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Mr. STORMER. I would like to take a moment to show you the variety of charts put together from the pieces of material that you have. Starting from the right-hand side, this is the manner by which we determine eligibility of a school district, these two pages, and they are pages one and two in your document.

This is the process of determining the entitlement under the A and B categories and under special sections within the law. The last portion is the determination of payment by the three payment tiers and while it was not possible to present you this in a size which was readable, each of the independent parts are in your packet in sequential order.

The computer form which details the computation of entitlement, prorated entitlement, and current payment and which is sent to an applicant school district along with payment, to Congress for notification, and to the states, is no longer the simple, easy to understand form that its predecessor was.

Considerably more time and manpower are now consumed in explaining the basis of entitlements, payments provided in the tier system, amounts provided by the hold-harmless provisions, amounts available for Title I programs, and reasons for ineligibility under any of the provisions.

Formerly the payment voucher was an 8] by 11 sheet. This is shown in your packet as Exhibit 7, the machine-usable voucher that is processed and provided to the applicant, the state and yourselves when a payment is made to a school district. (See Appendix 3.)

Formerly the application form consisted of four pages for those applying for a minimum rate or a state group rate. An additional sheet was required to be completed for those applying for a rate based on individually selected comparable districts. The application form has grown to 11 pages with 17 pages of instructions. An additional two sheets-Standard Form 424-was required by OMB.

Applications from school districts contain actual counts of federally-connected and total children in membership and estimated ADA. They are processed for an initial payment of from 70 percent to 90 percent of estimated prorated entitlement before the close of the school year in June. Most applications are received in January of each year and the processing of 4,300 applications for an initial payment consumes the period from February to June.

Following the close of the school year, school districts file a onepage final report, due by September 30, to indicate the actual ADA of total children. This figure is used to compute the actual ADA for the federally-connected children reported in the application. Entitlements are recomputed and the full balance of payments due is made during the fall and winter months.

As we have indicated, the minimum number of payments to a school district during a year is two; an initial and a final

. Added to this minimum number is a payment for low-rent housing children which will be discussed later. Also added to this minimum number is a payment under one or more of the hold-harmless provisions. An initial payment under these provisions was made separately for fiscal year 1976 and at present is being made separately again for fiscal year 1977. We had hoped to begin making these payments several months ago and combine them with regular initial payments but were not able to do so.

Indeed, we have been late in making many regular initial payments due to the many difficulties encountered as a result of our dependence on automated systems.

Turning to the low-rent housing children, the process for arriving at payment is even more complex for the applicant. The payments for low-rent housing are not included in an initial payment for the other children to a school district. Before any payment for low-rent housing can be made, an applicant must submit a plan for the use of the funds to its State Title I representative. The payment voucher accompanying a school district's check for other federallyconnected children indicates the estimated amount that can be received for low-rent housing children.

The school district needs to know this amount in order to plan for its use within a Title I or Title I-type program. After approval, the State Title I representative forwards to our office a document indicating that they have approved the applicant's planned use of the funds. Upon receipt of this document, we can then make an initial payment against the applicant's estimated prorated entitlement for low-rent housing.

Invariably estimated prorated entitlements change when final reports are filed and processed.

For example, in fiscal '76, in processing the final payment, we went into the third tier by six percent and therefore the amounts for low rent housing pupils generally increased over what the school district had previously anticipated it would receive. These changes result in either increasing or decreasing an applicant's entitlement for low-rent housing pupils.

If there is an increase, the school district must acquire state approval for the use of the increased amount. If there is a decrease, the district must either cut its program or acquire funds from other sources.

In addition, an on-site review by a regional program officer may disclose some ineligible children causing an adjusted final processing to further decrease entitlements. More often than not, this will occur after funds have been obligated, leaving no choice but to make up the cut funds from other sources, possibly affecting current regular programs.

I am sure you can see that these procedures cause additional complexities in payment processing and create numerous problems for the applicants in trying to plan meaningful programs without knowing the level of funding which will be finally determined.

The procedures for processing low-rent housing entitlements are illustrated at Exhibit 7 in the accompanying folder of material. (See Appendix 3.)

P.L. 874 payments for other than low-rent housing continue to be deposited in current operating accounts and used in accordance with state and local laws to pay the expenses of all children in a school district. However, payments for low-rent housing and for handicapped children must be accounted for, and thus maintained separately. School districts are dependent on the previously-discussed computer form to keep track of these funds.

Let us now focus on the four hold-harmless provisions added by the 1974 amendments. They are:

1. Guarantee minimum payment of 80 percent or in cases where 10 percent or more payment in 1973 is involved, 90 percent of previous year's payment to all applicants;

2. Guarantee minimum payment of 90 percent of previous year's entitlement to school districts losing 10 percent or more federally. connected children during fiscal year 1974 and fiscal year 1975 due to decrease or cessation of Federal activities affecting military installations announced after April 16, 1973;

3. Guarantee minimum payment of 90 percent of previous year's payment for B children if the number of out of county and out of state B children is at least 10 percent of total B children; and

4. Guarantee the difference between payment received from an appropriation shared with low-rent housing pupils and the payment that would have been received if the appropriation were not so shared.

The first provision is not costly in terms of total program dollars. It served its intent in 1976 by easing reductions in payments due to the reforms. However, in 1977 when approximately the same level of funding was provided for the program as in 1976, the situations it serves are unrelated to the reforms. These situations primarily relate to reductions in children. Such reductions are already cared for in Section 3(c)(A)(ii) and Section 3(e).

The second provision dealing with base closings was effective in fiscal year 1975. Thus it will have been in effect for four years by the end of 1978. We believe that this is sufficient time for school districts to recover from the effects of such closings.

For most districts eligible under the third hold-harmless clause, there is little likelihood of any payments resulting from this provision in 1979 if such authorization were extended in 1979. By that time, they will have gained enough in larger payments for stilleligible B children to meet the guarantee.

The fourth provision is the most costly and these costs will grow as payments for low-rent housing children grow. We do not believe that the funds provided for low-rent housing children, at least in the appropriations for 1976 and 1977, were provided at any appreciable sacrifice in payments for other children. Therefore, there is no need for this provision.

The "hold-harmless" clauses have been most difficult to administer. The computer programs developed to determine payments under these clauses are probably the most complicated of Office of Eduation computer programs. They require searching through applicants' earlier files for data on which to base guarantees which then must be compared to current year Section 3 payments for determination of a hold harmless payment. Whenever there is a change in data for an earlier year, then all subsequent year holdharmless payments will change accordingly. This frequently results in overpayments.

In the area of extra assistance for handicapped children, we have had fewer administrative difficulties. As you know, handicapped children residing on Indian lands or having a parent in one of the uniformed services are entitled to receive 150 percent of the local contribution rate if a special program for their educational needs is being provided.

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The application, which is signed by the school district and the State Education Agency, contains assurances that a special program is being provided and that such programs conform to state requirements and plans under the Education of the Handicapped Act.

During on-site reviews, we expect to have regional program officers insure that amounts representing increased rates have been expended on special programs for children claimed in this category. Payments for the handicapped children are made right along with payments for other federally-connected children. There is some conflict, however, between the definition of “free public education” in P.L. 81-874 and the requirement to furnish private schooling, if necessary, under the handicapped program. This is especially true with regard to Federal schools under Section 6. This section contains specific prohibitions against furnishing education to children in facilities other than those located on a Federal installation or owned by a local education agency. Although we may be able to resolve the conflict, we believe that amending language to update our law in this respect is preferable, and would make it compatible with other more recent laws concerning the handicapped.

In conclusion, we are all aware of the concerns that many have had over the years regarding inequities in the impact aid program.

Some concerns have as their basis:

Payments that do not reflect the economic benefits that Federal activities may bring to a community;

Payments for children who would likely be attending the same schools even if the Federal government had not moved into the area;

Payments to school districts that also receive funds through inlieu-of-tax payments;

Payments to some districts that are among the wealthiest in the country;

Payments that are unrelated to a tax-base loss caused by the Federal government.

Primarily these payments relate to B category children for whom the 1978 budget did not request any funds. Although the amendments provided some reforms by reducing entitlement and payment rates for B category children, many additional reforms are necessary.

In connection with the above-mentioned concerns, the Depar ment is intensely analyzing the Impact Aid Program and will provide you with the results of its study along with a set of recommendations for changing the law to make it more compatible with current conditions and present educational needs of children in Federally impacted areas.

We place emphasis on procedural problems in this testimony but recognize that there are important substantive problems. These will be addressed at a later point after the Administration has had the opportunity to complete its study and fully review the operations of the Impact Aid Program.

Chairman PERKINS. Thank you very much for a very fine statement.

I will now call on Mr. James D. Martin, Deputy Director of Human Resources Division, U.S. General Accounting Office.

STATEMENT OF JAMES D. MARTIN, DEPUTY DIRECTOR, HUMAN

RESOURCES DIVISION, U.S. GENERAL ACCOUNTING OFFICE AC.
COMPANIED BY DALE HARRISON, OPERATIONS RESEARCH AN.
ALYST, FINANCIAL AND GENERAL MANAGEMENT STUDIES DI-
VISION, GAO.

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Mr. MARTIN. Mr. Chairman and members of the subcommittee.
Chairman PERKINS. Identify yourself for the record.

Mr. Martin. I am James D. Martin, Deputy Director, Human
Resources Division, General Accounting Office.

Chairman PERKINS. Go right ahead.

Mr. MARTIN. Mr. Chairman and members of the subcommittee, we are pleased to have this opportunity to comment on the results of our work on the impact aid program. The results of our evaluation of this program are contained in our report to the Chairman, House Committee on Education and Labor entitled "Assessment of the Impact Aid Program" HRD-76-116, dated October 15, 1976. (See Appendix 5.)

At the request of 14 members of the House Committee on Education and Labor and two other congressmen, we reviewed certain aspects of the impact aid program, authorized by Public Law 81-874, approved September 30, 1950, as amended and administered by the Office of Education. We reviewed (1) the validity of claims for Federal funds, (2) the economic impact of Federally connected children on local educational agencies, (LEAs), (3) impact aid payment rates compared to local education costs, (4) the impact on applicant LEAs of reducing impact aid payments to eliminate claims for parents working on Federal properties located outside the LEA, and (5) the impact on local agencies receiving impact aid of one state's program for equalizing expenditures for public education. In addition, we reviewed the adequacy of OE's regulations and instructions for determining eligibility and payment rates.

We limited our review to LEAs receiving assistance under title I, sections 2, 3(a), and 3(b) of Public Law 81-874, for fiscal year 1973. The Education Amendments of 1974, dated August 21, 1974, changed these sections effective in fiscal year 1976. Although our report deals with LEAs which received assistance in fiscal year 1973, our recommendations on OE procedures for determining eligibility and its instructions and procedures for determining payment rates are still pertinent. The remainder of the report provides information about the program based on various analyses performed.

Provisions of Section 3 of Public Law 81-874:

One purpose of Public Law 81-874 is to minimize the fiscal inequities caused by both the presence of tax-exempt Federal lands and the burden of providing suitable free public education to federally connected children. Under title I, section 3 of Public Law 81-874, as amended (20 U.S.C. 238), LEAs are to be compensated for the cost of educating children who, while attending such schools (1) resided on tax-exempt Federal property with a parent employed on Federal property or had a parent who was on active duty in the Uniformed services-section 3(a)-or (2) were not included in section 3(a) and either resided on Federal property or resided with a parent employed on Federal property-section 3(b).

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