EXECUTIVE SUMMARY

Tichenor & Associates, LLP, Certified Public Accountants and Management Consultants, under contract to the U.S. Department of Labor (DOL), Office of Inspector General (OIG), conducted an audit of the Administrative Staff and Technical (AS&T) costs claimed by the New Jersey Department of Labor (NJDOL) as being applicable to grant awards from the DOL. Our audit covered Federal fiscal years (FFYs) ended September 30, 1998, 1999, 2000, and 2001. NJDOL records show that it claimed and was reimbursed by DOL for over $54.2 million of indirect costs for the 4-year period covered by our audit.

Our audit found that the NJDOL did not comply with OMB Circular A-87 requirements that indirect costs, such as AS&T costs, be allocated to all projects/programs on the basis of "relative benefits received." Our audit disclosed that for the 4-year period ended September 30, 2001, NJDOL had billed and received a total of over $54.2 million in AS&T costs from DOL. However, NJDOL's actual allowable AS&T costs properly allocable to DOL grant awards, on the basis of "relative benefits received," totaled only $48.0 million during this period. As a result, NJDOL overcharged DOL grant awards by about $6.2 million for AS&T costs during this 4-year period.

Based on our audit, we question $6,166,318 in AS&T costs claimed and recovered by NJDOL on DOL grant awards during the 4-year period ended September 30, 2001, primarily because:

• Although NJDOL reimbursed the Unemployment Insurance (UI) grant account for certain UI tax collection costs allocable to State tax programs which "piggy-back" on the UI tax collection system, it failed to include departmental AS&T costs in the amounts reimbursed. Consequently, the total costs charged to DOL for the UI program included AS&T costs that should have been reimbursed by State-funded programs.

• The allocation base used by NJDOL to distribute its AS&T costs to final cost objectives was flawed because it did not include all projects.

The net effect of the matters summarized above was a substantial shifting of costs from NJDOL's State programs (to which such costs were properly allocable) to DOL grant awards, resulting in a significant overrecovery of indirect costs on the DOL grant awards. We expect that a similar overrecovery of indirect costs on DOL grant awards will also occur in FFY 2002 because the conditions discussed above had not changed as of the completion of our fieldwork in December 2001.

Recommendations

We recommend that the cognizant DOL grant officer(s) to: (1) direct NJDOL to refund the $6,166,318 in AS&T costs which it over-recovered for FYs 1998, 1999, 2000, and 2001; and (2) to adjust its billings to DOL for FY 2002 for AS&T costs to preclude further overrecoveries of AS&T costs.

Further, we are recommending that the Assistant Secretary for Employment and Training direct NJDOL ensure that its proposals on AS&T cost allocation methodology rate proposals fully comply with the reasonableness, allocability, and allowability criteria mandated by OMB Circular A-87; and that the Assistant Secretary for Employment and Training direct NJDOL to include a provision in its annual audit plans for periodic audit of the implementation of negotiated agreements applicable to the sharing of UI tax collection costs and the allocation of AS&T costs directly to projects.

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We held an exit conference with NJDOL officials on December 13, 2001, in which we presented a summary of our findings. Generally, they reserved comment on the findings pending receipt of our draft audit report. However, we discussed in some detail the methodology we used for both findings included in this report, and, based on additional information provided by them shortly after the meeting, we made a minor adjustment to the data used in reallocating their AS&T costs to all projects.

Auditee's Response

In their response to our draft report, NJDOL officials disagreed with the report's findings and recommendations, concluding that NJDOL had not overrecovered its indirect costs and, therefore, did not owe a refund to DOL. NJDOL stated that while it did not reimburse UI for AS&T costs applicable to NJDOL shared UI tax collection costs, an audit of the entire process for sharing such costs would have revealed that NJDOL overreimbursed the UI program by about $6.1 million as opposed to the underreimbursement of AS&T costs of $4.8 million. Regarding the exclusion of several State programs from the base for allocating AS&T costs, NJDOL stated that it direct charged AS&T costs to State programs, and such direct charging does not violate Federal requirements.

We have incorporated NJDOL's detailed comments at the end of each finding, as appropriate. In addition, a copy of NJDOL's written response is included, in its entirety, as an appendix to this report.

Auditors's Conclusion

NJDOL's written response admits that it improperly excluded AS&T costs from its reimbursement of UI tax collection costs. At the same time, NJDOL contends it overreimbursed UI because its reimbursement methodology was flawed. However, our audit showed that the methodology was consistent with its negotiated, written agreement with DOL. In addition, NJDOL's contention that it direct charged AS&T costs to State programs is misleading because the amounts so charged were arbitrarily determined so that they would equal the AS&T amount appropriated by the State for these programs — they were not determined on the basis of relative benefits received as required by Federal cost principles.

NJDOL's comments do not warrant any changes to the report findings. All the recommendations are considered unresolved and will be addressed in ETA's formal audit resolution process.

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