Office of the Inspector General

Jo Anne B. Barnhart
Commissioner of Social Security

Inspector General

Disability Determination Services’ Budget Execution and Reporting of Limitation on Administrative Expenses Funds (A-15-99-52001)

The attached final report presents the results of our audit. Our objective was to evaluate the Social Security Administration’s policies and procedures for State disability determination services’ budget execution and reporting of obligations. The report presents budget execution and reporting issues that were initially noted during our Audit of the Administrative Costs Claimed by the Ohio Rehabilitative Services Commission for its Bureau of Disability Determination (A-13-98-51007).

Please comment within 60 days from the date of this memorandum on corrective action taken or planned on each recommendation. If you wish to discuss the draft report, please call me or have your staff contact Steven L. Schaeffer, Assistant Inspector General for Audit, at (410) 965-9700.

James G. Huse, Jr.

Attachment

Office of the Inspector General

Jo Anne B. Barnhart
Commissioner of Social Security

Inspector General

Disability Determination Services’ Budget Execution and Reporting of Limitation on Administrative Expenses Funds (A-15-99-52001)

OBJECTIVE

Our objective was to evaluate the Social Security Administration’s (SSA) policies and procedures for State disability determination services’ (DDS) budget execution and reporting of obligations.

SSA is primarily responsible for implementing the general policies needed to process Disability Insurance (DI) and Supplemental Security Income (SSI) disability claims. Disability determinations under both DI and SSI are performed by an agency in each State according to SSA regulations. These State agencies are referred to as DDSs. SSA reimburses the DDSs for 100 percent of their allowable administrative costs.

Each year, SSA determines the amount of the DDS funding authorization. The DDS funding authorizations are allocated from SSA’s Limitation on Administrative Expenses (LAE) appropriations for DDSs to perform disability determinations. The LAE appropriations restrict the availability of LAE funds for obligation by SSA to that Federal fiscal year (FY). SSA’s funding levels for each DDS are reported on the "State Agency Obligational Authorization for Disability Programs" (Form 872). For SSA’s purpose, the Form 872 creates an obligation in SSA’s accounting records. After each Federal FY quarter, DDSs submit a "State Agency Report of Obligations for SSA Disability Programs," (Form 4513), reporting the obligations it incurred. Guidance for the DDSs’ financial management is contained in SSA’s Program Operations Manual System (POMS) Section DI 39506.

Previously, SSA requested the Office of Audit to audit the administrative costs claimed by the Ohio Bureau of Disability Determinations (OH-BDD) for FYs 1995 through 1997. During that audit, we determined that purchase orders for electronic data processing (EDP) and other equipment, amounting to $4.3 million, were issued by OH-BDD after the close of the respective Federal FYs.

We met with SSA Headquarters staff in Baltimore, Maryland, as well as, Chicago’s Regional staff and OH-BDD officials in Columbus, Ohio. We analyzed correspondence between SSA and OH-BDD. We reviewed a legal opinion issued by SSA’s Office of General Counsel (OGC). We also reviewed:

• Applicable SSA POMS;
• Rehabilitation Services Commission (RSC) financial management guidance;
• Funding documentation, Forms 872, maintained by the Office of Disability (OD) for all DDSs for the period FY 1995 through 1999; and
• Data collected during our audit of administrative costs claimed by OH-BDD.

We conducted our field work during October 1998 through April 2000. Our audit was conducted in accordance with generally accepted government auditing standards.

Our methodology included reviewing applicable Federal laws, regulations, and instructions pertaining to the LAE appropriation and administrative costs incurred by DDSs. Our audit of internal controls was limited to the SSA POMS, Section DI 39506, pertaining to DDS financial management and flow of documents relating to fund authorizations.

SSA’s budget execution and reporting regulations and policies need clarification. SSA’s budget practices did not provide sufficient time for the DDSs to complete the procurement process before the Federal fiscal yearend. As a result, DDSs were incorrectly obligating SSA LAE funds after the Federal fiscal yearend. Further,

OH-BDD did not accurately report the status of obligations on its Forms 4513.

OH-BDD did not have the authority to create new obligations using SSA LAE funds after the end of the Federal FY. While conducting the administrative cost audit for

OH-BDD, we found that Federal funds were used to create new obligations after the end of the Federal FY. Specifically, $4.3 million in LAE funds were obligated by

OH-BDD after the Federal FY for which the funds were authorized. We examined 27 vouchers for EDP and other equipment purchases over $10,000. Nineteen of the 27 vouchers, totaling $4.3 million, related to obligations/purchase orders issued after the close of the Federal FY. In some instances, the funds were not obligated until as much as 3 years after the close of the Federal FY.

OH-BDD believed it had authority to continue obligating SSA funds after the Federal FY closed. The OH-BDD managers stated that the funding for the purchase of EDP equipment was not received in sufficient time to go through the procurement process before the Federal FY ends. They also stated EDP equipment funding is not usually received until the last week of the Federal FY. OH-BDD managers believed the SSA POMS gave them the flexibility to follow the State’s rules for incurring and reporting obligations.

We analyzed the FY 1995 through FY 1999 funding patterns for the SSA authorizations of DDS purchases of EDP hardware and software (see Appendix B). SSA frequently authorized funding for EDP and other equipment too late in the FY. In fact, 52 of the 54 DDSs received some funding at least once on September 15th or later during the period FY 1995 through FY 1999. The total late funding for all DDSs’ purchases of EDP and other equipment was $30,568,346 during this period. We believe this practice makes it unlikely that DDSs can enter into valid obligations before the Federal fiscal yearend. SSA’s funding pattern supported OH-BDD’s position that the funds were obtained too late to reasonably expect DDSs to complete the procurement process and issue obligating documents (purchase orders). However, we did not believe that late funding provides authority for the DDSs to create new obligations after the Federal fiscal yearend.

OH-BDD managers cited POMS as giving it the authority to issue new obligations after the Federal fiscal yearend. Specifically, OH-BDD cited POMS section DI 39506.806 A., which states:

We disagree with OH-BDD’s interpretation of the POMS. Our interpretation is that the POMS instructs DDSs to bring conflicts between the POMS and State rules to the attention of SSA so that SSA can address the issue. It does not give the DDSs the authority to issue new obligations after the Federal fiscal yearend. Also, other POMS sections clearly address the availability of funding authority. For example, POMS section DI 39506.803 A.2. clearly states that: "Amounts available for obligation in one year, to the extent they exceed actual obligations, may not be added to the new obligation limit for the ensuing fiscal year."

To resolve the issue of the validity of creating new obligations after the Federal fiscal yearend, we pursued further authoritative guidance.

We identified a memorandum, dated December 12, 1995, written by the SSA Deputy Commissioner for Finance, Assessment, and Management to an SSA regional commissioner which, in reference to a DDS’s use of SSA LAE funds, stated:

We reviewed an OGC legal opinion regarding whether DDSs had the authority to create new obligations after the close of the Federal FY. In that opinion, OGC stated that the POMS amply reflects the fact that a State DDS’ obligational authorization is available on an annual basis, coincides with the Federal FY, and thus, expires at the conclusion of the Federal FY.

After evaluating the applicable POMS, Deputy Commissioner’s memorandum, and the OGC legal opinion, we have concluded that the DDSs may not use LAE funds to create new obligations after the end of the Federal FY for which they were appropriated.

However, we are not recommending recovery of the funds because: 1) the DDS used the funds for an appropriate purchase to the betterment of SSA’s programs and

2) because we believe the State acted, although in violation of POMS, in accordance with informal guidance from SSA officials. Also, the State provided written evidence that SSA not only knew the purchases were made after the Federal FY (the violation) but even offered advice to the State as to possible vendors and equipment (see Reporting of Obligations below).

SSA’s budgetary practices for funding all DDSs need to be improved to avoid leading the DDSs into inappropriate use of LAE funds. SSA needs to review and revise its POMS governing the financial management of the DDSs, specifically, clarifying the budgetary requirements relating to obligating Federal funds.

OH-BDD practice of obligating funds goes against the accounting concept of reliability. To be reliable, accounting data must be verifiable, have representative faithfulness, and have neutrality. We found no independent basis for OH-BDD’s charging accounting periods other than funds were available for the period charged. We even found instances of individual purchase orders being split and charged to multiple years. We believe the selection of the Federal FY charged was arbitrary in nature.

OH-BDD did not accurately report the status of its obligations on the Form 4513. For example, OH-BDD reported planned obligations as actual obligations on its Forms 4513. This practice causes misleading and inaccurate financial reporting of DDS operations to SSA. Such inaccurate reporting inhibits SSA’s ability to properly fund the DDSs’ needs in a given Federal FY. As a result, the DDSs may be overfunded in 1 year and underfunded in another. OH-BDD, as stated above, reported that at least $4.3 million was already obligated when in fact, no purchase order or other commitment-to-pay was issued. Additionally, SSA had not reconciled known, unobligated funding to the amounts reported on the Form 4513.

OH-BDD reported on its Form 4513 that all its funds had been obligated by the close of the Federal FY. OH-BDD budget staff told us they included planned purchases as obligations as a justification for amounts reported as obligated. Such inaccurate reporting inhibits SSA’s oversight of DDS financial management when, for example, determining if funds can be reallocated to cover immediate needs in other areas.

OD had documentation indicating that OH-BDD had not actually obligated the funds for the purchase of EDP and other equipment as reported on the Forms 4513. SSA provided funding of $3.3 million to OH-BDD for the purchase of EDP equipment on September 25, 1995. OH-BDD reported on its Form 4513, dated October 20, 1995, that it had obligated the EDP equipment funding by September 30, 1995. OH-BDD wrote to SSA, on February 28,1996, to discuss planned purchases of $4.3 million for EDP and other equipment. Per the OH-BDD correspondence, the $4.3 million consisted of (i) $3.3 million funding authorized on September 25, 1995 (for FY1995); (ii) $700,000 left from a previously funded pilot of a local area network; and (iii) $263,000 of funds taken from OH-BDD but promised to be restored when needed. SSA subsequently denied OH-BDD those specific planned purchases because the proposed equipment exceeded the funding guidelines already provided and consisted of equipment different than proposed at the time the funding was provided. Eventually, these funds were used to make purchases of EDP equipment that, presumably, met SSA’s approval.

The above sequence of events led us to conclude that OH-BDD had not entered into valid obligations as reported on the Forms 4513. OD was aware that the OH-BDD had not accurately reported the status of its funds/obligations for the purchase of EDP and other equipment as reported on the Forms 4513. In fact, we believe that OH-BDD could construe its violation of the POMS as being allowed and ratified by SSA since SSA had not objected to its plans to use the LAE funds to create new obligations after the FY ended.

We believe that OD and the regional offices need to better enforce SSA’s formal, written policies and procedures as outlined in POMS for DDS financial management. OH-BDD could not have obligated all of its funding if funding remained for future purchases of EDP and other equipment, as described in correspondence between OH-BDD and SSA. Based on correspondence from OH-BDD, the amounts reported as obligated could not have been accurate. In fact, OD should have been concerned when the DDS reported that $3.3 million had been obligated only 5 days after the funding was provided.

SSA needs to review its regulations and POMS governing the financial management of the DDSs and clarify the financial requirements relating to the obligation of SSA funds. SSA needs to scrutinize the amounts of obligations being reported by the State DDSs to ensure the reasonableness of the reported amounts.

We recommend SSA:

1. Revise its budget practices for authorizing DDS purchases of EDP hardware and software so as to allow DDSs sufficient time to establish valid obligations (contracts) before the Federal fiscal yearend.
2. Revise its regulations and/or POMS, as needed, to clearly define the budgetary financial management requirements and limitations imposed on DDSs’ use of Federal funds.
3. Determine if the Chicago Regional Commissioner should direct OH-BDD to reclassify the EDP and other equipment purchases to the Federal FY in which the purchase orders were issued, as noted in our audit. Based on the results of that determination, direct all regional commissioners to review DDS EDP and other equipment purchases to assure consistent and appropriate recording.
4. More closely review the Forms 4513 submitted by the DDSs, as part of SSA’s fiscal oversight, to see if the reported financial data correspond with other known information and call into question any discrepancies.

SSA agreed with three of our four recommendations (i.e. recommendations 1, 2 and 4). Regarding recommendations 1 and 2, SSA states in its response that its in the process of revising POMS to address our concerns regarding revisions to certain budgetary practices. Regarding recommendation 4, SSA states it is also in the process of revising SSA Form-4513 to provide more detail of DDS expenditures to address DDS fiscal oversight concerns. SSA disagreed with our recommendation 3. (See Appendix C for the full text of SSA’s comments to our draft report)

We believe the Agency’s response that it disagrees with our recommendation 3 is the result of SSA misinterpretation. Recommendation 3 asks SSA to make a determination regarding the FY reclassification of certain equipment purchases. SSA’s determination not to reclassify those expenditures is not inconsistent with the recommendation.

James G. Huse, Jr.

Appendices

Appendix A – Acronyms

Appendix B - SSA’s Yearend Funding of Disability Determination Services

Electronic Data Processing Purchases

Appendix C - SSA Comments

Appendix D - OIG Contacts and Staff Acknowledgements

Agency Comments

OIG Contacts and Staff Acknowledgements

OIG Contacts

Frederick C. Nordhoff, Director, Financial Management and Performance Monitoring Audit Division, (410) 966-6676
Carl Markowitz, Audit Manager, (410) 965-9742

In addition to those names above:

Lance Chilcoat, Team Leader
Sigmund Wisowaty, Auditor-in-Charge
Philip Rogofsky, Audit Manager
Annette DeRito, Program Analyst