MANAGEMENT’S DISCUSSION AND ANALYSIS

FINANCIAL HIGHLIGHTS

Preparing these statements is part of the Department’s goal to improve financial management and to provide accurate and reliable information that is useful for assessing financial performance. Departmental management is responsible for the integrity and objectivity of the financial information presented in the financial statements.

The financial statements and financial data presented in this Report have been prepared from the accounting records of the DOT in conformity with generally accepted accounting principles (GAAP). GAAP for Federal entities are the standards prescribed by the Federal Accounting Standards Advisory Board (FASAB).

OVERVIEW OF FINANCIAL POSITION

ASSETS
The Consolidated Balance Sheet shows the Department had total assets of $61.3 billion at the end of FY 2008. This represents a 1 percent decrease over the previous year’s total assets of $61.8 billion. The largest increase of $950 million was in the increase in Direct Loans disbursements made under Transportation Infrastructure Finance Innovation Act (TIFIA) which provides credit assistance to major transportation projects.

The Department’s assets reflected in the Consolidated Balance Sheet are summarized in the following table.

Assets by Type (Dollars in Thousands)	2008	%	2007 Restated	%
Total Assets	$61,367,784	100.0	$61,831,838	100.0
Fund Balance with Treasury	$22,074,754	36.0	$23,392,470	37.8
Investments	21,728,238	35.4	21,218,168	34.3
General Property, Plant & Equipment	14,512,568	23.6	14,683,890	23.7
Inventory and Related Property, Net	802,368	1.3	785,760	1.3
Direct Loans and Guarantees, Net	1,670,284	2.7	889,885	1.4
Accounts Receivable	303,490	.5	623,810	1.0
Cash and Other Assets	276,082	.5	237,855	0.4

LIABILITIES
The Department had total liabilities of $14.8 billion at the end of FY 2008. This represents a 5 percent increase from the previous year’s total liabilities of $14.1 billion, which is reported on the Consolidated Balance Sheet and summarized in the following table. The largest increases were in the Debt which reflects the increase in the TIFIA loan program and; the Grant Accrual which reflects changes in grantee payment patterns.

Liabilities by Type (Dollars in Thousands)	2008	%	2007	%
Grant Accrual	$14,816,654	100.0	$14,075,223	100.0
Grant Accrual	$5,810,147	39.2	$5,526,288	39.3
Other Liabilities	4,628,380	31.2	4,727,489	33.6
Accounts Payable	1,528,335	10.3	1,591,693	11.3
Environmental and Disposal Liabilities	828,757	5.6	852,366	6.1
Debt	1,762,985	12.0	1,040,761	7.4
Loan Guarantees	258,050	1.7	336,626	2.3

NET POSITION
The Department’s Net Position at the end of FY 2008 on the Consolidated Balance Sheet and the Consolidated Statement of Changes in Net Position is $46.6 billion, a 1 percent decrease from the previous fiscal year total net position of $47.8 billion. Net Position is the sum of the Unexpended Appropriations and Cumulative Results of Operations.

RESULTS OF OPERATIONS

The results of operations are reported in the Consolidated Statement of Net Cost and the Consolidated Statement of Changes in Net Position.

NET COSTS
The Department’s total net cost of operations for FY 2008 was $66 billion.

Net Costs (Dollars in Thousands)	2008	%	2007 Restated	%
Net Cost of Operations	$66,270,463	100.0	$63,140,032	100.0
Surface Transportation	$50,153,011	75.7	$47,385,306	75.05
Air Transportation	15,532,121	23.4	14,814,454	23.46
Maritime Transportation	215,079	0.30	570,727	0.90
Costs Not Assigned to Programs	386,130	0.60	388,392	0.62
Less Earned Revenues Not Attributed to Programs	39,379	0.05	30,295	0.05
Cross-Cutting Programs	23,501	0.04	11,448	0.02

Surface and air costs represent 99.1 percent of the Department’s net cost of operations. Surface transportation program costs represent the largest investment for the Department at 76 percent of the Department’s net cost of operations. Air transportation is the next largest investment for the Department at 23 percent of the Department’s net cost of operations. The increases in Net Cost are attributed to the Surface and Air Programs. More funding was expended to increase mobility and improve safety which are Departmental goals.

Resources

BUDGETARY RESOURCES

The Combined Statement of Budgetary Resources provides information on how budgetary resources were made available to the Department for the year and their status at fiscal year-end. For the 2008 fiscal year, the Department had total budgetary resources of $133.7 billion, compared to the FY 2007 levels of $122.7 billion.

Budget Authority of $136.6 billion – which consists of $62.5 billion of appropriations received and $57 billion of borrowing and contract authority. The Department incurred obligations of $87.7 billion for the 2008 fiscal year, a 16 percent increase over the $75.8 billion of obligations incurred during 2007. Outlays reflect the actual cash disbursed against the Department’s obligations. The increases in Budgetary Authority are attributed to the Surface and Air Programs. More funding was expended to increase mobility and improve safety which are Departmental goals.

HERITAGE ASSETS AND STEWARDSHIP LAND INFORMATION

Heritage assets are property, plant and equipment that are unique for one or more of the following reasons: historical or natural significance; cultural, educational, or artistic importance; or significant architectural characteristics.

Stewardship Land is land and land rights owned by the Federal Government but not acquired for or in connection with items of general property, plant and equipment.

The Department’s Heritage assets consist of artifacts, museum and other collections, and buildings and structures. The artifacts and museum and other collections are those of the Maritime Administration. Buildings and structures include Union Station (rail station) in Washington, D.C., which is titled to the Federal Railroad Administration.

The Department holds transportation investments (Stewardship Land) through grant programs such as the Federal Aid Highways, mass transit capital investment assistance, and project grants for airport planning and development.

Financial information for Heritage assets and Stewardship Land is presented in the Financial Section of this Report under the Financial Statements and Required Supplementary Information.

LIMITATIONS OF THE FINANCIAL STATEMENTS

The principal financial statements have been prepared to report the financial position and results of operations of the Department of Transportation, pursuant to the requirements of 31 U.S.C. 3515 (b).

These statements have been prepared from the books and records of the Department of Transportation in accordance with generally accepted accounting principles (GAAP) for Federal entities and the formats prescribed by OMB. The statements are in addition to the financial reports used to monitor and control budgetary resources, which are prepared from the same books and records.

The statements should be read with the realization that they are for a component of the U.S. Government.

SYSTEMS, CONTROLS AND LEGAL COMPLIANCE

Federal Managers’ Financial Integrity Act (FMFIA)

• The FMFIA requires agencies to conduct an annual evaluation of its management controls and financial systems and report the results to the President and Congress. The Secretary of Transportation then prepares an annual Statement of Assurance based on these internal evaluations.
• As a subset of the FMFIA Statement of Assurance, DOT is required to report on the effectiveness of internal control over financial reporting, which includes safeguarding of assets and compliance with applicable laws and regulations, in accordance with the requirements of Appendix A of OMB Circular A-123. A separate discussion on Appendix A is located at the end of this section.
• The Secretary of Transportation’s has provided the President and Congress a qualified Statement of Assurance for FY 2008. The Department evaluated its management control systems and financial management systems for the fiscal year ending September 30, 2008. This evaluation provided reasonable assurance and formed the basis of the Secretary’s Statement of Assurance that the objectives of the FMFIA were achieved in FY 2008.

FMFIA ANNUAL ASSURANCE PROCESS

• The FMFIA review is an agency self-assessment of the adequacy of financial controls in all areas of the Department’s operations – program, administrative, and financial management.

Objectives of Control Mechanisms
Financial and other resources are safeguarded from unauthorized use or disposition. Transactions are executed in accordance with authorizations. Records and reports are reliable. Applicable laws, regulations, and policies are observed. Resources are efficiently and effectively managed. Financial systems conform to government-wide standards.

• Managers within the Department, being in the best position to know and understand the nature of the problems they face, establish appropriate control mechanisms to ensure Departmental resources are sufficiently protected from fraud, waste, and abuse, and to meet the intent and requirements of the FMFIA. The head of each Operating Administration and Departmental office submits an annual statement of assurance representing the overall adequacy and effectiveness of management controls within the organization to the Department’s Office of Financial Management. FMFIA material weakness and material nonconformances are also reported, citing milestones and/or accomplishments. Specific guidance for completing the end of fiscal year assurance statement and reporting on material deficiencies is issued annually by the Department’s Office of Financial Management.

CRITERIA FOR REPORTING MATERIAL WEAKNESSES AND NONCONFORMANCES

• A material weakness under FMFIA must fall into one or more of the categories below plus merit the attention of the Executive Office of the President and/or the relevant Congressional oversight committees.

Criteria for Reporting a Material Weakness

Significant weakness of the safeguards (controls) against waste, loss, unauthorized use or misappropriation of funds, property, or other assets. Violates statutory authority, or results in a conflict of interest. Deprives the public of significant services, or seriously affects safety or the environment. Impairs significantly the fulfillment of the agency’s mission. Would result in significant adverse effects on the credibility of the agency.

• A material nonconformance under FMFIA must fall into one or more of the categories below plus merit the attention of the Executive Office of the President or the relevant Congressional oversight committees.

Criteria for Reporting a Material Nonconformance
Prevent the primary accounting system from centrally controlling financial transactions and resource balances. Prevent compliance of the primary accounting system, subsidiary system, or program system under the Office of Management and Budget Circular A-127.

SUMMARY OF FY 2008 FMFIA MATERIAL WEAKNESSES

Status of Internal Controls (FMFIA Section 2)

The DOT is reporting one material weakness, due to the non-compliance with Federal Information Security Management Act (FISMA) of 2002, and OMB requirements for security information systems and providing privacy protection of personally identifiable information (PII).

Status of Financial Management Systems (FMFIA Section 4)

APPENDIX A, INTERNAL CONTROLS OVER FINANCIAL REPORTING

Appendix A of OMB Circular A-123 emphasizes management’s responsibility for establishing and maintaining effective internal control over financial reporting. Appendix A requires agencies to maintain documentation of the controls in place and of the assessment process and methodology management used to support its assertion as to the effectiveness of internal control over financial reporting. Agencies are also required to test the controls in place as part of the overall FMFIA assessment process. The assurance statement related to the assessment performed under Appendix A acts as a subset of the Overall Statement of Assurance reported pursuant to Section 2 of the FMFIA legislation. Management’s assurance statement as it relates to Appendix A is based on the controls in place as of June 30. The assurance statement is located in the following section of this report.

DOT is reporting an unqualified assurance statement on internal controls over financial reporting. DOT began the first full year of the Department’s Internal Control Program where it performed in-depth testing of the controls over four focus area business processes for each Operating Administration (OA). Additional testing of high-risk key controls from the remaining ten non-focus area business processes was performed for OAs whose transactions are material to the Department-wide financial statements.

Federal Financial Management Improvement Act

The Federal Financial Management Improvement Act of 1996 (FFMIA) requires that agencies’ financial management systems provide reliable financial data in accordance with generally accepted accounting principles and standards. Under FFMIA, financial management systems must substantially comply with three requirements — Federal financial management system requirements, applicable Federal accounting standards, and the U.S. Government Standard General Ledger (SGL). In addition, agencies must determine annually whether their systems meet these requirements. This determination is to be made no later than 120 days after the earlier of (a) the date of receipt of the agency-wide audited financial statement, or (b) the last day of the fiscal year following the year covered by such statement.

To assess conformance with FFMIA, the Department uses OMB Circular A-127 survey results, FFMIA implementation guidance issued by OMB, results of OIG and GAO audit reports, annual financial statement audits, the Department’s annual Federal Information Security Management Act (FISMA) Report, and other relevant information. The Department’s assessment also relies a great deal upon evaluations and assurances under the FMFIA, with particular importance attached to any reported material weaknesses and material nonconformances.

FFMIA OF 1996 NONCOMPLIANCE ISSUES
The Department is pleased to report the Section 4 noncompliance as related to the financial reporting of the CIP balance was resolved during FY 2008.

FFMIA OF 1996 FINANCIAL MANAGEMENT SYSTEMS STRATEGY
DOT uses Oracle Federal Financials software as its agency-wide financial management and accounting system of record (called Delphi). DOT was the first—and remains the only—cabinet agency to migrate all of its Operating Administrations (OAs) to a Financial Systems Integration Office-certified, commercial-off-the-shelf based financial system running on a cost-effective single production instance of the software. Using the DOT developed Financial Statement Solution enhancement, the Department is able to produce regulatory Financial Statements overnight from the core accounting system. This improves accuracy, effectiveness, efficiency and enables DOT to meet OMB, Treasury and other Federal reporting requirements on schedule.

In FY 2008, DOT enhanced its standardized release schedule for installing Delphi patches, enhancements and upgrades. The Office of Financial Management (OFM) Financial Systems Team and the Enterprise Services Center (ESC) Delphi Team worked with customers to identify, develop, test and coordinate six separate release deliverables. For FY 2008 the hardware and software releases have been decoupled so that technical infrastructure and application changes are in different releases. This release schedule assured more complete testing of patches and enhancements, allowed thorough design and review of hardware upgrades and greatly improved communication and understanding of changes made to the system. The Department was especially focused on upgrades needed to keep pace with vendor support requirements. In order to successfully migrate the Delphi Oracle Database to a new operating system in Mid 2009, a new middle tier was implemented and the Discoverer and Web reporting servers were replaces with modern technology. Communication was facilitated with timely and effective “Go To” on-line web-based meetings between the OAs, ESC and OFM.

These upgrades offer assurance that the Delphi Financial Application Software Modules are maintained at a level that ensures supportability by Oracle. The upgrade also adds some increased functionality for the Delphi support staff, reduces risks associated with technical enhancements, resolves some outstanding customer requests, provides customers with additional secure processing tools and allows Delphi to move toward future enhancements.

Throughout FY 2008 DOT has continued to refine the Delphi System Change Request (SCR) Process. The bulk of the work undertaken in FY 2008 to refine the process is being implemented in the first quarter of FY 2009. Major deliverables include, modifying the SCR Request document into a standardized Business Case Document that is used by all OAs, the Enterprise Service Center and the Office of Financial Management, Streamlining the SCR Process flow to ensure that all organizations have early visibility of all SCRs and modifying the Delphi SCR Tracking system (Kintana) to allow visibility of all SCRs scheduled for particular releases, and support the customers prioritization of business cases.

Federal Information Security Management Act

FISMA requires Federal agencies to identify and provide security protection commensurate with the risk and magnitude of harm resulting from the loss of, misuse of, unauthorized access to, disclosure of, disruption to, or modification of information collected or maintained by or on behalf of an agency. FISMA and its predecessor, the Government Information Security Reform Act (GISRA), required that Inspectors General to evaluate agencies’ information security programs and practices.

The Department has 13 Operating Administrations that, for Fiscal Year (FY) 2008, reported a total of 425 information systems, of which 62 percent belong to the Federal Aviation Administration (FAA). Among the systems the Department maintains and operates is the air traffic control system, which the President has designated as part of the critical national infrastructure. Other systems owned by the Department include safety-sensitive surface transportation systems and financial systems that are used to manage and disburse over $50 billion in Federal funds each year. In FY 2008, the departmental IT budget totaled about $2.8 billion.

This year’s IG report indicates that the Department’s information security program and practices are not effective. Consequently, the Department is not in compliance with FISMA and OMB requirements for security information systems and providing privacy protection of personally identifiable information (PII). Last year we reported that the overall effectiveness of DOT’s information security program declined because management had to divert resources and attention to resolving Headquarters move-related issues. While we observed some operational improvements, we nonetheless continued to see a decline in the Department’s program and practices. Our prior year’s information security-related recommendations have not been fully implemented.

Developing a robust information security program, including implementation of our current and prior years’ recommendations, requires (1) the Chief Information Officer (CIO) Office to effectively oversee Operating Administrations’ implementation of departmental policies/guidance, and (2) stability in the Office of the Chief Information Security Officer (CISO). However, when compared with some of his counterparts in other Federal agencies and other appointed officials within the Department, the DOT CIO has limited influence on Operating Administrations. Unless there are management or budgeting consequences, Operating Administrations are likely to continue the practice of not effectively implementing departmental policies/guidance. As a result, the IG has made a recommendation to increase Operating Administrations’ accountability.

During FY 2008, the Department’s performance was also hindered by significant turnover in the Office of the CISO. Consequently, the Department has not established adequate policies or procedures to implement and maintain an effective Department-wide information security program or to address key OMB privacy requirements.

The full FY 2007 FISMA report can be found at www.oig.dot.gov.

SAS-70 review on DOT’s Financial Management System

The SAS-70 report summarizes the results of a review of general, application, and operational controls over the DOT Enterprise Services Center (ESC). The ESC performs services including accounting; financial management; systems and implementation; media solutions; telecommunications; and data center services for DOT and other Federal organizations.

This is the fourth year that a SAS-70 audit has been conducted on DOT’s Delphi financial system. The ESC provides accounting and financial management systems and services for DOT and other Federal agencies. Delphi is hosted, operated and maintained by Federal Aviation Administration employees at the Mike Monroney Aeronautical Center in Oklahoma City, Oklahoma, under the overall direction of the Departmental Chief Financial Officer.

ESC is one of four Federal Shared Service Providers designated by the Office of Management and Budget to provide financial management systems and services to other government agencies. ESC supports other Federal entities, including the National Endowment for the Arts, the Commodity Futures Trading Commission, the Institute of Museum and Library Services, and the Government Accountability Office. The Office of Management and Budget requires Shared Service Providers to provide client agencies with an independent audit report in accordance with the American Institute of Certified Public Accountants’ (AICPA) Statement of Auditing Standards (SAS) 70.

This year’s SAS-70 audit of Delphi was conducted by Clifton Gunderson, LLP, of Calverton, Maryland. The DOT Office of Inspector General performed a Quality Control Review of the SAS-70 audit work to ensure that it complied with applicable standards.

The Clifton Gunderson SAS-70 audit report dated July 31, 2008 concluded that management’s description of controls for the Delphi Financial Management System presents fairly, in all material respects, the controls that had been placed in operation as of June 30, 2008. Clifton Gunderson recommended several enhancements to strengthen Delphi controls further; DOT has already implemented many of these recommendations and is implementing the remaining corrective actions. The operational environment enabled auditors to rely on Delphi system controls in conducting this year’s financial statement audits.

FOLLOW UP REVIEW

Since the issuance of its July 31, 2008 report, Clifton Gunderson completed a follow-up review covering the period from June 30, 2008 through the September 30, 2008 fiscal year end. The purpose of this follow-up review was to determine whether any significant changes had been made to Delphi’s operating environment. The follow-up review documented the corrective actions that have been implemented to strengthen Delphi controls in accordance with the SAS-70 recommendations. The full OIG report can be found on their web site at www.oig.dot.gov.

Improper Payments Information Act of 2002

In FY 2008, the Department fully implemented the Improper Payments Information Act of 2002 (IPIA), which requires that agencies: (1) review programs and identify those susceptible to significant improper payments; (2) report to Congress on the amount and causes of improper payments; and, (3) develop approaches for reducing such payments.

In FY 2008, the Department successfully completed its review of the Federal Highway Administration (FHWA) Federal-aid Highway Program, Federal Aviation Administration (FAA) Airport Improvement Program, and the Federal Transit Administration (FTA) Formula Grants Program and Capital Investment Grants Program.

In FY 2008, the Department re-engaged AOC Solutions, Inc. to develop a nationwide sampling plan, collect the results from the application of test procedures, and provide a nationwide estimate of improper payments for Federal-aid Highway Program, Airport Improvement Program, Formula Grants Program, and Capital Investment Grants Program. With respect to the Formula Grants Program, as in FY 2007, in FY 2008 the sampling plan, test procedures, and test results only applied to the grantees covered by the FTA’s Formula Grant Triennial Review Program, which represents approximately one-third of the grantee population. 49 U.S.C. 5307 prescribes a triennial review of all Formula Grant grantees. OMB Circular A-123, Attachment C, paragraph F provides for alternative approaches, including determining the amount of improper payments for components, such as those addressed in the foregoing statute.

The samples designed to execute the model are of sufficient size to yield an estimate with a 90 percent confidence interval within +/- 2.5 percent points around the estimate of the percentage of erroneous payments, as prescribed by OMB. The results of these efforts are discussed below.

FHWA FEDERAL-AID HIGHWAY PROGRAM
The Department developed and executed a sampling plan to test project payments and estimate the amount of improper payments nationwide. The FHWA executed the nationwide testing program using personnel from the FHWA division offices and covered Federal payments to grantees over the twelve-month period March 1, 2007 through February 29, 2008.

The IPIA sampling plan involved a multi-staged statistical approach that included the selection of 40 Federal payments totaling $109,732,056, 49 state payments totaling $30,910,426, and then 182 testable line items from supporting invoices totaling $20,733,729 for testing. As in FY 2007, the FY 2008 sample was designed to support a nationwide estimate of improper payments; it was not designed support an estimate for each state and territory grantee. States and territories that did not appear in the IPIA sample were subjected to a similar sampling process under the FHWA’s Financial Integrity Review and Evaluation (FIRE) program.

The test procedures applied to the line items were designed to test a range of administrative and contractual elements. Tests of administrative elements included determining whether payments were properly approved, billed at the correct Federal participation rate, and whether billings and payments were mathematically accurate. Tests of contractual elements included determining whether payments were in accordance with contract rates/prices for specified materials and whether material quality tests indicated that materials met contractual requirements.

Improper payments totaling $149,035 were found in the sample of 182 tested items. The projection of known improper payments to the population of program payments for the twelve-month period results in an improper payment estimate of $55.1 million +/- $4 million. The estimated improper payment rate is .17% +/- .01%. This projection does not meet OMB’s definition of significant improper payments ($10 million and 2.5 percent of total program payments).

The improper payments reported resulted from factors such as underpayments related to retainage not covered by contract provisions and incorrect calculations.

The FHWA has implemented its FIRE Program to monitor State and territory payments and provide a mechanism for assisting these entities with effectively addressing operational issues that result or could result in improper payments.

FTA FORMULA GRANTS PROGRAM

FY 2008 was the second year of nationwide coverage of the FTA Formula Grants Program. FTA executed the nationwide testing program for grantees covered by the 2008 Triennial Review Program using contractor personnel. The review covered the twelve-month period March 1, 2007 through February 29, 2008.

The sampling plan involved a multi-staged statistical approach that included the selection of 8 Federal payments totaling $95,650,747; 24 transportation authorities’ payments totaling $29,989,649; and then 44 testable line items from supporting invoices totaling $10,657,250 for testing. The test procedures applied to the line items were designed to test a range of administrative elements and contractual elements. Tests of administrative elements included determining whether payments were properly approved, billed at the correct federal participation rate, and whether billings and payments were mathematically accurate. Tests of contractual elements included determining whether payments were in accordance with contract rates/prices for specified materials and whether material quality tests indicated that materials met contractual requirements.

Potential improper payments totaling $199,874 were found in the sample of 44 tested items. The projection of known improper payments to the population of program payments for the twelve-month period results in an improper payment estimate of $47.6 million +/- 5.3 million. The estimated potential improper payment rate is 5.63% +/- .63%. This projection meets OMB’s definition of significant improper payments ($10 million and 2.5 percent of total program payments). The FTA believes this finding is inconclusive for reasons discussed below.

The potential improper payments reported are attributable primarily to the absence of documentation in support of the fringe benefit rate used to recover fringe benefits allowable under the Formula Grants Program. While such costs are allowable charges, OMB Circular A-87, Attachment E, requires that fringe benefit charges to Federal programs be supported by formal documentation and retained in accordance with the records retention provisions of the Grants Management Common Rule. The FTA believes that because as a general rule these costs are allowable, the FTA should validate the grantee’s methodology prior to a final determination on payment propriety of this finding.

The FTA will advise grantees of the provisions of OMB Circular A-87 with particular attention to the requirement that fringe benefit and indirect cost rates used for cost reimbursement be documented and retained for audit and program review. Finally, the FTA will assess the feasibility of follow-up actions to assess the extent to which grantees covered by the 2009 review are addressing deficiencies that resulted in improper payment determinations.

FTA CAPITAL INVESTMENT GRANTS PROGRAM
FY 2008 was the first year in which the FTA executed a sampling plan to provide a nationwide estimate of improper payments for this program. In FY 2007 the FTA developed a model for use in estimating the amount of improper payments.

The sampling plan involved a multi-staged statistical approach that included the selection of 10 Federal payments totaling $321,661,382; 31 transportation authorities’ payments totaling $35,783,951; and then 66 testable line items from those payments totaling $12,804,680 for testing. The test procedures applied to the line items were designed to test a range of administrative and contractual elements. Tests of administrative elements included determining whether payments were properly approved, billed at the correct federal participation rate, and whether billings and payments were mathematically accurate. Tests of contractual elements included determining whether payments were in accordance with contract rates/prices for specified materials and whether material quality tests indicated that materials met contractual requirements.

Improper payments totaling $43,672 were found in the sample of 66 tested items. The projection of known improper payments to the population of program payments for the twelve-month period results in an improper payment estimate of $87 million +/- $6 million. The estimated improper payment rate is 3.13% +/- .23%. This projection meets OMB’s definition of significant improper payments ($10 million and 2.5 percent of total program payments).

The improper payments reported resulted from draw-downs in excess of federal participation share. The grantee refunded known improper payments.

The FTA will advise grantees of actions needed to ensure reimbursement requests are in accordance with grant cost sharing or matching requirements.

FAA AIRPORT IMPROVEMENT PROGRAM (AIP)
The FAA developed and executed a sampling plan to determine the amount and cause of improper payments in the Airport Improvement Program. The FAA review covered the twelve-month period March 1, 2007 through February 29, 2008.

The sampling plan involved a multi-staged statistical approach that included the selection of 30 Federal payments to sponsors totaling $48,796,094; 30 sponsor payments to contractors totaling $37,107,109; and then 63 testable line items from contractor invoices totaling $15,390,373 for testing. The test procedures applied to the line items were designed to test a range of administrative elements and contractual elements. Tests of administrative elements included determining whether payments were properly approved, billed at the correct federal participation rate, and whether billings and payments were mathematically accurate. Tests of contractual elements included determining whether payments were in accordance with contract rates/prices for specified materials and whether material quality tests indicated that materials met contractual requirements.

Improper payments totaling $658.44 were found in the sample of 63 tested items. The projection of known improper payments to the population of program payments for the twelve-month period results in an improper payment estimate of $.973 million +/- $0.128 million. This projection does not meet OMB’s definition of significant improper payments ($10 million and 2.5 percent of total program payments).

The known improper payments are attributable to unexplained differences between payments to sponsors and payments to contractors.

The FAA will advise field personnel and sponsors of the need to establish control procedures for ensuring agreement between payments and requests for Federal reimbursement.