SOCIAL SECURITY ADMINISTRATION

INDIRECT COSTS CLAIMED BY THE
CONNECTICUT DISABILITY
DETERMINATIONS SERVICES

September 2004

A-15-03-23041

AUDIT REPORT

Mission

We improve SSA programs and operations and protect them against fraud, waste, and abuse by conducting independent and objective audits, evaluations, and investigations. We provide timely, useful, and reliable information and advice to Administration officials, the 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

By conducting independent and objective audits, investigations, and evaluations, we are agents of positive change striving for continuous improvement in the Social Security Administration's programs, operations, and management and in our own office.

MEMORANDUM

Date: September 7, 2004

To: Manuel J. Vaz
Regional Commissioner Boston

From: Assistant Inspector General for Audit

Subject: Indirect Costs Claimed by the Connecticut Disability Determination Services (A-15-03-23041)

OBJECTIVE

We conducted this audit at the request of the Social Security Administration (SSA). Our objectives were to:

determine whether the indirect costs claimed by the Connecticut Disability Determination Services (CT-DDS) on the State Agency Reports of Obligations for SSA Disability Programs (Form SSA-4513) for the period October 1, 2001 through September 30, 2003, were allowable and properly allocated;

determine what indirect services were received by the CT-DDS from the State of Connecticut; and

determine the reasonableness of the indirect costs allocated to the CT-DDS.

BACKGROUND

Disability determinations under SSA's Disability Insurance and Supplemental Security Income programs are performed by Disability Determination Services (DDS) in each State or other responsible jurisdictions according to Federal regulations. In carrying out its obligation, each DDS is responsible for determining claimants' disabilities and ensuring that adequate evidence is available to support its determinations.

SSA reimburses the DDS for 100 percent of the allowable expenditures reported quarterly on Form SSA-4513. The expenditures include both direct and indirect costs.

SSA requested this audit in response to a prior audit report Audit of the Administrative Costs Claimed by the Connecticut Disability Determination Services (A-15-00-30016). Specifically, SSA raised the issue of rising CT-DDS indirect costs as the result of the State of Connecticut changing its methodology for determining indirect costs from an indirect cost rate agreement to a Public Assistance Cost Allocation Plan (from this point on referred to as the "Cost Allocation Plan").

On June 28, 1994, the United States Department of Health and Human Services (DHHS) Division of Cost Accounting (DCA) approved the Connecticut Department of Human Resources (CT-DHR) indirect cost rate submission for State Fiscal Year
(SFY) 1993 (July 1, 1992 through June 30, 1993). The CT-DHR was the parent agency for the DDS. The CT-DDS applied the federally approved indirect rate of 12.2 percent to the direct salaries and wages in computing the indirect costs for Federal Fiscal Year (FFY) 1993 (October 1, 1992 through September 30, 1993).

In calculating the 12.2 percent indirect rate, the CT-DHR excluded 100 percent of the Department of Administrative Services - Bureau of Collection Services statewide central service costs. It did this because these costs were associated with the collection of child support payments, which only benefit the Child Support Enforcement, Title IV-D program. In addition, the CT-DDS excluded approximately 99 percent of the Office of the Attorney General statewide central service costs because the majority of these costs were associated with the attorneys and support staffs who work primarily on the Child Support Enforcement, Title IV-D program. The CT-DDS only received minor benefits (approximately 1 percent) from the Office of the Attorney General statewide central service costs for costs associated with reviewing any CT-DDS contracts (such as contracts for medical services).

On July 1, 1993, the CT-DHR was merged into the Connecticut Department of Social Services (CT-DSS), which is now the parent agency for the CT-DDS. Also, starting in SFY 1994, the State of Connecticut changed its methodology for determining the indirect costs allocated to the CT-DDS from an indirect cost rate to a Cost Allocation Plan. The implementation of the indirect Cost Allocation Plan resulted in an increase in indirect costs allocated to the CT-DDS. However, the State of Connecticut Office of Policy and Management (CT-OPM) granted the CT-DDS a waiver of the increased indirect costs from FFY 1994 through the 1st quarter of FFY 2003. This waiver was granted because of the adverse impact on program services (i.e., reduction in services) that would have resulted if the CT-DDS were assessed the full impact of the indirect cost allocation charges, since SSA did not budget for the unexpected increase in indirect charges. Therefore, for this period, the CT-DDS was allocated indirect costs at the prior rate of 12.2 percent.

On June 10, 2003, DHHS-DCA approved the CT-DSS Cost Allocation Plan effective July 1, 2001. Further, on June 19, 2003, the DHHS-DCA approved the amended CT DSS Cost Allocation Plan effective April 1, 2002. Therefore, starting in the 2nd quarter of FFY 2003, the CT-DDS was required to follow the federally approved Cost Allocation Plan.

RESULTS OF REVIEW

The DHHS-DCA approved Statewide Cost Allocation Plan distributed several statewide central service costs (including the Department of Administrative Services - Bureau of Collection Services and the Office of the Attorney General) to the CT-DSS. The CT DSS further distributed these costs in accordance with the Cost Allocation Plan to the CT-DDS. However, the CT-DDS did not receive any benefits from Department of Administrative Services - Bureau of Collection Services because these costs were associated with the collection of child support payments, which only benefit the Child Support Enforcement, Title IV-D program. Also, the CT-DDS only received minor benefits (approximately 1 percent) from the Office of the Attorney General statewide central service costs associated with reviewing any CT-DDS contracts (such as contracts for medical services).

Therefore, we disallowed $287,442 of the obligated $2,620,985 indirect costs as follows:

Year Claimed
Cost Disallowed
Cost
Difference
FFY 2002
1st Quarter $182,951 $0 $182,951
2nd Quarter 184,390 0 184,390
3rd Quarter 203,643 0 203,643
4th Quarter 197,727 0 197,727
2002 Total $768,711
$0 $768,711

FFY 2003
1st Quarter $195,654 $0 $195,654
2nd Quarter 346,879 142,355 204,524
3rd Quarter 650,235 145,087 505,148
4th Quarter 659,506 0 659,506
2003 Total $1,852,274
$287,442
$1,564,832

Total $2,620,985
$287,442
$2,333,543

INDIRECT RATE AGREEMENT
(FFY 2002 THROUGH THE 1ST QUARTER OF FFY 2003)

The CT-OPM granted the CT-DDS a waiver of the increased indirect costs associated with the Cost Allocation Plan that exceeded the prior indirect rate of 12.2 percent for FFY 2002 through the 1st quarter of FFY 2003. This waiver was granted due to the adverse impact on program services (i.e., reduction in services) which would have resulted if the CT-DDS were assessed the full impact of the indirect cost allocation charges, since SSA did not budget for the unexpected increase in indirect charges. Therefore, for this period, the CT-DDS was allocated indirect costs at the prior indirect rate of 12.2 percent.

We concluded that the CT-DDS correctly applied the federally approved indirect rate of 12.2 percent to the direct salaries and wages in computing the indirect costs allocated to the CT-DDS for FFY 2002 through the 1st quarter of FFY 2003. We took no exception to the $964,365 ($768,711 for FFY 2002 and $195,654 for the 1st quarter of FFY 2003) obligated indirect costs.

INDIRECT COST ALLOCATION PLAN
(2ND AND 3RD QUARTERs OF FFY 2003)

The CT-DDS calculated the $997,114 ($346,879 for the 2nd quarter of FFY 2003 and $650,235 for the 3rd quarter of FFY 2003) obligated indirect costs for the 2nd and 3rd quarters of FFY 2003 based on the Cost Allocation Plan. However, we disallowed $287,442 of the obligated $997,114 indirect costs or approximately 29 percent as the result of the CT-DSS allocating the Department of Administrative Services - Bureau of Collection Services and the Office of the Attorney General statewide central services costs to the CT-DDS in a manner not consistent with the amount of benefit received. Specifically, we excluded:

100 percent of the Department of Administrative Services - Bureau of Collection Services statewide central service costs. The CT-DDS historically excluded 100 percent of the Department of Administrative Services - Bureau of Collection Services statewide central service costs in calculating the indirect rate since the costs were associated with the collection of child support payments which only benefit the Child Support Enforcement, Title IV-D program.

Approximately 99 percent of the Office of the Attorney General statewide central service costs. The CT-DDS historically excluded a majority (approximately 99 percent) of the Office of the Attorney General statewide central service costs in calculating the indirect rate since the costs were associated with the attorneys and support staffs who work primarily on the Child Support Enforcement, Title IV D program. The CT-DDS only received minor benefits (approximately 1 percent) from the Office of the Attorney General statewide central service costs associated with reviewing any CT-DDS contracts (such as contracts for medical services).

The CT-DSS disagreed with our results and stated that the primary responsibility of the Department of Administrative Services - Bureau of Collection Services is to provide billing and collection services, and to administer trust accounts for individuals in State run facilities. Also, the CT-DSS stated that the Office of the Attorney General represents and advocates the interests of the CT-DSS and provides investigation and legal assistance for Affirmative Action complaints. However, the CT-DSS did not provide any evidence that the CT-DDS received any benefits from Department of Administrative Services - Bureau of Collection Services and the Office of the Attorney General statewide approved central service costs.

OMB Circular A-87, Cost Principles for State, Local, and Indian Tribal Governments, attachment A, C, 3, (a) states, "…a cost is allocable to a particular cost objective if the goods or services involved are chargeable or assignable to such cost objective in accordance with relative benefits received." The risk of allocating the Department of Administrative Services - Bureau of Collection Services and the Office of the Attorney General statewide central services costs to the CT-DDS is increased if the Cost Allocation Plan allocates these costs without taking into account the relative benefits received. Therefore, these costs are not allocable to the CT-DDS because it only benefits the Child Support Enforcement, Title IV-D Program. However, these costs may be allowable and allocable to the Department of Health and Human Services, the Office of Child Support Enforcement, Administration for Children and Families which has Federal oversight responsibility for State Title IV-D Child Support programs.

ESTIMATED INDIRECT COSTS
(4TH QUARTER OF FFY 2003)

As of December 12, 2003, the CT-DDS estimated $659,506 obligated indirect costs for the 4th quarter of FFY 2003. The CT-DDS did not have any support for this estimate; therefore, we were unable to audit these indirect costs. The CT DSS stated that it had not calculated the 4th quarter indirect costs in accordance with the Cost Allocation Plan. The CD-DSS is revising its cost allocation claims since July 2001 (the effective date of a Cost Allocation Plan) to conform to the Cost Allocation Plan. Also, the CT-DSS implemented new allocation software (MaxCars) in the 3rd quarter of FFY 2003. Therefore, the CT-DDS is using the 3rd quarter of FFY 2003 as the template for the new allocation software and will recalculate the 4th quarter of FFY 2003 once all the allocation software corrections are complete.

When the CT-DSS recalculates the 4th quarter of FFY 2003 indirect costs based on the Cost Allocation Plan, the CT-DSS should exclude the Department of Administrative Services - Bureau of Collection Services and the Office of the Attorney General statewide central service costs. Also, the CT-DDS should adjust the FFY 2003 unliquidated obligations of $1,348,059 (total FFY 2003 indirect cost obligation amount of $1,852,274 less the disbursement amount of $504,215) and update the SSA-4513 for the recalculated indirect cost amount.

RECOMMENDATIONS

We recommend SSA instruct the CT-DDS to:

1. Return $287,442 of unallowable indirect costs associated with the 2nd and
3rd quarters of FFY 2003.

2. Ensure that the indirect costs for the 4th quarter of FFY 2003 indirect costs exclude costs for the Department of Administrative Services - Bureau of Collection Services and the Office of the Attorney General.

3. Ensure that SFY 2004 Cost Allocation Plan distributes statewide central service costs to the CT-DDS according to the relative benefits received in accordance with OMB A-87.

4. Request DHHS-DCA to audit the reasonableness of the proposed SFY 2004 Cost Allocation Plan statewide allocation methodology taking into account the issues discussed in this report. (If DHHS-DCA has already approved the SFY 2004 Statewide Allocation Plan, SSA should request the DHHS-DCA revisit the statewide central service costs to ensure that the CT-DDS receives some relative benefit from these costs and amend the plan as needed.)

SSA COMMENTS

SSA agreed with our recommendations. The full text of SSA's comments is included in Appendix D.

STATE AGENCY COMMENTS

CT-DSS disagreed with our recommendations. Specifically, CT-DSS believes it has

properly allocated the Statewide Cost Allocation Plan costs because it allocated indirect costs in compliance with the approved Public Assistance Cost Allocation Plan; and

applied a reasonable approach to allocating indirect costs to benefiting agencies (not to benefiting programs within agencies) in accordance with OMB Circular A 87.

The full text of the CT-DSS' comments is included in Appendix E.

OIG RESPONSE

In our opinion, the allocation of statewide central services costs to the CT DDS is not reasonable, despite the fact it was approved by DCA. Moreover, DCA's Public Assistance Cost Allocation Plan approval letter states, "The implementation of the cost allocation plan approved by this document may from time to time be reviewed by authorized Federal staff. The disclosure of inequities during such review may necessitate changes to the plan." We believe that the current allocation is not equitable to the CT-DDS. In fact, the CT-DSS discussed this inequity in its response when it stated, "While the CT DDS may not have received any direct benefits from these services during the quarters in question, the services offered by Department of Administrative Services and Office of Acquisition and Grants are ones that at times could be critical to the CT-DDS."

Additionally, OMB A-87 states:

A cost is allocable to a particular cost objective (function, organizational subdivision, contract, grant, or other activity for which cost data are needed and which costs are incurred) if the goods or services involved are chargeable or assignable to such cost objectives in accordance with the relative benefits received.

Thus, the statewide central service costs should be allocated to the CT-DDS in accordance with the relative benefits received. Furthermore, the DHHS, as mandated by OMB A-87, issued A Guide for State, Local and Indian Tribal Governments - Cost Principles and Procedures for Developing Cost Allocation Plans and Indirect Cost Rates for Agreements with the Federal Government (ASMB C 10). This guide is designed to assist State, local, and Indian tribal governments in applying OMB A-87. In response to a specific question, the guide "…requires that where a cost or activity benefits multiple activities or programs, those costs must be allocated in accordance with the relative benefits received by each activity or program. This requirement is an underlying principle of cost allocation."

In our opinion, allocation to the CT-DDS of costs for the specific services discussed in this report is not reasonable, despite the fact that the allocation plan used to allocate the costs was approved by DCA. We believe SSA's proposed actions will reasonably distribute the cost of these services to the CT-DDS, and we encourage SSA to move forward with its planned corrective actions.

Steven L. Schaeffer

Appendices

APPENDIX A - Acronyms
APPENDIX B - Scope and Methodology
APPENDIX C - Comparison of Indirect Costs (Indirect Rate vs. Indirect Cost Allocation Plan)
APPENDIX D - SSA Comments
APPENDIX E - State Agency Comments
APPENDIX F - OIG Contacts and Staff Acknowledgments

Appendix A
Acronyms

CT-DDS Connecticut Disability Determination Services
CT-DHR Connecticut Department of Human Resources
CT-DSS Connecticut Department of Social Service
CT-OPM Connecticut Office of Policy and Management
DCA Division of Cost Accounting
DDS Disability Determination Services
DHHS Department of Health and Human Services
FFY Federal Fiscal Year
Form SSA-4513 State Agency Report of Obligations for SSA Disability Programs
OIG Office of the Inspector General
OMB Office of Management and Budget
SSA Social Security Administration
SFY State Fiscal Year
U.S.C. United States Code

Appendix B
Scope and Methodology

The Social Security Administration (SSA) requested this audit in response to a prior audit report Audit of the Administrative Costs Claimed by the Connecticut Disability Determination Services (A-15-00-30016) issued September 17, 2001. Specifically, SSA raised the issue of the rising Connecticut Disability Determination Services (CT-DDS) indirect costs as the result of the State of Connecticut changing its methodology for determining indirect costs from an indirect cost rate agreement to a Cost Allocation Plan. Therefore, we limited our audit to the impact the approved Connecticut Department of Social Services (CT-DSS) Public Assistance Cost Allocation Plan (effective July 1, 2001) had on the CT-DDS indirect costs reported on the State Agency Report of Obligations for SSA Disability Programs (Form SSA-4513) for Federal Fiscal Years (FFY) 2002 and 2003. To complete our objectives, we:

Reviewed Office of Management and Budget Circular (OMB) A-87, Cost Principles for State, Local and Indian Tribal Governments, SSA's Program Operations Manual System DI 39500 DDS Fiscal and Administrative Management, and other instructions pertaining to administrative costs incurred by CT-DDS.

Reviewed the State Fiscal Year 2001 and 2002 single audits for the State of Connecticut.

Interviewed staff at the CT-DDS and its parent agency CT-DSS, Department of Health and Human Services - Division of Cost Allocation, and MAXIMUS
(CT-DSS contractor).

Reviewed CT-DDS' computation using an indirect rate. The specific audit steps performed consisted of the following:

Verified the approved indirect rate was used in FFYs 2002 and 2003,

Verified the approved indirect rate was the "final" indirect rate,

Verified the approved indirect rate was applied to the appropriate base, and

Re-calculated indirect amounts to assure accuracy.

Reviewed CT-DDS' computation of indirect costs for FFY 2003. The specific audit steps performed consisted of the following:

Verified the statewide indirect cost amount,

Identified the accounts included in the indirect cost pool,

Determined how indirect cost pools were allocated,

Determined if the indirect cost allocation was consistent with the approved Cost Allocation Plan, and

Determined if the allocation method fairly and accurately allocated expenses to all benefiting agencies.

Reconciled the accounting records to the CT-DDS indirect costs reported on Form SSA-4513.

Also, we compared the indirect costs charged to the CT-DDS for the 2nd and
3rd quarters of FFY 2003 using the indirect rate agreement and the Cost Allocation Plan. See Appendix C for the results of our comparison.

We determined that the computerized data used during our review is sufficiently reliable given our audit objective and intended use of the data and should not lead to incorrect or unintentional conclusions. This audit was conducted in accordance with generally accepted government auditing standards. Our field work was performed from December 2003 through March 2004. We performed the field work at the CT-DSS and CT-DDS in Hartford, Connecticut.

Appendix C
Comparison of Indirect Costs
(Indirect Rate vs. Indirect Cost Allocation Plan)
Fiscal Year (FY) 2003
(2nd and 3rd Quarters) Indirect Rate Indirect Plan Difference Notes
Administrative Overhead $ 200,654 $ 527,712 $ 327,058 1
Statewide Cost Allocation 178,688 469,402 290,714 2
Total $ 379,342 $ 997,114 $ 617,772

Notes:

1. We were unable to isolate the reason for the $327,058 administrative overhead increase because the indirect rate agreement did not specifically identify the components of this cost (i.e., general support, contract administration, fiscal analysis, budget, fringe benefits or accrued vacation). However, we verified the reasonableness of the allocation methodology under the Cost Allocation Plan. Therefore, we did not take exception to the $527,712 administrative costs allocated to the Connecticut Disability Determination Services (CT-DDS).

Also, the Social Security Administration (SSA) had concerns regarding the proposed reorganization of production services (i.e., mailroom, duplicating and courier services) effective April 1, 2003. SSA requested that the State of Connecticut not implement this proposed change as it would have a direct impact on the CT-DDS. Our audit of the federally approved Connecticut Department of Social Service
(CT-DSS) Cost Allocation Plan effective July 1, 2001, determined that the CT-DDS was not affected by the reorganization of the production services. In fact, the production service costs were specifically excluded from the CT-DDS.

2. The $290,714 statewide cost allocation increase is due to the CT-DSS allocating the Department of Administrative Services - Bureau of Collection Services and the Office of the Attorney General statewide central services costs to the CT-DDS in a manner inconsistent with the amount of benefits received under the Cost Allocation Plan. Whereas, the indirect rate agreement excluded the Department of Administrative Services - Bureau of Collection Services and the Office of the Attorney General statewide central services costs. Therefore, we determined that $287,442 of the $290,714 or approximately 99 percent of the statewide cost allocation increase was the result of this improper allocation. However, these costs may be allowable and allocable to the Department of Health and Human Services, the Office of Child Support Enforcement, Administration for Children and Families which has Federal oversight responsibility for State Title IV-D Child Support programs.

Appendix D
SSA Comments

MEMORANDUM

Date: July 20, 2004
To: Steven L. Schaeffer
Assistant Inspector General for Audit

From: Manuel J. Vaz
Regional Commissioner Boston

Subject: Indirect Costs Claimed by the Connecticut Disability Determination Services (CT DDS) (A-15-03-23041) (Your Memo Dated July 2, 2004) - REPLY

We concur fully with the finding in this audit that the indirect costs claimed by the state of Connecticut for several statewide central services were not reasonable and did not adhere to the intent of OMB Circular A-87. Clearly, we never want to pay for services that we do not receive.

Finding

This audit was conducted at our request because of concerns we had with the increased indirect costs when the State of Connecticut started using a cost allocation plan. We did question all of the indirect services provided by the state to the CT DDS. After a careful review, we met with the state, the contractor writing the cost allocation plan, and the federal negotiator. Together, we scrutinized the costs and services that the DDS receives. Subsequent to that meeting, we continued to work closely with the DHHS cognizant agency to make adjustments. In the end, the DHHS, Division of Cost Allocation (DCA) negotiator assured us that the final negotiated plan had reasonable services and costs, and we therefore accepted it as the final agreement. Even with our substantial involvement, your auditor still found almost a half million dollars a year of "unreasonable" costs.

Recommendations

1. We concur that the state of Connecticut should return $287,442 for the 2nd and 3rd quarters of FFY2003.

2. We concur that the indirect costs for the 4th quarter of SFY2003 should exclude central services costs for services we do not receive or are not in proportion to the relative benefits received by the DDS.

3. We concur that the state of Connecticut should distribute statewide central service costs to the DDS according to benefits received (and in accordance with OMB Circular A-87).

4. We are unclear concerning the final recommendation and request further clarification of its purpose. Are you asking that we request DHHS-DCA to reopen and amend the plan to exclude these central service charges?

We are pleased with the results of this audit. These significant savings will allow us to devote these resources to claims processing activities. We want to extend our appreciation to your auditors for their cooperation and diligence.

Please contact me or your staff may contact Roni Brown of our Center of Disability at (617) 565-2390.

Appendix E
State Agency Comments

Appendix F
OIG Contacts and Staff Acknowledgments
OIG Contacts
Frederick C. Nordhoff, Director, Financial Audit Division
Victoria Vetter, Audit Manager, (410) 966-9081

Acknowledgments
In addition to those named above:
Mark Meehan, Auditor-in-Charge
Ronald Anderson, Auditor
Donna Parris, Auditor
Annette DeRito, Writer-Editor

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 Specialist at (410) 965-3218. Refer to Common Identification Number A 15 03 23041.

Overview of the Office of the Inspector General

The Office of the Inspector General (OIG) is comprised of our Office of Investigations (OI), Office of Audit (OA), Office of the Chief Counsel to the Inspector General (OCCIG), and Office of Executive Operations (OEO). To ensure compliance with policies and procedures, internal controls, and professional standards, we also have a comprehensive Professional Responsibility and Quality Assurance program.

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OA conducts and/or supervises 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 and program evaluations and projects on issues of concern to SSA, Congress, and the general public.

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