More than three quarters of the $45 billion  in federal outlays has been provided through the increased Federal  Medical Assistance Percentage (FMAP) grant awards and the State Fiscal  Stabilization Fund administered by the Department of Education. Figure 1  shows actual federal outlays as of August 28, 2009 and the original  estimate. Together, these nine programs are estimated to  account for approximately 87 percent of federal Recovery Act outlays to  state and localities in fiscal year 2009. Since our July report and with regard to the states’ receipt of the increased  FMAP, all 16 states and the District had drawn down increased FMAP  grant awards of just over $19.6 billion for the period of October 1, 2008  through September 4, 2009, which amounted to almost 84 percent of funds  available. Most commonly, states reported that they are using or planning  to use freed-up funds to cover their increased Medicaid caseload, to  maintain current benefits and eligibility levels, and to help finance their  respective state budgets. Several states noted that given the poor  economic climate in their respective states, these funds were critical in  their efforts to maintain Medicaid coverage at current levels. In March 2009, $26.7 billion was apportioned to all 50 states and the  District of Columbia (District) for highway infrastructure and other  eligible projects. More recently, as of September 1, 2009, $18 billion of the  funds had been obligated for almost 7,000 projects nationwide, and  approximately $11 billion had been obligated for almost 3,800 projects in  the 16 states and the District that are the focus of GAO’s review. Many state officials told us they selected  a large percentage of resurfacing and other pavement improvement  projects because they did not require extensive environmental clearances,  were quick to design, could be quickly obligated and bid, could employ  people quickly, and could be completed within 3 years. While officials from almost all of the states we reviewed  said that they considered project readiness, including the 3-year  completion requirement, when making project selections, there was  substantial variation in the extent to which states prioritized projects in  economically distressed areas and how they identified these areas. All states and the District have  submitted their certifications. Specifically, a March fact sheet, the Secretary’s April letter to  Governors, and program guidance issued in April and May mention that  the purposes of the SFSF include helping stabilize state and local budgets,  avoiding reductions in education and other essential services, and  ensuring LEAs and public IHEs have resources to “avert cuts and retain  teachers and professors.” The documents also link educational progress to  economic recovery and growth and identify four principles to guide the  distribution and use of Recovery Act funds: (1) spend funds quickly to  retain and create jobs; (2) improve student achievement through school  improvement and reform; (3) ensure transparency, public reporting, and  accountability; and (4) invest one-time Recovery Act funds thoughtfully to  avoid unsustainable continuing commitments after the funding expires,  known as the “funding cliff.”
After meeting assurances to maintain state support for education at least  at fiscal year 2006 levels, states are required to use the education  stabilization fund to restore state support to the greater of fiscal year 2008  or 2009 levels for elementary and secondary education, public IHEs, and, if  applicable, early childhood education programs. As an update to our July report, as of September 1, 2009, the District and  15 of the states covered by our review had received approval from  Education for their initial SFSF funding applications. Pennsylvania had  submitted an application to Education but it had not yet been approved. As of August 28, 2009, Education had made $21 billion in SFSF grants for  Education available to the 15 states and the District. In total, over  $7.7 billion, or about 36 percent of available funds had been drawn down  by these states as of August 28, 2009. Officials in many school districts told us that SFSF funds would help offset  state budget cuts and would be used to maintain current levels of  education funding. Single Audit Reporting Will Not Facilitate Timely Reporting of Recovery Act Program Findings and Risks

The single audit reporting deadline is too late to provide audit results in  time for the audited entity to take action on deficiencies noted in Recovery  Act programs. Efforts to Assess the Impact of Recovery Act Spending

As recipients of Recovery Act funds and as partners with the federal  government in achieving Recovery Act goals, states and local units of  government are expected to invest Recovery Act funds with a high level of  transparency and to be held accountable for results under the Recovery  Act. Under the Recovery Act, direct recipients of the funds, including  states and localities, are expected to report quarterly on a number of  measures including the use of funds and an estimate of the number of jobs  created and the number of jobs retained. However, we  remain concerned that OMB’s planned actions would not achieve the level  of accountability needed to effectively respond to Recovery Act risks and  does not provide for timely reporting on internal controls for Recovery Act  programs. OMB does not have a master timeline for issuing federal agency guidance. We found substantial  variation both in how states identified areas in economic distress and how  they prioritized project selection for these areas.
Why GAO Did This Study

This testimony is based largely on GAO's July 8, 2009 report, in response to a mandate under the American Recovery and Reinvestment Act of 2009 (Recovery Act). This testimony provides selected updates, including the status of federal Recovery Act outlays. The report addresses: (1) selected states' and localities' uses of Recovery Act funds, (2) the approaches taken by the selected states and localities to ensure accountability for Recovery Act funds, and (3) states' plans to evaluate the impact of Recovery Act funds. GAO's work for the report is focused on 16 states and certain localities in those jurisdictions as well as the District of Columbia--representing about 65 percent of the U.S. population and two-thirds of the intergovernmental federal assistance available. GAO collected documents and interviewed state and local officials. GAO analyzed federal agency guidance and spoke with Office of Management and Budget (OMB) officials and with program officials at the Centers for Medicare and Medicaid Services, and the Departments of Education, Energy, Housing and Urban Development, Justice, Labor, and Transportation.

What GAO Found

Across the United States, as of August 28, 2009, Treasury had outlayed about $45 billion of the estimated $49 billion in Recovery Act funds projected for use in states and localities in fiscal year 2009. More than three quarters of the federal outlays have been provided through the increased Medicaid Federal Medical Assistance Percentage (FMAP) and the State Fiscal Stabilization Fund (SFSF) administered by the Department of Education. GAO's work focused on nine federal programs that are estimated to account for approximately 87 percent of federal Recovery Act outlays in fiscal year 2009 for programs administered by states and localities. All 16 states and the District have drawn down increased Medicaid FMAP grant awards of just over $19.6 billion for October 1, 2008, through September 4, 2009, which amounted to almost 84 percent of such funds available to them. All states and the District experienced enrollment growth in this period. Several states noted that the increased FMAP funds were critical in their efforts to maintain coverage at current levels. States and the District reported they are planning to use the increased federal funds to cover their increased Medicaid caseload and to maintain current benefits and eligibility levels. As of September 1, the Department of Transportation (DOT) had obligated approximately $11 billion for almost 3,800 highway infrastructure and other eligible projects in the 16 states and the District and had reimbursed these 17 jurisdictions about $604 million. Across the nation, almost half of the obligations have been for pavement improvement projects because they did not require extensive environmental clearances, were quick to design, obligate and bid on, could employ people quickly, and could be completed within 3 years. Officials from most states considered project readiness, including the 3-year completion requirement, when making project selections and only later identified to what extent these projects fulfilled the economically distressed area requirement. We found substantial variation in how states identified economically distressed areas and how they prioritized project selection for these areas. FHWA issued clarifying guidance to address our recommendation in August 2009. As of September 1, 2009, the District and 15 of the 16 states covered by our review had received approval from Education for their initial SFSF funding applications. Pennsylvania had submitted an application to Education, but it had not yet been approved. As of August 28, 2009, Education has made $21 billion in SFSF grants for Education available to the 15 states and the District--of which over $7.7 billion had been drawn down as of August 28, 2009. School districts said they would use SFSF funds to maintain current levels of education funding, particularly for retaining staff and current education programs. They also told us that SFSF funds would help offset state budget cuts. Overall, states reported using Recovery Act funds to stabilize state budgets and to cope with fiscal stresses. The funds helped them maintain staffing for existing programs and minimize or avoid tax increases as well as reductions in services. States have implemented various internal control programs; however, federal Single Audit guidance and reporting does not fully address Recovery Act risk. The Single Audit reporting deadline is too late to provide audit results in time for the audited entity to take action on deficiencies noted in Recovery Act programs. Moreover, current guidance does not achieve the level of accountability needed to effectively respond to Recovery Act risks. Direct recipients of Recovery Act funds, including states and localities, are expected to report quarterly on a number of measures, including the use of funds and estimates of the number of jobs created and retained.