The Evolution of Grant Compliance at the School District of Philadelphia

1

• The Evolution of Grant Compliance at the School
  District of Philadelphia

From Gross Mismanagement to a Model District
to a New UGG Focus on Program Performance
2
The OIG Audit - Status

• School District of Philadelphia 8th largest K-12
  in the nation.
• Audit time period was July 1, 2005 to June 30,
  2006 and took two years.
• From a total of 354m in federal funds, the audit
  covered 245m (70).
• Audited Title I II, Reading First, FIE, IDEA,
  Gear-Up, Safe Drug Free Schools, CSR.
• Final OIG Audit Report issued January 2010 had
  138.4m of findings largest ever.
• 121.1m questioned costs and 17.3m of
  unallowable costs.
• Two PDLs issued with sustained costs of almost
  10m.

3
The Five Audit Findings - 138.4 Million

• Inadequate controls over personnel expenditures
  (123.7m/about 89).
• Use of federal funds to supplant local funding
  (6.9m/about 5).
• Inadequate controls over non-payroll costs
  (7.8m/about 6).
• Inadequate or unenforced policies transferring
  costs to federal funds.
• Lack of written policies and procedures.

4
The Five Audit Findings
Finding No. Finding Item(s)
1 Time and Effort Documentation Inadequate 123,772,665 questioned. Documentation per federal rules were either not maintained or were insufficient.
2 Supplantation of federal funds 6,979,063 of questioned costs were expensed from State and local funds then were transferred at year-end to federal grant funds
    Findings 3 through 5 contain 7,624,340 of questioned / unallowable costs
3 Inadequate Controls to Ensure Non-Payroll Expenditures Met Federal Regulations No process for reviewing expenditures for allowability, or for obtaining supporting documentation prior to making grant payments. No written accounts payable policies and procedures. Federal grant funds used for Finance charges Late fees Indemnity insurance for a nonpublic school Tips for alcoholic beverages iPods Pool tables Two 11-inch crystal vases Crystal wine bucket Newspaper subscriptions for the Title I program office Two copiers one not used, and one not used for intended purpose
5
The Five Audit Findings
Finding No. Finding Item(s)
4 Policies and Procedures Were Not Adequate and/or Enforced Journal Vouchers (expenditure transfer) Process Travel Policies and Procedures Imprest Fund Policies and Procedures Contract Provisions Inventory controls not enforced Significant technology items not tracked or controlled
5 No Written Policies and Procedures for Various Fiscal Processes Lack of effective control environment Lack of Written Policies and Procedures led to unallowable expenditures Budgets not monitored budget transfers violated federal rules Lack of Position Descriptions Ordering Excessive Amounts of Food Usage of accounting codes Lack of Supporting Documentation for Training and Professional Development
6
The Audit Resolution Process

• Alternative documentation or statute of
  limitations applied to all but 7.2m of findings.
• Formalized corrective actions through CAROI
  (Cooperative Audit resolution and Oversight
  Initiative) process with RMS and PDE.
• US DE OIG sought high risk grantee designation,
  but avoided.
• New regulatory precedent set on statute of
  limitations (date of obligation).
• U.S. Secretary of Ed. to apply equitable offset
  based upon egregiousness of violation. A new
  standard was created.
• Still on-going with several levels of appeal and
  other remedies sought. Currently have appealed
  3rd federal Circuit Court decision to the US
  Supreme Court.
• PDE argument relies on equitable offset and
  statute of limitations.
• 9 years from start - both audit resolution and
  legal process is still on-going.

7
Response and NegotiationsHow Could this Happen?

• How did the environment contribute to the
  findings and, more importantly, how to respond?
  The following were the key SDP deficiencies, any
  one of which would create audit risk and
  potential findings but, when combined, made large
  scale audit findings inevitable.
• Absence of written policies and procedures.
• Lack of staff training on rules and regulations.
• Ineffective or non-existent grant financial and
  managerial control systems.
• Insufficient staffing for grant financial
  management and independent compliance monitoring.
• Management approach focused on pushing as many
  dollars to schools as possible to the detriment
  of the effective administration.

8
Response and NegotiationsHow Could this Happen?

• More importantly, organizational churn worked
  against compliance.
• There were clearly fundamental deficiencies in
  the organization that needed to be addressed, and
  downplaying those deficiencies and continuing
  with the status quo would be unacceptable to the
  professional staff within the SDP, as well as the
  PDE and ED.
• A decision point was reacheddo we muddle though
  attempting to do the minimum required to keep our
  external funders at bay, or do we undertake a
  bold reform effort?
• We decided that the OIG audit would be the
  catalyst for the design of far-reaching
  organizational change. The question that
  remained was whether such a fundamental shift
  could be implemented and sustained in the face of
  continued leadership changes, the loss of federal
  Stimulus funds, continual financial stress, and
  mass layoffs in schools and the central office.

9
Corrective Actions (Initial)

• Key changes began in the spring and summer of
  2010 to convey we understood the gravity of the
  situation and our commitment to effective
  organizational improvement
• Existing Title I grant compliance staff were
  removed from academic office supervision and the
  Grant Fiscal Staff were removed from Budget
  Director supervision and combined to form the
  Office of Grant Compliance and Fiscal Services.
• The compliance role was expanded to all grants,
  with particular focus on federal grants.
• Commitments were made to begin immediately
  working to improve time and effort documentation.
• An outside consultant was hired to perform a risk
  assessment of management and controls to support
  the development of comprehensive policies and
  procedures.

10
Corrective Actions (Initial)

• EDs Office of Risk Management Services also
  began to participate in the review of the plans
  and provide support in order to help ensure that
  substantive progress was being made.
• The openness and commitment to change
  strengthened the SDPs already good relationship
  with PDEs Division of Federal Programs and
  fostered a slowly growing confidence on the part
  of ED that Philadelphia was serious about a
  transformative process and outcome.
• Throughout 2011, SDP staff spent countless hours
  with the outside consultant regarding the risk
  assessment they had undertaken and began the
  arduous process of re-engineering business
  processes and writing detailed policies and
  procedures.

When capable people with good intentions meet
bad processes, bad processes win 9 out of 10
times Marine General Jim Mattis
11
Risk Assessment Recommendations

• Conducting extensive staff interviews and
  gathered information about staffing levels, roles
  and responsibilities, existing policies and
  procedures (documented and undocumented) and the
  tools and technology that supported the grants
  management and compliance system.
• Benchmarked the Districts environment against
  other comparably sized school districts
  districts specifically identified by government
  and private education experts as having
  successful grants management programs (defined as
  having few or only minor instances of
  noncompliance).
• The goal of the best practices benchmarking was
  to identify the key aspects of grant compliance
  within these peer districts and determine how
  those districts were configured to effectively
  and efficiently meet federal compliance
  requirements.
• Peer Districts Charlotte Macklenberg Schools
  (NC), Cincinnati Public Schools (OH), Gwinnett
  County Public Schools (GA), and Tucson Unified
  School District (AZ).

12
Risk Assessment Recommendations

• The overall conclusion of the risk assessment and
  benchmarking analysis was that a strong and
  sustainable grants management and compliance
  system encompasses two distinct yet closely knit
  components
• Foundational Elements that form the basis of the
  system without which the system cannot properly
  function. This component encompasses support
  from top management, cross-departmental
  collaboration and accountability, adequate
  staffing, clarity of roles and responsibilities,
  knowledge management through effective training,
  and performance accountability.
• Business Process Elements that include the rules
  and tools to achieve the desired results. This
  area covers technology and management reports, as
  well as the policies and procedures that
  prescribe who should be doing what and in which
  order for each major business process.

13
(No Transcript)
14
Corrective Action Plan

• In December, 2011 the SDP delivered a
  comprehensive Corrective Action Plan building on
  the initial corrective actions AND the Risk
  Assessment. The state and feds were so impressed
  with our efforts to date and aggressive new
  actions and timelines, we were not designated
  high risk pending continued progress. The
  following corrective actions were fully
  implemented effective 7/1/12 designed,
  developed, and implemented in little more than a
  year.
• Tone at the Top / Cross-Departmental
  Collaboration
• Received explicit recognition from senior
  management that compliance was essential to
  maintaining the Districts federal funding
  stream. That support has been maintained and
  demonstrated in the form of corrective decision
  making when issues of non-compliance are raised.
• Created a grant oversight committee with members
  from senior management and relevant departments
  that provides collaboration on development and
  implementation of policies and procedures and
  coordinates and implements grant programs more
  effectively.

15
Corrective Action Plan

• Roles and Responsibilities / Performance
  Accountability and Compliance Systems
• Defined the roles and responsibilities of all
  personnel to include the modification of job
  descriptions.
• Developed detailed compliance monitoring tools
  and checklists.
• Developed instance of non-compliance thresholds
  for interventions.
• Inserted the Grant Compliance Office as the first
  level of approval for purchasing of goods and
  services in the accounting system to ensure that
  unallowable purchases can be stopped before
  occurring.

16
Corrective Action Plan

• Staffing
• Increased grant fiscal and compliance monitoring
  staff by nearly 50 percent (additional sixteen
  FTEs).
• Doubled grant accounting positions (additional
  two FTEs).
• Hired a dedicated grant attorney.
• The commitment to improving grant management and
  compliance is also demonstrated by the fact that
  the additional positions were filled after the
  end of the Federal Stimulus funds and after 2,700
  positions were eliminated in the summer of 2011,
  including a 50 percent cut of central office
  staff. The grant fiscal and compliance staffing
  levels have subsequently remained constant as
  financial pressures continue to mount. An
  additional 3,800 positions were eliminated in the
  summer of 2013 including further cuts to the
  central office. Overall, the SDP lost a third of
  its workforce between 2011 and 2013.

17
Corrective Action Plan

• Policies and Procedures
• Twenty six policies and fifty two procedures were
  codified to include fifty one forms and guidance
  documents. Many of the forms are form-fillable
  PDFs that require electronic signatures to reduce
  paper processing.
• The policies and procedures are web based and
  source references are cross-linked internally and
  with outside sources and are continuously updated
  as experience with implementation unfolds.
• Given that even peer best practice districts did
  not have well developed policies and procedures,
  the question arose as to whether a transformative
  culture change could occur without them. The
  conclusion was that written guidance that clearly
  delineated roles and responsibilities with
  detailed procedures and managerial and financial
  controls implemented through sign-off forms was
  the most direct path to effect change.

18
Corrective Action Plan

• Comprehensive Training
• Annual training for school and central office
  staff.
• Additional training is provided at intervals
  throughout the year, targeted to specific
  position types and also available for new
  personnel.
• Training materials include web-based videos and
  summary guidance documents for employee
  self-directed refresher training.
• Grant Management and Reporting
• Converted the budget development and management
  of federal funds in the accounting system from a
  multi-year to a 12 month perspective to improve
  the ability of middle and senior management to
  attain a more global picture of available funds
  from all funding sources on the SDP fiscal year
  basis. This conversion was critical for
  effective strategic planning, direction, and
  financial reporting and decision making,
  especially at a time of financial instability.

19
First Year Full Implementation

• The first full year of implementation began in
  FY13 (July 1, 2012).
• Many multi-million dollar grant usage decisions
  were made correctly that were not made that way
  in the past. The tone at the top has been
  successfully maintained across multiple District
  administrations.
• The question remained whether the more
  fundamental culture of compliance involving
  hundreds of people in multiple central office
  departments and over 200 separate schools would
  take root and grow.
• THE ANSWER IS YES!!!
• On the whole, staff learned the new procedures
  quickly and altered their planning and practices
  accordingly.
• You change a culture by changing how you interact
  with it and what you demand from it. You cant
  wait for the culture to change first.
• However, the first full year of implementation
  also uncovered ongoing control weaknesses.

20
On Going Control Weaknesses

• The number and dollar value of supplemental pay
  events found to be unallowable through
  after-the-fact monitoring was unacceptably high.
  
• Inventory controls, a frequent problem in large
  organizations, continued to present compliance
  risks.
• The retention of records essential to proving
  that effort was expended on federal cost
  objectives is largely left to program offices or
  schools to maintain which presents continuing
  risk given unrelenting staff reductions and
  turnover.
• There was no formal continuity plan to ensure
  consistency of focus and effort as changes were
  made to organizational leadership, a problem
  cited by ED as a frequent problem in other
  districts.
• The overall conclusion from the first full year
  of implementation was that the system of periodic
  reviewing and testing for compliance after
  financial obligations had already been incurred
  was not sufficient in the current environment.

21
Additional Controls

• Pre-Approval for All Expenditures The control
  was reversed from after-the-fact monitoring to a
  pre-expenditure approval and data entry control
  environment for supplemental pay. The Grant
  Compliance Office was given sole responsibility
  to process supplemental pay in the Payroll
  system.
• Memorandum of Understanding The SDP and PDE
  entered into a voluntary Memorandum of
  Understanding in the spring of 2013 that requires
  PDE review and approval before any material
  change can occur to the existing SDP
  organizational structure or capacity related to
  grant compliance. This agreement in effect
  through June of 2017.
• Inventory Controls Any school or central office
  that has not submitted their annual inventory is
  suspended from using federal dollars to purchase
  equipment until the inventory is submitted. The
  same for twice yearly random, sample checks for
  equipment. Schools and offices must demonstrate
  a credible inventory control plan.

22
Additional Controls (continued)

• Best Practice Program Management SDP grant
  programs that consistently demonstrate high
  achievement using best practices are reviewed
  and the examples used in an internal guide
  specific to SDP systems and resources. The goal
  is to encourage a culture of grant management
  excellence through training and mentoring.
  Well-trained and effective grant program managers
  are the most important contributor to reducing
  audit risk.
• Electronic Records Repository An electronic
  scanning and storage system of key documents
  related to grant management, administration and
  compliance has been implemented to capture
  documents in real time. Records are easily and
  quickly retrieved for internal compliance
  purposes and to fulfill audit requests. This
  system fulfills the key requirements of an
  effective record retention system in order to
  significantly reduce audit risk.

23
Lessons Learned

• Take Advantage of Shocks to the System A
  negative external audit or program monitoring
  assessment or even a negative internal audit can
  be the triggering event to aggressively begin a
  campaign to capture the attention and focus of
  senior management in order to change the tone at
  the top, and to embark on an organizational
  transformation, whether only modest or massive
  improvements are required. In this regard, the
  external (or internal) auditor is your best
  friend. You dont need to have an adversarial
  relationship with the auditorsyou may not agree
  with them all the time, but in the end, you both
  share a common interest of well run, effective
  and compliant federal programs.
• Honest Assessment Perform an honest assessment
  of the way your organization operates regarding
  program management and implementation, managerial
  and financial controls, compliance, etc.
  Admitting theres a problem is the required first
  step in addressing root causes.

24
Lessons Learned

• Become a Change Agent You, along with as many
  colleagues as possible, need to be an advocate up
  and down the chain of command for thoughtful
  planning and execution regarding the use of
  federal funds and for the compliance requirements
  to which your organization already agreed by
  accepting the money. This requires a degree of
  professional risk since some in the organization
  may actively or passively resist and resent such
  efforts.
• Plan of Action Create a concrete plan of
  action, timetable, and assemble a dedicated
  support team. There will be more people than you
  think willing to sign-on to the initiative if
  they see senior management support being backed
  by a plan with specific and detailed steps. This
  newly assembled team around the action plan must
  be dedicated to continuous improvement.

25
Lessons Learned

• Persistence and Adaptability Aggressively
  implement the plan, persistently and
  consistently. Dont continuously ask for
  permission for every action required to implement
  the plan as long as the plan explicitly provides
  for it, or the action is implicit to the plan.
  Few people, if any, will stop or reverse the
  implementation of sound business practices while
  being implemented, but theyll often delay action
  if you put it on the table for debate.
• Seek External Legal Support from Experts in the
  Field. Legal representation with experience in
  the field of federal compliance and audit
  resolution is critical to reducing financial
  liability. When faced with the threat of
  repaying millions of dollars to your grantor, the
  comparatively minimal cost of this support is a
  bargain. In-house legal counsel are not equipped
  or experienced enough, in most cases, to
  successfully navigate the federal system.

26
Lessons Learned

• Seek Independent Management Advice and Support.
  While not essential, an external analysis can
  lend legitimacy to the avowed need to correct
  weaknesses identified by findings or weaknesses
  you may already know exist and can provide new
  insights and comparative analysis to help form a
  plan of action and build momentum for positive
  change.
• Be Cooperative and Fully Utilize the Support of
  Your Grantor Agency. Work cooperatively towards
  audit resolution with all parties. It will
  almost always be the case that your grantor
  agency will be ready, willing, and eager to
  support the corrective action plan in any way
  possible. Embrace that support and cultivate
  that relationship. You will need it down the
  road.

27
Lessons Learned

• Build effective compliance through systems and
  controls. Its essential that the control
  environment be systematized and embedded into the
  regular processes of the organization so that it
  can better withstand personnel changes.
  Preferably, systems and controls should be
  documented through comprehensive policies and
  procedures to reduce the opportunity for
  misunderstanding and to make the training of new
  personnel easier. A weak culture of compliance
  can be successfully confronted and overcome by
  creating detailed policies and procedures that
  will invariably unveil the control weaknesses in
  your organization and provide the opportunity to
  discover root causes and develop solutions.

28
From Cost Principle to Programmatic Compliance
and Support

• Direct Assistance to Schools Direct support is
  provided to schools in completing all federally
  required documentation and entering orders in the
  accounting system. This help is provided
  year-round and intensively during the summer and
  designated weeks during the school year at
  drop-in centers. Budget to actual reports are
  distributed monthly to Principals and Assistant
  Superintendents. Finally, one-on-one training is
  provided to Principals and staff on allowable
  Title I activities regarding basic instruction,
  professional development, and parental
  involvement.

29
From Cost Principle to Programmatic Compliance
and Support (continued)

• School-Wide Planning Grant Compliance is
  working with the Academic Office to upgrade the
  school-wide Needs Assessment and School-Wide Plan
  process to respond to State monitoring criticism
  that the planning process is not robust. A new
  Principal and school community training and
  support model is being implemented, and Grant
  Compliance is providing an independent monitoring
  function to ensure that evidence of a robust
  process is occurring and that deficiencies be
  addressed quickly.

30
From Cost Principle to Programmatic Compliance
and Support (continued)

• Parental Involvement Grant Compliance has taken
  the lead in working with the Parental Involvement
  Office to develop a model Title I parental
  involvement activity calendar throughout the
  school year, and to create a comprehensive set of
  Title I training materials and delivery plan for
  Principals and parents to include rights, roles
  and responsibilities.

31
New Focus on Programmatic Compliance Under the
UGG

• The District is subject to federal laws and rules
  that compel it to ensure internal controls are in
  place to protect against waste, fraud and abuse.
  These requirements have been strengthened in the
  federal UGG that became effective on December 19,
  2014 (79 Federal Register 244). Several UGG
  provisions discuss fraud, waste and abuse
• Cooperative audit resolution is based on five
  pillars, including Federal agency leadership
  sending a clear message that continued failure to
  correct conditions identified by audits which are
  likely to cause improper payments, fraud, waste
  or abuse is unacceptable and will result in
  sanctions. 2 CFR 200.25.
• Fraud violations must be disclosed in writing to
  the federal agency. 2 CFR 200.113.

32
New Focus on Programmatic Compliance Under the
UGG (continued)

• Non-federal entities are required to sign
  certifications with each draw down and financial
  report stating I am aware that any false,
  fictitious, or fraudulent information, or the
  omission of any material fact, may subject me to
  criminal, civil or administrative penalties for
  fraud, false statements, false claims or
  otherwise. 2 CFR 200.415.
• The UGG mandates self-assessment by non-federal
  entities. The non-federal entity must monitor
  its activities under Federal awards to assure
  compliance with applicable federal requirements
  and performance expectations are being achieved.
  Monitoring by the non-federal entity must cover
  each program, function or activity. 2 CFR
  200.328(a) (emphasis added).

33
New Focus on Programmatic Compliance Under the
UGG (continued)

• Similarly, the section on internal controls
  states The non-federal entity must take
  prompt action when instances of noncompliance are
  identified including noncompliance identified in
  audit findings. 2 CFR 200.303(d) (emphasis
  added).
• The UGG, and predecessor federal OMB Circular
  A-87, requires the SDP to ensure that all federal
  grant costs are necessary to the operation of
  the program, be reasonable, in that the cost
  does not exceed what a prudent person would deem
  reasonable under the circumstances, and
  allocable, the cost is chargeable to the grant
  in accordance with the benefit received. 2 CFR
  200.403, 404, and 405.

34

• 2 Code of Federal Regulations 200.301
  Performance measurement.
• The Federal awarding agency must require the
  recipient to use OMB-approved standard
  information collections when providing financial
  and performance information. As appropriate and
  in accordance with above mentioned information
  collections, the Federal awarding agency must
  require the recipient to relate financial data to
  performance accomplishments of the Federal award.
  Also, in accordance with above mentioned
  standard information collections, and when
  applicable, recipients must also provide cost
  information to demonstrate cost effective
  practices (e.g., through unit cost data). The
  recipient's performance should be measured in a
  way that will help the Federal awarding agency
  and other non-Federal entities to improve program
  outcomes, share lessons learned, and spread the
  adoption of promising practices. The Federal
  awarding agency should provide recipients with
  clear performance goals, indicators, and
  milestones as described in 200.210 Information
  contained in a Federal award.

35
Program Monitoring Initiative

• Independent Performance Monitoring and Reporting
• A separate unit within the Grant Compliance
  Office is being staffed to, among other things,
  provide analysis and support to the UGG
  programmatic compliance effort
• Quarterly Assessment of Competitive Federal
  Awards and Select Federal Formula Award
  Activities.
• For competitive awards, the quarterly report to
  the federal program officer provides an
  opportunity for an independent review of cost
  principle compliance, rate of spend, and
  achievement of program goals to generate a risk
  assessment (high / medium / low) of the ability
  of the grant to achieve its objectives. Also
  includes recommendations to senior management so
  that corrective action may be taken in time to
  impact grant outcomes.
• For formula grants, such reviews will be
  conducted for discrete activities, probably on an
  annual program performance basis.

36
Program Monitoring Initiative

• Independent Performance Monitoring and Reporting
• Program Reviews
• When requested by senior management or as the
  result of allegations of waste, fraud and abuse,
  a full program review of a function will be
  undertaken to assess operational efficiency and
  effectiveness to include several or all of the
  following elements
• Employee self-declaration of tasks and subsequent
  interviews
• Interview of relevant stakeholder personnel
  (grantor and other)
• A survey of relevant program laws, rules, and
  guidance.
• District Office of Research and Evaluation
  reports for program performance assessments
• Financial operations, to include inputs and
  outputs to assess unit cost and efficiency
• Unannounced site visits

37
Questions?