Notes to Schedule of Expenditures for Federal Awards for the Year Ended Aug. 31, 2023

(1) Summary of Significant Accounting Policies

(a) Reporting Entity

The state of Texas Schedule of Expenditures of Federal Awards (schedule) includes the activity of all federal award programs administered by the primary government except for the federal activity of the Texas A&M Research Foundation (TAMRF), a blended component unit of the Texas A&M University System. TAMRF is excluded from the schedule and is subject to a separate audit in compliance with the audit requirements of Title 2, U.S. Code of Federal Regulations, Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance).

The schedule does not include the federal activity of discrete component units. These entities are legally separate from the state and are responsible for undergoing separate audits as needed to comply with the Office of Management and Budget’s (OMB’s) Uniform Guidance. The federal activity of the following discrete component units is excluded from the schedule:

• OneStar National Service Commission
• Teacher Retirement System of Texas
• Texas Appraiser Licensing and Certification Board
• Texas Boll Weevil Eradication Foundation Inc.
• Texas Health Insurance Risk Pool
• Texas State Affordable Housing Corporation

(b) Basis of Presentation

The schedule presents total federal awards expended for each individual federal program during the fiscal year ended Aug. 31, 2023. The information in the schedule is presented in accordance with the requirements of OMB Uniform Guidance.

Federal award program titles are reported by Assistance Listing number (ALN) as presented in the System for Award Management (SAM). Federal award program titles not presented in the SAM are identified by federal agency number followed by (.XXX). U.S. Department of Education (ED) subprograms are identified by a subprogram letter after the ALN and presented by ED subprogram title. Federal award programs and subprograms include expenditures, pass-throughs to non-state agencies (i.e., payments to subrecipients), non-monetary assistance and loan programs.

(c) Basis of Accounting

The expenditures for each of the federal financial assistance programs are presented in the schedule on the accounting basis as presented on the fund financial statements. For entities with governmental funds, expenditures are presented on a modified accrual basis. For entities with proprietary or fiduciary funds, expenditures are presented on the full accrual basis. Such expenditures are generally recognized following the cost principles contained in Title 2 U.S. Code of Federal Regulations, Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, in which certain types of expenditures are not allowable or are limited as to reimbursement for all awards except the Coronavirus Relief Fund (ALN 21.019) and programs identified in Appendix I of the 2023 Compliance Supplement. ALN 21.019 follows criteria determined by the U.S. Department of the Treasury for allowability of costs. Programs identified in Appendix I of the 2023 Compliance Supplement follow the cost principles in the Texas Grant Management Standards issued by the Texas Comptroller of Public Accounts for allowability of costs.

The expenditures in the Student Financial Assistance Cluster that meet the requirements for continuing compliance include the beginning balance of outstanding loans from the previous reporting period, new loans processed in the current reporting period and the administrative cost recovered. See Note 5 for more information on all loan expenditures.

Both the modified accrual and accrual basis of accounting use an estimation approach to determine the amount of expenditures incurred if not yet billed by a vendor. Thus, those federal programs presenting negative amounts on the schedule are the result of prior year estimates being overstated and/or reimbursements due back to the grantor.

(d) Matching Costs

Matching costs, the nonfederal share of certain program costs, are not included in the schedule, except for the state’s share of unemployment insurance (see Note 4).

(e) Indirect Cost Rate

The following state agencies elected to use the 10 percent de minimis indirect cost rate allowed under the Uniform Guidance:

• Commission on State Emergency Communications
• Soil and Water Conservation Board

(2) Relationship to Federal Financial Reports

The regulations and guidelines governing the preparation of federal financial reports vary by federal agency and among programs administered by the same agency. Accordingly, the amounts reported in the federal financial reports do not necessarily agree with the amounts reported in the accompanying schedule, which is prepared on the basis explained in Note 1(c).

(3) Relations to Revenues in the State of Texas’ Fund Financial Statements

The following is a reconciliation of total federal awards expended as reported in the schedule to federal revenues reported in the fund financial statements.

(4) Unemployment Insurance Funds

State unemployment tax revenues and the government and nonprofit contributions in lieu of state taxes (state unemployment insurance [UI] funds) must be deposited into the Unemployment Trust Fund in the U.S. Treasury. Use of these funds is restricted to pay benefits under the federally approved state unemployment law. State UI funds as well as federal funds are reported in the schedule under ALN 17.225. The state portion in the amount of $2.3 billion is a reconciling item in the reconciliation of the schedule to revenues in the fund financial statements (see Note 3).

(5) Federally Funded Loan/Credit Enhancement Programs

The state participates in various federally funded loan and credit enhancement programs. The programs can be grouped into three broad categories:

• Federally funded student loan programs
• Other federally funded loan programs
• Federally funded credit enhancement program

a) Federally Funded Student Loan Programs

The state participates in student loan programs that have continuing compliance requirements from the federal government. The state also participates in other student loan programs that do not require continuing compliance. The charts below summarize activity by the state for federally funded student loan programs.

New student loans processed totaling $3 billion are included in the schedule and are part of a reconciling item on Note 3.

The Federal Direct Student Loans Program (Direct Loan, ALN 84.268) does not require universities to disburse funds. The proceeds are disbursed by the federal government for direct loans.

b) Other Federally Funded Loan Programs

Clean Water State Revolving Funds (CWSRF, ALN 66.458)

The Texas Water Development Board receives capitalization grants to create and maintain Clean Water State Revolving Funds programs (CWSRF, ALN 66.458). The state can use capitalization grant funds to provide a long-term source of state financing for construction of wastewater treatment facilities and implementation of other water quality management activities.

The CWSRF provides loans with lower interest rates than those from commercial markets. Mainstream funds offer a net long-term fixed interest rate below market rate for those applicants financing the origination fee. The maximum repayment period for most CWSRF loans is 30 years from completion of construction. Capitalization loans processed for CWSRF for the year ended Aug. 31, 2023, were approximately $121.3 million and are included in the schedule. CWSRF outstanding loans with no continuing audit requirements as of Aug. 31, 2023, were approximately $3.5 billion.

Drinking Water State Revolving Funds (DWSRF, ALN 66.468)

The Texas Water Development Board receives capitalization grants to create and maintain Drinking Water State Revolving Fund programs (DWSRF, ALN 66.468). The state can use capitalization grant funds to establish a revolving loan fund. The revolving loan fund can assist public water systems in financing the costs of infrastructure needed to achieve or maintain compliance with the Safe Drinking Water Act. These compliance requirements ensure the public health objectives of the Safe Drinking Water Act.

The DWSRF can provide loans at interest rates lower than the market can, and can provide other types of financial assistance for qualified communities, local agencies and private entities. Mainstream funds offer a net long-term fixed interest rate below market rate for those applicants financing the origination fee. The maximum repayment period for most DWSRF loans is 30 years from the completion of construction. Capitalization loans processed for DWSRF for the year ended Aug. 31, 2023, were approximately $101.3 million and are included in the schedule. DWSRF outstanding loans with no continuing audit requirements as of Aug. 31, 2023, were approximately $1.9 billion.

The chart below summarizes activity by the state for the two revolving loan programs.

State Energy Program (SEP, ALN 81.041)

The State Energy Conservation Office receives an annual grant from the U.S. Department of Energy (DOE) to provide funds for the State Energy Program (SEP). These low-interest loans enable the municipalities to maximize their energy efficiency through building retrofits. The loans are paid back with funds saved from the reduction of energy costs. Also, the State Energy Conservation Office has chosen to continue the administration of the American Recovery and Reinvestment Act (ARRA) revolving loan program made available through the Department of Energy in 2009. The program will still offer low-interest loans to help government entities finance their energy-related cost reduction efforts. No dollars have been transferred from the now-discontinued ARRA award to the annual SEP award, and all monitoring will follow the same guidelines as the SEP annual grant. SEP loans processed for the year ended Aug. 31, 2023, were approximately $300,000 and are included in the schedule. SEP outstanding loans with no continuing audit requirements as of Aug. 31, 2023, were approximately $36.1 million.

State SEP Loan Program Activity for Fiscal 2023

c) Federally Funded Credit Enhancement Program

Credit Enhancement for Charter School Facilities (ALN 84.354A)

In 2005, the Texas Public Finance Authority Charter School Finance Corporation formed a consortium with the Texas Education Agency and the Texas Charter School Resource Center to apply for a federal grant to assist charter schools. In 2006, the consortium received $10 million in federal grants, to which the Texas Education agency added $100,000, to establish the Texas Credit Enhancement Program (TCEP). The $13.1 million of federal grants received is subject to continuing audit requirements and is included in the schedule. In addition, approximately $462,000 of interest earned on the federal grant monies drawn down in fiscal 2023 is also included in the schedule.

The TCEP provides credit enhancement grants to eligible charter schools by funding debt service reserve funds for bonds issued on behalf of the schools to finance education facilities. As of Aug. 31, 2023, approximately $12.2 million of the grant funds and related interest earnings was allocated in the form of credit enhancements to various charter schools.

(6) Nonmonetary Assistance

The state is the recipient of federal financial assistance programs that do not result in cash receipts or disbursements and are therefore not recorded in the state’s fund financial statements. Awards received by the state including cash and non-cash amounts are in the schedule as follows:

(7) Rebates From the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC)

During fiscal 2023, the state received cash rebates of approximately $223.4 million from infant formula manufacturers on sales of formula to participants in the WIC program (ALN 10.557), which are netted against total expenditures included in the schedule. Rebate contracts with infant formula manufacturers are authorized by Code of Federal Regulations, Title 7: Agriculture, Subtitle B, Chapter II, Subchapter A, Part 246.16a as a cost containment measure. Rebates represent a reduction of expenditures previously incurred for WIC food benefit costs. Applying the rebates received to such costs enabled the state to extend program benefits to more participants than could have been serviced this fiscal year in the absence of the rebate contract.

(8) Programs Not Subject to OMB Uniform Guidance

The fund financial statements include federal funding received from certain programs which are not subject to continuing compliance requirements. For the year ended Aug. 31, 2023, the fund financial statements include $247.3 million of federal funds that are not subject to the continuing compliance requirements of OMB Uniform Guidance, and are not included in the schedule.

Medicare Part D is not subject to OMB Uniform Guidance. Reimbursements of $171.3 million were received related to the Medicare Part D program by the administrators of postemployment health care plans. Administrators include the Employees Retirement System of Texas, University of Texas System and Texas A&M University System.

The Build America Bonds are taxable municipal bonds that carry special tax credits and federal subsidies for either the bond issuer or the bondholder. The revenue generated is excluded from the schedule. The state recognized federal revenues of $76 million related to the program.

(9) Disaster Grants – Public Assistance (ALN 97.036)

After a presidentially declared disaster, FEMA provides a public assistance grant to reimburse eligible costs associated with repair, replacement or restoration of disaster-damaged facilities. The federal government reimburses in the form of cost-shared grants which require state matching funds. For the year ended Aug. 31, 2023, $51.5 million of approved eligible expenditures that were incurred in a prior year are included on the schedule.

(10) Provider Relief Fund (ALN 93.498) Audited Entities

The state of Texas statewide single audit for the fiscal year ended August 31, 2023, did not include audits of state agencies that administered the Provider Relief Fund (PRF) program.

(11) Emergency Housing Voucher (EHV) Program Funding

During fiscal year 2023, the state received approximately $4 million as part of the Section 8 Housing Choice Vouchers (ALN 14.871) program. The EHV program expenditures are included in the Schedule as ALN 14.871 program expenditures.

(12) Donated Personal Protective Equipment (PPE) (Unaudited)

During fiscal year 2023, the state did not receive any federally donated PPE.

(13) Child Care and Development Fund (CCDF) Cluster Funding (ALNs 93.575, 93.596)

The CCDF provided federal funding to increase the availability, affordability and quality of childcare services. The CCDF cluster is a group of federal programs with similar compliance requirements that are administered separately. During fiscal 2023, the state received approximately $3.4 billion in direct revenues and non-state entity pass-through funding. The CCDF program revenues are included in the schedule as discretionary fund ALN 93.575 (approximately $3 billion) and matching fund ALN 93.596 (approximately $337.2 million).

(14) Reallocation of Federal Funding – Coronavirus State and Local Fiscal Recovery Funds (ALN 21.027)

During fiscal year 2023, certain state agencies exchanged federal funds as authorized in the 87th Legislature, Regular Session, 2021 (General Appropriations Act) for the 2022-23 biennium. Approximately $2.14 billion received from Coronavirus State and Local Fiscal Recovery Funds (ALN 21.027) was exchanged for certain federal Assistance Listing numbers (ALNs). This one-time federal authorization was excluded from the schedule. The agencies authorized in the federal fund exchange are the Texas Workforce Commission and the Department of State Health Services.