Summary

State of California: Internal Control and State and Federal Compliance Audit Report for the Fiscal Year Ended June 30, 1998 June 1999 98002 rotiduA etatS ainrofilaC S T I D U A E T A T S F O U A E R U B Copies of this report by the State Auditor are available for $10 per copy. Reports can be obtained by contacting: California State Auditor Bureau of State Audits 555 Capitol Mall, Suite 300 Sacramento, California 95814 (916) 445-0255 or TDD (916) 445-0255 x 248 OR This report is also available on the World Wide Web http://www.bsa.ca.gov/bsa/ Permission is granted to reproduce reports. CONTENTS Summary 1 Introduction 5 Status of the State(cid:146)s Solutions for the Year 2000 Computer Problems 7 Independent Auditor(cid:146)s Reports on Compliance and Internal Control 11 Independent Auditor’s Report on Compliance and on Internal Control Over Financial Reporting Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards 13 Independent Auditor’s Report on Compliance With Requirements Applicable to Each Major Program and on Internal Control Over Compliance in Accordance With OMB Circular A-133 17 Schedule of Findings and Questioned Costs 23 Compliance and Internal Control Issues Applicable to the Financial Statements 27 Compliance and Internal Control Issues of General Concern Related to Federal Grant Requirements 35 Compliance and Internal Control Issues Related to Grants Administered by Individual Departments 41 U.S. Department of Agriculture 43 U.S. Department Agriculture, U.S Department of Education 47 U.S. Department of Agriculture, U.S. Department of Education, U.S. Department of Health and Human Services 49 U.S. Department of Interior 52 U.S. Department Justice 54 Federal Emergency Management Agency 58 U.S. Department of Education 64 U.S. Department of Education, U.S. Department of Health and Human Services 86 U.S. Department of Health and Human Services 88 Corporation for National and Community Service 96 Summary of Prior Audit Findings 101 Schedule of Federal Assistance 127 Appendix Index by State Department 151 Response to the Audit Department of Finance R-1 SUMMARY T he State continues to experience problems in accounting and administrative practices that affect its internal control systems over financial reporting and compliance with federal requirements. These problems result in noncompliance with some state and federal regulations. Although these weaknesses are not individually significant, they have a cumulative effect on the accuracy of reported financial information and on the efficiency, effectiveness, and propriety of the State’s operations. STATUS OF YEAR 2000 COMPLIANCE Although the new millennium is rapidly approaching, the State has not yet ensured computer systems that provide critical services at many agencies will recognize the year 2000. Many of the State’s computer hardware and software applications identify a year using two digits; for example, 98 represents 1998. On January 1, 2000, these systems may produce nonsensical data or fail to operate because the computers will read 00 as 1900 rather than 2000. State agencies are focusing their efforts on applications that support mission-critical business practices and are making progress toward correcting critical computer systems. However, as of December 31, 1998, some agencies had not completely tested their computer systems, resolved critical issues with their data-exchange partners, corrected or replaced embedded chips that control certain computerized functions, or completed business continuation plans. Five of these agencies administer some of the largest federal programs. These agencies are the Department of Education, Employment Development Department, Department of Health Services, Department of Social Services, and Department of Transportation. Compliance and Internal Control Issues Applicable to the Financial Statements Inadequacies in various state departments’ compliance with state requirements and in their internal controls resulted in problems that affect financial statement amounts. Specifically, we found the following problems: • The State did not ensure that the Statewide Real Property Inventory and the State’s finan- cial statements incorporated all real property transactions. • The Department of Transportation did not accurately account for fixed assets for the Equipment Service Fund. • The State Controller’s Office and the Department of Finance (Finance) do not ensure that departments reconcile fund balance differences before issuing reports on the budgetary basis fund balances. 1 Compliance and Internal Control Issues of General Concern Related to Federal Grant Requirements We found that weaknesses exist in the State’s compliance with federal requirements and in internal controls over cash management. Specifically, Finance issued instructions to agencies regarding transactions under the Cash Management Improvement Act that were inconsistent with prescribed procedures. As a result, in at least one instance, the State’s interest liability to the federal government was understated by $17,400. Compliance and Internal Control Issues Related to Grants Administered by Individual Departments We found weaknesses in several state departments regarding their compliance with federal requirements and internal controls applicable to the administration of individual federal programs. We noted the following specific conditions under the related federal departments: U.S. Department of Agriculture U.S. Department of Education The State’s Department of Education (Education) did not always report to Finance transfers of federal funds. During fiscal year 1997-98, Education excluded 5 transfers totaling $16,200,000 from work sheets submitted in the first 3 quarters of the fiscal year for the Vocational Educa- tion—Basic Grants to States and 17 transfers totaling $5,400,000 from work sheets submitted for the Child and Adult Care Food Program. As a result, Finance understated the State’s inter- est liability for transfers related to these programs by $49,000. U.S. Department of Agriculture U.S. Department of Education U.S. Department of Health and Human Services Education lacks adequate procedures to ensure it promptly receives all required A-133 audit reports from nonprofit subrecipients. As of March 1999, Education had not received fiscal year 1996-97 audit reports from 70 of 180 subrecipients in the Food Distribution, Child and Adult Care Food Program, and the Adult Education—State Grant Program. Because of defi- ciencies in Education’s tracking system, we could not determine which subrecipients in its Child Care Mandatory and Matching Funds of the Child Care and Development Fund pro- gram were required to submit A-133 audit reports. U.S. Department of Interior For 3 of 12 sport fish restoration and wildlife restoration projects it completed during fiscal year 1997-98, the Department of Fish and Game did not have required documentation for in-kind contributions totaling $687,409. In addition, for a fourth project, the department could not support approximately $9,600 it reported as cost-sharing expenditures. 2 Federal Emergency Management Agency The State’s Office of Emergency Services (Emergency Services) did not always report to Finance transfers of federal funds. During fiscal year 1997-98, Emergency Services failed to report all refunds, totaling approximately $68,200,000, and four drawdowns totaling approxi- mately $2,500,000, for the Public Assistance Grants. As a result, Finance understated the State’s interest liability for transfers related to this program by approximately $177,000. In addition, Emergency Services failed to follow up on the 27 findings it received from the State Controller’s Office during fiscal year 1997-98. These findings included $212,000 in questioned costs. U.S. Department of Education The State’s Department of Education (Education) did not always ensure that it approved only allowable costs and activities. For instance, Education approved all 5 Goals 2000—State and Local Education Systemic Improvement Grants (Goals 2000) applications we reviewed even though they either included disallowed expenditures or did not sufficiently describe how the subrecipient intended to use the funds. Specifically, of the $683,124 awarded to these 5 subrecipients, we identified $74,596 for questionable activities and $202,098 in costs that lacked adequate documentation. Likewise, for 1 of the 40 Adult Education—State Grant Program applications we reviewed, Education approved the community-based organization’s application for $69,500 and subsequently increased the award to $325,750 without receiving a complete application to justify the funding. In addition, Education and the California Community Colleges, Chancellor’s Office (Chancellor’s Office) did not always adequately limit cash payments to subrecipients. For example, in April 1998, Education advanced approximately $42,000,000—or 80 percent of the $52,000,000 it awarded through 350 grants—to subrecipients of the Goals 2000 program without first determining their cash needs. As of February 1999, Education had received reports from subrecipients of only 5 of these grants indicating that they had spent their advances. Similarly, between October and November 1997, the Chancellor’s Office disbursed approximately $990,000, or 75 percent, of its fiscal year 1997-98 Tech-Prep Education awards, totaling $1,320,000, without first determining the cash needs of the subrecipients. As of December 31, 1997, the subrecipients had used from 4 percent to 55 percent of their funds, totaling approximately $316,000. U.S. Department of Health and Human Services Because of a computer error, the State’s Department of Health Services (Health Services) incorrectly paid certain claims for psychological services between August 1997 and December 1998. As a result, Health Services estimates it may have overpaid providers between $5,200,000 and $6,300,000. Although Health Services has been aware of the error 3 for some time, it has not yet identified actual overpayments to providers it should recover or the amount that it should refund to the federal government. According to Health Services, it has corrected the error, so no additional provider overpayments should occur. In addition, Health Services’ Investigations Branch (Investigations) does not have an adequate tracking system to ensure it properly refers all potentially fraudulent activities to the State’s Department of Justice (Justice). Specifically, Investigations stated that it referred 23 fraud cases to Justice during fiscal year 1997-98 but it cannot confirm this. Additionally, Justice did not find 16 of those cases in its statewide fraud tracking system. As a result, Health Services cannot ensure that potentially fraudulent activity is properly investigated for prosecution or recovery of state and federal medical assistance funds. Corporation for National and Community Service The State’s California Conservation Corps did not always ensure the service districts and subgrantees properly supported their invoices before it forwarded them for reimbursement under the AmeriCorps program. Specifically, 12 of 38 invoices reviewed were based on estimated costs rather than actual expenditures. These invoices totaled $195,700 for the grant period ending December 31, 1997. Further, it did not verify the invoices included allowable costs that complied with the program requirements. n 4 INTRODUCTION A s part of our examination of the general purpose financial statements of the State of California and the State’s administration of federal grants for the fiscal year ended June 30, 1998, we evaluated the State’s internal controls. This evaluation was necessary for the following three reasons: • To express an opinion on the State’s general purpose financial statements, on compliance with requirements applicable to each major program, and on the Schedule of Federal Assistance. • To determine compliance with federal grant requirements, laws, and regulations and the effects of noncompliance on the general purpose financial statements. • To determine compliance with state laws and regulations that affect the general purpose financial statements. During our audit, we reviewed fiscal controls at various state agencies and selected items from numerous departments for centralized testing of important transaction cycles. For example, we selected and tested a sample of payroll warrants the State processed through its payroll system and a sample of other warrants the State processed through its claims payment system. We reviewed the compliance of these agencies with state laws and regulations that materially affect the State’s financial statements. These laws and regulations help to ensure that the State maintains sufficient control over the budgeting, investing, collecting, and disbursing of state money and accurately reports the results of its financial activities. Finally, we reviewed the State’s compliance with federal regulations for all high-risk federal grants exceeding $42.95 million. We also reviewed 11 grants between $8.59 million and $42.95 million. Of the 378 federal grants the State administers, we reviewed 36. We excluded federal grants administered by the California State University and the University of California because other independent auditors review them. The specific scope of our audit is stated in the following reports that the federal Office of Management and Budget Circular A-133, Audits of States, Local Government, and Non-Profit Organizations (OMB Circular A-133) requires the State to issue each year. • The report on compliance and internal control over financial reporting based on our audit of the general purpose financial statements (begins on page 13). • The report on compliance with requirements for each major federal program, and on internal control over compliance in accordance with the federal OMB Circular A-133 (begins on page 17). 5 Page intentionally left blank. 6 STATUS OF THE STATE’S SOLUTIONS FOR THE YEAR 2000 COMPUTER PROBLEMS T he new millennium is fast approaching, yet the State has not yet ensured that com- puter systems at many of the 14 agencies that provide critical services will recognize the year 2000. Many of the State’s computer hardware and software applications identify a year using two digits, for example, 98 represents 1998. On January 1, 2000, these systems, like many of those worldwide, may produce nonsensical data or fail to operate because the computers will read the date 00 as 1900 rather than 2000. Unless the State identifies, corrects, and tests the computer systems susceptible to this problem by December 31, 1999, the effects on its operations and financial reporting could range from minor errors to catastrophic system failures. The State’s failure to address adequately the year-2000 (Y2K) problem could further result in multiple problems for Californians, ranging from malfunctioning traffic lights to erroneous tax notices to interruptions in assistance payments for families with dependent children. State agencies are focusing their remediation efforts on applications that support mission-critical business practices. The Governor issued an executive order requiring that mission-critical systems be remediated by December 31, 1998; purchases of new systems, hardware, software, and equipment be Y2K compliant; and any new computer projects be limited to those required by law until that department resolves its Y2K problems. Depart- ments are also required to address interfacing of information technology (IT) systems with external IT systems, and to report on contingency planning for problems that might occur if IT systems are not fully remediated by the end of 1999. In August 1998, we issued our report, entitled Year 2000 Computer Problem: Progress May Be Overly Optimistic and Certain Implications Have Not Been Addressed. The report discussed the progress of 39 state agencies that report on completed critical projects to the State’s Department of Information Technology, toward remediating the potential Y2K problems in their computer systems. These computer systems are composed of one or more computer projects. We found as of March 31, 1998, none of these agencies had rigorously time-tested their IT systems in an isolated environment which allows the resetting of the computer’s internal clock to make sure they will continue to function after the year 2000. Many of these agencies stated that some of their critical projects affect their ability to claim federal funding or comply with federal requirements. Five of these agencies administer some of the largest federal programs. The following table details how many critical projects at these five agencies affect federal funding. 7 Critical Projects Number of Critical That Affect Federal State Agency Projects Funding Education 11 1 Employment Development 80 44 Health Services 15 15 Social Services 38 18 Transportation 46 29 In our February 1999 follow-up report, entitled Year 2000 Computer Problem: The State’s Agencies Are Progressing Toward Compliance but Key Steps Remain Incomplete, we found that state agencies are making progress toward correcting critical computer systems; however, some agencies have not completely tested their computer systems, resolved critical issues with their data-exchange partners, corrected or replaced embedded chips that control certain computerized functions, or completed business continuation plans. The purpose of this audit was to assess the status of systems, which are critical to supporting program services vital to California, at December 31, 1998. However, because these systems may include those used to administer federal programs, the results are pertinent to this report. The following table, excerpted from our February 1999 report, indicates when the five departments that adminis- ter some of the largest federal programs plan to complete various remediation efforts for all programs they administer. Software, Hardware Exchange Embedded Continuation State Agency Hardware1 Clock2 Partners Chips Plans Education Complete Complete Complete 6-30-99 Complete Employment Development 7-30-99 12-21-99 7-30-99 9-30-99 Complete Health Services 6-30-99 6-30-99 10-15-99 6-30-99 6-30-99 Social Services 1-28-99 6-30-99 6-30-99 6-30-99 6-30-99 Transportation Complete n/a Complete 6-30-99 7-30-99 1 All application software and hardware has been tested in a production environment and accepted by users. 2 All supporting systems have been tested in an isolated environment where the hardware clock has been manually set to future dates. 8 With time running out and no potential for an extension, it is troubling to find that many computer systems are still in need of some remediation before state agencies can ensure the risk of failure is minimal. What is more disturbing is that many of the same agencies that have not fully remediated the computer systems supporting their programs also have not completed business continuation plans to deliver services if their efforts are further delayed or fail to work. While it is unlikely that the state government can take actions to compensate for all Y2K issues potentially impacting Californians, we believe the situation warrants diligent attention. As a result, the California State Auditor will continue to monitor department progress and will issue periodic reports. n 9 Page intentionally left blank. 10 Independent Auditor’s Reports on Compliance and Internal Control 11 Page intentionally left blank. 12 C S A ALIFORNIA TATE UDITOR KURT R. SJOBERG MARIANNE P. EVASHENK STATE AUDITOR CHIEF DEPUTY STATE AUDITOR Independent Auditor(cid:146)s Report on Compliance and on Internal Control Over Financial Reporting Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards The Governor and the Legislature of the State of California We have audited the general purpose financial statements of the State of California as of and for the year ended June 30, 1998, and have issued our report thereon dated November 20, 1998, which was qualified because insufficient audit evidence exists to support the State of California’s disclosures with respect to the year 2000 issue. We did not audit the financial statements of the pension trust funds, which reflect total assets constituting 87 percent of the fiduciary funds. We also did not audit the financial statements of certain enterprise funds, which reflect total assets and revenues, constituting 89 percent and 90 percent, respectively, of the enterprise funds. In addition, we did not audit the University of California funds. Finally, we did not audit the financial statements of certain component unit authorities, which reflect total assets and revenues, constituting 97 percent and 93 percent, respectively, of the component unit authorities. The financial statements of the pension trust funds, certain enterprise funds, the University of California funds, and certain component unit authorities referred to above were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for these funds and entities is based solely upon the reports of the other auditors. Except as discussed in the following paragraph, we conducted our audit in accordance with generally accepted auditing standards and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States. Governmental Accounting Standards Board Technical Bulletin 98-1, Disclosures about Year 2000 Issues, requires disclosure of certain matters regarding the year 2000 issue. The State has included such disclosures in Note 27. Because of the unprecedented nature of the year 2000 issue, its effects and the success of related remediation efforts will not be fully determinable until the year 2000 and thereafter. Accordingly, insufficient audit evidence exists to support the State’s disclosures with respect to the year 2000 issue made in Note 27. Further, we do not BUREAU OF STATE AUDITS 660 J Street, Suite 300, Sacramento, California 95814 Telephone: (916) 445-0255 Fax: (916) 327-0019 13 provide assurance that the State is or will be year 2000 ready, that the State’s year 2000 remediation efforts will be successful in whole or in part, or that parties with which the State does business will be year 2000 ready. COMPLIANCE As part of obtaining reasonable assurance about whether the State of California’s financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, and contracts, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance that are required to be reported under Government Auditing Standards. INTERNAL CONTROL OVER FINANCIAL REPORTING In planning and performing our audit, we considered the State of California’s internal control over financial reporting in order to determine our auditing procedures for the purpose of expressing our opinion on the financial statements and not to provide assurance on the internal control over financial reporting. However, we noted certain matters involving the internal control over financial reporting and its operation that we consider to be reportable conditions. Reportable conditions involve matters coming to our attention relating to significant deficiencies in the design or operation of the internal control over financial reporting that, in our judgment, could adversely affect the State of California’s ability to record, process, summarize, and report financial data consistent with the assertions of management in the financial statements. Reportable conditions are described in the accompanying schedule of findings and questioned costs as items 98-19-1, 98-19-2, and 98-19-3. A material weakness is a condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. Our consideration of the internal control over financial reporting would not necessarily disclose all matters in the internal control that might be reportable conditions and, accordingly, would not necessarily disclose all reportable conditions that are also considered to be material weaknesses. However, we believe none of the reportable conditions described above are material weaknesses. 14 This report is intended for the information of the governor and Legislature of the State of California and the management of the executive branch. However, this report is a matter of public record and its distribution is not limited. BUREAU OF STATE AUDITS (Signed by:) PHILIP J. JELICICH, CPA Deputy State Auditor Date: November 20, 1998 15 Page intentionally left blank. 16 C S A ALIFORNIA TATE UDITOR KURT R. SJOBERG MARIANNE P. EVASHENK STATE AUDITOR CHIEF DEPUTY STATE AUDITOR Independent Auditor(cid:146)s Report on Compliance With Requirements Applicable to Each Major Program and on Internal Control Over Compliance in Accordance With OMB Circular A-133 The Governor and Legislature of the State of California COMPLIANCE We have audited the compliance of the State of California with the types of compliance requirements described in the U. S. Office of Management and Budget (OMB) Circular A-133 Compliance Supplement that are applicable to each of its major federal programs for the year ended June 30, 1998. The State of California’s major federal programs are identified in the summary of the auditor’s results section of the accompanying schedule of findings and questioned costs. Compliance with the requirements of laws, regulations, contracts, and grants applicable to each of its major federal programs is the responsibility of the State of California’s management. Our responsibility is to express an opinion on the State of California’s compliance based on our audit. The State of California’s general purpose financial statements include the operations of the University of California and the California State University systems, which received $2.1 billion and $1.0 billion, respectively, in federal awards which are not included in the schedule of findings and questioned costs or the schedule of federal assistance for the year ended June 30, 1998. Our audit, as described below, did not include the operations of the University of California or the California State University because these entities engaged other auditors to perform an audit in accordance with OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations (OMB Circular A-133). We conducted our audit of compliance in accordance with generally accepted auditing standards; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A-133. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal BUREAU OF STATE AUDITS 660 J Street, Suite 300, Sacramento, California 95814 Telephone: (916) 445-0255 Fax: (916) 327-0019 17 program occurred. An audit includes examining, on a test basis, evidence about the State of California’s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination on the State of California’s compliance with those requirements. In our opinion, the State of California complied, in all material respects, with the require- ments referred to above that are applicable to each of its major federal programs for the year ended June 30, 1998. However, the results of our auditing procedures disclosed instances of noncompliance with those requirements, which are required to be reported in accordance with OMB Circular A-133 and which are described in the accompanying schedule of findings and questioned costs. See the attachment for a list of these issues. INTERNAL CONTROL OVER COMPLIANCE The management of the State of California is responsible for establishing and maintaining effective internal control over compliance with requirements of laws, regulations, contracts, and grants applicable to federal programs. In planning and performing our audit, we consid- ered the State of California’s internal control over compliance with requirements that could have a direct and material effect on a major federal program in order to determine our auditing procedures for the purpose of expressing our opinion on compliance and to test and report on internal control over compliance in accordance with OMB Circular A-133. We noted certain matters involving the internal control over compliance and its operation that we consider to be reportable conditions. Reportable conditions involve matters coming to our attention relating to significant deficiencies in the design or operation of the internal control over compliance that, in our judgment, could adversely affect the State of California’s ability to administer a major federal program in accordance with applicable requirements of laws, regulations, contracts, and grants. Reportable conditions are described in the accompa- nying schedule of findings and questioned costs. The attachment also contains a list of these issues. A material weakness is a condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level of risk the risk that noncompliance with applicable requirements of laws, regulations, contracts, and grants would be material in relation to a major federal program being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. Our consideration of the internal control over compliance would not necessarily disclose all matters in the internal control that might be reportable conditions and, accordingly, would not necessarily disclose all reportable conditions that are also consid- ered to be material weaknesses. However, we believe none of the reportable conditions described above are material weaknesses. 18 SCHEDULE OF FEDERAL ASSISTANCE We have audited the general purpose financial statements of the State of California as of and for the year ended June 30, 1998, and have issued our report thereon dated November 20, 1998, which was qualified because insufficient audit evidence exists to support the State of California’s disclosures with respect to the year 2000 issue. We did not audit the financial statements of the pension trust funds, which reflect total assets constituting 87 percent of the fiduciary funds. We also did not audit the financial statements of certain enterprise funds, which reflect total assets and revenues, constituting 89 percent and 90 percent, respectively, of the enterprise funds. In addition, we did not audit the University of California funds. Finally, we did not audit the financial statements of certain component unit authorities, which reflect total assets and revenues, constituting 97 percent and 93 percent, respectively, of the component unit authorities. The financial statements of the pension trust funds, certain enterprise funds, the University of California funds, and certain component unit authorities referred to above were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for these funds and entities, is based solely upon the reports of the other auditors. Except as discussed in the following paragraph, we conducted our audit in accordance with generally accepted auditing standards and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States. Governmental Accounting Standards Board Technical Bulletin 98-1, Disclosures about Year 2000 Issues, requires disclosure of certain matters regarding the year 2000 issue. The State has included such disclosures in Note 27 to the general purpose financial statements. Because of the unprecedented nature of the year 2000 issue, its effects and the success of related remediation efforts will not be fully determinable until the year 2000 and thereafter. Accordingly, insufficient audit evidence exists to support the State’s disclosures with respect to the year 2000 issue made in Note 27. Further, we do not provide assurance that the State is or will be year 2000 ready, that the State’s year 2000 remediation efforts will be successful in whole or in part, or that parties with which the State does business will be year 2000 ready. Our audit was performed for the purpose of forming an opinion on the general purpose financial statements taken as a whole. The accompanying schedule of federal assistance is presented for purposes of additional analysis as required by OMB Circular A-133 and is not a required part of the general purpose financial statements. OMB Circular A-133 requires the schedule of federal assistance to present total expenditures for each federal assistance program. However, although the State’s automated accounting system separately identifies revenues for each federal assistance program, it does not separately identify expenditures for each program. As a result, the State presents the schedule of federal assistance on a revenue basis. The information in the accompanying schedule has been subjected to the auditing procedures applied in the audit of the general purpose financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the general purpose financial statements taken as a whole. The schedule does not include expenditures of federal grants received by the University of California or the California State University. These expenditures are audited by other independent auditors in accordance with OMB Circular A-133. 19 This report is intended for the information of the governor and Legislature of the State of California, the management of the executive branch, and the federal awarding agencies. However, this report is a matter of public record and its distribution is not limited. BUREAU OF STATE AUDITS PHILIP J. JELICICH, CPA Deputy State Auditor March 1, 1999 (except as related to the report on the Schedule of Federal Assistance, as to which the date is November 20, 1998) Attachment 20 ATTACHMENT The compliance issues are: 98-1-2 98-9-2 98-2-2 98-12-3 98-2-3 98-12-4 98-2-4 98-13-1 98-2-5 98-13-3 98-2-6 98-13-4 98-3-1 98-13-5 98-3-3 98-14-3 98-5-1 98-14-4 98-5-2 98-14-6 The internal control over compliance issues are: 98-3-2 98-12-5 98-3-4 98-12-6 98-7-1 98-13-2 98-9-1 98-14-1 98-9-2 98-14-2 98-12-1 98-14-4 98-12-2 98-14-5 21 Page intentionally left blank. 22 Schedule of Findings and Questioned Costs 23 Page intentionally left blank. 24 STATE OF CALIFORNIA SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE FISCAL YEAR ENDED JUNE 30, 1998 Summary of Auditor’s Results Financial Statements Type of report issued by auditors Qualified Internal control over financial reporting: Material weaknesses identified? No Reportable conditions identified that are not considered to be material weaknesses? Yes Noncompliance material to financial statements noted No Federal Awards Internal control over major programs: Material weaknesses identified? No Reportable conditions identified that are not considered to be material weaknesses? Yes Type of report the auditor issued on compliance for major programs: Unqualified Any audit findings disclosed that are required to be reported in accordance with Section .510(a) of Circular A-133? Yes Dollar threshold used to distinguish between Type A and Type B programs: $42.95 million Auditee qualified as low-risk auditee? No 25 Identification of major programs: CFDA Numbers Name of Federal Program or Cluster 10.550 Food Distribution 10.551/10.561 Food Stamp Cluster 10.557 Special Supplemental Nutrition Program for Women, Infants, and Children 10.558 Child and Adult Care Food Program 12.113 State Memorandum of Agreement Program for the Reimbursement of Technical Services 14.228 Community Development Block Grants/State’s Program 14.239 Home Investment Partnerships Program 15.605 /15.611 Fish and Wildlife Cluster 16.579 Byrne Formula Grant Program 16.586 Violent Offender Incarceration and Truth in Sentencing Incentive Grants 17.250/17.246 JTPA Cluster 20.205 Highway Planning and Construction 20.505 Federal Transit Technical Studies Grants 83.544 Public Assistance Grants 83.548 Hazard Mitigation Grant 84.002 Adult Education—State Grant Program 84.027/84.173 Special Education Cluster 84.032 Federal Family Education Loans 84.034 Public Library Services 84.048 Vocational Education—Basic Grants to States 84.126 Rehabilitation Services—Vocational Rehabilitation Grants to States 84.243 Tech-Prep Education 84.276 Goals 2000—State and Local Education Systemic Improvement Grants 93.045/93.044 Aging Cluster 93.558 Temporary Assistance for Needy Families 93.561 Job Opportunities and Basic Skills Training 93.563 Child Support Enforcement 93.568 Low-Income Home Energy Assistance 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund 93.658 Foster Care—Title IV-E 93.659 Adoption Assistance 93.667 Social Services Block Grant 93.778/93.775/93.777 Medicaid Cluster 93.917 HIV Care Formula Grants 93.959 Block Grants for Prevention and Treatment of Substance Abuse 94.006 AmeriCorps 26 Compliance and Internal Control Issues Applicable to the Financial Statements 27 Page intentionally left blank. 28 VARIOUS STATE DEPARTMENTS Reference Number: 98-19-1 CRITERIA The California Government Code, Section 11011.15, requires the Department of General Services (General Services) to maintain a complete and accurate inventory of all property held by the State. It also requires each agency to furnish General Services with a record of each parcel of real property that it possesses and to update its real property holdings by July 1 each year. Further, the State Administrative Manual, Sections 7463, 7977, and 8660, requires agencies to report to the State Controller’s Office (Contoller’s Office) using the Statement of Changes in General Fixed Assets all additions and deletions to real property funded by governmental resources. CONDITION During fiscal year 1997-98, the State had inadequate procedures to ensure that the General Services’ Statewide Real Property Inventory and the State’s financial statements incorporate all real property transactions. We have reported similar concerns in previous years. To address this matter, the Department of Finance (Finance) issued Audit Memo 98-01 in November 1997, and a similar Audit Memo in November 1998, requiring agencies to evaluate the risk of an incomplete inventory and, depending on the level of risk assessed, reconcile the amounts reported in the Statewide Real Property Inventory with the agency’s Statement of Changes in General Fixed Assets. However, when we reviewed two agencies with significant property holdings, we found that the agencies did not comply with this direction, and problems continue to exist. Specifically, we found that neither the Department of Parks and Recreation (DPR) nor the California Youth Authority (CYA) evaluated the risk of the above weaknesses occurring for all of its fixed asset categories. Neither did each agency reconcile the amount reported in the Statewide Real Property Inventory categories. Further, we found that for approximately ten years, the CYA has not reported to either General Services or the Controller’s Office additions to or deletions of its land, buildings, or improvements. Although the DPR reports land additions to General Services, it has not reported changes in its buildings or improve- ments to General Services for approximately ten years. Unless agencies report complete and accurate information to the Controller’s Office and General Services, the State’s financial statements will be misstated and the Statewide Real Property Inventory will be incomplete and inaccurate. 29 RECOMMENDATION Because of the need for accurate financial information, Finance should monitor agency risk assessments and reconciliations to ensure that fixed asset transactions have been properly reported to the Controller’s Office and General Services. DEPARTMENT’S VIEW AND CORRECTIVE ACTION PLAN Finance will establish new procedures in the Audit Guide for the Evaluation of Internal Control used by agency internal auditors, requiring review and follow-up of real property controls. Finance will clarify these responsibilities in a subsequent Audit Memo informing agency internal auditors of the required procedures. DEPARTMENT OF TRANSPORTATION Reference Number: 98-19-2 CONDITION The Department of Transportation (department) did not accurately account for fixed assets for the Equipment Service Fund in its financial statements for fiscal year 1997-98, the first year of the fund’s existence. Specifically, we found the following: • In the process of establishing the fund, the department overstated construction and automotive fixed assets by approximately $410 million because it made a duplicate entry to its accounting records. After we brought this matter to its attention, the department adjusted its financial statements to reflect the correct fixed assets balance of $203 million, net of accumulated depreciation, as of June 30, 1998. • The department’s accounting records do not accurately reflect purchase and improvement costs of certain construction and automotive fixed assets. We found that more than 300 items were each recorded at a cost of $1,000 or less even though the average capital cost of comparable items ranged from $4,800 to $16,000. • For certain fixed assets, the useful life of the assets as recorded in the department’s accounting system differed from the standard useful life prescribed in the department’s guidelines for recording fixed assets. The useful life is a variable used in the calculation of depreciation, which affects accumulated depreciation of fixed assets and related deprecia- tion expenses. Of the 27 items we reviewed, we found that 7 items had useful lives 30 recorded in the accounting system that did not agree with the department’s prescribed guidelines. For example, the department recorded a 20-month useful life in its accounting records for a snowplow even though its guidelines state that the useful life is 228 months. • Newly-acquired fixed assets did not always begin incurring depreciation expenses when they were placed in service. In our review of ten newly-acquired construction and auto- motive fixed assets, we found one item that was in service for six months as of June 1998. However, the department’s accounting records indicated that the item had not incurred any accumulated depreciation or depreciation expense during fiscal year 1997-98. CRITERIA The California Government Code, sections 13401 and 13403, requires state agencies to maintain an effective system of internal control, which includes accurate record keeping procedures for fixed assets and related expenses. RECOMMENDATION The department should ensure that it properly records all fixed assets, particularly construc- tion and automotive equipment, in its accounting records. DEPARTMENT’S VIEW AND CORRECTIVE ACTION PLAN The department agrees with the above issues and informed us that it is making adjustments to its fixed-asset system. Specifically, the department reviewed items with unusually low capital costs by comparing these costs to those reported by its equipment service center. For each item with a material difference, the department increased the recorded cost of the item to match the cost reported by the equipment service center. The department also implemented a process to ensure that it correctly capitalizes future fixed-asset costs. In addition, the department has analyzed the assets we identified with useful lives recorded in its system that differed from its prescribed guidelines. Based on its review, the department made changes to its records. The department is also reviewing the useful life of other assets in its fixed-asset system to identify and correct any other possible inconsistencies. Finally, the department identified existing active fixed assets that did not have any depreciation expenses and corrected the amount of depreciation recorded for these items. Also, the department is cur- rently modifying its fixed asset system to begin recording depreciation expense for those items placed in service. 31 STATE CONTROLLER’S OFFICE DEPARTMENT OF FINANCE Reference Number: 98-19-3 CONDITION The State Controller’s Office (Controller’s Office) and the Department of Finance (Finance) report independently on the State’s budgetary basis financial condition using inconsistent amounts, which results in different fund balances for many of the State’s funds. This occurs because neither the Controller’s Office nor Finance identifies these differences and ensures that departments reconcile them before reporting on the State’s financial condition and budget, respectively. According to information the Controller’s Office provided to Finance, fund balance discrepancies exceeded $100,000 for fiscal year 1997-98 in each of 123 separate funds that remained unreconciled as of February 1999. The table below provides a breakdown of these discrepancies. Schedule of Fund Balance Discrepancies Between the State Controller’s Office and the Department of Finance Number of Funds Dollar Range of Differences 13 More than $25 million 6 $15 million to $25 million 7 $5 million to $15 million 37 $1 million to $5 million 60 $100,000 to $1 million Total 123 Financial decision makers receive conflicting information about the State’s true financial condition because of the differences in fund balances. For example, because Finance’s records are used in the State’s budgeting process, the inability to adequately account for the differ- ences may impair the integrity of the State’s budget. The Controller’s Office believes that a major factor causing these differences is the lack of communication between agency accounting staff, who submit financial reports to the Controller’s Office, and budget staff, who submit budget reports to Finance. In addition, Finance believes that each individual agency, rather than the Controller’s Office or Finance, is responsible for reconciling any differences in fund balances. Although we agree that individual agencies bear some responsibility for providing accurate financial information, the Controller’s Office and Finance have overall responsibility for reporting on the State’s finan- cial condition and budget, respectively. 32 CRITERIA The California Government Code, Section 13403, discusses the importance of a satisfactory system of internal accounting and administrative controls to reasonably ensure the accuracy of accounting data. In addition, the State Administrative Manual, Section 7900, discusses the importance of preparing regular reconciliations. RECOMMENDATION Because of the need for accurate and consistent financial information, the Controller’s Office and Finance should ensure that agencies reconcile fund balance differences before issuing reports of the budgetary basis fund balances. For example, the Controller’s Office and Finance could require agencies to certify that budgetary information they submit to Finance agrees with financial information they submit to the Controller’s Office. DEPARTMENTS’ VIEWS AND CORRECTIVE ACTION PLANS We reported this issue in previous years. Finance states that because it prepares the fund condition statement for the General Fund, it reconciles with Controller’s Office data to ensure that the fund balance for the past fiscal year is as accurate as possible. Further, Finance states that departments are required to follow the same process for other funds. This requirement was communicated to departments via budget letters, the Controller’s Office year-end train- ing, and Finance budget and financial condition training. However, Finance plans to notify departments when the listing of fund balance differences is available on the its Internet site. Additionally, depending on the materiality of the difference or the sensitivity of the fund, Finance may contact the departments for explanations of the differences. The Controller’s Office believes that this issue should be directed to the state agencies that produced the financial reports with the fund balance differences, or to Finance, which is responsible for the State’s accounting system. The Controller’s Office notes that only the state agencies that prepared the financial reports have the detailed records necessary to reconcile these differences. The Controller’s Office also observes that it is fulfilling its role in reconciling and eliminating these differences in several ways. Specifically, the Controller’s Office has identified and prepared a list of fund balance differences for Finance, has instructed state agencies to reconcile these amounts, and will be penalizing state agencies by not awarding the certificate of excellence in financial reporting when the fund balances differ. 33 Page intentionally left blank. 34 Compliance and Internal Control Issues of General Concern Related to Federal Grant Requirements 35 Page intentionally left blank. 36 CASH MANAGEMENT U.S. DEPARTMENT OF THE TREASURY Reference Number: 98-3-4 Federal Catalog Number: Various Federal Program Title: Various Federal Award Number and Calendar Year Awarded: Various State Administering Department: Department of Finance CRITERIA During our review, we determined that the following requirements relate to compliance with the federal default procedures: The Cash Management Improvement Act Default Procedures (CMIA Default Procedures), Section 7.7.6, imposes an interest liability on federal funds the State draws to cover a warrant that is not cashed from the time the funds are credited to the State until the State returns them or offsets them against future warrants. The Code of Federal Regulations, Title 31, Section 205.15(a)(2), requires the State to include in its annual report the interest liability for each program subject to the regulations. The CMIA Default Procedures, Sections 7.2.1 and 7.6.1, establish requirements for calculating federal and state interest liabilities, respectively. Further, the CMIA Default Procedures, Sections 7.2.2(c) and 7.6.2(c), provide the methods for calculating these liabilities. CONDITION • The Department of Finance (Finance) issued instructions to agencies regarding Cash Management Improvement Act transactions that were inconsistent with the default procedures. Finance instructed agencies to report refunds under $10,000 per transaction, errors, and claim corrections on a separate schedule that does not include the dates or other necessary information for Finance to calculate the State’s interest liability to the federal government. When reported in this way, the State is assuming no interest liability for its mistakes; however, the default procedures clearly indicate that the State must pay interest on errors, such as uncashed warrants. As a result of Finance’s faulty instructions, state agencies are not reporting all the pertinent information for uncashed warrants. For 37 example, because of errors at the Department of Community Services and Development (Community Services), warrants totaling $1,500,000 were not sent to vendors. However, based on the instructions provided by Finance, Community Services did not report the transactions in a manner that would have allowed Finance to include these transactions in its calculation of the State’s interest liability to the federal government. As a result, Finance underreported the State’s interest liability to the federal government by $17,400. • Finance understated the State’s interest liability due to the federal government by $52,452 for another error we identified. For the Rehabilitation Services—Vocational Rehabilitation Grants to States, Finance did not use the correct amount of funds drawn down in its calculation of advanced-funded payroll interest liability. RECOMMENDATION Finance should ensure that its instructions to state agencies regarding reporting of Cash Management Improvement Act transactions are consistent with the default procedures or an approved agreement between the U.S. Department of the Treasury (U.S. Treasury) and the State. In addition, the State should correct errors that affect the interest liability reported in the annual report. DEPARTMENT’S VIEW AND CORRECTIVE ACTION PLAN Finance agrees with our finding. It is aware that the instructions provided to agencies, specifically interest calculations for funds drawn down but never paid out, were too broad and allowed for different interpretations. Negotiations with the U.S. Treasury have created a more restrictive interpretation of the interest calculation for such funds in the fiscal year 1998-99 Treasury-State Agreement. Finance will provide agencies with new instructions on reporting claim corrections and funds drawn in error. Finance will continue its ongoing effort to reduce errors by analyzing the information reported by state agencies, providing ongoing consultation and training, and annually reminding agencies of their responsibilities. 38 IDENTIFYING PROGRAM EXPENDITURES Reference Number: 98-12-3 All Programs Category of Finding: Reporting Requirements CRITERIA In our review of federal reports, we determined the following were among the state and federal compliance requirements: The U.S. Office of Management and Budget, Circular A-133 Audits of State, Local Government and Non-Profit Organizations (OMB Circular A-133), requires that the State prepare a schedule showing total expenditures for the year for each federal program. Further, OMB Circular A-133 requires that the State identify and audit all high-risk Type A federal programs, which are those exceeding .15 percent of total federal program moneys the State expends during the fiscal year. The California Government Code, Section 13300, assigns the Department of Finance (Finance) the responsibility for maintaining a complete accounting system to ensure that all revenues, expenditures, receipts, disbursements, resources, obligations, and property of the State are properly tracked and reported. CONDITION Because of limitations in its automated accounting systems, the State has not complied with the provision of OMB Circular A-133 requiring a schedule showing total expenditures for each federal program. As a result, the schedule (beginning on page 127) shows total receipts, rather than expenditures, by program. Expenditure information is necessary to identify Type A programs. To ensure that we identified and audited all high-risk Type A programs, we reviewed accrual basis expenditures, which are identified manually, for all programs that we did not already plan to audit and that had cash receipts within 10 percent of the Type A program threshold. We identified three such programs; however, our review of the expendi- tures for these programs verified that they did not exceed the Type A program threshold and therefore did not require an audit. RECOMMENDATION As priorities and resources permit, Finance should modify the State’s accounting system to separately identify expenditures for all major programs. 39 DEPARTMENT’S VIEW AND CORRECTIVE ACTION PLAN We have previously reported on the inadequacies of the State’s financial reporting. Finance has responded that the State’s accounting system will require substantial modification to meet all federal and state requirements, and it will address changes in relation to other priorities and costs. 40 Compliance and Internal Control Issues Related to Grants Administered by Individual Departments 41 Page intentionally left blank. 42 U.S. DEPARTMENT OF AGRICULTURE Reference Number: 98-5-2 Federal Catalog Number: 10.558 Federal Program Title: Child and Adult Care Food Program Federal Award Number and Calendar Year Awarded: 7N1019; 1997 Category of Finding: Eligibility State Administering Department: Department of Education CRITERIA In our review of the Child and Adult Care Food Program (food program), we determined that the following compliance requirements pertain to eligibility: The Code of Federal Regulations, Title 7, sections 226.6(d)(1) and 226.6(e), requires the State Department of Education (Education) to establish procedures to ensure annually that institutions and facilities (sites) participating in the food program meet applicable licensing or approval requirements. Additionally, in November 1995, the U.S. Department of Agriculture issued All-Points Bulletin No. CACFP-96-04, which provides federal policy for the revised application and renewal requirements for institutions participating in the food program. This policy allows Education to establish documentation procedures that will allow it to fulfill its responsibilities and, at the same time, create administrative efficiencies and limit administrative burden. The policy indicates that such procedures might include obtaining the license status of sites directly from licensing agencies or maintaining a current computer checklist of licensed sites in the State. The policy does not require Education to obtain annually a copy of the actual license. CONDITION Education needs to improve its process for ensuring that institutions participating in the food program meet the applicable licensing or approval requirements. It could not demon- strate that it annually confirms the license status of sites. According to Education, it verifies the eligibility of sites during its audits and administrative reviews. In addition, participating institutions verify site licenses during their monitoring visits. Further, to complete the confir- mation process, Education requires participating institutions to attest annually to the validity of their sites’ licenses. Education stated that these three steps ensure that facilities have valid and current licenses. 43 However, Education does not conduct annual audits and administrative reviews of all participating institutions. Additionally, the reviews by participating institutions do not pro- vide Education an independent confirmation that sites are licensed. Further, the annual attestations by participating institutions are not reliable and, therefore, do not confirm annu- ally the license status of all sites participating in the food program. For example, the files for 8 of the 40 participants we tested contain attestation documents on licensing status that are out of date or incorrect. The most common deficiency is participating institutions certifying their sites have valid licenses even though the information in the certification documents indicate that the licenses for one or more has expired. We reported a similar finding in our audit of fiscal year 1996-97. At that time, Education was working with the state licensing agency and has since established a direct electronic link to the licensing agency’s data base. However, Education indicated that verifying the licensing status of every site on an individual basis is not administratively feasible. Education is still working with the licensing agency to enhance the electronic link to include access to a license revocation list the agency expects to complete by mid-1999. This would provide Education with information to ensure that only licensed sites participate in the program. Additionally, Education is developing a method to verify the licensing status of sites in 11 counties autho- rized to issue licenses to sites within their jurisdiction. RECOMMENDATION Education should continue to improve its process for ensuring that institutions participating in the food program meet the applicable licensing or approval requirements. Specifically, it should continue to work with the state licensing agency to ensure access to a revocation list. Additionally, Education should make sure it receives the license status of sites under the jurisdiction of the 11 counties. DEPARTMENT’S VIEW AND CORRECTIVE ACTION PLAN As mentioned above, in June 1998, Education and the Department of Social Services (Social Services) established a facility licensing profile system with “read only” rights for Education staff. When Education staff review the application of an institution participating in the food program, the licensing profile system is checked to ensure the applying or renew- ing institution has a current operating license. Education has been working with Social Services since 1996 to coordinate the development of license information systems linkage for institutions participating in the food program. Education has just received a sample non-licensed facility report from Social Services that lists the institutions participating in the food program that have lost their license to operate. Social Services will transmit the non-licensed facility report monthly to Education. Education will discontinue services to any non-licensed facility. 44 Eleven of the counties in California are authorized to license facilities within their individual counties. When these 11 counties issue licenses, they send a copy of the license to Education as verification of license status. Education is requesting that each of the 11 counties periodi- cally submit a non-licensed facility report to Education. Education plans to complete imple- mentation of both non-licensed facility report processes on or before June 30, 1999. Reference Number: 98-12-4 Federal Catalog Number: 10.550 Federal Program Title: Food Distribution Federal Award Number and Year Awarded: State fiscal year 1997-98 Category of Finding: Reporting State Administering Department: Department of Education CRITERIA In our review of the Food Distribution program, we found the following requirements apply to special reporting: The Code of Federal Regulations, Title 7, Section 250.16(a), requires the State Department of Education (Education) to maintain accurate and complete records on the receipt, inventory, distribution, and use of donated foods. In addition, Section 250.17(a) of the regulations requires Education to submit to the U.S. Department of Agriculture (USDA) monthly inven- tory reports on donated foods. CONDITION To ensure that subrecipients receive the donated foods while they have nutritional value, the USDA requires Education to report, on the FNS-155 form, the commodities it stores in its two warehouses in excess of six months. However, Education’s system of internal controls is not sufficient to assure this data is complete, accurate, and adequately supported. 45 The data Education reported on excess inventory to the USDA during fiscal year 1997-98 was not always the same as the data the warehouses reported to Education. Specifically, Education substantially misstated 1 of the 20 commodities listed in the July 1997 report, 3 of the 37 commodities in its September 1997 report, and 1 of 14 commodities in its June 1998 report. We consider misstated amounts by more than 10 percent and 500 cases to be substantially misstated. RECOMMENDATION Education should ensure that it reports complete and accurate information to the USDA, which it can support with warehouse records. DEPARTMENT’S VIEW AND CORRECTIVE ACTION PLAN The FNS-155 is required to ensure that Education distributes donated foods to subrecipients while the foods have nutritional value; generally, within six months for most commodities. Education agrees that clerical errors were made on the three FNS-155 reports identified by the auditors. However, Education ensures that all commodities are distributed to subrecipients within six months. In 1998, USDA changed its reporting procedures to allow states to base excess inventory estimates on “projected usage” instead of “past usage” and to require that the FNS-155 report be submitted only twice a year, on June 30 and December 30, instead of monthly. In the past, even though almost all commodities would have been distributed within a six-month period, the FNS-155 reports would indicate an excess because they were prepared reporting past usage, not projected usage. For example, in 1996, Education might have received ten truckloads of turkey roasts, allocated the turkey roasts to the schools based on their proportional entitlements, so that the turkey roasts would all be allocated within six months. In 1997, if Education received 20 truckloads of turkey roasts and reported the 1996 usage on the FNS-155, it would appear that Education was storing a one-year supply of turkey roasts, exceeding the six-month demand. Using USDA’s 1998 regulatory changes, Education now adjusts the allocation factors for the schools based on projected usage, allocating twice as much to the schools in 1998 to ensure that the 20 truckloads of turkey roasts are distributed while they have nutritional value. Incorporating the changes made by USDA, Education now prepares the FNS-155 report using projected usage. There are, therefore, only a few items listed on the FNS-155 report, indicating that nearly all donated foods are being distributed within six months, eliminating many clerical errors. 46 U.S. DEPARTMENT OF AGRICULTURE U.S. DEPARTMENT OF EDUCATION Reference Number: 98-3-3 Category of Finding: Cash Management State Administering Department: Department of Education (See listing of the specific federal program details following the discussion of the issues below.) CRITERIA We determined that the following requirements relate to compliance with the Cash Management Improvement Act Default Procedures (CMIA Default Procedures): Sections 7.2.1 and 7.6.1 establish requirements for calculating federal and state interest liabili- ties, respectively. Additionally, sections 7.2.2 and 7.6.2 provide the methods for calculating these interest liabilities. CONDITION To fulfill its responsibilities assigned by CMIA Default Procedures, the Department of Finance (Finance) requires state departments to report quarterly information related to the transfers of federal funds so that it can calculate the interest charges. However, during fiscal year 1997-98, the State Department of Education (Education) omitted 22 transfers of federal funds totaling $21,600,000 from its quarterly reports. Specifically, Education excluded 5 transfers totaling $16,200,000 from work sheets submitted in the first 3 quarters of the fiscal year for the Vocational Education—Basic Grants to States and 17 transfers totaling $5,400,000 from work sheets submitted throughout the fiscal year for the Child and Adult Care Food Program. As a result, Finance understated the State’s interest liability for transfers related to these programs by $49,000. The amounts omitted from the Vocational Education—Basic Grants to States work sheets were transfers from Education to the California Community Colleges, Chancellor’s Office. According to its federal funds administrator, a glitch in the system caused the omissions, and Education corrected the problem during the fourth quarter of the fiscal year. The Cash Management Improvement Act requires the calculation of interest due to the federal government when states request and receive federal funds in advance of disbursements to vendors, subrecipients, or program participants. Similarly, when they incur costs for federal programs before receiving federal reimbursements, the Cash Management Improvement Act allows the states to calculate interest due from the federal government. However, when Finance receives incomplete information from departments, the interest it calculates is incorrect. 47 RECOMMENDATION Education should make sure it provides Finance complete and accurate information for calculating interest. DEPARTMENT’S VIEW AND CORRECTIVE ACTION PLAN Education agrees with this finding and has modified its reporting system to include all transfers of federal funds, including those for the Vocational Education—Basic Grants to States and Child and Adult Care Food programs. U.S. DEPARTMENT OF AGRICULTURE Federal Catalog Number: 10.558 Federal Program Title: Child and Adult Care Food Program Federal Award Numbers and Calendar Years Awarded: 7N1019; 1997 7N1020; 1997 U.S. DEPARTMENT OF EDUCATION Federal Catalog Number: 84.048 Federal Program Title: Vocational Education—Basic Grants to States Federal Award Number and Calendar Year Awarded: V048A70005; 1997 48 U.S. DEPARTMENT OF AGRICULTURE U.S. DEPARTMENT OF EDUCATION U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES Reference Number: 98-13-4 Category of Finding: Subrecipient Monitoring State Administering Department: Department of Education (See listing of the specific federal program details following the discussion of the issues below.) CRITERIA In our review of federal programs, we found the following compliance requirement related to subrecipient monitoring: The U.S. Office of Management and Budget Circular A-133 Audits of State, Local Government, and Non-Profit Organizations (OMB Circular A-133), requires nonprofit subrecipients that spend more than $300,000 in federal assistance to submit audit reports to the State within 13 months of the end of their fiscal year. CONDITION The State Department of Education (Education) lacks adequate procedures to ensure that it promptly receives all required audit reports from nonprofit subrecipients. For three of the four programs we reviewed, Education identified nonprofit subrecipients that spent more than $300,000 in federal funds annually; however, it did not ensure that these subrecipients sub- mitted audit reports. As of March 1999, Education had not received fiscal year 1996-97 audit reports from 70 of 180 subrecipients. Further, these reports were from 4 to 13 months late and Education had not requested subrecipients to submit them. Because Education’s tracking system does not contain adequate information for nonprofit subrecipients of the Child Care Mandatory and Matching Funds of the Child Care and Development Fund, we could not determine which of these subrecipients were required to submit A-133 audit reports or whether they submitted them on time. Without an effective system to make sure nonprofit subrecipients submit audit reports on time, Education lacks the assurance that they comply with federal laws and regulations. 49 RECOMMENDATION Education should modify its system to identify all nonprofit subrecipients required to submit annual audit reports. Further, it should develop procedures to ensure subrecipients required to submit audit reports do so in a timely manner. DEPARTMENT’S VIEW AND CORRECTIVE ACTION PLAN The Office of External Audits has responsibility for the receipt and review of audit reports from nonprofit subrecipients. Education requires all nonprofit subrecipients receiving child development funding in excess of $25,000 to submit an audit report. As mentioned above, OMB Circular A-133 requires nonprofit subrecipients receiving more than $300,000 in federal assistance to submit audit reports to the State within 13 months of their fiscal year-end. Education Code, Section 8448(g), requires subrecipients of state child development funds to annually submit audit reports if they receive $25,000 or more and biennial audit reports if the subrecipient received less than $25,000. For Education’s audit purposes, it is not important for the Office of External Audits to know whether the subrecipient received federal or state child development funds, just that the subrecipient must submit an audit report. The Office of External Audits’ staff annually receives a list of child development subrecipients and their contract amounts for the fiscal year. In addition, Education requests annually that each subrecipient complete an Annual Audit Status Certification identifying the amount of federal funds expended in the past year. Finally, the Office of External Audits’ staff annually receives a confirmation of the funds provided to each child development subrecipient from Education’s School Fiscal Services Division. Using these three pieces of information, Education staff determine the type of audit report required of the subrecipient of child development funds to ensure that all OMB Circular A-133 requirements are met. Nevertheless, Education is in the process of expanding the capabilities of its audit report tracking system to provide a field to indicate the allocation of federal funds. The additional field will enable Education to determine prior to the audit due date which subrecipients are required to submit A-133 audit reports. Education staff are notifying all subrecipients who did not submit fiscal year 1996-97 audit reports that their audit reports are overdue, that an audit report must be submitted immedi- ately, and that failure to comply will result in termination of current program funding. 50 U.S. DEPARTMENT OF AGRICULTURE Federal Catalog Number: 10.550 Federal Program Title: Food Distribution Federal Award Number and Year Awarded: State fiscal year 1996-97 Federal Catalog Number: 10.558 Federal Program Title: Child and Adult Care Food Program Federal Award Number and Calendar Year Awarded: 7N1019; 1996 U.S. DEPARTMENT OF EDUCATION Federal Catalog Number: 84.002 Federal Program Title: Adult Education—State Grant Program Federal Award Number and Calendar Year Awarded: V002A60006; 1996 U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES Federal Catalog Number: 93.596 Federal Program Title: Child Care Mandatory and Matching Funds of the Child Care and Development Fund Federal Award Numbers and Calendar Year Awarded: 7G999004, 7G999005; 1996 51 U.S. DEPARTMENT OF INTERIOR Reference: 98-7-1 Category of Finding: Matching, Reporting State Administering Department: Department of Fish and Game (See listing of the specific federal program details following the discussion of the issues below.) CRITERIA The following are among the compliance requirements related to matching for the Sport Fish Restoration and Wildlife Restoration programs: The Code of Federal Regulations, Title 50, Section 80.12, states that federal participation is limited to either 75 percent of the eligible costs of approved projects or to the share specified in project agreements. Title 43, Section 12.64(b), of the same code states that third-party, in-kind contributions satisfying a cost-sharing or matching requirement must be supported with verifiable records. The section further requires that donated volunteer services be valued at rates equivalent to wages for similar work and, to the extent feasible, supported by the same methods used to document allocations of regular personnel costs. The U.S Office of Management and Budget Circular A-87 Cost Principles for State, Local Government and Indian Tribal Governments (OMB Circular A-87), Attachment B, Section 11.h(1), requires that salaries and wages charged to a federal award must be based on payrolls documented in accordance with the generally accepted practice of the governmental unit that receives the award. Additionally, the Code of Federal Regulations, Title 43, Section 12.60(b), requires grantees to maintain a financial management system that provides accurate, current, and complete financial reports of grant activities. CONDITION The Department of Fish and Game (department), lacked adequate documentation to support the shared costs it reported for sport fish restoration and wildlife restoration projects under the federal grants. To demonstrate it met its cost-sharing requirements, the department reported the costs it incurred as well as in-kind contributions from third parties, including donated volunteer services. However, for 3 of the 12 projects it completed during fiscal year 1997-98, the department did not have the required documentation for in-kind contributions of $1,114, $269,595, and $416,700, respectively. For this last project, the department could not provide verifiable records of the donated volunteer services it reported, yet these services represented all of the department’s participation in the project. In addition, for a fourth project, the department could not provide support for approximately $9,600 in expenditures 52 it reported as cost sharing. According to our calculation, the department spent $1,518,500, but reported $1,528,100. Without adequate support for its cost-sharing requirements, the department cannot be certain its financial participation in projects meets requirements. RECOMMENDATION The department should implement procedures to maintain verifiable records of the third-party contributions it uses to meet project cost-sharing requirements. In addition, the department should implement procedures to ensure it meets its cost-sharing requirements for projects assisted by federal grants and that it correctly reports the costs. DEPARTMENT’S VIEW AND CORRECTIVE ACTION PLAN The department agrees with our findings and is developing procedures to take corrective action. The department will implement a standard records system to record, summarize, and maintain verifiable records of in-kind matching. In addition, the department will revise cost reporting to ensure that it meets cost-sharing requirements for federally-funded projects and that it correctly reports the costs. U.S. DEPARTMENT OF THE INTERIOR Federal Catalog Number: 15.605 Federal Program Title: Sport Fish Restoration Federal Award Numbers and Calendar Years Awarded: F-49-AE-10; 1996 F-50-R-9; 1996 Federal Catalog Number: 15.611 Federal Program Title: Wildlife Restoration Federal Award Numbers and Calendar Years Awarded: W-58-HS-25; 1996 W-64-D-14; 1996 53 U.S. DEPARTMENT OF JUSTICE Reference Number: 98-2-4 Federal Catalog Number: 16.579 Federal Program Title: Byrne Formula Grant Program Federal Award Number and Calendar Year Awarded: 97-DB-MU-0006; 1997 Category of Finding: Allowable Costs and Cost Principles State Administering Department: Office of Criminal Justice Planning CRITERIA In our review of the Byrne Formula Grant Program (Byrne grant), we determined the follow- ing compliance requirements related to allowable costs or cost principles: • OMB Circular A-87, Attachment B, Section 11h(4), requires salaries and wages charged to a federal grant for employees working on multiple cost objectives or programs be supported by documentation, such as personal activity reports. Additionally, Section 11h(5) requires that personal activity reports reflect an after-the-fact distribution of the actual activity of each employee, account for the total activity of each employee, and be signed by the employee. Section 11h(3) requires that employees working solely on one project, or their supervisors, periodically certify their charges for salaries. The certifications are to be prepared at least semiannually. Finally, Section 11h(5)(e) states that prior budget estimates or other distribution percentages do not qualify as support for charges to a federal grant. • OMB Circular A-87, Attachment A, Section C.3.b., states that all activities benefiting from the governmental unit’s indirect cost will receive an appropriate allocation of those costs. Additionally, Section F.1. requires that indirect cost pools be equitably distributed to appropriate cost objectives based on relative benefits. 54 CONDITION We noted the following instances when the Office of Criminal Justice Planning (Criminal Justice Planning) failed to comply with federal requirements related to allowable costs or cost principles: • Criminal Justice Planning does not comply with the federal requirements to document or certify salaries and wages it charges to the Byrne grant. Specifically, Criminal Justice Planning allocates personal service costs to activities based on budget estimates rather than on actual time worked. In addition, Criminal Justice Planning does not prepare semiannual certifications for employees working solely on the Byrne grant. Although it is aware of the requirements of OMB Circular A-87 and recently received budgetary authority to hire additional staff, Criminal Justice Planning has been unable to hire staff to develop an adequate employee time-reporting system. • Criminal Justice Planning did not always appropriately allocate indirect costs to the federal programs. One of its indirect cost pools did not allocate costs in a manner consistent with its cost allocation plan. As a result, Criminal Justice Planning allocated $2,150 more in indirect costs to the Byrne grant than its cost-allocation plan allowed. Moreover, although Criminal Justice Planning developed statistical data as a basis for its cost-allocation plan, it could not support the statistics. As a result, we could not determine if Criminal Justice Planning’s cost allocation was reasonable, updated as necessary, or contained any material omissions. RECOMMENDATION Criminal Justice Planning should establish an adequate time-reporting system that uses activity reports or certifications to document the total activity of each employee and use these as the basis for allocating personnel costs. In addition, Criminal Justice Planning should ensure that all indirect cost pools consistently allocate costs. Finally, Criminal Justice Plan- ning should maintain sufficient documentation to support the basis for its cost allocation. DEPARTMENT’S VIEW AND CORRECTIVE ACTION PLAN Criminal Justice Planning agreed with our findings and will take corrective action. Criminal Justice Planning indicated that it is actively recruiting for an employee to develop an adequate time-reporting system. It also agreed to develop and maintain supporting documen- tation for its cost-allocation statistics. In addition, Criminal Justice Planning stated it would update its cost pools to be consistent with the current cost-allocation plan. 55 Reference Number: 98-14-6 Federal Catalog Number: 16.579 Federal Program Title: Byrne Formula Grant Program Federal Award Number and Calendar Year Awarded: 97-DB-MU-0006; 1997 Category of Finding: Special Tests and Provisions State Administering Department: Office of Criminal Justice Planning CRITERIA In our review of the Byrne Formula Grant Program (Byrne grant), we determined the follow- ing compliance requirements relate to the awarding of grants to subrecipients: The United States Code, Title 42, Section 3754, restricts Byrne grant funding for the same project to no more than four years (48 months) with the exception of multijurisdictional drug task forces, multijurisdictional gang task forces, or victim assistance programs. In a letter dated March 25, 1991, the Bureau of Justice Assistance (Justice Assistance) of the U.S. Department of Justice stated that it will allow a previously funded project to receive funding for more than 48 months if the project undergoes a fundamental change in focus, scope, or approach. For example, the project’s goals, objectives, or purpose must change substantially. In addition, on January 12, 1994, Justice Assistance provided the Office of Criminal Justice Planning (Criminal Justice Planning) with instructions for classifying Byrne-funded projects under one of 23 authorized purpose areas. These instructions require Criminal Justice Planning to categorize under purpose area #2 those drug enforcement pro- grams eligible for exclusion from the four-year rule. CONDITION Criminal Justice Planning did not comply with the four-year rule when it awarded $1.6 million of its 1997 Byrne grant to four subrecipients. Specifically, Criminal Justice Plan- ning awarded funds beyond the 48 months allowed to two projects that were not multijurisdictional and had not undergone a fundamental change in focus, scope, or approach. Criminal Justice Planning subsequently notified both subrecipients that a fundamental change in focus, scope, or approach was necessary to continue receiving funding for fiscal year 1998-99. The other two projects we reviewed were multijurisdictional but were not categorized under purpose area #2 as required by Justice Assistance’s instructions dated January 12, 1994. As a result, these projects did not qualify for funding beyond four 56 years. Because the four projects were either not exempt from the four-year rule or were not categorized as multijurisdictional, as required during fiscal year 1997-98, Criminal Justice Planning is out of compliance. RECOMMENDATION To ensure that it complies with the four-year rule funding limitation of the Byrne grant, Criminal Justice Planning should cease funding projects for longer than 48 months unless those projects have substantially changed or have been properly excluded from the four-year rule. DEPARTMENT’S VIEW AND CORRECTIVE ACTION PLAN Criminal Justice Planning agrees with our audit finding. It has recognized the need to imple- ment a new process to ensure that programs are not funded past 48 months unless properly exempt. Criminal Justice Planning stated that it has reviewed the subrecipient grant files and has implemented the following changes: • It now requires subrecipients whose projects are not multijurisdictional and have been funded beyond 48 months to implement an entirely new project. This change will be effective for fiscal year 1998-99. • It officially moved those projects that meet the definition of a multijurisdictional task force into purpose area #2. • It developed an internal management process to monitor compliance with Justice Assistance’s requirements. 57 FEDERAL EMERGENCY MANAGEMENT AGENCY Reference Number: 98-2-1 Federal Catalog Number: 83.548 Federal Program Title: Hazard Mitigation Grant Federal Award Number and Year Awarded: State fiscal year 1997-98 Category of Finding: Allowable Costs State Administering Department: Office of Emergency Services CRITERIA Our review of the Hazard Mitigation Grant program indicated the following limitation related to allowable costs: The Code of Federal Regulations, Title 44, sections 206.439(b)(1)(2) and 206.439(c)(2), states that no indirect costs of a subgrantee are eligible other than the statutory allowance provided for requesting, obtaining, and administering federal disaster assistance subgrants. CONDITION Of the 40 fiscal year 1997-98 payments we tested, the Office of Emergency Services (Emergency Services) paid a request for reimbursement that included $35,351 in indirect costs related to one Hazard Mitigation Grant project. These indirect costs represent less than 0.5 percent of the total payments tested. RECOMMENDATION Emergency Services should review all reimbursements paid to the Hazard Mitigation Grant project and disallow all separately claimed indirect costs. DEPARTMENT’S VIEW AND CORRECTIVE ACTION PLAN Emergency Services disagrees with the recommendation. Emergency Services states that it does not have the authority to withhold payments from applicants for costs incurred in accordance with a federally approved project. In this instance, the Federal Emergency Man- agement Agency approved the budget for the project, which included approximately $940,000 in overhead or indirect costs. Thus, Emergency Services states it must reimburse the applicant for those costs. 58 Reference Number: 98-3-1 Federal Catalog Number: 83.544 (formerly 83.516) Federal Program Title: Public Assistance Grants Federal Award Number and Year Awarded: State fiscal year 1997-98 Category of Finding: Cash Management State Administering Department: Office of Emergency Services CRITERIA We determined that the following requirements relate to compliance with the Cash Manage- ment Improvement Act Default Procedures (CMIA Default Procedures): The CMIA Default Procedures, sections 7.2.1, 7.4.1 and 7.6.1, establish requirements for calculating federal and state interest liabilities, respectively; sections 7.2.2(c), 7.4.3 and 7.6.2(c) provide the methods for calculating these interest liabilities. CONDITION To fulfill its responsibilities assigned by CMIA Default Procedures, the Department of Finance (Finance) requires state departments to report quarterly information related to the transfers of federal funds so that it can calculate interest charges. However, during fiscal year 1997-98, the Office of Emergency Services (Emergency Services) omitted 14 transfers of federal funds totaling $70,800,000 from the quarterly reports for the Public Assistance Grants. Specifically, Emergency Services did not report any refunds, a total of $68,200,000, and did not report four drawdowns totaling $2,500,000. As a result, Finance understated the State’s interest liability for transfers related to its program by $177,000. We reported a similar finding for fiscal year 1996-97. RECOMMENDATION Emergency Services should make sure it provides Finance with complete and accurate infor- mation for calculating interest charges, including information on all refunds. DEPARTMENT’S VIEW AND CORRECTIVE ACTION PLAN Emergency Services agrees with this finding and has taken steps to ensure that all refunds and drawdowns are reported to Finance. 59 Reference Number: 98-12-1 Federal Catalog Number: 83.544 (formerly 83.516) Federal Program Title: Public Assistance Grants Federal Award Number and Year Awarded: State fiscal year 1997-98 Category of Finding: Reporting State Administering Department: Office of Emergency Services CRITERIA We determined the following compliance requirement related to Public Assistance Grants (PAG) reporting: The Code of Federal Regulations, Title 44, Section 206.204(f), requires the State to submit quarterly progress reports to the Federal Emergency Management Agency (FEMA) describing the status of those PAG projects on which it has not received final payment of the federal share. CONDITION The Office of Emergency Services (Emergency Services) did not ensure that it obtained all required quarterly progress reports from subrecipients. For the subrecipients we reviewed, Emergency Services failed to obtain 11 of 32 quarterly reports required during fiscal year 1997-98. FEMA uses these reports to monitor projects funded with PAG money. The reports address the status of funded projects and identify changes in project costs, schedules, and scope of work. Without these reports, Emergency Services’ and FEMA’s ability to monitor the projects is diminished. RECOMMENDATION Emergency Services should develop procedures to follow up on subrecipients that do not submit quarterly progress reports and should consider withholding reimbursements from those subgrantees that do not submit their reports on time. 60 DEPARTMENT’S VIEW AND CORRECTIVE ACTION PLAN Emergency Services agrees with our finding and provides the following comments. Until now, FEMA has not provided guidance on what should be included in the quarterly reports. In the absence of such guidance, Emergency Services required subgrantees to submit quarterly reports on the status of each of their federally funded projects. Emergency Services believes this requirement has been too comprehensive and has led to a very low subgrantee compli- ance rate. Emergency Services Program Branch and Resources Branch staff are meeting with FEMA to devise a new quarterly report that will be simpler to complete. This includes having Emergency Services provide project information from its records and requiring subgrantees to report changes in the information on an exception basis. As part of this new reporting process, Emergency Services will also consider withholding payments from subgrantees who do not comply with the reporting requirements. Emergency Services plans to have the new system fully working by the first calendar quarter of 2000. Reference Number: 98-12-2 Federal Catalog Number: 83.544 (formerly 83.516) Federal Program Title: Public Assistance Grants Federal Award Number and Year Awarded: State fiscal year 1997-98 Category of Finding: Reporting State Administering Department: Office of Emergency Services CRITERIA Our review of federal programs determined that the Code of Federal Regulations, Title 44, Section 13.20(a), requires the State to maintain accurate accounting records and to properly track and report the financial activities related to federal grants. Further, the State Administra- tive Manual, Section 20014, requires agencies receiving federal funds to reconcile federal financial reports to their official accounting records. 61 CONDITION The Office of Emergency Services (Emergency Services) did not reconcile receipts and disbursements reported on its federal cash transaction reports to those recorded in its official accounting records. As a result, we cannot determine if the amount of receipts and disburse- ments reported on quarterly federal cash transaction reports agrees with Emergency Services’ accounting records. RECOMMENDATION Emergency Services should reconcile receipts and disbursements reported on federal cash transaction reports to those recorded in its accounting records. DEPARTMENT’S VIEW AND CORRECTIVE ACTION PLAN According to its senior accounting officer, Emergency Services was not aware that this reconciliation was required. It plans to develop a method for identifying relevant receipts and disbursements contained in its accounting records and for reconciling these receipts and disbursements to those reported in the federal cash transaction reports. Reference Number: 98-13-1 Federal Catalog Number: 83.544 (formerly 83.516) Federal Program Title: Public Assistance Grants Federal Award Number and Years Awarded: State fiscal years 1995-96 and 1996-97 Category of Finding: Subrecipient Monitoring State Administering Department: Office of Emergency Services CRITERIA In our review of federal programs, we found the following compliance requirements related to subrecipient monitoring: For fiscal year 1995-96 audit reports, the OMB Circular A-133, requires subrecipients receiving more than $25,000 in federal assistance to submit audit reports to the State within 13 months of the end of their fiscal year; for fiscal year 1996-97 reports, the funding cut-off level rose to 62 $300,000, and the date for submission of reports remained unchanged; when subrecipients fail to comply with federal laws and regulations, OMB Circular A-133 also requires the State to make a management decision regarding audit resolution within six months of receipt of the audit report and to proceed with corrective action as rapidly as possible. CONDITION The Office of Emergency Services (Emergency Services) did not make management decisions regarding resolution of audit findings within six months of receiving audit reports. During fiscal year 1997-98, the State Controller’s Office, which monitors the annual audit reports of cities, counties, and school districts, forwarded 27 findings to Emergency Services for resolution. These findings include $212,000 in questioned costs. However, Emergency Services did not follow up on any of them. Without an effective system to ensure prompt resolution of audit findings, Emergency Services cannot ensure that subrecipients are comply- ing with federal laws and regulations. We reported a similar finding for fiscal year 1996-97. RECOMMENDATION Emergency Services should follow up on all reported audit findings and ensure that it makes management decisions regarding their resolution within six months. DEPARTMENT’S VIEW AND CORRECTIVE ACTION PLAN Emergency Services submitted a fiscal year 1998-99 budget change proposal to provide staff to ensure follow-up and resolution of audit report findings. This proposal was not approved in January 1999. Emergency Services resubmitted the proposal for consideration during the May 1999 budget revision process. 63 U.S. DEPARTMENT OF EDUCATION Reference Number: 98-1-2 Federal Catalog Number: 84.002 Federal Program Title: Adult Education—State Grant Program Federal Award Number and Calendar Year Awarded: V002A70006; 1997 Category of Finding: Activities Allowed or Unallowed State Administering Department: Department of Education CRITERIA In our review of the Adult Education—State Grant Program (Adult Education), we identified the following compliance requirements related to activities allowed: The United States Code, Title 20, Section 1201, describes the basic provisions for using the Adult Education funds that include improving the educational opportunities for a specified population of adults by expanding and improving the current system for delivering services and encouraging the establishment of programs. The Code of Federal Regulations, Title 34, Section 461.31, describes how the State is to award funds, including reviewing applications for specific information relating to Adult Education programs and services. CONDITION For 2 subrecipients in our sample of 40, the State Department of Education (Education) did not take adequate precautions to ensure subrecipients use the funds for only activities autho- rized by federal laws and regulations. Specifically, in one instance, Education requested additional information from a community-based organization (CBO) after it determined that the CBO’s fiscal year 1997-98 application did not sufficiently describe the program activities, services, and other required components. Even though Education never received the additional information, it awarded the CBO $69,500. Furthermore, when additional funds became available during the fiscal year, Education increased the original grant award to $325,750. As of March 1999, Education was unable to provide a complete application to justify funding the CBO. In the other instance, Education paid $560 for activities not allowed. Although it discovered its error, Education did not attempt to recover the funds. After we discussed this with Educa- tion in February 1999, it billed the school district to recover the funds. 64 RECOMMENDATION Education needs to ensure that applications are complete and include only authorized activi- ties before awarding grants. In addition, Education should ensure that it takes the appropriate corrective action when it identifies errors or instances of noncompliance. DEPARTMENT’S VIEW AND CORRECTIVE ACTION PLAN The first subrecipient identified in this finding did not sufficiently describe program activities and services for their fiscal year 1997-98 application. Two Education consultants made a visit on August 27, 1997, to this subrecipient to provide the technical assistance needed for the subrecipient to become compliant with federal requirements. Education staff are reviewing adult education records to locate documentation of the visit. Education records indicate that this subrecipient served a larger number of students than originally projected. Education augmented this subrecipient’s grant based on the larger number of students served. The second subrecipient in this finding requested reimbursement of $560 for activities not authorized by federal law and regulations. Education has billed this subrecipient for the $560. The adult education office has a new manager who reorganized the office, creating a central filing system and requiring documentation of all contact with subrecipients. The new reorga- nization will ensure that Education has documentation to support all grant awards and that identified problems are immediately resolved. Reference Number: 98-2-2 Federal Catalog Number: 84.027 Federal Program Title: Special Education—Grants to States Federal Award Number and Calendar Year Awarded: H027A70116; 1997 Category of Finding: Allowable Costs and Cost Principles State Administering Department: Department of Education 65 CRITERIA In our review of the federal Special Education—Grants to States (Special Education) program administered by the State Department of Education (Education), we determined that the following are among the compliance requirements related to allowable costs: OMB Circular A-87, Attachment A, establishes the principles for determining allowable costs under grants with the federal government. Section (C) of this attachment states that for a cost to be allowable under a federal award, the goods or services involved must be chargeable or assignable to the cost objective. Additionally, Section (E) states that direct costs are identified specifically with a particular final cost objective. Further, Section (B) defines a cost objective as a function, organizational subdivision, contract, grant, or other activity requiring cost data or incurring costs. Examples of chargeable direct costs include compensation of employees’ time, as well as the materials, equipment, and travel expenses incurred specifically to carry out the federal grant. CONDITION Education charges costs to the Special Education program that are not specific to the federal grant. Specifically, in fiscal year 1997-98, Education charged the Special Education grant award approximately $715,000 for costs incurred by its Education Finance Division when allocating state funds. When Education uses federal funds to pay the cost of allocating state funds, it does not ensure it complies with federal regulations for allowable costs. We reported a similar finding in our audit of fiscal year 1996-97. At that time, Education stated that to comply fully with the federal mandates governing the Special Education program, it must allocate both state and federal funds to local education agencies that imple- ment the federal special education programs. Education stated that its Education Finance Division is responsible for allocating state funds and for providing technical assistance to local educational agencies on a wide range of fiscal matters pertaining to federal special education mandates. However, the allocation of state funds is not an activity specifically identified with allowable program costs. Education’s Special Education Division is responsible for allocating program funds, whereas its Education Finance Division only allocates state funds to local educational agencies. Because the activities are distinct, and separate divisions perform them, the costs of allocating state funds are not specifically identified with the program. Consequently, they are not allowable direct costs. RECOMMENDATION Education should obtain advance written approval or authorization from the U.S. Department of Education before using program funds for activities not specifically identified with the federal grant. 66 DEPARTMENT’S VIEW AND CORRECTIVE ACTION PLAN Education stated that it did not agree with this audit finding; Education believes that it is fully complying with the rules and regulations governing Special Education, including charging the federal grant for the costs of allocating state funds in support of the federal program. Further, Education does not believe that it needs advance approval from the U.S. Department of Education to continue this practice. For these reasons, Education believes that a corrective action plan is unnecessary. Education indicated that our finding relates to its use of federal grant funds to administer Special Education, including the disbursing of state funds and providing technical assistance and guidance to local agencies on fiscal matters relating to the program. Education views these expenditures as appropriate charges to the federal grant. According to Education, Special Education is a mandated federal program, one that the State is required to support because the program is not fully funded at the federal level. The disbursement of state funds is necessary to comply with the federal mandates underlying the program and, therefore, activities related to this disbursement can be specifically identified as necessary to the State’s performance of the federal program. Education stated that, consistent with the way it charges all administrative costs associated with Special Education, it appropriately charges to the administrative component of the federal grant the costs associated with disbursing state funds. The costs associated with administering the federal grant include those associated with disbursing federal local assistance funding, providing technical assistance and fiscal guidance, monitoring compli- ance, and resolving complaints. Education charges the cost of all administrative activities associated with Special Education to the federal program, regardless of where the activities take place in Education. 67 Reference Number: 98-3-2 Federal Catalog Number: 84.243 Federal Program Title: Tech-Prep Education Federal Award Number and Calendar Year Awarded: V243A70076; 1997 Category of Finding: Cash Management State Administering Department: California Community Colleges, Chancellor’s Office CRITERIA In our review of the Tech-Prep Education program, we determined that the following compli- ance requirements relate to awarding grants to subrecipients: The Code of Federal Regulations, Title 31, Section 205.20, requires the State to limit its cash advances to the minimum amounts needed to fulfill its immediate cash needs, and Title 34, Section 80.20 of the regulations extends this requirement to subawards, requiring the State to limit cash advances to subrecipients. CONDITION When it disbursed federal grant awards to 13 subrecipients, the California Community Colleges, Chancellor’s Office (Chancellor’s Office) did not minimize the time that elapsed between their receiving and spending federal funds. Specifically, the Chancellor’s Office disbursed approximately $990,000, or 75 percent, of its fiscal year 1997-98 awards, totaling $1,320,000, between October and November 1997 without determining the immediate cash needs of the subrecipients. As of December 31, 1997, the subrecipients had used between 4 percent and 55 percent of the funds, totaling approximately $316,000. RECOMMENDATION The Chancellor’s Office should modify its procedures to ensure that it complies with federal cash management regulations requiring it to disburse funds only for the immediate cash needs of its subrecipients. 68 DEPARTMENT’S VIEW AND CORRECTIVE ACTION PLAN The Chancellor’s Office agrees with our finding and states it will review its procedures for cash advances and will strengthen them where needed. Reference Number: 98-5-1 Federal Catalog Number: 84.126 Federal Program Title: Rehabilitation Services—Vocational Rehabilitation Grants to States Federal Award Number and Calendar Year Awarded: H126A980005; 1997 Category of Finding: Eligibility State Administering Department: Department of Rehabilitation CRITERIA In our review of the Rehabilitation Services—Vocational Rehabilitation Grants to States program, we determined that the following was among the compliance requirements for eligibility: The Code of Regulations, Title 34, Section 361.41(b), requires that the State establish stan- dards for promptly and equitably referring individuals for vocational rehabilitation services. In addition, the State must determine eligibility for services within 60 days of receiving an application, with certain exceptions. CONDITION The Department of Rehabilitation (department) did not always determine applicant eligibility within the required 60 days. For 3 of the 28 case files we reviewed, the department took 80 to 100 days to determine eligibility. Two other files lacked documentation indicating when the department determined eligibility. When the department does not follow the regulations, it cannot ensure clients promptly receive required services. RECOMMENDATION The department should ensure that it determines eligibility for program applicants within the required time frame. It should also appropriately document its decisions in its case files. 69 DEPARTMENT’S VIEW AND CORRECTIVE ACTION PLAN The department acknowledges it needs to continue its efforts to meet eligibility determination timelines and has taken steps to improve its success in meeting the requirement. During fiscal years 1997-98 and 1998-99, the department took the following steps: • The department developed and implemented new systems for monitoring case processing and review requirements in fiscal year 1997-98. The assistant deputy directors imple- mented regional plans and district management teams implemented district plans to review case processing and monitor timeline requirements. • The department held a two-day training seminar in April 1998 on compliance issues at a statewide meeting of rehabilitation supervisors and district administrators. • The department developed a 1998 Case Recording Handbook (handbook), which will streamline case-recording requirements and will assist in the prompt processing of eligibil- ity determinations. The handbook emphasizes compliance requirements and timelines consistent with federal regulations. • The department will train all rehabilitation supervisors on the handbook in June 1999 at a statewide meeting. This training will emphasize the supervisors’ responsibility to review case processing for compliance with federal regulations and adherence to timelines. Reference Number: 98-9-1 Category of Finding: Suspension and Debarment State Administering Department: California Community Colleges, Chancellor’s Office (See listing of the specific federal program details following the discussion of the issues below.) CRITERIA In our review of the Vocational Education—Basic Grants to States (Vocational Education) and Tech-Prep Education (Tech-Prep) programs, we determined that the following compliance requirement related to suspension and debarment: The Code of Federal Regulations, Title 34, Sections 80.35, requires the California Community Colleges, Chancellor’s Office (Chancellor’s Office) to ensure that it does not make subawards to any parties at any tier who are debarred, suspended, or otherwise excluded from participa- tion in federal assistance programs. 70 CONDITION The Chancellor’s Office did not require participants in the Vocational Education and Tech-Prep programs to submit signed suspension and debarment certifications, nor did it have any other procedures in place to make sure it was not providing federal grant awards to suspended or debarred parties. Without adequate controls, the Chancellor’s Office runs the risk of allowing suspended or debarred parties to participate in federal programs. We used an alternative procedure to determine that this did not occur during the period we reviewed. RECOMMENDATION The Chancellor’s Office should implement procedures to ensure that Vocational Education and Tech-Prep participants are not suspended or debarred from participating in federal assis- tance programs before approving contracts for funding. DEPARTMENT’S VIEW AND CORRECTIVE ACTION PLAN The Chancellor’s Office agrees with the finding and states that they will require all future participants of the Vocational Education and Tech-Prep programs to sign suspension and debarment certifications when they apply for program funds. U.S. DEPARTMENT OF EDUCATION Federal Catalog Number: 84.048 Program Title: Vocational Education—Basic Grants to States Federal Award Number and Calendar Year Awarded: V048A70005; 1997 Federal Catalog Number: 84.243 Program Title: Tech-Prep Education Federal Award Number and Calendar Year Awarded: V243A70076; 1997 71 Reference Number: 98-13-2 Federal Catalog Number: 84.276 Federal Program Title: Goals 2000—State and Local Education Systemic Improvement Grants Federal Award Numbers and Calendar Year Awarded: S276A60005; 1997 S276A70005; 1997 Category of Finding: Subrecipient Monitoring, Activities Allowed and Cash Management State Administering Department: Department of Education CRITERIA In our review of the Goals 2000—State and Local Education Systemic Improvement Grants (Goals 2000) program, we determined that the following compliance requirements govern awarding grants to subrecipients (subgrants): The OMB Circular A-133, Section 400(d), requires the State to monitor subrecipients to ensure they use federal grant money for authorized purposes only. This section of the circular also requires the State to provide subrecipients certain information on the grants they receive. Further, the United States Code, Title 20, Section 5889(b)(3)(B), identifies allowable activities under the Professional Development subgrants. Additionally, Title 31, Section 205.20, and Title 34, Section 80.20, of the Code of Federal Regulations, require the State to limit cash advances to the minimum amounts needed to fulfill immediate needs for the State and for subrecipients, respectively. CONDITION The State Department of Education (Education) did not sufficiently monitor subrecipients to make sure they used federal grant funds only on allowable activities or received advances only in the minimum amounts necessary. Additionally, Education did not provide subrecipients the Catalog of Federal Domestic Assistance number. Education approved all five Reading and Professional Development applications we reviewed even though they either included disallowed expenditures or did not sufficiently describe how the subrecipient intended to use some of the funds. However, Education asked the subrecipients to revise their budgets to include only costs for authorized activities. Nonethe- less, the revised documents still contained costs for questionable activities or lacked sufficient detail. Specifically, of the $683,124 awarded to these five subrecipients, we identified $74,596 for questionable activities and $202,098 in costs that lacked adequate documentation. 72 Education also did not ensure subrecipients requested the minimum amount necessary to meet their immediate needs before granting them advances. In April 1998, Education advanced approximately $42 million, or 80 percent of the $52 million awarded, to subrecipients without first determining their immediate cash needs. Although Education required subrecipients to submit an expenditure report by August 14, 1998, if they used their advances as of June 30, 1998, those that had not spent their advances could request an 11-month extension. As of February 1999, Education had received reports for only 5 of the more than 350 grants it provided. After we brought these issues to Education’s attention, it developed a preliminary expenditure report for subrecipients to complete detailing the activities justifying their budget expendi- tures, among other things. Education also reminded its subrecipients to use funds only for allowable purposes. Finally, Education did not provide its subrecipients the Catalog of Federal Domestic Assistance number. RECOMMENDATION To ensure that subrecipients use federal grant money appropriately, Education should improve its procedures for reviewing and approving applications. Further, Education should modify its procedures for advancing funds to comply with cash management laws. Finally, Education should provide subrecipients the Catalog of Federal Domestic Assistance number. DEPARTMENT’S VIEW AND CORRECTIVE ACTION PLAN When Education awarded Goals 2000 funds in fiscal year 1997-98, it took several steps to ensure that federal funds would be used only for allowable activities. Education notified each applicant of the proper use of Goals 2000 funding through the application certification requirement and the grant award letter. The state level legislation, Assembly Bill 1086, under which Goals 2000 funds were distributed as Reading and Professional Development grants, required the local education governing board applying for the grant to certify compliance with seven specific conditions of the law, including some related to the use of funds. Educa- tion required this certification from each school district as part of the application process. The grant award letter provided explicit information regarding the appropriate use of funds and expenditures disallowed under the Goals 2000 Act and Assembly Bill 1086. Applicants were asked to revise their budgets if they contained costs for unallowable expenditures. Education did not release fiscal year 1997-98 funds until the applicant signed and returned the Certification of Acceptance of Grant Conditions attached to the grant award letter and submitted a revised budget, if appropriate. In addition, Education provided information on the appropriate expenditure of Goals 2000 funds through daily telephone conversations with school districts and training sessions. In December 1998 and January 1999, Education conducted sessions throughout the State of 73 California to inform school districts of their responsibilities regarding the Reading Profes- sional Development Program. Finally, compliance items and suggested audit procedures for the Reading Instruction Development Program were included in the Standards and Procedures for Audits of California K-12 Local Educational Agencies for fiscal year 1997-98. Therefore, in fiscal year 1997-98, local auditors reviewed the expenditure of Goals 2000 funds at each school district. To further ensure that Education meets its monitoring responsibilities for Goals 2000, Education’s management has made a commitment to assign an additional analyst to the Reading and Mathematics Policy and Leadership Office. In July 1997, Education received authorization to spend federal 1996 and 1997 Goals 2000 funds for Reading and Professional Development. In fiscal year 1997-98, many school districts planned to continue professional development activities initiated during fiscal year 1996-97. Although grant award letters were not mailed until mid-February 1998 and funds were not distributed to school districts until late March 1998, school districts had been advised that the funds could be used for appropriate professional development activities conducted between July 1, 1997, and June 30, 1998. By March 1998, many school districts had reported that they had already spent their Reading and Professional Development funds. The initial funding to school districts was based on the misconception that school districts had already spent their funds. Following Education’s normal grant procedures, Goals 2000 funds for fiscal year 1998-99 are being distributed on a quarterly basis. School districts are being asked to submit a semiannual program expenditure report. To ensure that funds are being immediately expended, Education staff will review the semiannual program expenditure report prior to releasing their quarter funds. The third-quarter payment will be reduced if the semiannual report indicates that the school district has not expended the Goals 2000 funds already provided to the school district. Education staff will make the fourth quarterly payment only after review and approval of a final program expenditure report. In addition, to ensure that school districts have expended their fiscal year 1997-98 funds and to obtain more detail about each school district’s expenditures, Education developed and requested that school districts complete a preliminary expenditure report. Education is cur- rently receiving the completed preliminary expenditure reports from school districts. In the past, the Catalog of Federal Domestic Assistance number was provided to school districts and their auditors upon request. In addition to all other required information, the fiscal year 1998-99 grant award letters contain the Catalog of Federal Domestic Assistance number for Goals 2000. 74 Reference Number: 98-13-3 Category of Finding: Subrecipient Monitoring State Administering Department: California Community Colleges, Chancellor’s Office (See listing of the specific federal program details following the discussion of the issues below.) CRITERIA In our review of federal programs, we determined that the following compliance requirements relate to subrecipient monitoring: OMB Circular A-133, Section 200(a), requires that community colleges expending $300,000 or more in federal awards annually perform audits in accordance with specified federal provi- sions described in Section 500 of the circular. Further, Section 400(d) of the circular requires the California Community Colleges, Chancellor’s Office (Chancellor’s Office) to issue a man- agement decision on audit findings within six months of receiving audit reports and make sure subrecipients take timely corrective action. CONDITION The Chancellor’s Office did not sufficiently monitor the fiscal year 1996-97 audit reports of the State’s 71 community college districts. Because the Chancellor’s Office did not follow its procedures for resolving audit findings, it cannot ensure that it will be able to take timely corrective action. Although the Chancellor’s Office received the 5 audit reports we reviewed by January 1998, as of September 1998, it had not issued management decisions on 16 audit findings that related to federal programs and 13 internal control findings that could affect federal funds. Findings identified in these five reports included inadequate records of time charged to specific programs for multifunded positions, insufficient procedures for safeguard- ing assets, inadequate supporting documentation for reimbursements claimed against a federal program, and improper cash management procedures. We reported a similar finding for the fiscal year 1996-97 audit. At that time, the Chancellor’s Office stated that it implemented procedures to ensure resolution of audit findings. Under these procedures, the fiscal accountability unit would review audit reports and send findings to the appropriate program unit at the Chancellor’s Office for resolution. The program units would contact the community college districts, obtain corrective action plans, and report back to the fiscal accountability unit. 75 RECOMMENDATION The Chancellor’s Office should continue implementing its new system to ensure that it takes appropriate corrective action when community college audits identify failure to comply with federal regulations. DEPARTMENT’S VIEW AND CORRECTIVE ACTION PLAN The Chancellor’s Office agrees with the finding and as stated last year, it implemented a process to photocopy audit citings and distribute this information to the various program units for follow-up. Changes in key staff and administrators, staff shortages, and redirection of priorities for other key staff working on these citings have caused delays. However, only a few have now not been addressed. It has received authorization for additional staff and expects the internal structure of the Chancellor’s Office to stabilize to the point that it will be able to show more progress during the coming year. U.S. DEPARTMENT OF EDUCATION Federal Catalog Number: 84.048 Federal Program Title: Vocational Education—Basic Grants to States Federal Award Number and Calendar Year Awarded: V048A60005; 1996 Federal Catalog Number: 84.243 Federal Program Title: Tech-Prep Education Federal Award Number and Calendar Year Awarded: V243A60076; 1996 76 Reference Number: 98-13-5 Federal Catalog Number: 84.002 Federal Program Title: Adult Education—State Grant Program Federal Award Number and Calendar Year Awarded: V002A70006; 1997 Category of Finding: Subrecipient Monitoring State Administering Department: Department of Education CRITERIA In our review of the Adult Education—State Grant Program (Adult Education Program), we identified the following compliance requirement related to subrecipient monitoring: The Code of Federal Regulations, Title 34, Section 461.46, requires the State Department of Education (Education) to conduct program reviews and evaluations on at least 20 percent of all subrecipients each year so that it evaluates at least 80 percent during the 4-year period of the state plan. These evaluations must consider factors such as the projected goals of the subrecipient; the planning and content of the programs, services, and activities; and the extent to which educationally disadvantaged adults are being served. CONDITION Education did not adequately monitor subrecipients of the Adult Education Program. Education’s records show that during fiscal year 1997-98, it conducted reviews and evalua- tions of 18 percent of the subrecipients instead of the required 20 percent. In addition, our review of Education’s monitoring files for these subrecipients revealed deficiencies. In one case, Education could not provide evidence that it performed the review. In three other cases, it could not show that the reviews fully complied with the federal requirements. Furthermore, although Education identified deficiencies in four of the five subrecipients’ files in April and May 1998, it could not provide evidence that it took corrective action. After we brought this to Education’s attention, it billed two subrecipients to recover costs for activities not autho- rized for the program. However, for the remaining two, Education had not taken corrective action. 77 RECOMMENDATION Education should conduct evaluations and reviews of its subrecipients as required and make sure it takes appropriate corrective action on identified deficiencies. DEPARTMENT’S VIEW AND CORRECTIVE ACTION PLAN Education concurs with this finding. Education staff are currently attempting to reconstruct the compliance review files for fiscal year 1997-98 and are developing a subrecipient data base to record the results of compliance reviews. The data base will be used to record compliance information for fiscal year 1998-99. In addition, for fiscal year 1998-99, Education staff will conduct compliance reviews of 20 percent or more of its Adult Education subrecipients. With the implementation of the Workforce Investment Act, Education will have access to more subrecipient performance data than in the past. The performance data will enable Education to better evaluate its subrecipients’ ability to deliver effective literacy programs. In addition, in developing the new state plan, Education embraced the Workforce Investment Act’s stringent guidelines for local providers and will be requiring local providers to fully document and benchmark student achievement. Reference Number: 98-14-1 Federal Catalog Number: 84.032 Federal Program Number: Federal Family Education Loans Federal Award Number and Year Awarded: State fiscal year 1997-98 Category of Finding: Special Tests and Provisions State Administering Department: California Student Aid Commission CRITERIA In our review of the Federal Family Education Loans program (loan program), we determined the following compliance requirements relate to the administration of loan program funds: The Code of Federal Regulations, Title 34, Section 682.401 (b)(16), allows one or more private nonprofit institutions to administer the program under the supervision of a single state agency. For this purpose, “supervision” includes setting policies and procedures and having full responsibility for the operation of the program. 78 The Operating Agreement Between Student Aid Commission and Auxiliary Organization, Section XI, requires the auxiliary organization (auxiliary) to maintain adequate records and to submit periodic reports to the California Student Aid Commission (commission) showing the operation and financial status of the auxiliary. The records and reports should cover all activi- ties of the auxiliary. The California Education Code, sections 69766, 69766.1, and 69768, continuously appropriates money in the State Guaranteed Loan Reserve Fund (Loan Reserve fund) to the commission for carrying out the purposes of the loan program. In addition, the California Government Code, beginning in Section 13400, requires each state agency head to establish and maintain an adequate system of internal accounting and administrative controls designed to prevent errors, irregularities, or fraudulent acts. CONDITION In fiscal year 1996-97, we reported that the commission did not have a system to provide adequate oversight of the activities of its auxiliary. Additionally, we noted that the commis- sion had not retained sufficient staff to adequately protect the public funds entrusted to it. These conditions persisted during fiscal year 1997-98; however, the commission has taken a number of steps to improve its oversight of the auxiliary and to ensure the operation of each is adequately separated from the other. Nonetheless, the commission needs to do more. Additionally, recent litigation threatens its continued progress. In January 1997, the commission entered an operating agreement with its auxiliary to provide various services, including Loan Reserve fund management and reporting, federal financial and accounting reporting, accounting and funds disbursement, financial analysis and fore- casting, budgeting, and cash management. Under the terms of the agreement, most of the commission’s staff were assigned to work for the auxiliary. As a result, the commission had few staff remaining to oversee the operating agreement. Since it entered into the agreement, and continuing through fiscal year 1997-98, the only staff reporting to commission management and assigned to oversee the operating agreement were the chief deputy director, the chief of the commission’s management services division, and the commission’s internal auditor. These staff members also have other duties. Consider- ing the extent of the services provided by the auxiliary, this staffing level is too low to adequately protect the public funds entrusted to the commission. 79 Although the staffing shortage persists, the commission has implemented a number of changes intended to ensure proper oversight of the auxiliary and to ensure that operation of the commission is separated adequately from operation of the auxiliary, including the following: • Separated the positions of executive director of the commission and president/chief executive officer of the auxiliary and hired a new executive director. • Created an oversight committee to develop recommendations to strengthen and improve oversight of the auxiliary and the operating agreement. • Authorized the budget for a loan program oversight unit to oversee the operating agree- ment and hired the manager and one of four employees for the unit. • Authorized funds for additional staff to cover loan activities of administrative, accounting, and audit personnel. • Installed a new accounting system for the auxiliary that is separate from the State’s accounting system. • Transferred all accounting positions responsible for the maintenance of the Loan Reserve fund back to the commission. In addition to the changes it has already made, the commission still needs to fill vacant positions and develop an oversight plan. Despite the improvements the commission has made, recent litigation may jeopardize its continued progress. The auxiliary obtained a restraining order to prevent the commission from reconstituting the auxiliary’s governing board. Until this controversy can be settled, it is unlikely the commission will be able to provide the oversight needed. RECOMMENDATION The commission should continue its efforts to establish an adequate system of controls over its auxiliary that ensures the auxiliary’s compliance with the operating agreement. DEPARTMENT’S VIEW AND CORRECTIVE ACTION PLAN The commission states that it continues to work diligently to establish an adequate system of controls over its auxiliary. In addition, it has taken various steps to carry out its responsibili- ties as guarantor and to enforce the operating agreement. Further, its loan program oversight division is developing an oversight plan and vigorously seeking to fill vacant positions. 80 Reference Number: 98-14-2 Federal Catalog Number: 84.032 Federal Program Number: Federal Family Education Loans Federal Award Number and Year Awarded: State fiscal year 1997-98 Category of Finding: Special Tests and Provisions State Administering Department: California Student Aid Commission CRITERIA Under the Code of Federal Regulations, Title 34, Section 682.409(a)(1), a guarantee agency (agency) must promptly assign to the U.S. Department of Education (USDE) any loan held by the agency on which it has received payment. An agency must assign any loan that meets all of the following criteria as of April 15 of each year: (a) The unpaid principal balance is at least $100, (b) the agency has held the loan for five years, (c) the agency has not received a loan payment in the last year, and (d) a judgment has not been entered on the loan against the borrower. The USDE provided the following additional criteria in a May 27, 1997, letter: (a) The loan has not been assigned to the Federal Office Program or the IRS Tax Refund Offset Program, (b) the loan is not currently involved in bankruptcy proceedings, and (c) the loan has not been discharged (or a determination is pending) in connection with closed school, ability-to-benefit, or false certification. CONDITION The auxiliary, which administers the loan program on behalf of the California Student Aid Commission (commission), has not developed procedures to ensure it assigns all eligible loans to the USDE. Instead of reviewing all loans that are at least five years old or for which a payment has not been received in the last year, the auxiliary reviews only defaulted loans that have completed all the stages of its collection process. By limiting its review to just those loans, the auxiliary has no assurance that it has identified all loans eligible for assignment. RECOMMENDATION The auxiliary should either develop a system to identify and assign all eligible loans to the USDE or work with the USDE to develop an acceptable alternative. 81 DEPARTMENT’S VIEW AND CORRECTIVE ACTION PLAN The commission and the auxiliary concur with this finding and recommendation. They also recognize that assigning loans to USDE is a high priority. As such, the auxiliary assigned a special unit of four full-time and one part-time staff to this task. As a result, within the first three months of the current fiscal year, they forwarded six tapes of eligible loans to USDE. According to the commission and the auxiliary, they determine which loans to assign to USDE based upon information available in returned Franchise Tax Board (FTB) files. The use of FTB files eliminates research steps staff would have to perform on the pool of defaulted loans. Except for the five-year holding date, the loans submitted to FTB must also meet the USDE’s mandated criteria. When the FTB file is used for an assignment tape, staff execute an additional edit to ensure the loans have been in the auxiliary’s portfolio for a six-year period. This additional edit insures that the holding date criteria is met. Use of the FTB file as the subrogation set-up file has the following history. The auxiliary entered into contracts in May 1996 with five external collection agencies, which allowed it to assign collections on defaulted loans to all the agencies for a one-year period. If unsuccessful in its collection efforts, an agency returned the loan after one year and the auxiliary reas- signed the account to one of the other collection agencies. The number of assignments was limited to three. The auxiliary then changed the loan to a pending subrogation status after the third placement. In March 1997, the commission and auxiliary established an interagency agreement with the FTB. This agreement replaced the three-placement agreements previously contracted with the collection agencies to a one-placement assignment with the agencies and a second place- ment with the FTB. The first assignment of defaulted loans to FTB occurred in June 1997. The auxiliary delivered in excess of 75,000 borrowers owing more than $780 million. The borrowers represented accounts in the pending subrogation status. FTB will have one more opportunity to collect on this large portfolio prior to subrogation to USDE. In addition, the commission and the auxiliary stated that assigning collections to FTB is now the last step in the collection process before an eligible loan is subrogated to USDE. Uncollectable accounts meet most of USDE’s mandated subrogation requirements. The auxiliary then reviews these loans to assure they meet the remaining requirements. They have found this process to be the most efficient way to track and submit the mandated defaulted loans to USDE. Furthermore, the commission and auxiliary commented that the volume of accounts within the portfolio makes it impractical, if not impossible, to assign all eligible loans to USDE. It is their understanding that USDE could not accept all submissions. When the commission and the auxiliary next subrogate loans prepared using the current process described above, they will request USDE to approve this process as an acceptable alternative to Section 428 (c)(8) of the Higher Education Act and 34 CFR Section 682.409 (as described in the June 22, 1998, letter from USDE). 82 Reference Number: 98-14-3 Federal Catalog Number: 84.032 Federal Program Title: Federal Family Education Loans Federal Award Number and Year Awarded: State fiscal year 1997-98 Category of Finding: Special Tests and Provisions State Administering Department: California Student Aid Commission CRITERIA Our review of the Federal Family Education Loans program (loan program) determined the following compliance requirements relate to the administration of loan program funds: In accordance with the Code of Federal Regulations, Title 34, Section 682.404(a)-(c), the federal government reimburses guarantee agencies, such as the California Student Aid Com- mission (commission), a percentage of losses on defaulted loan claim payments to lenders. The federal government bases this percentage, called the reinsurance rate, on the amount of claims paid during the fiscal year and the reported loans in repayment at the end of the prior fiscal year. If the total amount of claims paid on defaulted loans during the fiscal year reaches 5 percent of loans in repayment, the federal government pays the guarantee agency a lower reinsurance rate for loans. When the total claims paid reaches 9 percent of loans in repay- ment, the reinsurance rate drops again. Additionally, the federal regulations require guarantee agencies to report complete and accurate data to the federal government so that a correct reinsurance rate can be calculated. Further, the California Code of Regulations, Title 5, Section 30904, requires lenders to report to the commission any loan transaction within 45 days of the date that it occurs or that a lender learns of the transaction. CONDITION The information the commission’s auxiliary, which administers the loan program, reports to the federal government for computing the reinsurance rate is not always accurate, and thus, the commission may not be receiving the correct amount of funds. We tested 40 loans to determine if the commission’s records properly reflect the loans’ status and found seven instances in which the records were inaccurate. In all seven instances, the commission reported the loans as being in repayment status. However, five were for borrowers who 83 had returned to in-school status; one was in forbearance, where the lender had temporarily allowed the borrower to change the repayment terms; and the lender had no record of the remaining loan. Repayment status is an element that affects the amount of loans in repayment reported to the federal government by the commission. The loans in repayment amount is used to calcu- late the reinsurance rate that determines the extent to which the federal government will reimburse the commission for defaulted loans. If the commission does not report accurate information, the federal government may not pay the proper amount of funds. The commission’s records did not reflect accurate information because it did not receive the information on the change in loan status from the lender. The commission recognizes that its system does not always reflect accurate information about its loans. As a result, it recently completed a reconciliation project for loans guaranteed before January 1, 1995, to ensure that the date in its system is accurate and matches that of the lender. Even though the commission completed the reconciliation, its system continues to reflect inaccurate loan status information. RECOMMENDATION The commission should continue to work with lenders to ensure they promptly report changes in loan status so its reports to the federal government are as accurate as possible. Additionally, the commission should review the status of loans in its system to ensure that its records reflect accurate information. DEPARTMENT’S VIEW AND CORRECTIVE ACTION PLAN The commission and auxiliary agree with the differences in loan status noted in the finding and recommendation. They continue to place a high priority on FAPS database accuracy. This accuracy is, however, tempered by the accuracy of the information lenders reported to them. Lenders must report any loan transaction or status change within 45 days of the date that it occurs or that the lender is aware of the transaction; however, the lenders do not always do this. FAPS reflects the most current status reported by the lenders. Furthermore, the commission and the auxiliary stated that the auxiliary recently completed a reconciliation project with lenders for loans guaranteed prior to January 1, 1995. The purpose of that project was to determine which loans were closed and obtain the current status of all open loans through this period. The first phase of this project was completed on September 30, 1998, and included 2.4 million loan records. Additionally, they are currently working with lenders on a second phase for all loans guaran- teed subsequent to January 1, 1995. This second phase will supplement the lenders’ status change reporting by utilizing the lenders’ quarterly files used by the auxiliary to report to the 84 National Student Loan Data System (NSDLS). This mechanism will assist lenders in reporting the most current loan status to FAPS. It will also provide greater integration between NSDLS and FAPS. The commission and the auxiliary will continue to use up-to-date technology and improved communications with lenders to insure that status differences are brought within acceptable standards. 85 U.S. DEPARTMENT OF EDUCATION U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES Reference Number: 98-9-2 Category of Finding: Suspension and Debarment State Administering Department: Department of Education (See listing of the specific federal program details following the discussion of the issues below.) CRITERIA In our review of federal programs, we determined that the Code of Federal Regulations, Title 45, Section 76.110, and Title 34, Section 80.35, prohibit the State from contracting with any party that is suspended, debarred, or otherwise ineligible to participate in federal assistance programs. CONDITION The State Department of Education (Education) did not always require participants of the Child Care Mandatory and Matching Funds of the Child Care and Development Fund (Child Care and Development Fund), Special Education—Grants to States, and Special Education— Preschool Grants programs to submit signed suspension and debarment certifications. Further, Education did not have any other procedures in place to make sure it was not awarding federal money to suspended or debarred parties. Specifically, for the Child Care and Development Fund program, Education did not have certifications for 5 of our sample of 40 subrecipients. For the other two programs, Education did not require any of its subrecipients to submit the certifications. Although we found no evidence that any of the participants in these programs were suspended or debarred from participating in federal programs, without adequate controls, Education runs the risk of having this happen. RECOMMENDATION Education should require all participants to submit signed suspension and debarment certifi- cates and make sure it receives them before disbursing program funds. DEPARTMENT’S VIEW AND CORRECTIVE ACTION PLAN Education has taken immediate action to ensure that it has suspension and debarment certifi- cations from all federal program subrecipients. 86 U.S. DEPARTMENT OF EDUCATION Federal Catalog Number: 84.027 Federal Program Title: Special Education—Grants to States Federal Award Number and Calendar Year Awarded: H027A70116; 1997 Federal Catalog Number: 84.173 Federal Program Title: Special Education—Preschool Grants Federal Award Number and Calendar Year Awarded: H173A70120; 1997 U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES Federal Catalog Number: 93.596 Federal Program Title: Child Care Mandatory and Matching Funds of the Child Care and Development Fund Federal Award Numbers and Calendar Year Awarded: 8G999004, 8G999005; 1997 87 U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES Reference Number: 98-2-3 Federal Catalog Number: 93.778 Federal Program Title: Medical Assistance Program Federal Award Numbers and Calendar Years Awarded: MAP 05-9605CA5028; 1997 MAP 05-9705CA5028; 1997 MAP 05-9805CA5028; 1997 Category of Finding: Allowable Costs and Cost Principles State Administering Department: Department of Health Services CRITERIA Our review of the Medicaid Cluster—which is composed of the Medical Assistance Program (Medicaid), the State Survey and Certification of Health Care Providers and Suppliers program, and the State Medicaid Fraud Control Units program—determined the following compliance requirements related to allowed activities, allowable costs, and cost principles: U.S. Office of Management and Budget Circular A-133 Compliance Supplement (Circular A-133 Compliance Supplement), states that, to be allowable, payments for Medicaid services must be based on claims that are adequately supported by medical records or other evidence indi- cating that the service was actually provided and consistent with medical diagnosis; OMB Circular A-87 states that, to be allowable under a grant program, costs must be necessary and reasonable for proper and efficient administration of grant programs; the Code of Federal Regulations, Title 42, Section 431.107, requires providers to maintain records that disclose the extent of services provided to Medicaid recipients. CONDITION Health care providers do not always maintain documentation to support the services for which they request reimbursement. Using state health care specialists to review 16 of the Medicaid claims we tested, we found that 3 were not supported by medical records or other evidence indicating that the service was actually rendered. These 3 claims totaled $91 and represent 13 percent of the $680 tested. Without adequate documentation, the Department of Health Services (Health Services) cannot ensure that the providers rendered the services for which they were paid. 88 RECOMMENDATION Health Services should expand its review of these providers to determine how pervasive the problem is. If warranted, Health Services should impose restrictions on these providers. DEPARTMENT’S VIEW AND CORRECTIVE ACTION PLAN Health Services concurs with our finding. In addition, it reviewed the providers’ paid claims data for the three unsupported claims, and determined that either an expanded audit or sanctions against the providers were not warranted. Consequently, a corrective action plan does not appear indicated. Reference Number: 98-2-6 Federal Catalog Number: 93.778 Federal Program Title: Medical Assistance Program Federal Award Numbers and Calendar Years Awarded: MAP 05-9605CA5028; 1997 MAP 05-9705CA5028; 1997 MAP 05-9805CA5028; 1997 Category of Finding: Allowable Costs and Cost Principles State Administering Department: Department of Health Services CRITERIA Our review of the Medicaid Cluster determined the following compliance requirements related to allowable costs and cost principles: Part 4 of the Circular A-133 Compliance Supple- ment, requires Medical Assistance Program (Medicaid) costs to be paid at rates allowed by the state plan; the Code of Federal Regulations, Title 42, Section 433.312, requires the State to refund provider overpayments to the federal government within 60 days of identification of the overpayment, regardless of whether the overpayment was collected from the provider. 89 CONDITION The Department of Health Services (Health Services) did not always ensure that it made correct payments to the providers of Medicaid services and that it refunded the federal share of overpayments to the federal government. Specifically, we found that Health Services’ automated Medicaid claims processing system (system) incorrectly paid 1 of the 30 claims we tested. The claim was a crossover claim for psychological services. A crossover claim is eligible for both Medicaid and Medicare; it is reimbursed by Medicare first and then crosses over to Medicaid. The error occurred because Health Services did not have the proper procedure code in its system. As a result, the system used an incorrect price for the procedure for which the claim was submitted. According to Health Services, which was aware of the problem prior to our testing, this system error may have affected all crossover claims for psychological services processed between August 1997 and December 1998. As a result, Health Services estimates that it may have overpaid providers between $5.2 million and $6.3 million. However, Health Services has not yet identified actual overpayments to individual providers that should be collected or the amount that should be refunded to the federal government. Further, in accordance with new federal regulations, Health Services now uses different procedure codes to reimburse crossover claims. Therefore, according to Health Services, it has corrected the previous system error, and no additional provider overpayments should occur. RECOMMENDATION Health Services should identify and recover provider overpayments for crossover psychologi- cal claims processed during the presence of the system error. Further, Health Services should refund the federal share of any overpayments to the federal government. DEPARTMENT’S VIEW AND CORRECTIVE ACTION PLAN Health Services agrees with the finding. According to the chief of the Payments Systems Division, Health Services has expedited the resolution of this problem and it has been given a high priority. Resolution of erroneous payments follows established procedures, which involve identifying the cause and scope of the problem, correcting the problem, testing the corrections, prioritizing the erroneous payment correction (EPC), and implementing the EPC. The Electronic Data Systems Corporation (EDS), a fiscal intermediary that operates the auto- mated payment system according to policies set by the Medi-Cal Policy Division, has identified the cause and scope of this problem, and is currently working on the correction. After the problem is corrected and tested, the EDS will implement the EPC. 90 Reference Number: 98-12-5 Federal Catalog Number: 93.561 Federal Program Title: Job Opportunities and Basic Skills Training Federal Award Number and Calendar Year Awarded: G9603CAJOBS; 1998 Category of Finding: Reporting State Administering Department: Department of Social Services CRITERIA In our review of this program, we determined the following requirements apply to reporting: The Code of Federal Regulations, Title 45, sections 92.20(a)(1) and (2) and 92.20(b)(1) and (2) require the State to maintain accurate accounting records and to properly track and report the financial activities related to federal grants; the State Administrative Manual, Section 20014, requires agencies receiving federal funds to reconcile federal financial reports with their official accounting records. CONDITION The Department of Social Services (Social Services) did not reconcile all of its quarterly finan- cial status reports for fiscal year 1997-98 to its accounting records. Specifically, Social Services did not prepare a reconciliation for the Job Opportunities and Basic Skills Training (JOBS) program. As a result, we could not determine if the total grant expenditures shown on its financial status report agreed with its accounting records. We reported a similar finding for our audits of fiscal years 1993-94 through 1996-97. Although Social Services made significant progress in implementing its reconciliation process and has prepared adequate reconciliations for all major ongoing programs, it still has not completed the reconciliation for its JOBS program. RECOMMENDATION Social Services should continue to implement its reconciliation process and ensure that it performs all reconciliations prior to completion of its federal reports. 91 DEPARTMENT’S VIEW AND CORRECTIVE ACTION PLAN Social Services agrees with the finding and recommendation and we appreciate the efforts of the Bureau of State Audits in working with it to implement reconciliation procedures for all federal grants that remain open. Notwithstanding the fact that the JOBS program has been discontinued, Social Services has now completed the reconciliation of this program. Reference Number: 98-14-4 Federal Catalog Number: 93.777 Federal Program Title: State Survey and Certification of Health Care Providers and Suppliers Federal Award Numbers and Calendar Years Awarded: 05-9705-CA-5000; 1997 05-9705-CA-5001; 1997 05-9805-CA-5000; 1998 05-9805-CA-5001; 1997 Category of Finding: Special Tests and Provisions State Administering Department: Department of Health Services CRITERIA In our review of the Medicaid Cluster, we identified the following compliance requirements for special tests and provisions: The Code of Federal Regulations, Title 42, Section 447.10, requires that payments for Medicaid claims be made only to authorized providers; Section 455.2 defines a practitioner (provider) as a physician or other individual licensed under state law to practice his or her profession; sections 455.103 through 455.106 require providers to disclose, among other things, information regarding significant beneficial interest in any other entity involved in billing and reimbursement for Medicaid claims. CONDITION The Department of Health Services (Health Services) does not have adequate controls to ensure that providers requesting Medicaid payments are licensed in accordance with federal laws. For 2 of the 25 providers we reviewed, Health Services paid claims even though errors existed on its automated provider system. Specifically, Health Services’ automated provider 92 master file showed these providers as “active,” but the license numbers given by the providers were incorrect or had changed. Although we subsequently discovered each of these providers was properly licensed, Health Services’ controls do not function as intended. Because of this, Health Services cannot assure that it is disbursing Medicaid payments to licensed providers. In addition, Health Services does not have adequate controls to ensure providers make required disclosures to the State. For 7 of the 25 providers we reviewed, Health Services and one of its fiscal intermediaries did not have the required agreements on file. As a result, we were not able to verify that the providers had made the required disclosures. RECOMMENDATION Health Services should ensure, at the time of provider enrollment, that all information is valid and correct. Health Services should also ensure providers inform it of any changes. Further, Health Services should ensure accurate provider information is input into its automated files and ensure information on provider claims for payment agrees with its automated files. Also, Health Services and its fiscal intermediary should ensure, at the time of enrollment, that providers disclose all information in an agreement as required by sections 455.103 through 455.106. Further, Health Services should ensure that it has the required agreements on file for all providers receiving Medicaid payments. DEPARTMENT’S VIEW AND CORRECTIVE ACTION PLAN Health Services agrees with our findings. According to the chief of the Provider Master File Unit, one of the provider’s computer media claiming agreements could not be located and is assumed to be missing. However, Health Services has corrected the license numbers for the two providers found to have incorrect license numbers on file. Also, Health Services is work- ing with the Department of Consumer Affairs to update licensing information for all active providers. Health Services will periodically sample the agreements and require the providers to resubmit agreements when it identifies that an agreement is missing. 93 Reference Number: 98-14-5 Federal Catalog Number: 93.778 Federal Program Title: Medical Assistance Program Federal Award Numbers and Calendar Years Awarded: MAP 05-9605CA5028; 1997 MAP 05-9705CA5028; 1997 MAP 05-9805CA5028; 1997 Category of Finding: Special Tests and Provisions State Administering Department: Department of Health Services CRITERIA In our review of the Medicaid Cluster, we identified the following compliance require- ments related to special tests and provisions: The Code of Federal Regulations, Title 42, Section 455.13, requires the state Medicaid agency (the Department of Health Services in California) to establish procedures to refer all suspected fraud cases to law enforcement officials; sections 455.15 and 455.21 clarify that the state Medicaid agency must refer these cases to the state Medicaid Fraud Control Unit, operated by the Department of Justice (Justice) in California. CONDITION The Department of Health Services (Health Services) does not have adequate controls to ensure all potentially fraudulent activities are properly referred to Justice. Our review of the three main units that refer fraud activity to Justice revealed that one unit, the Investigations Branch (Investigations), did not adequately track the fraud cases it referred. Specifically, Investigations stated that it referred 23 fraud cases to Justice during fiscal year 1997-98, but Justice did not find 16 of those cases in its statewide fraud-tracking system. Additionally, Investigations cannot confirm that it referred the fraud cases to Justice; therefore, it cannot ensure that potentially fraudulent activity is properly investigated for prosecution or recovery of state and federal medical assistance funds. Further, the potentially fraudulent activities could still be ongoing. 94 RECOMMENDATION Health Services’ Investigations Branch (Investigations) should tighten its controls over pro- vider fraud referrals and ensure the proper handling of all future referrals sent to Justice. Further, Health Services should attempt to determine the status of the missing referrals or resubmit them. DEPARTMENT’S VIEW AND CORRECTIVE ACTION PLAN Health Services concurs with our finding. Investigations will implement an improved tracking system that will include a confirmation from Justice for all referrals. Staff will be instructed to send all referrals to the Investigations headquarters’ office. The referrals will be logged in and transmitted to Justice with a cover letter. Justice will send Investigations a receipt confirmation. Health Services plans to establish a new position to monitor and closely track the referrals. Also, Health Services will prepare a quarterly status report on the referrals. 95 CORPORATION FOR NATIONAL AND COMMUNITY SERVICE Reference: 98-2-5 Federal Catalog Number: 94.006 Federal Program Title: AmeriCorps Federal Award Numbers and Calendar Years Awarded: 94ASCCA005Y3-C06; 1996 94ASCCA005Y4-C06; 1997 Category of Finding: Allowable Costs, Subrecipient Monitoring, Reporting State Administering Department: California Conservation Corps CRITERIA The following are among the compliance requirements related to allowable costs and subrecipient monitoring for the AmeriCorps program: The Code of Federal Regulations, Title 45, Section 2541.200, requires the State to maintain a fiscal management system with effective internal controls and accountability for all grant assets. The system must also provide accurate, current, and complete disclosure of the grants’ financial activities. Section 8 of the interagency agreement between the California Commission on Improving Life Through Service (commission) and the California Conservation Corps (CCC) for the Cadre of Corps program states that the CCC must invoice the commission monthly showing the expenditure categories in the budget. The commission’s Fiscal Manual states that the commission will reimburse the CCC only for approved program expenditures. Under no circumstances will the commission reimburse programs for unauthorized or unallowable expenditures, or advance funds. The Code of Federal Regulations, Title 45, Section 2541.400, states that grantees must monitor grant and subgrant activities to ensure compliance with federal requirements. 96 CONDITION The CCC, a state grantee of the commission, administers the Cadre of Corps program, an element of the AmeriCorps program, through agreements with its service districts and AmeriCorps subgrantees. These service districts and subgrantees submit invoices to the depart- ment for reimbursement of program and administrative costs. The CCC uses information from the invoices, rather than data from its accounting records, to prepare financial reports of AmeriCorps grant activities. We found that the CCC did not always ensure the service districts and subgrantees properly supported their invoices before it forwarded them to the commission for reimbursement. For example, 12 of 38 invoices we reviewed, which totaled $195,700 for the grant period ending December 31, 1997, were based on estimated costs rather than actual expenditures. Further, the CCC did not verify the invoices included allowable costs that complied with the program requirements. The CCC also does not receive timely invoices from service districts and subgrantees, which further prevents it from adequately monitoring their fiscal activities. We reviewed the invoices submitted to the CCC and found that three of the four service districts, and five of the six subgrantees, submitted invoices up to ten months late. As a result, the CCC cannot produce reports on AmeriCorps grant activities that are accurate, complete, and supported by its accounting records. RECOMMENDATION The CCC should ensure that service districts and subgrantees submit invoices for actual expenditures before reimbursing them for the AmeriCorps program. Additionally, the CCC should ensure they submit monthly invoices in a timely fashion and abide by the terms and conditions of each AmeriCorps agreement. Further, the CCC should ensure it obtains all the required financial information to completely and accurately report on AmeriCorps grant activities. DEPARTMENT’S VIEW AND CORRECTIVE ACTION PLAN The CCC agreed that it should have necessary policies and procedures in place to ensure that the program’s requirements are met. The CCC stated that in the second year of the Cadre of Corps program (grant ending on December 31, 1996), it monitored its service districts’ and subgrantees’ (sites) activities using primarily the monthly invoices received at its central office. Prior to the start of each program year, each site submitted a budget proposal that was based on the planned number of corpsmembers in the program. Using approved budgets, the sites divided their annual budgets into 12 months for ease and simplicity of submitting costs for reimbursement. Beginning in the fourth year (grant ending on December 31, 1998), the CCC required all sites to submit supporting documentation for all costs charged to the Cadre 97 of Corps program. This change resulted in delayed invoice processing and quarterly financial status reports that did not include information from all sites. Beginning with the fifth year (grant ending on December 31, 1999), the CCC plans the following corrective action: • Implement new fiscal procedures and continue to monitor the receipt of supporting documentation for all costs charged to the Cadre of Corps program. • Conduct random visits to each site no less than twice during the program year that will incorporate fiscal reviews for compliance. The CCC will further review its fiscal procedures in the sixth year (grant ending December 31, 2000) to ensure fiscal integrity, along with timely and accurate documentation. The Cadre of Corps program is now in its fifth year of service. The CCC is committed to refining its fiscal processes in order to achieve compliance with federal and state requirements. Reference Number: 98-12-6 Federal Catalog Number: 94.006 Federal Program Title: AmeriCorps Federal Award Number and Calendar Year Awarded: CA94ASCCA005; 1996 Category of Finding: Reporting and Subrecipient Monitoring State Administering Department: California Commission on Improving Life Through Service CRITERIA In our review of federal programs, we determined that the following were among the compli- ance requirements related to reporting and subrecepient monitoring: The Code of Federal Regulations, Title 45, Section 2541.200, requires the State to maintain a financial management system with effective internal control over and accountability for all grant assets. This system should also provide accurate, current, and complete disclosure of the grant’s financial activities. Section 2541.410(b)(4) of this same code requires the State to submit a final financial report to the Corporation for National and Community Service 98 (corporation) within 90 days of the expiration of the grant. Section 2541.400 of the same code requires that grantees of AmeriCorps programs monitor grant- and subgrant-supported activities to ensure compliance with applicable federal requirements. CONDITION The California Commission on Improving Life Through Service (commission) does not pro- vide complete and accurate financial reports of AmeriCorps grant activities. We noted that the commission prepared its December 31, 1997, financial report from subgrantee reports without reconciling the data to its program or accounting records. As a result, the commission was unaware the financial report did not include any expenditures for four subgrantees. These expenditures totaled $1,286,000. In addition, the report did not include final quarter expendi- tures of $216,000 for five other subgrantees because the subgrantees did not submit this information. While the commission notified the corporation of the missing information, it did not file an amended report when it received the data. As of April 1999, the commission also has not filed a final financial report for the grant. Furthermore, we noted differences between the grant-funded expenditures subgrantees report and the commission’s records of grant funds paid to those subgrantees. For 9 of 38 subgrantees, the commission’s records showed it had disbursed more grant funds than the subgrantees reported spending. Discrepancies in amounts ranged from $1,720 to $111,930. Because the commission has not investigated the differences, it cannot be certain that the unreported amounts were used for allowable purposes. RECOMMENDATION The commission should reconcile the subgrantees’ financial reports with its program and accounting records. It should also ensure that all financial reports contain accurate and complete expenditure information. In addition, the commission should monitor the subgrantees’ fiscal data to ensure they account for all grant funds they receive. DEPARTMENT’S VIEW AND CORRECTIVE ACTION PLAN The commission staff agrees with our finding and has implemented an internal policy of verifying each financial status report submitted by an AmeriCorps program against grant funds paid through the reimbursement process. Commission staff is currently requiring California AmeriCorps programs to submit revised financial status reports for the program years 1994-95, 1995-96, and 1996-97; based on the identified variances, it expects this task to be completed by June 15, 1999. 99 Page intentionally left blank. 100 Summary of Prior Audit Findings 101 Page intentionally left blank. 102 103 SUMMARY OF PRIOR AUDIT FINDINGS Reference Number and Federal Catalog State Department Number Audit Finding Status of Corrective Action Department of Aging 97-2-3 Noncompliance With Requirements to Certify The DOA continues to require employees working Various or Document Personal Service Costs. While on multiple programs to provide monthly the Department of Aging (DOA) began personnel activity reports. These activity reports preparing certifications as of October 1, 1996, provide the basis for the allocations of salaries and for employees who worked solely on one wages to various federal programs. federal program, these certifications did not correspond to the personal service costs actually charged in the accounting system. In addition, the DOA failed to require or cor- rectly use personal activity reports, such as certified time sheets, for employees working on multiple activities. Specifically, the DOA allocated at least some personal service costs to activities based on budget estimates rather than on actual time worked. Department of Health Services 97-2-3 Noncompliance With Requirements to Certify Beginning July 1, 1997, DHS implemented the Various or Document Personal Service Costs. certification system for staff working 100 percent Department of Health Services (DHS) did not on federal projects and grants. On January 21, prepare periodic certifications for employees 1998, DHS issued an Information Memorandum who worked on a single program or award. In 98-05 that implemented the time reporting addition, DHS allocated at least some personal requirements in accordance with the A-87 federal service costs to activities based on budget guidelines. DHS has a few programs that will estimates rather than on actual time worked. request approval of a substitute system for allocating salaries and wages to federal projects that will be used in place of activity reports. The substitute systems should be ready for federal review by the end of 1999. 104 Reference Number and Federal Catalog State Department Number Audit Finding Status of Corrective Action Department of Alcohol and 97-2-3 Noncompliance With Requirements to Certify Each month a time sheet is prepared and entered Drug Programs Various or Document Personal Service Costs. The for every employee. The DADP had instituted a Department of Alcohol and Drug Programs process to follow-up regarding the receipt of time (DADP) allocated at least some personal sheet to ensure that the referenced policy is service costs to activities based on budget adhered to.1 estimates rather than on actual time worked. Office of Criminal Justice 97-2-3 Noncompliance With Requirements to Certify As part of its corrective action plan, OCJP Planning Various or Document Personal Service Costs. The requested and received with enactment of the Office of Criminal Justice Planning (OCJP) 1998-99 Budget Act in August 1998, baseline allocated at least some personal service costs authority in fiscal year 1998-99 for establishment to activities based on budget estimates rather of additional staff resources to develop, imple- than on actual time worked. ment, and manage a more effective system of budgetary oversight. However, after two recruit- ment attempts, the Budget Branch has had difficulty in filling the authorized position. The Budget Branch has initiated an expanded third recruitment to fill the authorized Budget Analyst position. Successful recruitment will enable OCJP to successfully implement its corrective action plan.2 California Community Colleges, 97-2-3 Noncompliance with Requirements to Certify The Vocational Education program continues to Chancellor’s Office Various or Document Personal Service Costs. Califor- follow the timesheet process originally initiated nia Community Colleges, Chancellor’s Office in fiscal year 1996-97 for personal services. The (Chancellor’s Office) allocated at least some timesheets reflecting actual time worked for personal service costs to activities based the fiscal year 1997-98 were keyed into the on budget estimates rather than on actual automated accounting labor subsystem during time worked. the year end closing period.1 Footnotes begin on page 124. 105 Reference Number and Federal Catalog State Department Number Audit Finding Status of Corrective Action Department of Education 97-2-3 Noncompliance With Requirements to Certify Employees in the CDE’s Agricultural Education Various or Document Personal Service Costs. The Unit are recording their actual time worked on Department of Education (CDE) allocated at their monthly employee timesheets by cost least some personal service costs to activities objective.3 based on budget estimates rather than on actual time worked. Department of Rehabilitation 97-2-3 Noncompliance with Requirements to Certify The DOR implemented a monthly certification Various or Document Personal Service Costs. The process in December 1997, for employees Department of Rehabilitation (DOR) did not working on a single federal award, and has use periodic certifications to support personal continued to maintain the monthly certification service costs. process. Department of Mental Health 97-2-3 Noncompliance With Requirements to Certify The DMH is still not fully in compliance with Various or Document Personal Service Costs. The federal requirements. While all supervisors were Department of Mental Health (DMH) notified, the response has not been consistent allocated at least some personal service costs and information on employees that work on to activities based on budget estimates rather multiple projects is not always documented, or than on actual time worked. is done on a quarterly rather than monthly basis. This is not a problem for employees working on only one project. The new chief of fiscal systems has been assigned the project of developing a time-reporting system that will meet all federal requirements and also allow the information to be collected in CALSTARS so that manual reporting mechanisms will not be necessary.1 Footnotes begin on page 124. 106 Reference Number and Federal Catalog State Department Number Audit Finding Status of Corrective Action Employment Development 97-2-3 Noncompliance With Requirements to Certify The Fiscal Programs Division worked with the Department Various or Document Personal Service Costs. The Audit and Evaluation Division (A&ED) and the Employment Development Department legal office to develop corrective action to ensure allocated at least some personal service costs correct charging of time. The resolution was that to activities based on budget estimates rather both entities are now charging time to actual than on actual time worked. activities and hours performed by the employee. The A&ED implemented this change on July 1, 1998, and the legal office implemented this change on October 1, 1998.1 Department of Finance 97-3-1 Noncompliance with Federal Regulations or Response from the DOF: Various Default Procedures. The interest liability the a) As part of the 1997-98 Annual Report, DOF State calculated and reported to the federal calculated both state and federal interest government for fiscal year 1996-97 could not liability on payroll funds and included those or did not always comply with federal amounts in the totals. It is still DOF’s opinion regulations or Cash Management that the process required to calculate these Improvement Act (CMIA) Default Procedures. amounts is extremely staff intensive and should The Bureau of State Audits (BSA) reported a be deleted with no net liability to either the similar issue during the audit for fiscal year State or the federal government. 1995-96. b) The DOF provided updated clearance patterns to Financial Management Services (FMS) to a) The Department of Finance (DOF) incorporate into their revised default proce- understated the State’s liability because the dures. This would eliminate the finding on DOF did not include in the annual report incorrect warrant redemption information. state interest liability it calculated for However, as of this date, DOF has not received federal funds advanced to the State for a revised version of the default procedures that payroll expenditures. include these new clearance patterns. b) The State used clearance patterns in the c) The reporting errors have been included as calculation that did not comply with the prior year adjustments in the 1997-98 Annual CMIA Default Procedures. Report which is due on December 31, 1998. c) The State’s interest liability due to the d) The DOF continues its stand regarding the federal government was understated due inclusion of direct costs in the Annual Report to department reporting errors. even though California has no signed Treasury- Footnotes begin on page 124. 107 Reference Number and Federal Catalog State Department Number Audit Finding Status of Corrective Action d) The State understated its interest liability State Agreement in place. This issue is still because the DOF offset the liability by the being negotiated with FMS. direct cost of implementing the CMIA, e) The DOF included an adjustment in the even though the offset is not allowed when 1997-98 Annual Report for the direct cost the State does not have an agreement with overcharges that occurred because individual the U.S. Department of Treasury. state agencies included their CMIA direct costs e) The State may have billed the federal in their indirect cost rate proposals which government twice for a portion of the caused a duplication in claiming those costs. State’s direct cost of implementing the f) The DOF also continues to calculate CMIA in 1995-96 because the State a federal interest liability for reimbursement included its direct costs of implementing funds not received timely for the State Criminal CMIA in its 1996-97 Statewide Cost Alien Assistance Program. This interest liability Allocation Plan. is included in the Annual Report. f) The State did not remit its interest liability to the federal government for fiscal years 1995-96 and 1996-97 because it offset those liabilities by an estimated federal interest liability for the State Criminal Alien Assistance Program. Department of Finance 97-3-2 Miscellaneous Federal Cash Management The funding techniques for the Department of Various Issues. The State did not always comply with Education’s six federal programs and the CMIA Default Procedures. The Bureau of State Maternal and Child Health Services Block Grant Audits reported a similar issue during the audit have been the issue. The Department of Finance for fiscal year 1995-96. (DOF) has included the appropriate techniques in the proposed agreement for these programs, but Financial Management Services (FMS) has not updated their CMIA Default Procedures to match the information. FMS told DOF that they would make the change, but nothing has been received to date. 108 Reference Number and Federal Catalog State Department Number Audit Finding Status of Corrective Action Department of Finance 97-12-4 Identifying Program Expenditures. Because of The State’s accounting system will require All Programs limitations in its automated accounting substantial modification to meet all federal and systems, the State has not complied with the state requirements. The Department of Finance provision of OMB Circular A-133 requiring a will address changes in relation to other priorities schedule showing total expenditures for each and costs.4 federal program. As a result, the schedule shows total receipts, rather than expenditures, by program. Department of Aging 97-13-4 Monitoring of Nonprofit Subrecipients. The The DOA continues to log the receipt of all audits Various Department of Aging (DOA) did not receive of nonprofit subrecipients. This log is reviewed the audit reports for two of four subrecipients by the audit manager to assure audits are tested that received more than $25,000 in received in a timely manner. federal assistance for its special programs. Additionally, the Bureau of State Audits was not able to determine whether the two audit reports it did receive were obtained within the required time frame because the DOA does not document when it receives the reports. Office of Emergency Services 97-13-4 Monitoring of Nonprofit Subrecipients. The OES has submitted a 1998-99 Budget Change Various Office of Emergency Services (OES) did not Proposal (BCP) in order to eliminate this have a system in place to identify nonprofit weakness. If the BCP is approved, OES will have subrecipients receiving more than $25,000 in adequate staff to ensure the timely receipt and federal assistance for the Disaster Assistance review of subrecipient single audit reports.5 program. Further, OES did not review the audit reports it received for compliance with the federal requirements. Footnotes begin on page 124. 109 Reference Number and Federal Catalog State Department Number Audit Finding Status of Corrective Action Department of Health Services 97-13-4 Monitoring of Nonprofit Subrecipients. The The DHS has developed a process, which meets Various Department of Health Services (DHS) did not federal audit requirements. On April 22, 1997, have a system in place to monitor nonprofit DHS issued Management Memorandum 97-08 subrecipients receiving more than $25,000 in to all fiscal agents listing prescribed steps for federal assistance for compliance with federal compliance with the annual audit requirements. requirements for the HIV Care Formula Grants. In addition, the Office of AIDS has recently hired a full-time auditor that is training and assisting staff in the review and follow-up of all audit findings. Specific attention has been given to the modification of existing audit procedures, timely submission of audits, responses to audit findings, and other areas of concern. Department of Education 97-13-4 Monitoring of Nonprofit Subrecipients. The The CDE provided addresses for the organizations Various State did not receive all audit reports from for which DSS had no address. On July 30, 1998, emergency feeding organizations receiving DSS requested an audit report for fiscal year more than $25,000 in federal funds, including 1995-96 from all emergency feeding organiza- commodities, for one of the federal programs tions.6 receiving commodities under the Food Distribution program. The Department of Education (CDE) is no longer responsible for monitoring these emergency feeding organizations, since October 1996, and the responsibility was reassigned to the Department of Social Services (DSS). However, neither department ensured that these organizations submitted the required audit reports. Department of Social Services 97-13-4 Monitoring of Nonprofit Subrecipients. The DSS requested and received addresses for all Various State did not receive all audit reports from emergency feeding organizations (EFO) organizations receiving more than $25,000 in participating in the program during federal funds. The Department of Social fiscal year 1995-96 from the CDE. DSS received Services (DSS) was assigned the responsibility to and reviewed single audit reports from 134 EFO’s monitor the emergency feeding organizations and determined that no compliance findings in October 1996. were reported which required DSS follow-up.6 Footnotes begin on page 124. 110 Reference Number and Federal Catalog State Department Number Audit Finding Status of Corrective Action California Community Colleges, 97-13-5 Monitoring of Community College Districts. The procedures were implemented and Chancellor’s Office Various The Chancellor’s Office did not sufficiently satisfactory resolution of most citings was monitor the fiscal year 1995-96 audit reports accomplished. However, a few citings are still of the State’s 71 community college districts. unresolved due to the departure of Review of audit reports of 5 community the vice chancellor and dean in one of the college districts disclosed that the Chancellor’s program areas and the short-term medical leave Office did not ensure that the districts of a key staff member in the accountability unit.7 resolved audit findings within six months after it received the audit reports. The Bureau of State Audits reported a similar finding for audit of fiscal year 1995-96. State Controller’s Office 97-13-6 Monitoring of City, County, and Special In June 1998, SCO updated the tracking system Various District Subrecipients. The State did not by purging the name of districts that did not always monitor sufficiently the audit reports of receive any federal pass-through funds, or have its local government subrecipients. As a result, been exempt from the Single Audit requirement the State Controller’s Office (SCO) could not in the last three fiscal years. In addition, through a determine which subrecipients were required report generated by the SCO’s Division of to submit audit reports for fiscal year 1995-96. Accounting and Reporting, SCO updated the The SCO did not update its tracking system to database to include only the districts that have identify additional special districts and received federal funds in excess of $300,000 or incorporated subrecipients that the federal have filed a Single Audit report. This tracking government require to submit audit reports system will be updated annually. SCO also for fiscal year 1995-96, nor did the SCO established procedures that the Division of remove subrecipients that were not required Accounting and Reporting notify SCO of forma- to submit audit reports. tion of new cities and dissolution of existing cities so that they can update the database accordingly. The newly formed cities are then notified of the reporting requirements. As a result of the system updates, the listing of subrecipients that was shown as delinquent declined drastically, from 130 for fiscal year 1995-96 to 34 for fiscal year 1996-97. As of December 31, 1998, 15 of the 34 delinquent subrecipients have filed the required reports. SCO is in the process of making follow-up inquiries on the status of the remaining 19 subrecipients. Footnotes begin on page 124. 111 Reference Number and Federal Catalog State Department Number Audit Finding Status of Corrective Action Department of Education 97-5-1 Eligibility. The Department of Education (CDE) In June 1998, the CDE staff received training and 10.558 needs to improve its process for ensuring that started to use Department of Social Services’ institutions participating in the food program database to verify the licensing status of facilities meet applicable licensing or approval participating in the child and adult care food requirements. The CDE could not demonstrate program. By Spring 1999, the state licensing that it confirmed annually the license status of agency plans to provide monthly to the CDE a participating institutions for the food program. list of the institutions and facilities whose licenses have been revoked.8 Department of Housing and 97-12-1 Reporting Requirements. The Department of These weaknesses pertain to the HOME and Community Development 14.228 Housing and Community Development’s CDBG programs within the department. The 14.239 (HCD) system of internal administrative corrective actions taken by the HOME program controls is not sufficient to assure that the include: statistical and fiscal information reported to • Including HOME reporting requirements in the the federal Department of Housing and Urban Grant Management Manual. Development for the Community • Sending a reminder letter to HOME state Development Block Grant (CDBG) and Home recipients and Community Housing and Investment Partnerships Program (HOME) is Development Organizations (CHDOs) 90 days complete and supported by accurate statistical prior to the end of the annual reporting period, data. In addition, the HCD did not comply advising them of the data reporting with all of the reporting requirements. The requirement and providing the appropriate Bureau of State Audits reported a similar issue reporting form. The required report will be due during the audit for fiscal years 1994-95 and to the HOME program no later than 30 days 1995-96. after the end of the annual reporting period. • Maintaining a database of all state recipients and CHDOs with reporting responsibility for the annual reporting period. This database will be used to keep track of who has and who has not filed required reports. • State recipients and CHDOs which have not filed the required report by the 30-day deadline will be sent a reminder letter. To the extent permitted by program regulations, those that fail to submit reports in a timely manner will receive negative performance scores. Footnotes begin on page 124. 112 Reference Number and Federal Catalog State Department Number Audit Finding Status of Corrective Action • Where possible, data provided by state recipients and CHDOs will be reviewed and reconciled to program records. Data such as amounts committed to individual state recipients/CHDOs, expenditure, and balance information will be reconciled to program records. The corrective action taken by the CDBG program include: • A tape was run on each column of the spreadsheet to ensure the accuracy of current year’s annual report. • The HCD considers timeliness of reports under the prior performance criteria for awarding the general allocation. • The program is currently working to generate letters on an “automatic” basis to grantees when reports are late.9 Department of Housing and 97-13-1 Subrecipient Monitoring. The Department of The HOME program established new procedures Community Development 14.239 Housing and Community Development on September 30, 1998, to comply with long- neither developed written policies and term monitoring requirements. Procedures have procedures nor performed any monitoring to been established for both state recipients and fulfill the program’s long-term, on-site CHDOs. These include Operating Budget and monitoring requirements. Annual Report forms, a Regulatory Agreement Compliance Letter, updated and revised long-term monitoring checklist, and a long-term monitoring schedule for the remainder of fiscal year 1998-99. HOME has centralized long-term monitoring activities and staff have been assigned to exclusively work on meeting the program’s long-term monitoring requirements.10 Footnotes begin on page 124. 113 Reference Number and Federal Catalog State Department Number Audit Finding Status of Corrective Action Department of Housing and 97-13-2 Subrecipient Monitoring. The Department of The CDBG monitoring schedule has been kept Community Development 14.228 Housing and Community Development (HCD) current by a management services technician. needs to further improve its monitoring Back-up training has been completed. The activities of Community Development Block program is in the process of converting to a new Grant (CDBG) subrecipients to ensure database system. Over the next few months, the compliance with program requirements. The program will enter data into the system, which Bureau of State Audits reported a similar will generate similar monitoring reports. All finding on audits for fiscal years 1994-95 and CDBG General program 1995 visits have 1995-96. occurred and all but two letters have been sent. The HCD is currently monitoring 1996 contracts. The program has adopted quarterly reports to ensure timely visit, letters and close-outs for the program as a whole. State Board of Control 97-1-2 Activities Allowed. The State Board of Control In response, Victims of Crime Program (VOCP) 16.576 (BOC) needs to improve its claims processing. management issued Program Memo 98-05 to all For 2 of the 15 claims for compensation VOCP staff. Like the earlier Program Memo 92-06, Bureau of State Audits (BSA) reviewed, BSA Program Memo 98-05 directs staff to approve or found that the BOC did not approve or deny deny applications accepted in accordance with the claims within the required 180 days. Government Code Section 13962(a) within an Further, the BOC did not advise the claimants average of 90 days, and approve or deny any and their representatives, in writing, of individual claim within 180 days. The program the reasons for the delays. memo provides detailed instructions to staff for handling claims that are approaching the 180-day mark. Further, the memo reiterates the need to provide written notice to the claimant in those instances in which an issue cannot be resolved, i.e., the eligibility determination not be made, before the 180-day mark. VOCP managers and supervisors were instructed to discuss Program Memo 98-05 with their staff at the weekly staff meeting immediately following the issuance of the memo. In addition to reissuing the VOCP guide- lines, the BOC has implemented a program to report “processing times” to executive and VOCP management. These reports are discussed at monthly meetings with executive management and VOCP team managers, supervisors, and other pertinent staff. 114 Reference Number and Federal Catalog State Department Number Audit Finding Status of Corrective Action Office of Criminal Justice 97-7-4 Earmarking. The Office of Criminal Justice Currently, 5 percent of the annual Byrne funds Planning 16.579 Planning (OCJP) did not meet the require- are allocated to the Bureau of Criminal ment to allocate and spend at least 5 percent Information and Identification to improve of its Byrne grant awards for improving the criminal justice records. To ensure that these State’s criminal justice records in 1994 and funds are properly tracked and expended, 1995. Specifically, OCJP allocated and spent this project was removed from more than only 3.1 percent for the required purpose in 70 projects that have a Drug Control (DC) 1994 and spent only 4.8 percent for that designation and given its own specific Criminal purpose in 1995. Information (CI) designation. In addition to the specific CI designation that will allow OCJP to more easily track and monitor the expenditures of the project, OCJP has also switched the grant award process to an augmentation/extension process which allows the grantee the flexibility of a longer period of time to expend the entire grant award. If the grantee is unable to expend the funds in a timely manner, OCJP will request an extension from Bureau of Justice Assistance in order to fully expend the funds. Office of Criminal Justice 97-7-5 Earmarking. The Office of Criminal Justice This error was discovered during the preparation Planning 16.575 Planning’s procedures for allocating grant of the fiscal year 1998 application in December funds for programs assisting underserved 1997. Hence, not only was the fiscal year 1998 victims are not in accordance with the Crime and subsequent fiscal year 1999 application Victim Assistance Grant’s guidelines. calculated correctly, but at the time that Bureau of State Audits made this finding, OCJP already had a policy memo out regarding the error, and the plan to shift funds from other programs was previously approved. The shift in funds occurred on June 16, 1998, using end of year balances from other Victims of Crime Acts funded projects. 115 Reference Number and Federal Catalog State Department Number Audit Finding Status of Corrective Action Office of Criminal Justice 97-8-2 Period of Availability of Funds. The Office of OCJP has asked for a formal extension of these Planning 16.579 Criminal Justice Planning (OCJP) did not grants so that the costs may be claimed. A formal comply with the federal period of availability extension from the Bureau of Justice Assistance requirements for the 1994 and 1995 Byrne (BJA), has not been received. Upon receipt of a grants. formal extension from BJA, OCJP will revise the quarterly Financial Status Reports.11 Office of Criminal Justice 97-12-2 Financial Reporting. In its financial status Upon receipt of a formal extension from the BJA, Planning 16.579 reports of Byrne grants for years 1994, 1995, OCJP will revise the quarterly Financial Status and 1996, the Office of Criminal Justice Reports.11 Planning (OCJP) incorrectly reported expenditures and made some omissions. Office of Criminal Justice 97-14-7 Special Tests and Provisions. The Office of Currently, all multijurisdictional projects are Planning 16.579 Criminal Justice Planning (OCJP) did not categorized under program purpose area #2, comply with the 48-month rule of the Byrne and all non-multijurisdictional projects have been grant, which restricts Byrne funding for the notified that they are subject to the 48-month same projects to no more than four years. rule. Additionally, a log book is maintained on all The Bureau of State Audits reported the same Byrne-funded projects that lists the program finding in fiscal years 1994-95 and 1995-96. purpose area of each project, and the year that it was first funded. A review of this log at the beginning of each funding cycle enables OCJP to know which projects are exempt from the 48- month rule, and by what date the other projects will need to change the focus of their activities. OCJP has also instituted a grant file numbering system that identifies how many years each project has been funded under its current program purpose area.12 Footnotes begin on page 124. 116 Reference Number and Federal Catalog State Department Number Audit Finding Status of Corrective Action Department of Transportation 97-14-2 Special Tests and Provisions. The Department The Caltrans has taken corrective action by filling 20.205 of Transportation (Caltrans) did not always two vacancies in the Materials Laboratory and comply with the federal requirement for providing testing frequency in accordance with materials sampling and testing. Specifically, the Caltrans Construction Manual. Currently, the Caltrans did not always follow its Construction Marysville Materials Laboratory is in compliance Manual for frequency of sampling and testing with the Caltrans Construction Manual for construction materials. required frequency of testing. Compliance has been maintained during the recently completed construction season, with 99 percent coverage given for testing requested with 24-hour notice, and coverage on an inspector-availability basis given for testing requested without such notice. Department of Rehabilitation 97-14-1 Services Allowed, Eligibility. The Department The DOR has taken the following steps to 84.126 of Rehabilitation (DOR) files do not fully improve its success in meeting the timeliness for comply with federal and state regulations progress evaluations, annual reviews, eligibility because the files do not document DOR’s determination, and IWRP development: evaluation of its client’s progress. In addition, • Developed and implemented a new system for the DOR’s completion and review of the monitoring case processing and review require- Individualized Written Rehabilitation Program ments in March 1998. (IWRP) and determination of the client’s • Conducting a management study, in collabora- eligibility were not always in accordance with tion with the Regional Counselor Continuing federal and state regulations. Education Program (RCCEP), to develop a statewide multi-level case review system for monitoring compliance and program effective- ness. • Revising the timeline requirements in the California Code of Regulations for progress evaluations and IWRP development for greater consistency with federal law. • Aggressively filled vacant counselor positions during fiscal year 1997-98 and, as a result, reduced the counselor vacancy rate from 14 percent to 8 percent. 117 Reference Number and Federal Catalog State Department Number Audit Finding Status of Corrective Action • Developed and distributed statewide a new Case Recording Handbook dated October 8, 1998. • Provided a two-day training seminar on compliance issues at a statewide meeting of Rehabilitation Supervisors and District Adminis- trators on April 22 and 23, 1998. In addition, case file review and monitoring is emphasized on an ongoing basis at statewide and regional meetings with district administrators and rehabilitation supervisors.13 Department of Education 97-2-2 Allowable Costs and Cost Principles. The The CDE does not agree with this audit finding 84.027 Bureau of State Audits found that the and believes that it is fully complying with the Department of Education (CDE) charged costs rules and regulations governing the Special to Special Education that are not specific to Education program, including its charging of the performance of the federal grant award. the federal grant for the costs of allocating state funds in support of the federal program. Further, the CDE does not believe that it needs advance approval from the U.S. Department of Education to continue this practice. As such, a corrective action plan is not necessary.14 Department of Alcohol and 97-7-2 Earmarking. The Department of Alcohol and This issue has been resolved with the U.S. Drug Programs 84.186 Drug Programs (DADP) needs to improve its Department of Education. Per the settlement system for monitoring administrative agreement, effective with the July 1, 1999, grant expenditures allocable to the federal Safe award, the DADP will establish accounting and Drug-Free program. Because it did not procedures to monitor compliance with the monitor expenditures by grant award, the SDFSC administrative cost cap. DADP exceeded its administrative cost limit by $210,000. Footnotes begin on page 124. 118 Reference Number and Federal Catalog State Department Number Audit Finding Status of Corrective Action California Student Aid 97-14-3 Special Tests and Provisions. The California To establish a system of controls over the Commission 84.032 Student Aid Commission (commission) did commission’s auxiliary, EDFUND, the following not have a system to provide adequate steps were taken to insure the appropriate oversight of the activities of its auxiliary. The oversight structure: commission did not retain sufficient staff to • The positions of Executive Director of the adequately protect the public funds entrusted commission and President/CEO of EDFUND to it, and the commission paid invoices were separated. The new Executive Director of submitted by the auxiliary without reviewing the commission, Wally Boeck, was hired in the invoices for propriety. August 1998. Jon Shaver is the President/CEO of EDFUND. • The commission’s Federal Loan and EDFUND Oversight Committee expanded its duties to include review of policy and operational issues related to the loan programs and EDFUND contract performances. • The commission appointed a liaison to the EDFUND Board from the membership of the Federal Loan and EDFUND Oversight Committee. • The EDFUND board appointed a liaison to the commission board. • The commission’s annual workshop was conducted in conjunction with the EDFUND annual workshop. • The responsibilities of the Audit Committee were expanded to include oversight of EDFUND. • The commission requested and received budget approval for new positions and resources to strengthen its loan-related oversight responsibilities. • EDFUND transferred all accounting positions responsible for the maintenance of the Loan Reserve Fund back to the commission. 119 Reference Number and Federal Catalog State Department Number Audit Finding Status of Corrective Action • The Commission’s Internal Audit Services has begun an internal control review of the Commission and its auxiliary, EDFUND. This review will establish the adequacy of controls in many areas, but especially those controls that exist in the cash receipts and disbursements functions. In addition to the review of the system of controls for each organization, expenditures submitted through invoices by EDFUND to the Commission are being re- viewed through the audit process.15 California Student Aid 97-14-4 Special Tests and Provisions. The California As of June 30, 1996, the percent of collections Commission 84.032 Student Aid Commission did not report reported late was 28 percent. The percent of late approximately $10.5 million (11 percent) of collections reported was reduced to 11 percent the collections owed to the federal as of June 30, 1997. It was further reduced to government for fiscal year 1996-97 within the 8 percent as of June 30, 1998. For the period required 45 days. The Bureau of State Audits July 1, 1998, through November 30, 1998, reported a similar finding for audits of fiscal collections reported late equates to 0.45 percent. years 1994-95 and 1995-96. California Student Aid 97-14-5 Special Tests and Provisions. In the contract The commission’s auxiliary, EDFUND, currently Commission 84.032 monitoring reviews conducted in 1994, the has six external collection agencies under contract California Student Aid Commission to perform collections on defaulted accounts. (commission) noted findings regarding due Contract compliance and “due diligence” reviews diligence activities performed by the have been performed on five of the agencies in collection agencies. However, the commission 1998. The remaining collection agency will be did not conduct contract compliance reviews reviewed in January 1999. Annual reviews will be from July 1995 to January 1998, for ensuring conducted on all collection agencies contracted their collection agencies perform due with EDFUND. diligence activities. Footnotes begin on Page 124. 120 Reference Number and Federal Catalog State Department Number Audit Finding Status of Corrective Action California Student Aid 97-14-6 Special Tests and Provisions. The information The Lender Portfolio Reconciliation Project has Commission 84.032 the California Student Aid Commission been completed. As of September 25, 1998, all (commission) reports to the federal government loans guaranteed prior to January 1, 1995, that for computing the reinsurance rate is not were in an active status, were matched to the always accurate, and thus, the commission may active portfolios or participating lenders. Of the not be receiving the correct amount of funds 2.4 million loan records identified at the outset from the federal government. A similar finding of the project, almost 2 million loan records for audit of fiscal year 1995-96 was reported. received confirming transactions from lenders. The remaining 500,000 loans were resolved by administrative action. These loans were either classified as paid-in-full, uninsured, or canceled. Loan record changes that resulted from the reconciliation project have all been posted to the Financial Aid Processing system. Lenders have been advised that the commission through its auxiliary, EDFUND, will begin a new reconciliation project in February 1999. This new project is intended to include all loans guaranteed in 1995, 1996, and 1997.16 Department of Health Services 97-1-3 Activities Allowed or Unallowed. The DHS implemented new procedures that reject 93.778 Department of Health Services (DHS) does not claims that are not properly certified. In the fiscal have adequate controls to ensure that provider year 1997-98 federal compliance review, BSA has claim documents are appropriately certified. For not cited DHS for inadequate controls on claim 4 of the 13 provider claims reviewed, the claim certification. documentation did not contain proper evidence of the authenticity of the claim information. The Bureau of State Audits (BSA) reported a similar finding for audits of fiscal years 1994-95 and 1995-96. Footnotes begin on page 124. 121 Reference Number and Federal Catalog State Department Number Audit Finding Status of Corrective Action Department of Health Services 97-7-1 Matching, Level of Effort, and Earmarking. The Currently, costs are systematically tracked in 93.917 Department of Health Services did not have accordance with the formula-based allocations, sufficient internal controls in place to ensure which are now based upon each county’s that not less than 15 percent of HIV Care demographic incidence of AIDS among the grant funds were allocated to provide health population. and support services to infants, children, women, and families with HIV. Department of Education 97-7-3 Earmarking. The Department of Education The CDE took immediate action to correct the 93.596 (CDE) did not select an appropriate child care audit finding. In the future, the CDE will ensure program to meet the United States Code, that it expends a “substantial portion” of the Title 42, Section 9858c(c)(3)(d) requiring the grant funds, after meeting all other specified CDE to expend in each fiscal year a substantial earmarking requirements, to provide child care portion of the grant funds, after meeting services to families who are low-income and other specified earmarking requirements, to working. provide child care assistance to low-income, working families. Community Services and 97-8-1 Period of Availability. The Department of The CSD has always had a process to determine Development 93.568 Community Services and Development (CSD) the amount of the carryover for the LIHEAP does not have a specific process to determine program. In addition to the use of the State’s LIHEAP program funds available for carryover. CALSTAR accounting system, the CSD staff also employ spreadsheets to ensure that the carryover does not exceed the maximum allowable. In this instance, the Bureau of State Audits (BSA) included leveraging funds that should not have been included in calculating the carry-over amount. Through a review conducted by CSD’s audit staff and budget officer, it has been verified that the amount of the carryover did not exceed the allowable 10 percent. It was found that the BSA auditors did not account for all of the expenditures that had been incurred. The CSD staff are currently working with BSA to eliminate this audit finding entirely. 122 Reference Number and Federal Catalog State Department Number Audit Finding Status of Corrective Action Department of Alcohol and 97-14-1 Special Tests and Provisions. The Department The Substance Abuse and Mental Health Services Drug Programs 93.959 of Alcohol and Drug Programs did not provide Administration (SAMHSA), the Division of Grants for periodic independent peer reviews to Management, Financial Advisory Services Office, assess the quality, appropriateness, and has determined that adequate corrective action efficacy of services provided by treatment has been taken regarding the independent peer providers receiving Substance Abuse review issue. Prevention and Treatment program funds. Department of Social Services 97-12-3 The Department of Social Services (DSS) did DSS has implemented federal financial report Various not reconcile all of its quarterly federal cash reconciliations to subsidiary accounting records, transaction reports or its final federal financial including California State Accounting and status or expenditure reports prepared during Reporting System (CALSTARS), for all federal fiscal year 1996-97 to the DSS’s accounting financial reports. The DSS is continuing to work records. The Bureau of State Audits (BSA) with BSA to refine the reconciliation process and reported similar findings for audits of fiscal ensure compliance with this recommendation. years 1993-94 and 1995-96. BSA staff will be reviewing these reconciliations during their single audit of the DSS financial statements for fiscal year 1997-98.17 California Conservation Corps 97-2-1 Allowable Costs. The California Conservation The CCC is currently working with Director of 94.006 Corps (CCC) did not always review Fiscal Services at Folsom Cordova School District subgrantee invoices to ensure that they were to resolve the overpayment issue. The accounting properly supported. office has continued to work very closely with all program managers to ensure that all charges submitted by subgrantees are for actual expenditures already incurred before making payments for any AmeriCorps programs.18 Footnotes begin on page 124. 123 Reference Number and Federal Catalog State Department Number Audit Finding Status of Corrective Action California Conservation Corps 97-13-3 Subrecipient Monitoring. The California As a follow up, an additional memorandum, 94.006 Conservation Corps (CCC) did not sufficiently dated December 24, 1997, was sent out to the monitor its subgrantees’ fiscal activities. The district offices as notification that they must use delays and lack of proper documentation the checklists that the Accounting Branch had indicated that there was a lapse in provided in order to maintain sufficient and responsibility for monitoring this grant. In supporting documentation. The Accounting addition, the system that ensures careful Branch has been working very closely with the review of invoices appeared to be ineffective. program managers to ensure timely and accurate reporting. No payments have been issued until all supporting documentation has been received. If there is insufficient documentation, the CCC has disallowed the costs. As a proactive approach, the CCC Accounting and Project Support branches have provided training sessions with sponsors and project coordinators regarding the submission of proper invoices and documentation. The skills and abilities of each program manager have been reviewed to determine if levels are adequate for further responsibilities. As a result of this, there have been some rotations of assignments.18 Footnotes begin on page 124. 124 FOOTNOTES 1 Our testing revealed that for fiscal year 1997-98, the DADP, Chancellor’s Office, DMH, and EDD continued to allocate some personal service costs to activities based on estimates rather than actual time worked and did not update estimates at least quarterly. However, these exceptions did not constitute material noncompliance. 2 We reported a similar weakness during our fiscal year 1997-98 audit. Please refer to reference number 98-2-4 for additional information. 3 Although the CDE has made some effort to correct the weakness that we identified in our audit of fiscal year 1996-97, it did not always allocate personal service costs to activities of the Vocational Education and Adult Education programs based on actual time worked. However, because these costs were immaterial to the programs, we did not report this issue for fiscal year 1997-98. 4 The status of this issue remains unchanged. Please refer to reference number 98-12-3 for additional information. 5 The 1998-99 Budget Change Proposal was not approved in January 1999. Consequently, we continued to find that OES is not adequately monitoring subrecipients. Please refer to reference number 98-13-1 for additional information. 6 The law now requires subrecipients that spend more than $300,000 in federal funds, including commodities, to submit A-133 audit reports. Although the CDE maintained responsibility to ensure timely receipt of these reports from its nonprofit subrecipients, its system is not sufficient to ensure compliance. Please refer to reference number 98-13-4 for additional information. 7 We reviewed the status of this issue during our audit of fiscal year 1997-98 and found that the Chancellor’s Office had written procedures in place but did not fully implement them. Therefore, we reported a similar weakness. Please refer to reference number 98-13-3 for additional information. 8 The CDE is correcting the weaknesses that we identified in our audit of fiscal year 1996-97. However, it has not completed its modifications to ensure compliance with federal laws and, therefore, we reported this weakness again in fiscal year 1997-98. Please refer to reference number 98-5-2 for additional information. 9 The HCD has corrected some of the weaknesses we identified in our fiscal year 1996-97 audit. In fiscal year 1997-98, its reports included accurate financial data; however, its statistical data continues to be incomplete. Nonetheless, we did not consider this to be a material deficiency. 10 We agree that by September 30, 1998, the Department of Housing and Community Development (HCD) developed written procedures and implemented long-term, on-site monitoring of multi-family rental projects. Because the HCD is still in its initial stages of implementing these monitoring activities, we noted that it does not always adhere to its written procedures. Specifically, findings and concerns identified during monitoring visits are not always communicated and resolved in a timely manner. However, because we determined that this is not a material weakness to the program, we are not reporting it as a finding for fiscal year 1997-98. 11 The OCJP submitted a written request for the extension in April 1999. However, as stated in its corrective action, OCJP cannot revise its financial status reports until the U.S. Department of Justice formally approves the extension. We will review the revised reports during our fiscal year 1998-99 audit, if they are available. 125 12 We reported a similar weakness during our fiscal year 1997-98 audit. However, our audit covered the period from July 1, 1997, to June 30, 1998, and OCJP’s statements may reflect its actions taken after our audit period, which we have not reviewed. Please refer to reference number 98-14-6 for additional information. 13 We agree that the DOR has taken action to correct the noncompliance we identified in our fiscal year 1996-97 audit. However, we noted similar noncompliance in our fiscal year 1997-98 audit. Please refer to reference number 98-5-1 for additional information regarding eligibility requirements. However, for progress evaluations, annual reviews, and IWRP development, these exceptions do not constitute material noncompliance. 14 We disagree with the CDE’s position. Additionally, it has not implemented any corrective action plan. Therefore, we reported this weakness again in our audit of fiscal year 1997-98. Please refer to reference number 98-2-2 for additional information. 15 Although we agree that the commission implemented some of the corrective actions indicated, we reported a similar weakness for fiscal year 1997-98 because it did not begin to implement the actions until late fiscal year 1997-98. Therefore, during fiscal year 1997-98, we could not assess whether the commission has implemented all actions sufficiently to ensure that the auxiliary is complying with all provisions of the operation agreement. Please refer to reference number 98-14-1 for additional information. 16 Although the commission has completed its lender reconciliation project, its system continues to reflect inaccurate loan status information. Please refer to reference number 98-14-3. 17 Although the DSS made significant progress in implementing its reconciliation process and has prepared adequate reconciliations for all major ongoing programs, it still has not completed the reconciliation for its JOBS program. Please refer to reference number 98-12-5 for additional information. 18 We agree that the CCC has taken action to correct the noncompliance we identified in our fiscal year 1996-97 audit. However, we noted similar noncompliance in our fiscal year 1997-98 audit. Please refer to reference number 98-2-5 for additional information regarding eligibility requirements. Page intentionally left blank. 126 Schedule of Federal Assistance 127 Page intentionally left blank. 128 STATE OF CALIFORNIA SCHEDULE OF FEDERAL ASSISTANCE FISCAL YEAR ENDED JUNE 30, 1998 Federal Catalog Federal Agency/Program Title Number Grant Amount Received Department of Agriculture: Forestry Incentives Program 10.064 $ 5,907 Grants for Agriculture Research—Competitive Research Grants 10.206 25,538 Food Distribution 10.550 84,130,084 * Food Stamps 10.551 2,225,360,622 * School Breakfast Program 10.553 179,131,903 National School Lunch Program 10.555 676,615,853 Special Milk Program for Children 10.556 841,574 Special Supplemental Nutrition Program for Women, Infants, and Children 10.557 685,924,759 Child and Adult Care Food Program 10.558 170,520,124 Summer Food Service Program for Children 10.559 18,610,684 State Administrative Expenses for Child Nutrition 10.560 13,909,393 State Administrative Matching Grants for Food Stamp Program 10.561 247,266,031 Nutrition Education and Training Program 10.564 282,068 Commodity Supplemental Food Program 10.565 1,520,049 Emergency Food Assistance Program 10.568 31,488,650 * Nutrition Program for the Elderly 10.570 11,484,212 WIC Farmers’ Market Nutrition Program (FMNP) 10.572 123,711 Team Nutrition Grants 10.574 176,847 Forestry Research 10.652 43,290 Cooperative Forestry Assistance 10.664 1,815,189 129 Federal Catalog Federal Agency/Program Title Number Grant Amount Received Schools and Roads—Grant to States 10.665 33,976,533 National Forest—Dependent Rural Communities 10.670 784,693 Other—U.S. Department of Agriculture 10.999 751,121 Department of Commerce: Trade Development 11.110 33,239 Economic Development—Support for Planning Organizations 11.302 121,657 Economic Development—State and Local Economic Development Planning 11.305 50,000 Special Economic Development and Adjustment Assistance Program—Sudden and Severe Economic Dislocation and Long-Term Economic Deterioration 11.307 757,947 Special Economic Development and Adjustment Assistance Program— Sudden and Severe Economic Dislocation 11.311 2,803,308 ** Anadromous Fish Conservation Act Program 11.405 471,059 Interjurisdictional Fisheries Act of 1986 11.407 112,425 Coastal Zone Management Administration Awards 11.419 2,659,185 Coastal Zone Management Estuarine Research Reserves 11.420 205,173 Marine Sanctuary Program 11.429 142,149 Marine Fisheries Initiative 11.433 8,386 Coastal Services Center 11.473 19,000 Other—U.S. Department of Commerce 11.999 92,500 Department of Defense: Navigation Projects 12.107 24,987 Planning Assistance to States 12.110 716,902 State Memorandum of Agreement Program for the Reimbursement of Technical Services 12.113 13,641,338 130 Federal Catalog Federal Agency/Program Title Number Grant Amount Received Basic and Applied Scientific Research 12.300 25,952 National Guard Military Operations and Maintenance (O&M) Projects 12.401 22,825,667 Community Economic Adjustment Planning Assistance 12.607 70,249 Selected Reserve Educational Assistance Program 12.609 84,554 Community Economic Adjustment Planning Assistance for Reductions in Defense Industry Employment 12.611 120,000 Research and Technology Development 12.910 242,000 Other—U.S. Department of Defense 12.999 7,277,021 Department of Housing and Urban Development: Community Development Block Grants/Special Purpose Grants/Technical Assistance Program 14.227 41,000 Community Development Block Grants/ State’s Program 14.228 37,916,232 Emergency Shelter Grants Program 14.231 4,446,025 Supportive Housing Program 14.235 6,305,014 ** Supplemental Assistance for Facilities to Assist the Homeless 14.236 243,702 Home Investment Partnerships Program 14.239 56,010,700 ** Housing Opportunities for Persons with AIDS 14.241 1,281,248 Equal Opportunity in Housing 14.400 1,526,060 Section 8 Rental Voucher Program 14.855 945,148 Lower Income Housing Assistance Program— Section 8 Moderate Rehabilitation 14.856 295,450 Section 8 Rental Certificate Program 14.857 1,742,060 Lead-Based Paint Hazard Control in Privately-Owned Housing 14.900 1,942,723 131 Federal Catalog Federal Agency/Program Title Number Grant Amount Received Department of Interior: Small Reclamation Projects 15.503 337,436 Reclamation and Water Reuse Program 15.504 23,470 Anadromous Fish Conservation 15.600 481,045 Sport Fish Restoration 15.605 8,693,251 Environmental Contaminants 15.607 39,427 Wildlife Restoration 15.611 6,944,185 Endangered Species Conservation 15.612 613,986 Cooperative Endangered Species Conservation Fund 15.615 44 Clean Vessel Act 15.616 694,730 Wildlife Conservation and Appreciation 15.617 105,154 Administrative Grants for Federal Aid in Sport Fish and Wildlife Restoration 15.618 298,426 U.S. Geological Survey—Research and Data Acquisition 15.808 158,871 Historic Preservation Fund Grants-In-Aid 15.904 2,512,326 Outdoor Recreation—Acquisition, Development and Planning 15.916 1,845,592 Research Information 15.975 675,763 Other—U.S. Department of the Interior 15.999 26,544,727 Department of Justice: Juvenile Justice and Delinquency Prevention— Allocation to States 16.540 8,172,602 Juvenile Justice and Delinquency Prevention— Special Emphasis 16.541 1,971,161 Part E—State Challenge Activities 16.549 788,698 National Criminal History Improvement Program (NCHIP) 16.554 3,707,247 Justice Research, Development, and Evaluation Project Grants 16.560 351,110 132 Federal Catalog Federal Agency/Program Title Number Grant Amount Received Criminal Justice Discretionary Grant Program 16.574 3,566,483 Crime Victim Assistance 16.575 20,978,426 Byrne Formula Grant Program 16.579 50,355,982 * Edward Byrne Memorial State and Local Law Enforcement Assistance Discretionary Grants Program 16.580 6,016 Violent Offender Incarceration and Truth in Sentencing Incentive Grants 16.586 55,397,119 Violence Against Women Formula Grants 16.588 3,874,490 Rural Domestic Violence and Child Victimization Enforcement Grant Program 16.589 52,471 Local Law Enforcement Block Grants Program 16.592 534,629 Residential Substance Abuse Treatment for State Prisoners 16.593 142,453 Public Safety Partnership and Community Policing Grants 16.710 4,374,654 Other—U.S. Department of Justice 16.999 1,451,900 Department of Labor: Labor Force Statistics 17.002 5,843,667 Compensation and Working Conditions Data 17.005 518,675 Labor Certification for Alien Workers 17.203 6,113,307 Employment Service 17.207 89,005,740 Unemployment Insurance 17.225 3,512,852,320 Senior Community Service Employment Program 17.235 7,379,188 Trade Adjustment Assistance—Workers 17.245 7,116,642 Employment and Training Assistance— Dislocated Workers 17.246 268,726,163 Employment Services and Job Training— Pilot and Demonstration Programs 17.249 873,773 133 Federal Catalog Federal Agency/Program Title Number Grant Amount Received Job Training Partnership Act 17.250 325,320,236 Occupational Safety and Health—State Program 17.503 18,063,000 Consultation Agreements 17.504 4,437,000 Mine Health and Safety Grants 17.600 132,631 Women’s Special Employment Assistance 17.700 9,280 Disabled Veterans’ Outreach Program 17.801 11,452,632 Local Veterans’ Employment Representative Program 17.804 6,610,009 Department of Transportation: Boating Safety Financial Assistance 20.005 3,191,193 Airport Improvement Program 20.106 92,345 Highway Planning and Construction 20.205 1,705,483,352 ** Motor Carrier Safety 20.217 3,585,725 Motor Carrier Safety Assistance Program 20.218 37,195 Federal Transit Capital Improvement Grants 20.500 10,067,167 Federal Transit Technical Studies Grants 20.505 11,388,302 Public Transportation for Nonurbanized Areas 20.509 8,186,126 State Planning and Research 20.515 586,437 State and Community Highway Safety 20.600 12,802,476 Alcohol Traffic Safety and Drunk Driving Prevention Incentive Grants 20.601 8,620,566 Pipeline Safety 20.700 2,978,424 Interagency Hazardous Materials Public Sector Training and Planning Grants 20.703 485,207 State Marine Schools 20.806 200,000 Other—U.S. Department of Transportation 20.999 348,859 Department of Treasury: Other—U.S. Department of Treasury 21.999 225 134 Federal Catalog Federal Agency/Program Title Number Grant Amount Received Equal Employment Opportunity Commission: Employment Discrimination—State and Local Fair Employment Practices Agency Contracts 30.002 2,352,500 General Services Administration: Donation of Federal Surplus Personal Property 39.003 8,303,218 *** National Aeronautics and Space Administration: Aerospace Education Services Program 43.001 432,291 National Foundation on the Arts and the Humanities: Promotion of the Arts—Media Arts: Film/Radio/Television 45.006 50,000 Promotion of the Arts—State and Regional Program 45.007 929,655 Institute of Museum and Library Services— General Operation Support 45.301 6,294 National Science Foundation: Engineering Grants 47.041 186,486 Mathematical and Physical Sciences 47.049 13,650 Geosciences 47.050 2,264 Biological, Behavioral, and Social Sciences 47.051 49,599 Material, Development, Research, and Informed Science Education 47.067 77,968 Studies, Evaluation, and Dissemination 47.068 1,187,635 Computer and Information Science and Engineering 47.070 12,655 Science and Technology Centers 47.073 1,462,264 Biological Sciences 47.074 799,176 Social, Behavioral, and Economic Sciences 47.075 113,324 Education and Human Resources 47.076 1,355,341 Academic Research Infrastructure 47.077 86,861 135 Federal Catalog Federal Agency/Program Title Number Grant Amount Received Small Business Administration: Procurement Assistance to Small Businesses 59.009 555,859 Small Business Development Center 59.037 6,683,814 Department of Veterans Affairs: Grants to State for Construction of States Home Facilities 64.005 328,126 Veterans State Domiciliary Care 64.014 5,188,611 Veterans State Nursing Home Care 64.015 8,562,930 Veterans State Hospital Care 64.016 158,066 All Volunteer Force Educational Assistance 64.124 37,789 Other—U.S. Department of Veterans Affairs 64.999 482,308 Environmental Protection Agency: Air Pollution Control Program Support 66.001 15,735,649 Air Pollution Control Technical Training 66.006 89,375 Air Pollution Control—National Ambient Air and Source Emission Data 66.007 1,149 State Indoor Radon Grants 66.032 181,112 Construction Grants for Wastewater Treatment Works 66.418 109,704 Water Pollution Control—State and Interstate Program Support 66.419 4,352,567 State Underground Water Source Protection 66.433 415,025 Water Pollution Control—Lake Restoration Cooperative Agreements 66.435 76,481 Construction Management Assistance 66.438 1,302,155 Water Quality Management Planning 66.454 731,861 National Estuary Program 66.456 176,578 Capitalization Grants for State Revolving Funds 66.458 821,754,502 ** Nonpoint Source Implementation Grants 66.460 5,193,560 Wetlands Protection—Development Grants 66.461 611,194 136 Federal Catalog Federal Agency/Program Title Number Grant Amount Received EPA New Coastal Waters Program 66.462 245,407 National Pollutant Discharge Elimination System Related State Program Grants 66.463 1,014,698 Near Coastal Waters 66.464 62,619 Environmental Protection—Consolidated Research 66.500 115,951 Air Pollution Control Research 66.501 57,326 Water Pollution Control—Research, Development, and Demonstration 66.505 2,730 Safe Drinking Water Research and Demonstration 66.506 6,848,390 Toxic Substances Research 66.507 481,010 Surveys, Studies, Investigations and Special Purpose Grants 66.606 463,081 * Consolidated Pesticide Enforcement Cooperative Agreements 66.700 2,579,959 Toxic Substances Compliance Monitoring Cooperative Agreements 66.701 20,890 TSCA Title IV State Lead Grants—Certification of Lead-Based Paint Professionals 66.707 393,889 Pollution Prevention Grants Program 66.708 170,077 Hazardous Waste Management State Program Support 66.801 6,866,570 Superfund State Site—Specific Cooperative Agreements 66.802 2,997,622 State Underground Storage Tanks Program 66.804 370,184 Leaking Underground Storage Tank Trust Fund Program 66.805 2,844,288 Solid Waste Management Assistance 66.808 289,942 Other—U.S. Environmental Protection Agency 66.999 2,469,229 137 Federal Catalog Federal Agency/Program Title Number Grant Amount Received Department of Energy: University—Laboratory Cooperative Program (CIM) 81.004 20,330 State Energy Program 81.041 2,519,007 Weatherization Assistance for Low-Income Persons 81.042 4,042,552 Environmental Research and Impact Assessments 81.046 34,407 Office of Energy Research Financial Assistance Program 81.049 144,539 Energy Conservation for Institutional Buildings 81.052 1,105,338 Regional Biomass Energy Programs 81.079 51,407 Conservation Research and Development 81.086 79,594 Renewable Energy Research and Development 81.087 1,639,717 Environmental Restoration 81.092 439,808 Technology Development for Environmental Management 81.104 36,426 National Industrial Competitiveness through Energy, Environment, and Economics 81.105 149,737 Other—U.S. Department of Energy 81.999 173,081 United States Information Agency: Educational Exchange—University Lecturers (Professors) and Research Scholars 82.002 84,184 Federal Emergency Management Agency: Hazardous Materials Training Program for Implementation of the Superfund Amendment and Reauthorization Act (SARA) of 1986. 83.011 72,640 Acquisition of Flood Damage Structures 83.502 224,188 Civil Defense—State and Local Emergency Management Assistance 83.503 3,151,696 138 Federal Catalog Federal Agency/Program Title Number Grant Amount Received State Disaster Preparedness Grants 83.505 7,455 Arson Prevention Grant 83.508 11,514 Earthquake Hazards Reduction Grants 83.521 1,270,234 Emergency Management Institute—Field Training Program 83.528 152,792 State and Local Emergency Management Assistance—Other Assistance 83.531 8,925 Emergency Management—State and Local Assistance 83.534 6,717,608 Mitigation Assistance 83.535 371,338 Flood Mitigation Assistance 83.536 68 Crisis Counseling 83.539 42,557 Individual and Family Grants 83.543 4,292,968 Public Assistance Grants 83.544 278,450,930 Hazard Mitigation Grant 83.548 36,696,596 Department of Education: Adult Education—State Grant Program 84.002 42,458,254 Title I Grants to Local Educational Agencies 84.010 796,451,245 Migrant Education—Basic State Grant Program 84.011 85,586,505 Title I Program for Neglected and Delinquent Children 84.013 3,644,668 Special Education—Innovation and Development 84.023 217,194 Services for Children with Deaf-Blindness 84.025 974,879 Special Education—Grants to States 84.027 281,811,284 Special Education—Personnel Development and Parent Training 84.029 948,939 Federal Family Education Loans 84.032 22,992,545,820 ** Public Library Services 84.034 11,650,116 Interlibrary Cooperation and Resource Sharing 84.035 1,092,945 139 Federal Catalog Federal Agency/Program Title Number Grant Amount Received Vocational Education—Basic Grants to States 84.048 110,931,412 Vocational Education—Consumer and Homemaking Education 84.049 266,287 Vocational Education—State Councils 84.053 259,794 State Student Incentives Grants 84.069 7,835,538 Postsecondary Education Programs for Persons with Disabilities 84.078 64,064 Fund for the Improvement of Postsecondary Education 84.116 203,208 Rehabilitation Services—Vocational Rehabilitation Grants to States 84.126 202,889,152 Rehabilitation Services—Service Projects 84.128 1,463,166 Rehabilitation Long-Term Training 84.129 323,869 Centers For Independent Living 84.132 2,351,326 Business and International Education 84.153 83,460 Public Library Construction and Technology Enhancement 84.154 1,197,793 Secondary Education and Transitional Services for Youth with Disabilities 84.158 210,473 Immigrant Education 84.162 23,513,814 Independent Living—State Grants 84.169 2,718,916 Special Education—Preschool Grants 84.173 27,379,165 Vocational Education—Community Based Organizations 84.174 195 Douglas Teacher Scholarships 84.176 151,476 Rehabilitation Services—Independent Living Services for Older Individuals Who are Blind 84.177 228,965 Special Education—Grants for Infants and Families with Disabilities 84.181 39,299,812 Byrd Honors Scholarships and Communities 84.185 1,780,716 140 Federal Catalog Federal Agency/Program Title Number Grant Amount Received Safe and Drug-Free Schools and Communities—State Grants 84.186 55,540,703 Supported Employment Services for Individuals with Severe Disabilities 84.187 5,071,630 Bilingual Education Support Services 84.194 1,184,100 Education for Homeless Children and Youth 84.196 3,906,347 Graduate Assistance in Areas of National Need 84.200 149,313 Even Start—State Educational Agencies 84.213 9,450,428 Fund for the Improvement of Education 84.215 435,353 Capital Expenses 84.216 2,106,871 State School Improvement Grants 84.218 1,859,656 State Grants for Assistive Technology 84.224 856,438 Tech-Prep Education 84.243 10,795,607 Urban Community Service 84.252 573,235 Rehabilitation Training—Experimental and Innovative Training 84.263 106,076 Rehabilitation Training—State Vocational Rehabilitation Unit In-Service Training 84.265 279,851 National Early Intervention Scholarship and Partnership 84.272 332,957 Goals 2000—State and Local Education Systemic Improvement Grants 84.276 65,583,738 School Career Implementation Grants 84.278 2,177,251 Eisenhower Professional Development State Grants 84.281 33,399,747 Charter Schools 84.282 1,265,307 Innovative Education Program Strategies 84.298 35,020,134 Technology Literacy Challenge Fund Grants 84.318 9,724,386 141 Federal Catalog Federal Agency/Program Title Number Grant Amount Received Department of Health and Human Services: Public Health and Social Services Emergency Fund 93.003 217,206 Special Programs for the Aging—Title III, Part F—Disease Prevention and Health Promotion Services 93.043 1,576,134 Special Programs for the Aging— Title III, Part B—Grants for Supportive Services and Senior Centers 93.044 29,435,672 Special Programs for the Aging— Title III, Part C—Nutrition Services 93.045 41,123,510 Special Programs for the Aging— Title III, Part D—In-Home Services for Frail Older Individuals 93.046 891,366 Special Programs for the Aging— Title VII, Chapter 6—Allotments for Vulnerable Elder Rights Protection Programs 93.049 55,828 Grants for Residential Treatment Programs for Pregnant and Postpartum Women 93.101 4,655,190 Demonstration Grants for Residential Treatment for Women and Their Children 93.102 2,841,290 Food and Drug Administration—Research 93.103 1,634,667 Comprehensive Community Mental Health Services for Children with Serious Emotional Disturbances 93.104 2,566,908 Minority International Research Training Grant in the Biomedical and Behavioral Sciences 93.106 1,173,287 Maternal and Child Health Federal Consolidated Programs 93.110 78,280 Project Grants and Cooperative Agreements for Tuberculosis Control Programs 93.116 5,983,609 Acquired Immunodeficiency Syndrome (AIDS) Activity 93.118 8,649,458 Mental Health Planning and Demonstration Project 93.125 1,039,266 Emergency Medical Services for Children 93.127 13,605 142 Federal Catalog Federal Agency/Program Title Number Grant Amount Received Grants for Technical Assistance Activities Related to the Block Grant for Community Mental Health Services—Mental Health Statistics Improvement Program 93.128 14,890 Injury Prevention and Control Research and State and Community Based Programs 93.136 635,836 Minority Community Health Coalition Demonstration 93.137 126,463 Projects for Assistance in Transition from Homelessness 93.150 1,613,387 Health Program for Toxic Substances and Disease Registry 93.161 694,992 Grants for State Loan Repayment 93.165 840,890 Community Youth Activity Program Block Grants 93.171 220,230 Disabilities Prevention 93.184 115,728 Cooperative Agreements for Drug Abuse Treatment Improvement Projects in Target Cities 93.196 916,643 Biological Models and Materials Research 93.198 40,761 Health Care Systems Cost and Access Research and Development Grants 93.226 72,476 Demonstration Cooperative Agreements for Development and Implementation of Criminal Justice Treatment Networks 93.229 728,023 Consolidated Knowledge Development and Application Program 93.230 17,159 Immunization Grants 93.268 86,301,940 * Centers for Disease Control and Prevention— Investigations and Technical Assistance 93.283 85,188 Advanced Nurse Education 93.299 147,878 Biomedical Research Support 93.337 152,689 Professional Nurse Traineeships 93.358 113,981 Minority Biomedical Research Support 93.375 39,576 Research Infrastructure 93.389 988,202 143 Federal Catalog Federal Agency/Program Title Number Grant Amount Received Academic Research Enhancement Award (AREA) 93.390 62,040 Cancer Detection and Diagnosis Research 93.394 382 Family Preservation and Support Services 93.556 19,852,427 Temporary Assistance for Needy Families 93.558 3,061,377,772 Family Support Payments to States— Assistance Payments 93.560 12,849,908 Job Opportunities and Basic Skills Training 93.561 13,089,824 Assistance Payments—Research 93.562 548,786 Child Support Enforcement 93.563 34,579,519 Refugee and Entrant Assistance—State Administered Programs 93.566 30,481,264 Low-Income Home Energy Assistance 93.568 61,349,871 Community Services Block Grant 93.569 43,319,804 Community Services Block Grant Discretionary Awards—Community Food and Nutrition 93.571 294,381 Child Care and Development Block Grant 93.575 119,855,628 Refugee and Entrant Assistance— Discretionary Grants 93.576 2,825,392 U.S. Repatriate Program 93.579 59,688 Refugee and Entrant Assistance— Targeted Assistance 93.584 6,849,735 Empowerment Zones Program 93.585 4,130,252 Refugee Assistance—Naturalization and Citizenship Activities 93.589 187,136 Community-Based Family Resource and Support Grants 93.590 1,470,289 Child Care Mandatory and Matching Funds of the Child Care and Development Fund 93.596 212,696,726 Head Start 93.600 172,391 144 Federal Catalog Federal Agency/Program Title Number Grant Amount Received Developmental Disabilities Basic Support and Advocacy Grants 93.630 5,762,521 Children’s Justice Grants to States 93.643 1,001,226 Child Welfare Services-State Grants 93.645 30,158,568 Social Services Research and Demonstration 93.647 147,033 Temporary Child Care and Crisis Nurseries 93.656 192,587 Foster Care—Title IV-E 93.658 850,415,959 Adoption Assistance 93.659 81,914,138 Social Services Block Grant 93.667 281,169,286 Child Abuse and Neglect State Grants 93.669 936,235 Child Abuse and Neglect Discretionary Activities 93.670 144,498 Family Violence Prevention and Services/ Grants for Battered Women’s Shelters— Grants to States and Indian Tribes 93.671 4,955,686 Grants to States for Planning and Development of Dependent Care Programs 93.673 12,721 Independent Living 93.674 12,013,844 Medicare-Supplementary Medical Insurance 93.774 5,410,863 State Medicaid Fraud Control Units 93.775 8,892,199 State Survey and Certification of Health Care Providers and Suppliers 93.777 20,808,498 Medical Assistance Program 93.778 9,955,532,711 Health Care Financing and Research, Demonstrations and Evaluations 93.779 558,913 Cell Biology and Biophysics Research 93.821 30,823 Health Careers Opportunity Program 93.822 157,405 Medical Library Assistance 93.879 4,956 Minority Access to Research Careers 93.880 33,753 Model Comprehensive Drug Abuse Treatment Programs for Critical Populations 93.902 233,992 145 Federal Catalog Federal Agency/Program Title Number Grant Amount Received Model Criminal Justice Drug Abuse Treatment for Incarcerated Populations, Non-Incarcerated Populations and Juvenile Justice Populations 93.903 748,782 Grants to States for Operation of Offices of Rural Health 93.913 291,683 HIV Care Formula Grants 93.917 74,183,066 Cooperative Agreements for State-Based Comprehensive Breast and Cervical Cancer Early Detection Program 93.919 3,953,359 Cooperative Agreements to Support Comprehensive School Health Programs to Prevent the Spread of HIV and Other Important Health Problems 93.938 1,036,836 HIV Demonstration, Research, Public and Professional Education Projects 93.941 318,636 Assistance Program for Chronic Disease Prevention and Control 93.945 107,041 Community—Based Comprehensive HIV/STD/TB Outreach Services for High Risk Substance Abusers Demonstration Program 93.949 441,536 Demonstration Grants to States with respect to Alzheimer’s Disease 93.951 474,914 Block Grants for Community Mental Health Services 93.958 33,947,048 Block Grants for Prevention and Treatment of Substance Abuse 93.959 197,279,806 Preventive Health Services—Sexually Transmitted Disease Control Grants 93.977 2,007,675 Mental Health Disaster Assistance and Emergency Mental Health 93.982 273,622 Health Program for Refugees 93.987 660,699 Cooperative Agreements for State-Based Diabetes Control Program and Evaluation of Surveillance Systems 93.988 229,583 Preventive Health and Health Services Block Grant 93.991 15,814,911 146 Federal Catalog Federal Agency/Program Title Number Grant Amount Received Maternal and Child Health Services Block Grant to the States 93.994 39,387,755 Other—Department of Health and Human Services 93.999 13,207,18 Corporation for National and Community Service: Service America/Higher Education 94.001 546,367 State Commissions 94.003 1,427,641 Learn and Serve America—School and Community Based Programs 94.004 1,984,579 Learn and Serve America—Higher Education 94.005 247,596 AmeriCorps 94.006 18,652,750 Foster Grandparent Program 94.011 815,877 Social Security Administration: Social Security—Disability Insurance 96.001 165,103,443 Social Security—Research and Demonstration 96.007 121,043 Miscellaneous Grants and Contracts: Shared Revenue—Flood Control Lands 98.002 185,303 Shared Revenue—Grazing Land 98.004 124,473 Capital Outlay—Reed Act 98.012 551,250 Department of Housing and Urban Development—Interest Reduction 98.013 345,196 U.S. Department of the Interior—Fire Prevention/Suppression Agreement 98.014 134,000 U.S. Department of the Interior—Fire Prevention/Suppression Agreement 98.015 217,412 U.S. Department of Agriculture and Various Other U.S. Department—Fire Prevention/ Suppression 98.016 17,611,340 147 Federal Catalog Federal Agency/Program Title Number Grant Amount Received Miscellaneous Federal Receipts 98.099 967,828 Miscellaneous Federal Receipts 98.999 4,030,111 Total $52,608,753,479 * This amount includes or consists of the value of commodities or food stamps. ** This amount includes the value of insurance in effect during the year and/or loans or loan guarantees outstanding at year end. *** This amount consists of the value of donated property. 148 NOTES TO THE SCHEDULE OF FEDERAL ASSISTANCE FISCAL YEAR ENDED JUNE 30, 1998 1. GENERAL The accompanying State of California Schedule of Federal Assistance presents the total amount of federal financial assistance programs received by the State of California for the fiscal year ended June 30, 1998. This schedule does not include expenditures of federal grants received by the University of California or the California State University. The expenditures of the University of California and California State University are audited by other independent auditors in accordance with the U.S. Office of Management and Budget, Circular A-133, Audits of States, Local Governments and Non-Profit Organizations (OMB Circular A-133). The $52,608,753,479 in total federal assistance consists of the following: Grant amounts received $26,501,646,305 Noncash federal awards 2,337,557,949 Loans and/or loan guarantees outstanding 20,210,314,821 Insurance in-force 3,559,234,404 Total $52,608,753,479 2. BASIS OF ACCOUNTING OMB Circular A-133, and the Single Audit Act of 1984 (Amended 1996) require the Schedule of Federal Assistance to present total expenditures for each federal assistance program. However, although the state accounting system separately identifies revenues for each federal assistance program, it does not separately identify expenditures for each program. As a result, the State prepares its Schedule of Federal Assistance on a revenue basis. The schedule shows the amount of cash and noncash federal assistance received, loans and loan guarantees outstanding, and insurance in force for the year ended June 30, 1998. 3. UNEMPLOYMENT INSURANCE Of the $3,512,852,320 in total unemployment insurance funds (federal catalog number 17.225) received by the Employment Development Department during fiscal year 1997-98, $3,152,611,577 was State Unemployment Insurance funds which were drawn down from the Unemployment Trust Fund in the U.S. Treasury. 149 4. OTHER The State was also loaned Federal Excess Personal Property (FEPP) from the U.S. Forest Service during the period October 1, 1997 to September 30, 1998. According to the State’s Department of Forestry and Fire Prevention, the amount loaned between October 1, 1997 and September 30, 1998, was approximately $26.4 million. The U.S. Forest Service and the State maintain the FEPP program at federal acquisition costs of the property. 150 APPENDIX Index By State Department Page Number(s) On Which Issue(s) Begins Business, Transportation and Housing Agency Department of Transportation 30 California Commission on Improving Life Through Service 98 California Community Colleges, Chancellor(cid:146)s Office 68, 70, 75 California Student Aid Commission 78, 81, 83 Department of Education 43, 45, 47, 49, 64, 65, 72, 77, 86 Department of Finance 29, 32, 37, 39 Health and Human Services Agency Department of Health Services 88, 89, 92, 94 Department of Rehabilitation 69 Department of Social Services 91 Office of Criminal Justice Planning 54, 56 Office of Emergency Services 58, 59, 60, 61, 62 Resources Agency California Conservation Corps 96 Department of Fish and Game 52 State Controller(cid:146)s Office 32 151 Agency’s response provided as text only: June 17, 1999 Mr. Kurt R. Sjoberg State Auditor 555 Capitol Mall, Suite 300 Sacramento, CA 95814 Dear Mr. Sjoberg: STATE OF CALIFORNIA: INTERNAL CONTROL AND STATE AND FEDERAL COMPLIANCE AUDIT REPORT FOR THE YEAR ENDED JUNE 30, 1998 Thank you for the opportunity to respond to the internal control and compliance audit report. This report was the result of your examination of the state's general purpose financial statements for the fiscal year ended June 30, 1998, and will be part of the Single Audit Report covering this period. We accept the reported findings and recommendations. Although our controls can always be improved, the conclusion that none of the findings were material weaknesses is evidence of the state's effective fiscal oversight. The state continues to make substantial progress toward the goal of Year 2000 compliance. California is an entity with numerous programs and activities carried out for its citizens and is much more complex and vast than most economic entities in the world. Such complexity, along with budget constraints, challenge us to meet the requirements of those programs and activities efficiently and effectively. Moreover, such operations must exist within a process of internal control that safeguards assets and resources and produces reliable financial information. Attaining these objectives and overseeing the financial and business practices of the state continues to be an important part of the Department of Finance's leadership. In meeting our responsibility for financial leadership and oversight, the Department of Finance conducts internal control reviews of state departments and also reviews areas of potential weakness in the state's fiscal systems. In addition, we provide oversight of departmental internal audit units through the issuance of audit guidelines and completion of quality assurance reviews. Further, we have an ongoing process of issuing Audit Memos to departments to establish policy or provide technical advice on various audit related issues. We will soon issue an Audit Memo concerning the results of the fiscal year 1997-98 Single Audit. R-1 The head of each state department is responsible for establishing and maintaining internal control within their department. This responsibility includes documenting the controls, communicating control requirements to employees, and assuring that controls are functioning as prescribed and are modified for changes in conditions. Moreover, all levels of state management must be involved in assessing and strengthening the internal controls to minimize fraud, errors, abuse, and waste of government funds. Individual departments have separately responded to the findings and recommendations concerning their activities and these responses are included in the report. We will monitor the findings and reported corrective actions to identify potential changes in statewide fiscal procedures. The Department of Finance will continue to provide leadership to ensure the proper financial operations and business practices of the state, and to ensure that internal controls exist for the safeguarding and effective use of assets and resources. If you have any questions concerning this letter, please contact Samuel E. Hull, Chief, Office of State Audits and Evaluations, at (916) 322-2985. Sincerely, (Signed by:) B. TIMOTHY GAGE Director R-2