VIA HAND DELIVERY. May 27, Mr. John Keel, CPA Texas State Auditor Robert E. Johnson, Sr. Building 1501 North Congress Ave.

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1 INTERNAL AUDIT Michelle Finley, Chief Internal Auditor VIA HAND DELIVERY May 27, 2014 Mr. John Keel, CPA Texas State Auditor Robert E. Johnson, Sr. Building 1501 North Congress Ave. Austin, TX Dear Mr. Keel, On October 23, 2013, a concern was reported to the University of North Texas System ( UNTS ) Internal Audit department ( IA ) regarding a funding practice at the University of North Texas ( UNT ) related to state funded benefits. UNTS IA conducted an initial review, engaging Deloitte & Touche, LLP ( Deloitte ) to assist, and subsequently informed the Texas State Auditor s Office ( SAO ). In response, the SAO opened an investigation and requested that UNTS IA quantify whether any excess state benefits were received during the time period of September 1, 2004 through April 30, As requested, the analysis performed by Deloitte is enclosed. The funding practice was reviewed in connection with General Appropriations Act, Article IX, Part 6, Section 6.08 (b), which specifies, Unless otherwise specifically authorized by this Act, the funds appropriated by this Act out of the General Revenue Fund may not be expended for employee benefit costs, or other indirect costs, associated with the payment of salaries or wages, if the salaries or wages are paid from a source other than the General Revenue Fund except for public community or junior colleges. Article III, Section 6.08(b) further provides, No educational and general funds appropriated to any institution or agency named in this article may be expended on auxiliary enterprises, unless specifically authorized in this Act. During the period in question, excess state funding was obtained by UNT through: Deposits of locally generated funds into and/or expenditure transfers out of UNT s general revenue state treasury account that provided for additional state salary/wage and benefits funding opportunities, and Submissions for reimbursement of salary/wage expenditures for ineligible employees, which resulted in excess state-funded benefits. The enclosure outlines the methodology for quantification discussed with the SAO and the results of the analysis of excess state funded salaries and benefits. UNTS IA is continuing to review controls associated with this practice and making recommendations to management Union Circle, # TEL Denton, TX FAX internalaudit@untsystem.edu

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3 University of North Texas System UNT Benefits Funding Proportionality Analysis University of North Texas System Deloitte & Touche LLP May 27, 2014

4 May 27, 2014 Ms. Michelle Finley Chief Internal Auditor University of North Texas System 1155 Union Circle, # Denton, TX Deloitte & Touche LLP 2200 Ross Avenue Suite 1600 Dallas, TX USA Tel: Fax: Dear Ms. Finley: Deloitte & Touche LLP ( Deloitte & Touche ), in conjunction with the University of North Texas System ( UNTS ) Office of the Chief Internal Auditor ( UNTS Internal Audit ), has completed an analysis of the University of North Texas ( UNT ) salary expenditures and associated benefits funded through the State of Texas general revenue appropriation ( appropriation 10752, fund 0001 ) during appropriation years ( AY ) as a result of the Texas State Auditor s Office ( SAO ) request to UNTS Internal Audit. The analysis performed, and assumptions used, are outlined in this report and were jointly developed with UNTS Internal Audit. The purpose of this report is to summarize the results of the analysis. Our services were performed in accordance with the Statement on Standards for Consulting Services issued by the American Institute of Certified Public Accountants (AICPA). Our services did not constitute an engagement to provide audit, compilation, review, or attestation services as described in the pronouncements on professional standards issued by the AICPA, and, therefore, we will not express an opinion or other form of assurance with respect to our services. In addition, our services did not constitute an examination or compilation of prospective financial information in accordance with standards established by the AICPA. We did not provide any assurance regarding the outcome of any future audit or regulatory examination or other regulatory action; nor did we provide any legal advice regarding our services; the responsibility for all regulatory and legal issues with respect to these matters resides with UNTS. It is further understood that UNTS management is responsible for, among other things, identifying and ensuring compliance with laws and regulations applicable to UNT and UNTS financial statement activities. UNTS is solely responsible for providing accurate and complete information requested by Deloitte & Touche. Deloitte & Touche has no responsibility for the accuracy or completeness of the information provided by or on behalf of UNTS or other state agencies. This report is intended solely for the information and internal use of UNTS and is not intended to be, and should not be, used by any other party. No other person or entity is entitled to rely, in any manner, or for any purpose, on this report. The report may be provided to other parties as specifically designated in the engagement letter dated October 17, We appreciate the cooperation received from management and staff of UNTS and UNT during the performance of this analysis. Very truly yours, Deloitte & Touche LLP By: Shawn Kilchrist, Director University of North Texas System UNT Benefits Funding Proportionality Analysis 1

5 Table of Contents Section Name Page Number Executive Summary 3 Appendix A Analysis Results 5 University of North Texas System UNT Benefits Funding Proportionality Analysis 2

6 Executive Summary Objective, Scope, and Approach The objective of this analysis was to calculate the potential amount of eligible and ineligible salary expense reimbursed to UNT through appropriation 10752, fund 0001, and any excess benefit expenditures reimbursed on UNT s behalf. This analysis was performed jointly with UNTS Internal Audit and is based upon data provided to UNTS Internal Audit by the Texas Comptroller of Public Accounts ( TXCPA ) from the Uniform Statewide Accounting System ( USAS ), the General Appropriation Act ( GAA ) for appropriation years published by the State of Texas Legislative Budget Board ( LBB ), and other information provided by the Employees Retirement System of Texas ( ERS ) and Teacher Retirement System of Texas ( TRS ). Information from the UNTS Enterprise Information System ( EIS ) was used to assess and calculate the amount of ineligible salary expense. A customized approach for this analysis was developed in unison with UNTS Internal Audit and socialized with TXCPA and SAO. For each appropriation year, the following procedures were performed: Step 1: The appropriation establishment amount for appropriation 10752, fund 0001 was reduced by bond retirement strategies outlined in the GAA, appropriation lapses, and net appropriation transfers. The result of this step provided the net appropriation balance used in the analysis. Step 2: Local fund deposits made to appropriation 10752, fund 0001 and net expenditure transfers were added to the net appropriation balance. The result of this step provided the amount of available funding for expenditures. Step 3: The amount of non-salary expenditures, eligible salary expenditures, and ineligible salary expenditures were quantified using data from USAS and a defined methodology to assess eligibility. The result of this step provided the amount of eligible salary expenditure in excess of the net appropriation balance defined in Step 1. Step 4: For each of the benefit expenditure groupings (ERS, TRS, Old Age Survivors Insurance (OASI), and Optional Retirement Program (ORP)), the actual benefit expenditure was compared to total salary expenditure to provide the percentage of benefit expenditure when compared to salary for each benefit grouping. Step 5: For each benefit expenditure group, the percentage defined in Step 4 was applied to the excess eligible salary expenditures, total ineligible salary expenditure, and net expenditure transfer amounts. The result of this step provided the amount of estimated potential excess of benefit expenditure received. Step 6: If the amount of ineligible salary expenditure exceeded the amount of local fund deposits made to appropriation 10752, fund 0001, the amount of ineligible salary expenditure not funded through local deposits made was calculated to quantify ineligible salary expenditure potentially funded. University of North Texas System UNT Benefits Funding Proportionality Analysis 3

7 Analysis Results The results of the analysis of potential excess benefits and ineligible salary expenditure is outlined in the table below and is intended to be used for discussion between UNTS management and relevant state oversight agencies: Fiscal Year Potential Excess Benefits* Potential Excess Ineligible Salary* 2004 $3,771, ,932, ,957, ,355, ,292, ,995, ,354, ,952, ,495, ,340, , , , , Total $80,595, $2,866, *Assumptions Used in Analysis USAS was considered to be the system of record related to appropriation establishment amounts, appropriation transfer amounts, local deposit amounts, expenditure transfer amounts, non-salary expenditure amounts, salary expenditure amounts, OASI expenditure amounts, and ORP expenditure amounts in the analysis. The GAA for each applicable appropriation year was considered to be the system of record related to tuition revenue bond retirement and Skiles Act bond retirement strategies amounts in the analysis. In 2010 & 2011, an appropriation lapse was applied to and reduced from the appropriation establishment amount less bond retirement strategies to reflect the required appropriation reductions taken in those years. The ineligible amount of salary expenditure was determined by a methodology, discussed in a previous section of this report, which determined the expected funding source for departments at UNT. Based on EIS information, the amount of salary expenditures funded through appropriation 10752, fund 0001 expected to be funded through local funds was considered to be the amount of ineligible salary expenditure. ERS expenditure reports provided by TXCPA to UNTS Internal Audit were considered to be the documents of record related to ERS expenditure amounts for in the analysis. For 2014, the ERS expenditure amount is an estimate based on two-thirds of the ERS appropriation amount for UNT in that year. A TRS expenditure outline provided by TRS to UNTS Internal Audit was considered to be the document of record related to TRS expenditure amounts in the analysis. Repayments of benefit expenditures funded through fund 0001 were not reimbursed when salary expenditure transfers were made from fund 0001 to fund Expenditures in excess of the net appropriation balance relate to salary expenditures rather than non-salary expenditures. The timing of when the expenditures were incurred was not considered when quantifying the excess eligible salary expenditure amount. Data from EIS for fiscal year ( FY ) 2004 begins on December 4, 2003 due to limitations related to system conversion issues and data from USAS and EIS for FY2014 was provided through April 30, University of North Texas System UNT Benefits Funding Proportionality Analysis 4

8 Appendix A Analysis Results Line Data Line Item Calculation Ref. A Appropriation 10752, Fund 0001 Appropriation Establishment Amount - $ 91,844, $ 92,135, $ 93,968, $ 93,294, $ 103,903, $ 103,768, $ 106,823, $ 107,842, $ 94,708, $ 94,070, $ 99,417, B Net Appropriation Adjustments - 6,242, ,828, ,970, ,419, ,968, ,610, ,123, ,418, ,648, ,456, ,064, C Net Appropriation Balance A - B 85,601, ,306, ,997, ,874, ,934, ,157, ,700, ,424, ,060, ,613, ,352, D Local Fund Deposits Made to Appropriation 10752, Fund ,804, ,002, ,322, ,025, ,000, ,010, ,928, ,387, , E Net Expenditure Transfers In/Out for Appropriation 10752, Fund , , ,508, ,014, ,546, ,735, ,527, ,832, F Available Funding for Expenditures C + D + E 103,331, ,310, ,827, ,914, ,480, ,903, ,156, ,812, ,892, ,630, ,352, G H I J Non-salary expenditure incurred through Appropriation 10752, Fund 0001 (Not Including Principal & Interest) Eligible Salary Expenditure funded through Appropriation 10752, Fund 0001 Potential Ineligible Salary Expenditure funded through Appropriation 10752, Fund 0001 Eligible Salary Expenditure in excess of Net Appropriation Balance and Non- Salary Expenditures - 3,744, , ,729, ,246, ,348, ,000, ,312, ,418, ,363, ,065, ,069, ,896, ,669, ,900, ,394, ,707, ,168, ,954, ,434, ,365, ,679, ,046, , , , , ,199, ,584, ,791, ,069, ,340, , , C - G - H (17,040,362.40) (16,953,154.10) (23,632,375.17) (29,767,184.55) (24,121,856.96) (50,011,852.18) (59,566,755.84) (71,428,203.55) (13,668,512.58) 868, ,235, K Total Calculated Potential Excess ERS Expenditure - 1,994, ,775, ,825, ,443, ,949, ,997, ,373, ,148, ,086, , , L Total Calculated Potential Excess TRS Expenditure - 436, , , , , ,605, ,012, ,182, , , , M Total Calculated Potential Excess OASI Expenditure - 772, ,166, ,701, ,129, ,778, ,771, ,253, ,687, ,766, , , N Total Calculated Potential Excess ORP Expenditure - 567, , , ,002, , ,620, ,714, ,934, , , , O Total Potential Excess Funded Benefits K + L + M + N 3,771, ,932, ,957, ,355, ,292, ,995, ,354, ,952, ,495, , , P Total Potential Funded Ineligible Salaries If I > D, I - D ,340, , , Q Total Potential Excess Funded Salaries and Benefits O + P $ 3,771, $ 3,932, $ 5,957, $ 7,355, $ 6,292, $ 11,995, $ 15,354, $ 15,952, $ 10,835, $ 1,277, $ 737, University of North Texas System UNT Benefits Funding Proportionality Analysis 5