Recovery Act:

As Initial Implementation Unfolds in States and Localities, Continued Attention to Accountability Issues Is Essential

GAO-09-580: Published: Apr 23, 2009. Publicly Released: Apr 23, 2009.

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The American Recovery and Reinvestment Act of 2009 (Recovery Act) is estimated to cost about $787 billion over the next several years, of which about $280 billion will be administered through states and localities. The Recovery Act requires GAO to do bimonthly reviews of the use of funds by selected states and localities. In this first report, GAO describes selected states' and localities' (1) uses of and planning of Recovery Act funds, (2) accountability approaches, and (3) plans to evaluate the impact of funds received. GAO's work is focused on 16 states and the District of Columbia--representing about 65 percent of the U.S. population and two-thirds of the intergovernmental federal assistance available through the Recovery Act. GAO collected documents from and interviewed state and local officials, including Governors, "Recovery Czars," State Auditors, Controllers, and Treasurers. GAO also reviewed guidance from the Office of Management and Budget (OMB) and other federal agencies.

About 90 percent of the estimated $49 billion in Recovery Act funding to be provided to states and localities in FY2009 will be through health, transportation and education programs. Within these categories, the three largest programs are increased Medicaid Federal Medical Assistance Percentage (FMAP) grant awards, funds for highway infrastructure investment, and the State Fiscal Stabilization Fund (SFSF). The funding notifications for Recovery Act funds for the 16 selected states and the District of Columbia (the District) have been approximately $24.2 billion for Medicaid FMAP on April 3, $26.7 billion for highways on March 2, and $32.6 billion for SFSF on April 2. Fifteen of the 16 states and the District have drawn down approximately $7.96 billion in increased FMAP grant awards for the period October 1, 2008 through April 1, 2009. The increased FMAP is for state expenditures for Medicaid services. The receipt of this increased FMAP may reduce the state share for their Medicaid programs. States have reported using funds made available as a result of the increased FMAP for a variety of purposes. For example, states and the District reported using these funds to maintain their current level of Medicaid eligibility and benefits, cover their increased Medicaid caseloads-which are primarily populations that are sensitive to economic downturns, including children and families, and to offset their state general fund deficits thereby avoiding layoffs and other measures detrimental to economic recovery. States are undertaking planning activities to identify projects, obtain approval at the state and federal level and move them to contracting and implementation. For the most part, states were focusing on construction and maintenance projects, such as road and bridge repairs. Before they can expend Recovery Act funds, states must reach agreement with the Department of Transportation on the specific projects; as of April 16, two of the 16 states had agreements covering more than 50 percent of their states' apportioned funds, and three states did not have agreement on any projects. While a few, including Mississippi and Iowa had already executed contracts, most of the 16 states were planning to solicit bids in April or May. Thus, states generally had not yet expended significant amounts of Recovery Act funds. The states and D.C. must apply to the Department of Education for SFSF funds. Education will award funds once it determines that an application contains key assurances and information on how the state will use the funds. As of April 20, applications from three states had met that determination- South Dakota, and two of GAO's sample states, California and Illinois. The applications from other states are being developed and submitted and have not yet been awarded. The states and the District report that SFSF funds will be used to hire and retain teachers, reduce the potential for layoffs, cover budget shortfalls, and restore funding cuts to programs. Planning continues for the use of Recovery Act funds. State activities indlude appointing Recovery Czars; establishing task forces and other entities, and developing public websites to solicit input and publicize selected projects. GAO found that the selected states and the District are taking various approaches to ensuring that internal controls manage risk up-front; they are assessing known risks and developing plans to address those risks. State auditors are also planning their work including conducting required single audits and testing compliance with federal requirements. Nearly half of the estimated spending programs in the Recovery Act will be administered by non-federal entities. State officials suggested opportunities to improve communication in several areas. Officials in nine of the 16 states and the District expressed concern about determining the jobs created and retained under the Recovery Act, as well as methodologies that can be used for estimation of each.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: This particular recommendation was not implemented in time for 2009 audits.

    Recommendation: To provide additional leverage as an oversight tool for Recovery Act programs, the Director of OMB should adjust the current audit process to focus the risk assessment auditors use to select programs to test for compliance with 2009 federal program requirements on Recovery Act funding.

    Agency Affected: Executive Office of the President: Office of Management and Budget

  2. Status: Closed - Not Implemented

    Comments: We previously reported that to address this recommendation, OMB had implemented a voluntary Single Audit Internal Control Project for states receiving Recovery Act funds. One of the goals of the project was to achieve more timely communication of internal control deficiencies for higher-risk Recovery Act programs so that corrective action could be taken more quickly. The project encouraged participating auditors to identify and communicate deficiencies in internal control to program management 3 months sooner than the 9-month time frame required under statute. The project also required that program management provide corrective action plans aimed at correcting any deficiencies to the federal awarding agency 2 months earlier than required under statute. While the project was successful in encouraging earlier reporting of internal control deficiencies for the participants, the voluntary nature of the project limited its effectiveness and may also have biased the project's results by excluding from analysis states or auditors with practices that cannot accommodate the project's requirement for early reporting of control deficiencies. We believe that OMB needs to take additional steps to encourage more comprehensive and timely reporting on internal controls through single audits for Recovery Act programs. However, as of July 2014, OMB has not taken such actions and we are closing this out as unimplemented.

    Recommendation: To provide additional leverage as an oversight tool for Recovery Act programs, the Director of OMB should adjust the current audit process to provide for review of the design of internal controls during 2009 over programs to receive Recovery Act funding, before significant expenditures in 2010.

    Agency Affected: Executive Office of the President: Office of Management and Budget

  3. Status: Closed - Implemented

    Comments: On February 28, 2012, OMB published an advance notice of proposed guidance, which proposed for public comment a number of reforms relating to concentrating audit resolution and oversight resources on higher dollar, higher risk grant awards. These reforms, if implemented, would be integrated into the Single Audit Act's implementing guidance, OMB Circular No. A-133 on Audits of States, Local Governments, and Non-Profit Organizations and the guidance in OMB Circular A-50 on Single Audit Act follow-up. The reforms are intended to revise the requirements of the Single Audit framework such that larger expenditures of federally funded grants would be required to undergo increased levels of audit oversight as compared with smaller expenditures of federally funded grants. The proposed guidance is a result of various OMB working groups, at least one of which was initiated as a result of the President's February 28, 2011, memorandum entitled Administrative Flexibility, Lower Costs, and Better Results for State, Local, and Tribal Governments. To develop their suggestions for improving Single Audit requirements, the working groups obtained input from federal, state, local, and Native American tribal officials involved in varying capacities with federal grants and provided a report of their findings to OMB. OMB considered the report of the working groups and incorporated information from the working groups into their proposed reforms.

    Recommendation: To provide additional leverage as an oversight tool for Recovery Act programs, the Director of OMB should adjust the current audit process to evaluate options for providing relief related to audit requirements for low-risk programs to balance new audit responsibilities associated with the Recovery Act.

    Agency Affected: Executive Office of the President: Office of Management and Budget

  4. Status: Closed - Implemented

    Comments: In response to requests for more guidance on the recipient reporting process and required data, OMB, after soliciting responses from an array of stakeholders, issued additional implementing guidance for recipient reporting on June 22, 2009. Over the last several months OMB met regularly with state and local officials, federal agencies, and others to gather input on the reporting requirements and implementation guidance. In its June 22 guidance, OMB endeavors to (1) dispel some of the confusion related to reporting on jobs created and retained versus the macroeconomic impact of the Recovery Act, (2) clarify which recipients of Recovery Act funds are required to report under the act, and (3) provide additional detail on how to calculate jobs created and retained. The new guidance articulates once again that under the Recovery Act, there are two distinct types of job reports. First, the Council of Economic Advisers (CEA), in consultation with OMB and the Department of the Treasury, is required to submit quarterly reports to Congress that detail the impact of programs funded through the Recovery Act on employment, economic growth, and other key economic indicators. In order to fulfill this mandate, CEA has developed macroeconomic methodologies to estimate employment effects for both the national and state levels. OMB and federal agencies will coordinate with CEA on these quarterly reports and other questions regarding macro-level jobs estimates. The second type of job report is part of the "recipient reports" required under section 1512 of the Recovery Act. Specifically, section 1512(c)(3)(D)requires recipients of Recovery Act funds to report an estimate of the direct jobs created or retained by the Recovery Act project or activity. The June 22 OMB guidance clarifies that recipients of Recovery Act funds are required to report only on jobs directly created or retained by Recovery Act-funded projects, activities, and contracts.

    Recommendation: Given questions raised by many state and local officials about how best to determine both direct and indirect jobs created and retained under the Recovery Act, the Director of OMB should continue OMB's efforts to identify appropriate methodologies that can be used to (1) assess jobs created and retained from projects funded by the Recovery Act; (2) determine the impact of Recovery Act spending when job creation is indirect; and (3) identify those types of programs, projects, or activities that in the past have demonstrated substantial job creation or are considered likely to do so in the future. We also recommended that the Director of OMB consider whether the approaches taken to estimate jobs created and retained in these cases can be replicated or adapted to other programs.

    Agency Affected: Executive Office of the President: Office of Management and Budget

  5. Status: Closed - Implemented

    Comments: GAO's May 2010 review of states' and localities' use of Recovery Act funds provided an update on this recommendation (GAO-10-604, pages 279-280). OMB has taken steps to ensure data quality through issuance of additional guidance. OMB has also worked with the states to minimize to the extent possible the new reporting burdens under the Recovery Act.

    Recommendation: In consultation with the Recovery Accountability and Transparency Board and States, the Director of OMB should evaluate current information and data collection requirements to determine whether sufficient, reliable and timely information is being collected before adding further data collection requirements. As part of this evaluation, OMB should consider the cost and burden of additional reporting on states and localities against expected benefits.

    Agency Affected: Executive Office of the President: Office of Management and Budget

  6. Status: Closed - Implemented

    Comments: On May 11, 2009, OMB, in response to our recommendation, released a memorandum, M-09-18, Payments to State Grantees for Administrative Costs of Recovery Act Activities (May 11, 2009), clarifying how state grantees could recover administrative costs of Recovery Act activities.

    Recommendation: The Director of OMB should timely clarify in a timely manner what Recovery Act funds can be used to support state efforts to ensure accountability and oversight, especially in light of enhanced oversight and coordination requirements.

    Agency Affected: Executive Office of the President: Office of Management and Budget

  7. Status: Closed - Implemented

    Comments: GAO's May 2010 review of states' and localities' use of Recovery Act funds provided an update on this recommendation (GAO-10-604, pages 276-277). In response to our recommendation, OMB has made important progress in notifying recipients when Recovery Act funds are available, communicating the status of these funds at the federal level through agency Weekly Financial Activity reports, and disseminating Recovery Act guidance broadly while actively seeking public and stakeholder input. OMB has taken the additional step of requiring federal agencies to notify Recovery Act coordinators in states, the District of Columbia, commonwealths, and territories within 48 hours of an award to a grantee or contractor in their jurisdiction.

    Recommendation: To foster timely and efficient communications, the Director of OMB should develop an approach that provides dependable notification to (1) prime recipients in states and localities when funds are made available for their use, (2) states, where the state is not the primary recipient of funds, but has a state-wide interest in this information, and (3) all non-federal recipients, on planned releases of federal agency guidance and, if known, whether additional guidance or modifications are expected.

    Agency Affected: Executive Office of the President: Office of Management and Budget

 

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