Review of Disbursements 2006-04 – 2007-06 California Prison Health Care Receivership

Office of the Inspector General Matthew L. Cate, Inspector General California Prison Health Care Receivership Review of Disbursements April 2006 through June 2007 February 2008 State of California Contents Executive Summary...............................................................................................1 Introduction Background................................................................................................4 Objectives, Scope, and Methodology........................................................7 Review Results Compensation.............................................................................................8 Benefits......................................................................................................12 Professional Fees......................................................................................13 Travel........................................................................................................15 Other Expenses.........................................................................................18 Capital Assets...........................................................................................19 Attachments Receivership’s Agreement Receivership’s Response Executive Summary In April 2006, the U.S. District Court for the Northern District of California gave the California Prison Health Care Receivership Corporation broad powers over the California Department of Corrections and Rehabilitation’s delivery of medical care to prisoners after the court found the department’s medical care efforts were “horrifying” and “shocking.” The court also found that continued medical malpractice and neglect existed within California prisons. As a result, the court suspended the department secretary’s authority over California’s prison medical system during the receivership and granted this power to the receiver. The court also ordered the department to pay all costs the receivership incurs in implementing policies, plans, and decisions to carry out its responsibilities. Accordingly, the receivership requested and received from the state more than $33 million between April 2006 and June 2007. To ensure the transparency and accountability of its budget operations, the court required the receivership to coordinate with the Office of the Inspector General to periodically review its expenditures. Because the receivership is not a state entity encompassed by the Office of the Inspector General’s statutory authority, we entered into an agreement with the receiver to perform periodic reviews of the receivership’s expenditures––including this first review––to produce a public report for the court that describes how the receivership uses state funds. We included in this agreement a provision for the Office of the Inspector General to report any instances of fraud, waste, or abuse discovered during the review. Therefore, while these reviews are substantially less in scope than a typical audit, they will report any instances of fraud, waste, or abuse that we identify. During the period April 2006 Figure 1 California Prison Health Care Receivership Total Disbursements - $20.6 Million through June 2007, the April 2006 through June 2007 receivership spent $20.6 million for its operating costs and long- Compensation term capital assets purchased on $4,888,858 24% the department’s behalf. As shown in Figure 1, the receivership’s largest expense Capital Assets category was personnel services, $8,719,171 41% comprising the receivership’s employees and consultants. Benefits $1,022,863 During the period we reviewed, 5% the receivership spent $5.9 million on employee compensation and benefits. Compensation that the Other Expenses Professional Fees receivership paid to its employees $742,902 Travel $4,891,971 4% 24% consisted mainly of salaries and $352,816 2% wages, but also included amounts Office of the Inspector General Bureau of Audits and Investigations Page 1 paid in lieu of benefits and amounts paid to its executives for vehicle allowance. The receivership paid 29 of its 45 employees (64 percent) salary and other compensation that equates to a projected annual amount of more than $100,000, including 12 employees whose projected annual compensation exceed the department secretary’s $225,000 annual salary. Included in this compensation is $610,642 the receivership paid employees in lieu of receiving benefits. However, the receivership paid $218,790 of this amount even after it began providing benefits. The receivership continued this practice until the judge who created the receivership and oversees its operation ordered the receivership to end the in- lieu-of-benefits compensation program in October 2007. Besides the compensation the receivership paid to its employees, the receivership also paid for employee benefits, such as pension contributions; medical, dental, and life insurance; and payroll taxes. The receivership made most of its $4.9 million in consultant payments to a single contractor––Maxor National Services Corporation––that provides pharmacy management consulting services. During the period we reviewed, the receivership paid Maxor almost $2.8 million. The receivership also paid more than $350,000 for its employees’ and contractors’ reasonable and customary travel-related expenses, including lodging, transportation, meals, and mileage. Although the receivership created a travel policy in February 2007 to guide its staff in incurring travel expenses, the receivership does not always enforce this policy. In our sample of lodging expenses, we found that the receivership had failed to require staff members to provide proper support before paying $10,500 in lodging expenses. Therefore, we could not determine whether the charges were appropriate. Similarly, in our limited review of 23 travel-related expenses, we found 11 instances of meal charges that exceeded the receivership’s policy limit or lacked the proper documentation. These expense claims totaled $1,800. We also found that the receivership does not always require its contractors to follow its travel policies. In one instance, the receivership paid a consultant $125 a day for meals, totaling $12,000 during our review period. Had the receivership restricted this consultant to the limits included in its travel policy, it would have only compensated the consultant up to $4,800––a difference of $7,200. Finally, the receivership spent more than $8.7 million on capital assets, which are assets the receivership purchased to carry out its responsibilities over a long period, such as buildings, office equipment, and information systems. Although a small portion of this amount was for the receivership itself, it made most of its capital asset purchases on the department’s behalf. In this report, we present information on the receivership’s use of state funds, in accordance with our agreement with the receiver. Therefore, we generally do not include analysis or conclusions on the appropriateness of the receivership’s use of state funds. Nonetheless, we present the following recommendations to help the receivership ensure that it uses public funds only for appropriate purposes. Office of the Inspector General Bureau of Audits and Investigations Page 2 The Office of the Inspector General recommends that the receivership take the following actions: • To ensure that the level of compensation paid to employees is an appropriate use of state funds, regularly reevaluate the salary and wage package it provides to staff members. • To help the receivership ensure that it uses public funds only for appropriate business purposes: o Ensure that employees and contractors properly support all travel expense claims with original receipts or invoices and include a description of the business purpose, and verify that the amounts are within established policy limits. o Ensure that employees properly support charges appearing on corporate credit card accounts before paying the bill. Office of the Inspector General Bureau of Audits and Investigations Page 3 Introduction Background The court created a receivership to correct the state’s failure to provide the constitutionally required level of inmate medical care. In April 2001, California prisoners filed a class action lawsuit1 against the state alleging that California officials inflicted cruel and unusual punishment by being deliberately indifferent to serious inmate medical needs. The state settled the lawsuit in 2002, agreeing to overhaul its medical care policies and procedures and to significantly increase resources in prisons to ensure timely access to adequate medical care. However, in 2005, the U.S. District Court for the Northern District of California, which oversees the case, found that the California Department of Corrections and Rehabilitation’s inmate medical care was “horrifying” and “shocking,” and that medical malpractice and neglect continued.2 Therefore, in June 2005, the court decided to establish a receivership to control the delivery of medical services to California prisoners. In its order, the court stated: By all accounts, the California prison medical care system is broken beyond repair. The harm already done in this case to California’s prison inmate population could not be more grave, and the threat of future injury and death is virtually guaranteed in the absence of drastic action. The Court has given defendants every reasonable opportunity to bring its prison medical system up to constitutional standards, and it is beyond reasonable dispute that the State has failed. Indeed, it is an uncontested fact that, on average, an inmate in one of California’s prisons needlessly dies every six to seven days due to constitutional deficiencies in the [department’s] medical delivery system. This statistic, awful as it is, barely provides a window into the waste of human life occurring behind California’s prison walls due to the gross failures of the medical delivery system. It is clear to the Court that this unconscionable degree of suffering and death is sure to continue if the system is not dramatically overhauled. Decades of neglecting medical care while vastly expanding the size of the prison system has led to a state of institutional paralysis. The prison system is unable to function effectively and suffers a lack of will with respect to prisoner medical care. Accordingly, through the Court’s oral ruling and with this Order, the Court imposes the drastic but necessary remedy of a Receivership in anticipation that a Receiver can reverse the entrenched paralysis and dysfunction and bring the delivery of health care in California prisons up to constitutional standards. Once the system is stabilized and a constitutionally adequate medical system is established, the Court will remove the Receiver and return control to the State. 1 Plata v. Schwarzenegger, C01-1351 TEH. 2 Plata v. Schwarzenegger, C01-1351 TEH, May 10, 2005, Order to Show Cause RE Civil Contempt and Appointment of Interim Receiver. Office of the Inspector General Bureau of Audits and Investigations Page 4 The court gave the receiver broad powers over prison medical care. Effective April 17, 2006, the court appointed Robert Sillen3 to serve as the receiver over the department’s delivery of medical care to prisoners. The court suspended the department secretary’s exercise of power related to the administration, control, management, operation, and financing of the prison medical system during the receivership and granted these powers to the receiver. The court also provided the receivership the power to acquire, dispose of, modernize, repair, and lease property, equipment, and other tangible goods as necessary to carry out its duties under the order. To carry out these duties, the court provided the receivership unlimited access to all records, files, and facilities maintained by the department, as well as access to prisoners and department staff, as deemed necessary by the receiver. The court established the following duties of the receivership: • Provide leadership and executive management of the California prison medical care delivery system. • Develop a detailed plan of action designed to restructure and develop a constitutionally adequate medical care delivery system. • Determine the annual medical care budget and implement an accounting system that meets professional standards. • Provide the court with bimonthly reports addressing the receivership’s progress made, particular problems encountered, successes achieved, and an accounting of its expenditures and all other matters deemed relevant. In carrying out his responsibilities, the court stated that the receiver should make all reasonable efforts to exercise his powers in a manner consistent with California laws, regulations, and contracts––including labor contracts. However, if the receiver finds that a state law, regulation, contract, or other state Table 1 action or inaction is clearly preventing the State Payments to the Receivership receivership from developing or implementing a Through June 30, 2007 constitutionally adequate medical health care system, the receiver may ask the court to waive Date Amount the state or contractual requirement causing the 3/16/2006 $ 750,000 impediment. 6/16/2006 2,000,000 7/31/2006 1,200,000 The court ordered the state to pay all costs the 10/17/2006 7,571,555 2/7/2007 3,168,000 receivership incurs in carrying out its 5/2/2007 18,622,000 responsibilities. As discussed above, the receiver controls the administration, management, Total $33,311,555 operation, and financing of California’s prison 3 In January 2008, the court terminated Robert Sillen as the receiver and appointed J. Clark Kelso in that role. Office of the Inspector General Bureau of Audits and Investigations Page 5 medical system. For fiscal year 2006–07, the department spent $925 million for its adult medical services. The receivership expends most of these funds through the state’s control agencies, including the State Controller’s Office. However, the department also makes payments directly to the receivership to fund the receivership’s operations. As shown in Table 1, between the date of the receivership’s inception and June 2007, the department paid the receivership $33.3 million. The receivership’s office maintains these funds in its own bank account, out of which it makes disbursements to pay its operating costs. To ensure the transparency and accountability of its budget operations, the court required the receivership to coordinate with the Office of the Inspector General to complete periodic reviews of its operations. To carry out these responsibilities, we reached agreement with the receiver to perform periodic reviews of the receivership’s expenditures––including this first review—to produce a public report for the court that describes how the receivership uses state funds. We included in this agreement a provision for the Office of the Inspector General to report any instances of fraud, waste, or abuse uncovered during the review. We plan to complete similar efforts annually until the receivership is terminated. Our agreement with the receiver is included in the Attachments section of this report. The receivership expends state funds to Table 2 finance its operations. To carry out its court- How the Receivership ordered mandate, the receivership hires Used State Funds employees, executes contracts, and otherwise April 2006 through June 2007 incurs costs of doing business. As shown in Table 2, for the period April 2006 through Description Amount June 2007, the receivership spent $11.9 million Salaries and Wages $ 4,888,858 Benefits 1,022,863 on operating expenses. Most of the Rent or Lease 198,146 receivership’s operating costs relate to personnel Professional Fees 4,891,971 services. These costs include the salaries and Insurance 55,737 benefits for the receivership’s employees and the Office Expenses 70,618 amounts that the receivership paid to consultants Travel 352,816 Telephone and Network providing professional services. Lines 60,012 Other Expenses 358,390 The receivership also spent a significant Total Operating Expenses $11,899,411 amount—$8.7 million––to acquire capital assets. Although this amount includes the costs of Capital Assets $ 8,719,171 Deposits 353,220 establishing and equipping the receivership’s Cash/Prepaid Balances 15,907,890 offices, it primarily comprises costs of an information technology project the receivership Total $36,879,692* is developing on the department’s behalf and * Difference between state payments to the construction costs the receivership incurred at receivership and amounts used by receivership is San Quentin State Prison. mainly attributable to $3.3 million in accounts payable and other liabilities at fiscal year end. Office of the Inspector General Bureau of Audits and Investigations Page 6 Objectives, Scope, and Methodology Under a February 2006 order from the U.S. District Court for the Northern District of California, the Office of the Inspector General periodically reviews the receivership’s expenses. The purpose of these reviews is to issue a public report that describes how the receivership uses state funds. Although these reviews are substantially less in scope than a typical audit, they will report any instances of fraud, waste, or abuse that the Office of the Inspector General becomes aware of during its review. In conducting this review, we performed the following procedures: 1. To gain an understanding of the receivership’s operations and the nature and scope of projects undertaken, we reviewed documents related to the receivership’s creation and interviewed key receivership staff members. 2. To verify the amount of state funds that the department paid to the receivership between its inception and June 30, 2007, we reviewed relevant documents and interviewed key staff members from the receivership, the department, and the California Department of Finance. We then reconciled this amount to the amounts the receivership reported in its financial statements. 3. To learn about the goods and services for which the receivership expended state funds during the review period, we obtained detailed accounting reports and identified significant expense accounts. We then reviewed a sample of transactions from each expense category and learned the purpose of the expense. 4. To determine whether duplicate payments occurred during the period of our review, we obtained a list of payments made by the department to any receivership employees or contractors. 5. To determine whether there were any potential instances of fraud, waste, or abuse at the receivership, we contacted the public accounting firm that audited the receivership’s financial statements. The firm told us that it did not become aware of any instances of fraud, waste, or abuse, either as a result of its audit procedures performed or through discussions with the receivership’s management during its audit of the receivership’s financial statements. 6. To develop the information for this report, we analyzed the data gathered in the above procedures. Office of the Inspector General Bureau of Audits and Investigations Page 7 Review Results In its first 15 months of operation, the California Prison Health Care Receivership spent $20.6 million in state funds. The receivership spent almost $11 million of these funds for personnel services, from both its own employees and from consultants. The receivership also spent almost $9 million on capital assets, most of which were for the benefit of the California Department of Corrections and Rehabilitation’s adult prisons. As shown in Figure 1 of the Executive Summary, the receivership spent $20.6 million in six general categories. In this report, we describe how the receivership used state funds in each of the general categories. Compensation Figure 2 California Prison Health Care Receivership Compensation To carry out its court- April 2006 - June 2007 ordered responsibilities, the receivership hires employees who work out Compensation of three different offices. $4,888,858 24% The compensation each Capital Assets employee receives varies Compensation Amount depending on the • Salaries and Wages $ 4,209,550 • Compensation in employee’s designation. Lieu of Benefits 610,642 But compensation may • Vehicle Allowance 68,666 Benefits include salaries and Total $4,888,858 wages, compensation in lieu of benefits, and a Other Expenses Travel Professional Fees vehicle allowance. As shown in Figure 2, during the period of our review, the receivership incurred almost $4.9 million in compensation- related expenses, amounting to 24 percent of the receivership’s total disbursements. The receivership designates employees as either executive or non-executive. Between April 2006 and June 2007, the receivership employed 45 people––21 executives and 24 non-executives––including both full- and part-time employees who the receivership paid either on an hourly or salary basis. The receivership also provided some employees an option of receiving additional compensation––30 percent of base salary––in lieu of receiving benefits. In addition, the receivership provided some employees a vehicle allowance of $500 a month. The receivership obtains advice from human resources consultants to identify competitive compensation levels and to determine the salary or wage it will pay each employee. During the period of our review, the receivership spent $4.2 million on employee salaries and wages. Table 4 at the end of this section summarizes the salaries and wages the Office of the Inspector General Bureau of Audits and Investigations Page 8 receivership paid to each staff member during the review period, as well as any additional items of compensation the employees received. As shown on this table, the receivership paid 29 of its 45 employees (64 percent) salary and other compensation that equates to a projected annual amount of more than $100,000, including 12 employees whose projected annual compensation exceed the department secretary’s $225,000 annual salary. The receivership did not provide benefits to its employees the first nine months of its operation. Rather, the receivership provided its employees additional compensation–– 30 percent of their base salary––in lieu of benefits, such as medical insurance and pensions. Accordingly, from April 2006 through December 2006, the receivership paid 17 of its staff members $391,852 in lieu of benefits. In January 2007, the receivership began Table 3 offering health-related benefits to its Example of Executive Compensation employees. At that time, the receivership gave In Lieu of Benefits Payment its executive employees the option of either (annual amounts) continuing to receive their complete in-lieu Salary $150,000 payment or receiving health benefits and having the in-lieu payment reduced by the In-lieu Benefit receivership’s cost of providing medical (30 percent of salary) 45,000 benefits. The receivership did not provide this Cost of Medical Insurance (20,000) option to non-executive employees, electing to discontinue the in-lieu-of-benefits Cost of Pension Benefit (15,000) compensation for these employees. In Residual In-lieu Amount March 2007, the receivership also began Paid to Employee $ 10,000 offering pension benefits to its employees. Again, the receivership gave its executive employees the option of either continuing to receive the in-lieu payment or adding the pension benefit and having the in-lieu payment reduced by the receivership’s cost of providing the pension benefit (see example in Table 3). Similar to health benefits, the receivership did not provide this option to non-executive staff members. From January 2007 through June 2007, the receivership paid its executives $218,790 in lieu of benefits. Therefore, between April 1, 2006, and June 30, 2007, the receivership paid 18 of its 45 employees (12 executives and 6 non-executives) $610,642 in payments in lieu of benefits. For example, the receiver, Robert Sillen, received $12,500 each month as compensation in lieu of benefits in addition to his $41,666 monthly salary. In January 2007, the receivership began providing medical benefits to Mr. Sillen and reduced his in-lieu-of-benefits payment by the monthly cost of the insurance, $259. In March, the receivership began providing a 401(k) retirement contribution for Mr. Sillen, and it again reduced his monthly in-lieu-of-benefits payment by the cost of the retirement contribution, $2,344. Thus, between March and June 2007, Mr. Sillen received $9,897 each month as compensation in lieu of benefits, even though he received medical and Office of the Inspector General Bureau of Audits and Investigations Page 9 retirement benefits. We detail the in-lieu-of-benefits payments in Table 4 at the end of this section. The receivership continued its in-lieu-of-benefits payments to its executives until October 2007. We do not include in this review the in-lieu-of-benefits payments the receivership paid its executives between July 2007 and October 2007 because our current scope is limited to the period April 2006 through June 2007. In October 2007, the judge who created the receivership and oversees its operation ended the receivership’s in-lieu- of-benefits compensation program. In his communication to the receiver, the judge stated that he was “under the impression that once an employee benefit package became available that [receivership] employees would transition to the employee benefit package.” The judge added that the “practice of paying [receivership] employees ‘cash in lieu of benefits’ in addition to providing a benefit package was unacceptable given that these are publicly funded salaries.…” Accordingly, he directed the receivership to discontinue in-lieu-of-benefit payments effective October 31, 2007. The final component of the receivership’s employee compensation was vehicle allowance. The receivership provides an allowance, normally $500 a month, to executive staff members. As indicated in Table 4, the receivership paid 18 employees, one of whom was non-executive, a total of $68,666 during the period April 2006 through June 2007. Recommendation To ensure that the level of compensation paid to employees is an appropriate use of state funds, the Office of the Inspector General recommends that the receivership regularly reevaluate the salary and wage package it provides to staff members. Office of the Inspector General Bureau of Audits and Investigations Page 10 Table 4 Total Compensation Received by Receivership Staff Between April 2006 and June 2007 Compensation No. of Salary & C-I-L Vehicle Average Projected Total Employee Position Mos. Wages Benefit Allowance Monthly Annual Received Sillen Receiver 15.0 $ 605,468 $ 170,322 $ 0 $ 51,719 $ 620,628 $ 775,790 Hill Chief Medical Officer 12.5 364,751 98,398 6,250 37,552 450,624 469,399 Kagan Director of Communications 15.0 219,285 47,111 7,250 18,243 218,916 273,646 McGrath Director, Custody Support 12.0 261,521 0 0 21,793 261,516 261,521 Goldman Staff Attorney 15.0 185,546 37,447 7,250 15,350 184,200 230,243 Wood Chief Financial Officer 8.5 189,719 32,873 4,162 26,677 320,124 226,754 Graham Chief Medical Information Officer 8.5 184,988 37,609 4,069 26,667 320,004 226,666 Hummel Chief Information Officer 8.0 179,104 32,321 3,911 26,917 323,004 215,336 Buzzini Staff Attorney 13.0 163,281 42,500 6,500 16,329 195,948 212,281 Estrada Special Assistant 15.0 123,101 26,005 7,250 10,424 125,088 156,356 Russell Health Care Project Officer 9.5 116,206 25,818 0 14,950 179,400 142,024 Turner Statewide Nursing Officer 5.0 114,583 0 2,500 23,417 281,004 117,083 Hector Inmate Prison Relations Manager 12.5 98,257 14,969 0 9,058 108,696 113,226 Clark Director of Nursing Ops 5.0 104,167 0 2,500 21,333 255,996 106,667 Ha Chief Nurse Executive 4.0 97,885 0 2,000 24,971 299,652 99,885 Scott Nursing Director 5.0 93,450 2,700 2,500 19,730 236,760 98,650 Rea Nursing Director 5.0 93,750 0 2,500 19,250 231,000 96,250 Robinson Nursing Director 5.0 93,750 0 2,500 19,250 231,000 96,250 Weston Special Assistant 7.0 95,410 0 0 13,630 163,560 95,410 Saich Coordinator 12.0 81,000 12,000 0 7,750 93,000 93,000 Kirkland Director, Plata Support 6.0 84,718 0 3,000 14,620 175,440 87,718 Meier Custody Support Services 6.5 78,405 0 0 12,062 144,744 78,405 Honey Construction Analyst 9.5 76,313 0 0 8,033 96,396 76,313 Marengo Director of Facilities 4.0 51,923 15,577 1,909 17,352 208,224 69,409 Whittaker Manager, Program Management Office 4.5 58,558 0 0 13,013 156,156 58,558 Bartle Administrative Assistant 11.0 47,278 6,211 0 4,863 58,356 53,489 Hill Custody Support Services 7.0 49,855 0 0 7,122 85,464 49,855 Huber Administrative Assistant 9.5 38,258 4,082 0 4,457 53,484 42,340 Cameron Controller 4.0 41,667 0 0 10,417 125,004 41,667 Uhler Administrative Assistant 9.0 19,768 3,618 0 2,705 32,460 23,386 Sampson Manager, Medical Records 4.5 21,757 0 2,000 5,279 63,348 23,757 Sandoval Administrative Aide 7.0 21,776 1,081 0 3,265 39,180 22,857 Moy Director, Health Information Integration 2.0 22,788 0 0 11,394 136,728 22,788 McPherson Personnel Specialist 4.5 22,635 0 0 5,030 60,360 22,635 Norcio Director, Clinical Integration 1.5 18,462 0 615 12,718 152,616 19,077 Lerner Staff Attorney 6.0 16,647 0 0 2,775 33,300 16,647 Stuart Administrative Assistant 3.5 14,905 0 0 4,259 51,108 14,905 Knox Administrative Assistant 3.5 14,730 0 0 4,209 50,508 14,730 Dovey Custody Support Specialist 1.0 12,093 0 0 12,093 145,116 12,093 Lucas Investigation & Discipline Coordinator 1.0 9,083 0 0 9,083 108,996 9,083 Sgro Administrative Manager 1.5 8,513 0 0 5,675 68,100 8,513 Matranga Receptionist 3.5 6,969 0 0 1,991 23,892 6,969 Cambra Jr. Custody Support Specialist 0.5 6,047 0 0 12,094 145,128 6,047 Dunn Administrative Assistant 0.5 225 0 0 450 5,400 225 Durocher Administrative Assistant 2.5 150 0 0 60 720 150 TOTALS *$4,208,745 $610,642 $68,666 $610,029 $7,320,348 *$4,888,053 * Amount does not agree with total presented at the beginning of this section because of an immaterial difference of $805, which we did not pursue. Office of the Inspector General Bureau of Audits and Investigations Page 11 Benefits Figure 3 California Prison Health Care Receivership Benefits In addition to the April 2006 - June 2007 compensation the receivership paid to its Capital Assets Benefits Amount Compensation employees, the receivership • Payroll Taxes $ 309,558 • 401(k) Contributions 217,050 also paid for certain • Insurance 216,882 employee benefits. Although • Paid Time Off 215,459 the receivership provided • Workers’ Compensation 54,456 some of the benefits during • Relocation Expenses 9,458 the entire period of our Total $1,022,863 review, such as payroll taxes Benefits and paid time off, it offered $1,022,863 Other Expenses other benefit items for only 5% a part of the period. As Travel Professional Fees discussed in the previous section, the receivership began providing health-related benefits to its employees in January 2007 and pension benefits in March 2007. Nonetheless, as shown in Figure 3, during our review period the receivership spent over $1 million on benefits for its employees. Payroll taxes represented the largest benefit expense during the review period. This benefit included the employer portion of Social Security and Medicare payments, totaling $309,558. The receivership also recognized a liability of just over $215,000 at June 30, 2007, for the earned but unused vacation its employees had accrued. In addition, the receivership paid a little under $217,000 for medical, dental, and life insurance for its staff members electing to receive the benefit between January 2007 and June 2007. The receivership pays the entire cost of these insurance items for its employees. Finally, the receivership contributed $217,050 to its employees’ 401(k) pension accounts between March 2007 and June 2007. The receivership makes monthly 401(k) contributions equal to 12.5 percent of base salary for executive employees and 7.5 percent for non-executive employees. Office of the Inspector General Bureau of Audits and Investigations Page 12 Professional Fees Figure 4 California Prison Health Care Receivership Professional Fees The receivership has April 2006 - June 2007 entered into contracts to obtain the services of Professional Fees Amount certain professionals to • Pharmacy Consulting $2,796,459 • Chief of Staff 605,526 carry out its duties under • Legal 481,100 the court mandate. • Recruitment 362,269 Compensation Accordingly, as shown in Capital Assets • Nursing 195,600 • Physicians 115,700 Figure 4, the receivership • Human Resources 93,551 Benefits spent $4.9 million on • Information Technology 87,586 professional fees during • Other Professional Fees 79,458 • Temporary Agencies 74,722 the period of our review. Total $4,891,971 Most of these payments Professional are to a single contractor Other Expenses Fees $4,891,971 that provides pharmacy 24% Travel management consulting services. However, the receivership also included costs related to its chief of staff, legal, and recruitment services. The single largest recipient of professional fees is Maxor National Services Corporation, which is helping the receivership to improve the department’s prison pharmacy system. From April 2006 through June 2007, the receivership paid Maxor almost $2.8 million. According to its contract with the receivership, Maxor has seven specific goals: 1. Develop meaningful and effective centralized oversight, control, and monitoring over the pharmacy services program. 2. Implement and enforce clinical pharmacy management processes. 3. Establish a comprehensive program to review, audit, and monitor pharmaceutical contracting and procurement processes. 4. Develop a meaningful pharmacy human resource program. 5. Redesign and standardize overall institution level pharmacy drug distribution operations. 6. Design and implement a uniform pharmacy information management system. 7. Develop a process to assure the department’s pharmacy meets accreditation standards. The receivership also included in this category payments to its chief of staff, John Hagar, who is an independent contractor to the receivership rather than an employee. Under his agreement with the receivership, Mr. Hagar is responsible for (1) coordinating the receiver’s activities, (2) ensuring the flow of accurate information to and from the receiver and the receivership, and (3) providing integrated policy analysis and strategic consultation to the receiver and the receivership. The receivership compensates Mr. Hagar $250 an hour for his services and pays for his ordinary and reasonable expenses––such as travel expenses––incurred in performing his services. During our review period, the receivership paid Mr. Hagar $605,526 for his services. The Office of the Inspector General Bureau of Audits and Investigations Page 13 receivership accounts for Mr. Hagar’s expenses in its “travel” category, which we discuss in the next section. The receivership also spent $481,100 on legal services during the period under review. For example, it paid the law firm Futterman & Dupree LLP just over $183,000 to serve as the receivership’s attorney. According to its agreement with the receivership, Futterman & Dupree LLP provides general legal services, including representation in federal receivership proceedings involving the California prison health care system. The agreement calls for the receivership to pay the firm’s attorneys rates that range from $225 to $350 an hour and the firm’s legal assistants rates that range from $75 to $160 an hour. Finally, the receivership included in this category $362,269 in costs of recruiting its staff members. The receivership paid just over $344,000 of this amount to one firm, Korn/Ferry International. This firm recruited candidates for executive positions, including the receivership’s chief financial officer, chief information officer, chief nurse executive, and chief quality officer. In its contract with Korn/Ferry, the receivership agreed to pay the firm a fee equal to 33 1/3 percent of the first year’s estimated cash compensation of the positions being filled, with a minimum fee of $65,000 per position. In addition to this fee, the receivership also agreed to pay Korn/Ferry’s direct, out-of- pocket expenses plus an amount equal to 12 percent of the fee to cover the firm’s other search-related expenses. Office of the Inspector General Bureau of Audits and Investigations Page 14 Travel Figure 5 California Prison Health Care Receivership Travel The receivership’s policy April 2006 - June 2007 is to pay for its employees’ and Compensation Travel Amount contractors’ reasonable Capital Assets • Lodging $132,413 and customary travel • Transportation 103,736 expenses incurred for • Meals and Entertainment 57,095 authorized travel away Benefits • Mileage 53,499 from their home or • Other 6,073 designated office to Other Expenses Professional Fees Total $352,816 conduct official business. Travel These costs include $352,816 lodging, transportation, 2% meals and entertainment, mileage, and other minor expenses. As shown in Figure 5, the receivership spent $352,816 on travel during our review period. Lodging was the receivership’s largest category of travel expense incurred during the period of our review, totaling $132,413. The receivership’s February 2007 travel policy requires employees to substantiate the amount, time, location, and business purpose of lodging expenses incurred while traveling away from home. Prior to this policy, the receivership had not issued any policies guiding its staff members’ travel expenses. The February 2007 policy states that the purpose of the lodging must be related to receivership business, and that the employee must submit an expense report with receipts to obtain reimbursement. The policy also specifies that expense reports must contain “original invoices or receipts and not photo copies [sic]” [emphasis in original]. Further, instructions on the receivership’s travel expense form specify that credit card statements are not acceptable as a receipt. However, the receivership does not always enforce this policy. Two of the lodging expense claims we reviewed amounting to just over $10,500 did not include proper documentation. In one instance, the receivership paid a December 2006 corporate credit card bill that included a charge for $4,271 from Hotels.Com. The charge was for lodging expenses incurred by five receivership employees and the department’s director of correctional health care services. Even though this charge occurred before the receivership travel policy was in place, we evaluated the charge using the provisions of the subsequently issued policy because the court order creating the receivership required it to make all reasonable efforts to operate within California state regulations. The state regulations contain even more stringent controls over travel than the receivership’s February 2007 policy. When we asked the receivership for support for the charges, it provided us a series of e-mailed room confirmations for a hotel in Houston that a receivership employee had received from Hotels.Com. However, the date of the e-mails is November 6, 2007—nearly a year after the receivership had paid the charge. Moreover, the documents are merely confirmations, not receipts, and the documents do not indicate the business purpose of the expense. Therefore, although the charges were likely for Office of the Inspector General Bureau of Audits and Investigations Page 15 legitimate receivership business purposes, the receivership paid this item of expense without adequate documentation. This practice increases the risk of the receivership paying for improper travel or other expenses. Similarly, the receivership paid an October 2006 corporate credit card bill that included two charges for lodging: one for $5,862 in Corte Madera and another for $432 in Hanford. When we asked for support for these charges, the receivership again provided us with faxed copies of receipts from the hotels, both dated February 11, 2008––more than one year after the receivership paid the charges. The support for the $5,862 charge appeared to be for a conference, but the invoice does not indicate who participated in the conference or the business purpose the conference served. The support for the $432 charge indicated that it was for a one-night stay for five receivership employees. However, it did not include a description of the business purpose of the expense. According to the receivership’s accountant, she often must pay credit card bills without proper supporting documentation to avoid finance charges. She told us that she makes efforts to obtain proper documentation after she has paid the bill, but she does not always receive it from receivership staff members. Again, while we found no evidence of fraud, this practice increases the risk of the receivership paying for improper travel or other expenses. The receivership also paid $103,700 in transportation charges claimed by its employees and contractors. This amount includes charges for items such as airline and train tickets, rental cars, taxicabs, and parking. We reviewed a sample of five separate claims totaling $6,917 in transportation charges and found that the employees or contractors had adequately supported the claimed costs. However, we found that the receivership does not always follow its travel policy when it pays its employees’ and contractors’ meals and entertainment expenses. Between April 2006 and June 2007, the receivership paid $57,095 for meals and entertainment. Similar to lodging expenses, the receivership’s policy requires employees to substantiate the amount, time, location, and business purpose of meal expenses incurred while traveling away from home. It states that the purpose of the meals must be related to receivership business, and that the employee must submit an expense report with original receipts to obtain reimbursement. Further, the policy limits meal expenses to $50 a day during overnight travel. The policy does allow the executive staff to pay for other business guests’ meals with prior receiver approval. Nonetheless, the receivership did not follow these guidelines in several instances that we reviewed. For example, the receiver, Robert Sillen, claimed a February 2007 meal expense of $740 from a Sacramento steakhouse and provided no original receipt, business purpose, or listing of other business guests joining him at the meal. The sole support accompanying the documentation was a credit card statement showing the charge. This same expense claim had two other charges for meals that exceeded the $50 policy limit. One charge was for $127 and the other was for $109. Similar to the $740 charge, Mr. Sillen provided only a credit card statement to support both of these charges. In our limited review of 23 travel-related expenses, we found 11 instances of meal Office of the Inspector General Bureau of Audits and Investigations Page 16 charges made by several receivership employees that exceeded the receivership’s policy limit or lacked the proper documentation. These expense claims totaled $1,847. Again, this practice increases the risk of the receivership paying for improper travel or other expenses. Finally, the receivership included in the meals and entertainment category $12,000 that it paid to a contractor for per diem payments in her work for the receivership as a corrections health consultant. The contract with the consultant calls for the receivership to pay her an hourly rate for her services and travel time, actual expenses incurred in carrying out her work, and a per diem amount of $125. The receivership reimbursed the consultant for actual expenses such as airfare, lodging, car rental, mileage, and parking. The only normal cost of travel for which the receivership did not reimburse the consultant for actual expenses was meals. As discussed above, the receivership limits its own staff to $50 a day for meals during authorized travel. Therefore, if the receivership had held this consultant to the same standard as its own employees, the receivership would have only compensated the consultant up to $4,800––a difference of $7,200 from the amount it actually paid the consultant in per diem. According to a staff attorney at the receivership’s office, the receivership revised the terms of its agreement with this consultant effective July 1, 2007, to eliminate the per diem amount. The staff attorney told us that the receivership revised the contract because it was not its normal practice to pay per diem to its consultants. Recommendations To help the receivership ensure that it uses public funds only for appropriate business purposes, the Office of the Inspector General recommends that the receivership take the following actions to make sure its staff members adhere to its current travel reimbursement policy: • Ensure that employees and contractors properly support all travel expense claims with original receipts or invoices and include a description of the business purpose, and verify that the amounts are within established policy limits. • Ensure that employees properly support charges appearing on corporate credit card accounts before paying the bill. Office of the Inspector General Bureau of Audits and Investigations Page 17 Other Expenses Figure 6 California Prison Health Care Receivership Other Expenses We include in the other April 2006 - June 2007 expenses category all the remaining minor expenses Other Expenses Amount • Conferences/ incurred by the receivership. Seminars $271,278 As indicated in Figure 6, a Capital Assets • Rent or Lease 198,146 Compensation • Office Expenses 70,618 wide range of items is • Telephone 60,012 included in this category, • Insurance 55,737 totaling $742,902. • Leasing – Benefits Modulars 27,019 • Dues and The largest item in this Subscriptions 17,763 • Miscellaneous 16,769 category was expenses Other • Employee related to conferences and Expenses Professional Fees Development 12,934 seminars attended by the $742,902 Travel • Minor Equipment 12,626 Total $742,902 receivership’s employees. 4% The receivership spent $271,278 on these expenses during our review period. The receivership paid $263,750 of this amount to the Association of California Nurse Leaders, which provided training to nurses in supervisory and leadership capacities to learn key competencies and enhance their communication effectiveness. According to the association’s summary of the trainings, 212 nurses participated in the training program between November 2006 and May 2007. The receivership also spent almost $13,000 on employee development. This entire amount was for the receivership’s purchase of 1,875 tote bags for department nursing staff in May 2006. According to the receivership’s chief nursing executive, the receivership purchased these tote bags and provided them to nurses as recognition during the national nurses appreciation week. The nursing executive added that the bags were custom printed with the department logo and a message stating “Correctional Nursing – Excellence Begins with Caring.” The nursing executive also told us that the receivership included in each bag a letter of thanks signed by the receiver, the chief nurse, and the statewide nursing officer. We did not review examples of expenses in the rent/lease, office expenses, telephone, insurance, or minor equipment categories because of the low-risk nature of the expenses or their relatively small amounts. Office of the Inspector General Bureau of Audits and Investigations Page 18 Capital Assets Figure 7 California Prison Health Care Receivership Capital Assets During our review period, April 2006 - June 2007 Capital Assets the receivership spent $8.7 $8,719,171 Receiver Capital Assets Amount * million on capital assets, 41% Compensation • • F C u o r m n p it u u t r e e r & E q F u ix ip tu m re e s n t $ 1 1 2 8 6 0 , , 0 5 2 8 5 2 as shown in Figure 7. • Office Equipment 110,845 • Leasehold Improvements 13,388 Capital assets––sometimes Total $430,840 called fixed assets––are Capital Assets Receiver Held for the Department Amount * assets the receivership • Information Systems $5,068,379 purchased to carry out its • Construction/ Capital Projects 2,875,686 responsibilities over a long Benefits • Building and period, such as buildings, Improvements 296,091 • Furniture & Fixtures 32,917 office equipment, and • Vehicles 15,258 information systems. The Professional Fees Total $8,288,331 Other Expenses Travel * Amounts shown net of depreciation receivership capitalizes asset purchases exceeding $1,000 and depreciates the cost over the assets’ useful lives. The receivership includes in this expense category two major subcategories: assets held for receivership use and assets held for the department. The receivership includes in the first subcategory long-term assets needed to carry out its court-ordered responsibilities. Asset acquisitions the receivership made for its use included leasehold improvements, cubicle/modular furnishings, office equipment including a comprehensive telephone system, and computer hardware and software applications. From April 2006 through June 2007, the receivership spent $430,840 on capital assets in this subcategory. The receivership incurred almost all the furniture and fixtures expenses with one company, Inter Form, which provided and set up the receivership’s office furniture. As an example of the purchases the receivership made for office equipment, it paid VoicePro $42,378 to provide and install a phone system at the receivership’s San Jose offices. The receivership incurred almost all its computer equipment expenses with ZAG Technical Services to provide computer-related equipment and services. The receivership made most of its capital asset purchases on behalf of the department rather than itself. Although the receivership made these purchases––amounting to nearly $8.3 million––out of its own fund, the items or services it purchased were for the direct benefit of a particular department institution or for all the department’s institutions. Therefore, because the asset is not for the direct use of the receivership, it accounts for them separately from those discussed above. Most of the receivership’s expenses in this category were for an information system the receivership is developing for the department and construction that the receivership began at San Quentin State Prison. In the information systems expenses, almost $4.8 million went to Unisys Corporation to implement an electronic medical contract and invoice processing system for the department. The receivership also paid OVERRA Construction Company almost $966,000 to renovate the triage and treatment building at San Quentin. In addition, the receivership paid Ghilotti Brothers Contractors just over $233,000 for paving projects at San Quentin. Office of the Inspector General Bureau of Audits and Investigations Page 19 Receivership’s Agreement Receivership’s Response