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REPORT DIGEST DEPARTMENT OF CENTRAL MANAGEMENT SERVICES FINANCIAL AUDITAND COMPLIANCE EXAMINATIONFor the Year Ended: June 30, 2007 Summary of Findings: Total This Year 28 Total Last Year 18 Repeated From Last Year 14 Release Date: May 27, 2008
State of Illinois Office of the Auditor General WILLIAM G. HOLLAND AUDITOR GENERAL
To obtain a copy of the
Report contact: Office of the Auditor
General 740 E. Ash Street Springfield, IL 62703 (217) 782-6046 or TTY (217) 888-2887 This Report Digest and the
Full Report are also available on the worldwide web at http://www.auditor.illinois.gov |
SYNOPSIS
{Expenditures and Activity Measures are summarized on the next page.} |
STATE OF
ILLINOIS
DEPARTMENT
OF CENTRAL MANAGEMENT SERVICES
FINANCIAL
AUDIT AND COMPLIANCE EXAMINATION
For The Year Ended June 30, 2007
STATEMENT OF ACTIVITIES
INFORMATION –
GOVERNMENTAL
ACTIVITIES (expressed in thousands) |
Fiscal Year 2007 |
Fiscal Year 2006 |
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PROGRAM REVENUES
Charges for Services............................................................ EXPENSES
General Government............................................................ Interest................................................................................ NET (EXPENSE) REVENUES........................................ Total General Revenues and transfers................................... CHANGE IN NET ASSETS............................................ Beginning Net Assets, July 1................................................ ENDING NET ASSETS, JUNE 30.................................. |
$158,326 |
$147,074
$6,933 $154,007 |
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STATEMENT OF
NET ASSETS INFORMATION
GOVERNMENTAL
ACTIVITIES (expressed in thousands) |
Fiscal Year 2007 |
Fiscal Year 2006 |
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Cash equity with State Treasurer.........................................
|
$65,723 |
$72,706 |
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Cash and cash equivalents..................................................
|
$4,107 |
$5,605 |
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Investments.......................................................................
|
$0 |
$1,918 |
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Capital Assets, net..............................................................
|
$295,393 |
$284,188 |
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Other Assets......................................................................
|
$137,391 |
$93,992 |
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Total Assets....................................................................
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$502,614 |
$458,409 |
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Accounts Payable..............................................................
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$53,169 |
$37,539 |
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Long Term Obligations.......................................................
|
$261,638 |
$247,037 |
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Other Liabilities..................................................................
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$29,481 |
$19,826 |
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Total Liabilities...............................................................
|
$344,288 |
$304,402 |
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Net Assets, invested in capital assets, net of debt.................
|
$249,652 |
$236,316 |
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Net Assets, restricted.........................................................
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$3,675 |
$3,441 |
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Net Assets, unrestricted......................................................
|
$(95,001) |
$(85,750) |
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Total Net Assets.............................................................
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$158,326 |
$154,007 |
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SELECTED ACTIVITY
MEASURES (unaudited) |
FY07 |
FY06 |
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Average
Number of Employees ............................................ Number
of Business Enterprise Program applications received Number
of Network Data Circuits managed........................... Number
of flexible spending account participants.................... Number of equipment items transferred out of surplus........... Percent
of Workers’ Compensation claims paid within 90 days Total
gallons of gasohol sold.................................................. Number
of facilities participating in I-cycle........................... |
1,682 809 8,048 10,602 1,826 78.64% 957,389 252 |
1,729 1,248 7,900 7,705 2,616 31.28% 1,030,376 251 |
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EXECUTIVE
DIRECTOR
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During the Audit Period: Paul Campbell (through March 9, 2007)
Maureen
O’Donnel (effective March 10, 2007)
Currently:
Maureen O’Donnel |
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FINDINGS, CONCLUSIONS, AND
RECOMMENDATIONS EXCESS FUND BALANCES REPRESENTING NONCOMPLIANCE WITH FEDERAL
REGULATIONS The Department generated excess fund balances for certain internal service fund activities and failed to make adequate adjustments as required by OMB Circular A-87. The Department’s internal service funds receive revenue from charges for services provided to various federal grants of the State. Circular A-87 allows internal service funds to maintain reasonable working capital reserves (up to 60 days cash expenses) for normal operating purposes. However, two internal service funds administered by the Department maintained fund balances in excess of the allowable working capital reserve. Consequently, a payback representing the federal share of excess fund balances for fiscal years 2004 and 2005 is required from the: 1) Statistical Services Revolving Fund (SSRF) totaling approximately $6.862 million; and 2) Communications Revolving Fund (CRF) totaling approximately $8.121million. Department officials believe that it is probable that a payback will also be required from these funds for fiscal years 2006 and 2007. It is estimated that for fiscal years 2006 and 2007, the SSRF liability is approximately $7.552 million and the CRF liability is approximately $1.576 million. Total liabilities recognized at June 30, 2007, representing the federal share of excess fund balances, are reported to be $14.414 million for the SSRF and $9.697 million for the CRF.
Furthermore, Circular A-87 stipulates “A comparison of the revenue generated by each billed service (including total revenues whether or not billed or collected) to the actual allowable cost of the service will be made at least annually, and an adjustment will be made for the difference between the revenue and the allowable costs”. (Finding Code No. 07-1, pages 15-17) We recommended the Department comply with the provisions of OMB Circular A-87 by making adequate adjustments for excess fund balances in internal service funds for each billed service using an acceptable method. The Department did not agree with this
finding. The Department contends that
direct payback to the Department of HHS, which is negotiated approximately
every two years, is an appropriate and allowable adjustment mechanism to
remedy excess balances. Furthermore,
the Department stated that the large balances accumulated in recent years were
the cumulative result of the IT consolidations, and consequently, more
frequent rate adjustments and credits were not feasible during such a
volatile developmental period. The
Department indicated it will continue to adjust rates going forward to reduce
exposure to excess balances. However,
direct negotiated paybacks have always been, and will likely always be a part
of the remedy for excess balances.
We responded with an auditor’s comment indicating that OMB Circular A-87 requires that adjustments be made on an annual basis. Waiting on the two year federal audit cycle is not consistent with the annual methods of settlement as set forth in the Circular. The Department has been generating these excess fund balances for the past four consecutive fiscal years. Failure to adequately adjust excess fund balances in the Department’s internal service funds has resulted in significant liabilities to the federal government. REPORTING OF COSTS NOT IN ACCORDANCE WITH FEDERAL REGULATIONS The Department recognized costs for federal reporting purposes which was different than those reported in the Department’s financial statements prepared in accordance with generally accepted accounting principles (GAAP), and unallowable costs were reported for federal purposes. Specifically, we noted the following during our review of the fiscal year 2006 reconciliations that were completed by the Department during the audit period (in March 2007) for the Statistical Services Revolving Fund (SSRF) and the Communications Revolving Fund (CRF): · Certain IT billings have been reported differently in SSRF for GAAP purposes than for federal purposes resulting in balances that are not entirely reconcilable. · SSRF credits of $1.485 million applied against fiscal year 2005 GAAP basis revenue was not reported for federal purposes until fiscal year 2006. · Equipment totaling $1.574 million purchased in the SSRF during the fiscal year 2006 lapse period was properly excluded from fiscal year 2006 expenses for the GAAP basis financial statements but was expensed in fiscal year 2006 for federal purposes. · The Department has not been able to document the matching of revenues with related expenses for certain fiscal year 2006 pass-through billings totaling $2.406 million in the SSRF. These revenues are excluded for federal purposes but the Department could not document that the corresponding expenses were removed. · Equipment totaling $3.588 million purchased in the CRF during the fiscal year 2005 lapse period was reported in the fiscal year 2005 GAAP basis financial statements but was expensed in fiscal year 2006 for federal purposes. · Expenses of $1.965 million relating to equipment purchased in prior years for another State agency have been excluded from the fiscal year 2006 GAAP basis financial statements but were included in expenses reported in fiscal year 2006 for federal purposes. A number of the differences cited above represent timing differences and, over a period of two fiscal years the over and under statements will offset one another. However, as the determination of excess fund balances is required to be performed annually, reporting such revenues and expenses in the wrong period could significantly alter the results of the calculation of excess balances. During our testing of expenditures charged to the internal service funds, we also noted certain expenditures that were not reasonable and necessary for the administration of the fund. Included were travel expenses for the Director paid from the SSRF and purchases of bottled water from the CRF. (Finding Code No. 07-2, pages 18-20)
We recommended the Department comply with the provisions of OMB Circular A-87 by reporting revenues and expenses in accordance with generally accepted accounting principles for federal purposes. The Department partially concurred with our
recommendation. The Department stated
that some of the differences are associated with timing, but the Department
asserts that the adjustments are reported accurately in the SWCAP [Statewide
Cost Allocation Plan]. Furthermore,
the Department stated that the current methods have been accepted by the
Department of Health and Human Services, however, they do agree to pursue a
more clear presentation of the reconciliation, and to adjust their practices
where feasible to reduce the total number of reconciling items. We responded with an auditor’s comment. We continue to assert that certain items as identified in the reconciliation process are not reported the same for GAAP and federal cost recovery purposes. As stated in the finding above, the majority of the exceptions noted are timing differences; however, the determination of excess balances is calculated annually and reporting revenues or expenses in the wrong period could have a significant impact on the calculation of excess balances. We further commented, that the absence of a finding by representatives of the Department of Health and Human Services when performing biennial reviews does not constitute acceptance and approval of noncompliance with OMB Circular A-87. DOCUMENTATION OF PAYROLL COSTS NOT IN COMPLIANCE WITH FEDERAL
REGULATIONS The Department did not document the distribution of salaries or wages for employees working on multiple activities as required by OMB Circular A-87. Fiscal year 2006 revenues and expenses for the Department’s internal service funds were reported to the federal government during March 2007. During our testing of these revenues and expenses, we noted payroll costs for employees being paid from one internal service fund were allocated to another internal service fund. The allocated costs were not supported by adequate documentation as required by federal regulations. For fiscal year 2006, the Department allocated payroll costs for approximately 60 employees paid from the Statistical Services Revolving Fund (SSRF) to the Communications Revolving Fund (CRF) in the amount of $1.942 million for federal reporting purposes. For fiscal year 2006, the Department allocated payroll costs for approximately 25 employees paid from the CRF to the SSRF in the amount of $910,000 for federal reporting purposes. (Finding Code No. 07-3, pages 21-22) We recommended the Department comply with the provisions of OMB Circular A-87 by maintaining appropriate personnel activity reports or equivalent documentation to support costs of salaries and wages reported for federal purposes. The Department did not agree with the
finding and stated that the negotiators responsible for reviewing and
approving the SSRF & CRF have accepted the salary distributions currently
in use. Furthermore, the particular
allocations questioned by the auditor were at the Fund level. Subsequently, costs are reallocated
through various federally approved means to the service levels. The Department will pursue a more formal
documentation during FY08 for the Fund level allocation for the particular
staff cited by the auditors. We responded with an auditor’s comment by indicating that the Department has not documented that a substitute system acceptable under the guidelines of OMB Circular A-87 has been approved by the federal cognizant agency. Furthermore, the absence of a finding by the federal representatives when performing biennial reviews does not constitute acceptance and approval of noncompliance with OMB Circular A-87.
FAILURE TO COMPLY WITH ADVANCE BILLING RULES The Department failed to comply with Illinois Administrative Code rules governing advance billings for internal service fund services. During testing we noted the Department collected payments from other State agencies in advance of billings and reported certain receipts as revenues in the wrong fiscal year. In the fiscal year 2007 lapse period, the Department accepted payments from the Department of Revenue (IDOR), totaling $2,825,621, that were not associated with any billings for services rendered. The Department did apply $614,957 of these payments toward outstanding balances owed by IDOR. IDOR reported expenditure against its current fiscal year appropriations, while the Department was recognizing the receipt as an advance payment against fiscal year 2008 services. This is a violation of the Advance Billings Rules. Although the Department did not specifically issue a billing, the Department did accept and process payments which allowed the IDOR to expend remaining appropriations. In addition, we noted the Department received payments from the Department of Children and Family Services (DCFS) during the fiscal year 2007 lapse period totaling $925,522 representing advance or duplicate payments. Combined with overpayments from DCFS for fiscal years 2005 through 2007, DCFS has paid the Department $1,415,527 in excess of amounts billed. Overpayments to the Department remaining unapplied while DCFS continues to make payments on their accounts is the result of an inadequate billing/receivable reconciliation and reporting function. During testing of other advance payments received by the Department, we also noted eight (8) instances in which the Department received payments in fiscal year 2007 that were for services to be provided to other State agencies in fiscal year 2008. This too is in violation of the the Advance Billings Rules. As a result, the Department overstated fiscal year 2007 revenues by $549,151 and user agencies created credit balances (or reductions of fiscal year 2007 receivable balances) for services not received until fiscal year 2008. Department officials have stated they were not aware that the billings were for services to be rendered in fiscal year 2008. (Finding Code No. 07-5, pages 25-26) We recommended the Department establish adequate controls over internal service fund billings to ensure compliance with rules governing advance billings and fiscal year budgetary controls. We further recommend the Department improve the receivable reporting functions to more effectively communicate overpayments received from user agencies and to apply credits to future billings on a timely basis. The
Department did not agree with this finding, but rather stated that unapplied payments occur for a variety of
reasons, and many of these payments are received electronically by DCMS. The Department further stated that the
Department appropriately applies unapplied payments to invoices throughout
the FY, and that they must work with the agencies to apply these amounts to
open invoices. Furthermore, the
Department stated that the eight instances cited by the auditor were for
projects begun during the reporting period but not completed until after the
end of the FY. We responded with an auditor’s comment indicating that in the cases described above, payments were received by the Department for services that had not yet been rendered or that were rendered after the end of the fiscal year. The subsequent acceptance and processing of these payments resulted in credit balances for the involved agencies. Together these actions resulted in noncompliance with the Rules. INAPPROPRIATE USE OF APPROPRIATION AUTHORITY The Department made payments for Workers’ Compensation Act claims from funds appropriated to the Department of Healthcare and Family Services for health care coverage per the State Employees Group Insurance Act of 1971. Public Act 94-0798 appropriated to CMS $108,200,000 from the Workers’ Compensation Revolving Fund for “payment of Workers’ Compensation Act claims and contractual services in connections with said claims payments.” The same Public Act appropriated $1,785,234,100 to the Department of Healthcare and Family Services (HFS) from the Health Insurance Reserve Fund for “provisions of health coverage as elected by eligible members per the State Employees Group Insurance Act of 1971.” (Emphasis Added) In April 2007 an interagency agreement was transacted between the Department and HFS which essentially authorized the Department to expend funds (up to $20 million) from HFS’ appropriation from the Health Insurance Reserve Fund for the payment of medical expenses under the Workers’ Compensation program. During fiscal year 2007, the Department processed $19,998,199 from HFS’ appropriation for State Employees Group Insurance to pay for claims and services related to the Workers’ Compensation Act.
We recommended the Department make payments in accordance with its appropriation authority. We further recommended the Department implement controls to ensure interagency agreements are in compliance with all provisions of the Intergovernmental Cooperation Act. The Department did not agree with this
finding, but rather indicated that the authority to utilize the funds and
process the transactions in question does exist within the Group Insurance
Act. The Department is seeking
legislation to clarify the relevant section of the Act. We responded with an auditor’s comment stating that the 2007 appropriation law clearly provided for separate appropriations for health care coverage as elected by eligible members and for payment of Worker’s Compensation Act claims. This authority was circumvented when the Department paid Worker’s Compensation Act claims from the appropriations made to HFS for health care coverage. Furthermore, since the actions of the interagency agreement between the Department and HFS resulted in the circumvention of limitations established by law on State appropriation, according to the Intergovernmental Cooperation Act, this interagency agreement is invalid. BOND FUND UTILIZED FOR INAPPROPRIATE USE The Department’s expenditure control system was inadequate to ensure that bond funds were utilized for appropriate purposes. During fiscal year 2007, the Department paid vouchers totaling $1,353,546 from the Capital Development Fund that were subsequently rejected by the Illinois Office of the Comptroller (IOC) and reclassified to an appropriate fund. In a letter dated May 29, 2007, the IOC concluded the Department “…has prepared vouchers for operational expenditures out of the Capital Development Fund that would normally be made from contractual services appropriations. These expenses do not appear to meet the criteria for use of this bond financed fund.” The expenses were transferred to the Statistical Services Revolving Fund. Public Act 094-0798, Article 94, Section 5, establishes an appropriation from the Capital Development Fund to the Department “…for Information Technology infrastructure expenses including but not limited to related hardware and equipment.” Section 10 further stipulates “No contract shall be entered into or obligation incurred for any expenditures from appropriations in Section 5 of this Article until after the purposes and amounts have been approved in writing by the Governor.” Department officials have stated they believe approvals were obtained when the Governor signed the bond release documentation and they have indicated the matter is still pending in discussions between the Department, the IOC and the Capital Development Board. (Finding Code No. 07-7, pages 29-30) We recommended the Department establish adequate procedures to ensure bond funds are utilized for appropriate purposes and proper approvals of obligations incurred for any expenditure from the Capital Development Fund are obtained in advance of the expenditure. The Department did not agree with
this finding, but rather responded as follows: “The Department had the authority to process these payments through the
Capital Development Fund. Our
authority to process the transactions was inherent in the legislation
establishing these appropriations from the CDF for the specific purposes
cited. Prior to our sending the vouchers, the IOC had released the bond funds
into the DCMS account, indicating that we had the authority to use these
funds. The IOC initially processed
these payments and later reversed some, but not all of them. The IOC determined that the appropriation
language did not match the bond authorization, and it is within their purview
to reject a transaction. But their
rejection does not in any way mean that the Department violated a process
when we sent payments in good faith according to appropriation authority.” We responded with an auditor’s comment indicating that the general release of the bond funds into the Capital Development Fund does not, by itself, satisfy the requirement set forth in the appropriation ordinance stipulating expenditures from the fund are to be approved in writing by the Governor in advance. Such advance approval requirements establish a process to be followed by the Department to ensure expenditures from bond proceeds released to the fund are not for operational purposes.
CONSOLIDATED SERVICES BILLINGS NOT ADEQUATELY SUPPORTED The Department did not provide adequate documentation to support charges billed for information technology, facilities management and graphic designers (consolidated services). The Department billed the Department of Human Services, the Department of Public Health, the Department of Healthcare and Family Services, the Department of Revenue and the Department of Transportation for services rendered. During testing of these agencies, detail billing invoices from the Department totaling $14,856,843 were tested. Based on the results of this testing it was noted there was no specific documentation supporting $11,705,251 of the charges, including $5,674,490 of payroll charges. The Service Level Agreements (SLA) between the Department and four of the other agencies dated January to April 2005 outlined the terms and conditions under which the Department would provide specified IT services, and required the Department to “provide monthly detailed allocation billing statements to the agencies. These billings will be based on actual costs incurred by [the] Department on behalf of the agencies.” An SLA was drafted but not formally executed with the Department of Healthcare and Family Services. By not providing properly detailed documentation, the billed agencies are unable to determine the propriety of the charges. Department officials have stated that they had an alternate system which they believe provided adequate substantiation. (Finding Code No. 07-8, pages 31-32) We recommended the Department prepare and provide adequately detailed documentation to agencies to support the consolidated services it is providing. The Department did not agree
with this finding. The Department
replied that a separate personnel activity reporting system (SCAS) was used
to account for and certify their time devoted to legacy agency tasks, and
that reports detailing the time spent on behalf of these agencies and all
payroll and related costs were provided to the Agencies. The Department asserts that the daily
entry into SCAS, and the supervisor approval of these semi monthly records,
constituted a proper level of verification.
Furthermore, in terms of non-payroll IT direct charge backs, the
Department responded that significant supporting detail was provided to
agencies. Lastly, the Department
commented that the Facilities and Graphic Artist charges are rates-based
charges where direct utilization drives the charge. Sufficient detail does exist to establish agency utilization of
these services, and is provided to agencies. We responded with an auditor’s comment indicating that this issue was first identified in the 2007 BCCS Third Party Review, at which time the Department stated in their response, for the IT billings, “the IBiS charging methodology does exist and training was provided to staff, [however], the process was not fully optimized during the period under review.” Furthermore, during FY07, the SCAS was not properly utilized; not all employees were required to use the System and therefore they did not all enter their time into the System. Documentation supporting the facility and graphic artist charges was not provided to the user agencies. OTHER FINDINGS
The remaining findings are reportedly
being given attention by the Department.
We will review the Department’s progress toward the implementation of
all our recommendations in our next engagement. AUDITORS’ OPINION Our auditors stated the Department’s financial statements as of and for the year ended June 30, 2007 are fairly presented in all material respects. WILLIAM G. HOLLAND, Auditor General WGH:KAL:pp
SPECIAL ASSISTANT AUDITORS Sikich LLP was our special assistant auditor for this engagement. |