Late Liquidation Policy

The U.S. Department of Education (ED) issued an updated policy memorandum entitled: Extension of Liquidation Periods and Related Accounting Adjustments for Grantees in Department of Education State-Administered Programs. The memo lays out a new late liquidation policy that will begin on October 1, 2007.

The current policy will remain in effect until September 30, 2007. It allows grantees in state administered programs to make late liquidation requests in two phases. Phase I requests cover liquidations up to one year after the end of the “Tydings period,” which is the 27-month period for obligating state administered program funds (or 9 months after the end of the normal liquidation period) if the requests meet certain criteria outlined in the memorandum. Phase I requests are approved by ED’s program offices and in theory are fairly routine, but in practice, they are sometimes denied. Phase II requests cover liquidations more than one year after the end of the Tydings period and must be approved by the Office of the Chief Financial Officer. Approval of Phase II requests is extremely rare.
The new policy, beginning on October 1, extends Phase I requests and eliminates Phase II requests. Now grantees may request to liquidate funds up to 18 months after the end of the Tydings period (or 15 months after the end of the normal liquidation period). In general, ED will not grant extensions beyond then “except under extraordinary circumstances or in cases involving lengthy construction contracts.”
This official policy change does not come as a major surprise and better reflects ED’s actual practice. ED has been cracking down on late liquidation requests, toughening the standards for Phase I requests and all but refusing to grant Phase II requests. As a practical matter, this policy change may have an important impact on state administered programs. ED is under tremendous pressure (both internal and external) to minimize “lapsed funds” (program funds that remain unspent and revert to ED and ultimately the U.S. Department of Treasury). ED views lapsed funds as a significant risk factor that may indicate systemic problems that prevent grantees and subgrantees from efficient operation of their programs. Late liquidation requests have been a way to avoid lapsing funds. With ED’s stricter policy in place, it is more important than ever to ensure funds are obligated and spent timely.
Lapsed funds have also been a powerful political tool. Several years ago, when states complained about the level of funding for No Child Left Behind programs, ED and Congressional officials pointed to the high level of lapsed funds as proof that states did not need more funding. With NCLB reauthorization looming, funding debates may heat up again, and if so, lapsed funds could become an issue.
There are numerous tools state and local educational agencies can use to ensure they obligate and spend federal funds in a timely manner. Please do not hesitate to contact us if you would like additional information.
Authors: DAD, SLK