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The legislation does not specify the uses that can be made of such funds. Most LEAS deposit the Federal funds in their general operating expense accounts with all other available funds. The combined funds are used to finance the LEAS' total school programs. The program is not designed to produce specific educational outcomes of school children. The legislation also provides that impact aid funds cannot be used to supplant state funds.

Administration and funding of impact aid:

In administering the program OE develops policies and procedures and distributes bulletins, instructions, and application forms to LEAs through state educational agencies. LEAS send applications through their state agencies to OE for review and approval. Payments, however, are made directly to LEAS.

Payments under sections 3(a) and 3(b) increased from $25 million in fiscal year 1951 to about $550 million in fiscal year 1975. This growth is attributable to several factors, including increases in school population, increases in school expenditure per pupil, expanded Federal activity, and amendments liberalizing the basic legislation. From 1951 to 1975 the number of children counted under section 3(a) incrased from just over 50,000 to about 342,000. For the same period section 3(b) children increased from about 386,000 to 1.6 million.

The fiscal year 1975 appropriation legislation directed OE to pay claims for federally connected children under section 3(a) at 90 percent of entitlements or, if such children comprised 25 percent or more of the LEAS total enrollment, at 100 percent. Section 3(b) claims were to be paid at 68 percent of entitlements.

For fiscal year 1975 the $550 million available for section 3(a) and 3(b) totalled about 86 percent of the $637 million made available for all Public Law 81-874 activities.

Basis for selecting LEAS:

From the 4,581 LEAS receiving impact aid funds, we selected for review a sample of 100 in 17 states which received $61.7 million under sections 3(a) and 3(b) in fiscal year 1973. The sample was chosen primarily to test the accuracy of LEAs' claims for payment and to determine how OE applied eligibility criteria to individual LEAS. Selection was based on several criteria including (1), number of eligible children in the LEAS and percent of payments received, (2), the percent of eligible children in the LEA of total number of children in enrollment, and (3), a reasonable geographic distribution.

Because the LEAS in our sample were selected judgmentally, we did not project our findings to all LEAs in the program. The findings apply only to the LEAS studied and the results cannot be used to draw overall conclusions about the impact aid program. The sample LEAs included about 298,000 children claimed as eligible, or 13.5 percent of the total children claimed in the program. The sample LEAs also received funds of nearly $62 million, or 12.1 percent, of the total section 3(a) and 3(b) payments for fiscal year 1973. The LEAs we reviewed are listed in appendix I in the report.

Scope of Review:

At OE headquarters in Washington, D. C., and at HEW regional offices in Atlanta, Boston, Dallas, Denver, Kansas City and San Francisco, we interviewed officials and reviewed applicable legislation, regulations, policies, and procedures for administering the program. We also examined assistance applications and other records of the 100 LEAS for fiscal year 1973 and interviewed LEA officials. In addition, we reviewed allocation formulas of the states in which the 100 LEAS were located. We gathered data for making our analysis of economic impact of federally connected children on LEAS at OE Headquartrs. We will discuss the data used in more detail later in the testimony.

Validity of claims for impact aid funds:

Of the 100 local educational agencies we reviewed, 93 claimed either more or less than their eligible number of pupils. In total these LEAS overclaimed a net of $578,224-slightly less than one percent of their total assistance claimed. However, OE program personnel, on the basis of their programmed review of the LEAS' claims at the time of our field work identified a net of $366,091 in overclaims and adjusted the claims. Therefore, the LEAS were overpaid a net total of $212,133.

We brought our findings to the attention of OE officials in a May 30, 1975 letter. OE officials agreed to follow up on these claims and said that payments were not considered final until a detailed review of supporting records had been completed or three years had elapsed without such a review.

OE regulations and instructions for determining eligibility need to be clarified and better enforced:

We identified several areas where OE regulations and instructions for determining eligibility need to be clarified and better enforced to minimize the chance of LEAS overstating or understating claims for impact aid funds.

Defining eligibility:

OE has not, except for a few special employment situations, issued regulations or instructions defining the requirements which a parent must meet to be considered employed on Federal property. To document the eligibility of pupils claimed, LEAS use a parentpupil survey which is a method approved for use by OE. It has accepted claims for pupils whose parents were working temporarily on Federal property on the day the parent-pupil survey was taken, regrdless of where the parents were actually employed. OE uses the terms "working on" and "employed on" synonymously. Thus some LEAS have been reimbursed for pupils whose parents live on and are employed by firms located on private property.

HEW concurred with our recommendation to clarify the requirements that a parent must meet to be considered employed on Federal property.

Identifying eligible children:

One frequent error made by LEAS was to claim children who did not reside in the household of the federally connected parent. Of the 100 LEAS, 21 did not have adequate documentation to determine if the child resided with the federally connected parent.

We recommended that documentation be required to determine that children claimed did reside with civilian federally connected parents. HEW said that the instructions in this area would be strengthened but that the stuation could be appreciably improved only through extensive field reviews.

Also, OE regulations and instructions do not adequately define the eligibility requirements for a child residing with a parent in the Uniformed services. Furthermore, OE procedures for approving claims based on a child's having a parent in the uniformed services do not appear to be consistent with the intent of the law.

We recommended that documentation be required from LEAS to determine whether a child is a dependent of a uniformed services parent. HEW said that the statute expresses no requirement of dependency for a child of a uniformed services parent,, and that it is thus not feasible to seek such information. We do not fully agree. The legislative history of Public Law 81-874 suggests that to be eligible the child should be a dependent of a Uniformed services parent.

Impact aid funds used to supplant state funds:

For fiscal year 1973-the most recent year with complete data available for review-impact aid funds, by law, could not be paid to any LEAS in states which considered such funds as local resources in determining eligibility for or computing the amount of state aid to be given to individual LEAS. This provision was intended to prevent states from using impact aid funds to supplant state funds. Two states appeared to have been using section 3 funds to supplant state funds violating Public Law 81-874.

We brought this to the attention of OE and recommended that reviews be made of state aid allocation formulas relative to the supplant provision of the law. HEW agreed and said that with the passage of the 1974 amendments to the impact aid law, in depth examinations of state aid programs will occur.

Impact aid payment rates:

An LEA's actual educational costs are not used for determining payment rates because federally connected children influence the revenues available and the amount which the LEA can spend on education. To avoid this problem, the law provides tht payment rates be based on the amounts private property owners is generally comparable LEAS pay toward the cost of educating children. The law also establishes a minimum payment rate which is equal to the higher of either one-half the national or one-half the state average expenditure per pupil. However, in no case may the minimum rate exceed the state average expenditure per pupil. The amount of aid provided to an LEA may not be based on a rate lower than the applicable minimum rate.

OE, after consulting with the state educational agencies and LEAS, determines which LEAs are in its judgment generally comparable to the applicant.

HEW regulations provide that payment rates be established subject to the minimum rates by either grouping all LEAs within a state into generally comparable groups and basing each applicant's payment on its group's average expenditure per pupil from local revenues, or individually selecting comparable LEAS for each appli

cant and basing each applicant's payment rate on the comparable LEA's average expenditure per pupil from local revenues.

The comparability criteria are the same in both procedures; both require OE to compute payment rates using data compiled by the state educational agency or LEAS on expenditures paid from local revenues of comparable LEAS. This payment rate equals the average expenditure per pupil in average daily attendance paid from local revenues-hereafter referred to as the local contribution rate of the LEAS which are comparable to the applicant.

OE should review the data used to compute payments rates: Although local contribution rate data submitted to OE is the basis for selecting comparable LEAs to determine impact aid payment rates, OE does not periodically review the revenue which local and state educational agencies report to determine if it is received from state or local sources. What constitutes local revenue is subject to interpretation because LEAs receive revenue from many sources under a wide array of Federal, state and local activities. Such interpretations can affect the amount of impact aid funds received. HEW concurred with our recommendation to review revenue which LEAS and SEAS report to determine if it is received from state or local sources, but indicated that manpower in its regional offices is insufficient to conduct these reviews.

OE Instructions not adequate for determining comparable LEAS. OE instructions contain criteria for selecting comparable LEAS which provide for legal classification, grade levels, size as measured by cost per pupil in average daily attendance, geographical size, population density, industrialization, current revenues, aggregate property values, percent of pupils transported, and other relevant factors.

OE instructions for selecting comparable LEAS to determine impact aid payment rates provide no assurance that the LEAS selected are, in fact, comparable. While the cost per pupil is a critical criterion for determining comparability, neither the regulations nor the instructions specify what weight should be given to other criteria. Moreover, OE has not established ranges for each criterion to assist state or local educational agencies in determining comparability. Both of these factors are needed, regardless of the comparable LEA procedure used to make selection of comparable LEAS consistent.

As for specifying the weight that should be given to its published criteria and establishing ranges for each criterion, HEW indicated that it recognized the need for study of this problem, and if the use of a weighting system is deemed advisable it will change existing regulations.

OE procedures for approving rates from individually selected comparable LEAs are not consistent with its instructions for selecting comparable LEAS. It generally does not review the comparable LEAS to determine whether they were selected in a manner consistent with its criteria but compares the resulting payment rates to the applicants' local contribution rates for nonfederally connected pupils. Because the local contribution rate for nonfederally connected pupils is not a criterion stipulated in OE instructions or regulations, few of the LEAs used it in selecting comparable LEAS.

We recommended that procedures be developed by OE for approving Federal payment rates based on comparable LEAS which are consistent with OE's instructions for selecting such LEAS. HEW said that present procedures provide for a review of the criteria for selecting comparable LEAS.

We do not believe that HEW's comments are responsive to our recommendation.

Analysis of economic impact of federally connected children on LEAS.

To respond to the congressional request for an analysis of the economic impact of federally connected children on LEAs, we calculated the tax increase that would be needed if LEAS did not receive payments under the impact aid program. This could be considered an indirect measure of the burden that federally connected children impose on LEAS.

These analyses were based on information in claims totaling $188 million, made by the 1671 LEAS in 16 states for aid under title I, sections 2 and 3(a) and 3(b) of Public Law 81-874 for fiscal year 1973. Section 2 allows for payments to LEAS that have had large amounts of property removed from the tax rolls through acquisition by the Federal government.

Our analyses do not consider the effects on the program of the provisions of the Education Amendments ot 1974, effective in fiscal year 1976, which provide payments for students living in low-rent public housing and handicapped students.

LEAS using the individually selected comparable LEA procedure for payment purposes must report on nine criteria such as property valuations and tax rates for all LEAs in that state. The state also sends this information to OE headquarters for verification of the LEA's selection. For both sections of the law, this information is to include LEA property valuations and tax rates. Because the LEAS we analyzed were not selected on a scientific basis, the results of our review are presented as a case study of 16 states and is not necessarily representative of the entire nation.

For each LEA we determined how much taxes would have to be increased to replace all or a part of their 1973 entitlements. We compared the percentage of impaction-that is, the percent of federally connected average daily attendance-for the 1671 LEAs to the percentage of change in taxes that would be necessary because of loss of aid.

Our analyses were based on school year 1971-72 valuations for taxable property since this was the latest information available. Historical trends in property values indicate that these values were probably much lower than current valuations. We used 100 percent of the impact aid entitlements in our analyses, which exceeded actual impact aid payments over the past few years by 25 to 30 percent, because appropriations have not been adequate to pay full entitlements. The use of these two factors tends to make our results a conservative estimate of the effect that loss of aid would have because they yield higher estimates of tax changes than would actually be necessary.

We analyzed the impact aid program to determine the effects of changes in eligibility and payment provisions. We considered all

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