The American Recovery and Reinvestment Act of 2009 (Recovery Act) mandates GAO to review states' and localities' use of funds made available under the act. Currently, we are examining the efforts of selected states and local educational agencies (LEA) to ensure appropriate uses of Recovery Act funds. In North Carolina, we have been reviewing efforts undertaken by the North Carolina Department of Public Instruction (DPI) and selected LEAs to administer and oversee the use of Recovery Act funds under the State Fiscal Stabilization Fund (SFSF) education stabilization funds; Title I of the Elementary and Secondary Education Act of 1965 (ESEA Title I), as amended; and Part B of the Individuals with Disabilities Education Act (IDEA), as amended. According to Education regulations, grant funds may only be used for allowable costs and reasonable fees or profit to cost-type contractors, and state and local governments must follow the cost principles set out in OMB Circular No. A-87 for determining allowable costs. North Carolina's Office of Economic Recovery & Investment (OERI) issued management directives regarding the use of Recovery Act funds for procurement of goods and services. According to state officials, OERI directives require recipients of Recovery Act funds to advertise contracts for $5,000 or more and obtain multiple bids or price quotes for Recovery Act procurements.

Winston-Salem/Forsyth County Schools (WSFCS) expended $38,400 of ESEA Title I funds on a program that included some expenses that appeared to constitute entertainment, a potentially unallowable use of these funds. WSFCS officials told us that the LEA paid ESEA Title I Recovery Act funds to the Housing Authority of Winston-Salem (HAWS) for a 2009 summer educational program for students entitled the "Summer Teaching Enrichment Program" (STEP). According to STEP officials, the ESEA Title I funds comprised the majority of STEP's 2009 budget, which also included funding from a local corporation and the local police department. WSFCS and STEP officials described the program as providing remedial academic assistance in reading, math, science, and technology to help students retain educational gains over the summer months. Furthermore, the WSFCS Superintendent said that the district's arrangement with the STEP program was to use district funds to pay only for teachers' salaries, and that other sources of funds would be used to pay for noneducational activities. HAWS officials said that they were instructed by a WSFCS official to make sure that all of the children enrolled in the program attended ESEA Title I schools and that they obtained confirmation from the district that all of the children did so. In our review of documents, we found evidence that in addition to paying teachers a total of $17,270 in salaries, HAWS also used ESEA Title I funds to pay for STEP activities that included other salaries and field trip-related expenses, including tickets for movies, a water park, fast food, and other entertainment. The invoice that HAWS provided to WSFCS lacked supporting documentation for the full range of activities paid with ESEA Title I funds. Instead, payment was made at a rate of $800 per child attending the program, but no attendance records were provided in support of the invoice. WSFCS staff could not provide documentation to show that the district obtained multiple bids or price quotes for contracts for goods and services. WSFCS officials also could not provide us with documentation of the district having obtained multiple bids or price quotes for contracts for services. WSFCS officials also acknowledged that for at least one contract, they were not in compliance with WSFCS's purchasing policy to solicit bids/price quotes for purchases of items costing more than $5,000 but less than $90,000.