ARCHIVED INFORMATION -- Fiscal Year 1996 Annual Accountability Report

Notes

NOTE 1 - REPORTING ENTITY

These consolidated principal financial statements present the financial position and activity of the U.S. Department of Education (ED), a cabinet-level agency of the Executive Branch of the United States Government. ED executes programs under the Education, Training, Employment and Social Services function established by Congress in the Budget Act of 1974. ED's financial activity relates to execution of its congressionally approved budget and programs. This activity is recorded in individual general (appropriated) funds and summarized for reporting purposes.

These statements include the activity and balances of our two principal student loan programs, the Federal Family Education Loan (FFEL) and William D. Ford Direct Loan programs, along with other programs and activities of the Department. The FFEL Program, authorized by the Higher Education Act of 1965, as amended (HEA), operates with state and private nonprofit guaranty agencies to provide loan guarantees and interest supplements through permanent budget authority on loans by private lenders to eligible students attending participating postsecondary schools. The Direct Loan Program, authorized by the Student Loan Reform Act of 1993, is an alternate to the FFEL Program in which loan capital is provided by the federal government through borrowing from the U.S. Treasury.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

These financial statements have been prepared to report the financial position, results of operations and changes in net position and cash flows of the Department, as required by the Chief Financial Officers Act of 1990 (Public Law 101-576) and the Government Management Reform Act of 1994. ED prepared the financial statements from its books and records in accordance with the Department's accounting policies, which are summarized in this note. These statements are different from the financial reports used to monitor and control the use of budgetary resources, which are also prepared by ED pursuant to OMB directives.

ED's accounting policies follow another comprehensive basis of accounting, comprising the following hierarchy, agreed to by the Comptroller General, the Secretary of the Treasury and the Director of the Office of Management and Budget (OMB):

  1. Individual standards agreed to by the above named officials. These are known as Statements of Federal Financial Accounting Standards (SFFAS).

  2. Form and content requirements in OMB Bulletin 94-01, Form and Content of Agency Financial Statements, dated November 16, 1993.

  3. Accounting standards contained in agency accounting policy, procedures manuals and/or related guidance as of March 29, 1991, so long as they are prevalent practices.

  4. Accounting principles published by authoritative standard setting bodies and other authoritative sources (1) in the absence of other guidance in the first three parts of this hierarchy and (2) if the use of such accounting standards improves the meaningfulness of the financial statements.

OMB Bulletin 94-01 prescribes a framework for agencies to develop financial statements which provide information useful to Congress, government officials and the public. ED has informed OMB in a letter dated February 14, 1997 of its intent to use the same deviations from OMB Bulletin 94-01 on FY 1996 financial statements that were requested, approved by OMB and used on ED's FY 1995 financial statements, unless an objection is raised. OMB has not objected to use of the following deviations in ED's FY 1996 principal statements:

The Statements of Operations and Changes in Net Position follows the format suggested in the Governmental Accounting Standards Board's Codification of Governmental Accounting and Financial Reporting Standards, which identifies a separate disclosure for the total effects of operations, exclusive of appropriations or intra-governmental funding sources.

We have discontinued the Statement of Budgetary Resources and Actual Expenses, which is not provided for in the Government Management Reform Act of 1994 nor in the Statement of Federal Financial Accounting Concepts for Entity and Display, issued April 20, 1995 by OMB.

Basis of Accounting

Transactions are recorded on an accrual basis. Therefore, revenues are recognized when earned and expenses are recognized when a liability is incurred, without regard to receipt or payment of cash.

Basis of Consolidation

The accompanying consolidated financial statements include the accounts of all funds under ED's control. All interfund balances within ED have been eliminated. The consolidated financial statements do not include centrally-administered assets and liabilities related to the federal government as a whole, such as General Services Administration owned property and equipment, and borrowing from the Public by the U.S. Treasury, which may in part be attributable to ED.

Budgets and Budgetary Accounting

The components of ED's budgetary resources include current budget authority (i.e., appropriations and borrowing authority) and unobligated balances remaining from multi-year and no-year budget authority received in prior years. Budget authority is the authorization provided by law to enter into financial obligations that result in immediate or future outlays of federal funds. Budgetary resources also include reimbursements received and other income (i.e., spending authority from offsetting collections credited to an appropriation or fund account) and adjustments (i.e., recoveries of prior year obligations). Pursuant to Public Law 101-510, unobligated balances associated with appropriations that expire at the end of the fiscal year remain available for obligation adjustments, but not new obligations, until that account is canceled. When accounts are canceled, five years after they expire, amounts are not available for obligation or expenditure for any purpose.

Financing Sources and Program Revenues

ED receives the majority of the funding needed to support its programs through congressional appropriations. Borrowing from the Treasury, another financing source, provides most of the funds for the Direct Loan Program loans to students and Facilities Loan Program loans to postsecondary institutions. The effect on ED's net position of appropriations received, returned and transferred to others is shown in the Statement of Changes in Net Position.

Revenues are recognized as financing sources when payments are received or become payable to ED from other agencies and from the public in exchange for goods and services rendered to others. Major sources of reported revenues include interest accrued or collected from Direct Loan Program borrowers on outstanding loans receivable and interest accrued or collected from Treasury on uninvested fund balances. Fees received on student financial assistance loans, such as loan origination fees, are offset against subsidy costs and therefore are not reported as revenue.

Subsidy Estimates and Reestimates

The Federal Credit Reform Act of 1990 (CRA) was enacted to measure the costs of federal credit programs more accurately, place the cost of credit programs on a budgetary basis equivalent to other federal spending, encourage the delivery of benefits in the form most appropriate to the needs of the beneficiaries and improve the allocation of resources among and between credit programs and other spending programs. All credit programs within ED conform with the provisions of CRA beginning with fiscal year 1992 transactions.

CRA, SFFAS No. 2 --Accounting for Direct Loans and Loan Guarantees, and related regulations and guidance, require recording the net present value of subsidy costs (i.e., estimated interest rate differentials from market rates, interest subsidies, defaults, collections on defaulted loans, fee offsets, certain administrative expenses and other cash flows) associated with direct loans and loan guarantees to be recognized in the year loans are disbursed for both budgetary and accounting purposes. In addition, the net present value of these subsidy costs are recorded as allowance for Direct Loan subsidy or liabilities for loan guarantees.

Subsidies are estimated based on the difference between present values of expected government cash outflows and inflows, discounted by the interest rate earned by a Treasury debt instrument of similar term on the date loans are disbursed. Subsidy costs are recognized as expenses in the year loans are disbursed.

In accordance with SFFAS No. 2, the subsidy costs of credit program loans are reestimated each year as of the financial statement date. A reestimate is a change in the net present value of estimated cash flows due to changes in interest rates, defaults, delinquencies, prepayment and recoveries. Any increase (decrease) in the subsidy cost resulting from the reestimates is recognized as an increase (decrease) of subsidy expense.

Fund Balances With U.S. Treasury

ED does not maintain significant amounts of cash in commercial bank accounts. Cash receipts and disbursements are generally processed by the U.S. Treasury. However, ED has the authority to disburse U.S. Treasury funds directly to agencies and institutions participating in ED programs. The Fund Balances with U.S. Treasury are primarily revolving funds, other appropriated funds and undisbursed U.S. Treasury borrowings available to pay current liabilities and to finance subsidy expenses for post-1991 loans. A portion of the appropriated funds included at September 30, 1996 and September 30, 1995, were forward-funded by multi-year appropriations for expenditures anticipated during the years ending September 30, 1997 and September 30, 1996, respectively. ED does not have any restricted unobligated balances. Fund Balances with U.S. Treasury do not include any non-entity funds.

Investment

Congress appropriated funds for the Department to invest in the College Construction Loan Insurance Association (commonly known as Connie Lee) start up costs when it was incorporated in 1987. Connie Lee was created to insure and re-insure the financing of construction of postsecondary educational facilities. ED has two appointed members on Connie Lee's Board of Directors and holds about 14 percent of its shareholder equity. While Connie Lee may be considered a government-sponsored enterprise, it is neither a government corporation nor a government-controlled corporation. Therefore, ED would not incur any liabilities if Connie Lee suffered losses or went bankrupt. This investment is reported at cost. However, the Secretary of Education is authorized to sell any portion, or all, of this investment at a price established by the binding independent market appraisal of a nationally-recognized financial firm. The sale of this investment and the privatization of this entity was initiated after September 30, 1996. The current status of this investment is discussed further in Note 11, Subsequent Events.

The Student Loan Marketing Association (Sallie Mae) is a major holder of guaranteed loans. Seven of the 21 members of the Sallie Mae Board of Directors are appointed by the President of the United States. However, neither ED nor the federal government has any investment in that for-profit corporation. ED's transactions with Sallie Mae are essentially the same as those with any other lender organization. The current status of this investment, including the privatization of this entity, is discussed further in Note 11, Subsequent Events.

Credit Program Receivables

Credit program receivables are carried at the principal amounts outstanding, net of allowances for subsidy or uncollectible receivables. Credit programs include the FFEL and Direct Loans programs, and the Facilities Loan Program. Allowances for subsidy cost represent the differences between the present values of estimated net cash inflows and outflows of the underlying credit program loans. The allowance for subsidy is amortized by the effective interest method using the interest rate determined at the time credit program loans were disbursed. For the pre-CRA loans, the allowances for uncollectible receivables represents an analysis of loan collectibility based on risk groupings of borrowers.

Accounts Receivable

Accounts receivable are due from recipients of grant and other financial assistance programs, and other federal agencies. These amounts are initially listed and controlled in a claims-in-process file due to their contingent nature. When the collection probability of such a claim is established by obtaining a payment, promissory note, or entering into a settlement agreement with the debtor, an accounts receivable and offsetting historically determined allowance for uncollectibility is recorded in the ledgers and reported in the statements.

Guaranty Agency Reserves

Federal fund balances held by the state and non-profit guaranty agencies participating in FFEL Program operations are recognized on an accrual basis as ED receivables and as payables to Treasury. These balances are offset by an allowance for uncollectibles based on ED management's judgment (see Note 7). Guaranty agency reserves are available balances resulting from receipts of federal reinsurance payments, insurance premiums, agency share of collections on defaulted loans, investment income and administrative cost allowances; and payments of lender claims, operating expenses and federal reinsurance fees. Agency and ED shares of default collections for 1996 and 1995, are 27% and 73%, respectively.

The Balanced Budget Down Payment Act provides that 1) the Secretary may not require return of guaranty agency reserve funds except after consultation with both the Chairmen and Ranking Members of the House Economic and Educational Opportunities Committee and the Senate Labor and Human Resources Committee; and 2) any reserve funds recovered by the Secretary shall be returned to the Treasury for purposes of reducing the federal deficit. In accordance withthese provisions, the guaranty agency reserves are reported as both a non-entity receivable asset and a payable to Treasury.

Liabilities

Liabilities represent the amount of monies or other resources that are likely to be paid by ED as a result of transactions or events that have already occurred. However, no liability can be paid by ED absent an appropriation or borrowing authority. Liabilities for which an appropriation has not been enacted are therefore classified as liabilities not covered by budgetary resources (unfunded liabilities). Most of FFEL and Direct Loan program liabilities result from entitlements covered by permanent authority and ED is required to pay these liabilities if all eligibility requirements are met. Any non-entitlement liability of the Department, such as federal administrative costs, not arising from contracts, and entitlements not yet vested, can be abrogated by the government acting in its sovereign capacity.

Under the FFEL Program's accounting policies, liabilities for loan guarantees include provisions for payment of loan defaults, interest subsidies and special allowance benefits, certain administrative expenses (administrative expense allowances and supplemental preclaims assistance) and interest expense. These liabilities are offset by estimated future collections on loans that will default, loan origination fees paid by borrowers and fees paid by lenders, including Sallie Mae.

Liabilities are recognized when applicable for funds expended by state and local governments and other recipient organizations for amounts due and payable by ED under the terms of financial assistance agreements (accrued grant liability).

Borrowing from the U.S. Treasury

Borrowings from the U.S. Treasury provide most of the funding for loans in the Direct Loan and Facilities Loan programs. Principal repayments are made to Treasury based on the repayment schedules of the underlying loans. Borrowings from the U.S. Treasury are also reduced by authorized write-offs of Facilities Loan Program loans receivable. Interest is paid to Treasury based on a weighted average rate determined for each year.

Accrued Grant Liability

Disbursements of funds under ED's more than 200 grant programs are generally made when requested by grantees. These drawdown requests may be received and fulfilled before grantees make ED program expenditures. When funds have been disbursed by ED, but expenditures are not yet reported by grant recipients, these disbursements are recorded as advances. However, if a recipient reports program expenditures that have not been advanced by ED as of the end of the fiscal year, such amounts are recorded as grants payable and grant expenses in that fiscal year.The net result of these amounts is shown as accrued grant liability on the Consolidated Statement of Financial Position.

Annual, Sick and Other Leave

Annual leave is accrued as it is earned and the accrual is reduced as leave is taken. Each year, the balance in the accrued annual leave account is adjusted to reflect current pay rates. Annual leave earned but not taken, within established limits, is funded from future financing sources. Sick leave and other types of non-vested leave are expensed as taken.

Retirement Plans

The majority of ED employees participate in the contributory Civil Service Retirement System (CSRS), to which the Department makes matching contributions equal to seven percent of pay, or the Federal Employees Retirement System (FERS), offering a savings plan, which automatically contributes one percent of pay and matches any employee contribution up to an additional four percent of pay. In addition, for employees covered under FERS, the Department also contributes the employer's matching share for Social Security. ED does not report CSRS or FERS assets, accumulated plan benefits, or liabilities not covered by budgetary resources (unfunded liabilities), if any, applicable to its employees. Reporting such amounts is the responsibility of the Office of Personnel Management.

Net Position

Net position is the residual difference between assets and liabilities. It is composed of unexpended appropriations, invested capital, future funding requirements and donations. Unexpended appropriations include undelivered orders.

Invested capital includes amounts advanced to guaranty agencies under sections 422(a) and 422(c) of the HEA for commencement of agency operations and making loan default payments to lenders, acquisitions of capital assets and investments in Connie Lee. Net position has been reduced to reflect the excess of unfunded liabilities over any offsetting assets, which will require future funding. These unfunded liabilities include ED's liabilities for accrued leave, certain loan guarantees and actuarial liabilities not covered by available budgetary resources. Donations are relatively small contributions of funds which the Secretary has authority to accept and spend for certain purposes.

Comparative Data and Reclassifications

Comparative data for the prior fiscal year are presented to provide an understanding of changes in the financial position and operations of the Department. Certain 1995 amounts have been reclassified to conform to 1996 classifications.
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[Consolidated Statement of Cash Flows] [Table of Contents] [Notes 3 through 6]