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Thursday, June 7, 2012

Missouri Auditor Reviews End-of-Year Spending

BY ELIZABETH CRISP • > 573-635-6178 | Posted: Wednesday, June 6, 2012 9:37 am

JEFFERSON CITY • With the end to the 2012 budget year quickly approaching, Missouri Auditor Tom Schweich released a report today on spending trends near the end of prior budgets.
The myth, and sometimes truth, of end-of-the-fiscal year spending sprees isn’t new.
Those who oppose the practice say it artificially inflates agencies’ needs for the coming year and prevents the state from using the money left over for future expenses. It gives agency heads the opportunity to say they spent all of their budget and can’t handle more cuts, as opposed to allowing lawmakers to notice a large sum of unspent money at the end of the year.
Those who favor the spend-down agree that the point is to prevent further cuts – particularly amid the budget crisis.
Schweich said he wanted to look into the practice because it is often discussed.
“I said, 'Let’s see if it’s true or not,'” he said.
And the report shows that it may be.
“State agencies appear to make an effort toward the end of the year to identify remaining (general revenue fund) appropriations and use those available funds instead of allowing them to lapse,” the auditor's report states. “Some agency personnel claim this is the result of fiscal constraints due to the state’s economic crisis and the potential for governor’s withholdings.”
Schweich noted that agencies generally purchased items they would use down the road, rather than useless items.
“Clearly there was a rush to spend a lot of money at the end of the year – the good news is we didn’t find anyone buying things that weren’t needed," he said. “I was most worried about blatant fraud and we didn’t find that.”
The auditor's office looked at five state agencies that spent 25 percent or more of their general revenue dollars in May and June of the past two fiscal years.
The Department of Revenue appeared to stock up on postage and cigarette stamps at the end of the year.
According to the report, DOR employees said the June purchases were made to maintain inventory, but the auditor concludes that it may have been excessive.
In the final days of the last fiscal year, DOR purchased $573,000 in postage – pushing its inventory above $600,000. The agency used $330,000 in postage in July and made no postage purchases that month. “Thus, the DOR subsidized postage usage for the entire month of July 2011 and into August 2011 with these two year-end purchases,” the report states.
On the cigarette stamps (vendors who sell cigarettes in the state receive these stamps upon paying taxes on packs of smokes) the audit found that DOR bought about $248,000 at the end of the 2010 fiscal year with the intention of selling the stamps the following year. The purchase meant DOR’s stamp inventory on June 30, 2010 was higher than the total amount of stamps sold during the entire fiscal year for most stamp types. The same thing happened the following year.
The report notes that the state does not have specific guidelines to determine if such purchases that result in higher than normal inventory levels are proper.
Schweich has recommended that the Office of Administration consider legislation, regulations, policies or procedures to provide guidance on the proper use of general revenue appropriations at the end of the fiscal year.
“In addition, the OA should consider implementing additional controls to ensure year-end purchases are made in accordance with sound financial and management practices,” the recommendation states. “At a minimum, the guidance should address expending payments before due, higher than normal inventory levels, the usage of the state’s general fund instead of agency-controlled dedicated funds and items not placed into service in a timely manner.”
Schweich said he will also put this on his legislative agenda for the coming year.
The review notes that there are legitimate reasons for buying big-ticket items at the end of the year - for one thing, agencies have to watch to see if the governor will be making any withholds from the budget.
The Office of Administration, which is included in the report, responded – focusing mostly on the positive and perhaps taking some liberties with what the auditor’s report says, putting a more favorable spin on it.
Specifically, OA’s response cites two lines from the auditor’s report but drops qualifying words from each quote.
From the OA response:
“After an audit of year end spending practices of four departments covering a two year period, the audit ‘did not identify instances of wasteful spending.’ In fact, it was found that ‘the agencies had a legitimate need for the items or services reviewed.’ As noted in the audit, there are legitimate reasons for year end spending by departments, including the need to delay spending to manage agencies' budgets to determine what funds, if any, will be accessible for the remainder of the fiscal year.” (Note: The audit actually covered five agencies – which is noted throughout the auditor’s report. The OA response incorrectly states that it was four departments.)
What the auditor’s report actually says:
“While our test work determined the agencies generally had a legitimate need for the items or services we reviewed, we noted examples of year end purchases that could have been made from subsequent year appropriations.”
And - “Our audit did not identify widespread instances of wasteful spending; however, our report consists of various examples of year end purchases at the agencies we audited and reasons given by agency officials for making those purchases. In some cases, the purchases appear to have been disbursed to prevent the lapse of appropriated funds.”
Or if you want to turn to the summary of the report, which is intended to break it down for citizens: While the audit did not identify instances of wasteful spending, the audit did identify examples of purchases made at year end that: 1) were expedited and paid before due; 2) resulted in higher than normal inventory levels; 3) were charged to the state's General Revenue Fund instead of agency controlled dedicated funds; and 4) were not placed into service in a timely manner.”
Some more details from the report:
The Office of Administration cut a check for $45,625 on June 23, 2010 but then held it for three months.
In a June 10, 2010 email to the vendor, an OA employee explained the plan.
“As we are at the end of the fiscal year, we need to issue a check for this project to insure that we won’t lapse the funding. We will hold this check in our safe until the project is completed. In order to issue this check, we need to get a final invoice,” the email stated, according to the auditor’s report.
The check was released on Sept. 16, 2010.
The auditor’s report notes that state law does not allow advance payment of goods or services not yet received and payment for services in one fiscal year cannot come from the prior year’s budget.
“The invoice should not have been paid from a fiscal year 2010 appropriation,” the auditor’s report concludes.
DOR also followed the practice.
DOR held an $85,458 check that was issued on June 24, 2011 for several months.
The check - $50,986 of which came from general revenue dollars – paid for varoious hardware components that were part of an upgrade to the Transaction Management System software. The components were delivered and installed in Sept. 2011 and the check was released the following day.
“Therefore, the payment should not have been from fiscal year 2011 appropriations,” the audit states.
DOR personnel said the advance check writing was due to the vendor’s delay in delivering the hardware.
In several cases, agencies made payments early so they could use the full appropriation before it lapsed.
“This practice allows an agency to use funds remaining at the end of the year, thereby potentially increasing available funds in future years for other purposes.”
In one example, the Office of state Courts Administrator made advance payments for recurring network data line charges incurred the following year.
In June 2011, the OSCA paid about $96,000 for July 2011 data line charges, which should have fallen in fiscal 2012. The year before, nearly $231,000 was paid for July and August 2010 data line charges from the previous year’s budget.
“OSCA management indicated because of looming budget issues, paying for the monthly charges in advance was the most beneficial course of action,” the report states.
The Missouri Department of Corrections spent $313,198 on 550 handheld radio telephones and accessories for various facilities on June 23, 2011.
The equipment required programming before it could be used, which had to be bid out by the Office of Administration. The bidding had not started as of Nov. 4, 2011 so at least four months went by with the equipment basically unusable.
DOC also spent $103,925 on a washer extractor for the Western Reception, Diagnostic and Correctional Center on June 26, 2011. According to DOC management, it was unknown at the time the equipment specifications would require building modifications prior to installation. The bidding process for that installation also took several months, so the washer extractor could not be used until at least seven months after its purchase.
“The state does not have specific guidance to determine if it s proper to make payments at year end for equipment which will not be placed into service in a timely manner,” the report states.
DOC also used money left over at the end of FY2010 to make early lease payments. According to the report, DOC management said the leases were paid off early because general revenue dollars were available and cuts in coming budget years could threaten the agency’s ability to make future payments.

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