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Managements

Discussionand

Analysis

FY 2006 Performance and Accountability ReportU.S. Department of Education


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FY 2006 Performance and Accountability ReportU.S. Department of Education


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MANAGEMENTS DISCUSSION AND ANALYSIS

Our Mission

Historically, the Departments mission hasbeen to ensure equal access to education andto promote educational excellence throughoutthe nation. Nearly five years after theenactment of theNo Child Left Behind Act of2001, this mission requires the Department tofocus on achieving academic proficiency by2014, increasing the rigor of mathematics andscience curricula, improving Americancompetitiveness, and providing access tohigher education for all.

Of the many services that governmentprovides to its citizens, few are as far-reaching as education. Every communitythroughout America has schools that provide

instruction in reading, writing, mathematics,and science, as well as immersion inAmerican history and culture. Mostcommunities also have a high school wherestudents learn science, mathematics, andother subjects that help them becomeinformed American citizens. In addition,technical andpostsecondaryeducationalinstitutions areavailable to

Americans tofurther improvetheir skills andeducation andenable them tobecomecontributingmembers of oursociety.

The Departmentis proud to be apart of this grand

enterprise.Nationally, education expenditures areapproximately $900 billion. The Departmentprovides $99.8 billionor 11 percent of thetotalto help leverage the balance of funding

and ensure that every child has the opportunity tolearn and to reap the benefits of a high qualityeducation.

Our nations schools are the foundation for aneconomic engine that helps ensure we are a countrywith educated citizenry, full employment, and theability to be fully competitive in the internationalmarketplace.

To maintain our national competitiveness we musthave world-class higher education and continuouslearning systems. These systems derive from asecondary education system that graduates highschool students with advanced mathematics andscience skills. Students with these skills are theproduct of rigorous mathematics and science

programs in elementary schools. These programsfocus on inclusion of all students in challengingand comprehensive instruction using best practicesand research-based techniques.

America has the worlds greatest range ofeducational environments to meet the diverse needs

of its students: public schools, public charterschools, specialized schools, and nonpublicschools. This report discusses how the Departmentof Education has supported and will continue tosupport these initiatives and activities.

Continuous National Improvement

Through Education

Elementary

Reading &

Mathematics

Proficiency

Increased

Rigor in

Mathematics

& Science

Improvement

in High

School

Competitiveness

More Students

Accessing

Postsecondary

Education

Improved

Job

Competitiveness

Improved

National

Competitiveness

TeacherQuality

Students&

Parents

Continuous National Improvement

Through Education

Elementary

Reading &

Mathematics

Proficiency

Increased

Rigor in

Mathematics

& Science

Improvement

in High

School

Competitiveness

More Students

Accessing

Postsecondary

Education

Improved

Job

Competitiveness

Improved

National

Competitiveness

TeacherQuality

Students&

Parents

Elementary

Reading &

Mathematics

Proficiency

Increased

Rigor in

Mathematics

& Science

Improvement

in High

School

Competitiveness

More Students

Accessing

Postsecondary

Education

Improved

Job

Competitiveness

Improved

National

Competitiveness

Elementary

Reading &

Mathematics

Proficiency

Increased

Rigor in

Mathematics

& Science

Improvement

in High

School

Competitiveness

More Students

Accessing

Postsecondary

Education

Improved

Job

Competitiveness

Improved

National

Competitiveness

TeacherQuality

Students&

Parents

FY 2006 Performance and Accountability ReportU.S. Department of Education 3


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History and Organization

The federal government recognized thatfurthering education is a national priority in1867, when its initial role in educationencompassed statistical data collection andreporting. Although the agencys form andlocation in the Executive Branch havechanged over the years, the federal focus hasremained on identifying and sharing whatworks in education with teachers andeducation policymakers. It was not untilMay 1980 that the Congress established theDepartment of Education as a Cabinet-levelagency.

By that time, several major legislative actionshad been taken to channel federal support to

improve the quality of, and access to,education. Legislation in the late 1800s andearly 1900s focused on the areas of educationthat would support Americas overalleconomic progress, such as the creation ofland-grant colleges and universities, and onagricultural, industrial, and home economicstraining for high school students. Later majorlegislative actions included theLanham Actof 1941, Impact Aid, and the GI Bill.These actions, a direct result of the impact ofWorld War II on our countrys families,

supported school districts that were affectedby the large number of military enlistmentsand provided opportunities for education forthose men and women who served theircountry.

Managements

DiscussionandAnalysis

Between World War II and 1980, severallandmark legislative actions shapedAmericas education systems. The focusduring this period was equal access, and thelegislation included Title VI of the CivilRights Act of 1964, theElementary andSecondary Education Act of 1965, theHigher

Education Act of 1965, Title IX of theEducation Amendments of 1972, Section 504of theRehabilitation Act of 1973, and theEducation of All Handicapped Children Actof 1975, now known as theIndividuals withDisabilities Education Act.

TheElementary and Secondary Education Actlaunched a comprehensive set of programs that arestill administered by the Department today. Tofurther enhance this legislation, President Bushrecommended, and the Congress enacted, theNo Child Left Behind Act of 2001. This recentamendment to the 1965 act established programsthat account for more than 40 percent of theDepartments fiscal year 2006 discretionaryspending.

Today, the Department operates programs thattouch every area and level of education. Theelementary and secondary programs annually serve15,500 school districts and approximately50 million students. Department programs also

provide grant, loan, and work-study assistance tomore than 10 million postsecondary students.

The Department strives to achieve these resultswith the smallest workforce of the 15 Cabinet-leveldepartments. Fewer than 4,200 full-time-equivalent staff manage approximately $58 billionin annual discretionary funds and oversee a studentfinancial loan portfolio exceeding $400 billion.

In 2005, Secretary Spellings announced a newcoordinating structureone that better focusesresources on assisting our educational partners and

emphasizes tangible results as the yardstick of oursuccess. This structure will result in a Departmentthat is increasingly responsive to the needs ofstates, districts, schools, teachers, students,institutions of higher education, and otherstakeholders in fostering academic achievement.The revised coordinating structure is displayed onthe next page.

The Department recognizes the primary role ofstates and school districts in providing a highquality education, employing highly qualifiedteachers and administrators, and establishing

challenging content and achievement standards.The federal role is to supplement these state andlocal efforts with leadership, expertise, and targetedresources that optimize opportunities and improveachievements for all Americans.

FY 2006 Performance and Accountability ReportU.S. Department of Education4


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Department of Education Coordinating Structure

FY 2006



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Our Customers

Every American has a stake in the nations education success.

The Departments customers includeAmerican taxpayers, students, teachers,

parents, postsecondary students, institutions,and global citizens. WhenNo Child LeftBehindtook effect, the governmentintensified its commitment to the students ofAmericas elementary and secondary schools.The act benefits children, empowers parents,supports teachers, and strengthens schools.

Elementary and Secondary Students

According to the Departments report, TheCondition of Education 2006, there are signsof improved achievement at the elementaryand secondary levels. U.S. fourth-gradestudents had higher average scores in readingliteracy than the international average asmeasured in the 2001 Progress inInternational Reading Literacy Study. Thirty-five countries participated, and the U.S.students had a higher average than 23 of theother 34 countries that participated.

Managements


In mathematics and science, the U.S.demonstrated mixed results. U.S. fourth-grade students showed no measurable changein performance in the 2003 Trends in

International Mathematics and Science Study,while eighth-graders performance improved.The standings of fourth-graders actuallydeclined in both mathematics and sciencerelative to students from the 14 othercountries that participated in both the 1995and 2003 assessments.

Since the inception of theIndividuals withDisabilities Education Act, the number andpercentage of youth aged 321 enrolled inpublic schools who receive special educationservices have steadily increased. In 200405,

more than 6.7 million youth aged 321 wereserved under the act.

Parents

The provisions ofNo Child Left Behindhavemade schools more accountable to parentsand provided parents with information abouttheir children and what they should expectfrom their schools. No Child Left Behindrequires that parents be informed about their

childs test results and whether their childs schoolis making adequate yearly progress. If a school

does not make progress, parents can choose to havetheir child transferred to another school. Thefollowing year if the school does not makeprogress, parents are informed and students areprovided supplemental education services.

Teachers

According to the 2004 School and Staffing Survey,there were 3.3 million public school teachers and87,621 principals working in 15,500 schooldistricts throughout the country. No Child LeftBehindincludes provisions stating that all teachersin core academic areas must be highly qualified inthe core academic subjects they teach by the end ofthe 200506 school year. In general, a highlyqualified teacher must have a bachelors degree,full state certification as defined by the state, anddemonstrated competency as defined by the state ineach core academic subject he or she teaches.

Postsecondary Students and Institutions

More students are enrolling in colleges and gettingdegrees, and the enrollment increase is projected tocontinue through 2015. The number of bachelorsdegrees awarded increased by 33 percent between

198990 and 200304, while the number ofassociates degrees increased by 46 percent.Female college enrollment passed male enrollmentin 1978, and the gender gap has widened and isexpected to grow.

To help students who could not otherwise affordpostsecondary education, the Department providesassistance through various programs such as theFederal Family Education Loan Program, theFederal Direct Loan Program, the Pell GrantProgram, the Perkins Loan Program, and theFederal Work-Study Program, authorized under

Title IV of theHigher Education Act. In 2006, theDepartments office of Federal Student Aiddelivered approximately $77 billion in aid to morethan 10 million students attending over6,100 institutions.



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Performance Results and Highlights

In fiscal year (FY) 2006, the Departmentadministered and assessed 150 programs.The key measures provided in this reportrepresent those measures that provide anoverall assessment of the Departmentsprogress in achieving improvements in theeducational system.

The table below summarizes theDepartments performance results forFY 2006 key measures. There are 64 keyperformance measures that support theDepartments mission and strategic goals.

For the most recent data available, theDepartment met or exceeded targets for33 key measures, did not meet 15, and is

awaiting data for the remainder. This year,data are pending for 16 key measures, whichis a result of the time lag of between 12 and24 months from the end of the measurementperiod.

Each year, the Department assesses key measuresfor that years performance plan and evaluates theutility and appropriateness of those measures. As aresult, key measures are continued, replaced, orcompletely removed from the objective keymeasurement process. This assessment processprovides a method for continued improvement andenhancement in Department programs.

Shown below are the actual results for each keymeasure. The table presents whether the actualresult met, failed to meet, or exceeded the expectedtarget. The shaded areas indicate that a measurewas not in place during the time period. In somecases, establishing a baseline is the target and isrecognized as met if the data are available and the

baseline is established. For measures where dataare not currently available, the date the data areexpected is indicated.

Legend

NA = No measure for period = Met target + = Exceeded targetT = Measure replaced or

discontinuedr = Less than target or prior

year level

Performance Results Summary Cohort FY 2004 FY 2005 FY 2006

Strategic Goal 1 Create a Culture of Achievement

1.1 Link federal education funding to accountability for results

A. Number of states that have reading/language arts assessments that align with the statesacademic content standards for all students in grades 38 and in high school. [1201] r r

B. Number of states that have mathematics assessments that align with the statesacademic content standards for all students in grades 38 and in high school. [1202] r r

C. Number of states that have science assessments that align with the states academiccontent standards for all students in grades 38 and in high school. [1203]

NA NADec.2007

D. Number of states that have completed field testing of the required assessments inreading/language arts. [1204]

NA + T

E. Number of states that have completed field testing of the required assessments inmathematics. [1205]

NA + T

F. Number of states that have completed field testing of the required assessments in

science. [1206] NA NA +1.2 Increase flexibility and local control

A. Percentage of eligible school districts utilizing the Rural Education Achievement Programflexibility authority. [1473] r r

Apr.2007

B. Overall American Customer Satisfaction Index as scored by Department grantees. [2200] NA r1.3 Increase information and options for parents

A. Number of charter schools in operation around the nation. [1146] r + +B. Amount of funding program grantees leverage for the acquisition, construction or

renovation of charter school facilities. [1208] r +Feb.2007



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Managements


Performance Results Summary FY 2004 FY 2005 FY 2006Cohort1.4 Encourage the use of scientifically based methods within federal education programs

A. Proportion of school-adopted approaches that have strong evidence of effectivenesscompared to programs and interventions without such evidence. [2201]

NA NA Dec.2007

Strategic Goal 2 Improve Student Achievement

2.1 Ensure that all students read on grade level by the third grade

A. Number of states reporting an increase in the percentage of fourth-grade low-incomestudents meeting state performance standards by scoring at or above proficient inreading/language arts on state assessments. [1066]

NA r Aug.2007

B. Number of states reporting an increase in the percentage of fourth-grade students withdisabilities meeting state performance standards by scoring at or above proficient onstate assessments in reading. [1519]

NA r Aug.2007

C. Number of states that met the state target for attainment of English language proficiency.[1830]

NA NAJan.2007

2.2 Improve mathematics and science achievement for all students

A. Number of states reporting an increase in the percentage of eighth-grade low-incomestudents meeting state performance standards by achieving proficiency or above inmathematics on state assessments. [1067]

NA +Aug.2007

B. Number of states reporting an increase in the percentage of eighth-grade students withdisabilities meeting state performance standards by scoring at or above proficient onstate assessments in mathematics. [1520]

NA +Aug.2007

2.3 Improve the performance of all high school students

A. Percentage of students with disabilities who graduate from high school with a regular highschool diploma. [1527]

NA Aug.2007

B. Percentage of students with disabilities who drop out of school. [1528]NA +

Aug.2007

C. Number of Advanced Placement tests taken by low-income public school studentsnationally. [1149]

NA NAJan.2007

2.4 Improve teacher and principal quality

A. Percentage of core academic classes in high-poverty schools taught by highly qualifiedteachers. [1180]

NA Dec.2007

B. Percentage of core academic classes in elementary schools taught by highly qualifiedteachers. [1182] + +

Dec.2007

C. Percentage of core academic classes in secondary schools taught by highly qualifiedteachers. [1183] + +

Dec.2007

Strategic Goal 3 Develop Safe Schools and Strong Character

3.1 Ensure that our nations schools are safe and drug free, and that students are free ofalcohol, tobacco, and other drugs

04NA

Dec.2006

A. Percentage of Safe Schools/Healthy Students grant sites that experience a decrease inthe number of violent incidents at schools during the three-year grant period (by cohort).[1825 & 2019]

05NA NA

Dec.2006

04NA

Dec.2006

B. Percentage of Safe Schools/Healthy Students grant sites that experience a decrease insubstance abuse during the three-year grant period (by cohort). [1826 & 2020]

05NA NA

Dec.2006

04NA

Dec.2006

C. Percentage of Safe Schools/Healthy Students grant sites that improve school attendanceduring the three-year grant period (by cohort). [1827 & 2021]

05NA NA

Dec.2006

D. Percentage of Student Drug Testing grantees that experience a 5 percent annualreduction in the incidence of past-month drug use by students in the target population (bycohort). [1828]

03 NA NA

E. Percentage of Student Drug Testing grantees that experience a 5 percent annualreduction in the incidence of past-year drug use by students in the target population (bycohort). [1829]

03 NA NA

3.2 Promote strong character and citizenship among our nations youth.



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Performance Results Summary FY 2004 FY 2005 FY 2006Cohort

Strategic Goal 4 Transform Education into an Evidence-Based Field

4.1 Raise the quality of research funded or conducted by the Department

A. Percentage of new research proposals funded by the Departments National Center forEducation Research that receive an average score of excellent or higher from anindependent review panel of qualified scientists. [1022]

NA r

B. Percentage of new research proposals funded by the Departments National Center forSpecial Education Research that receive an average score of excellent or higher from anindependent review panel of qualified scientists. [1940]

NA NA

4.2 Increase the relevance of our research in order to meet the needs of our customers

A. Percentage of new research projects funded by the Departments National Center forEducation Research and National Center for Education Evaluation and RegionalAssistance that are deemed to be of high relevance to education practices as determinedby an independent review panel of qualified practitioners. [1028]

Dec.2006

Mar.2007

B. Percentage of new research projects funded by the Departments National Center forSpecial Education Research that are deemed to be of high relevance by an independentpanel of qualified practitioners. [1942]

NA NA

Strategic Goal 5 Enhance the Quality of and Access to Postsecondary and Adult Education

5.1 Reduce the gaps in college access and completion among student populations differingby race or ethnicity, socioeconomic status, and disability while increasing the educationalattainment of all

A. Percentage of TRIO Educational Opportunity Centers participants enrolling in college.[1612] + r

Dec.2007

B. Percentage of TRIO Student Support Services participants persisting at the sameinstitution. [1617] + +

Dec.2007

C. Percentage of TRIO Student Support Services participants completing an associatesdegree at the original institution or transferring to a four-year institution within three years.[1618]

NA NADec.2007

D. Percentage of TRIO Student Support Services first-year students completing a bachelorsdegree at the original institution within six years. [1619] r r

Dec.2007

E. Percentage of TRIO McNair participants enrolling in graduate school. [1614]+ +

Dec.2007

F. Percentage of TRIO McNair participants persisting in graduate school. [1615]+ +

Dec.2007

5.2 Strengthen the accountability of postsecondary institutions

5.3 Establish funding mechanisms for postsecondary education

5.4 Strengthen Historically Black Colleges and Universities, Hispanic-Serving Institutions, andTribal Colleges and Universities

A. Percentage of full-time undergraduate students who were in their first year ofpostsecondary enrollment in the previous year and are enrolled in the current year at thesame Historically Black College or University. [1587]

NA NA r

B. Percentage of students enrolled at four-year Historically Black Colleges and Universitiesgraduating within six years of enrollment. [1589]

NA NADec.2007

C. Number of Ph.D., first professional, and masters degrees awarded at Historically BlackGraduate Institutions. [1595]

NA NADec.2007

D. Percentage of full-time undergraduate students who were in their first year ofpostsecondary enrollment in the previous year and are enrolled in the current year at thesame Tribally Controlled College or University. [1569]

NA NA +

E. Percentage of students enrolled at four-year Tribally Controlled Colleges and Universitiesgraduating within six years of enrollment. [1571]

NA NADec.2007

F. Percentage of students enrolled at two-year Tribally Controlled Colleges and Universities

who graduate within three years of enrollment. [1572] NA NA

Dec.

2007

G. Percentage of full-time undergraduate students who were in their first year ofpostsecondary enrollment in the previous year and are enrolled in the current year at thesame Hispanic-Serving Institution.[1601]

NA NADec.2007

H. Percentage of students enrolled at four-year Hispanic-Serving Institutions graduatingwithin six years of enrollment. [1603]

NA NADec.2007

I. Percentage of students enrolled at two-year Hispanic-Serving Institutions who graduatewithin three years of enrollment. [1604]

NA NADec.2007

5.5 Enhance the literacy and employment skills of American adults

A. Percentage of general and combined state vocational rehabilitation agencies that assistat least 55.8 percent of individuals receiving services to achieve employment. [1681] r r

Apr.2007



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Managements


Performance Results Summary FY 2004 FY 2005 FY 2006CohortB. Percentage of adults with a high school completion goal who earn a high school diploma

or recognized equivalent. [1386] + +Dec.2006

C. Percentage of adults enrolled in English literacy programs who acquire the level ofEnglish language skills needed to complete the levels of instruction in which theyenrolled. [1384]

r r Dec.2006

5.6 Increase the capacity of U.S. postsecondary education institutions to teach worldlanguages, area studies, and international issues

A. Percentage of critical languages taught, as reflected by the list of critical languagesreferenced in the HEA, Title VI program statute. [1665]

NADec.2006

Dec.2007

B. Percentage of National Resource Center Ph.D. graduates who find employment in highereducation, government and national security. [1664] +

Dec.2006

Dec.2007

C. Average competency score of Foreign Language and Area Studies Fellowship Programrecipients at the end of one full year of instruction minus the average score at thebeginning of the year. [1671]

+ Dec.2006

Strategic Goal 6 Establish Management Excellence

6.1 Develop and maintain financial integrity and management internal controls

A. Achieve an unqualified opinion. [2204]

6.2 Improve the strategic management of the Departments human capital

A. Index of quality human capital performance management activities. [2205] NA r6.3 Manage information technology resources, using e-gov, to improve service for our

customers and partners

A. Percentage of grant programs providing online application capability. [2206] NA +

6.4 Modernize the Federal Student Assistance programs

A. Customer service level for Free Application for Federal Student Assistance on the Web.[2207]

NA r r

B. Customer service level for Direct Loan Servicing. [2208] NA r +C. Customer service level for Common Origination and Disbursement. [2209] NA + +

D. Customer service level for Lender Reporting System. [2210] NA r r6.5 Achieve budget and performance integration to link funding decisions to results

A. Percentage of Department program dollars associated with programs reviewed under theProgram Assessment Rating Tool process that demonstrate effectiveness. [2211]

NA +Aug.2007

6.6 Leverage the contributions of faith-based and community organizations to increase theeffectiveness of Department programs

A. Percentage of applications in competitions of amenable discretionary programs that arefaith-based or community organizations. [2212]

NA NA

Performance Achievements

Five years after the enactment of theNo Child LeftBehind Act, the revolutionary changes to oureducation system called for by President Bush arealmost implemented. States have put in placerigorous new accountability systems and are

implementing reading and math assessmentscovering all students in grades three through eight.Improved data collection and reporting on teacherqualifications are helping states to ensure that allteachers are highly qualified. School districts areproviding new support and assistance to low-performing schools while making available publicschool choice and supplemental educational serviceoptions to millions of students who attend thoseschools.

Despite the great promise and progress ofNo ChildLeft Behind, gaps remain in the federal effort toimprove the performance of Americas publicschools. These gaps are exposed by the rapid paceof technological change and increasing globaleconomic competition.

To ensure a strong and prosperous America in the21st century, our students must possess themathematics and science knowledge that is thefoundation of our nations long dominance inscience, technology, and innovation; graduate fromhigh school prepared to enter college or theglobally competitive workforce; and master criticalforeign languages needed both for success in theglobal business arena and to ensure our nationalsecurity in the war on terrorism.



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In FY 2006, the Department of Educationadministered over $77 billion in new grants, loans,and work-study assistance to help over 10 millionstudents and their families pay for college. Inaddition to student financial assistance, the

Department provides continuing support forinstitutional development at colleges anduniversities serving large percentages of minoritystudents and funds opportunities for postsecondarystudents to gain international expertise and trainingas language and area specialists.

Hurricane Relief

On December 30, 2005, President Bush signed intolaw theHurricane Education Recovery Act. Thisact provided $1.4 billion to help school districtsand schools meet the educational needs of students

displaced by Hurricanes Katrina and Rita. Thefunding provided under the act also helped schoolsthat closed as a result of the hurricanes to reopen asquickly and effectively as possible. The act alsoprovided funding of $200 million to help highereducation institutions directly affected by thehurricanes, as well as other colleges anduniversities around the country that enrolleddisplaced students. An additional $285 million waslater authorized and provided by the Congress,totaling $1.9 billion to assist the educationalinstitutions in the immediately affected areas and

those educational systems that provided assistancefor displaced students. Approximately$900 million, or 47 percent of authorized funding,was provided to assist local educational agenciesthat accepted and assisted displaced students.

TheHurricane Education Recovery Actalsoauthorized the Secretary, under certaincircumstances, to waive or modify any statutory orregulatory provision applicable to the studentfinancial assistance programs under Title IV of the

Higher Education Act, as amended. The Secretarydetermined that institutions in the impacted areas inpossession of Title IV funds awarded to studentsenrolled for the disrupted academic period will,generally, not be required to return funds for thestudents who withdrew or never began attendance.The aid related to this waiver was approximately$28 million.

As of September 30, 2006, over $230 million hadbeen expended from the Emergency Impact Aid forDisplaced Students program for restart aid. Thisfunding was intended by the Congress for expenses

related to the restart of school operations, thereopening of and the re-enrollment of students inelementary and secondary schools in Gulf Coaststates.

In addition, the Department received approximately$61 million in foreign aid donations to rebuild andrestore educational institutions at all levels in theaffected areas. Of this amount, $35 million hasbeen awarded.

Presidents Management Agenda

During FY 2006, the Department made significantimprovements on the Presidents ManagementAgenda scorecard. The Office of Management andBudget recognized improved status for theDepartment in three areas: E-government,Budget-Performance Integration, and EliminatingImproper Payments. E-government met allmilestones and continues to improve overall.Budget-Performance Integration met efficiencymeasures for all PART and marginal coststandards, and has assessed 99.4 percent of thebudgeted dollars, excluding programs that areexempted. In addition, the Department hasassessed many programs that are not required to beassessed. The Department continues to makeprogress in the Eliminating Improper Paymentsinitiative by developing timelines for specific riskassessments and finalizing estimates for majorprograms. See p. 18 for the Scorecard Results.

Funds Appropriated for

Hurricane ReliefHigher

Education

13%

HomelessYouth < 1%

Displaced

Students

47%

Restart

Operations

40%


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Civil Rights Enforcement

The enforcement of civil rights laws drives studentoutcomes by ensuring that discrimination does notdeny or limit student access to education programsand activities at any educational level. The

Department enforces five civil rights laws thatprotect students against discrimination on the basisof race, color, national origin, sex, disability, andage primarily in educational institutions thatreceive federal funds. In addition, the Departmentensures that the Boy Scouts of America and otherdesignated youth groups have equal access to meetin elementary and secondary schools that receivefederal funds from the Department. Theseantidiscrimination laws protect approximately50 million students attending elementary andsecondary schools and more than 17.7 million

students attending colleges and universities.The Office for Civil Rights, a law enforcementagency within the Department, performs civil rightsenforcement responsibilities in a variety of ways.

Civil rights enforcement responsibilities includeinvestigating complaints alleging discrimination,conducting compliance reviews of educationalinstitutions, and providing technical assistance toeducational institutions on compliance with the law

and to parents and students on their rights under thelaw. The Department also issues regulations oncivil rights laws, develops policy guidanceinterpreting the laws, and distributes theinformation broadly.

At the beginning of FY 2006, the Office for CivilRights had 1,546 pending complaints ofdiscrimination. During the year, the Departmentreceived an additional 5,805 complaints andresolved 5,893. The goal of each investigation is toaddress the alleged discrimination promptly and todetermine if civil rights laws and regulations have

been violated. As shown in the chart below, themajority of complaints received by the Departmentallege discrimination due to disability.

Managements


FY 2006 Discrimination Complaints

Age 1%Sex 6%

Disability

52%

Multiple 13%

Other** 11%

Race/

National

Origin 17%

** Indicates no jurisdiction or jurisdiction not yet determined.



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Data Quality

Complete, accurate, and reliable data areessential for effective decision-making. Stateand local educational agencies havehistorically provided education performancedata that do not fully meet informationquality standards. With the passage of theNoChild Left Behind Act, the accuracy of stateand local educational performance data iseven more crucial. Funding decisions aremade and management actions are taken onthe basis of this performance information.Reliable information is a prerequisite foreffective management. However, ensuringthat data are high quality is not solely theresponsibility of our grantees.

Performance Data

Collecting Data from the States Through

EDFacts. EDFacts is a collaborative effortamong the Department, state educationalagencies, and industry partners to place theuse of timely and accurate performance dataat the core of decision- and policy-making ineducation. This initiative provides acentralized tool to collect, access, and useeducational performance data in support ofthe requirements ofNo Child Left Behind. Italso organizes collection activities in a waythat minimizes the burden on the stateeducational agencies, which provide theDepartment with these data.

Data collected will be used to evaluate theeffectiveness of federal education programsand monitor the status of states in meeting therequirements ofNo Child Left Behind. Thedata will provide the transparency required totrack and improve program management,including identifying the federal educationprograms that provide the best outcomes for

students and their families.Confidence in the programs and their resultsbegins with data quality. There are two majorareas of focus in the EDFacts data qualityprogram:

ExternalPrior to submission toEDFacts, data collection at the school,district, and state levels will be conducted

using well-organized and methodologicallyrigorous techniques.

InternalAfter the data files have been

submitted by the state educational agencies,data will be validated through electronic andhuman subject matter expert review processes.

These data quality control procedures andcheckpoints ensure both the quality of the data andthat reports produced by EDFacts will be accurateand timely.

To remedy the challenges faced in the collection ofdata, EDFacts is undergoing a rigorous assessmentto determine the best course of development for thefurther enhancement of the data quality control

processes. Once this assessment is completed andthe recommended options selected, the data qualityprogram will be refined and enhanced, enabling theDepartment to do the following:

Validate and improve data accuracy byidentifying data collection gaps, inaccuratedata, and data anomalies.

Ensure that the data presented in reportsrepresent valid comparisons.

Display quality metrics on reports.

Provide reporting tools and data access toDepartment leadership, federal programoffices, state and local educational agencies,schools, and the public.

Limit access to data based on security andprivacy requirements.

Provide predefined reports that displaytransmittal statistics on the states submissions,and provide the Department with the sameinformation at the national level.

The Departments future data quality improvement

requirements include the following:

An organization responsible for data quality.

The ability for state educational agencies toview and resolve data submission errors via auser-friendly Web interface.

A centralized data certification system andprocess.

A single data repository for data usage.



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Access to financial data related toprogram management and monitoring.

Federal Student Aid. Federal Student Aid isimproving systems to yield reliableperformance data to make informed budget

and policy decisions. These systems willenhance the budget process and increase theaccuracy and reliability of informationreceived from operating partners.

Department Data Quality

The Department itself also develops and usesdata. One of the most visible areas in whichthis occurs is the annual budget developmentprocess. One goal of the budget process is touse program performance data in theformulation and execution of the

Departments budget. One of the fivegovernment-wide elements of thePresidentsManagement Agenda is the integration ofbudget and performance, which focuses onmaking budget decisions based on results.

The Department recognizes the benefits ofand need for improving the completeness,

accuracy and reliability of data forNo Child LeftBehindreporting, integrated performance-basedbudgeting and general program management. Inaddition to completeness, accuracy and reliability,the Department acknowledges the need forimprovements in the timeliness of data. Currently,

data time lags between 12 and 24 months exist forsome performance data. The Department expectsthat the implementation of EDFacts will help toreduce the reporting burden on state and localeducational agencies, resulting in an improvementin the timeliness of data.

The Department also produces financial data forofficial submission to the Congress, the Office ofManagement and Budget, and other federalauthorities as mandated in the GovernmentPerformance and Results Act. The data qualityprocesses for financial data are reflected in ouraudit report and managements internal controlover financial reporting assessment. The financialstatements, associated notes, and auditors reportscan be found on pp. 91-155, which include therequired Limitations of the Financial Statements.Managements Assurance of internal control can befound on p. 24.

Managements




15/28


Financial Highlights

In order to support state and school districtsin providing quality education, the Office ofthe Chief Financial Officer is responsible forproviding accurate, timely, and useful grant,loan, contract, and financial managementinformation to all Department stakeholders.

The Department continues to enhance themodel for what constitutes a high-qualityfinancial reporting environment. This modelwill result in financial reports that reflect theunderlying economics of the business in acomparable, consistent fashion. The modelemphasizes transparency as the method tofacilitate the free flow of information todecision-makers and stakeholders.

The Department consistently producesaccurate and timely financial information thatis used by management to inform decision-making and drive results in key areas ofoperation. For the fifth consecutive year, weachieved an unqualified (clean) opinion fromindependent auditors on the annual financialstatements. Since 2003, the auditors havefound no material weaknesses in theDepartments internal control over financialreporting. In accordance with the Office ofManagement and Budgets Circular

No. A-123, Managements Responsibility forInternal Control, the Department continues totest and evaluate findings and riskdeterminations uncovered in managementsinternal control assessment.

In the first quarter of FY 2007, theDepartment will complete the implementationof an upgraded financial management system.This system implementation will provide theDepartment an enhanced financialmanagement solution by improving reportingcapabilities, data processing, and generalfinancial management. The new system willalso allow the Department to enhance theability to link financial data to performancemeasures.

Sources of Funds

We managed a budget of approximately$99.8 billion in FY 2006, of which 36 percentsupported elementary and secondary grant

programs. Postsecondary grants and administrationof student financial assistance accounted for58 percent, including loan programs costs thathelped more than 10 million students and theirparents to better afford higher education duringFY 2006. An additional 5 percent went towardother programs and grants encompassing research,development, and dissemination, as well asrehabilitation services. Administrativeexpenditures are less than 2 percent of theDepartments appropriations.

Nearly all the Departments non-administrativeappropriations support three primary lines ofbusinessgrants, guaranteed loans, and directloans. The original principal balances of the

Federal Family Education Loans and Federal DirectStudent Loans, which compose a large share offederal student financial assistance, are funded bycommercial bank guarantees and borrowings.

The Departments three largest grant programs areTitle I grants for elementary and secondaryeducation, Pell Grants for postsecondary financialaid, and Special Education Grants to States undertheIndividuals with Disabilities Education Act.Each programs FY 2006 appropriation exceeded$10 billion.

The Federal Family Education Loan Programinsures the loan capital from more than 3,200private lenders available to students and theirfamilies. Through 35 active state and privatenonprofit Guaranty Agencies, the Departmentadministers the federal loan guarantee program toprotect lenders against losses related to borrowerdefault. As of the end of September 2006, the totalprincipal balance of outstanding guaranteed loansheld by lenders was approximately $325 billion.The governments estimated maximum exposurefor defaulted loans is approximately $321 billion.

The Federal Direct Student Loan Program, createdby the Student Loan Reform Act of 1993, providesan alternative method for delivering assistance tostudents. This program uses Treasury funds toprovide loan capital directly to postsecondaryschools. The schools then disburse loan funds tostudents. As of September 30, 2006, the value ofthe Departments direct loan portfolio was$92.6 billion.



16/28


Financial Position

The Departments financial statements areprepared in accordance with establishedfederal accounting standards and are auditedby the independent accounting firm of Ernst& Young, LLP. FY 2006 financial

statements and footnotes appear on pp. 95-127. Analyses of the principal financialstatements follow.

Balance Sheet. The Balance Sheet presents,as of a specific point in time, the economicvalue of assets and liabilities retained ormanaged by the Department. The differencebetween assets and liabilities represents thenet position of the Department. The BalanceSheet displayed on p. 95 reflects total assetsof $214.4 billion, a 15 percent increase over

FY 2005.Fund Balance with the Treasuryincreased by 38 percent over FY 2005. Thisincrease is attributable to (1) an increase incollections from borrowers due toconsolidation prepayments, and (2) anincrease in the estimated long term cost ofloan guarantees the Department makes toprivate lenders.

Liabilities for Loan Guarantees increased71 percent or $21.8 billion. The $21.8 billionincrease is primarily attributed to the markedincrease in student loan consolidation activity.Student loan consolidations represent borrowersconsolidating underlying variable rate loans into a

new fixed rate loan.

In fiscal years 2006 and 2005, the Departmentexperienced record highs in consolidation activityas a result of rising interest rates. As marketinterest rates increase, special allowance paymentsto lenders also increase. Special allowancepayments are made to lenders when the marketinterest rate exceeds the borrower rate.

Several factors influenced the change in theDepartments net position in FY 2006. The factorsinclude the subsidy re-estimates for federal student

loan programs and the increase in FY 2006 grantappropriations. Net position increased by 9 percentover FY 2005.

Managements


$145.4

$110.1

$157.3

$117.8

$172.6

$128.3

$186.6

$143.7

$214.4

$167.6

$0

$50

$100

$150

$200

$250

Billions

FY 2002 FY 2003 FY 2004 FY 2005 FY 2006

Total Assets vs Total Liabilities

Total Assets Total Liabilities



17/28


Statement of Net Cost. The Statement of NetCost presents the components of theDepartments net cost, which is the gross costincurred less any revenues earned from the

Departments activities. The Statement of NetCost is presented to be consistent with theDepartments strategic goals and thePresidentsManagement Agenda. The Departments totalprogram net costs, as reflected on the Statementof Net Cost, p. 96, are $96.8 billion, a 29 percentincrease over FY 2005. The following chartprovides a detailed crosswalk of theDepartments Net Cost programs linking them toStrategic Plan Goals 2 through 5.

The Department considers Strategic Goal 1,Create a Culture of Achievement, a synopsis ofthe four pillars on which educational excellenceis established. Strategic Goal 6, Establishing

Management Excellence, emphasizesadministrative and oversight responsibilities.These two strategic goals support theDepartments programmatic mission, and as aresult, we do not assign specific program coststo either of them for presentation in the

The Enhancement of Pos

Statement of Net Cost.

tsecondary and Adult

$49.8

$58.8 $63.6

$75.2

$96.8

$0

$20

$40

$60

$80

$100

Billions

FY 2002 FY 2003 FY 2004 FY 2005 FY 2006

Net Cost by Fiscal Year

Education experienced a 57 percent increase incosts over FY 2005. The increase is largelyattributed to two factors associated with theFederal Family Education Loan Program,subsidy reestimate and consolidation loan

volume.

Statement of Budgetary Resources. This

es are

h

Statement of Financing. This statements

) with

he

ations

statement provides information about theprovision of budgetary resources and theirstatus as of the end of the reporting period.The statement displayed on p. 98 shows thatthe Department had $210.9 billion inbudgetary resources for the year endedSeptember 30, 2006. Budgetary resourccomposed of $104.3 billion in appropriated

budgetary resources and $106.6 billion innon-budgetary credit reform resources, whicprimarily consist of borrowing authority forthe loan programs. Of the $51.7 billion thatremained unobligated at year-end,$47.6 billion represents funding provided inadvance for activities in future periods thatwas not available at year end. These fundswill become available during the next orfuture fiscal years.

demonstrates the relationship between an entityproprietary and budgetary accounting information.It links the net cost of operations (proprietarynet obligations (budgetary) by identifying keydifferences between the two statements. Thisstatement is structured to identify total resourcesused during the fiscal year, with adjustments basedon whether the resources were used to finance t

net obligations or net cost. This statement,displayed on p. 99, identifies $74.9 billion ofresources used to finance activities, $19.6 billion ofresources not part of the net cost of operations, and$2.3 billion of components of net cost of operthat will not require or generate resources in thecurrent period.

Net Cost Program GoalNo. Strategic Goal

Enhancement ofPostsecondary andAdult Education

5 Enhance the Quality ofand Access toPostsecondary andAdult Education

2Creation of StudentAchievement, Cultureof Achievement andSafe Schools

3

Improve StudentAchievement

Develop Safe and Drug-Free Schools

Transformation ofEducation

4 Transform Educationinto an Evidence-BasedField

Special Education and

Program Execution

Cuts across Strategic

Goals 2, 3, 4 and 5



18/28


Presidents Management Agenda

Scorecard Results

Under thePresidents Management Agenda,the Executive Branch Management

Scorecards track how well the departmentsand major agencies are executing fivegovernment-wide initiatives and otheragency-specific program initiatives. Thescorecard employs a simple grading systemcommon today in well-run businesses: greenfor success, yellow for mixed results, and redfor unsatisfactory.

Status. Scores for status are based on thescorecard standards for success developed bythe Presidents Management Council anddiscussed with experts throughout

government and academe, including theNational Academy of Public Administration.The standards have subsequently been refinedwith continued experience implementing thePresidents Management Agenda. Undereach of these standards, an agency is greenor yellow if it meets all of the standards fora given level of success identified and agreedupon by the agency and the Office ofManagement and Budget; it is red if it hasany one of a number of serious flawsidentified for the agency.

Progress. The Office of Management and Budgetassesses progress on a case-by-case basis against

the agreed-upon deliverables and time linesestablished for the five initiatives as follows: greenrepresents that implementation is proceedingaccording to plan; yellow indicates there is someslippage or other issues requiring adjustment by theagency in order to achieve the initiative objectiveson a timely basis; and red indicates the initiative isin serious jeopardy and the agency is unlikely torealize objectives absent significant managementintervention.

Department of Education Results. DuringFY 2006, the Department made significant

improvements on the scorecard. The Office ofManagement and Budget recognized improvementof status for the Department in three areas:E-government, Budget-Performance Integration,and Eliminating Improper Payments.

Improved Credit Management is a new initiativedeveloped in the fourth quarter of FY 2006 and isthe primary reason we currently have a redstatus.

Managements


Presidents Management AgendaFY 2006 Scorecard

Q4-2005 Q4-2006

Target Area Status Progress Status Progress

Financial Performance G G G G

Competitive Sourcing G G G G

Human Capital Y G Y G

E-government Y G G GG

overnment-wide

Initiatives

Budget-Performance Integration Y G G GFaith-Based and Community Initiatives G G G G

Eliminating Improper Payments R G Y GProgram

Initiatives

Improved Credit Management(New Initiative in FY 2006)

NA NA R Y

G = green Y = yellow R = red NA = not applicable



19/28


Management Challenges and Future Initiatives

Managements challenges and future

a

ctive operational

ted

documenting processes, control assessments,and risk evaluation, are the same acrequired by enterprise risk management. Tconvergence of these procedures permitsorganizations to gain efficicompliance costs by el undantcontrols and dup fectivelystreamlining operations.

It is im ent managementbegin to sur , and thenestablish acceptable levels of risk in dailyoperations. The y integratedWeb-based systemtechnology, and telecommunication s shas increased thbarriers to serving custom

These advances of the interconnected worldhave co nd hatmanagement mugovernance framaccount for such risks, but will also have to

measurement and

gement, program management,

thee

imarye

Oversight of theFederal Managers FinancialIntegrity Act(FMFIA) annual assessment and

corrective action plan processes.of significant risks facing the

tment through the review and monitoringof significant findings fro and

the Office of Inspectorenera f au s and

udits by t overnm Accoun ility

epartmen onitoring reviews.

eview of signific risks ide ied in thenternal Co ol Eval n Staff ews.

Review of the status of the Departmentsompliance with applicable federal laws and

regulations.

Discussion of potential risks that may resultom anticipated legislative changes,

environmental changes, and changes in humansources.

initiatives will involve the enhancement ofthe Departments governance process. Thisprocess will be based on accountability withcentral focus on compliance and riskmanagement. Numerous recent federalregulations have increased the pressure ongovernment entities to measure and mitigaterisks involving financial loss, as well asdamage to their reputations.

Implementing an effegovernance framework represents one ofmanagements most pressing challengesmoving into the future. While extremelydemanding, the benefits of a well-construc

governance framework simultaneouslyprovide increased visibility into operationsleading to enhanced performance, reducedcosts, and the necessary transparency toproperly analyze risk. In the future,successful governance frameworksimplemented by management will have toaccount for and integrate risk and complianceprocedures into the Departments core values.

A number of the rigorous regulatory activitiesrequired to perform recently institutedcompliance requirements, such as

tivitieshe

IdentificationDepar

encies and reduceiminating red

lication of effort, ef

perative that Departmmea e, monitor risk

advent of fulls, advancing information

ysteme speed of, and decreased the

ers.

rrespo ingly increased the risks tst mitigate. Futureeworks will not only have to

proactively enable a continuingmonitoring process. That process will allowmanagement to either accept or mitigate the risksassociated with the many benefits of the latesttechnological innovations.

To ensure the implementation of a governancestrategy based on accountability and risk,management is implementing an executive-levelprocess. This process will ensure that seniormanagements attention is focused on the mostsignificant risk management issues facing theDepartment. Risk management issues includefinancial manahuman capital, security, and compliance withapplicable laws and regulations.

Management has recently established a RiskManagement and Compliance Committee. Thiscommittee will be an essential component ofrisk management and internal control infrastructurof the Department. The committees prresponsibilities are to ensure management is awarof the risks facing the Department and thatappropriate measures are taken to mitigate thoserisks. Specifically, the committee will provide:

m auditsinvestigationsG

byl, external inancial dits, review

a he G ent tabOffice, non-federal single audits, andD t m

R the ant ntif I ntr uatio revi

c

fr

re



20/28


Review of the anOffice of Inspector General and the

nd

epartmentsation

in

ncial

iciencies. These

proving

sight

ghe

ion

an

ting

pro

2.5 percent threshold that requires a statistical

itworcon .

Pro

con cecha artmentissued new procedures that required that contract

nexis

congov n the Department. The

pro ailabilityof iAss n of this report (see p. 24). TheDepartment has continued efforts to strengthenindividual business cases and to map proposed

nual work plans of the Department Response

Internal Control Evaluation Staff.

The implementation of a comprehensivebusiness governance strategy will improve

the Departments business processes adrive efficiencies across the enterprise.

Credit Reform Management

A significant amount of the Dfiscal activity is related to the administrof direct and guaranteed loans. As a result,the Department has significant challengesaddressing the estimates related to creditreform.

In response to the Office of Management andBudgets recent addition of anImprovedCredit Management Scorecard, theDepartment continues to improve its finamanagement. This fiscal year, theDepartment has done the following withrespect to credit management:

Defined target borrower segments.

Managements


Improved its lending policies andprocedures.

Established cost control estimates.

Management Challenges Identified by

the Inspector General

Other current and future managementchallenges include those identified by theInspector General in the annual report toimprove departmental effrecommendations are provided in the OtherAccompanying Information section of thisreport (see pp. 175-180). Therecommendations include: improvingoversight and management of programs byestablishing and maintaining appropriateinternal control accountability, identifyingand correcting improper payments, improcurement and monitoring of contractedservices, human capital planning, andmanaging information security andtechnology investments.

The Department continues to address thechallenges associated with managements overof internal controls related to programs, improperpayments and procurement.

Accountability. Progress has been made in theoversight of certain programs through monitorinplans that include technical support provided by tstaff of the Office of the Chief Financial Officer.The Department has also implemented a GrantHigh Risk Module within the Grant AdministratPayment System to alert program offices ofexisting high risk conditions such that awards cbe made with appropriate restrictions andrequirements.

Improper Payments. Identifying and correcimproper payments remains a challenge for theDepartment. It has increased its participation inperforming monthly monitoring site visits for theTitles I and III of theElementary and SecondaryEducation Actprograms at various state and localeducational agencies.

The Department also enlists the assistance ofoutside resources to perform risk analysis of itsprograms. Recent analysis indicates that the Title I

grams were not at risk of exceeding the

review. The student financial assistance programin iatives are continuing and the Deparment is

king with other government agencies toduct studies and utilize statistical sampling

curement. The Departments procurement andtract management processes continues to fallenges. However, in FY 2006, the Dep

mo itoring plans be developed for all new andting contracts.

Information Security. Information securitytinues to be a concern throughout theernment and i

Department works to improve security controls totect the confidentiality, integrity and avts data and systems as noted in the Managementurance sectio



21/28


investments to the Departments enterpriseitecture strategy. In addition, theartment recently established plans t

archDep oimprove controls relating to the protection of

eDepartment as well as other agencies

epartmentwill see a significant percentage of its

In

Managers must develop succession plans and

ntthat is

ff

agementt elpar

le to accomplish this

ald further integrating our

personally identifiable information.

Human Capital. Human capital planningremains a significant challenge facing th

throughout the government. The D

workforce eligible for retirement in 2007.addition, the advent of technology haschanged critical skill requirements for staff.As a result, staff are being challenged outsidetheir current position requirements.

identify training needs for their staff tomitigate these challenges. The Departmerequires managers to attend trainingdesigned to improve their understanding ofand assist in the development of staperformance standards. In addition,communication and project man

raining is also offered to employees to hddress essential management skill gapsequired to carry out their mission.

Summary

Ensuring equal access to education and promotingeducational excellence throughout the nation is ourmission. Achieving management excellence is the

foundation on which we are abmission. Department management made greatstrides in improving the nations educationalopportunities through data collection and reportingstrategies. Producing accurate, timely, and reliablefinancial reports and taking steps to minimize therisk of making improper payments enables theDepartment to execute its mission effectively.

The Department acknowledges the challenges itfaces, but only by focusing on human capitmanagement anperformance and financial information will wecontinue to ensure access to, and excellence in, thenations educational system.



22/28


Integration of Perfor

Focusing on results and accountabilitythrough performance monitoring andfinancial reporting is a sound practic

mance cial Information

e for

nk

l

ures,

e

udget

ol

Budget uses this mechanism consistentlyacross government and works with federal

agencies to judge the effectiveness ofprograms with regard to their stated purpose,strategic planning, internal management, andresults and accountability. PART reviewsprovide critical information that is used toestablish funding priorities for budgetplanning and development. Once a programhas been through the PART process, theDepartment implements follow-up actionsbased on PART recommendations.

By September 2006, the Department hadcompleted PART reviews on 74 programs.This report includes information from PARTreviews performed in preparation for theDepartments FY 2007 budget submission.

Integrating Performance Plan Into Budget.Since FY 2005, the Department has combinedthe annual performance plan and annualbudget to create an annual performancebudget, consistent with the Office of

ed

t

and Finan

increasing the Departments productivity.One gauge of how effectively taxpayerdollars are being used is for an agency to lithe performance of its programs tosubsequent budget determinations.

The Department constantly seeks tostrengthen the linkage between financiainvestments and program quality. TheDepartment enhances this linkage bydeveloping and using program measreporting mechanisms, and effective budget

Managements


management. This report is one example of

how we provide comprehensive, accuratinformation to the American public in atimely manner.

Program Assessment Rating Tool. Since2002, the Office of Management and Bhas required federal agencies tosystematically assess the quality ofgovernment programs using a diagnostic toolcalled the Program Assessment Rating To(PART). The Office of Management and

Management and Budgets guidance. Additionally,the Department shifted from the use of strategicmeasures that reported the national status ofeducation to focus on program-related measuresthat more accurately reflect Department objectives.

The entire program performance report requirunder the Government Performance and ResultsActis available athttp://www.ed.gov/about/reports/annual/2006repor/program.html.

Challenges Linking Performance to Funding.

he

the fundingschedule for these programs.

In the Department, only a portion of a given fiscalyears appropriation is available to state, school,organization, and student recipients during thefiscal year in which the funds are appropriated.The remainder is available at or near the end of theappropriation year or in the subsequent year. Thefunds remain available to recipients for varying

lengths of time.Funds for competitive grant programs are generallyavailable when appropriations are passed by theCongress. However, the processes required forconducting the grant competitions often result inthe award of grants near the end of the fiscal yearwith funding available to grantees for additionalfiscal years.

Thus, the results presented in this report cannot beattributed solely to the actions taken related toFY 2006 funds but to a combination of funds fromfiscal years 2004 through 2006. Furthermore, theresults of education programs may not be apparentfor many years after the funds are expended.

Although we cannot isolate program results anddirectly link them to a fiscal years funding,performance results during a specific single fiscalyear serve as a proxy. Most Department programsare continuous and funded each year through theappropriation process.

The Departments challenge of linkingperformance results, expenditures, and budget iscomplicated by the fact that we accomplishobjectives indirectly. More than 98 percent of t

Departments funding is disbursed through grantsand loans. The challenge of linking performance toexpenditures is further complicated by



23/28


Managements Assurances

Federal Managers Financial Integ

Act

As required under theFederal Managers

Financial Integrity Act, the Departmentreviewed its management control system.The objectives of the management csystem are to provide reasonable assu

rity

ontrolrance

ce

ble

accounted for to permit the

ctively

d

ifyit

eness

of Controls. Department management does

,tf

e control system, misstatements

ement

ces of which the

ng

ur

ment systems.

e

rabilities identified by the Inspector

by

isk management program.

that the following occur:

Obligations and costs are in complianwith applicable laws.

Assets are safeguarded against waste,loss, unauthorized use, ormisappropriation.

The revenues and expenditures applicato agency operations are properlyrecorded and

preparation of accounts and reliablefinancial and statistical reports, andmaintain accountability over assets.

Programs are efficiently and effecarried out in accordance with applicablelaws and management policy.

Managers throughout the Department areresponsible for ensuring that effective

controls are implemented in their areas ofresponsibility. Individual assurancestatements from senior management serve asa primary basis for the Departmentsassurance that management controls areadequate. The assurance statement provideon p. 24 is the result of our annual assessmentand is based upon each senior officersevaluation of controls.

Department organizations that identmaterial deficiencies are required to submplans for correcting the cited weaknesses.

The plans must include a risk assessment,cost of correction, and estimated date ofcompletion. These corrective action plans,combined with the individual assurancestatements, provide the framework forcontinual monitoring and improving of theDepartments management controls.

Inherent Limitations on the Effectiv

not expect that our disclosure on controls overfinancial reporting will prevent all errors and allfraud. A control system, no matter how wellconceived and operated, can provide onlyreasonable, not absolute, assurance that theobjectives of the control system are met. Furtherthe design of a control system must reflect the facthat there are resource constraints. The benefits othe controls must be considered relative to theirassociated cost. Because of the inherent limitationsin a cost effectivdue to error or fraud may occur and not bedetected.

Federal Financial Management Improv

Act

The Secretary has determined that the Departmentis in compliance with the Federal FinancialManagement Improvement Act (FFMIA), althoughour auditor has identified instanDepartments financial management systems didnot substantially comply with the act.

We are cognizant of our auditors concerns relatito instances of non-compliance with FFMIA asnoted in the Compliance with Laws andRegulations Report located on pp. 152-154 of thisreport. We continue to strengthen and improve o

financial manage

However, since our last FFMIA report, theDepartment has continued to invest a considerablamount of time, effort and resources in assessingthe security controls protecting its information andinformation resources. As a result of theseassessments, the Department has learned thatcertain vulneGeneral and our auditors in this years reports werepreviously accepted on an enterprise-wide basisthe Departments Designated ApprovingAuthorities, Certifier and Government TechnicalExpert.

To this end, the Department has made a well-informed and documented risk-based businessdecision to operate its networks, systems andapplications in the presence of certainvulnerabilities and security exposures. Thisacceptance of risk is in keeping with the rules andprinciples governing a r



24/28


Furthermore, the Department fullyunderstands the risks inherent in operati

sures. To assist in the management of

tify,

remediate and monitor forThis

r

rked

agers Fi

Department of Education i

ng

research, manage,vulnerabilities and security exposures.

information resources in the presence ofcommon vulnerabilities and securityexpothe potential risks, the Department has

implemented proactive processes to iden

Federal Man

remediation cycle can be an extended process foany particular vulnerability and as a result, at anygiven time as they await remediation,vulnerabilities may be present in any netwo

environment, including the Departments.

nancial Integrity Act

s responsible for establishing and maintainingManagement for theeffective internal control and financial management systems that meet the intent andobjectives of theFederal Managers Financial I ct (FMFIA). I am able to provide antegrity Aqualified statement of assurance that the Departments internal control structure and financialmanagement systems meet the objectives of FMFIA, with the exception of two material

weaknesses. The details of these exceptions are provided in Exhibit 1.

The Department conducted its assessment of i enternal control in compliance with applicabl

Managements

DiscussionandAnalysis laws and regulations, and in accordance with the Office of Management and Budgets

Circular No. A-123, Managements Responsibility for Internal Control. Based upon theresults of this evaluation, the Department identified two material weaknesses in its internalcontrol over the effectiveness and efficiency o licablef operations, and compliance with applaws and regulations, as of September 30, 2006. Other than the exceptions noted in Exhibit 1,the internal controls were operating effectively, and no material weaknesses were found inthe design or operation of the internal controls.

In addition, the Department conducted an assessment of the effectiveness of internal controlover financial reporting, which includes safeguarding of assets and compliance with

applicable laws and regulations, in accordance with the requirements of Appendix A of theOffice of Management and Budgets Circular No. A-123, Managements Responsibility forInternal Control. Based on the results of this evaluation, the Department of Education canprovide reasonable assurance that its internal control over financial reporting as of June 30,2006, was operating effectively and that no material weaknesses were found in the design oroperation of the internal control over financial reporting.

/ s /

November 15, 2006



25/28


Exhibit 1 FMFIA Material Weakne

sses

IDMaterial

Weakness Description Corrective ActionAnticipated

Correction Date

1 Information

TechnologySecurity

Instances of inadequate security contincluding password protection, encryptand intrusion detection.

he Office of the Chief Information OfficerCIO) is implementing a number of

itigating actions to correct information

Corrective actions arecurrently being implemented,and are expected t

(FISMA)

rols,ion,

T(Omtechnology security deficiencies found inmanagement, operational and technicalcontrol controls.

procuring a world class managed securityservice provider who would have

o becompleted by September 30,2007.

Some of the mitigating actions include

independent verification & validationresponsibilities in the areas of operationalintrusion detection monitoring and incidentescalation, situational awareness,vulnerability and configurationmanagement, software assurance, andsecurity operations center management.

OCIO plans to mitigate weaknesses inpassword protection by implementing a two-factor authentication solution derived fromHomeland Security Presidential Directive 12(Hspd-12). OCIO also plans to correctdeficiencies found in protecting personallyidentifiable information (PII) by encryptingbackup tapes, laptop computers and othermobile media instruments containing PIIsuch as thumb drives, CDs and DVDs.

2 PMC

e Office of Elementary and Secondary

s, including the repaymentfunds, including the return of3.6 million from Puerto Rico, are currently

implemented.

Reading First program,the Department is implementing correctiveactions to address all of the

commendations made by the Office ofor General in an inspection report,

and is also making additionalimprovements.

ed,

1,tiveted,

including the return of$13.6 million from Puerto Rico;further repayments from otherstates may take one year ormore to complete.

Many corrective actions arebeing implemented currently,and will be completed by

December 31, 2006; allcorrective actions areexpected to be completed byDecember 31, 2007.

rogram In two programs, the Reading First and the Th

anagementontrol

Migrant Education programs, the Departmentidentified possible instances of lack of propercontrols and management oversight inseveral past years in the implementation of

the programs.

Education is implementing compensatingcontrols to correct or mitigate weaknessesin both programs.

With regard to the Migrant Educationprogram, the Office of Migrant Education isimplementing compensating controls tocorrect or mitigate weaknesses. States aresubmitting new information related toeligibility based on appropriate controls.Corrective action

Corrective actions arecurrently being implementand most actions will becompleted by December 32007. Some of the correcactions have been comple

of$1being

With regard to the

reInspect



26/28


Improper Payments Overview

heImproper Payments Information Act of 2002encies to an and

e s and acts e to

paym guid the Officeof M nt and Budget defines significantimproper payments as those annual erroneouspayments that exceed both $10 million and2.5 percent of the program payments. For eachprogram identified, agencies are required toreport the annual estimated amount of improperpayments and the steps taken to reduce oreliminate them.

The Department has undertaken the followinginitiatives relating to the implementation of the

Improper Payments Information Act of 2002.

Student Financial Assistance Programs

Federal Student Aid operates and administersthe majority of theHigher Education Act of1965, as amended, Title IV Student Assistance(Title IV) programs for the Department. InFY 2006, nearly $77 billion was provided tostudents and families to help them overcome the

a thaand tseStudent Aid adminis

loans, and loan guarantees through its financialassistance programs. The processes developedto administer the programs are responsive tochanges in statutes, the reauthorization ofexisting statutes, and the changing needs ofeducational institutions and their students.

Title IV student assistance programs are largeand complex. Federal Student Aid relies on over6,100 eligible postsecondary institutions, 3,200lenders, 35 loan Guaranty Agencies, and a

number of private loan servicers to adp r funds r

anive dr the c

A, Federal Student Aidduring FY 2006, and

yments made duringt complete fiscal year

ble), to assess the riskmount of improper payments

w identified and thenrams (Federal Family

, Federal Pell Grantental Educational

ral Work-StudyProgram),

t of Federal Student

programs were identifiede to risk: FederalProgram, Federal Pell-based programs, the

ord Federal Direct Loan Program,

hA

each sp

nc

ing table providthree of the primary Federaprogram estimates.

T(IPIA)ass

requires agall program

nually reviewsse susceptibl

ents. Theanageme

ivities to identifysignificant improperance provided by

tho

fin ncial barrierscomplete pos

t make it difficult to attendcondary education. Federalters a variety of grants,

minister itseceived as an, Federal Student

rograms. Except foministrative cost aad llow

Aid program funds recein trust by the school foDepartment, and, in somlenders and Guaranty Agencies.

ced by a school are hele students, theases, for private

As required by theIPIinventoried its programsreviewed program paFY 2005 (the most recenfor which data are availathat a significant awere made. The reviefocused on five key prog

Education Loan ProgramProgram, Federal SupplemOpportunity Grant, FedePrograms and Direct Loanrepresenting 98.7 percenAids FY 2005 outlays.

The following Title IV

Managements


as potentially susceptiblFamily Education LoanGrant Program, CampusWilliam D. F

Loan Consolidations, and tCompetitiveness and SMdetailed discussion ofcan be found in the Improsection of thisPerformaReporton pp. 158-171.

The follow

e AcademicRT Grant program. Aof these programer Payments Detailse and Accountability

es the outlook forl Student Aid

Federal Student Aid Improper Payment R 0eduction Outlook Fiscal Years 2 05 2009

($ in millions)

Actual Estimated

2005 2006 2007 2008 2009

Program Outlays IP % IP $ Outlays IP % IP $ Outlays IP % IP $ Outlays IP % IP $ Outlays IP % IP $

Direct LoanProgram $12,231 NA NA NA NA NA NA NA NA NA NA NA NA NA NA

FFELProgram $8,626 2.2% $190 $18,245 2.2% $401 $5,340 2.2% $117 $5,340 2.2% $117 $5,340 2.2% $117

Pell GrantProgram $12,749 3.48% $444 $12,117 3.48% $422 $12,825 3.48% $446 $12,825 3.48% $446 $12,825 3.48% $446



27/28


Federal Student Aid Manager

Federal Student Aid program managers are

. The

s

f

FY 2006. TheErroneous Payments Risk

ies

Management and Budget Circular A-133 single

irprogram mo

findings that most frequently occur.Additionally, a new gran itoring trainingcourse is now offered and a post-audit follow-upoverview course is currently being developed to

e e ss h eircular A-133 single

to p en

ep p to er training for managers that will focus on

ls m T

y seminar for all Departmentde a framework for

hets

Programs

tuted a

ms. The Department continued toDepartment of Energys

ge National La ory to performng i ti va l F ra

Audit Clearinghouses Single Audit Database,t e me Gr Ad nis onPayment System, and the Departments Audit

u l l ng te

Accountability. mandatory one-damanagers will provi

responsible for making recommendedimprovements and achieving quantifiablesavings. The Federal Student Aid ExecutiveManagement Team monitors these efforts

Executive Management Team is composed ofkey managers and is the executive decision-making body within Federal Student Aid.Further, the Office of Inspector Generalconducts periodic audits of student aid programsand makes appropriate recommendations tomanagement and the Congress.

Title I Program

The Department performed a risk assessment otheElementary and Secondary Education Act

Title I Program, parts A, B, and D, during

Assessment Project Reportdocumented that therisk of improper payments under the currentstatutory requirements is very low. In order tovalidate the assessment data, the Departmentinitiated a three-year review cycle in FY 2006.The review encompasses all states and territorreceiving Title I funds. The Office of the ChiefFinancial Officer participated with the Office ofElementary and Secondary Education in themonitoring process, beginning March 2005, toprovide technical support regarding fiduciarycompliance. There were no findings in themonitoring reviews with questioned costs thatcontradicted the data in the risk assessment.

Manager Accountability. In FY 2006, theDepartment used a database of the Office of

audit findings to provide feedback to programmanagers regarding the frequency anddistribution of findings within their programs.This will assist the managers in tailoring the

administering the improper payment controlsprogram utilizing applicable regulations,guidelines, and best practices. Part of this one-day training will focus on the utilization of the

risk assessment criteria to properly assess trisk of improper payments in the Departmenprograms.

nitoring efforts to the type of During FY 2006, the Department insti

more detailed risk assessment of all its othergrant prograts mon

improv the us fulne of t e Offic of Manageaudits

ment and Budget Cthe De artm t.

The D artment also lans develop int nalcontrolcontro to eliminate i proper payments. he

Remaining Grant

work with theRid

Oakdata-borat

mini on nforma on a ilab e in the ede l

he D part nts ant mi trati and

Acco ntabi ity and Reso ution Tracki Sys m.The Department is leveraging the results of the

Grant Program

Improper Payment Estimates

%F

unctional Program

2001 2002 2003 2004

E

St

ducation Research,

atistics & Assessment0.00 0.02 0.36 0.0

E

E

lementary & Secondary

ducation

0.13 0.12 0.13 0.6

E

A

nglish Language

cquisition0.00 0.02 0.10 0.1

H 1 0.4igher Education 2.72 0.29 0.2

I 0.55 0.04 0.4mpact Aid 0.00

Innovat

I

ion and

mprovement0.28 0.21 0.23 0.1

R

D

ehabilitation Services &

isability Research0.07 0.12 0.32 2.1

afe & Drug-Free Schools 0.37 0.33 0.13 1.2S

pecial Education 0.09 0.06 0.83 0.1S

itle I 0.04 0.16 1.19 0.2T

V

E

ocatio

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