CSA
Summary
Read the report at California State Auditor ↗
Department of Insurance:
Needs To Refine Its Cost Model for
Insurance Examination and
Proposition 103 Fees
January 1996
95018
Table of Contents
Summary S-1
Introduction 1
Chapter 1
Insurance Examination Fees Are Inaccurate,
While Proposition 103 Fees Are Accurate 7
Recommendations 13
Chapter 2
The Department’s System for Gathering Its
Costs for Insurance Examination and
Proposition 103 Activities Can Be Improved 15
Recommendations 21
Appendix
A Detailed Description of the Department’s
Cost Model for Computing Examination Fees 23
Response to the Audit
Department of Insurance 33
Summary
Results in Brief
Accurately
Audciatl cHuliagtehdl ights ... The Department of Insurance (department) is responsible for
Proposition 103 fees. protecting the insurance policyholders of the State. To meet this
responsibility, the department administers various programs
The department has
Needs to improve the designed to monitor insurance companies. These programs
modified its cost
collection of labor include ones that examine insurance companies. In addition, the
accounting system to
costs and the department must enforce Proposition 103, a voters’ initiative
capture the costs of its
allocation of indirect passed in November 1988. The Insurance Code limits the
examination and
charges. amount of fees the department can charge for examinations and
Proposition 103 activities.
Proposition 103 activities to the actual cost of these regulatory
However, it:
activities. In a Bureau of State Audits report, issued in
April 1994, we reported that the department could not
Incorrectly
completely identify its costs related to the regulatory activities.
calculated insurance
Since that audit was issued, the department has modified its cost
examination fees.
accounting system so that it can capture costs by activity. Our
review focused on whether the department's fees for fiscal year
1995-96 were based on actual costs from the previous fiscal
year. We noted the following concerns:
The fees that the department will charge for examinations of
insurance companies during fiscal year 1995-96 are inaccurate. These inaccuracies are
caused by errors and flaws in the department's cost model used to calculate these fees.
Specifically, the department did not properly adjust for errors in reporting employee time, it
included travel costs in its calculations when it should not have, and it made several
mathematical errors. As a result, the department’s estimated billings for examinations of
$13.1 million will be underbilled by $1.6 million in fiscal year 1995-96. The department
intends to correct any underbillings or overbillings in one fiscal year by adjusting the fees for
the following fiscal year. This method is not equitable because the department does not
examine the same insurance companies each year. Therefore, insurance companies
examined during fiscal year 1995-96 will generally be underbilled, whereas insurance
companies examined during fiscal year 1996-97 will be overbilled.
The fees that the department will charge during fiscal year 1995-96 to recoup costs incurred
in carrying out its regulatory responsibilities under Proposition 103 are accurate and
generally based on actual costs, as required by the Insurance Code.
Although the department adjusted for errors in the actual cost data used in its fee
calculations, it needs to improve its procedures for gathering the data. Specifically,
department employees are not always charging their time correctly. In addition, late or
unapproved employee time sheets are not appropriately recorded in the department's cost
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accounting system. Moreover, errors in the reporting of employee time skew the
department's allocation of indirect costs.
Recommendations
Based on the flaws and errors we found in the department's cost model for calculating insurance
examination fees, the department should revise the fees it will charge during fiscal year 1995-96.
To ensure that its future fees are accurate, the department needs to improve its cost model for
calculating insurance examination fees and improve its process for gathering data used in the
cost model. Specifically, it should do the following:
In its actual cost data, make the proper adjustments for errors in reporting employee time.
Exclude travel costs from the calculation of insurance examination fees.
Perform a detailed review of its calculations to ensure that all mathematical errors are
detected and corrected.
Implement procedures to ensure that time reporting errors are detected.
Improve its process for ensuring that employee time sheets are submitted and approved
promptly.
Modify its time reporting procedures to ensure that employees charge program and
administrative activities to the proper cost centers.
Agency Comments
The department agrees with the information and conclusions in our report. Further, the
department is taking steps to implement all our recommendations. For the one insurance
examination fee that we reported was overstated, the department has reduced the fee to the
amount we calculated. For the three insurance examination fees we reported were understated,
the department is seeking a legal opinion to determine if it is allowed to increase these fees more
than once during fiscal year 1995-96. If their legal counsel believes the department cannot
increase those three fees immediately, then the department intends to adjust billings to those
affected insurers at the close of fiscal year 1995-96.
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Introduction
Background
The primary responsibility of the Department of Insurance (department) is to protect insurance
policyholders in the State of California. To meet this responsibility, the department administers
programs to protect policyholders, beneficiaries, and the public from the insolvency of insurers
and to
prevent unlawful or unfair practices by insurers. The department also protects the general
public and policyholders from discriminatory, unlawful, or fraudulent practices
or incompetence relating to the sale of insurance. The department’s activities include
examinations of insurance companies and brokers to ensure that their operations comply with the
Insurance Code. In addition, Proposition 103, a voters’ initiative passed in November 1988,
required the department to develop regulations and implement rollbacks of property and casualty
insurance rates. Proposition 103 also requires the department to review and approve changes in
property and casualty rates before they go into effect.
The department funds its regulatory activities almost exclusively from fees assessed to the
entities it regulates, that is, the insurers and brokers in the State. The department assesses
various types of fees, which it calculates in different ways. The various fees include the
following:
Fees, established by the Insurance Code, for licensing and certifying insurance companies or
brokers, with the fee amount varying, depending on the type of license or certification issued;
Fees, established by the Insurance Code, for investigating fraudulent insurance activities;
Fees that are direct charges to insurance companies to cover the hourly costs of staff
members engaged in actuarial, field, insurance practice, and financial analysis examinations
that are in accordance with Section 736 of the Insurance Code; and
Fees based on regulations promulgated by the department to recover costs incurred in
meeting its regulatory obligations under Proposition 103.
Until July 1995, the department also charged fees for consumer complaint examinations.
However, in a recently decided lawsuit, National Association of Independent Insurers, et al. v.
John Garemendi, the California Court of Appeals ruled that the department did not have
statutory authority to charge fees for consumer complaints.
The department bills insurance companies an hourly fee for providing insurance examinations
authorized under the Insurance Code, Section 736. In our previous audit of the department in
April 1994, we could not determine whether
the fees that the department collected for examinations matched the department’s costs. Since
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then, the department has modified its cost accounting system to capture the fees and costs for
each of its regulatory activities. Thus, fiscal year 1994-95 was the first year that the department
was able to determine its costs related to regulatory activities and compare these costs against the
fees collected. According to the department’s records, the department’s examination costs were
more than the fees it collected for each of the four insurance examination fees we reviewed, as
shown in Table 1.
Table 1
Examination Fees and Related Costs
for Fiscal Year 1994-95
Type of Examination Fees Collected Costs Incurred
Actuarial $ 466,000 $1,111,000
Field 5,581,000 7,876,000
Insurance practice 2,770,000 3,637,000
Financial analysis 1,143,000 2,470,000
Fiscal year 1995-96 is the first year that the law requires the department to base its fees on actual
costs.
The department bills insurance companies for Proposition 103 fees each quarter. During fiscal
year 1994-95, the department assessed $21 million in Proposition 103 fees against expenditures
of $19.4 million. The department reduced its fiscal year 1995-96 Proposition 103 fees for the
difference of $1.6 million between its fees and expenditures for fiscal year 1994-95.
Results of Previous Reports by
the Bureau of State Audits
In April 1994, the Bureau of State Audits issued a report, entitled “The Department of Insurance
Cannot Completely Identify Its Costs for Implementing Proposition 103 and Performing
Examinations.” During that audit, we found that the department could not identify the costs of
carrying out its regulatory responsibilities under Proposition 103. In addition, the department
did not have a comprehensive method for identifying all its costs related to examinations of
insurance companies. Thus, we concluded that the department did not have an effective way to
determine whether Proposition 103 and insurance examination fees should be decreased or
increased to match the actual cost of conducting these activities. Also, the department did not
use an appropriate method for allocating indirect costs to Proposition 103 or insurance
examinations. Moreover, the department had collected more revenues than necessary to cover
its operating costs. We did find the department was revising its cost accounting system to
identify expenditures related to specific fees.
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We made the following recommendations to help ensure that the department complied with the
requirements that fees approximate the amount of costs incurred for its regulatory
responsibilities:
Periodically compare expenditures against the fees charged for those activities.
Adjust fees when they significantly differ from related costs.
To ensure consistency in its allocation of expenditures to cost centers, provide clear guidance
to employees on distinguishing among activities when charging their time.
Develop a method to document the allocation of costs to activity-based cost centers.
Devote sufficient resources to promptly make any necessary changes to its cost accounting
system to implement our recommendations.
As a result of our audit, the Legislature added Article 5, commencing with Section 12990, to
Chapter 2 of Division 3 of the Insurance Code. Article 5 requires the department to assess
Proposition 103 fees based on the actual administrative and operational costs arising from
Proposition 103 and to set insurance examination fees based on the actual cost of providing the
examination. Further, Article 5 requires the department to implement a cost accounting system
as recommended by our audit. This system must accurately identify costs by regulatory
activities and link the costs to fees collected for those activities. In addition, Article 5 required
the department to publish a schedule of these fees by October 1, 1995, and did not allow the
department to bill for these fees until it completed the schedule. Finally, Article 5 requires the
state auditor to complete an audit of these fees to determine whether they are based on actual
costs.
In response to our audit and the Legislature’s changes to the Insurance Code, the department
developed a cost model for calculating insurance examination and Proposition 103 fees. This
model is simply the department's methodology for converting the department's costs associated
with these regulatory activities to a schedule of fees that can be charged to insurance companies
subject to the activities. To gather the costs of Proposition 103 activities and insurance
examinations, the department made significant changes to its cost accounting system.
Specifically, the department revised its cost
allocation process by establishing cost centers to accumulate costs incurred for each of its
regulatory responsibilities.
Further, in July 1994, the department implemented an employee timekeeping system to allow
department employees to record their time based on the type of activity performed.
The Department of Finance is conducting a comprehensive audit of the department's internal
accounting and administrative controls. It expects to issue the audit report to the department in
early 1996.
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Scope and Methodology
The purpose of this audit was to determine whether the department implemented the
recommendations from our previous audit and to determine whether it based its fees on actual
costs as required by Article 5 of the Insurance Code. Therefore, we reviewed the department's
new cost model and analyzed the process it used to gather the cost data used in the model.
In conducting this audit, we reviewed laws, regulations, and departmental policies relating to
Proposition 103 and to the insurance examination fees authorized under Section 736 of
the Insurance Code. Further, we interviewed personnel in the department’s Fiscal Services
Bureau, Rate Regulation
Division, Enforcement Branch, Financial Surveillance Branch, Administrative Law Bureau, and
other units in the department.
Our review of the department's cost model focused on whether the department based the fiscal
year 1995-96 fees on actual costs and whether it calculated the fees appropriately. Thus, we
performed a detailed review of the schedules and reports the department used to calculate the
fees. In its cost model, the department used a combination of fiscal year 1994-95 actual costs,
fiscal year 1995-96 budget data, and estimates as a basis for calculating these fees. We
cross-referenced fiscal year 1994-95 actual costs to reports from the department's cost accounting
system. We verified whether the budget data were accurate and whether the budgeted
expenditure would be incurred during fiscal year 1995-96. When estimates were used, we
determined the basis for these estimates and evaluated whether that basis was reasonable. We
also verified whether the department's mathematical calculations were accurate. We then
recalculated the department's fees for errors and flaws in its methodology.
To determine the accuracy of the department’s actual
cost data related to Proposition 103 activities and insurance examinations, we reviewed the
department’s cost accounting system and cost allocation process in place during fiscal year
1994-95. This cost accounting system accumulates costs in cost centers that are attributable to
the department’s various programs. Thus, our review of the department’s accounting system
focused on whether the department recorded costs to the proper cost centers.
Most of the costs charged to the cost centers are personnel costs. Therefore, we examined the
department’s new time reporting system. This system, known as the Time Activity and
Reporting System (TARS), accounts for hours that employees charge to the department's
regulatory activities. We selected a sample of department employees and reviewed the activities
they charged according to TARS records to determine whether these activities were consistent
with the employee’s job description and the cost center charged. We also interviewed
employees in our sample who charged time to Proposition 103 or insurance examination
activities to verify that the employee actually performed the activities charged. Because the
TARS records only hours, not dollars charged to activities, we reviewed the transfer of TARS
hours to the department's cost accounting system. We then reviewed the process through which
the department's cost accounting system converts these hours to dollars. Moreover, to verify
that time data were transferred correctly, we reconciled the hours recorded in the TARS with
those recorded in the department's cost accounting system.
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We also reviewed the department's allocation of indirect costs to determine whether the
department allocates these costs appropriately. To understand and evaluate its cost allocation
methodology, we reviewed the department's cost allocation plan and interviewed department
staff members. To determine whether indirect costs were allocated properly, we reviewed
selected allocations in fiscal year 1994-95.
We also reviewed selected operating expenditures to determine whether these expenditures were
charged to the proper cost centers.
In Chapter 1, we analyze the department’s cost model for converting the department's costs for
doing insurance examinations and Proposition 103 work into a schedule of fees for these
activities. In Chapter 2, we analyze the department’s cost accounting system and the data it
produces for use in the cost model.
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Chapter 1
Insurance Examination Fees Are Inaccurate,
While Proposition 103 Fees Are Accurate
Chapter Summary
A
ccording to the Insurance Code, by October 1, 1995, the Department of Insurance
(department) should limit the fees it assesses for several types of examinations of
insurance companies to the approximate costs of performing these exams. Similarly, the
Insurance Code requires the department by the same date to limit the fees it charges insurance
companies for Proposition 103 regulatory activities. Although the department generally
calculated Proposition 103 fees appropriately, it did not correctly calculate the fees for insurance
examinations. As a result, it has understated three fees and overstated another fee it plans to
charge for conducting insurance examinations. If these errors are not corrected, the
department's billings of $13.1 million for examinations in fiscal year 1995-96 will be understated
by $1.6 million.
The Department Has Implemented the Recommendations of Our Previous Audit
Since our previous audit was issued, the department has made significant improvements in its
ability to match its fees with the actual costs of performing insurance examinations and
Proposition 103 activities. To comply with the new provisions of
the Insurance Code and to implement our recommendations, the
department modified its cost accounting system to capture costs in
The department’s cost
cost centers based on types of activities. Also, as part of these
accounting system now
modifications, the department implemented its Time Activity and
allows it to link fees to
actual costs.
Reporting System (TARS). Department employees use the TARS
to record time spent on various program activities. Thus, the
department now has procedures to properly track the costs of its
regulatory activities. Although the department has made
significant progress in linking its fees to actual costs, additional
refinements are needed.
The department’s Fiscal Services Bureau (bureau) is responsible for determining the fiscal year
1995-96 insurance examination and Proposition 103 fees. The bureau has developed cost
models for calculating these fees based on actual costs. The models make adjustments to
actual costs to arrive at a fee schedule that the department believes will represent the actual cost
of performing these activities.
In this chapter, we focus on how the department calculated its insurance examination and
Proposition 103 fees. As described in this chapter, the department must first gather its costs
related to insurance examination and Proposition 103 activities so that it can calculate the fees.
Chapter 2 describes certain errors in the cost information the department gathered.
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The Cost Model for Calculating
Insurance Examination Fees
Through modifications to its cost accounting system, the department can now compute the
hourly fees for doing insurance examinations based on the department's costs. The department
will charge these fees to insurance companies for each hour that its examiners spend on
examinations.
The bureau took the following steps to arrive at an hourly fee for each of the four types of
examinations we reviewed:
Collected information from the department's cost accounting system on the direct and
indirect costs for conducting each type of examination for fiscal year 1994-95;
Adjusted this direct and indirect cost data for fiscal year 1994-95 to correct for errors in the
way department employees charged their time to various examination cost centers;
Adjusted the direct and indirect costs for fiscal year 1994-95 for budgetary changes expected
in fiscal year 1995-96 to arrive at a reasonable estimate of the cost of doing each of the
examinations;
Collected information from the bureau managers on the estimated billable hours for
examinations for fiscal year 1995-96; and
Computed the hourly fee by dividing the expected cost of examinations for fiscal year
1995-96 by the estimated billable hours for fiscal year 1995-96.
We provide a detailed description of how the bureau calculated the four types of fees in the
appendix.
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Flaws and Errors in the
Department’s Cost Model
We analyzed the department’s calculations for each step of the cost model to determine if its fees
approximate actual costs. Although we found that the department’s cost model generally based
examination fees on actual costs, we found several flaws and errors in its calculations of the fees.
Specifically, in gathering the costs of these examinations, the
department discovered errors employees made in reporting their
time. We found that the department’s method for adjusting for
Department
these errors was flawed. The model also included travel costs in
miscalculations resulted
its calculation of fees even though the department bills examiners’
in erroneous examination
actual travel costs separately. In addition, the department’s
fees.
calculations contained several mathematical errors. We analyzed
the flaws and errors noted above to determine the overall effect on
the fees and then recalculated the fees by correcting them for the
flaws and errors we found. Table 2 shows the recalculated fees.
The effect of these flaws and errors is described more fully in the appendix.
Table 2
Recalculation of the Department’s
Hourly Examination Fees
Type of Examination
Insurance Financial
Actuarial Field practice analysis
Department’s hourly fee $ 240 $ 95 $ 78 $ 111
plus:
Methodology flaws $ 32 $ 1 $ * $ 10
Travel costs 3 2 3 0
Mathematical errors (53) 12 3 11
Total error $ (18) $ 15 $ 6 $ 21
Recalculated hourly fee $ 222 $110 $ 84 $ 132
* We did not observe a methodology flaw in the insurance practice fee.
The department will be using these inaccurate fees to bill insurance companies on an hourly
basis for examinations during fiscal year 1995-96. Therefore, the department’s billings for
fiscal year 1995-96 will be in error. To determine the extent of the error, we used the
department’s estimated billing hours for fiscal year 1995-96 to calculate the effect (as shown in
Table 3) on the department’s projected billings. We project that the department's total billings
for insurance examination fees during fiscal year 1995-96 to be approximately $13.1 million.
As
8
a result of the department's inaccurate fees, we estimate that
the department will underbill insurance companies by approximately $1.6 million for the four
types of examinations.
Table 3
Overbilling (Underbilling) of Fees
Based on Fiscal Year 1995-96
Estimated Billable Hours
Estimated
Type of Total Error Fiscal Year 1995-96 Overbilling
Examination in Each Fee x Billing Hours = (Underbilling)
Actuarial $ 18 3,844 $ 69,192
Field (15) 74,036 (1,110,540)
Insurance practice (6) 41,756 (250,536)
Financial analysis (21) 16,927 (355,467)
Total estimated underbilling $ (1,647,351)
For any overbilling or underbilling of fees in fiscal year 1995-96, the department intends to
adjust its fees for fiscal year 1996-97 to correct the difference. However, in our opinion, the
department’s method of adjusting for overbilling or underbilling is
not equitable to individual insurance companies because the
department does not examine each insurance company every year. So
Insurance companies will those companies receiving a field, insurance practice, or financial
be underbilled analysis examination in fiscal year 1995-96 would be underbilled,
$1.6 million because of whereas those companies receiving these same types of examinations
inaccurate examination in fiscal year 1996-97, after the fees have been adjusted, would be
fees. overbilled. The converse is true for companies receiving an actuarial
examination in fiscal year 1995-96. Because adjusting the fees in
fiscal year 1996-97 will cause these types of billing inequities, we
believe that the department should immediately adjust the fiscal year 1995-96 fees.
The Cost Model for Calculating
Proposition 103 Fees
Except for a few minor errors, the department's model for calculating the Proposition 103
assessment results in fees that match the department's actual Proposition 103 administrative and
operational costs. In the past, the department could not separately identify its expenditures
related to these activities. As a result, it could not determine whether Proposition 103 fees
should be increased or decreased to match the costs of regulatory activities. However, the
department modified its cost accounting system to separately identify the actual costs of
Proposition 103 activities, and now the department can collect cost data to use as a basis for
calculating the fees.
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The bureau took the following steps to arrive at the Proposition 103 assessment:
Collected information from the department's cost accounting system on the operational and
administrative costs for fiscal year 1994-95 for Proposition 103 regulatory activities;
Adjusted the cost data for fiscal year 1994-95 because of errors in the way department
employees charged their time to Proposition 103 cost centers;
Updated the fiscal year 1994-95 costs for Proposition 103 to a projected cost for fiscal year
1995-96 because the fee was to be implemented in fiscal year 1995-96;
Adjusted the costs for fiscal year 1994-95 for known budget changes, including a $9.4
million budget augmentation to be used for resolving Proposition 103 rate rollback cases; and
Reduced the costs for fiscal year 1995-96 by the $1.6 million that it overassessed the fee
assessment for fiscal year 1994-95.
Based on its calculations, the bureau determined that the total Proposition 103 assessment for
fiscal year 1995-96 is $27.6 million. Unlike insurance examination fees in which insurance
companies are charged an hourly fee for examinations, the Proposition 103 fees are assessed to
insurance companies based on a fee schedule in the California Code of Regulations. Using this
schedule, the department applies the assessment fee based on the volume of insurance premiums
written by an insurance company during the preceding calendar year.
Minor Errors in the Department's
Calculation of Proposition 103 Fees
We analyzed the bureau’s calculations to determine whether the bureau based the Proposition
103 fee for fiscal year 1995-96 on actual costs. We found that the
bureau appropriately based the fiscal year 1995-96 fee on actual
costs for fiscal year 1994-95, adjusted for known errors and
The department’s budgetary changes. However, we noted several minor mistakes
calculations of
that the bureau made when calculating the fiscal year 1995-96 fee.
Proposition 103 fees
These mistakes cause the fiscal year 1995-96 assessment to be
are generally accurate.
understated by $209,000. Although the bureau’s review process
did not detect these errors, they are relatively immaterial (as shown
in Table 4) to the total fiscal year 1995-96 assessment.
Table 4
Recalculated Proposition 103
Fee Assessment
10
Department's fee assessment $27,635,000
Add:
Mistakes in calculation 209,000
Recalculated fee assessment $27,844,000
At the end of fiscal year 1995-96, the bureau intends to compare collections against its
Proposition 103 expenditures and adjust the Proposition 103 fee for fiscal year 1996-97 for any
undercollections or overcollections. When the department makes this adjustment to the fiscal
year 1996-97 assessment, it also could adjust for the errors that we discovered.
Conclusion
The department's cost model for determining insurance examination fees contains several flaws
and errors. As a result, fees the department will charge for examinations of insurance
companies during fiscal year 1995-96 are inaccurate. Conversely, the department correctly
calculated the fee assessment for Proposition 103.
Recommendations
Because the fees that the department is charging for examinations of insurance companies during
fiscal year 1995-96 are inaccurate, the department should immediately revise these fees.
Moreover, the department should do the following to ensure that its future fees are accurate and
based on actual costs:
In its actual cost data, make the proper adjustments for errors employees make in reporting
their time.
Exclude travel costs from the cost model because the department separately bills for travel of
examiners.
Thoroughly review future fee calculations to ensure that all mathematical errors are detected
and corrected.
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Chapter 2
The Department’s System for Gathering Its
Costs for Insurance Examination and
Proposition 103 Activities Can Be Improved
Chapter Summary
T
he cost model used by the Department of Insurance (department) to determine insurance
examination and Proposition 103 fees depends on upon actual cost information from the
department's cost accounting system. In Chapter 1, we discussed flaws and errors we
found in the department's cost model. Some of these errors were caused by the department's
attempts to correct for unreliable data. In this chapter, we discuss errors in the department's cost
data for fiscal year 1994-95 that individually may not be significant but that collectively raise
concerns about the reliability of data entered in the department's cost accounting system. For
example, we found that department employees did not record their time to the correct program
activities. Further, late submission of employee time sheets resulted in employee time charged
to the wrong cost centers. Moreover, because the department allocates indirect costs based on
employee labor charges, the errors we found in the department's cost data caused a misstatement
in the allocation of indirect costs. Although we could not quantify the effect of these time
reporting errors, they misstate the department's cost for Proposition 103 and insurance
examination activities, and this misstated cost in turn affects the fees charged for these activities.
For the first year of the department's fee schedule, the department adjusted for these errors by
surveying the managers of the bureaus regarding the extent to which time reporting errors
existed. Then the department adjusted the data used in the cost models to mitigate these errors.
However, for future years, the department needs to improve its process for gathering costs so that
adjustments to the cost data are minimized. We discuss the process that the department uses to
adjust the cost data in Chapter 1 and in the appendix of this report.
Basic Principles of a Reliable
Cost Accounting System
A well-designed cost accounting system uses cost centers based on types of activities to record
direct and indirect costs equitably. However, a cost accounting system depends on reliable
source data. If the source data are unreliable or
contain errors, then information produced from the cost accounting system is inaccurate. This is
especially important for the department because the law requires it to base insurance examination
and Proposition 103 fees on actual costs. Therefore, the department should make every effort to
ensure the reliability and accuracy of the data used in its cost accounting system.
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Source data for the department's cost accounting system consist of
operating expenditures and personal service expenditures.
To be effective, the
Operating expenditures include costs for equipment, contracts,
department’s cost
rent, and supplies. They can be charged to direct or indirect cost
accounting system
centers depending on whether they directly benefit a specific
should gather accurate
program. We reviewed the department's allocation of operating
labor and operating data.
expenditures and found no errors related to insurance examination
or Proposition 103 activities.
The Time Activity and Reporting System (TARS) records
employee time spent on programs and is the source for
the department's personal service expenditures. The TARS accumulates the monthly time
charges of department employees in hours spent working on specific activity-based cost centers.
Monthly, the department transfers the hours employees charged to cost centers into the
department's cost accounting system. Because the cost accounting system records personal
service costs in dollars, not hours, it converts these hours into dollars using employee salaries.
Thus, the cost accounting system depends on accurate TARS data to ensure the accuracy of its
allocation of employee labor charges.
Another aspect of a cost accounting system is the allocation of indirect costs. Indirect costs are
those costs that cannot be easily identified with or assigned to a given cost center. They
generally include administrative costs, such as the cost of the executive office, general
administration, budgeting, accounting, personnel, business services, data processing, and
training. The department gathers these indirect costs into indirect cost centers and then allocates
them to the cost centers relating to each of its programs. The department uses cumulative labor
charges in direct cost centers as the basis for allocating indirect costs. So if a direct cost center
comprised 50 percent of the department’s cumulative labor charges, then it would be allocated
50 percent of the department’s indirect costs. Therefore, for the indirect cost allocation to be
equitable, the department's employees need to record their time accurately.
Department Employees Do Not
Always Record Time Correctly
Although the department has set up guidelines to ensure that
employees record their time accurately, we found that the
Program costs are not
employees are not always doing so. In addition, we found that the
accurate because of
department's process for reviewing the accuracy of employee time
employee time reporting
reporting is weak. Because employees do not always record their
errors.
time to the correct programs, both the direct and indirect costs of
the programs are inaccurate.
In reviewing the department’s year-end reports from TARS for
fiscal year 1994-95, we found that department employees did not consistently charge time to the
program activities they performed. For example, employees in the Consumer Communications
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Bureau charged approximately 2,700 hours of administrative time to a Proposition 103 cost
center. In addition, employees in the Rate Enforcement Bureau charged approximately 5,700
hours of administrative time to a Proposition 103 cost center. However, these employees should
have charged this time to the unit’s indirect cost center, which, in turn, would have allocated the
administrative time to all programs in each bureau.
Conversely, employees in the Field Actuarial Bureau charged approximately 1,400 hours of
direct program activities as an indirect cost. Also, employees in the Reinsurance Bureau
charged approximately 1,200 hours of direct program activities as an indirect cost. These
employees should have charged this time to direct cost centers. Because these costs were
incorrectly charged as an indirect cost, all the programs in each bureau were charged
inappropriately for these costs.
We also reviewed a sample of employees’ time sheets and found that 3 of the 60 employees we
tested charged their time incorrectly. For example, one employee charged his time to the wrong
unit during fiscal year 1994-95. This employee’s error caused indirect costs to be incorrectly
allocated in the unit. As a result, Proposition 103 costs were overcharged by $160,000. This
overcharge consisted of $84,000 for the employee’s salary and benefits and $76,000 of allocated
indirect costs. A second employee charged workers’ compensation activities to a Proposition
103 cost center. However, workers’ compensation and Proposition 103 activities are unrelated.
As a result, Proposition 103 costs were overcharged by $4,000. Finally, a third employee who
works in the License Bureau charged time to a Proposition 103 cost center. However, the
License Bureau does not perform Proposition 103 activities. As a result, Proposition 103 costs
were overcharged by $43,000. We provided the information on these three examples to the
Fiscal Services Bureau (bureau) so that it could correct these errors when calculating the
insurance examination and Proposition 103 fees.
Department supervisors are in the best position to determine whether employees in their unit
have charged their time correctly. The department has procedures that require supervisors to
ensure the accuracy of their employees’ time sheets. Since April
1995, the bureau has provided to department supervisors monthly
reports showing which cost centers their employees charged.
Supervisors should However, we believe a more useful report also would show the
ensure that employees specific activities and tasks that employees charged. This level of
accurately charge their detail would allow department supervisors to determine whether
time. their staff members charged the correct cost centers. By not
providing detailed reports to supervisors, the department is lacking
an important control over time reporting.
The bureau is responsible for ensuring accurate TARS data. The bureau also has the necessary
TARS reports available to
it to detect employee errors in time reporting. However, the department’s procedures are not
specific as to what steps the bureau should take to ensure accurate data.
14
Late or Unapproved Time Sheets Are
Not Recorded to the Proper Cost Centers
We also found that late or unapproved time sheets are not recorded properly in the department's
cost accounting system. For the TARS to work effectively, each employee must complete a
monthly time sheet. Before an employee’s time sheet can be sent to the department's cost
accounting system, the employee must complete it and the supervisor must approve it. Time
sheets that are not submitted and approved do not pass to the department's cost accounting
system. When this occurs, the employee’s time does not get recorded to the cost centers they
charged. Instead, the cost accounting system charges the employee’s time to a default cost
center, known as the homebase, assigned to that employee’s unit. The homebase cost center can
be either a direct cost center representing a specific regulatory activity or an indirect cost center
that will allocate costs to all the direct cost centers in a unit. The homebase cost center may not
be representative of how employees actually spent their time during the month.
During fiscal year 1994-95, we found that the number of late or unapproved time sheets ranged
from 13 to 126, or 1.4 to 12.8 percent of the monthly time sheets. Thus, the time of these
employees is not correctly recorded in the department's
cost accounting system. As a result, the department's cost accounting system does not reflect
the correct distribution of labor costs for these employees.
The Fiscal Services Bureau (bureau), which administers the TARS, cuts off time reporting each
month when at least 95 percent of employee time sheets for direct programs are submitted and
approved. The reason for this cutoff is that the bureau needs to record this information promptly
in its cost accounting system. The bureau believes that the effect of having 5 percent or less of
its employee time sheets charged to the homebase cost center does not materially alter the
department's allocation of its indirect costs. We recognize the need to meet accounting
deadlines; however, the bureau should ensure that employees and supervisors promptly submit
and approve time sheets so that the most accurate cost data are recorded in its cost accounting
system. Further, although a cutoff of 95 percent was reasonable during the first year of TARS
operation, when the department was still orienting its employees to the new system, department
employees are now more familiar with the TARS. In our opinion, 99 percent of the
department's employees should be expected to submit their accurately completed time sheets on
time.
Errors in Time Reporting Cause
Misallocations of Indirect Costs
Indirect costs are a substantial portion of the expenditures associated with insurance examination
and Proposition 103 activities. Thus, it is important that the department have a fair and
equitable process for allocating indirect costs. However, the errors discussed above cause the
misallocation of the department's indirect costs.
15
The department's cost accounting system uses cumulative labor charges as a basis for allocating
indirect costs. Therefore, proper allocation of indirect costs
depends on accurate time reporting. However, because the
department's labor charges contain errors, the basis for the
The department uses
allocation of indirect costs is skewed. For example, we noted that
cumulative labor charges
3 of the 60 employees we tested did not report their time correctly.
as a basis of allocating
For the employee who charged his time to the wrong unit, we
indirect costs.
determined that this error caused an underallocation of $49,000 in
indirect costs to an insurance examination cost center and an
overallocation of $76,000 to a Proposition 103 cost center.
This example demonstrates the effect that employee time reporting has on the indirect cost
allocation and demonstrates that an error by even one employee can alter the indirect cost
allocation. We did not attempt to quantify the overall effect of employee time reporting errors
because neither we nor the department could determine the extent of those errors. However,
because of the time reporting errors noted above, the department's allocation of indirect costs is
not totally correct during fiscal year 1994-95.
The Department Has Taken
Corrective Action
The department has taken steps to minimize employee
time reporting errors. Beginning in November 1995, the department now requires that bureau
managers review a more detailed TARS report for employee time reporting errors. This detailed
report shows not only the cost centers charged, but also the types of activities charged. Thus,
bureau managers will now be able to determine if the activities charged to cost centers are
appropriate.
In addition, beginning in July 1995, the bureau began identifying employees whose time sheets
missed the cutoff for input to the cost accounting system. The bureau now obtains these
employees’ time sheets and manually inputs them in the cost accounting system. The bureau
also sends a report to its division chiefs and deputy commissioners identifying those employees
whose time sheets were late. The bureau believes that these procedures will ensure that at least
99 percent of its employees submit their time sheets on time.
Conclusion
The department can improve its process for gathering costs related to insurance examination and
Proposition 103 activities. Specifically, employees are not always reporting their time to the
proper cost centers. Further, late or unapproved employee time sheets are not recorded
appropriately in the department's cost accounting system. Moreover, because the department
bases its allocation of indirect costs on employee labor charges, errors in the way employees
report their time skew the allocation of indirect costs. Finally, the department needs to improve
its process for gathering these costs so that future adjustments are minimized.
16
Recommendations
To improve the gathering of actual cost data used in the cost model for determining examination
and Proposition 103 fees, the department should do the following:
Implement procedures requiring supervisors to review monthly TARS reports for errors by
employees reporting their time.
Define and implement the procedures that the Fiscal Services Bureau will use for ensuring
accurate TARS data.
Implement procedures to require that 99 percent of employee time sheets are submitted and
reviewed on time.
Modify its procedures for reporting time to ensure that employees charge program and
administrative activities to the proper cost centers.
We conducted this review under the authority vested in the state auditor by Section 8543 et seq.,
of the California Government Code and according to generally accepted governmental auditing
standards. We limited our review to those areas specified in the audit scope of the this report.
Respectfully submitted,
KURT R. SJOBERG
State Auditor
Date: January 9, 1996
Staff: Steven M. Hendrickson, Audit Principal
John Baier, CPA
Willie D. Benson, Jr.
Jim Gabler
17
Appendix
A Detailed Description of the Department’s
Cost Model for Computing Examination Fees
A
s discussed in Chapter 1, the department has a cost accounting system that enables it to
gather its actual costs of performing insurance examinations. Using these actual costs,
the department can compute the hourly fees for insurance examinations. The department
will charge these fees to insurance companies for each hour its examiners spend doing
examinations.
The following are the steps the department's Fiscal Services Bureau (bureau) took to arrive at an
hourly fee for each of the four types of examinations we reviewed:
1. The bureau collected information from the department's cost accounting system on the
direct and indirect costs for each type of examination for fiscal year 1994-95.
2. The bureau then adjusted the direct and indirect cost data for fiscal year 1994-95 because of
errors in the way department employees charged their time to various examination cost
centers.
3. The bureau collected each bureau’s direct costs for fiscal year 1994-95 from the
department's cost accounting system. These direct costs include not just the cost of doing
examinations but also the cost of all other activities.
4. The bureau collected information on the percentage of time the bureaus spent doing
examination activities. These percentages were used to estimate the portion of each
bureau’s direct costs related to each examination activity.
5. The bureau collected each bureau’s budgeted direct costs for fiscal year 1995-96 from the
department's budget office.
6. The bureau obtained an estimate from the bureau managers of the percentage of direct costs
that would be spent on each examination activity in fiscal year 1995-96. These
percentages were used to estimate the portion of each bureau’s budgeted direct costs that
the bureau managers estimate will be spent on examination activities in fiscal year
1995-96.
7. Using the direct costs for fiscal year 1994-95 and the budgeted direct costs for fiscal year
1995-96 for examination activities as determined in the previous four steps, the bureau
calculated the expected change in the cost of each of the examinations from fiscal year
1994-95 to fiscal year 1995-96.
18
8. The bureau adjusted the direct and indirect costs for fiscal year 1994-95 for budgetary
changes to arrive at a reasonable estimate of the expected fiscal year 1995-96 cost for each
of the examinations.
9. The bureau collected information from the bureau managers on the estimated billable hours
for examinations for fiscal year 1995-96.
10. Finally, the bureau computed the hourly fee by dividing the expected fiscal year 1995-96
cost of examinations by the estimated billable hours for fiscal year 1995-96.
Flaws and Errors in the
Department's Cost Model
We analyzed the department’s cost model to determine if it based the fees on actual costs.
Although we found that the department’s cost model generally based the fees on actual costs, we
found several flaws and errors that materially misstated the fees. For example, the department’s
methodology for adjusting the expenditures for fiscal year 1994-95 for errors employees made in
reporting their time overcompensated for the effect those errors had on the fees. It also included
travel costs in its calculation of the fees even though the department bills examiners’ actual
travel costs separately. In addition, the department’s calculations contained several
mathematical errors.
Example Using Actuarial
Examination Fees
In the text below, we discuss the department's calculation
and the errors we found, using the department's actuarial examination fee as an example. We
explain each of the steps that the bureau took to determine the actuarial fee, along with our
calculations. In the exhibit, we present the department's calculation and our calculation side by
side for ease of comparison.
Steps 1 and 2:
Collected Fiscal Year 1994-95 Direct and Indirect Costs and Adjusted Them for
Known Errors
To calculate the fee, the bureau collected the direct and indirect costs for fiscal year 1994-95.
Typically, the efforts of several of the department's bureaus will make up the total time spent on
a given type of examination. For example, the Actuarial Analysis Bureau, Field Actuarial
Bureau, Office of Chief Actuary, and Field Examination Division Office each contribute in the
performance of actuarial examinations. Therefore, employees from each of these units who
participated in the performance of actuarial examinations should have charged their time to the
cost center for actuarial examinations.
19
The bureau knew that the direct and indirect costs for fiscal year 1994-95 contained some time
reporting errors, so it made adjustments to the costs for the known errors. Although the bureau
adjusted for the known errors, it did not adjust for all the errors discovered by the bureau
managers. Specifically, the bureau managers determined that the percentage of time employees
spent on examination activities was in error. The bureau managers supplied the bureau with
corrected percentages for fiscal year 1994-95. However, as explained below, the bureau did not
properly adjust the direct and indirect costs for fiscal year 1994-95 for these time reporting
errors. In Tables 1 and 2 of the exhibit, we illustrate the department's calculation and our
calculation.
The Department's Calculation Our Calculation
The bureau collected the direct and indirect costs The bureau should have estimated the amount for
of actuarial examinations for fiscal year 1994-95. time reporting errors using the percentages
These costs also included travel costs, which the supplied by the bureau managers. Also, the
department bills separately from examination fees. bureau should have adjusted the direct and indirect
The bureau then adjusted these costs for known costs for fiscal year 1994-95 for these errors. We
errors, as shown in Table 1 of the exhibit. used the percentages to determine a reasonable
estimate of the time reporting errors. We then
used these estimates to adjust each bureau’s total
direct and indirect costs related to actuarial
examinations, as shown in Table 2 of the exhibit.
In addition, the bureau made a mathematical error
in calculating one of its adjustments.
Furthermore, travel costs should have been
excluded from the direct and indirect costs for
fiscal year 1994-95. As shown in Table 2 of the
exhibit, our methodology resulted in lower direct
and indirect costs for fiscal year 1994-95.
Steps 3 and 4:
Calculated Fiscal Year 1994-95 Actual
Direct Costs Related to Actuarial Examinations
Because the fee schedule being created would be put into effect in
fiscal year 1995-96, the Fiscal Services Bureau (bureau) realized
that it needed to adjust the fiscal year 1994-95 costs for budgetary
changes in fiscal year 1995-96. However, the department's
budget is broken down by bureau, not by cost center. Therefore,
to adjust for budgetary changes, it was necessary for the bureau to
compare each bureau’s actual costs for fiscal year 1994-95 to its
budgeted costs for fiscal year 1995-96. The bureau began by
obtaining the direct costs of each bureau that does actuarial
examinations. In addition, the bureau determined the percentage
of time, as recorded in the Time Activity and Reporting System
(TARS), that each of the bureaus spent doing actuarial
examinations in fiscal year 1994-95. However, the bureau relied
on these percentages, as shown in Table 3 of the exhibit, in
instances when it knew the TARS data contained time reporting
20
errors. Instead, it should have used the percentages that the
bureau managers felt were more accurate, as shown in our
calculations in Table 4 of the exhibit.
The Department's Calculation Our Calculation
Using each bureau’s direct costs for fiscal year Each bureau’s direct cost that the Fiscal Services
1994-95 and the percentage of time, according to Bureau (bureau) used was correct. However, the
the TARS, that each bureau spent doing actuarial bureau used percentages based on the TARS,
examinations, the bureau calculated the total direct despite information from the bureau managers
costs of actuarial examinations for fiscal year indicating that these percentages were inaccurate.
1994-95, as shown in Table 3 of the exhibit. The To arrive at a more accurate direct cost for fiscal
percentages used are based on data from the year 1994-95, the bureau should have used the
TARS. percentages developed by the bureau managers
when it estimated the percentage of time each
bureau spent doing actuarial examinations in
fiscal year 1994-95. In our calculations, we used
the percentages that the bureau managers
supplied to determine a more accurate estimate of
direct costs for fiscal year 1994-95, as shown in
Table 4 of the exhibit.
Steps 5 and 6:
Calculated Fiscal Year 1995-96 Budgeted
Direct Costs Related to Actuarial Examinations
As discussed above, the bureau needed to adjust its direct and
indirect costs for fiscal year 1994-95 for budgetary changes.
To adjust for these changes, the bureau compared each
bureau’s actual direct cost for fiscal year 1994-95 to its
budgeted direct cost for fiscal year 1995-96. To determine the
budgeted direct costs related to actuarial examinations for
fiscal year 1995-96, the bureau obtained the fiscal year
1995-96 budget for each bureau that does actuarial
examinations. In addition, from the bureau managers, the
bureau obtained estimates of the percentage of time each
bureau would spend doing actuarial examination activities in
fiscal year 1995-96. As shown below, the bureau used these
percentages to determine the portion of each bureau’s budget
that the bureau managers estimate will be spent on actuarial
examination activities in fiscal year 1995-96. Tables 5 and 6
of the exhibit illustrate the department’s calculation and our
calculation.
The Department's Calculation Our Calculation
To calculate the estimated direct cost related to The bureau's method for calculating the
actuarial examinations for fiscal year 1995-96, the fiscal year 1995-96 budget for actuarial
21
bureau used the budgeted direct cost for fiscal year examinations was appropriate. However, we
1995-96 for each bureau and the percentage of noted one mathematical error in its calculations.
time the bureau managers estimate their examiners Specifically, the bureau did not correctly record
will spend doing actuarial examinations in fiscal one bureau’s estimated percentage. When we
year 1995-96. Table 5 of the exhibit shows this used the correct percentage, we determined a
calculation. much lower estimate of direct costs for fiscal year
1995-96, as shown in Table 6 of the exhibit.
Step 7:
Expected Budgetary Change
The bureau calculated an expected budgetary change to adjust
the direct and indirect costs for estimated workload changes for
fiscal year 1994-95. To compute the expected budgetary
change, the bureau used the totals for the direct costs for fiscal
year 1994-95 and the budgeted direct costs related to actuarial
examinations for fiscal year 1995-96, as calculated in the two
previous steps. The department's calculation of the budgetary
change is illustrated in Table 7 of the exhibit, and our calculation
is illustrated in Table 8 of the exhibit.
The Department's Calculation Our Calculation
The bureau divided the estimated direct costs of We found no mathematical errors in the bureau's
actuarial examinations for fiscal year 1995-96 calculation of the expected budgetary change.
(Table 5 of the exhibit) by the direct costs of However, as shown in the previous two steps,
actuarial examinations for fiscal year 1994-95 the bureau did not correctly calculate the direct
(Table 3 of the exhibit) to arrive at the expected costs of actuarial examinations for fiscal year
percentage change in the budget. Thus, as shown 1994-95 and the budgeted direct costs for fiscal
in Table 7 of the exhibit, the bureau calculated the year 1995-96. Specifically, the fiscal year
percentage change to be 78 percent. In other 1994-95 direct costs should have been
words, the bureau expects the direct and indirect approximately $446,000, as shown in Table 4 of
costs of actuarial examinations for fiscal year the exhibit. Further, the budgeted direct costs
1995-96 to be only 78 percent of the direct and for fiscal year 1995-96 should have been
indirect costs for fiscal year 1994-95. approximately $434,000, as shown in Table 6 of
the exhibit. When we used these more accurate
estimates of direct costs, we calculated the
expected budgetary change to be 97 percent, as
shown in Table 8 of the exhibit.
Step 8:
Adjusted the Fiscal Year 1994-95 Direct
and Indirect Costs for Budgetary Changes
After the bureau calculated the expected percentage change in
the budget, it adjusted the direct and indirect costs for fiscal
year 1994-95 for the expected change to arrive at an estimate
of direct and indirect costs for fiscal year 1995-96. After
the estimated direct and indirect costs were calculated for
fiscal year 1995-96, the bureau reduced the estimated costs by
the fiscal year 1995-96 travel cost expected to be incurred in
22
doing actuarial examinations. However, because examiners’
actual travel costs are billed separately, travel costs should not
be included in the calculation of the fee. The department's
calculation of the estimated direct and indirect costs for fiscal
year 1995-96 is illustrated in Table 9 of the exhibit, and our
calculation of the estimated direct and indirect costs for fiscal
year 1995-96 is illustrated in Table 10 of the exhibit.
The Department's Calculation Our Calculation
As shown in Table 9 of the exhibit, the bureau As shown in Table 10 of the exhibit, we
adjusted the direct and indirect costs for fiscal year recalculated the estimated direct and indirect
1994-95 for the estimated budgetary changes for costs of actuarial examinations for fiscal year
fiscal year 1995-96. The bureau did this by 1995-96 because of errors in the previous
multiplying the 78 percent determined in the calculation steps. Furthermore, it is more
previous step by the direct and indirect costs for appropriate to exclude travel costs from the fee
fiscal year 1994-95, as calculated in Table 1 of the calculations because examiners’ actual travel
exhibit. In addition, because the bureau included costs are billed separately. We removed the
actual fiscal year 1994-95 travel costs in its fee actual travel costs from the direct and indirect
calculation, it reduced the estimated fiscal year costs for fiscal year 1994-95, as shown in Table
1995-96 costs by the estimated fiscal year 1995-96 2 of the exhibit. Therefore, we did not reduce
travel costs. the estimated direct and indirect costs for fiscal
year 1995-96 by the estimated travel costs for
fiscal year 1995-96. By making these
corrections, we determined a more accurate
estimate of direct and indirect costs for actuarial
examinations for fiscal year 1995-96, as shown
in Table 10 of the exhibit.
Steps 9 and 10:
Computed the Hourly Fee
To compute the hourly fee, the bureau obtained from the
bureau managers the estimates of fiscal year 1995-96 billable
hours. The bureau divided the estimated direct and indirect
costs for fiscal year 1995-96 by the estimated fiscal year
1995-96 billable hours to arrive at the actuarial examination
fee. However, errors that the bureau made in its calculations
in the previous steps caused the fee to be inaccurate. The
department's calculation and our calculation of the actuarial
examination fee are illustrated in Tables 11 and 12 of the
exhibit.
The Department's Calculation Our Calculation
As shown in Table 11 of the exhibit, the bureau As shown in Table 12 of the exhibit, because of
calculated the fee as $241. the errors we noted above, the bureau should have
calculated the fee as $222.
23
We did not illustrate the bureau’s calculations of the other three examination fees, nor did we
illustrate our calculations of these fees, because the calculations and errors were similar. The
effects on the other three fees from the errors discussed above are illustrated in Tables 2 and 3 of
Chapter 1 of this report.
24
Exhibit
The Department’s Calculation Our Calculation
Steps 1 and 2 Steps 1 and 2
Table 1 Table 2
Unadjusted FY 1994-95 Unadjusted FY 1994-95
Direct and Indirect Costs $1,111,297 Direct and Indirect Costs $ 1,111,297
Adjustments to: Adjustments to:
Actuarial analysis $ 1,344 Actuarial analysis $(74,499)
Field actuarial 93,279 Field actuarial 61,027
Office of chief actuary - Office of chief actuary (162,531)
Field examination Field examination
division office - division office (481)
Departmental overhead - Departmental overhead (47,894)
Travel costs - Travel costs (7,460)
Total Adjustments 94,623 Total Adjustments (231,838)
Adjusted FY 1994-95 Costs $1,205,920 Adjusted FY 1994-95 Costs $ 879,459
(Bureau of State Audits adjustments are shown in bold.)
Steps 3 and 4 Steps 3 and 4
Table 3 Table 4
Percentage
Percentage Direct Cost Attributable Direct Cost
Attributable of Doing to Actuarial of Doing
to Actuarial Actuarial Activities Actuarial
Activities Examination From Examinations
FY 1994-95 Based on s FY 1994-95 Bureau for
Bureau Direct Costs the TARS for Bureau Direct Costs Managers FY 1994-95
FY 1994-95
Actuarial analysis Actuarial analysis
$636,464 30.36% $193,211 $636,464 18.35% $116,791
Field actuarial 530,138 57.08 302,610 Field actuarial 530,138 57.08 302,610
Office of chief Office of chief
actuary 324,774 57.23 185,872 actuary 324,774 8.0 25,982
Field examination Field examination
division office 545,477 0.59 3,227 division office 545,477 0.13 709
Total Estimated Direct Costs for FY 1994-95 $684,920 Total Estimated Direct Costs for FY 1994-95 $446,092
(Bureau of State Audits adjustments are shown in
25
Note: Percentages in the tables are rounded to two digits for presentation purposes. Therefore, calculations using percentages
may be off by small amounts because of rounding.
The Department’s Calculation Our Calculation
Steps 5 and 6 Steps 5 and 6
Table 5 Table 6
Estimated Estimated
Percentage Estimated Percentage Estimated
FY 1995-96 Attributable Direct Costs FY 1995-96 Attributable Direct Costs
Budgeted to Actuarial for FY Budgeted to Actuarial for FY
Bureau Direct Costs Activities 1995-96 Bureau Direct Costs Activities 1995-96
Actuarial analysis $643,512 18.35% $118,084 Actuarial analysis $643,512 18.35% $118,084
Field actuarial 507,633 57.0 289,351 Field actuarial 507,633 57.0 289,351
Office of chief Office of chief
actuary 313,625 8.0 25,090 actuary 313,625 8.0 25,090
Field examination Field examination
division office 639,332 16.0 102,293 division office 639,332 0.16 1,023
Total Estimated Direct Costs for FY 1995-96 $534,818 Total Estimated Direct Costs for FY 1995-96 $433,548
(Bureau of State Audits adjustments are shown in bold.)
Step 7 Step 7
Table 7 Table 8
FY 1995-96 FY 1994-95 FY 1995-96 FY 1994-95
Estimated Estimated Expected Estimated Estimated Expected
Direct Costs Direct Costs Budgetary Direct Costs Direct Costs Budgetary
(Table 5) (Table 3) Change (Table 6) (Table 4) Change
$534,818 $684,920 = 78.08% $433,548 $446,092 = 97.19%
Step 8 Step 8
Table 9 Table 10
FY 1994-95 direct and indirect cost as FY 1994-95 direct and indirect cost as
adjusted (Table 1) $ 1,205,920 adjusted (Table 2) $879,459
Expected budgetary change (Table 7) 78.08% Expected budgetary change (Table 8) 97.19%%
Subtotal 941,640 Subtotal 854,730
Less estimated FY 1995-96 travel costs (15,000) Less estimated FY 1995-96 travel costs
Estimated FY 1995-96 Direct and Estimated FY 1995-96 Direct and
Indirect Cost $ 926,640 Indirect Cost $854,730
Steps 9 and 10 Steps 9 and 10
Table 11 Table 12
Estimated Estimated
FY 1995-96 FY 1995-96 FY 1995-96 FY 1995-96
Direct and Estimated Actuarial Direct and Estimated Actuarial
Indirect Cost FY 1995-96 Examination Indirect Cost FY 1995-96 Examination
(Table 9) Billable Hours Fee (Table 10) Billable Hours Fee
$926,640 3,844 = $241.061 $854,730 3,844 = $222.35
1 The department elected to bill this fee at $240, rather than use the $241
26
as calculated.
Note: Percentages in the tables are rounded to two digits for presentation purposes. Therefore, calculations using percentages may be off
by small amounts because of rounding.
27