Audit of Administrative Costs Claimed by the New Jersey
Department of Labor for its Division of Disability Determinations
- A-02-95-00002 - 6/20/97
This final report presents the results of our audit of administrative
costs claimed by the New Jersey Department of Labor (NJDOL),
for its Division of Disability Determinations (NJDDD). The NJDDD
performs disability determinations under the Social Security Administration`s
(SSA) Disability Insurance (DI) and Supplemental Security Income
(SSI) programs. The objectives of our audit were to:
determine whether costs claimed on the State Agency Report of
Obligations for SSA Disability Programs (Form SSA-4513) for the
period October 1, 1993 through September 30, 1994, were
allowable and properly allocated;
o determine if the aggregate of the Federal funds drawn down were
in excess of total actual cash disbursements for the Fiscal Year
(FY) 1994 disability determinations; and
o evaluate internal controls over the accounting and reporting
of the administrative costs claimed, as well as of the drawdown
of Federal funds.
We reviewed the administrative costs of $34,029,741 for SSA disability
determinations claimed as of December 31, 1994 for the year ended
September 30, 1994. Our procedures were designed to determine whether
costs were allowable and properly allocated and Federal funds were
accounted for properly. Also, we reviewed internal controls over
the accounting, recording, and reporting of transactions. The obligations
reported to SSA for this period should have been reduced by a net
amount of $85,786 to adjust for both overstated unliquidated obligations
and understated disbursements (see Appendix A). Also, based on its
accounting records, as of December 31, 1994, $390,137 of the Federal
funds drawn by NJDOL were in excess of total actual cash disbursements
and are due back to SSA with applicable interest. Controls over accounting
records, financial reporting, and Federal funds drawdowns need to
be strengthened to minimize the likelihood of these reporting, accounting,
and drawdown deficiencies occurring in the future.
NJDOL submitted to SSA a final Form SSA-4513 on April 26, 1997 for
the FY ended September 30, 1994. NJDOL also provided us with comments
on our report which generally agreed with our findings and recommendations.
However, NJDOL continues to disagree with our audit adjustment on
the drawdown of excess funds. Based on adjustments to its costs subsequent
to our fieldwork, we have adjusted the drawdown of excess funds to
$204,336. Please refer to the section NJDOL COMMENTS AND THE OFFICE
OF THE INSPECTOR GENERAL CONCLUSIONS for more details.
The DI program was established in 1954 under title II of the Social
Security Act (the Act). The program is designed to provide benefits
to wage earners and their families in the event the wage earner becomes
disabled. In 1974, Congress enacted the SSI program (Public Law 92-603).
Title XVI of the Act provides a nationally uniform program of income
to financially needy individuals who are aged, blind or disabled.
SSA is primarily responsible for implementing the general policies
governing the development of disability claims under the DI and SSI
programs. Disability determinations under both DI and SSI are performed
by an agency in each State in accordance with Federal regulations.
In carrying out its obligations, each State agency is responsible
for determining the claimants` disabilities and ensuring that
adequate evidence is available to support its determinations. To
assist in making proper disability determinations, each State agency
is authorized to purchase medical examinations, x-rays, and laboratory
tests on a consultative basis to supplement evidence obtained from
claimants` physicians or other treating sources.
SSA reimburses the State agency for 100 percent of allowable expenditures.
Each year, the State agency submits a budget request to SSA for review
and approval. Once approved, NJDOL is allowed to withdraw Federal
funds through the Department of Health and Human Services’ (HHS),
Payment Management System to meet immediate program expenses. The
HHS, Division of Payment Management (DPM) is responsible for operating
this centralized payment system. Cash drawn from the Treasury to
pay for program expenditures are to be drawn in accordance with 31
Code of Federal Regulations, Part 205 and, since July 1, 1994, a
Treasury/State agreement under the Cash Management Improvement Act.
At the end of each quarter of the Federal FY, the State agency submits
a "State Agency Report of Obligations for SSA Disability Programs" (Form SSA-4513)
(Federal financial report) to account for program disbursements and
unliquidated obligations. Reimbursement for costs under the program
is subject to the requirements set forth in the Office of Management
and Budget`s Circular A-87, "Cost Principles for State
and Local Governments." Allocation of indirect costs is done
in accordance with NJDOL`s cost allocation plan which is approved
by the Federal Department of Labor.
The NJDDD is an agency within the NJDOL and operates from two locations,
a headquarters and main office located in Newark and a branch office
located in New Brunswick. The agency employs approximately 410
personnel and has a budget of $34 million. A budget of $34,477,680 was
authorized by SSA for disability determinations for FY 1994 and the
only Federal program for which the NJDDD conducts operations is the
disability determination program. The NJDDD`s accounting functions
are performed primarily by the NJDOL Comptroller`s Office in
Trenton. The Office of Leasing Operations is New Jersey`s
primary agent for the procurement and control of leased space.
Our audit was conducted in accordance with generally accepted government
auditing standards. The objectives of the audit were to:
determine whether costs claimed on the State Agency Report of
Obligations for SSA Disability Programs (Form SSA-4513) for the
period October 1, 1993 through September 30, 1994, were allowable
and properly allocated;
determine if the aggregate of the Federal funds drawn down were
in excess of total actual cash disbursements for the FY 1994 disability
determinations; and
evaluate internal controls over the accounting and reporting
of the administrative costs claimed, as well as of the drawdown
of Federal funds.
To accomplish the audit objectives, we:
reviewed Federal laws, regulations, and instructions pertaining
to administrative costs incurred by NJDDD and to the drawdown of
Federal funds;
reviewed NJDDD`s policies and procedures, and internal controls
regarding the administration of the disability determination activities;
performed an examination of the administrative expenses (e.g.,
personnel costs, employee benefits, employee travel costs, office
space and maintenance, indirect costs, etc.) incurred by NJDDD
and claimed by NJDOL for the period October 1, 1993 through
September 30, 1994;
reviewed purchased medical service costs incurred by NJDDD;
reviewed the reconciling of the official accounting records
to the administrative costs reported by NJDOL to SSA on the SSA-4513
report for the period October 1, 1993 through September 30,
1994; and
compared the amount of Federal funds drawn for support of program
operations to the allowable expenditures.
Our audit included examining on a test basis documentation supporting
the costs claimed by the NJDOL for the period October 1, 1993 through
September 30, 1994, as reported to SSA as of December 31, 1994. Except
as noted under "Findings and Recommendations," the results
of our tests indicated that, with respect to the items tested, the
NJDOL complied in all material respects with the Federal cost principles
and regulations. For those items not tested, nothing came to our
attention to indicate that the untested items were not in compliance
with applicable laws and regulations.
The field work was performed from February 1995 through March 1995
at the NJDOL headquarters in Trenton, New Jersey, the NJDDD
headquarters in Newark and the branch office in New Brunswick.
Additional field work was performed during August through September
1996 to address cash management issues. We held discussions with
officials from the New Jersey State Auditor`s Office, KPMG
Peat Marwick (Single Audit CPA firm for New Jersey), and the
SSA’s New York Regional Office (see Appendix C for organization
of SSA). An exit conference to discuss the draft report was held
February 25, 1997.
The reconciliation of the accounting records to the administrative
costs claimed by the NJDOL showed that disbursements were understated
and unliquidated obligations were overstated. During FY 1994, the
NJDOL had not claimed net disbursements of $72,878. Also, the NJDOL
claimed $158,664 of unliquidated obligations that are not allowable.
As a result, total costs reported to SSA by the NJDOL for the period
should be reduced by a net amount of $85,786 to adjust for both understated
disbursements and overstated obligations (see Appendix A). Based
on its records, NJDOL had drawn Federal funds of $390,137 in excess
of its reported disbursements for FY 1994.
ACCOUNTING FOR DISBURSEMENTS
NJDOL did not claim net disbursements totaling $72,878 because errors
were made in accounting for and reporting disbursements. The following
disbursement amounts should be adjusted:
A-87 Indirect Costs - $73,620: NJDOL claimed $258,248
for indirect costs on the Form SSA-4513 as of December 31,
1994 although its accounting records contained disbursements of
$340,275 for such costs. However, our review found that only $331,868
of the recorded indirect costs were valid. Therefore, the disbursed
indirect costs claimed should be increased by $73,620 ($331,868
- $258,248).
EDP Maintenance - $9,208: EDP maintenance disbursements
should be increased by $9,208 for one invoice in the NJDOL accounting
records that was not claimed on the Form SSA-4513.
Professional Fees - $5,774: Claimed professional fee
disbursements should be reduced by a total of $5,774. This consists
of one invoice for $5,070 for part-time clerical services that
was recorded twice in the accounting records and $704 consisting
of two amounts, $318 and $386, that were not supported by invoices.
Transcription Services - $4,162: A disbursement claimed
for transcription services should be decreased by $4,162 for which
the supporting invoice could not be located.
Supplies -$14: Claimed disbursements for supplies should
be reduced by a net amount of $14. This consists of claimed unsupported
disbursements of $1,049, consisting of three payments which were
offset by three valid disbursements totaling $1,035 for supplies
that were not claimed by NJDOL.
ACCOUNTING FOR UNLIQUIDATED OBLIGATIONS
Unliquidated obligations are cost commitments for orders placed,
contracts awarded, and services received that have not been paid.
The unliquidated obligations claimed for FY 1994 should be reduced
by $158,664. This reduction occurred in the following expenses categories.
Transcription Services - $144,800: Transcription Services
totaling $289,600 should be reduced by $144,800 because obligations
were recorded twice.
Professional Fees - $9,362: Professional fees of $9,362
should be decreased because services were canceled.
EDP Maintenance - $4,502: A purchase order originally
obligated for $5,000 resulted in a purchase for $498. Therefore,
the unliquidated obligations balance should be reduced by $4,502.
DRAWDOWNS OF EXCESS FEDERAL FUNDS
Effective July 1, 1994, the State of New Jersey and the U.S. Department
of the Treasury entered into an agreement under the Cash Management
Improvement Act (CMIA). The agreement covers disability determinations
and specifies the funding techniques to be applied. For nonmedical
costs, Federal funds are to be drawn down biweekly. The amount drawn
should be the actual amount of administrative expenses for the most
recent prior quarter for which data is available divided by the number
of pay periods in the current quarter. At the end of the current
quarter, if the total draws do not equal the total actual disbursements
for the current quarter, an adjustment for the difference is required
to be made to the next biweekly request for Federal funds. For medical
costs, Federal funds are scheduled by NJDOL to be drawn weekly in
the amount of the total medical costs paid during the week. The Federal/State
agreement provides that New Jersey will receive Federal funds for
disability determinations via the automated clearing house (ACH).
The ACH is an electronic fund transfer "next business day" direct
deposit method. Recipients using ACH are expected to drawdown only
the Federal funds needed for actual immediate disbursement since
the funds are normally available the next business day after making
a request.
We reviewed the NJDOL drawdowns for the period October 1, 1993 through
June 30, 1994 (prior to the inception of the CMIA agreement). The
NJDOL was in conformity with Federal regulations as it was not holding
Federal funds in excess of its current disbursement needs. In fact,
as of June 30, 1994, the Federal funds it had drawn were $734,950
less than its paid disability determinations costs, as follows:
For the Period October 1, 1993 Through
June 30, 1994
Disbursements - Per Form SSA-4513
$ 21,917,140
Less: Federal funds drawn - Per NJDOL records
21,182,190
Balance
$ 734,950
Beginning July 1, 1994, NJDOL should have drawn down Federal funds
using the funding techniques contained in the CMIA agreement described
above. However, NJDOL did not implement Federal fund drawdowns under
the CMIA agreement until the quarter beginning April 1, 1995. Rather,
it continued with the previous funding technique under which the
amount of the drawdowns of Federal funds was to be as close as feasible
to New Jersey`s actual disbursements. When NJDOL finally began
to drawdown funds under the CMIA agreement, it did not utilize the
authorized funding technique for its administrative costs. Instead
of initially basing its drawdowns on prior quarter actual amounts,
it utilized an estimate of the administrative expenses for the current
quarter. The latter technique is authorized under the CMIA agreement
for some other programs but not DDS’. NJDOL believes this technique
had not been authorized for disability determinations due to an error
in the preparation of the CMIA agreement. Our review of NJDOL`s
records supporting its drawdowns from July 1, 1994 to December 31,
1994, for FY 1994 disability determinations, disclosed that NJDOL
had drawn excess Federal funds of $390,137 as follows
Federal Fund Balance (under drawn as of 6/30/94)
($ 734,950)
Add: Federal Funds Drawn Down (7/1/94 - 12/31/94)
12,552,587
Total Federal Funds Available
$11,817,637
Less: Disbursements (7/1/94 - 12/31/94)
11,354,622
Balance
$ 463,015
Adjustment for Unreported Net Disbursements-Per
Audit
72,878
Excess Drawdowns of Federal Funds (as of 12/31/94)
$ 390,137
We discussed the drawdown of excess Federal funds with NJDOL staff
and were informed that a Federal fund drawdown on October 21, 1994
for $1,195,639 had been erroneously recorded in the agency`s
accounting records. Of this amount, according to the officials, $759,420
had been recorded as a FY 1994 Federal fund drawdown but should have
been recorded as a drawdown for FY 1995. We were unable to verify
the validity of this assertion as we were informed the supporting
documentation could not be located. Moreover, DPM advised us that
for the period of our audit its records did not identify the year
or years to which drawdowns pertained.
INTERNAL CONTROLS
The accounting and reporting of administrative costs, as well as
the drawdown of Federal funds are performed by one NJDOL employee.
The responsibilities of the function require the employee to receive,
record, and report the receipt of billings and expenditures. Specifically,
the employee is responsible for:
monitoring all expenditures incurred for operating
the DDS program,
drawing down Federal funds,
accounting for drawdowns,
preparing quarterly expenditure reports (Form SSA-4513), and
preparing quarterly cash reports.
The performance of these functions by one employee results in weak
internal controls. The errors identified by our review were not detected
because of a lack of checks and balances. Due to the lack of separation
of duties and compensating controls there is a high risk for errors
and irregularities to occur.
1. Increase the reported disbursement amounts on the Form SSA-4513
for FY 1994 by a net total of $72,878 to adjust for the disbursements
not claimed or not supported.
2. Decrease the total unliquidated obligations on the Form SSA-4513
by a total of $158,664 to adjust for the unliquidated obligations
which should be canceled or were duplicated.
3. Refund $390,137, the amount of the excess drawdown of Federal
funds and any applicable interest.
4. Strengthen internal controls over its accounting records through
the segregation of duties or compensating controls over the accounting,
recording, and reporting of transactions.
NJDOL COMMENTS AND THE OFFICE OF
THE INSPECTOR GENERAL CONCLUSIONS
On April 10, 1997, the Commissioner, Department of Labor, State
of New Jersey, provided comments in response to our draft report.
The full text of the NJDOL comments are in Appendix B of this
report. We appreciate the cooperation and prompt action by the State
of New Jersey to resolve the issues identified in our draft
report. The NJDOL generally agreed with our recommendations. Subsequent
to our audit, NJDOL submitted a final Form SSA-4513 to SSA and incorporated
audit adjustments applicable to recommendations 1 and 2. NJDOL does
not agree with recommendation 3 on drawdowns of excess funds and
did not comment on recommendation 4 to strengthen internal controls
over its accounting records. We continue to believe that SSA should
require NJDOL to strengthen its internal controls. NJDOL comments
and our conclusions to recommendations 1, 2, and 3 are summarized
below:
Recommendation 1 - Accounting for Disbursements
The NJDOL final Form SSA-4513 reported indirect costs of $331,868
which agrees with our draft report findings. NJDOL considered the
other four disbursement findings, with a net over reporting of $742,
too small to pursue. We concur with its position on these four disbursements.
Recommendation 2 - Accounting for Unliquidated Obligations
The NJDOL final Form SSA-4513 shows that all unliquidated obligations
were canceled. Transcription services of $144,799.56 were canceled
in the exact amount identified in our audit and outstanding obligations
for EDP maintenance and temporary services were canceled in amounts
less than we recommended.
The NJDOL also reported in its final Form SSA-4513 total obligations
of $33,704,541. This amount is $ 239,414 lower than the $33,943,955
allowed in our draft audit report. Since NJDOL is reporting obligations
lower than amounts allowed in our audit report and these amounts
according to NJDOL were subject to the States’ single audit
review, we recommend that no further action be taken on this recommendation.
Recommendation 3 - Drawdown of Excess Funds
The NJDOL does not agree with the audit position concerning cash
management. The NJDOL contends that the cash position of a major
program changes daily as funds are drawn and program disbursements
occur. The audit attempts to identify one single point in time and
recover the excess drawdown of Federal funds on that day. Further,
the NJDOL contends that never under CMIA are Federal funds returned.
We do not agree because the disability service grant is funded on
a FY basis. As such, specific distinctions are made between FYs.
Each FY is subject to a budget request and approval. Moreover, at
the end of each quarter, submission of an expenditure report (Form
SSA-4513) accounting for program disbursements and unliquidated obligations
by program FY is required. The NJDOL is implying that the distinctions
between FYs is not important because the program is ongoing in nature.
As described in this report, CMIA is only a funding technique which
provides guidance for calculating the amount of drawdowns of specific
expenses and its frequency. Accordingly, a refund is due for an excess
drawdown of Federal funds.
As a result of changes made by the NJDOL subsequent to our fieldwork
as evidenced in the response to our draft report, including the submission
of a final Form SSA-4513, we recalculated the amount of the excess
drawdown. This also includes an update to reflect the total amount
of funds drawn down for the FY 1994 period.
The last drawdown for FY 1994 was made February 10, 1995. The revised
over draw for FY 1994 is $204,336 calculated as follows:
Federal funds drawn-10/1/93 - 12/31/94 per report $33,734,777
Add: Federal funds drawn-1/1/95 - 2/10/95 174,100
Total funds drawn for FY 1994 $33,908,877
Less: Disbursements-10/1/93 - 3/31/96 per final Form SSA-4513 33,704,541
Excess drawdowns of Federal funds (as of 3/31/96) $ 204,336
Pamela J. Gardiner
Assistant Inspector General
for Audit
www.socialsecurity.gov
