States Struggle with Managing Federal Stimulus Funds

The federal government made nearly $100 billion available to states and school districts for various education programs through the American Recovery and Reinvestment Act (ARRA.) Since the Department of Education first made the funds available in early April, states have been disbursing ARRA funds to their local education agencies (LEAs) at varying rates and through different processes. While some states have implemented extensive applications and oversight to ensure that the funds are disbursed when they are needed and spent quickly, others have pushed out the funds to LEAs as quickly as possible regardless of LEA need. A recent report published by the Department of Education’s Office of Inspector General discusses some of these practices and the impact they have on state and LEA finances. The report finds that several states are disbursing ARRA funds to LEAs before they can spend them, calling into the question the methods states are using to disburse the funds and triggering financial penalties for the LEAs.

The Office of Inspector General (OIG) has been auditing seven states and Puerto Rico to better examine how these states have been managing the flow of ARRA funds to LEAs. Federal regulations require that state governments disburse funds in a manner that minimizes the time between the transfer of funds to LEAs and when the LEA actually spends the money. In cases in which LEAs do not spend federal funds within three days, they must remit interest payments earned on the unspent funds to the U.S. Treasury at least quarterly.[1] Although Department of Education guidance has reinforced these federal requirements, five of the audited states have engaged in practices that are likely to disburse funds to LEAs before they are able to spend them.

California, for example, pushed out more than $4 billion in ARRA funds to school districts between late May and early July before determining the districts’ need for the funds. In late July, LEAs were still planning how they would use the funds and had actually spent very little. As a result, these LEAs should be remitting interest payments on these funds at least quarterly. However, the OIG has also found that California LEAs have been miscalculating their interest payments or not remitting them at all, likely due to lack of state guidance on these practices.

This OIG report has interesting implications for the use of ARRA funds across the country. If, in fact, many states are disbursing funds before LEAs are actually able to use them, these funds are likely languishing in local coffers, forcing LEAs to remit interest payments that they cannot afford. This means that there is a great disparity between the percent of ARRA funds that have been drawn down for disbursement and the percent of ARRA funds that have actually been spent. As we have mentioned in the past, the data reported by the recipients of ARRA funds does not include actual expenditures by LEAs. In absence of this data, it is impossible to know the extent to which state disbursements of ARRA funds are presenting real problems for LEAs.

Additionally, the ARRA represents a large increase in federal allocations to public education. Given the significant guidance, oversight, and transparency tied to these new funds, it’s no surprise that LEAs are unable to spend them immediately. In fact, the slow speed of expenditure at the local level suggests that these funds are being used thoughtfully as the guidance encourages. Regardless, this report makes a good case for ensuring that state education agencies disburse ARRA funds carefully to ensure they have the greatest positive impact on LEA finances.

[1] Interest payments from the LEAs are necessary because the U.S. Treasury incurs interest costs when it borrows funds to make the federal payments. When a state education agency pushes out federal funds to LEAs too soon, the U.S. Treasury incurs additional costs on those borrowed funds that otherwise should have been drawn down later.