EXECUTIVE
SUMMARY
OBJECTIVE
The objective of this audit was to determine the amount and
allowability of incentive payments made under the Colorado pay-for-performance
pilot legislation.
BACKGROUND
Section 24-50-104(8)(d)(I) of the Colorado Revised Statutes
created, in the State personnel system, a performance-based pay
pilot program under which an employee or team of employees could
participate on a voluntary basis, subject to the approval of the
head of the State agency in which the employee or team is employed.
The pilot program provided for team-based performance incentives
consisting of bonuses that could be awarded to each employee on
a team of employees participating in the pilot program.
The Colorado Disability Determination Services (DDS) submitted
a team-based
pay-for-performance proposal to its parent Agency, the Department
of Human Services (DHS), in December 1995. The proposal was approved
by DHS in February 1996, but not submitted to the Social Security
Administration (SSA) for approval until June 1996. SSA notified
DDS to deobligate funding for potential DDS incentive payments
resulting from the proposal until the pertinent legal issues could
be assessed. However, apparently acting on advice of the Colorado
Attorney General, the DDS, on December 31, 1996, paid $234,895
to 125 employees.
Our audit found that the incentive payments were never approved
by SSA. On December 6, 1996, the SSA Office of General Counsel
issued a legal opinion to the Associate Commissioner for Disability
on the incentive payments, declaring them unallowable under applicable
cost principles contained in Office of Management and Budget (OMB)
Circular A-87 because the incentive payments were to be funded
from a source other than the amount obligated for personal services
as required by the Colorado legislation. Therefore, DDS was notified
on January 15, 1997 that the incentive payments were unallowable.
Our audit also found that the incentive payments were not uniform
(as required by OMB Circular A-87) with respect to both federally
and nonfederally funded team awards.
RESULTS OF REVIEW
§. DDS INCENTIVE PAYMENTS WERE NEVER APPROVED
BY SSA
§. DDS INCENTIVE PAYMENTS DID NOT COMPLY
WITH THE APPLICABLE COST PRINCIPLES IN OMB CIRCULAR A-87
§. DDS INCENTIVE PAYMENTS WERE NOT ALLOCATED
UNIFORMLY AMONG FEDERAL AND NONFEDERAL ACTIVITIES
RECOMMENDATIONS
• DDS should refund to SSA $234,895
used for unallowable incentive payments.
• DDS should ensure that future incentive
payment proposals comply with applicable State and Federal
regulations and are approved by SSA prior to payment.
AGENCY COMMENTS
The Colorado Attorney General`s office agreed
that DDS paid incentives of $234,895 to 125 DDS employees in December
1996, but did not agree with the recommendation to refund those
incentives to SSA. The State disagreed with SSA`s legal basis
to approve or disapprove DDS incentive payments. The State also
contends that although it was not formally required to notify SSA
of the impending payments, it did so informally several months
prior to the June 21, 1996 formal submission.
Regarding the precedent citations in the audit
report of SSA`s disapproval of the Washington and Texas incentive
proposals, Colorado indicated that the States of Kentucky, Florida,
and Utah also used incentive payment plans. The State also believes
that the DDS appropriation of $13,959,997 should have been entirely
allocated to personal services. Finally, the State indicated that
the pilot program, although available to all State employees, cannot
be uniform as some employees may qualify and others may not.
OIG RESPONSE
SSA has clear authority to approve or disapprove
DDS incentive payments. Section 221(f) of the Social Security Act
(Act) indicates that money paid to a State under section 221(e)
should be used solely for the purpose for which it is paid, i.e.
to make disability determinations, and that money paid but not
so used should be returned to the trust fund. The $234,895 of incentive
payments paid by DDS to its employees were not necessary costs
of making disability determinations, and therefore could not be
funded.
Washington and Texas were cited as precedents
for the necessity of SSA`s approval in the incentive proposal
review process because the circumstances of SSA rejecting their
proposals involved payment from documented savings, similar to
the Colorado DDS proposal. Three other incentive proposals by Kentucky,
Florida, and Utah were cited by Colorado in its response. We noted
that only one of those proposals, Kentucky, was similar to the
Colorado proposal and Kentucky required in its incentive legislation
that any incentive payments conform to applicable Federal regulations.
Colorado cited DDS`s legislative appropriation
of $13,959,997 for State Fiscal Year (FY) 1996 as the appropriate
amount for its personal services figures. However, the $13,959,997
appropriation included funding for other costs to operate DDS in
addition to personal services costs. Internal personal services
planning documents cite $7,776,366 to fund DDS for FY 1997 during
which the incentive payments were made and $7,656,986 for FY 1996.
Finally, we realize that incentive payments by their nature cannot
be uniform to all State employees. However, these payments were
clearly biased to Federal awards, and even more biased to DDS.
Please refer to the sections entitled Agency Comments and OIG Response
for more details. See Appendix A for the full text of the Colorado
Attorney General`s comments.
INTRODUCTION
"A State agency that participates in
team-based performance incentives under the pilot program may
fund the performance incentives with not more than 1 percent
of the State agency`s annual appropriation for personal
services. A State agency may have one or more teams of employees
participating in the team-based performance incentives under
the pilot program."
Chronology of DDS Actions Preceding Incentive
Payments
On December 19, 1995, the Colorado DDS submitted
a pay-for-performance team proposal to its parent agency, the DHS.
The proposal specified $617,688 of total anticipated savings in
consultative examinations (CE) and all other costs for the 9-month
period October 1, 1995 through June 30, 1996, compared to similar
costs for the period October 1, 1994 through June 30, 1995. The
savings included $496,706 for medical costs, and $120,982 for all
other costs. The proposal stipulated that DDS would retain half
of the savings, or $308,844, for incentive payments to its employees,
and the other half would be returned to SSA. The proposal was approved
by DHS on February 23, 1996.
On June 21, 1996, DDS submitted the same proposal
to SSA Region VIII for approval. On August 2, 1996, the Associate
Commissioner for Disability notified the Region VIII Commissioner
and on August 20, 1996, the Region VIII Commissioner, in turn,
notified DDS that it should not obligate funds or make any incentive
payments until the pertinent legal issues could be assessed.
On September 27, 1996, the SSA Region VIII Commissioner
noted that DDS had obligated funds in the third quarter of FY 1996
for incentive payments in direct violation of the August 20, 1996
directive. DDS was formally notified that the unauthorized funds
for incentive payments should be deobligated.
On December 6, 1996, the SSA Office of General
Counsel issued a legal opinion to the Associate Commissioner for
Disability on the incentive payments, declaring them unallowable
under applicable cost principles contained in OMB Circular A-87
because they were to be funded from a source other than the amount
obligated for personal services as required by the Colorado legislation.
On December 17, 1996, the original $617,688 in
estimated savings was decreased to $469,791. The revision was based
on an increase in actual CE costs to $58.31 per case for the period
October 1, 1995 through June 30, 1996 compared to the original
estimate of $52.87 per case. One-half of the $469,791, reduced
the amount of potential incentive payments from $308,844 to $234,895.
On December 11, 1996, the Colorado Attorney General’s
office, in a letter to DHS, stated that it ". . . would not
advise against the department`s going ahead with these payments
. . . ." Acting on this advice, on December 31, 1996, DDS
paid $234,895 in incentive payments to 125 employees. The incentive
payments were based on a combination of monthly salaries and each
employee`s rating for the 6-month period January through June
1996.
On January 8, 1997, the Associate Commissioner
for Disability gave the Region VIII Commissioner final notice that,
based on the December 6, 1996 legal opinion, the incentive payments
were unallowable. On January 15, 1997, the Region VIII Commissioner
notified DDS that the incentive payments were unallowable.
On January 16, 1997, SSA requested that the Office
of the Inspector General audit the incentive payments made under
the Colorado pay-for-performance pilot. Our audit corroborated
SSA`s legal opinion rendering the incentive payments unallowable
because the payments were funded from a source other than the amount
obligated for personal services as required by the Colorado legislation.
Our audit also found that the incentive payments were neither approved
by SSA nor uniform with respect to both Federal and nonfederal
team awards.
SCOPE AND METHODOLOGY
Our methodology included a 100 percent review
of the incentive payments made on December 31, 1996 to determine
how they were computed and paid. We also developed all pertinent
issues presented by SSA in its legal opinion pertaining to the
allowability of the DDS incentive payments. We reviewed the facts
in conjunction with the applicable regulations, and presented our
conclusions. Specifically, we reviewed the following information:
1. The amount and number of incentive payments
made to DDS employees on December 31, 1996. We also reviewed
DDS`s method of computing incentive payments, using the base
period of October 1, 1995 through June 30, 1996.
2. Colorado Senate bill 94-222, which amended
section 24-50-104 of the Colorado Revised Statutes by adding
sections 24-50-104(8)(d)(I) and 24-50-104(8)(d)(II) and created
a performance-based pay pilot program.
3. State and Federal regulations applicable
to incentive payments.
4. Related DDS incentive proposals and SSA’s
actions on those proposals.
5. Applicable correspondence among DDS, DHS,
the State Attorney General`s office, and SSA.
Audit field work was conducted during February
1997 at the Colorado DDS and the SSA Region VIII office in Denver,
Colorado, and continued via telecommunications from our Kansas
City field office during March and April 1997. Our audit was performed
in accordance with generally accepted government auditing standards.
RESULTS OF REVIEW
We determined that on December 31, 1996, DDS paid
incentives of $234,895 to 125 employees. Authority for the payments
was based on a pay-for-performance plan which was approved by DHS,
DDS`s State parent agency. However, DDS did not receive approval
from SSA before making the incentive payments. SSA has clear authority
to approve or disapprove DDS expenditures and has established precedence
in reviewing and rejecting incentive payment proposals which were
based on savings, not obligated DDS funds. Furthermore, the DDS
incentive payments did not comply with applicable cost principles
in OMB Circular A-87, dated May 4, 1995, entitled, "Cost Principles
for State, Local and Indian Tribal Governments."
The cost principles require costs to be authorized
(or not prohibited) under State laws or regulations and uniformly
applied to both Federal and other governmental activities. The
incentive payments were funded from surplus funds, or savings,
but not from DDS’s personal services appropriation as required
by the Colorado pay-for-performance pilot legislation. The incentive
payments were not uniformly allocated among Federal and other governmental
activities.
DDS
INCENTIVE PAYMENTS WERE NEVER APPROVED BY SSA
DDS never obtained the required SSA approval for
incentive payments made to employees. This situation may have been
caused, at least in part, by the Colorado Attorney General’s
tacit approval of the incentive payments. DDS paid the incentive
payments before SSA formally notified DDS that the payments were
unallowable.
DDS relied primarily on communications with DHS,
rather than SSA, in developing the proposal and obtaining approval
for the pay-for-performance pilot. DDS submitted the proposal to
DHS in December 1995 and obtained approval on February 23, 1996.
However, DDS did not formally present the proposal to SSA until
June 21, 1996.
Therefore, SSA was at a disadvantage in attempting
to be timely in its review of the proposed incentive payments.
SSA, in an August 20, 1996 letter from the Region VIII Commissioner
to the DDS Director, specified that no incentive payments should
be made until pertinent legal issues could be assessed.
SSA
Has Clear Authority to Approve or Disapprove DDS Incentive
Payments
Section 221(a)(1) of the Act indicates that a
State may elect to make disability determinations on behalf of
the Commissioner. Section 221(e) of the Act entitles a State that
has elected to make disability determinations to receive payment
from the trust funds for the cost to the State of making those
disability determinations.
Furthermore, section 221(f) of the Act requires
that money paid to a State under section 221(e) be used solely
for the purpose for which it is paid and that money paid but not
so used should be returned to the trust funds. SSA`s approval
is clearly required by 20 Codified Federal Register, Chapter III,
sections 404.1626(d) and 416.1026(d) dated April 1, 1997 which
state, "The State may not incur or make expenditures for items
of cost not approved by us or in excess of the amount we make available
to the State."
SSA
Has Established Precedence in the Incentive Proposal Review
Process
The Washington DDS, in 1988, requested SSA approval
for a Teamwork Incentive Program proposal for providing cash awards
to DDS employees to be funded out of documented savings achieved
by DDS. SSA declined to approve the proposal because Federal funds
can only be used for necessary costs in making disability determinations
and that, by definition, only the funding amount obligated by DDS
can be considered in a necessary cost determination.
SSA used the same basis as that used in Washington
to deny a Texas State Employee Incentive Program (SEIP) proposal
in 1991. SSA again stated that Federal funds must be used only
for necessary costs in making disability determinations.
The Associate Commissioner for Disability, in
an August 20, 1991 memorandum, to the Dallas Regional Commissioner,
noted that the predominate characteristic of the SEIP was that
awards were to be paid from documented savings achieved by suggestions
for streamlining DDS processes. Since savings were not based on
funds obligated, the costs were not considered necessary and the
proposal was denied. A subsequent Texas achievement bonus program
proposal was approved in 1992 because it was open to all State
employees and was to be funded not from savings, but from the regular
DDS salary appropriation.
The
SSA Approval Process Provides Assurance that SSA and DDS
Goals Are Congruent
To ensure that DDSs make accurate and timely disability
decisions, SSA needs to review and approve or disapprove any potential
incentive payments. Without that involvement, there is no assurance
that DDS performance goals and/or cost-cutting measures, which
could be linked to potential incentive payments, are congruent
with SSA goals. With the advent of the Government Performance and
Results Act (GPRA) of 1993, Public Law 103-62, 107 Stat. 285, SSA
must now pay particular attention to DDS performance. Since DDS
performance and potential incentive payments may be linked, SSA
needs to ensure that DDS goals are congruent with Federal criteria
on claims processing times and accuracy rates, and GPRA goals.
DDS
INCENTIVE PAYMENTS DID NOT COMPLY WITH THE APPLICABLE COST
PRINCIPLES IN OMB CIRCULAR A-87
The DDS incentive payments did not comply with
applicable cost principles contained in OMB Circular A-87. To be
allowable under Federal awards, costs must meet the following two
factors:
1. section C.1.c. states that costs must "Be
authorized or not prohibited under State or local laws or regulations," and
2. section C.1.e. states that costs must "Be
consistent with policies, regulations, and procedures that apply
uniformly to both Federal awards and other activities of the
governmental unit."
DDS
Incentive Payments Were Not Funded from the Personal Services
Appropriation as Required by Colorado Legislation
DDS did not fund its incentive payments from its
personal services budget as required by the Colorado legislation,
but instead funded the payments directly from surplus funds, or
savings in CEs and all other costs. The CE medical expense budget
authorization was specifically for medical costs to purchase CEs
and the other cost budget authorization provided for communications,
maintenance, travel and supplies. Neither of these funding sources
was related to the State agency`s annual appropriation for
personal services.
Section 24-50-104(8)(d)(II) of the Colorado Revised
Statutes specifies that, "A State agency that participates
in team-based performance incentives under the pilot program may
fund the performance incentives with not more than 1 percent of
the State agency’s annual appropriation for personal services." Since
DDS did not fund the incentive payments from the personal services
appropriation, it was in violation of section C.1.c of OMB Circular
A-87 which states that costs must ". . . be authorized or
not prohibited under State or local laws or regulations."
The
1 Percent State Incentive Payment Legislative Guideline Should
Have Been Applied to the DDS Personal Services Appropriation
The State has defined State agency as not just
the DDS, but the entire DHS. Using the State’s definition,
DDS would have been well within the 1 percent guideline if it had
based the incentive payments on the DHS appropriation for personal
services for the State FY July 1, 1995 through June 30, 1996. This
calculation would have resulted in $1,540,022 being authorized
for incentive payments.
However, we noted that SSA established precedence
by approving the Texas SEIP based on an incentive payment allocation
from the Texas DDS’s personal services appropriation (see
page 6). We believe that, instead of using savings as a basis for
the incentive payments, the Colorado DDS should have calculated
the maximum amount of incentive payments by applying 1 percent
to its personal services appropriation. This calculation, for the
budget period July 1, 1995 through June 30, 1996, would have resulted
in maximum incentive payments of $76,570 (1 percent times $7,656,986),
or $158,325 less than the $234,895 actually paid.
DDS
INCENTIVE PAYMENTS WERE NOT ALLOCATED UNIFORMLY AMONG FEDERAL
AND NONFEDERAL ACTIVITIES
Since the Colorado pay-for-performance pilot legislation
was enacted on May 31, 1994, the State of Colorado paid $98,770
in incentive awards to 408 employees for the period July 1, 1994
through June 30, 1995. None of those payments were made for federally
funded activities. The State of Colorado paid $357,805 to 461 employees
during the period July 1, 1995 through June 30, 1996. Of this amount,
$261,605 was Federal ($234,895 to the DDS and $26,710 to the Department
of Higher Education, Student Loan Program).
Federal awards were 4.7 times greater than nonfederal
awards. Furthermore, DDS awards were 5.7 times greater than nonfederal
awards. The awards appeared to be disproportionately allocated
for Federal activities, with particular emphasis on DDS. Therefore,
the DDS incentive payments were not uniformly allocated among Federal
and other governmental activities in accordance with the uniformity
requirement established in OMB Circular A-87, section C.1.c.
CONCLUSIONS
AND RECOMMENDATIONS
DDS did not receive SSA`s approval before paying $234,895
of incentive payments. SSA has clear authority to approve or disapprove
DDS expenditures and has established precedence in rejecting proposals
based on savings, and not obligated personal services funds. Furthermore,
the DDS incentive payments did not comply with OMB Circular A-87.
The cost principles require costs to be:
1. authorized (or not
prohibited) under State laws or regulations, and 2. uniformly
applied to both Federal and other governmental activities. The incentive
payments were funded from surplus funds, or savings, not from
the
DDS personal services appropriation as required by the Colorado
pay-for-performance pilot legislation. Finally, the incentive
payments were not uniformly allocated among Federal and other governmental
activities. RECOMMENDATIONS
6. DDS should refund to SSA $234,895 used for
unallowable incentive payments.
7. DDS should ensure that future incentive payment
proposals comply with applicable State and Federal regulations
and are approved by SSA prior to payment.
AGENCY COMMENTS
The Colorado Attorney General`s office provided
comments to our findings and recommendations. They agreed that
the Disability Determination Services (DDS) paid incentives of
$234,895 to 125 DDS employees in December 1996 but did not agree
with the recommendation to refund those incentives to SSA. The
State disagreed with SSA`s legal basis to approve or disapprove
DDS incentive payments. The State also contends that, although
it was not formally required to notify SSA of the impending payments,
it did so informally several months prior to the June 21, 1996
formal notification.
Regarding the precedent citations in the audit
report of SSA`s disapproval of the Washington and Texas incentive
proposals, Colorado indicated that the States of Kentucky, Florida,
and Utah also used incentive payment plans. The State also believes
that the DDS appropriation of $13,959,997 for State FY 1996 would
have applied to DDS personal services. Finally, the State indicated
that the pilot program, although available to all State employees,
cannot be uniform as some employees may qualify and others may
not.
OIG RESPONSE
SSA has clear authority to approve or disapprove
DDS incentive payments. Section 221(f) of the Social Security Act
(Act) indicates that money paid to a State under section 221(e)
should be used solely for the purpose for which it is paid, i.e.
to make disability determinations, and that money paid but not
so used should be returned to the trust fund. The $234,895 of incentive
payments paid by DDS to its employees were not necessary costs
of making disability determinations, and therefore could not be
funded.
We cited the States of Washington and Texas as
precedents for the necessity of SSA`s approval in the incentive
proposal review process because the circumstances of SSA rejecting
their proposals involved payment from documented savings, similar
to the Colorado DDS proposal. Only one of the other three State
incentive proposals cited in the response, Kentucky, was similar
to the Colorado proposal. The Florida and Utah proposals differed
from Colorado in that proposed incentive payments were not based
on processing time and accuracy goals, but on specific targets
of increased productivity, while maintaining accuracy and processing
time standards. Furthermore, unlike Colorado, neither the Florida
nor Utah proposals authorized the use of savings to justify incentive
payments.
We noted that the Kentucky proposal was similar
to the Colorado proposal in that cost savings could be allocated
to salary incentives. However, Kentucky required in its incentive
legislation that any incentive payments conform to applicable Federal
regulations. Furthermore, Kentucky required, in its recommendation
for State approval, that paying incentives would require documenting
baselines for savings, processing time, and cost per case and relating
those items to one another.
Colorado cited the DDS legislative appropriation
of $13,959,997 for State FY 1996 as the appropriate amount for
DDS personal services. However, the $13,959,997 appropriation included
funding for other costs to operate DDS in addition to personal
services costs. Internal personal services planning documents cite
DDS allocations as $7,776,366 for FY 1997 during which the incentive
payments were made and $7,656,986 for the FY 1996 proposal period.
We recognize that the State is in a better position
to interpret the legislated 1 percent requirement wherein it believes
that the requirement should be applied to the entire DHS agency
instead of just DDS. However, we again invoke the precedent established
by Texas (see pages 5-6) wherein incentives were approved by SSA
only if the costs of the program came from the DDS personal services
appropriation. SSA`s approval of the Texas achievement bonus
program was based on sound accounting principles wherein the incentive
payments were matched against the costs of individuals generating
those incentives. Using generally accepted accounting principles
and matching revenue with expenses during the proposal period of
October 1, 1995 through June 30, 1996, the maximum incentives allowable
to Colorado would have been $76,570 ($7,656,986 times 1 percent).
We also noted that since SSA did not approve the
Colorado incentive payments, there was no assurance that DDS performance
goals and/or cost-cutting measures, which could be linked to potential
incentive payments, were congruent with SSA goals.
Finally, we realize that incentive payments, by
their nature, cannot be uniformly applied to all State employees.
However, the Colorado incentive payments were clearly biased to
Federal awards, and even more biased toward the Colorado DDS (see
page 8). We continue to recommend that the DDS refund to SSA $234,895
used for unallowable incentive payments. We further recommend that
DDS ensure that future incentive payments comply with applicable
State and Federal regulations and be approved by SSA prior to payment.
APPENDICES
APPENDIX B
MAJOR CONTRIBUTORS TO THIS REPORT
Office of the Inspector General
Bill Fernandez Director, Program Audits (Western
Division)
Fred Uehling Deputy Director, Program Audits
Ronald Bussell Auditor
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