VA Education Benefits: VA Needs to Ensure That It Can Continue to Provide Effective School Oversight

In fiscal year 2017, VA provided about $11 billion in education benefits to about 14,460 schools to help eligible veterans and their beneficiaries pay for postsecondary education and training. VA typically contracts with state agencies to help it provide oversight of schools participating in this education benefit program.

The Harry W. Colmery Veterans Educational Assistance Act of 2017 included a provision for GAO to review VA's and states' oversight of schools receiving VA education benefits. This report examines (1) how, if at all, the available level of funding to state agencies has affected states' and VA's ability to carry out their oversight responsibilities, (2) to what extent VA and state agencies use risk-based approaches to oversee schools, and (3) to what extent VA coordinates and shares information with the states to support their oversight activities. GAO reviewed VA documents; assessed VA funding data for fiscal years 2003-2018; interviewed VA and selected state agency officials; and reviewed correspondence between these officials. GAO interviewed officials from eight state agencies who were past or present officials at the association representing state agencies, and officials from three other states, including one that did not renew its contract with VA in fiscal year 2018.

The Department of Veterans Affairs (VA) is responsible for overseeing schools nationwide that provide VA education benefits to veterans. To help provide this oversight, VA contracts with state agencies to oversee schools in their states and provide outreach and training to school officials and allocates them funding to cover the cost of oversight, outreach, and training activities. However, since fiscal year 2006, funding for oversight, outreach, and training has remained at about $19 million, and only recently increased in fiscal year 2018 to $21 million. State agency officials told GAO that the limited level of funding they have received from VA has been a long-standing problem that has strained their ability to (1) adequately cover staff costs, (2) pay for travel for school visits, and (3) provide needed technical assistance and training to the schools about VA education benefit requirements. As a result, a few states, such as New Mexico, have chosen to withdraw from their school oversight roles. When this happens, VA must take over the state agencies' oversight responsibilities. GAO found that assuming additional oversight responsibilities is likely to stretch VA's staff resources, especially in large states, where schools are geographically dispersed and school visits are time consuming and costly. VA has begun but has not completed an assessment of the risks that potential future state agency withdrawals could have on its ability to provide school oversight. Moreover, VA has not developed a contingency plan for how it will oversee more schools if additional states do not renew their oversight contracts. Federal standards for internal control state that agencies should identify and assess risks related to achieving objectives, and define contingency plans for assigning responsibilities if key roles are vacated. Until VA takes these steps, the agency runs the risk of being unprepared to conduct effective oversight in the event that more state agencies withdraw from their contracts in the future.

VA and state agencies use certain risk factors to select schools for oversight. VA officials said that they prioritize schools for annual reviews of compliance with program requirements based on findings from prior reviews as well as other risk factors, such as schools with a history of VA benefit payment errors. GAO found that VA and state agencies have recently begun a joint effort to explore a new strategy that they expect will strengthen the school review selection and prioritization process. According to VA officials, as of mid-October 2018, VA used this strategy to select five schools to undergo risk-based reviews. VA officials said they expect these five reviews to be completed by late December 2018.

VA and state agencies coordinate and share information about their oversight activities in a variety of ways. For example, VA has shared information with the state agencies on how to conduct annual reviews of schools in their states. However, according to officials at the association representing state agencies, VA has not provided specific direction on conducting targeted reviews in response to complaints. VA officials acknowledged that the procedures they currently have in place are outdated and said that they are being revised to provide state agencies with more details. As of late October 2018, VA officials said these procedures were undergoing internal review. Once implemented, VA's new procedures have the potential to enhance VA's and state agencies' efforts to conduct reviews at those schools for which they have received complaints.

GAO recommends that VA complete the identification and assessment of oversight risks, and prepare a contingency plan for overseeing schools if additional states do not renew their oversight contracts. VA concurred with the recommendation.

The Department of Veterans Affairs (VA) provided about $11 billion in  education benefits (VA education benefits) in fiscal year 2017 to about  14,460 schools to provide approved programs of education and training to  eligible veterans and their beneficiaries and help them afford  postsecondary education. Eligible individuals can use these payments to  cover education costs—including up to the amount of in-state tuition and  fees at public institutions of higher learning, or up to $22,805 at private  institutions—in the 2017-2018 academic year. VA contracts with State  Approving Agencies (state agencies) to help VA oversee postsecondary  schools’ compliance with program requirements to ensure they are  appropriately using VA education benefits for their eligible students. The  Harry W. Colmery Veterans Educational Assistance Act of 2017 (Colmery  Act), enacted on August 16, 2017, included a provision for GAO to review  and report to the Veterans’ Affairs Committees on several issues related  to veterans’ education benefits. This report answers the following  questions:  1.  How, if at all, has the available level of funding to state agencies  affected states’ and VA’s ability to carry out their responsibilities in  overseeing schools receiving VA education benefits?  2.  To what extent do VA and state agencies use risk-based approaches  to oversee these schools?  3.  To what extent does VA coordinate and share information with the  states to support their oversight activities?

We reviewed VA policies, procedures, practices, and applicable federal  laws and regulations. In addition, we interviewed VA officials and eight  officials from the National Association of State Approving Agencies  (NASAA), the organization that represents the interests of state agencies  overseeing schools receiving VA education benefits. These selected  NASAA officials have held a variety of leadership positions within the  organization, including on the NASAA Executive Board as well as on  select NASAA committees. During these interviews, we obtained NASAA  officials’ perspectives about state agencies in general, and about their  specific experiences as directors or members of their own state agencies.  NASAA officials we interviewed represented the views of state agencies  across all four NASAA regions (East, South, Central, and West), and  were from states that received both recent increases and decreases in  VA funding, and with a varied number of schools and beneficiaries that  received VA education benefits. We also interviewed officials from three  additional states selected to provide more in-depth information at the  state level. These included a state with a recent decrease in VA funding  (New Hampshire), a state with a recent increase in funding (California),  and a state that did not renew its contract with VA in fiscal year 2018  (New Mexico). We chose these states to obtain different perspectives on  how the level of funding affected their ability to carry out school oversight.  For all three questions, we also reviewed VA documents and written  correspondence between VA, NASAA, and the state agencies in fiscal  years 2014 to 2018 related to VA education benefits. In addition, we  reviewed a 2016 report from VA’s Office of Inspector General (Inspector  General) and a 2017 study conducted by an external contractor hired by  VA that discuss VA’s use of risk factors in selecting schools for its annual  reviews.

We obtained VA data on the amount of funding allocated by the agency to  the state agencies in fiscal years 2003 to 2018. We assessed the  reliability of these data by reviewing key documents and written  responses from knowledgeable officials. We determined the data to be  sufficiently reliable for our purposes. We used as criteria federal  standards for internal control regarding (1) identifying, assessing, and  responding to risks related to achieving objectives and (2) defining  contingency plans if key roles are vacated to help the entity continue to  achieve its objectives.

We conducted this performance audit from November 2017 to November  2018 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient and appropriate evidence to provide a reasonable basis  for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on our audit objectives.

VA provides education benefits to eligible veterans and their beneficiaries  enrolled in approved programs of education and training to help them  afford postsecondary education. VA staff conduct oversight of schools  receiving these benefits. In addition, each year, VA contracts with state  agencies to help provide this school oversight. In fiscal year 2017, there  were about 14,460 schools receiving VA education benefits for about  750,000 veterans and their beneficiaries across the country.

State agencies’ core oversight functions, as generally required by statute,  VA regulations, and their VA contracts, include approval of schools to  receive VA education benefits, annual compliance surveys of schools— which are reviews to ensure schools’ compliance with program  requirements—and technical assistance to schools, among other things  (see fig. 1). VA and state agencies both conduct annual compliance  surveys of selected schools, which generally entail a visit to the school.  For veterans to receive the education benefits, school employees must  certify to VA that they are enrolled in classes and notify VA of any  changes in enrollment.

NASAA was founded to coordinate the efforts of state agencies and is  managed and administered by an executive board and several leadership  committees, such as a contract committee and a legislative committee. All  members of NASAA leadership are also either directors or have other  roles at individual state agencies. VA’s Education Service is led by a  Director and is under the Veterans Benefits Administration. This office  works with NASAA to prepare annual contracts to allocate federal funding  and specify workload requirements for each state agency.

Limited Funding Has Impacted States’ Oversight Abilities, Leading State Agencies to Withdraw from This Role, and VA Has Not Assessed How It Will Respond to Future State Withdrawals

Funding Has Remained Relatively Constant Over a Decade and VA Recently Revised Its Allocation Method

For over a decade, funding provided by VA to state agencies remained at  the same level of $19 million. In fiscal year 2018, VA allocated $21 million  for state agencies—the first increase in funds allocated to states since  fiscal year 2006 (see fig. 2).

Each year, state agencies can also request supplemental funding from  VA if their costs exceed their allocated funding amount. VA has the  discretion to approve an agency’s request based on its justification of  need and the amount of VA funding available for supplemental requests.  NASAA officials said that supplemental funding is helpful, but that it is not  a reliable funding source because there is no guarantee that VA will be  able to provide states with the requested amount. According to NASAA  officials, some state agencies also receive additional funding from their  state governments if they request these funds, but many states do not  provide this additional funding. NASAA officials also noted that in some  cases, states do not want to provide their own funds to state agencies  because their view is that the agencies already receive VA funding  through their federal contracts.

VA recently changed its method of allocating funding to state agencies.  VA hired an external contractor to develop a new funding allocation  method. Before fiscal year 2017, VA funded state agencies primarily  based on the number of schools in the state with at least one veteran  student receiving VA education benefits in the previous year. In fiscal  year 2017, VA implemented a new funding allocation method. VA  officials told us this new method was a significant improvement over the  previous method they used, which was very limited. For example, VA  officials said the prior funding method did not estimate how long it took  state agencies to perform certain oversight activities. The officials said  this limitation was a key reason they decided to develop a new funding  method. VA’s new method to fund states more equitably is based on their  work requirements, i.e., their school oversight activities and the amount of  time needed to complete them. The new funding method factors in,  among other things:  the number of staff needed to complete a state’s workload in  overseeing schools; national salary averages ($80,000 for professional and $50,000 for  support staff), including benefits; a national travel allowance based on the number of professional staff  required to complete work requirements;  the number of schools receiving VA education benefits in the state;  and  the estimated time needed to review different school types, the type of  review (such as approvals vs. compliance surveys), and the number  of student veterans enrolled.

State Agencies Identified Impacts of Limited Funding on Their Ability to Fulfill Oversight Responsibilities

VA, NASAA, and selected state agency officials we spoke with said that  limited funding before and after the recent changes to the funding method  has impacted state agencies’ ability to fulfill their oversight responsibilities  in three areas: (1) ability to pay and train oversight staff, (2) ability to visit  geographically dispersed schools due to travel costs, and (3) ability to  provide technical assistance and training to schools. Under their contracts  with VA, state agencies have been meeting their core school oversight  functions, according to NASAA officials. VA and NASAA officials we  interviewed, however, said state agencies have been underfunded for  many years. They said states’ funding concerns and challenges existed  prior to the new method to allocate funds to state agencies and remain  despite a total funding increase to state agencies from about $19 million  to $21 million in fiscal year 2018.

NASAA officials we interviewed said some state agencies have difficulty  paying for the number of staff they need because there is a mismatch  between VA’s average salary and benefits used to calculate states’  funding and the actual salaries and benefits some state agencies are  required to pay under state laws. VA officials acknowledged that some  states have required salary and benefit levels that exceed the average  levels used in VA’s new funding allocation method. VA’s new funding  method uses an average salary of $80,000 (including benefits) for  professional staff. VA officials noted that some states have annual  salaries for professional staff of over $100,000 excluding benefits. A state  agency official we spoke with said the salary and benefit costs for  professional staff in her state average $130,000, with some salary and  benefits costing up to about $150,000. The official said this can make it  difficult for the state agency to be able to pay a sufficient number of staff,  which hinders its ability to fulfill its VA-contracted oversight. In another  case, a NASAA official said his state agency did not have enough funds  to pay for a second full-time employee because the state’s required salary  and benefits were higher than VA’s $80,000 allotment for professional  staff.

Limited funding for state agency oversight staff has led to state requests  for additional funds, as well as higher turnover and less training of the  staff. VA officials said that the primary reason that some state agencies  requested supplemental funding from VA in fiscal years 2016 and 2017  was that their initial allocation was not sufficient to cover salary, benefits,  and travel expenses. Some state governments have had to cover those  costs, hoping that VA would reimburse the state at the end of the fiscal  year, according to VA officials. In addition, some state agencies have had  significant turnover due, in part, to the uncertainty about the amount of  annual VA funding, according to NASAA officials. NASAA officials also  said that funding amounts limit the professional development provided to  state agency staff, including travel to conferences. VA officials said that  they support professional development and routinely provide funding for  travel to conferences. However, according to VA officials, VA has denied  requests from state agencies for travel to additional, repetitious  conferences during the same year.

NASAA officials said limited VA funding also makes it difficult for state  agencies in geographically large states to pay travel expenses to visit  schools as part of their oversight responsibilities. For example, NASAA  officials said state agencies in Alaska, Montana, and Washington find it  difficult to afford mileage and hotel costs for school visits that require  travelling long distances—sometimes over mountain ranges—and  overnight stays. NASAA officials also said VA’s new funding method does  not allocate sufficient funding for travel.

Officials we interviewed at selected state agencies have had mixed  experiences with travel costs. One state agency official told us her  agency selected schools to visit that were physically near her office  because of insufficient travel funds. In contrast, a state agency official in a  geographically small state said the agency has sufficient funding to travel  throughout the state to visit schools, mainly because overnight stays are  unnecessary. VA and NASAA officials said some state agencies have  been able to address travel costs by stationing agency staff in different  parts of the state. VA officials, however, acknowledged that this is not  possible in all states because some states require agency staff to be  located in a central office.

VA’s new funding allocation method calculates a national travel allowance  for all states based on the total number of professional staff it estimates  would be required to complete work requirements in all states. VA officials  explained that this travel allowance does not account for individual  differences in geographic size among states. VA officials said that in  developing the new funding method, the contractor reviewed the historical  travel costs of states and determined that a distinction by the geographic  size of a state did not need to be factored into the funding method. The  contractor based this decision on several factors, including that some  state agencies: (1) paid their travel costs using state funds, not VA funds;  (2) have located their staff in offices across the state and, as a result,  their travel costs were lower than in other states; and (3) planned their  travel so they visited schools within a short timeframe, which reduced  travel costs.

When faced with funding difficulties, many state agencies reduce their  technical assistance to schools and outreach activities because they need  to use available funds on salaries, benefits, and travel related to  compliance survey and approval workloads, according to NASAA officials.  For example, one state agency official told us her agency has significantly  reduced its technical assistance to schools because it does not have the  funds to travel across the large, rural state to provide it. A NASAA official  said available funding has reduced his state agency’s ability to conduct  outreach, such as connecting veterans with education and benefit  resources, or holding in-person meetings to educate employers on  providing apprenticeships to veterans using VA education benefits.

NASAA officials also said that many state agencies have reduced the  number of visits to train school employees on VA education benefits  requirements. They noted that this training is important because it helps  reduce over- and under-payments and the misuse of VA education  benefits. A 2016 report from VA’s Inspector General estimated that VA  makes $247.6 million in improper payments of VA education benefits  annually, mostly over-payments. The Inspector General found that many  of the improper payments occurred because school employees provided  VA incorrect or incomplete information on student enrollment.

VA Plans to Revise the New Funding Method to Address Ongoing Concerns by States

NASAA officials told us that they continue to have concerns that the new  funding method’s time estimates for completing certain oversight activities  are inaccurate and, as a result, this method does not allocate sufficient  funds. For example, NASAA officials said the funding method does not  properly estimate the time it takes state officials to travel to schools and  carry out oversight functions, including conducting certain school  approvals, and providing schools with technical assistance and training.  NASAA officials said the time estimates used to fund approvals are  inaccurate and need to be revised because different types of schools and  education programs—including flight schools, degree programs, and non- degree programs—take different amounts of time to review and approve.  For example, NASAA officials said that state agencies need less time to  conduct an approval for an on-the-job training program than for a large  public university.

VA officials said they are aware of the concerns that NASAA and state  agencies have raised that the time estimates for oversight in the new  funding method are inaccurate—with some being too high and others too  low. They are also aware that NASAA and state agencies believe that the  analysis to develop these estimates should have more accurately  factored in the time needed to approve and review different types of  schools and education programs.

To address the concerns states have raised about its new funding  allocation method, VA provided documentation to us of its plans to hire a  contractor in fiscal year 2018 to improve and update its funding method.  In September 2018, VA hired a contractor to carry out a contract with a 6- month period of performance. VA reported that the contractor would  review the new funding allocation method to determine if any specific  changes are needed to more equitably distribute funding across state  agencies. Specifically, VA officials said the contractor would review the  accuracy of the funding method’s allowances for state agencies’ salary,  benefits, and travel costs, and its time estimates for states to conduct  oversight activities to determine if changes are needed. VA officials  reiterated that allowances for salaries and travel, and the time estimates  are critical factors in the funding method. VA officials noted, however, that  regardless of how VA divides the funding up among the state agencies,  the total amount of program funding to these agencies will remain the  same within any one fiscal year.

Two State Agencies Have Discontinued Their Oversight Contracts, but VA Has Not Assessed These Impacts or How It Will Address Future Withdrawals

States have the option of not renewing their school oversight contracts  with VA, and two have exercised this option in recent years, citing  insufficient funding levels from VA to fulfill their responsibilities. When this  happens and the state withdraws from its school oversight role, VA must  perform all oversight responsibilities for VA education benefits in that  state. New Mexico—which currently has 4,754 veteran students and 107  schools receiving VA education benefits—did not renew its contract with  VA in fiscal year 2018 because funding was not sufficient to cover its  costs for salaries, travel, and technical assistance to schools, according  to VA officials (see text box).

New Mexico Did Not Renew Department of Veterans Affairs (VA) Contract Due to  Lack of Funding  New Mexico’s state agency began to face significant funding difficulties starting in fiscal  year 2015, according to a state official, and it did not renew its VA contract to oversee  schools receiving VA education benefits in fiscal year 2018. Although the state agency  was able to conduct the oversight activities required by its VA contract in fiscal year  2017, the official said the agency had to reduce its staff, and the one remaining  employee was frequently required to work long hours and weekends to meet contract  requirements. Further, New Mexico did not receive adequate funding for travel costs to  visit schools in its geographically large, rural state, the state official noted. As a result,  the official said the state agency opted not to renew its VA contract in fiscal year 2018.  VA and New Mexico officials have differing views on how well VA staff will be able to  provide effective oversight of schools receiving veterans’ education benefits in the  state. In January 2018, New Mexico state officials stated that although VA regional staff  have assumed the former state agency’s oversight responsibilities, they are unlikely to  be able to provide the same level of oversight the state agency did because the VA  staff are also responsible for overseeing schools in three other states in addition to New  Mexico. As a result, state agency officials said schools in New Mexico would likely  receive fewer oversight visits. VA officials, on the other hand, believe that their regional  staff are handling oversight of schools in New Mexico effectively, although they  acknowledged the staff may be conducting fewer compliance surveys and providing  schools less technical assistance.

Other states have also expressed concerns about their ability to conduct  oversight given available funding levels. For example, Alaska—which  currently has 4,011 veteran students and 53 schools receiving VA  education benefits—also chose not to contract with VA for about 5½  years (fiscal year 2012 through January 2017), according to VA officials  and the director of Alaska’s veterans affairs office. Alaska’s director also  said that a major reason that Alaska did not renew its contract was limited  VA funding. During this time, regional VA staff based in Oklahoma  handled Alaska’s oversight, which VA officials said often had to be  conducted remotely given that schools are spread throughout the state,  and travel to those areas can be expensive as well as challenging given  weather conditions. VA officials said that VA’s presence was not as  strong in Alaska as in other states because VA staff overseeing Alaska  are located in another state and in a different time zone. Further,  according to VA data for fiscal years 2014 and 2015, VA staff were  unable to complete all the compliance surveys they were assigned in  Alaska. In addition, California officials told us they almost did not renew  their oversight contract in fiscal year 2018 due in part to funding  concerns. California has the largest number of veteran students (86,926)  and schools receiving VA education benefits (1,091) of any state, yet  state agency officials told us that they lacked sufficient funding to pay  salaries for staff to conduct necessary oversight of these schools,  including approvals and technical assistance visits. VA officials noted,  however, that California receives the most funding of any state and has  received the greatest increases of any state in the last two years.

Although VA stepped in to provide oversight of schools in New Mexico  and Alaska, the agency does not have a plan for how it will oversee  additional schools if other states choose not to renew their oversight  contracts. VA officials told us their current approach is to assign the state  agency’s workload to regional VA staff who already have their own school  oversight responsibilities. However, providing oversight in states without a  contract in addition to VA staffs’ existing workload is likely to stretch  agency resources. For example, existing VA regional staff may not be  able to oversee all schools in states with a large number of schools. In  addition, VA staff may be strained in providing oversight in geographically  large states where schools are widely dispersed because school visits  would be time consuming and costly.

VA has begun some initial steps to identify and assess how it would  handle additional oversight. In August 2017, VA began working with its  Office of General Counsel regarding what options the agency has when a  state agency chooses not to contract with VA, and the Office issued a  legal opinion in September 2017. In April 2018, VA formed a workgroup,  which also met a few times in May and once in July, to prepare a draft  paper of possible scenarios and response options based on this legal  opinion. In August 2018, the workgroup followed up with the field  supervisor responsible for approval, compliance, and liaison and  produced a new draft paper of scenarios and options. As of September  2018, VA’s Education Service Director is holding discussions with VA  leadership regarding assessing the options and developing a formal plan.  However, VA has not completed an assessment to ensure the agency  can handle additional school oversight responsibilities in states that do  not renew their contracts and has yet to prepare a contingency plan.

Federal standards for internal control state that agencies should identify,  assess, and respond to risks related to achieving objectives. After  identifying risks, the agency should assess the significance—or effect on  achieving the objective—of these risks, which provides a basis for  responding to the risks. Then, in responding to these risks, the standards  state that agencies should define contingency plans for assigning  responsibilities if key roles are vacated to help the entity continue to  achieve its objectives. Specifically, if the agency relies on a separate  organization to fulfill key roles, then the agency should assess whether  this organization can continue in these key roles, identify others to fill  these roles as needed, and implement knowledge sharing with  replacement personnel. Without fully identifying and assessing the risks  of additional state withdrawals, and without a contingency plan to address  how VA can oversee additional schools, the agency runs the risk that if  more states withdraw from their oversight responsibilities, then VA will be  unprepared to oversee the schools in these states.

VA and State Agencies Use Certain Risk Factors to Select Schools for Review, and Have Taken Steps toward a New Oversight Approach

VA and State Agencies Use Payment Errors and Other Risk Factors to Select Schools for Compliance Surveys

Each year, VA uses findings from prior compliance surveys and other  information to develop a strategy for prioritizing a sample of schools to  receive annual reviews, according to VA officials. VA is generally required  by statute to conduct an annual compliance survey of schools with 20 or  more enrolled veterans at least once every 2 years. VA officials said  with the help of state agencies, VA uses these surveys to determine if  schools are meeting legal requirements and are using VA education  benefits funds appropriately, including whether they are making over- or  under-payments on students’ education expenses. According to a VA  document, in conducting the surveys, VA and state agencies review  various statutory and regulatory requirements, such as the accuracy of a  school’s student enrollment records, tuition payments, and whether a  school has corrected deficiencies identified in previous compliance  surveys.

According to VA officials, the agency has taken steps to incorporate risk  factors into its compliance survey strategy in response to  recommendations from our prior work and recent VA studies. The  examples below show how VA has responded to recommendations to  use risk in overseeing schools.

In 2011, we recommended that VA adopt risk-based approaches to  ensure proper oversight of schools. As part of the agency’s official  response to this recommendation, VA reported to us that in fiscal year  2012 the agency began prioritizing compliance surveys at for-profit  schools. Further, VA officials said that the agency added this focus  to its written annual compliance survey strategy for fiscal years 2016  and 2017 based on prior years’ compliance survey findings and  congressional priorities.

In a 2016 report, VA’s Inspector General recommended that VA  consider particular risk factors in selecting schools for compliance  surveys. Specifically, the report recommended that VA prioritize  schools at risk of payment errors including (1) making errors resulting  in over- or under-payments of VA education benefits, and (2)  neglecting to recover unspent VA education benefit funds, such as  when students receive funds but then reduce their course loads or  repeat classes. In response, VA officials stated that the agency began  using data on these payment errors to prioritize schools with high  error rates. For example, VA officials said that when data revealed  that flight schools were particularly prone to such errors—along with  charging high tuition and fees and failing to meet some VA education  benefits criteria, among other issues—VA decided to prioritize these  schools for compliance surveys in its fiscal year 2018 strategy (see  text box).

VA’s Compliance Survey Strategy for Schools Receiving VA Education Benefits for  Fiscal Year 2018  The Department of Veterans Affairs (VA) is generally required by statute to conduct an  annual compliance survey of schools receiving VA education benefits and that have 20 or  more enrolled veterans at least once every 2 years. For its fiscal year 2018 compliance  survey strategy, VA prioritized the following types of schools for review:  100 percent of schools with flight programs;  100 percent of schools with fewer than 20 veterans, with priority to those  that had not received surveys for the longest time period;  100 percent of federal on-the-job training and apprenticeship programs;  schools with serious deficiencies identified in previous compliance surveys;  schools newly approved for the program with enrolled VA beneficiaries;  schools that have never received a compliance survey (for example, VA officials said  some schools have not received a compliance survey due to a shortage of VA  oversight staff or due to the fact that in prior years, the statute did not require VA to  conduct compliance surveys at schools with fewer than 300 veterans); and  a sample of foreign schools receiving VA education benefits for students from the  United States (conducted by VA via remote survey).

An August 2017 study, conducted by an external contractor hired by  VA, reviewed ways to strengthen VA’s compliance survey process  and outcomes. The report found that VA has not placed enough  emphasis on improving school compliance over time. For example,  VA has historically prioritized completing a certain number of surveys  each year rather than ensuring that schools are actually  demonstrating compliance. Among other recommendations, the report  identified the need for VA to more effectively use data to measure  schools’ compliance over time and to establish priorities to select  schools for compliance surveys based on their risk level. As of July  2018, VA officials said that the agency has begun analyzing the  study’s recommendations to improve its compliance survey process  and that its new compliance survey strategy for fiscal year 2019 and  future years will address many of these study recommendations.

VA Conducts Reviews in Response to Complaints at Schools

VA officials said that in 2014 they began conducting targeted reviews of  schools in response to complaints received from students, government  officials, or others. VA’s policies and procedures state that, in addition to  complaints, other factors that could trigger a targeted review include  compliance survey results, management mandates, and a school self- reporting a violation, among others. VA officials said, however, that VA  has not initiated a targeted review in response to anything other than a  complaint.

To determine whether to conduct a targeted review, VA officials said they  review each complaint and may corroborate it with other sources of  information, such as compliance survey data on that school and input  from states or other agencies. According to VA’s policies and procedures,  the focus of targeted reviews varies based on the nature of the complaint,  and VA assigns a higher priority to complaints that are higher risk, i.e.,  those that allege fraud, waste, or abuse (see table 1). As of July 2018, VA  and state agencies have conducted about 160 targeted reviews of  schools in response to complaints since 2014, resulting in the withdrawal  of program approval for 21 schools, according to data provided by VA  officials.

VA Has Taken Steps to Adopt a New Risk-Based Oversight Approach

VA has taken steps to adopt a new risk-based approach to overseeing  schools receiving VA education benefits, including selecting schools  based on risk factors such as those identified in the Colmery Act. Among  other things, the Colmery Act explicitly authorizes VA to use the state  agencies for risk-based surveys and other oversight based on a school’s  level of risk, and identifies specific risk factors that can be used for school  oversight (see text box).

Risk Factors Identified in the Harry W. Colmery Veterans Educational Assistance  Act of 2017  The Colmery Act explicitly authorizes the Department of Veterans Affairs (VA) and state  agencies to use risk-based surveys (reviews) in oversight of schools receiving VA  education benefits. The Colmery Act identifies specific risk factors that can be used for  school oversight, but does not require VA or state agencies to use these risk factors in  their oversight of these schools:  rapid increases in veteran enrollment,  increases in the amount of VA education benefits a school receives per veteran  student,    volume of student complaints,  rates of federal student loan defaults of veterans,  veteran completion rates,   deficiencies identified by accreditors and other state agencies, and   deficiencies in VA program administration compliance.

VA officials told us that they have not yet used the risk factors cited in the  Colmery Act in conducting their compliance surveys. VA officials  acknowledged, however, that adopting a more risk-based oversight  approach could help prevent problems, such as some schools’ use of  deceptive practices in recruiting veterans and receipt of overpayments  from VA. VA officials said that the agency is exploring risk factors to  consider in developing its compliance survey strategy for selecting  schools in fiscal years 2019 to 2021.

State agency officials we spoke to said that they use the risk factors cited  in the Colmery Act to varying degrees in their oversight of schools  receiving VA education benefits. For example, one state agency official  said that he tracks all of the risk factors cited in the Colmery Act except  the rates of veterans’ student loan defaults. On the other hand, a NASAA  official said that her state agency tracks the volume of student complaints  and deficiencies identified by accreditors and other state agencies. States  generally have limited opportunities to select specific schools for  compliance surveys, because VA develops the annual priorities for  compliance surveys, according to NASAA officials. In some cases,  NASAA officials told us, state agency staff work with regional VA staff to  select schools for visits based on VA’s priorities.

VA has recently taken steps to explore a new risk-based approach to  oversee schools receiving VA education benefits that would be in addition  to compliance surveys, according to VA officials. Specifically, VA officials  told us that VA has participated in a joint working group with NASAA  officials focused on developing a new type of school review in which VA  would select schools based on specific risk factors, including those  identified in the Colmery Act. NASAA officials told us they were  supportive of VA’s efforts in this area. As of February 2018, NASAA  officials had drafted a possible approach to state agencies’ oversight to  monitor one risk factor—rapid increases in veteran enrollment for VA’s  consideration. VA officials told us the working group plans to build on this  effort in reviewing other risk factors. In May 2018, VA prepared a draft  charter for the working group, which, among other things, outlines the  potential scope and implementation of new risk-based surveys, and  provided it to NASAA for review. Documentation we reviewed from a VA  and NASAA working group meeting held in May 2018 stated that in its  upcoming meetings, the working group plans to continue developing the  charter, including agreeing to roles and responsibilities, establishing the  risk factors to be used, and identifying data sources related to these risk  factors. VA officials said that at an August 2018 joint working group  meeting, the charter was deemed to have served its purpose and the  decision was made to establish a risk-based review policy and  procedures moving forward. According to VA officials, as of mid-October  2018, VA used this strategy to select five schools to undergo risk-based  reviews. VA officials said they expect these five reviews to be completed  by late December 2018.

VA and State Agencies Have Approaches to Coordinate Oversight Activities and VA Is Developing Additional Guidance for States on Targeted Reviews

VA and State Agencies Identified Various Ways They Coordinate on Oversight Activities

VA and state agencies coordinate to divide responsibility for who will  conduct compliance surveys of schools receiving VA education benefits in  a variety of ways, according to VA and NASAA officials. After VA provides  state agencies information about its annual strategy for selecting schools  for these surveys, VA regional staff work with state agency staff to select  the specific schools for that year, according to these officials. NASAA  officials we interviewed said their working relationships with regional VA  staff are excellent—they have good communication and understand and  help each other. For example, one state official we interviewed said the  state agency and regional VA staff in the state coordinate to make sure  they alternate who visits which schools to obtain multiple perspectives.  They also have discussions before and after each visit, the official said. In  some cases, VA officials said, VA and state agency officials collaborate to  conduct compliance surveys together.

VA also provides information to states on how to conduct and report on  compliance surveys, including a checklist to help guide the states’ review  of items tied to specific statutory requirements, as well as a template for  reporting compliance survey results. VA leadership also holds  conferences twice a year that NASAA and state agency staff can attend,  and communicates throughout the year on school oversight issues,  according to officials from these entities.

In addition, VA officials told us they collaborate with NASAA on providing  training for state agency staff that NASAA provides through the National  Training Institute. According to NASAA’s website, the Institute provides  an overview of state agency responsibilities and activities, including  information on public laws, accreditation, VA education benefits approval  criteria, and compliance surveys. New state agency staff must attend this  training, according to NASAA officials.

VA Is Developing New Guidance for States on Targeted Complaint-Based Reviews

NASAA officials told us that VA has not provided state agencies with  sufficient information on how to conduct targeted school reviews in  response to complaints, and as a result it is difficult for states to conduct  these types of reviews. VA officials acknowledged this lack of information.  NASAA officials reported that many state agencies want more direction  on how to conduct and report on targeted school reviews in response to  complaints. A policy and procedures document on targeted school  reviews that VA developed in 2014 describes the criteria to use in  determining when to conduct targeted, complaint-based reviews,  including what issues to prioritize. VA officials acknowledged, however,  that the document is outdated and does not provide sufficient detail. VA  officials said the agency is in the process of revising the document to  provide more clarity. In July 2018, VA provided a draft document to us  showing the changes it plans to make in its policy and procedures on  targeted, complaint-based school reviews, which includes specific  information about how state agencies should conduct and report on these  reviews. As of late October 2018, VA officials said these procedures were  undergoing internal review. VA officials said they are open to state  agency feedback on the new procedures. In addition, VA officials said  they are currently updating their database for complaint-based reviews to  add specific, standard data fields for states to use in reporting the results  of these reviews. VA officials told us that the revised database and  procedures will allow state agencies to develop their own template to  electronically report information collected during these reviews in a  standardized way. We believe that when implemented, VA’s new  procedures could help enhance VA’s and state agencies’ efforts in  responding to complaints about schools receiving VA education benefits.

It is critical for VA to ensure that schools receiving VA education benefits  are complying with program requirements and that veterans receive the  education they have been promised. Because funding concerns have led  to states withdrawing from their oversight roles, decisions by other states  to not renew their school oversight contracts could result in VA taking on  additional school oversight responsibilities. However, VA has neither  completed identification nor assessment of the risks posed by any future  state withdrawals that could leave VA unprepared to conduct oversight in  these states. Further, VA’s lack of a contingency plan for assuming the  responsibilities of state agencies in these cases raises the risk that  schools receiving VA education benefits would not be overseen and  student veterans could be adversely affected.

We recommend that the Secretary of Veterans Affairs direct the Under  Secretary for Benefits to:  (1) Complete efforts to identify and assess risks related to future  withdrawals by state agencies in overseeing schools and (2) address  these risks by preparing a contingency plan for how VA will oversee  additional schools if more states choose not to renew their oversight  contracts. (Recommendation 1)

We provided a draft of this report to VA for review and comment. VA’s  comments are reproduced in appendix I. VA agreed with our  recommendation. VA also provided technical comments, which we  considered and incorporated as appropriate.

In addition, we provided relevant excerpts from a draft of this report to  NASAA leadership for review and comment. NASAA provided technical  comments, which we considered and incorporated as appropriate.

We are sending copies of this report to the appropriate congressional  committees; the Secretaries of Veterans Affairs and Education; and other  interested parties. In addition, the report is available at no charge on  GAO’s website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (617) 788-0534 or emreyarrasm@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on   the last page of this report. GAO staff who made key contributions to this  report are listed in appendix II.

Appendix I: Comments from the Department of Veterans Affairs

Appendix II: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Elizabeth Sirois (Assistant  Director), Linda L. Siegel (Analyst-in-Charge), Jessica Ard, and Rachel  Pittenger made key contributions to this report. Also contributing to this  report were Susan Aschoff, James Bennett, Deborah Bland, Sheila R.  McCoy, Jean McSween, Benjamin Sinoff, and Sarah Veale.


Foreign Assistance: U.S. Assistance for the West Bank and Gaza, Fiscal Years 2015 and 2016

Since 1993, the U.S. government has committed more than $5 billion in bilateral assistance to the Palestinians in the West Bank and Gaza. According to the Department of State, this assistance to the Palestinians promotes U.S. economic and political foreign policy interests by supporting Middle East peace negotiations and financing economic stabilization programs. USAID is primarily responsible for administering ESF assistance to the West Bank and Gaza.

Appropriations acts for fiscal years 2015 and 2016 included provisions for GAO to review the treatment, handling, and uses of funds provided through the ESF for assistance to the West Bank and Gaza. This report examines (1) the status of ESF assistance and projects provided to the West Bank and Gaza for fiscal years 2015 and 2016, including project assistance and payments to PA creditors, and (2) the extent to which USAID conducted required vetting of PA creditors to ensure that this assistance would not support entities or individuals associated with terrorism and assessed PA ministries' capacity to use ESF assistance as intended. GAO reviewed relevant laws and regulations and USAID financial data, policies, procedures, and documents. GAO also interviewed USAID and State Department officials.

As of March 2018, the U.S. Agency for International Development (USAID) had allocated about $545 million of funding appropriated to the Economic Support Fund (ESF) for assistance in the West Bank and Gaza for fiscal years 2015 and 2016. USAID obligated about $544 million (over 99 percent) and expended about $351 million (over 64 percent) of the total allocations. Project assistance accounted for approximately $399 million of the obligated funds, while payments to Palestinian Authority (PA) creditors accounted for $145 million (see figure). USAID's obligations for project assistance in the West Bank and Gaza for fiscal years 2015 and 2016 supported three development objectives—Economic Growth and Infrastructure ($239 million), Investing in the Next Generation ($107 million), and Governance and Civic Engagement (about $25 million). In fiscal years 2015 and 2016, USAID made payments directly to PA creditors—two Israeli fuel companies, to cover debts for petroleum purchases, and a local Palestinian bank, to pay off a line of credit used for PA medical referrals to six hospitals in the East Jerusalem Hospital network.

USAID vetted PA creditors to ensure that the program assistance would not provide support to entities or individuals associated with terrorism and also conducted external assessments and financial audits of PA ministries of Health and Finance and Planning. USAID documentation showed that, as required, officials checked the vetting status of each PA creditor within 12 months before USAID signed its debt relief grant agreements with the PA. In addition, although USAID determined that it was not legally required to assess the PA Ministry of Health's medical referral services and the Ministry of Finance and Planning's petroleum procurement system, the agency commissioned external assessments of both ministries. These assessments found some weaknesses in both ministries' systems; however, USAID mission officials stated that these weaknesses did not affect USAID debt relief payments to the PA creditors. Nevertheless, USAID took additional steps to mitigate the identified weaknesses. For example, a USAID contractor worked with the Ministry of Health to update, revise, and approve guidelines for medical referrals. In addition, USAID commissioned financial audits of the debt relief grant agreements between USAID and the PA for direct payments to PA creditors in fiscal year 2015 and 2016. The audits did not identify any ineligible costs, reportable material weaknesses in internal control, or material instances of noncompliance with the terms of the agreements.

GAO is not making recommendations in this report.

The West Bank and Gaza cover about 2,400 square miles and have a  combined population of about 4.6 million people. The Palestinian  Authority (PA) and Israel administer areas in the West Bank, and Hamas- controlled de facto authorities control Gaza. According to the Department  of State (State), U.S. economic and humanitarian assistance to the  Palestinians promotes the economic and political foreign policy interests  of the United States by supporting Middle East peace negotiations and  financing economic stabilization programs. The U.S. Agency for  International Development (USAID) has primary responsibility for  administering assistance for the West Bank and Gaza, most of which is  appropriated through the Economic Support Fund (ESF). In addition to  providing project assistance to the Palestinians in the West Bank and  Gaza, USAID entered into debt relief grant agreements with the PA using  fiscal year 2015 and 2016 funds. Under these agreements, according to  USAID, it agreed to pay PA creditors who provided goods and services to  the PA rather than to transfer cash directly to the PA for this purpose.

Appropriations acts for fiscal years 2015 and 2016 included provisions for  GAO to review the treatment, handling, and uses of funds provided  through the ESF—in this report, “ESF assistance”—for the West Bank  and Gaza. This report examines (1) the status of ESF assistance to the  West Bank and Gaza for fiscal years 2015 and 2016, including project  assistance and payments to PA creditors, and (2) the extent to which  USAID conducted required vetting of PA creditors to ensure that  assistance would not support entities or individuals associated with  terrorism and assessed PA ministries’ capacity to use ESF assistance as  intended.

To address our objectives, we reviewed appropriations legislation, related  budget justification documents, and fiscal year 2015 and 2016 financial  data, including expenditures as of March 31, 2018, that USAID provided.  We also reviewed relevant USAID documents, including notifications to  Congress, regarding the obligation of allocated funds. In addition, we  interviewed USAID and State officials in Washington, D.C., and  conducted telephone interviews with USAID West Bank and Gaza  mission officials in Tel Aviv, Israel. In addition, we reviewed statutory  requirements and relevant USAID documentation, such as USAID’s  antiterrorism policies and procedures, for vetting PA creditors to ensure  that assistance does not support entities or individuals associated with  terrorism. See appendix I for more information on our scope and  methodology.

We conducted this performance audit from September 2017 to August  2018 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.

Since 1993, USAID has obligated more than $5 billion in bilateral  assistance to the Palestinians in the West Bank and Gaza, primarily using  funds appropriated through the ESF. According to State officials, through  the ESF, USAID provides project assistance and debt relief payments to  PA creditors. USAID, with overall foreign policy guidance from State,  implements most ESF programs, including programs related to private  sector development, health, water and road infrastructure, local  governance, civil society, rule of law, education, and youth development.  According to USAID officials, this assistance to the West Bank and Gaza  contributes to building a more democratic, stable, prosperous, and secure  Palestinian society—a goal that USAID described as being in the interest  of the Palestinians, the United States, and Israel. Figure 1 shows the  location of the West Bank and Gaza relative to surrounding countries.

USAID assistance to the West Bank and Gaza is conducted under  antiterrorism policies and procedures outlined in an administrative policy  document known as Mission Order 21. The stated purpose of the  mission order, as amended, is to describe policies and procedures to  ensure that the mission’s program assistance does not inadvertently  provide support to entities or individuals associated with terrorism.

We have previously reported on the status of ESF assistance to the  Palestinians and USAID’s antiterrorism policies and procedures in the  West Bank and Gaza.

Status of ESF Assistance to the West Bank and Gaza for Fiscal Years 2015 and 2016, Including Project Assistance and Payments to PA Creditors

As of March 31, 2018, USAID had obligated about $544.1 million (over 99  percent) and expended about $350.6 million (over 64 percent) of  approximately $544.5 million in ESF assistance allocated for the West  Bank and Gaza in fiscal years 2015 and 2016 (see table 1). USAID  obligated portions of the allocated funds for direct payments to PA  creditors—specifically, payments to two Israeli fuel companies, to cover  debts for petroleum purchases, and to a local Palestinian bank, to pay off  a line of credit used for PA medical referrals to six hospitals in the East  Jerusalem Hospital network.

Project assistance obligated for fiscal years 2015 and 2016 accounted for  about $215 million (74 percent) and $184 million (72 percent),  respectively, of USAID’s obligations of ESF assistance for the West Bank  and Gaza for those fiscal years (see fig. 1). Payments to the PA’s  creditors accounted for the remaining obligations—about $75 million (26  percent) of fiscal year 2015 obligations and about $70 million (28 percent)  of fiscal year 2016 obligations.

According to USAID documents, ESF project assistance for the West  Bank and Gaza for fiscal years 2015 and 2016 was obligated for three  USAID development objectives: Economic Growth and Infrastructure  (about $239 million), Investing in the Next Generation (about $107  million), and Governance and Civic Engagement (about $25 million).  Program support—which sustains all development objectives, according  to USAID—accounted for about $29 million (see table 2).

Economic Growth and Infrastructure. The largest share—about 60  percent—of USAID’s ESF project assistance for the West Bank and  Gaza for fiscal years 2015 and 2016 supported the agency’s  Economic Growth and Infrastructure development objective.  According to USAID documents, as of March 31, 2018, the agency  had obligated about $239 million and expended approximately $89  million (about 37 percent) for projects under this objective. USAID  officials stated that the agency funded these projects under the  following standard State-budgeted program areas: health (including  water), infrastructure, private sector competiveness, and stabilization  operations and security sector reform. The largest project—the  Architecture and Engineering Services project—received about $20  million of fiscal year 2015 ESF assistance and $17 million of fiscal  year 2016 ESF assistance. The purpose of the project was to  rehabilitate and construct infrastructure through the procurement of  infrastructure services, including engineering design and construction  management, among other things. The contractor was required to  coordinate with relevant PA and Israeli entities, as well as with  USAID, to assist in the selection of PA water and wastewater projects  and in the planning and design of water projects such as small- to  large-scale water distribution systems, water treatment systems, and  institutional capacity building.

Investing in the Next Generation. The second-largest share—about  27 percent—of USAID’s fiscal years 2015 and 2016 ESF project  assistance for the West Bank and Gaza supported the agency’s  Investing in the Next Generation development objective. According to  USAID documents, as of March 31, 2018, the agency had obligated  about $107 million and expended approximately $79 million (about 74  percent) for projects under this objective. Program areas funded  included education, health, social and economic services and  protection of vulnerable populations. The largest project funded under  this objective—a grant to the World Food Program for assistance to  vulnerable groups—received $12 million in fiscal year 2015 and $15  million in fiscal year 2016 ESF assistance. The project focused on  ensuring food security, including meeting food needs, of the  nonrefugee population; increasing food availability and dietary  diversity for the most vulnerable and food-insecure nonrefugee  population; and establishing linkages with the Palestinian private  sector (shopkeepers, farms, and factories) to produce and deliver the  aid being provided to Palestinians. For example, the project directly  distributed a standard food ration through both direct food distribution  and electronic food vouchers to vulnerable nonrefugee families.

Governance and Civic Engagement. The smallest share—about 6  percent—of USAID’s fiscal years 2015 and 2016 ESF project  assistance for the West Bank and Gaza supported the agency’s  Governance and Civic Engagement development objective. According  to USAID documents, as of March 31, 2018, USAID had obligated  about $24.6 million and expended approximately $14.5 million (about  60 percent) for projects in program areas that included civil society,  good governance, and rule of law. The largest project funded under  this objective—a contract for the Communities Thrive Project— received about $5.2 million and $8 million in fiscal years 2015 and  2016 ESF assistance, respectively. The project aimed to help 55 West  Bank municipalities improve fiscal management, fiscal accountability  and transparency, and delivery and management of municipal  services, among other things.

Under debt relief grant agreements with the PA, USAID made direct  payments of ESF assistance to PA creditors totaling about $75 million  from fiscal year 2015 funds and $70 million from fiscal year 2016 funds.  USAID paid about $40 million from fiscal year 2015 funds and $45 million  from fiscal year 2016 funds to two oil companies to cover debts for  petroleum purchases. In addition, USAID paid about $35 million from  fiscal year 2015 funds and $25 million from fiscal year 2016 funds to the  Bank of Palestine, to pay off a PA line of credit that was used to cover PA  medical referrals to six hospitals in the East Jerusalem Hospital network.

USAID Vetted PA Creditors and Conducted External Assessments and Financial Audits of PA Ministries

Before using fiscal years 2015 and 2016 ESF assistance to pay PA  creditors, USAID vetted the creditors to ensure that the assistance would  not provide support to entities or individuals associated with terrorism, as  required by its policies and procedures. USAID determined that certain  legal requirements, including the requirement for an assessment of the  PA Ministry of Finance and Planning, were not applicable for direct  payments of these funds to PA creditors. Nevertheless, USAID continued  to commission external assessments and financial audits of the PA  Ministries of Health and Finance and Planning.

USAID Vetted PA Creditors as Required by Its Policies and Procedures for Direct Payments to Creditors

USAID documentation for payments to creditors shows that before  signing debt relief agreements with the PA, mission officials checked, as  required by Mission Order 21, the vetting status of PA creditors who  would receive direct payments under the agreements, to ensure their  eligibility before any payment was made. USAID Mission Order 21  requires that before payments to PA creditors are executed, the creditors  must be vetted—that is, the creditors’ key individuals and other identifying  information must be checked against the federal Terrorist Screening  Center database and other information sources to determine whether  they have links to terrorism. According to USAID policies and  procedures, each PA creditor must be vetted if more than 12 months  have passed since the last time the creditor was vetted and approved to  receive ESF payments. We found that for payments made to PA creditors  using fiscal years 2015 and 2016 ESF assistance, USAID vetted each PA  creditor that received payments and completed the vetting during the 12-  month period before the debt relief agreements with the PA were signed  (see table 3).

USAID Determined Certain Legal Requirements Were Not Applicable to Payments to PA Creditors

USAID determined that certain legal requirements applicable to cash  transfers to the PA were not applicable to direct payments to PA creditors  of fiscal years 2015 and 2016 ESF assistance. In September 2015, we  reported that USAID ceased making cash payments directly to the PA in  2014 and began making payments of ESF assistance directly to PA  creditors. In reviewing USAID’s compliance with key legal requirements,  we found that USAID had complied with the requirements when making  cash transfers to the PA in fiscal year 2013. However, USAID had  determined that some requirements were not applicable to direct  payments made to PA creditors in fiscal year 2014, because no funds  were being provided directly to the PA.

After fiscal year 2015, USAID further defined the scope of statutory  requirements it deemed applicable to payments to PA creditors using  fiscal years 2015 and 2016 ESF assistance, under the rationale that  these payments do not constitute direct payments to the PA.  Specifically, according to USAID, the agency determined that the  following statutory requirements discussed in our prior report were not  applicable to direct payments to PA creditors.

A requirement to notify the Committees on Appropriations 15 days  before obligating funds for a cash transfer to the PA

A requirement for the PA to maintain cash transfer funds in a separate  account

A requirement for the President to waive the prohibition on providing  funds to the PA and to submit an accompanying report to the  Committees on Appropriations

A requirement for the Secretary of State to provide a certification and  accompanying report to the Committees on Appropriations when the  President waives the prohibition on providing funds to the PA

Requirements for direct government-to-government assistance,  including an assessment of the PA Ministry of Finance and Planning  According to USAID officials, they currently do not plan to resume cash  payments to the PA, because making direct payments to creditors  minimizes the misuse of funds and assures full transparency and  appropriateness of transfers.

USAID Commissioned External Assessments and Financial Audits of PA Creditors before Executing Payments

Although USAID concluded that the statutory requirement mandating  assessments of the PA Ministry of Finance and Planning did not apply to  direct payments to PA creditors, the West Bank and Gaza mission  commissioned external assessments of the PA Ministry of Health’s  medical referral services and Ministry of Finance and Planning’s  petroleum procurement system. According to a USAID document, while  the payments to the creditors did not constitute direct budget support to  the PA, the agency chose to commission external assessments to  determine whether the PA’s financial systems were sufficient to ensure  adequate accountability for USAID funds consistent with legislative  requirements for direct budget support funds. These external  assessments identified weaknesses in both systems.

Ministry of Health medical referrals. The assessment report stated  that the ministry did not have approved policies and procedures for  the medical referral process, a list of medical services covered by the  referral system, and written criteria for selecting referral hospitals in  the medical referral systems. In response, in a January 2016  internal memorandum, the West Bank and Gaza mission officials  concluded, among other things, that the findings did not pose a  significant risk to USAID funds. They also stated that the Ministry of  Health’s medical referral system had adequate policies and  procedures for referrals to local hospitals. However, after the  assessment report was issued, a USAID contractor worked with the  Ministry of Health to update, revise, and approve guidelines for  medical referrals.

Ministry of Finance and Planning petroleum procurements. The  assessment report stated that the ministry lacked specific policies and  procedures to prevent or detect fraud in the petroleum procurement  systems. In the West Bank and Gaza mission’s January 2016  memorandum, USAID mission officials disagreed with the  assessment’s findings regarding the petroleum procurement system,  stating that the assessment did not take into account sufficient and  adequate internal controls at the ministry as a first line of defense  against fraud. The memorandum also stated that the finding did not  affect USAID debt relief payments to the PA creditors.

USAID officials told us that, while they did not believe the external  assessments’ findings affected the integrity of USAID’s debt relief  payment process, they took four additional steps to mitigate findings  noted in the assessment of the Ministry of Finance and Planning’s fuel  procurement processes. According to USAID officials, they (1) confirmed  that the fuel companies had controls and systems to ensure an objective  and transparent system in receiving and recording PA orders, (2)  dispatched orders with official and properly signed shipping delivery and  receipt documents, (3) obtained written confirmation from the fuel  companies of the costs of the fuel provided to the PA, and (4) confirmed  the PA’s petroleum debt with the fuel companies before initiating the  payments and after making the payments.

In addition, in 2016, USAID commissioned two routine financial audits of  the debt relief grant agreed to by USAID and the PA for the use of fiscal  year 2015 ESF assistance to make direct payments to PA creditors.  According to USAID officials, the auditors were to examine the PA  Ministry of Finance and Planning’s recording of USAID payments to PA  creditors in its financial records as well as the ministry’s and USAID’s  compliance with the terms of the grant agreement and related  implementation letters. The audits did not identify any questioned or  ineligible costs, reportable material weaknesses in internal control, or  material instances of noncompliance with the terms of the debt relief  grant. Also, in 2017, USAID contracted for a financial audit of the fiscal  year 2016 debt relief grant agreed to by USAID and the PA. According to  a USAID document, in May 2018, USAID held an entrance conference  with the PA Ministry of Finance and Planning for the audit of the fiscal  year 2016 grant. In July 2018, USAID sent the final audit report to the  Regional Inspector General for review. According to the USAID  document, the report did not identify any questioned or ineligible costs,  reportable material weaknesses in internal controls, or material instances  of noncompliance with the terms of the grant.

We provided a draft of this report to USAID and State for review and  comment. USAID provided comments, which we have reproduced in  appendix II, as well as technical comments, which we incorporated as  appropriate. State did not provide comments.

We are sending copies of this report to the appropriate congressional  committees, the Administrator of USAID, and the Secretary of State. In  addition, the report is available at no charge on the GAO website at  http://www.gao.gov  If you or your staff have any questions about this report, please contact  me at (202) 512-3149 or gootnickd@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who contributed to this report are  listed in appendix III.

Appendix I: Objectives, Scope, and Methodology

Appropriations acts for fiscal years 2015 and 2016 included provisions for  GAO to review the treatment, handling, and uses of funds provided  through the ESF for assistance to the West Bank and Gaza. This report  examines (1) the status of ESF assistance and projects provided to the  West Bank and Gaza for fiscal years 2015 and 2016, including payments  to PA creditors, and (2) the extent to which USAID conducted required  vetting of PA creditors to ensure that assistance would not support  entities or individuals associated with terrorism and assessed PA  ministries’ capacity to use ESF assistance as intended.

To address our first objective, we reviewed appropriations legislation,  related budget justification documents, and financial data for fiscal years  2015 and 2016, including expenditures as of March 31, 2018, provided by  USAID’s West Bank and Gaza mission in Tel Aviv, Israel. We reviewed  data that USAID provided on obligations and expenditures of all ESF  assistance for the West Bank and Gaza as of March 31, 2018, from  annual allocations for fiscal years 2015 and 2016. We also reviewed  relevant USAID documents, including notifications to Congress regarding  the use of appropriated funds. In addition, we interviewed USAID and  State officials in Washington, D.C., and Tel Aviv.

To determine whether the data were sufficiently reliable for the purposes  of this report, we requested and reviewed information from USAID  officials about their procedures for entering contract and financial  information into USAID’s data system. We determined that the USAID  data were sufficiently reliable. For the project information included in this  report, we relied on data that USAID provided, showing its obligations and  expenditures of fiscal year 2015 and 2016 ESF assistance for West Bank  and Gaza. For illustrative purposes, we requested and obtained from  USAID descriptions of projects that, according to USAID officials,  represented the largest financial obligations for each development  objective in fiscal years 2015 and 2016.

To address our second objective, we identified and reviewed relevant  legal requirements as well as USAID policies and procedures to comply with those requirements. USAID Mission Order 21 is the primary  document that details USAID procedures to ensure that the mission’s  assistance program does not provide support to entities or individuals  associated with terrorism, consistent with the prohibition on such support  found in relevant laws and executive orders. In addition, we reviewed 27  USAID determinations of compliance for payments to PA creditors and  discussed with USAID mission officials their efforts to comply with the  policies and procedures in Mission Order 21 before executing payments  to hospitals, companies, and banks that facilitated the payments. We also  reviewed the timing of USAID’s vetting of each PA creditor that received  payments, to ensure that, as required by Mission Order 21, the vetting  occurred within 12 months before USAID signed the relevant debt relief  grant agreement with the PA. Further, we reviewed external assessments  of the PA Ministries of Health and Finance and Planning and financial  audits of the PA Ministry of Finance and Planning, and we discussed the  assessments’ and audits with USAID officials responsible for payments to  PA creditors.

We conducted this performance audit from September 2017 to August  2018, in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for findings and  conclusions based on our audit objectives.

Appendix II: Comments from the U.S. Agency for International Development

Appendix III: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Judith McCloskey (Assistant  Director), Tom Zingale (Analyst-in-Charge), Eddie Uyekawa, Jeff Isaacs,  and Nicole Willems made significant contributions to this report. David  Dornisch, Neil Doherty, Reid Lowe, and Roger Stoltz also contributed to  the report.

The United States provides economic and humanitarian assistance to Palestinians in the West Bank and Gaza to promote Middle East peace and stability.

In 2015 and 2016, the U.S. Agency for International Development provided about $545 million for projects such as water treatment systems and to pay Palestinian Authority creditors directly for fuel and health services. USAID is required to ensure no support goes to people or entities linked to terrorism.

We found that USAID carried out the required vetting of Palestinian Authority creditors.