SOCIAL SECURITY ADMINISTRATION

INDIRECT COSTS CLAIMED BY
THE NEW MEXICO DISABILITY
DETERMINATION SERVICES

September 2009

A-06-09-19122

AUDIT REPORT

Mission

By conducting independent and objective audits, evaluations and investigations, we inspire public confidence in the integrity and security of SSA's programs and operations and protect them against fraud, waste and abuse. We provide timely, useful and reliable information and advice to Administration officials, Congress and the public.

Authority

The Inspector General Act created independent audit and investigative units, called the Office of Inspector General (OIG). The mission of the OIG, as spelled out in the Act, is to:

Conduct and supervise independent and objective audits and investigations relating to agency programs and operations.
Promote economy, effectiveness, and efficiency within the agency.
Prevent and detect fraud, waste, and abuse in agency programs and operations.
Review and make recommendations regarding existing and proposed legislation and regulations relating to agency programs and operations.
Keep the agency head and the Congress fully and currently informed of problems in agency programs and operations.

To ensure objectivity, the IG Act empowers the IG with:

Independence to determine what reviews to perform.
Access to all information necessary for the reviews.
Authority to publish findings and recommendations based on the reviews.

Vision

We strive for continual improvement in SSA's programs, operations and management by proactively seeking new ways to prevent and deter fraud, waste and abuse. We commit to integrity and excellence by supporting an environment that provides a valuable public service while encouraging employee development and retention and fostering diversity and innovation.

MEMORANDUM

Date: September 30, 2009

To: Ramona Schuenemeyer
Regional Commissioner Dallas

From: Inspector General

Subject: Indirect Costs Claimed by the New Mexico Disability Determination Services (A-06-09-19122)

OBJECTIVE

Our objective was to determine whether the indirect costs claimed by the New Mexico Disability Determination Services (NM-DDS) for Federal Fiscal Years (FY) 2007 and 2008 were allowable and properly allocated.

BACKGROUND

The Disability Insurance (DI) program, established under Title II of the Social Security Act (Act), provides benefits to wage earners and their families in the event the wage earner becomes disabled. The Supplemental Security Income (SSI) program, established under Title XVI of the Act, provides benefits to financially needy individuals who are aged, blind, and/or disabled.

The Social Security Administration (SSA) is responsible for implementing policies for the development of claims under the DI and SSI programs. Disability determinations under both DI and SSI are performed by disability determination services (DDS) in each State or other responsible jurisdiction, in accordance with Federal regulations. In carrying out its obligation, each DDS is responsible for determining claimants' disabilities and ensuring adequate evidence is available to support its determinations. SSA reimburses the DDS for 100 percent of allowable expenditures up to its approved funding authorization. The expenditures include both direct and indirect costs. At the end of each quarter of the FY, each DDS submits a Form SSA-4513, State Agency Report of Obligations for SSA Disability Programs, to account for program disbursements and unliquidated obligations.

The New Mexico Division of Vocational Rehabilitation (NM-DVR) serves as NM-DDS' parent agency. NM-DVR provides NM-DDS with various administrative services, such as accounting and procurement. Costs associated with these services are called indirect costs. Federally assisted programs bear their fair share of indirect costs except where restricted or prohibited by law. Federal cost standards state that expenditures may be allocated to a particular cost objective if the goods or services are charged in accordance with the relative benefits received. Each year, NM-DVR prepares and submits an indirect cost rate proposal to the U.S. Department of Education, the cognizant Federal agency, for approval. The indirect cost rate proposal is prepared based on the actual costs incurred 2 FYs prior. For example, the FY 2007 proposal was prepared based on actual costs from FY 2005. At the request of the cognizant agency, NM-DVR uses the "simplified or single rate method" in formulating the indirect cost rate. Federal cost standards allow use of this method whenever a governmental grantee has only one major function encompassing a number of individual projects or activities that benefit from its indirect costs to approximately the same degree.

NM-DVR allocates indirect costs aggregated in indirect pools to three of its programs: Rehabilitation Services, Special Programs (Program Development and Support), and DDS. The indirect costs consist of services provided by the Assistant Secretary for Vocational Rehabilitation, the Administrative Services division, and the Information Services division. The indirect cost rate is then derived by dividing the indirect cost pool total by the total direct base (direct costs of the Rehabilitation Services, Program Development and Support, and DDS). See Appendix B for our audit scope and methodology and Appendix C for information on NM-DVR's organizational structure.

FY 2005 FY 2006
Actual Direct Cost Base
Rehabilitation Services $19,974,558 $19,888,654
Program Development and Support 3,353,688 3,510,280
Disability Determination Services 9,624,760 9,387,056
Total Direct Base $32,953,006 $32,785,990
Indirect Cost Pools
Executive Services $619,145 $650,259
Executive Support Services 168,037 21,337
Administrative Services Director 168,406 196,781
Financial Management 789,906 916,315
Personnel Services 216,795 270,326
General Expenditures and Procurement 616,613 595,942
Human Resources 251,653 241,562
Information Services 1,306,283 976,879
Grants and Contracts 199,887 453
Direct Programs Terminal Leave 25,476 31,014
Statewide Cost Allocation 366,454 382,348
Total Indirect Pools $4,728,655 $4,283,216
Indirect Rate = Total Indirect Pools/Total Direct Base 14.3% 13.1%

SSA reimbursed NM-DVR for FY 2007 indirect costs by multiplying actual direct costs by 14.3 percent and FY 2008 indirect costs by multiplying actual direct costs by 13.1 percent. As of December 31, 2008, SSA indirect cost reimbursements for FYs 2007 and 2008 totaled $1.25 million and $1.09 million, respectively.

RESULTS OF REVIEW

Indirect costs claimed for reimbursement under SSA's disability programs were generally allowable for FYs 2007 and 2008 and paid in accordance with the cost rates approved by the cognizant agency. In most instances, NM-DVR's use of the single rate method to allocate indirect costs was appropriate because it appeared NM-DDS benefited from the related services to the same degree as Rehabilitation Services and Special Programs.

However, based on discussions with NM-DVR and NM-DDS personnel and review of available information, use of the single rate method resulted in excessive Information Services, General Expenditures and Procurement, and Human Resources cost allocations to NM-DDS relative to the benefits actually received.

Indirect Cost Pool Total FY 07 & 08
Indirect Costs
Attributable to the Cost Pool Percentage of SSA's Total Indirect Cost Reimbursements
Information Services $593,922
25.4
General Expenditures and Procurement 314,661 13.4
Human Resources 127,999
5.5
Total $1,036,582

NM-DVR implemented the single rate method at the direction of the cognizant agency. However, basic application of this allocation method was not appropriate in these three instances because NM-DDS did not benefit from these cost pools to the same degree as the other NM-DVR divisions. For FYs 2007 and 2008, SSA reimbursed NM-DVR just over $1 million for indirect costs related to these three cost pools. NM-DVR personnel stated that a lack of sufficient staffing prevented them from considering an alternative method of allocating these costs. Adjusting the allocation methodology to reflect that NM-DDS did not benefit from these services to the same degree as the other NM-DVR programs would have resulted in a reduction to the approximately $1 million in indirect cost reimbursements paid by SSA. As long as NM-DVR continues to use the single rate method to allocate Information Services, General Expenditures and Procurement, and Human Resources costs and does not adjust the cost pool amounts downward to reflect the actual level of support provided, excessive indirect costs will continue to be allocated to NM-DDS.

INFORMATION SERVICES COSTS

The Information Services cost pool supports NM-DVR by developing and maintaining information technology systems; providing email service to its programs; storing information; backing up financial, payroll, and training databases; and providing support for interfaces between NM-DVR and the Department of Finance and Administration financial system. NM-DVR allocated Information Services costs to three of its programs based on a percentage of their total direct costs, resulting in NM-DDS indirect cost allocations totaling $593,922 for FYs 2007 and 2008. Federal cost standards state this method of allocation is appropriate only if activities benefit from the indirect expenditures to approximately the same degree. However, NM-DDS did not benefit from Information Services expenditures to the same degree as the other two NM-DVR programs. Illustrations of how support provided to the NM-DDS differed from the other NM-DVR programs follow.

SSA purchases the computer equipment and software NM-DDS uses. This equipment interfaces with SSA's systems. Because of the sensitivity of information accessible through SSA's systems, the software installed on NM-DDS computers contains an electronic firewall that restricts access to or from NM-DVR computer systems. As a result, NM-DDS has limited access to NM-DVR financial systems and training modules.

NM-DDS employs two full-time information technology support staff whose salaries are included in direct costs already reimbursed by SSA. Their responsibilities include keeping NM-DDS computer systems running and updated, maintaining the network and workstations, and maintaining the mainframe and printers.

SSA provides NM-DDS computer systems with both email access and Internet service. The Information Services indirect cost pool includes charges for these same services, which are neither available to nor accessible by NM-DDS because of the SSA firewall.

Based on the level of support Information Services actually provided, use of the single rate method resulted in excessive indirect cost allocations to the NM-DDS.

GENERAL EXPENDITURES AND PROCUREMENT COSTS

The General Expenditures and Procurement cost pool captures costs incurred by
NM-DVR to provide guidance and consultation concerning building leases, develop specifications for new buildings or new office locations, coordinate and manage vehicle leases with the State's General Services Department, and coordinate leases of telecommunications and photocopying equipment. Additionally, NM-DVR provides guidance and consultation on procurement of goods and services. NM-DVR allocated General Expenditures and Procurement costs to its three programs based on a percentage of their total direct costs, resulting in NM-DDS indirect cost allocations totaling $314,661 for FYs 2007 and 2008. However, NM-DDS did not benefit from General Expenditures and Procurement costs to the same degree as the other two
NM-DVR programs.

For example, NM-DDS had not leased a vehicle from the State in 3 years. Further,
NM-DDS employees, whose salaries and benefits are fully funded by SSA, initiate and administer the procurement of goods and services for a majority of the items they require. Once goods have been procured, NM-DDS provides information to the parent agency for administrative review and processing through the State system. Based on the level of support General Expenditures and Procurement actually provided, use of the single rate method resulted in excessive allocations to NM-DDS.

HUMAN RESOURCE COSTS

The Human Resource cost pool consists of NM-DVR expenditures for training new employees, conducting the "Rehab Academy" (for developing NM-DVR counselors and technicians) and overseeing the education assistance program and budget. The education assistance program pays for State employees to complete bachelor's and, in some instances, master's degrees. Once employees get their degrees, they become eligible for counselor positions. NM-DVR allocated Human Resource costs to its three programs based on a percentage of their total direct costs, resulting in NM-DDS indirect cost allocations totaling $127,999 for FYs 2007 and 2008. However, NM-DDS did not benefit from Human Resource expenditures to the same degree as the other two
NM-DVR programs.

Discussions with NM-DDS staff indicated that most training provided to NM-DDS personnel is either obtained on-line, via the SSA-provided Internet, or purchased directly by NM-DDS. SSA fully reimburses these costs. According to NM-DDS staff, most of the training available to NM-DVR employees and staff through the NM-DVR Intranet is not relevant to DDS operations, and most training modules are not available for NM-DDS access because of SSA firewall restrictions. The Staff Coordinator stated that the training provided to NM-DDS employees consists of a new employee orientation, safety training, violence prevention training, and employment discrimination training. There are no other services provided to NM-DDS, and there is minimal communication with the Staff Coordinator. Finally, SSA receives no benefit from the State's education assistance program. These expenditures provide college degrees exclusively for Rehabilitative Services counselors and should not be allocated to NM-DDS. Based on the level of support actually provided, use of the single rate method to allocate Human Resources costs resulted in excessive allocations to NM-DDS.

CONCLUSION AND RECOMMENDATION

Indirect costs claimed for reimbursement under SSA's disability programs were generally allowable and paid in accordance with the cost rates approved by the cognizant agency. However, NM-DVR allocated costs to NM-DDS from three indirect cost pools in amounts that were not equitable considering the relative benefit received. NM-DVR used the single rate method to allocate these costs and did not make any adjustments to reflect that many of the services provided by Information Services, General Expenditures and Procurement, and Human Resources were either already provided by SSA or were not used by NM-DDS. NM-DDS will continue to receive excess indirect cost allocations as long as NM-DVR continues to allocate these indirect cost pools using an unadjusted single rate method.

We recommend that SSA ensure NM-DDS bears no more than its fair share of indirect costs by working with NM-DVR and the cognizant agency to develop and implement a methodology that allows for downward adjustments to Information Services, General Expenditures and Procurement, and Human Resources indirect cost pool amounts to reflect the actual degree of support provided to NM-DDS.

SSA COMMENTS

SSA agreed with our recommendation and will work with NM-DDS and NM-DVR to develop more reasonable cost sharing methods. See Appendix D for the full text of the Agency's comments.

NM-DVR COMMENTS

NM-DVR agreed that NM-DDS should bear no more than its fair share of indirect costs and stands ready to work with both SSA and the cognizant agency. NM-DVR provided several observations indicating disagreement with information presented in the report. See Appendix E for the full text of NM-DVR's comments.

OIG RESPONSE

We appreciate the comments from SSA and NM-DVR. We are encouraged that both parties indicate willingness to work together to ensure NM-DDS bears no more than its fair share of indirect costs. NM-DVR stated its belief that information in the report was inaccurate or unsubstantiated. NM-DVR stated it was provided no interview protocol and no opportunity to clarify statements made. During the audit, we interviewed several NM-DVR and NM-DDS officials including the NM-DVR Director, Chief Information Officer, Human Resources Manager, Staff Development Coordinator, Administrative Operations Manager, and the NM-DDS Administrator. Information obtained during interviews with management and staff was to help us understand the cost allocation documentation provided. The interviews were not a significant factor in formulating our conclusion. Other factors included available financial data and indirect cost pool documentation obtained during the audit.

The NM-DVR stated that costs for Rehabilitation Services Unit staff to obtain degrees were removed from the indirect cost pool. We learned about the degree program while discussing the Human Resources indirect cost pool with the NM-DVR Staff Development Coordinator. Unlike the other NM-DVR components, SSA pays the costs of most training provided to NM-DDS employees and receives no benefit from either the Rehab Academy or the education assistance program, both managed by Human Resources (now referred to as the Staff Development Unit).

NM-DVR stated the report did not completely portray the Information Services support it provides to NM-DDS. NM-DVR also stated the Information Services provides/maintains several email groups for NM-DDS as well as an interface with the State Financial System. NM-DVR further stated it is providing the NM-DDS a separate network connection in its Albuquerque facility for use by visiting NM-DVR employees and maintains an employee Website where NM-DDS employees can access on-line training. We appreciate the technological support Information Services provides the NM-DDS. However, we believe the costs associated with providing these items is a relatively small portion of the more than $2.2 million charged to the Information Services cost pool. Further, the costs associated with the current installation of a network connection in the NM-DDS have no bearing on the FY 2005 and FY 2006 actual costs used in determining the FY 2007 and 2008 indirect cost rates.

Patrick P. O'Carroll, Jr.

Appendices
APPENDIX A - Acronyms
APPENDIX B - Scope and Methodology
APPENDIX C - Organization Chart
APPENDIX D - SSA Comments
APPENDIX E - New Mexico Division of Vocational Rehabilitation Comments
APPENDIX F - OIG Contacts and Staff Acknowledgments

Appendix A
Acronyms
Act Social Security Act
C.F.R. Code of Federal Regulations
DDS Disability Determination Services
DI Disability Insurance
FY Fiscal Year
NM-DDS New Mexico Disability Determination Services
NM-DVR New Mexico Division of Vocational Rehabilitation
OMB Office of Management and Budget
SSA Social Security Administration
SSI Supplemental Security Income

Appendix B
Scope and Methodology

We reviewed the indirect costs reported by the New Mexico Division of Vocational Rehabilitation (NM-DVR) and its component, the New Mexico Disability Determination Services (NM-DDS) on its State Agency Report of Obligations for SSA Disability Programs (Form SSA-4513) for Federal Fiscal Years (FY) 2007 and 2008. We reviewed NM-DVR and NM-DDS' compliance with applicable laws and regulations over the allowability of indirect costs.

To accomplish our objectives, we:

Reviewed Office of Management and Budget Circular A-87, Cost Principles for State, Local, and Indian Tribal Governments, the Code of Federal Regulations, United States Code, the Social Security Administration's (SSA) Program Operations Manual System, and NM-DDS Cost Allocation Plan.

Interviewed employees from SSA, NM-DVR, and NM-DDS.

Examined the indirect costs incurred and claimed by NM-DVR.

Reviewed the supporting documentation used to formulate the allocation methodology used to distribute costs to the NM-DVR.

Reviewed workpapers and source documentation used in preparing the indirect cost proposal for FYs 2007 and 2008.

Compared the description of services provided by NM-DVR to the services received by NM-DDS.

Reviewed Forms SSA-4513 for FYs 2007 and 2008

We tested the data obtained for our audit and determined they were sufficiently reliable to meet our objective. We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. We performed our audit from January through June 2009 at the NM-DVR in Santa Fe, New Mexico; NM-DDS in Albuquerque, New Mexico; and SSA regional office in Dallas, Texas.

Appendix C
Organization Chart

New Mexico Division of Vocational Rehabilitation
Organization Chart

There are five programs under the Assistant Secretary - Division of Vocational Rehabilitation (NM-DVR). In calculating the indirect cost rate, NM-DVR divides the indirect costs of the Assistant Secretary - Division of Vocational Rehabilitation, Deputy Director - Administrative Services, and Deputy Director - Information Services & CIO by the total direct costs of the Deputy Director - Rehabilitation Services, Deputy Director - Special Programs (Program Development and Support), and Deputy Director - Disability Determination Services. This becomes the indirect cost rate that is applied to the New Mexico Disability Determination Services.

The NM-DVR uses the "simplified, or single rate method" in formulating the indirect cost rate. This method is allowable whenever a governmental grantee has only one major function encompassing a number of individual projects or activities that benefit from its indirect costs to approximately the same degree.

Appendix D
SSA Comments

Sent: Wednesday, September 09, 2009 3:31 PM
To: ^Audit Correspondence
Cc: ^DCO OPSOS AUDIT CONTROLS; ||DA ARC MOS; Johnson, Pam RO Dallas; Carter, Val
Subject: Dallas Reply: Signed Formal Draft Report (A-06-09-19122)

Pat,

We appreciate the opportunity to comment on the Signed Formal Draft Report (A-06-09-19122), Indirect Costs Claimed by the New Mexico Disability Determination Services. We would like to thank the OIG Audit staff in the Dallas Region for the excellent manner in which they organized and performed this audit. We appreciate their efforts to keep all parties informed of their progress during the audit.

Our response to the recommendation contained in the narrative report follows:

OIG Recommendation: We recommend that SSA ensure the New Mexico Disability Determination Services (NM-DDS) bears no more than its fair share of indirect costs by working with the New Mexico Division of Vocational Rehabilitation (NM-DVR) and the cognizant agency to develop and implement a methodology that allows for downward adjustments to Information Services, General Expenditures and Procurement, and Human Resources indirect cost pool amounts to reflect the actual degree of support provided to NM-DDS.

Response: We agree that these cost pools require further analysis and justification. We will work with the New Mexico DDS and DVR to develop more reasonable cost sharing methods.

If members of your staff have any questions, please have them call Irving Wilkerson or Roberta Irwin at 214-767-4281 in Management and Operations Support, Center for Disability.

Ramona

Appendix E
New Mexico Division of Vocational Rehabilitation Comments

Appendix F
OIG Contacts and Staff Acknowledgments
OIG Contacts
Ron Gunia, Director, Dallas Audit Division
Jason Arrington, Audit Manager
Acknowledgments
In addition to those named above:
Warren Wasson, Senior Auditor

For additional copies of this report, please visit our web site at www.ssa.gov/oig or contact the Office of the Inspector General's Public Affairs Staff Assistant at
(410) 965-4518. Refer to Common Identification Number A-06-09-19122.

Overview of the Office of the Inspector General
The Office of the Inspector General (OIG) is comprised of an Office of Audit (OA), Office of Investigations (OI), Office of the Counsel to the Inspector General (OCIG), Office of External Relations (OER), and Office of Technology and Resource Management (OTRM). To ensure compliance with policies and procedures, internal controls, and professional standards, the OIG also has a comprehensive Professional Responsibility and Quality Assurance program.

Office of Audit
OA conducts financial and performance audits of the Social Security Administration's (SSA) programs and operations and makes recommendations to ensure program objectives are achieved effectively and efficiently. Financial audits assess whether SSA's financial statements fairly present SSA's financial position, results of operations, and cash flow. Performance audits review the economy, efficiency, and effectiveness of SSA's programs and operations. OA also conducts short-term management reviews and program evaluations on issues of concern to SSA, Congress, and the general public.

Office of Investigations
OI conducts investigations related to fraud, waste, abuse, and mismanagement in SSA programs and operations. This includes wrongdoing by applicants, beneficiaries, contractors, third parties, or SSA employees performing their official duties. This office serves as liaison to the Department of Justice on all matters relating to the investigation of SSA programs and personnel. OI also conducts joint investigations with other Federal, State, and local law enforcement agencies.

Office of the Counsel to the Inspector General
OCIG provides independent legal advice and counsel to the IG on various matters, including statutes, regulations, legislation, and policy directives. OCIG also advises the IG on investigative procedures and techniques, as well as on legal implications and conclusions to be drawn from audit and investigative material. Also, OCIG administers the Civil Monetary Penalty program.

Office of External Relations
OER manages OIG's external and public affairs programs, and serves as the principal advisor on news releases and in providing information to the various news reporting services. OER develops OIG's media and public information policies, directs OIG's external and public affairs programs, and serves as the primary contact for those seeking information about OIG. OER prepares OIG publications, speeches, and presentations to internal and external organizations, and responds to Congressional correspondence.

Office of Technology and Resource Management
OTRM supports OIG by providing information management and systems security. OTRM also coordinates OIG's budget, procurement, telecommunications, facilities, and human resources. In addition, OTRM is the focal point for OIG's strategic planning function, and the development and monitoring of performance measures. In addition, OTRM receives and assigns for action allegations of criminal and administrative violations of Social Security laws, identifies fugitives receiving benefit payments from SSA, and provides technological assistance to investigations.