Table of Contents Section I of II Independent Auditors’ Report on the Schedule of Expenditures of Federal Awards ............................................................................................................................. 1 Independent Auditors’ Report on Compliance for Each Major Program and on Internal Control Over Compliance Required by OMB Circular A-133, Audits of States, Local Governments, And Non-Profit Organizations .................................................................................................................................... 2 Schedule of Expenditures of Federal Awards ............................................................................................................. 22 Notes to Schedule of Expenditures of Federal Awards ............................................................................................. 171 Schedule of Findings and Questioned Costs Section 1: Summary of Auditors’ Results .................................................................................................................................. 177 Section 2: Financial Statement Findings .................................................................................................................................... 181 Section 3a: Federal Award Findings and Questioned Costs - KPMG ......................................................................................... 183 Section 3b: Federal Award Findings and Questioned Costs – Other Auditors ............................................................................ 235 Section II of II Summary Schedule of Prior Audit Findings - KPMG .............................................................................................. 445 Summary Schedule of Prior Audit Findings - Other Auditors .................................................................................. 486 Independent Auditors’ Reports Federal Portion of Statewide Single Audit Report For the Year Ended August 31, 2013 KPMG LLP Suite 1900 111 Congress Avenue Austin, TX 78701-4091 Independent Auditors’ Report on Compliance for Each Major Program and on Internal Control Over Compliance Required by OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations The Honorable Rick Perry, Governor, The Honorable David Dewhurst, Lieutenant Governor, The Honorable Joe Straus, Speaker of the House of Representatives, Members of the State Legislature, State of Texas Report on Compliance for Each Major Federal Program We have audited the State of Texas’ (the State) compliance with the types of compliance requirements described in the OMB Circular A-133 Compliance Supplement that could have a direct and material effect on each of the State’s major federal programs for the year ended August 31, 2013. The State’s major federal programs are identified in the summary of auditor’s results section of the accompanying schedule of findings and questioned costs. The State’s financial statements include the operations of OneStar National Service Commission, Texas Guaranteed Student Loan Corporation, Texas Health Insurance Risk Pool, Texas Boll Weevil Eradication Foundation, Inc., Texas State Affordable Housing Corporation, and Teacher Retirement System of Texas (the component units of the State), which received approximately $134 million in federal awards which is not included in the schedule of expenditures of federal awards for the year ended August 31, 2013. Our audit, described below, did not include the operations of the component units of the State because each of those component units has engaged other auditors to perform an audit in accordance with OMB Circular A-133, if applicable. Management’s Responsibility Management of the State Agencies and Universities is responsible for compliance with the requirements of laws, regulations, contracts, and grants applicable to its federal programs. Auditors’ Responsibility Our responsibility is to express an opinion on compliance for each of the State’s major federal programs based on our audit of the types of compliance requirements referred to above. We did not audit the State’s compliance with the types of compliance requirements described in the OMB Circular A-133 Compliance Supplement that could have a direct and material effect on the Student Financial Assistance Cluster, Research and Development Cluster, CFDA 10.500-Cooperative Extension Service, CFDA 66.458-Capitalization Grants for Clean Water State Revolving Funds, CFDA 66.468-Capitalization Grants for Drinking Water State Revolving Funds, CFDA 97.036-Disaster Grants- Public Assistance (Presidentially Declared Disasters), CFDA 97.046-Fire Management Assistance Grant, 97.067- Homeland Security Grant Program, and the Highway Planning and Construction Cluster major federal programs (the other auditor major federal programs) which represent approximately 18% of total federal assistance received by the State for the year ended August 31, 2013. The other auditor’s major federal programs are identified in the accompanying schedule of findings and questioned costs as major federal programs and were audited by another auditor whose reports have been furnished to us, and our opinion, insofar as it relates to the other auditor’s major federal programs is based solely on the reports of the other auditor. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about 2 KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative (“KPMG International”), a Swiss entity. the State’s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of the State’s compliance. Basis for Qualified Opinion As identified below and described in the accompanying schedule of findings and questioned costs, the State did not comply with requirements regarding the following: Compliance Finding Agency/University Major Program Requirement Number General Land Office CDBG – State-Administered Davis–Bacon Act 2013-009 CDBG Cluster Subrecipient Monitoring Health and Human Services TANF Cluster Subrecipient Monitoring 2013-016 Commission Medicaid Cluster Special Tests and 2013-017 Provisions 2013-018 Lamar Institute of Student Financial Assistance Special Tests and 2013-102 Technology Cluster Provisions Department of Public Safety CFDA 97.036 – Disaster Grants – Reporting 2013-111 Public Assistance (Presidentially Declared Disasters) CFDA 97.046 – Fire Management Procurement and 2013-116 Assistance Grant Suspension and Debarment Subrecipient Monitoring University of Texas at Student Financial Assistance Special Tests and 2013-172 Arlington Cluster Provisions University of Texas at El Research and Development Activities Allowed or 2013-178 Paso Cluster Unallowed Research and Development Allowable Costs/Cost Cluster – ARRA Principles University of Texas M.D. Research and Development Cash Management 2013-184 Anderson Cancer Center Cluster Compliance with such requirements is necessary, in our opinion and the opinion of the other auditor, for the State to comply with the requirements applicable to that program. Qualified Opinion In our opinion, based on our audit and the reports of the other auditor, except for the noncompliance described in the Basis for Qualified Opinion paragraph, the State complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of the major programs identified in the Basis for Qualified Opinion paragraph for the year ended August 31, 2013. 3 Un modified Opinion on Each of the Other Major Federal Programs In our opinion, based on our audit and the reports of the other auditor, the State complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its other major federal programs for the year ended August 31, 2013. Other Matters The results of our auditing procedures and the reports of the other auditor disclosed other instances of noncompliance, which are required to be reported in accordance with OMB Circular A-133 and which are described in the accompanying schedule of findings and questioned costs as items: Compliance Finding Agency/University Major Program Requirement Number Department of Aging and Aging Cluster Matching, Level of Effort, 2013-001 Disability Services and Earmarking Reporting Subrecipient Monitoring Period of Availability of 2013-002 Federal Funds Reporting Special Tests and 2013-003 Provisions CFDA 93.667 – Social Services Cash Management 2013-004 Block Grant Medicaid Cluster Allowable Costs/Cost 2013-005 Principles Texas Department of CFDA 10.558 – Child and Adult Cash Management 2013-007 Agriculture Care Food Program Child Nutrition Cluster Department of Family and CFDA 93.658 – Foster Care – Eligibility 2013-008 Protective Services Title IV-E General Land Office CDGB – State-Administered Reporting 2013-010 CDBG Cluster Health and Human Services CFDA 93.667 – Social Services Allowable Costs/Cost 2013-011 Commission Block Grant Principles CFDA 93.767 – Children’s Health Insurance Program SNAP Cluster TANF Cluster Medicaid Cluster SNAP Cluster Eligibility 2013-012 TANF Cluster Special Tests and Medicaid Cluster Provisions 4 Compliance Finding Agency/University Major Program Requirement Number Health and Human Services CFDA 93.767 – Children’s Health Matching, Level of Effort, 2013-013 Commission Insurance Program Earmarking Medicaid Cluster Program Income 2013-014 Reporting 2013-015 SNAP Cluster Special Tests and 2013-019 Provisions TANF Cluster Special Tests and 2013-020 Provisions Texas Department of CFDA 93.568 – Low-Income Reporting 2013-022 Housing and Community Home Energy Assistance Affairs Office of the Attorney CFDA 93.563 – Child Support Allowable Costs/Cost 2013-023 General Enforcement Principles Medicaid Cluster Department of State Health CFDA 10.557 – Special Reporting 2013-025 Services Supplemental Nutrition Program for Women, Infants, and Children CFDA 93.268 – Immunization Special Tests and 2013-026 Cooperative Agreements Provisions CFDA 93.959 – Block Grants for Matching, Level of Effort, 2013-028 Prevention and Treatment of Earmarking Substance Abuse CFDA 93.667 – Social Services Matching, Level of Effort, 2013-029 Block Grant Earmarking Subrecipient Monitoring Texas Workforce TANF Cluster Special Tests and 2013-034 Commission Provisions Lamar Institute of Student Financial Assistance Eligibility 2013-101 Technology Cluster Lamar State College – Student Financial Assistance Eligibility 2013-103 Orange Cluster Special Tests and 2013-104 Provisions 5 Compliance Finding Agency/University Major Program Requirement Number Lamar University Student Financial Assistance Eligibility 2013-105 Cluster Special Tests and 2013-106 Provisions Department of Public Safety CFDA 97.036 – Disaster Grants – Activities Allowed or 2013-107 Public Assistance Unallowed (Presidentially Declared Allowable Costs/Cost Disasters) Principles Cash Management 2013-108 Period of Availability of 2013-109 Federal Funds Procurement and 2013-110 Suspension and Debarment Subrecipient Monitoring Special Tests and Provisions CFDA 97.046 – Fire Management Activities Allowed or 2013-112 Assistance Grant Unallowed Allowable Costs/Cost Principles Cash Management 2013-113 Eligibility 2013-114 Period of Availability of 2013-115 Federal Funds Reporting 2013-117 CFDA 97.067 – Homeland Activities Allowed or 2013-118 Security Grant Program Unallowed Allowable Costs/Cost Principles Reporting 2013-119 Subrecipient Monitoring 2013-120 Sam Houston State Student Financial Assistance Eligibility 2013-121 University Cluster Special Tests and 2013-122 Provisions 6 Compliance Finding Agency/University Major Program Requirement Number Texas A&M AgriLife CFDA 10.500 – Cooperative Activities Allowed or 2013-123 Extension Service Extension Service Unallowed Allowable Costs/Cost Principles Equipment and Real 2013-124 Property Management Procurement and 2013-125 Suspension and Debarment Reporting 2013-126 Texas A&M Engineering Research and Development Activities Allowed or 2013-127 Experiment Station Cluster Unallowed Allowable Costs/Cost Principles Reporting 2013-128 Research and Development Special Tests and 2013-129 Cluster – ARRA Provisions Texas A&M Forest Service CFDA 97.036 – Disaster Grants – Activities Allowed or 2013-130 Public Assistance Unallowed (Presidentially Declared Disasters) Cash Management 2013-131 CFDA 97.046 – Fire Management Cash Management 2013-132 Assistance Grant Texas A&M Health Science Research and Development Activities Allowed or 2013-133 Center Cluster Unallowed Allowable Costs/Cost Principles Research and Development Cash Management 2013-134 Cluster Research and Development Cluster – ARRA Research and Development Period of Availability of 2013-135 Cluster Federal Funds Reporting 2013-136 Research and Development Special Tests and 2013-137 Cluster – ARRA Provisions 7