CHARLESTON, W.Va. — How did a crucial audit of West Virginia’s higher education system wind up late to federal officials even after a stern warning about the consequences?

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Paul Espinosa

The education chairman of West Virginia’s House of Delegates would like to know that too.

“Despite clear warning that ‘OK, we’re going to cut you some slack for last year but you need to comply this coming year or there’s going to be sanctions,’ it seems like those warnings were ignored,” state Delegate Paul Espinosa, R-Jefferson, said in a Monday telephone interview.

“It’s just not really clear why a higher priority wasn’t given to abiding by that.”

What consequences does West Virginia face?

By missing a deadline for the U.S. Department of Education for the third straight year, West Virginia’s higher education system now faces sanctions including provisional certification and heightened cash monitoring.

The upshot is, the sanctions potentially affect cash flow of about $240 million for West Virginia’s higher education system.

Under normal conditions, the U.S. Department of Education would provide institutions money up front to be used for expenditures such as Pell grants and federally-subsidized student loans.

Under the sanctions, colleges will have to pay for those expenses first and then ask for reimbursement.

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Sarah Tucker

So, let’s say absolute worst case scenario, all students ask for their student loans and federal financial aid on the same day, all of the colleges have to reimburse on that day within a 24-hour window,” said Sarah Tucker, state chancellor for community and technical college education.

“You’re looking at about $240 million that the colleges have to find some way to float, just for the fall semester. Now, you have a two-week window so during that two-week window you’re going to have payroll hit as well.”

Tucker emphasized that although this will be a headache for the institutions, students will receive their federal financial aid.

“We’re really worried that students are going to think they’re not going to get financial aid or their student loans, and that is not the case,” Tucker said.

“Students will get whatever amount of money they deserve. We will find a way to do it. This will all be back room dealings so they don’t have any effect on their own students’ ability to go to college.”

Anotherpossible ramification is that colleges would need federal approval every time they stop of start a program.

This would be a hurdle for the community colleges, which sometimes need to quickly adjust to training needs for local employers.

“That’s something we would need to push back on pretty hard,” Tucker said.

What are potential remedies?

West Virginia officials just got official word about a week ago that the Department of Education will impose sanctions. So they’re still sorting through all this themselves.

“We’re trying to build the airplane as we fly it,” Tucker said.

“This is all sort of figuring out how to maneuver money so that when the federal money comes in, whatever money is given gets immediately replaced. It’s just trying to figure out how to get people through that two-week time period so that people are being paid. We’re going to have to do some fancy footwork.”

Many of West Virginia’s colleges should be able to do this on their own, Tucker said.

“But there are going to be a few that can’t, and we’re going to have to work very closely with those that can’t to figure out how to deal with it. We’re still very much trying to figure out what that’s going to look like. That’s not completely clear yet.”

All of West Virginia’s congressional delegation sent a letter last week to U.S. Education Secretary Betsy DeVos to ask for reconsideration:

“All of these students and their institutions will be critically impacted when the heightened cash monitoring delays the disbursement of federal funds to institutions,” according to the letter signed by Sen. Joe Manchin, Sen. Shelley Moore Capito, Congressman David McKinley, Congressman Alex Mooney and Congressman Evan Jenkins.

How did this happen, anyway?

West Virginia’s higher education system has to submit an annual financial audit to the U.S. Department of Education. It is due every year by March 31.

But the higher education aspect is only a portion of a broader, annual financial audit of all state agencies. The Department of Administration compiles the information for that audit, which is contracted out to Ernst & Young.

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Paul HIll

The task is enormous and complicated, acknowledged Paul Hill, West Virginia’s higher education chancellor.

The process begins as each fiscal year concludes June 30. Agencies then spend the first quarter of the new fiscal year preparing their information, but that process often slips into the second quarter. Before you know it, deadline is approaching.

West Virginia first missed the federal deadline three years ago. The federal government first threatened sanctions last year.

West Virginia fell behind on the audits for fiscal 2014 and then 2015 as it transitioned to a new enterprise resources planning system, more commonly called wvOasis. “Financial reporting issues were encountered by state agencies as they compiled information,” Hill and Tucker wrote in a 2016 letter to Department of Education officials.

New pension reporting requirements were also cited as reasons for missing the fiscal 2014 and then 2015 deadlines.

“These pensions are administered by the West Virginia Consolidated Public Retirement Board,” Hill and Tucker wrote in 2016. “The CPRB was unable to compile the necessary actuarial data until November 2015. As a result, the process for the single audit was delayed.”

In their 2016 letter, West Virginia’s higher education officials wrote that they hoped to avoid federal sanctions.

“We wish to reiterate that the delayed response of the single audit was not caused by our higher education institutions, and we respectfully request that your agency reconsider its citation for failure to submit a timely audit this year,” Hill and Armstrong wrote on Aug. 26, 2016.

That argument won the day, and the U.S. Department of Education announced on Oct. 13, 2016, that it would back off on the sanctions it had threatened that year.

But the pardon came with a warning.

“The Department is providing notice to all schools that failure to submit its annual compliance and financial statements timely to the Departments eZ-Audit system is a serious violation and untimely submissions in the future will result in such restrictions.”

West Virginia’s filing problems resurfaced this past year.

Hill wrote to federal officials that the pension liability data was again not available until Dec. 20, 2016, and that delayed completion of the higher education audit to this past Feb. 7.

“Were we working late into the process? Absolutely,” Hill said in an interview. “But it still was within the window to get it in there in a timely manner to be included with the report.”

The full state audit field work was done by March 1

“The pension liability data was again not available until December 20, 2016,” Hill wrote in another letter to federal officials. “As a result, the final institutional audit was not complete until February 17, 2017. Ernst & Young did complete the single audit field work by March 1, 2017.”

In that same letter, dated March 15, 2017, Hill acknowledged serious concerns that West Virginia was about to miss the deadline again.

“Although the West Virginia Department of Administration and its audit firm are well aware of the Department of Education due date, and are making every attempt to complete the audit within this time frame, last week they informed us they most likely will not complete the State of West Virginia’s financial financial and single audits by March 31.”

Hill continued, “I again emphasize that our institutions have taken the Department of Education’s findings very seriously and, until last week, were confident that the audit submission by the state would be on time. We have not taken for granted the importance of the March 31 deadline.”

The Department of Education finally, officially received West Virginia’s higher education audit this past May 22.

What happened to cause that last delay? Neither the Justice administration nor the Department of Administration has yet addressed that. Hill and Tucker speculate the final delay was with a straggling state agency or more that held up the works for the full state audit.

“Somewhere in that mix of audits, the only thing I can imagine — although I don’t know the answer to this — is that some of those groups didn’t get their audit in in time for the March 31 deadline,” Tucker said. “Who is at fault? We have no idea. We don’t know.”

By April 4, Manchin’s office was already trying to intervene. An April 25 response from the Department of Education just said a ruling would be upcoming.

When its ruling came out, the Department of Education said a deadline is a deadline.

“This was the third annual submission to be submitted late,” stated a July 17 letter from Nancy P. Gifford, division director for the U.S. Department of Education in Philadelphia. “Failing to submit a timely annual audit submission constitutes a failure of financial responsibility under the Department’s regulations.”

Jim Justice

Shortly after that, Gov. Jim Justice sent out a statement with this message: “Heads will roll.” 

“When I find out who is responsible heads will roll,” Justice stated. “Our schools and students are being penalized because of a mistake that’s been brewing two years and ten months before I got here. We’ve got to get to the bottom of it because West Virginians deserve better.

Justice added, “There is going to be finger pointing like crazy, but the only way to improve is to admit that something isn’t working. I didn’t break it but I’ll fix it. In the past our federal delegation was able to correct this and I hope they can help me fix it again this year.”

What comes next?

Higher education leaders are hoping the argument by the congressional delegation wins the day. Meanwhile, they’re starting to work with the state’s colleges and universities to resolve the possible cash-flow problems.

One possibility to avoid future problems is for the higher education system to have its own audit completed, independent of the full state audits. Hill and Tucker say that might be worthwhile, even if it results in additional costs.

“We’re certainly looking at ways to change functionally what happens, up to and including ‘Do we just submit it not as part of the state audit?'” Tucker said. “Given the gravity of what has happened to the colleges, there’s more understanding of why that might be important for higher ed.”

As bad as the current sanctions may be, they are actually considered Stage 1.

Stage 2 — and the potential penalty for missing a fourth year in a row — would result in worse cash flow problems for colleges.

“Stage 2 would be like DEFCON 5,” Tucker said.

Espinosa, the House education chairman, would like to know why state leaders didn’t do more early on to avert the current punishment.

“It raises a question mark. Is there something amiss here?” Espinosa asked. “All indications are the higher education institutions did what they were supposed to do. The HEPC, to their credit, tries to raise the alarm.

“It’s just not really clear why a higher priority wasn’t given to abiding by that March 31 deadline when there was a clear warning from the Department of Education. You’re given a deadline that’s going to impact all of your higher education institutions. Somehow, some way you find a way to do it. Those are questions that really have to be answered by the governor and the Department of Administration.

Espinosa added, “If there truly was a compelling reason why they looked like they were going to miss it, I just can’t figure out why somebody didn’t escalate it to the higher levels.”

Espinosa said he wasn’t aware of the deadline problem until it became public knowledge last week. He wished the issue had been raised to legislators, either on the education or the finance committees.

“I just don’t recall it ever being raised as an issue. If it didn’t happen, I wish the HEPC had alerted us or alerted me directly that there was concern about the potential of missing this audit for the third year. I certainly would have escalated it. I just don’t think that red flag was raised.”

Espinosa says questions will likely arise now at legislative interim meetings in August. Right now he and many others are wondering how West Virginia got in this situation.

“I just want to understand and I think a lot of folks want to understand why this happened,” he said.

“As much advance notice that it appears there was, that’s what’s perplexing to me — how we allowed that to happen. Certainly I want to give the governor the benefit of the doubt, but I’m not sure there’s going to be an explanation that I’m going to be able to swallow about how we’ve missed it three years in a row.”

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