Report 2009-611.1 Summary - June 2009

High-Risk Update—California's System for Administering Federal Recovery Act Funds: State Departments Are Preparing to Administer Aspects of Recovery Act Funding, but Correction of Control Weaknesses and Prompt Federal and State Guidance Are Needed


Our analysis of the State's applicable activities and internal controls at four state departments expected to receive significant amounts of American Recovery and Reinvestment Act of 2009 (Recovery Act) funds revealed the following:


The federal government intends to provide states, local governments, and other entities $787 billion under the American Recovery and Reinvestment Act of 2009 (Recovery Act) to jump-start the economy and to create or preserve jobs. As of May 28, 2009, the California Economic Recovery Portal Web site (State Recovery Portal) showed that California's share of this funding will be $85.4 billion.

As of May 2009 California was still establishing the necessary processes and procedures to fully administer Recovery Act funding. Because the Recovery Act imposes significant provisions for accountability1 and transparency2 on entities that receive funds, as well as penalties for noncompliance, we examined the State's preparedness for administering Recovery Act funding by analyzing applicable activities and internal controls at four state departments expected to receive significant amounts of Recovery Act funds in fiscal year 2008-09: the Department of Education (Education), the Department of Health Care Services (Health Care Services), the Employment Development Department (EDD), and the Department of Social Services (Social Services). These four departments are responsible for administering 13 federal programs3 that have received or are expected to receive $50 million or more in Recovery Act funds by the end of fiscal year 2008-09. Based on our analysis, we conclude that although some of the departments have exhibited more progress than others, none of the four are fully prepared to administer Recovery Act funding.

Representatives from each of the four departments generally stated that, where applicable, they planned to rely on internal controls already in place for existing federal programs to administer Recovery Act funding. According to the U.S. Office of Management and Budget's (OMB) February 18, 2009, initial implementing guidance for the Recovery Act, accountability objectives for implementing the Recovery Act include ensuring that funds are used for authorized purposes; mitigating the potential for fraud, waste, error, and abuse; and ensuring the recipients and uses of all Recovery Act funds are transparent to the public and the public benefits of these funds are reported clearly, accurately, and in a timely manner.

Although relying on existing internal controls is a reasonable approach, our Single Audit report covering fiscal year 2007-084 noted 30 internal control weaknesses related to certain OMB Circular A-133 compliance requirements and federal programs for which the four departments we assessed expect to receive Recovery Act funds in fiscal years 2008-09 and 2009-10. For example, Social Services' processes for reviewing and authorizing counties' expense and assistance claims for the Temporary Assistance for Needy Families program does not provide reasonable assurance that federal funds were expended only for allowable activities and costs. Additionally, EDD did not adequately monitor subrecipients of federal funds during the award period. For example, EDD did not conduct any on-site reviews of community-based organizations that received a total of $83.5 million in federal funding for the Workplace Investment Act programs in fiscal year 2007-08. As a result, Social Services and EDD cannot ensure that their respective subrecipients are or will be spending Recovery Act funds only on allowable activities. During our analysis, we noted that the four departments' progress in correcting the 30 internal control weaknesses is limited—the departments appear to have corrected only four, are still in the process of correcting 22, and have taken minimal or no action for the remaining four. Consequently, without correcting these internal control deficiencies, relying on existing internal controls may not provide sufficient assurance that Recovery Act funding is properly administered.

Some of the departments we evaluated stated that they are uncertain as to whether they will be able to meet the new reporting requirements established under Section 1512 of the Recovery Act that apply to many programs. For example, officials at Education acknowledged that the department was still waiting for guidance on performance reporting pursuant to Section 1512 of the Recovery Act. Reporting provisions oblige departments to report information to the federal government regarding the total amount of Recovery Act funds received, obligated, or spent and performance data such as the number of jobs created and preserved by projects or activities using Recovery Act funds. Although the departments indicated that they plan to use existing mechanisms to meet the requirements for reporting financial data, each indicated that it was either awaiting further guidance from the federal government regarding how to satisfy the requirement for reporting performance data or seeking guidance on other Recovery Act provisions. If departments are not successful obtaining this guidance from the federal oversight agencies soon, it may be too late to take the appropriate actions necessary to implement the reporting provisions of the Recovery Act correctly. Further, certain departments that administer entitlement or mandatory programs believe they are exempt from Section 1512 reporting requirements, but are seeking additional guidance from the State or federal government to confirm their belief.

Finally, we examined the efforts of the California Federal Economic Stimulus Task Force (Task Force) to help departments prepare to administer the Recovery Act. Although it has provided general guidance for securing Recovery Act funds and administering the Recovery Act, we believe the Task Force should provide a more detailed framework for administering Recovery Act funding. Ideally, it would provide explicit direction regarding the systems or processes departments need to administer Recovery Act funding. Recognizing the variety of federal programs the departments administer, a one-size-fits-all, detailed approach likely would not be practical. However, the Task Force could offer a broad framework within which departments can operate that would allow the flexibility necessary for each to administer its federal programs. This framework could include direction on how to coordinate with the State Controller's Office (State Controller) to establish a unique account number for tracking the receipt of Recovery Act funds separately from other federal funds coming to California and an agenda or list of topics departments should discuss with their staff when providing training on how to administer Recovery Act funding. Additionally, once the OMB informs the Task Force whether the Recovery Act's Section 1512 reporting requirements apply to both the recipient and subrecipient or just the recipient, the Task Force could provide an example of the type of language departments should include as part of their terms and conditions of an award to require subrecipients to meet Section 1512 reporting requirements.


We recommend that to strengthen the State's preparedness to administer Recovery Act funding, the Task Force should do the following:

State departments should do the following:

1 The federal Recovery Web site defines accountability as providing data that will allow citizens to evaluate the Recovery Act's progress and provide feedback.

2 The federal Recovery Web site defines transparency as showing how, when, and where Recovery Act funds are spent.

3 What we refer to as federal programs are actually individual federal financial assistance awards that provide funding for an existing or new federal program or a component of a federal program.

4 State of California: Internal Control and State and Federal Compliance Audit Report for the Fiscal Year Ended June 30, 2008, Report 2008-002 (May 2009).