that Education had adequate funding through the effective date of the law (April 28,
1997) by allowing Education to use funds provided from General Fund appropriations for
that period.  However, Public Law 24-17 did not (1) contain language addressing what funds
should be retained or transferred or (2) provide for a transition period (such as 60 days) to
address questions and resolve differences of opinion instead of, in effect, requiring
immediate implementation.  The Standing Rules of the 24th Guam Legislature did not
include requirements to address such issues in draft legislation.  In addition, although Public
Law 24-34 included some guidance on what the Legislature intended with the existing
appropriated funds, this law did not prevent the transfers because they had occurred before
the May 21, 1997, effective date of the law.

     Interagency Coordination.  The Departments of Administration and Education did
not adequately coordinate financial information to identify expenditures that occurred before
April 29, 1997, and that should have been paid from General Fund appropriations.
According to Administration's Controller, Administration could not determine how much
of the $5.6 million balance in Education's bank accounts was needed because Education had
not provided Administration with a complete listing of outstanding encumbrances for the
period prior to April 29, 1997.  The Controller told us that without the financial information
and because Public Law 24-17 did not provide clear guidance, Administration had to act to
control the funds in Education's bank accounts to ensure that the General Fund had sufficient
monies to pay all outstanding checks issued on these accounts.

     Procedures for Closing Accounts.  Administration did not have written policies or
procedures that provided guidance on how and when to transfer funds and close Government
of Guam bank accounts.  In our opinion, since Administration had the sole signature
authority over Education's bank accounts, Administration did not need to close Education's
two bank accounts before all outstanding checks had cleared or to immediately transfer the
$5.6 million to a General Fund bank account.  Administration's Controller told us that, in his
opinion, there was no urgency to close the Education bank accounts and that, in retrospect,
the bank accounts probably should have remained open until all outstanding checks had
cleared.  As a result, Administration's accounting and management personnel unnecessarily
expended at least 130 hours on work related to resolving accounting and banking problems
that occurred because the accounts were closed.

Accounting for Transferred Funds

Title 5, Section 7102, of the Guam Code Annotated requires Executive Branch employees
to manage public money with "prudence and diligence under the circumstances then
prevailing that a prudent person acting in like capacity . . . would use."  In addition, Title 5,
Section 22203, of the Code requires the Director of  Administration to "determine fairly . . .
[the] results of financial operations; . . . [and] provide a basis for financial and administrative
control. . . ."  Further, Public Law 24-34, Section 9(b) stated, "All existing Department of
Administration accounts for the Department of Education shall be deposited or transferred
to the School Operations Fund for use by the Department of Education in fiscal year 1997."

     Reductions to Appropriations.  Despite these requirements, on May 7, 1997, the
Acting Director of the Bureau of Budget and Management Research, based on information
provided by Administration and without contacting Education to determine what funds were
needed, withdrew $4.9 million in allotments previously provided to Education.  The form
"Request for Appropriation and Allotment Modification," which Budget and Management
Research prepared to effect the reduction in allotments, stated that the $4.9 million was
"unexpended by DOE [Department of Education]."  A subsequent $2.1 million increase to
Education's allotments resulted in a net reduction by Budget and Management Research of
about  $2.8  million.    A  Budget  and  Management  Research  official  told  us  that, based
on the policy of  the Bureau of Budget and Management Research,  the $2.8 million could
not be returned to Education once the fiscal year 1997 appropriation period ended.  As a
result, Education lost the use of this $2.8 million during fiscal year 1997 (see Appendix 2).

     Liquidation of Outstanding Checks.  After the net reduction of $2.8 million in the
General Fund appropriations for Education, the remaining $2.8 million (of the $5.6 million
that Administration had transferred from Education's bank accounts) was available for
Administration to use in liquidating outstanding checks that were written against the
accounts prior to April 29, 1997.  However, as of September 30, 1997, Administration had
paid only $1.6 million to liquidate outstanding checks, and, as of the date of completion of
our audit (February 28, 1998), Administration had not (1) returned the $1.2 million
unexpended balance to Education, (2) provided Education with an accounting report on the
$1.6 million used to pay Education expenses, and (3) provided Education the records
(including bank statements and canceled checks) for Education's operations and payroll bank
accounts for April and May 1997.

According to Administration's Controller, Education had not made a formal request for the
return of the funds, an accounting of the funds, or the bank statements.  The Controller
stated, "The bank statements can be provided immediately and the balance of the funds
would be provided once all checks have either cleared or become stale dated."  Based on our
review, we concluded that Education lost the use of $4 million in General Fund
appropriations (see Appendix 2), which consisted of (1) the net amount of $2.8 million that
Budget  and  Management  Research   reduced  Education's  appropriations  and  (2)  the
$1.2 million in unexpended funds that Administration held after liquidating outstanding
checks that had been issued against Education's bank accounts prior to April 29, 1997.
Further, Education subsequently had to pay, from Gross Receipts Tax revenues, expenditures
of an additional $2.8 million that were incurred prior to April 29, 1997, and that would have
been properly chargeable against the General Fund appropriations of $4 million that were
transferred from its bank accounts.
Recommendations

We recommend that:

     1. The Speaker of the Guam Legislature propose that the Standing Rules be revised
to ensure that any future legislation which changes the method of funding a government
entity includes language that specifies the disposition of existing funding and requires a
transition period to ensure that the transfer is properly accounted for, any uncertainties as to
legislative intent are resolved, and legal issues related to the funding changes are addressed.

     2. The Governor of Guam require the Director of the Department of Administration
to prepare written procedures to ensure that the Treasurer of Guam does not close bank
accounts or transfer funds in bank accounts until the affected agencies have had the
opportunity to determine the best method for clearing all legal (outstanding) transactions.

     3. The Board of Education require the Director of the Department of Education to
make a formal written request to the Department of Administration and the Bureau of Budget
and  Management  Research for  the return of  the unused balance of $4 million  from the
$5.6  million originally transferred from Education's bank accounts, an accounting of the
$1.6 million used by the Department of Administration to pay Education expenses, and the
records for transactions in Education's bank accounts during April and May 1997.

Guam Legislature Response and Office of Inspector General Reply

In the July 24, 1998, response (Appendix 3) to the draft report from the Speaker of the Guam
Legislature, the Legislature concurred with Recommendation 1 and indicated that corrective
actions would be taken.  Based on the response, we consider Recommendation 1 resolved
but not implemented (see Appendix 6).

Governor of Guam Response and Office of Inspector General Reply

In the July 23, 1998, response (Appendix 4) to the draft report from the Governor of Guam,
the Department of Administration concurred with Recommendation 2 and indicated that
corrective action would be taken.  Based on the response, we consider Recommendation 2
resolved but not implemented (see Appendix 6).

Although Recommendation 3 was not addressed to the Governor, the Department of
Administration, in response to the draft report, stated that our report "fails to confirm whether
or not actual expenditures of $4 [million] was in fact incurred prior to the passage of Public
Laws 24-17 and 24-34" and that, because the report references only $2.8 million of actual
expenditures incurred, "the amount of $2.8 [million] is the only amount reimbursable."
Therefore, Administration requested that we clarify the exact dollar amount of
reimbursements owed the Department of Education.

Although our report stated that Education had incurred, prior to passage of the two public
laws, at least $2.8 million of expenses that it had to pay from revenues received after passage
of the public laws, this information was provided to show the impact of the transfer of the
funds from Education's account.  Our position on the return of the $4 million (which is
supported by our discussions with Legislature officials) is that the Legislature intended for
Education to retain the total amount of funds appropriated to it whether or not Education
incurred any expenditures relating to these funds prior to passage of the two public laws.
Therefore, we believe that Education is entitled to reimbursement of $4 million, as indicated
in Recommendation 3.

Board of Education Response and Office of Inspector General Reply

In the July 23, 1998, response (Appendix 5) to the draft report from the Chairperson of the
Board of Education, the Board and the Department of Education did not express concurrence
or nonconcurrence with Recommendation 3.  Therefore, the Board of Education is requested
to reconsider its response to Recommendation 3, which is unresolved (see Appendix 6).

In a May 15, 1998, letter included with the response from the Chairperson of the Board of
Education, the Director of Education stated that Education agreed with the general content
of the audit but not with the statement in the report that Education "[was] not adequately
coordinating financial information" with Administration.  The Director included a copy of
a May 29, 1997, letter in which he transmitted to Administration a listing of outstanding
payables and encumbrances of Education as of April 1997.  Education stated that it had
"made an attempt to cooperate with the transition" of funding for its department.

The section of the finding "Interagency Cooperation" states, "According to Administration's
Controller, Administration could not determine how much of the $5.6 million balance in
Education's bank accounts was needed because Education had not provided Administration
with a complete listing of outstanding encumbrances for the period prior to April 29, 1997."
That statement is an accurate representation of statements made by Administration's
Controller at the time of the audit.  Additionally, Administration officials stated that the
listings of outstanding payables and encumbrances referred to in the Director of Education's
letter were not received (see May 22, 1998, letter from the Director, Department of
Administration, in Appendix 4).  Based on our review of the listings provided by Education,
we noted that the documents included accounts payable totaling $842,767 and outstanding
purchase orders totaling $1,094,552.  However, we subsequently determined that the listings
were incomplete because they did not include outstanding utility billings totaling $1,997,320.
As such, in our opinion, better interagency coordination would have diminished or avoided
the funding problems discussed in the report.

                                                                   APPENDIX 1

CLASSIFICATION OF MONETARY AMOUNTS

Funds To Be Put
Finding Area                                  To Better Use*

Operational Financing                        $4,009,331

*Amount represents local funds.
                                                   APPENDIX 2

                  SUMMARY OF ADJUSTMENTS TO
               GENERAL FUND APPROPRIATIONS FOR
                 THE DEPARTMENT OF EDUCATION


                                                Description  Amounts  Item No.

Reductions to Education Appropriation Allotments:

  Appropriation Allotments as of May 1, 1997        $83,211,164         1
  May 7, 1997 Allotment Reduction                    (4,938,636)        2
       Interim Appropriation Allotment Amount       $78,272,528
  Late May 1997 Allotment Reinstatement               2,180,879
       Final Appropriation Allotment Amount         $80,453,407         3

  Appropriation Allotments as of May 1, 1997 (See Item 1)   $83,211,164
  Final Appropriation Allotment Amount (See Item 3) (80,453,407)
       Net May 1997 Reduction to Appropriation Allotments    $2,757,757           4

Transfers From Education Bank Accounts:

  May 7, 1997 Transfer (Operations Account)          $4,296,980
  May 7, 1997 Transfer (Payroll Account)                641,656
       Subtotal May 7, 1997 Transfers (See Item 2)   $4,938,636
  May 14, 1997 Transfer (Operations Account)             38,937
  May 15, 1997 Transfer (Payroll Account)               622,453
       Total May 1997 Transfers from Education Accounts      $5,600,026           5

Status of Funds Transferred From Education:

  Total Transfers from Education Accounts (See Item 5)       $5,600,026
  Net May 1997 Reduction to Appropriation Allotments (See Item 4) (2,757,757)
       Amount Available for Education Expenses       $2,842,269
  Education Bills Paid by Administration             (1,590,695)
       Unused/Unaccounted for Transfers              $1,251,574         6

Summary of Adjustments to General Fund Appropriations for Education:

  Net May 1997 Reduction to Appropriation Allotments (See Item 4) $2,757,757
  Unused/Unaccounted for Transfers (See Item 6)       1,251,574
       Total General Fund Appropriations Not Available to Education *  $4,009,331


* The Department of Education subsequently paid, from Gross Receipts Tax revenues,
additional expenditures of $2,803,257 that were incurred before April 29, 1997,
and that would have been properly chargeable against this $4,009,331 in General
Fund appropriations.

                                                    APPENDIX 3
                                                  Page 1 of 2


           SPEAKER OF THE GUAM LEGISLATURE RESPONSE


                        (Insert Here)                APPENDIX 4
                                                  Page 1 of 5


                  GOVERNOR OF GUAM RESPONSE


                        (Insert Here)
                                                     APPENDIX 5
                                                  Page 1 of 2


                 BOARD OF EDUCATION RESPONSE


                        (Insert Here)
                                                     APPENDIX 6

            STATUS OF AUDIT REPORT RECOMMENDATIONS


Finding/Recommendation

Reference

1

2

3

      Status

Resolved;
not
implemented


Resolved;
not
implemented

Unresolved.


Action Required

The recommendation will be referred to
the Assistant Secretary for Policy,
Management and Budget for tracking of
implementation.  However, when the
amendment to the Standing Rules of the
Legislature is adopted or legislation is
enacted, a copy should be provided to our
office.

The recommendation will be referred to
the Assistant Secretary for Policy,
Management and Budget for tracking of
implementation.  However, when the
written procedures implemented by the
Department of Administration have been
completed, a copy of the procedures
should be provided to our office.

Reconsider the recommendation, and
provide a response indicating concurrence
or nonconcurrence. If concurrence is
indicated, an action plan should be
provided that includes the target date and
title of the official responsible for making
a formal request to the Department of
Administration and the Bureau of Budget
and Management Research for the return
of $4 million transferred from Education's
bank accounts, an accounting of the
$1.6 million used to pay Education
expenses, and the records for transactions
in Education's bank accounts during April
and May 1997.






ILLEGAL OR WASTEFUL ACTIVITIES SHOULD BE REPORTED

TO THE OFFICE OF INSPECTOR GENERAL BY:

Sending written documents to:



Within the Continental United States

U.S. Department of the Interior
Office of Inspector General
1849 C Street,N.W.
Mail Stop 5341
Washington, D.C. 20240

Calling:

Our 24 hour
Telephone HOTLINE
1-800-424-5081 or
(202) 208-5300

TDD for hearing impaired
(202) 208-2420 or
1-800-354-0996



Outside the Continental United States


Caribbean Region

U.S. Department of the Interior
Office of Inspector General
Eastern Division- Investigations
1550 Wilson Boulevard
Suite 410
Arlington, Virginia 22209

Calling:
(703) 235-9221


North Pacific Region

U.S. Department of the Interior
Office of Inspector General
North Pacific Region
238 Archbishop F.C. F'lores Street
Suite 807, PDN Building
Agana, Guam 96910


Calling:
(700) 550-7428 or
COMM 9-011-671-472-7279