Honorable Charles Norwood
House of Representatives
Washington, DC 20515

Dear Congressman Norwood:

I am writing to provide you with a report of our efforts to correct long-standing management problems at the Department of Education. Some of the persistent management problems that I inherited have been identified in the Ernst & Young financial statement audit for the period ended September 2000, and in the testimony to Congress by the Department's Inspector General. As a result of the Inspector General's testimony, there have been widely quoted news reports suggesting that $450 million was lost due to mismanagement, fraud, or theft.

This letter is intended to explain what we have learned to date as a result of our investigations regarding that figure. It will also explain the nature and type of payments or costs reflected in the $450 million, how they were discovered and whether they resulted in actual losses to the Department, methods of recovery we have initiated to recapture any lost funds, and actions I have undertaken to ensure that this situation does not occur again. I want to clarify at the outset that the $450 million figure does not represent funds lost by the Department and is not a proper measure of the Department's financial management problems.

This Department provides approximately $63 billion in payments to recipients annually. These funds are awarded to a wide range of government agencies, private and public organizations, and individuals. For example, recipients typically include state and local education agencies, colleges and universities, nonprofit organizations, private contractors, and individual students. In making these payments, the Department makes about 500,000 financial transactions every year.

The Inspector General characterized $450 million of these payments or costs as improper over the period 1998-2000. The following three categories explain how this $450 million was determined:

• $250 million represents duplicate payments or two payments provided to one entity for the same purpose. The Department recovered this entire amount and no financial loss occurred to the taxpayer. The money was not properly awarded, but it has been recovered. The $250 million is not "missing."

• $100 million was identified as legal judgments against grantees or other recipients of Department funds who may have obtained funds through illegal or improper methods. Responsibility for the recovery of this money has been turned over to the Justice Department, and they have informed us that to date they have recovered approximately $40 million of these funds. We are continuing to work aggressively with the Justice Department to pursue recovery of the remaining funds.

• $100 million was identified as misspent through routine financial audits of grantees, contractors, and other fund recipients conducted by the Department and Inspector General. As a result of this audit work, the Inspector General questioned, and Department staff later agreed, that approximately $100 million had been misspent. This includes, for example, funds not spent in accordance with the terms and conditions of a grant award, or expenditures where the recipient was unable to provide adequate documentation to support the expenditures. We have recovered almost $3 million of these funds, and have promissory notes outstanding from entities and students that should result in the recovery of an additional $53 million. I must note, however, that it is unlikely that most of the remaining $44 million will be recovered. Some of the recipients of this money have now declared bankruptcy. Also, it may ultimately be determined that some of the money may not be owed to the Department, since the audit determinations may be reduced or overturned through legal or administrative appeals.

None of the $200 million described in the two preceding bullets represents losses due to financial mismanagement by the Department. Rather, these amounts reflect wrongdoing by recipients of Department funds, failure to adhere to contract or grant terms, or lack of documentation by recipients. Efforts by the Inspector General's office, other Department offices, and the Justice Department to find these problems, recover the funds, and enforce the law are examples of efforts we need to make in order to protect the federal interest.

As you know, I have launched an initiative to strengthen Department management, with a particular emphasis on financial management. A few weeks ago, I held a news conference and told the press and the American taxpayer that yes, there have been problems in the past, and that there are no excuses for those problems. Our job is straightforward: fix the problems and protect the taxpayers' money.

Our two major goals are to obtain a clean audit (an unqualified financial statement audit opinion) and remove the General Accounting Office's "high risk" designation from our student financial aid programs. I believe that achievement of these goals is vital to assure public confidence in the integrity of the Department, and our ability to carry out our mission to improve education in our Nation. The American people and the Congress have every right to expect effective stewardship of taxpayer funds by the Department. Rest assured, as Secretary of Education, it is my mission to see that taxpayers' money is protected and spent on educating children.

We are working hard to correct long-standing management problems we found in the Department. I look forward to sharing the results of our management improvement efforts regularly with Congress and the public. I also look forward to working with you and others in Congress as we strive to reform American education and improve student achievement so that no child is left behind.

Sincerely,

/s/

Rod Paige