IMPORTANT INFORMATION

November 18, 2011

TO THE ADMINISTRATOR ADDRESSED:

SUBJECT:     Observations Related to Desk Monitoring of Federal Grant Expenditures

During the past fiscal year, the Texas Education Agency (TEA) conducted desk reviews and audits related to expenditures of American Recovery and Reinvestment Act of 2009 (ARRA) and non–ARRA federal formula and discretionary grant funds awarded to subrecipients. TEA is issuing this letter to make subrecipients aware of the prevailing issues observed during the desk reviews.

Background—Monitoring Responsibility

TEA is required to monitor the activities of subrecipients (such as local educational agencies [LEAs], regional education service centers [ESCs], and nonprofit organizations) to ensure that federal grant awards are used for authorized purposes in compliance with laws, regulations, and the provisions of contracts or grant agreements. The authority for these monitoring activities is given by the Office of Management and Budget (OMB) Circular A-133, Subpart D, ___.400(d)(3) and Title 34 of the Code of Federal Regulations (CFR) 80.40(a). Similarly, 34 CFR 76.770 requires states to perform the administrative monitoring necessary to ensure that subrecipients are in compliance with applicable statutes and regulations.

Specifically, TEA staff monitored the following:

1. That the subrecipient obligated, expended, and used grant funds in accordance with:
   1. The approved grant application.
   2. The purpose authorized by law for those funds.
   3. The federal cost principles, including maintenance of time and effort records in accordance with the applicable federal cost principles.
   4. The period of availability (that encumbrances/obligations and receipt of goods and services occurred during the grant period and in time to substantially benefit the grant period).
   5. The fiscal requirements applicable to the funds, including cash management requirements.
2. That grant expenditures were properly supported by the subrecipient’s source documentation and that costs were allocable to the grant program.
3. That expenditures reported to TEA in the automated expenditure reporting (ER) system corresponded to expenditures recorded in the subrecipient’s general ledger and payroll journal and to the budget in the approved grant application.
4. That the subrecipient complied with the mandatory account code structure and accounting requirements in the Financial Accounting and Reporting (FAR) module of the Financial Accountability System Resource Guide (FASRG), if applicable. (Only LEAs and ESCs are required to comply with FAR. All other subrecipients are required to comply with generally accepted accounting principles [GAAP] and fund accounting in accordance with 34 CFR 74.21, Standards for Financial Management Systems.)
5. That the subrecipient demonstrated compliance with the standards for financial management systems promulgated in 34 CFR 80.20(b)(3). Specifically, the subrecipient’s policies and procedures should adequately describe the processes, authorizations, records, and other internal controls required to maintain effective control and accountability for all grant cash, real and personal property, and other assets, and to safeguard all such property adequately and assure that it was used solely for authorized purposes.
6. That for its expenditures related to infrastructure projects:
   1. The subrecipient demonstrated compliance with the provisions of the Buy American Act as promulgated in Section 1605 of ARRA. The provisions require subrecipients to ensure that all iron, steel, and manufactured goods used in an infrastructure investment project were produced in the United States.
   2. The subrecipient demonstrated compliance with the provisions of the Davis Bacon Act as promulgated in Section 1606 of ARRA. The provisions require subrecipients to ensure that contractors or their subcontractors pay workers who are employed at the site of the work no less than the locally prevailing wages and fringe benefits that are paid on projects of a similar character.

Prevailing Issues Noted

After a year of monitoring subrecipients’ accounting and grant records, TEA staff noted several prevailing issues. In many instances:

1. Subrecipients did not adequately maintain time and effort records to ensure compliance with the time and effort reporting requirements promulgated in OMB Circular A-87 (applicable to school districts and ESCs) or OMB Circular A-122 (applicable to nonprofit organizations), 2 CFR Appendix B to Part 225(8)(h), and 34 CFR 80.20(b)(5). Specifically, subrecipients:
   1. Did not maintain adequate time and effort documentation to support the payroll costs charged to the grant (such as periodic certification or personnel activities reports).
   2. Did not maintain adequate documentation to support payroll costs charged to the grant (such as extra-duty pay agreements, time sheets, and/or stipends).
   3. Failed to develop and implement comprehensive administrative procedures that identified the processes and forms that should be used to ensure compliance with the time and effort requirements promulgated in the applicable OMB circular.
   4. Used administrative procedures related to time and effort documentation that did not comply with the requirements promulgated in the applicable OMB circular.
2. Subrecipients did not demonstrate compliance with the standards for financial management systems promulgated in 34 CFR 80.20(a), (b)(1), (2), or (4); or in 34 CFR 74.21(b)(1), (2), or (4) (for institutions of higher education or nonprofit organizations). Specifically, subrecipient’s accounting records (the general ledger) indicated that:
   1. The subrecipient did not comply with the mandatory account code structure and accounting requirements, including the use of a fund code or other account code to identify the grant funding source.
   2. The general ledger did not reflect expenditures by the class/object codes budgeted in the approved grant application.
   3. The subrecipient did not maintain a financial accounting system that enabled it to compare budgeted amounts for each grant to the actual expenditures incurred and the outlays of grant funds to ensure that actual expenditures did not exceed the approved budget.
3. Subrecipients failed to maintain adequate and sufficient source documentation to support the expenditures charged to grants and reported to TEA as the basis for reimbursement, as required by 34 CFR 80.20(b)(4), (5), or (6); or 34 CFR 74.21(b)(4), (6), or (7). Specifically, subrecipients:
   1. Expended grant funds from budget categories that were not approved or amended in the grant application.
   2. Obligated grant funds outside of the grant period.
   3. Did not provide adequate source documentation (such as third-party invoices or receipts) to support the expenditure of grant funds.
4. Subrecipients did not comply with the requirements promulgated in ARRA related to infrastructure projects by failing to demonstrate:
   1. Compliance with the provisions of the Buy American Act as promulgated in Section 1605 of ARRA.
   2. Compliance with the provisions of the Davis Bacon Act as promulgated in Section 1606 of ARRA.
   3. Compliance with the certification requirements as promulgated in Section 1511 of ARRA.
5. Subrecipients did not calculate excess costs for the education of elementary and secondary school students with disabilities, in accordance with 34 CFR 300 Appendix A. Subrecipients must calculate costs that are in excess of the average annual per-student expenditure from the preceding school year.

TEA’s goal in providing the results of the monitoring process and the prevailing issues identified above is to improve the grant management efforts of all subrecipients and to help them avoid audit problems and possible enforcement actions, such as the return of federal funding to the federal government.

Subrecipients should remember that all expenditures of grant funds must comply with the federal cost principles and must also be reasonable and necessary for carrying out the objectives of the specific grant program. If subrecipients determine that they are not in compliance, they should amend their grant applications and remove these costs from their general ledgers. TEA will continue to use due diligence in monitoring the use of federal funds throughout the current fiscal year by continuing its desk reviews.

Thank you for your assistance in this matter. For more information, please contact the Office for Grants and Fiscal Compliance (OGFC) (previously known as the Office for Planning, Grants and Evaluation) at gafpc@tea.state.tx.us.

Sincerely,
Nora Ibáñez Hancock, EdD
Associate Commissioner
Office for Grants and Fiscal Compliance