Knighton and Special Project Award Winners “Tell Us How They Did It”
District of Columbia
Kansas City
Montgomery County
Fullerton County
Metro
Orlando
Summit County
Large Shop Knighton Award 2004 Winner
Government Of The District Of Columbia
Office Of Inspector General
Audit Of The Management Of The 401(a) Defined Contribution Pension Plan
This audit resulted in the return of forfeited funds to the District government of about $27 million. This information supplements our audit guide and the audit report, which was issued October 15, 2003. Both the guide and the report are available upon request.
Background. A former employee contacted the Office of the Inspector General, Audit Division, to request assistance in stopping the quarterly statements of account he was receiving from the contractor responsible for administering the 401(a) Defined Contribution Pension Plan (Plan). This employee had resigned over a year ago and was not vested. To be vested, an employee needed 5 years of creditable service. Contributions made to the Plan by the District on behalf of the employee and any earnings are generally forfeited after a non-vested employee has been off the payroll for a period of 1 year.
An auditor was assigned to determine why the statements were continuing to be sent to employees who had left the payroll more than a year ago because these funds should have been returned to the District. During the period of research, the auditor determined that substantial funds should have been returned over the years. When he asked the government representative how often and how much had been refunded over the years, the response was that none had ever been refunded to the government by the contractor. However, the government representative maintained an Excel spreadsheet to account for the forfeited funds in the custody of the contractor. At the beginning of the audit survey, the spreadsheet indicated that forfeited funds were in excess of $24 million. The auditor questioned the purpose of this spreadsheet and the necessity for leaving the funds with the contractor.
Pension Plan Information. The District, once an employee has completed 1 year of creditable service, contributes 5 percent of the employee’s base pay every bi-weekly pay period to an investment option selected by the employee. These are District funds and do not come out of an employee’s pay. These funds are subject to taxation to the vested employee when withdrawn. The first year of creditable service counts towards vesting but no contributions are made by the District until the beginning of the 2nd year of creditable service.
When a non-vested employee leaves the employ of the District, contributions to the employees account balance stop. However, the funds in the employee’s retirement account remain, subject to the risks of the chosen investment option for 1 year. After 1 year, if the employee has not been reemployed, the funds are transferred to a forfeiture account. These funds are invested in the default option, which is the one chosen when an employee fails to designate an investment option.
Office of Inspector General Involvement. The assigned auditor contacted the District’s Chief Financial Officer’s Office of Finance and Treasury to gain information regarding the forfeiture account. It was found that, even though the investment option represented a lower risk than some other offered options, there was still an element of risk involved and that the forfeiture fund account was subject to maintenance fees by the retirement plan’s administrator.
It was determined that funds belonging to the District should not be held at risk, subject to unnecessary costs, and should be returned to the District promptly. We found that no forfeited funds had been returned to the District since the inception of the Plan, and that in the few months since we began our review, the forfeiture account balance had risen to a sum in excess of $27 million.
Upon completion of our review the funds were returned to the District and procedures were established for periodic reimbursement of forfeited funds. Additionally, forfeited funds were directed to a safer investment vehicle that paid interest.
Incidentally, we found that the complaining former employee was still receiving quarterly account statements because Human Resources failed to notify the Plan’s administrator of the employee’s departure.
Audit Development. The objective of this audit was to determine whether forfeited pension contributions were prudently managed and that management was in compliance with laws and procedures.
We gathered and analyzed background information to provide us with the insight needed to pursue our objective. This data included:
• Organization. We sought the organization of the Plan’s administrator as well as that of the District organization responsible for day-by-day interface with the Plan’s administrator.
• Internal Revenue Service. This data included the Internal Revenue Code and publications relating to use of forfeitures in a Sec. 401(a) defined contribution plan for tax exempt government entities; Sec 411, minimum vesting standards, 26 CFR 1.401-7 Forfeitures under a qualified pension plan.
• Federal and local government legislation used to determine the legitimate use of forfeited contributions and income on same.
• Policies and procedures regarding establishment and maintenance of the forfeiture account.
We also consulted with IRS and the Office of the Inspector General’s legal staff to acquire their opinion regarding the holding of forfeited contributions.
We also examined the frequency of audits of the plan and found no independent audits of the 401(a) Plan’s assets and expenditures were conducted at request of the government or the contractor. We also weighed the legality and the pros and cons of whether the District or the Plan should pay for such a financial audit and benchmarked against other municipalities to determine whether their retirement plan had been subject to independent audit and whether the costs of the audit came from the plan’s assets.
We examined the means of reporting forfeited funds in the District’s Comprehensive Annual Financial Report.
Communications. During the audit, we frequently met with the staff of the Office of Chief Financial Officer, including the District’s Treasurer. We also briefed the Mayor.
Office of the Inspector Contacts
For additional information, contact:
William J. DiVello Assistant Inspector General for Audits
717 14th St., N.W. (5th Floor)
Washington, D.C. 20005 (202) 727-2540
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Medium Shop Knighton Award 2004 Winner
City of Kansas City Auditor's Office
Where Did the Money Go?
Tax increment financing (TIF) is one of the fastest growing items in Kansas City, Missouri’s budget. The city transferred about $20 million to the TIF Commission in 2002 for development reimbursements and expects that amount to double by 2005. TIF is an incentive that the city provides to encourage real estate development. It is intended to improve areas affected by blight or adverse conditions that make private investment unfeasible. The premise is that improvements to an area generate additional tax revenue, a portion of which is made available to reimburse developers for approved project costs.
We decided to audit TIF for several reasons. Both the TIF Commission’s external auditor and our office had audited TIF in the past, identifying serious financial and management control issues, but TIF staff had been unresponsive to correcting those problems. The growth in the number of TIF projects and amount of tax dollars redirected to TIF was accelerating, increasing potential risks. In addition, TIF is administered by an outside Commission, not city staff, and therefore, is not subjected to the city’s normal budget process. Millions of dollars in reimbursements and bond payments were handled by a small staff, few of whom had an accounting background. Finally, TIF proponents, including TIF staff, developers, and a powerful professional constituency many of whom provide services to the commission and developers, made claims regarding the use and benefits of TIF revenues that could not be substantiated.
For this audit of TIF, we focused on following the money. People may not understand what TIF is, but they do understand money and officials’ duty to safeguard, manage, and account for the public tax dollars. We wanted to know what TIF tax dollars had purchased and whether controls over reimbursements were adequate.
We limited the scope of our audit to the reimbursements and bond payments approved by the TIF Commission in one year. Because each plan is unique, we looked at all of the plans, amendments, contracts, minutes, correspondence, reimbursement documentation and accounting records for 10 plans.
The files were incomplete and in disarray. Information we found in the files raised additional issues that we were compelled to investigate.
We found that the TIF Commission had not established basic internal controls to safeguard, manage, and account for the public dollars for which it was responsible. More than $7 million in developer expenses approved for reimbursement by the Commission were not adequately supported. The TIF Commission underpaid the city and one of the counties by over $3 million. Our efforts to determine what TIF purchased were hampered because of missing and inadequate documentation and because developer costs were not classified into meaningful categories.
As a result of the audit, the city and county recovered more than $3million in delinquent payments from the TIF Commission; the Commission made changes to address the report’s findings; and we won the Knighton Award.
Animal Services Division Follow-Up Report, January 2003
In Montgomery County Maryland, animal services are delivered through two organizations. Animal licensing and law enforcement is provided by a division of the police department (ASD). Care of animals in custody and adoption services are provided by the Montgomery County Humane Society (MCHS) under a contract administered by the police department. The initial audit was a complete review of all aspects of the animal services function. The audit evaluated administrative practices for both organizations, reviewed communications, field operations, shelter operations, employee health and safety, and community relations. ASD concurred with 83 recommendations, MCHS concurred with 81.
This project was performed as a follow-up to the initial program evaluation completed in March 2001. It is OIG policy to follow-up on prior projects 18–24 months after the initial report is published. The scope of the follow-up is to determine agency implementation of corrective action where the agency initially concurred with the recommendation.
Our follow-up process begins with an agency self-assessment. At that time agencies are asked to rate implementation and provide supporting materials for their responses. OIG reviews agency responses and supporting materials and does on-site verification of all significant recommendations and areas where OIG and the agency disagree about implementation status. For each recommendation both the agency and OIG assign a letter grade for implementation status: A = full implementation, B = substantial implementation, C = moderate implementation, D = minimal implementation, and F = unresolved. These terms are defined in both the material sent to the agency and in the report. Additionally, to evaluate implementation process, OIG assesses implementation compared to the difficulty of implementation. For example, we would expect greater implementation of recommendations to enforce existing policies than implementation requiring a major system acquisition. Grading of overall implementation considers difficulty.
We like providing agency staff and government decision makers an implementation “report card.” We think the A through F grading scale is readily understandable by staff and the public and as more followup reports are completed, will enable informed readers to compare recommendation implementation across agencies.
For further information, contact:
Mary Wengraf Meier Acting Inspector
General Office of Inspector General
51 Monroe Street, Suite 802
Rockville, Maryland 20850
240.777.8240 FAX 240.777.8254
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Small Shop 2004 Special Project Honorable Mention
City of Fullerton, Contract Custodial Performance Audit
In 2002 and 2003, we began receiving anecdotal information from City employees that the satisfaction levels with our contract custodial service were much lower than our Facility Division’s internal surveys indicated. We decided to perform an audit of the contractor’s performance and the Division’s contract management efforts. One of the biggest challenges we faced was how to objectively rate the level of cleaning service being provided and employee’s perceptions of those services. Cleanliness is a subjective concept: one person may be satisfied with a lower level of service than someone else. We developed different methods of assessing the quality of custodial services:
• We sent our own survey to a random sample of employees in each major City facility. The survey asked a different set of questions than the Facility Division’s form, and was sent directly back to us. We noted employees tended to rate custodial service satisfactory overall, but ratings were lower when the questions concerned an employee’s personal workspace and restroom maintenance. This led us to the conclusion most people tended to notice the level of cleanliness in areas more important to them, than the condition of other areas like public lobbies.
• To get an objective rating of our services, we sent the contract specs to a facility manager in Milwaukee County, WI, who has won awards from the International Executive Housekeepers Association. We asked her to review the specs and the time the contractor said it took to perform the listed tasks; her expert opinion was there was no way for a contractor to do everything in the spec within the time limits the contractor gave the City;
• Since the independent review questioned the contractor’s ability to provide sufficient services in the time allotted, we spent a lot of time in the field observing custodians and the work they were doing, and then comparing the actual work to the specifications in the contract. We discovered the contractor consistently spent much less labor time at most facilities than indicated in the contract documents, and did not follow the work schedule submitted to the City;
• We contacted other local cities to see how much time/effort it took their custodial service providers to meet their specs.
Our object was to show, based on employee perception, expert opinion, and evidence form other agencies that our contractor was under-performing. We then applied the usual tests of evidence, etc. to be sure we could prove what we were saying.
It should be noted the audit team is not organizationally independent; we work for the department whose programs we audit, and auditing is just one element of our overall jobs. As you might imagine, this presents challenges on both the professional and personal levels. For example, the manager who runs the City’s Facility Division and is responsible for custodial contract management has an office literally across the hall from mine. When our audits include negative findings, this can create an awkward working relationship. Fortunately, we have the opportunity to work with our managers in other areas (such as budget and administrative support) that provide positive encounters. And we have always made it clear up front we would never back off from a negative finding, so managers know not to try to pressure us. Also, we found using the Yellow Book standards has added to our audits’ legitimacy and authority, since our readers know we have to meet standards outside our organization, especially those concerning the applicability of evidence and objectivity. I think we have a very successful program.
Small Shop Knighton Award 2004 Honorable Mention
The Story Behind Metro Audit Report, MERC’s Accountability Processes Need to Be Strengthened
Praises were high for the MERC’s (a Metro component unit) Pay-for-Performance (PFP) program. Everyone at Metro had heard of its accomplishments and wanted a similar program for the rest of Metro. And why not – reportedly employees were very happy, they were receiving good salary increases and bonuses, and management had a more productive workforce. Enter the Metro Auditor and her staff to study this successful program and recommend how it could be replicated throughout Metro. Exit with a trilogy of critical audit reports.
The titles of the three reports capture their conclusions: “MERC’s Accountability Processes Need to be Strengthened,” “MERC Employee Performance Agreements Need Improvement” and “MERC’s PFP Program Implementation Is Not a Model for Metro.”
Overall, we found that MERC lacked the controls necessary to demonstrate that the PFP program was being managed fairly, consistently and in the public’s best interest.
Our studies revealed that MERC gave significant pay raises that were not based on performance. These increases, which amounted to approximately $300,000 over two years and primarily benefited top management, came as MERC faced financial challenges and Oregon’s economy suffered with one of the nation’s highest unemployment rates. In addition, MERC made compensation decisions inconsistent with its own policies - awarding bonuses during probationary periods and granting substantially more vacation benefits than MERC policy allows.
The studies also found that MERC could not show that its pay program contributed to improved organizational performance. In addition, as many as 9 out of 10 employees continued to have significant misgivings about the four-year old PFP program.
We encountered a hostile environment as we conducted this audit. Requests for information were usually not responsive and required extra follow-up. When we asked if the MERC board knew of the problems, the General Manager said no and advised us not to inform them. Preliminary discussions with board leadership disclosed great concern about potential negative press and how it might be controlled. It became clear that management and the board would vigorously oppose our audit findings.
To meet this challenge, we engaged a public relations firm to provide us with a one-day training course on media relations using the MERC PFP reports as the case study. In the end, we received great press training and favorable media coverage. MERC continued to disagree with our findings but they subsequently implemented many of our recommendations. As an aside, the MERC General Manager left his position within a year of these reports. Unrelated? Possibly.
The story behind this report is truly interesting!
Office of Audit and Evaluation
City of Orlando, Florida
Audit of Budget Development, Monitoring and Change Processes
Our Audit of Budget Development, Monitoring and Change Processes was selected during our annual risk assessment. This audit had a timely impact as reports of a large annual budget deficit emerged and a new mayor was elected when the audit was due to be performed. We believe our report promotes needed improvements and supports City leaders in managing the budget process.
The objectives, scope and methodology of this report are comprehensive. The objectives of the audit were to determine if budget development, monitoring and change practices are in compliance with written policies and procedures and whether existing policies and procedures are adequate and meet the reporting and accountability needs of the City departments and senior management. We reviewed relevant City policies and procedures, interviewed management and budget staff, tested material budget revision requests, reviewed budgeting and spending activities in selected projects, and interviewed fiscal managers in four City departments.
Recommendations include improvements in the: structure and policies of our budget process; timely monitoring and reporting of budget to actual results; development of the budget document; and controls over budget revisions. Recommendations further suggest that policies be created to define City budgetary reserves, create limits to budget transfers, minimize project cost overruns, provide better budgetary information to the public, and develop systematic means to monitor budget variances.
For more information, contact:
Mona S. Mellon, CPA, Audit Program Manager
City of Orlando,
Office of Audit and Evaluation
(407) 246-2678, Fax (407) 246-2206
Email:
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Small Shop Special Project 2004 Winner
Summit County, Children Services Performance Audit Review
In April 2002, the Summit County Internal Audit Department was called upon by its Audit Committee to work in conjunction with a Blue Ribbon Panel appointed by the Summit County Executive, James B. McCarthy. The overall review of the agency began in response to a public outcry over the case of extreme abuse and neglect of six children. The project proceeded to address the concerns about the performance of the Summit County Children Services.
The panel was informally named the Performance Audit Review Committee (PARC) by elected officials and the press. Performance audit is a misnomer for the project. Although some performance issues were reviewed, the project was not a formal performance audit due to the direction of the committee and the many issues that entered into the project that did not relate to a formal audit.
The Children Services Board (CSB) is a ten-member board, nine of its members appointed by the County Executive that oversees the strategic direction of the agency. An Executive Director and his Executive Council oversee the agency’s operation.
The concentration on the Intake and Protective Services divisions was upon direction from the PARC. These departments were seen as the major areas of concern because of the flow of work through them.
A consultant was hired to review the caseload management issue and the IAD worked closely with them to:
The project was a unique situation due to its very political nature and because the IAD worked with two divergent groups to produce the report. It was exacerbated by a strike by the CSB social workers and support staff during the review timeframe. The strike issues dictated the focus of the audit. That focus could change on a weekly and sometimes daily basis. The department was directly involved with all of the numerous interviews that were conducted during the project. Scheduling became a challenge because the strikers and one member of the PARC would not cross the picket lines. Interviewees had to be contacted at home, at their new part-time jobs, on their cell phones or at the union hall. The caseworkers looked to the consultant’s report for ammunition in their fight for caseload size limits inclusion in the union contract. The negotiations influenced who the PARC scheduled for interviews and what areas they wanted the IAD to test. The week before the report was released, the Children Services Board agreed to and the County Executive and County Council encouraged both parties to enter into binding arbitration to settle the strike. The union decided to wait until the report was released to make their decision. The increased stress level on the IAD during this time was most challenging. The report was anxiously awaited as evidenced by the December 13, 2003 article in Akron’s newspaper: “Created during one of the roughest times in CSB history, the eagerly anticipated report was received by many in the community and even the County Council as if it had the authority of Moses descending with the commandments.”
The release of the report on December 12th was seen as the determining factor in ending the strike that began on July 14th. All entities that participated in the review process recommended major changes in how the agency does business. Significant financial savings were reflected in the recommendations having to do with human resource issues and the agency’s receiving units. Recommended changes to the agency’s “open-door policy” of addressing all requests as opposed to the Ohio Revised Code mandated allegations was seen as a way to help resolve the caseload/workload issues. Change management, grievance resolution, well-defined policies and procedures, computer case management system upgrade and Board training were also strongly recommended. We have also included a copy of the press release that was included in the press package on December 12th that outlines the major report recommendations. If you have any questions or require any further information, please feel free to give me a call. Thank you and your committee for considering the report for the Special Projects Award. Bernard F. Zaucha
Summit County, Ohio
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