Performance Audit Report. Department of Human Resources The Maryland Energy Assistance Program and the Electric Universal Service Program

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1 Performance Audit Report Department of Human Resources The Maryland Energy Assistance Program and the Electric Universal Service Program Accounting Records Cannot Be Relied Upon to Provide Accurate Expenditure Information Inadequate Vendor Monitoring May Have Contributed to Ineffective Implementation of the Energy Assistance Information Technology System Upgrade Application Procedures Must Be Improved September 2001

2 This report and any related follow-up correspondence are available to the public and may be obtained by contacting the Office of Legislative Audits or the Department of Legislative Services Office of the Executive Director, 90 State Circle, Annapolis, Maryland. Alternate formats may be requested by contacting the Office of Legislative Audits at , (voice), or (toll-free voice), or (fax), and (Maryland Relay Service). Audit reports can also be viewed or downloaded from the Internet. Our web site address is

3 September 25, 2001 Delegate Samuel I. Rosenberg, Co-Chair, Joint Audit Committee Senator Nathaniel J. McFadden, Co-Chair, Joint Audit Committee Members of Joint Audit Committee Annapolis, Maryland Ladies and Gentlemen: We conducted a performance audit to assess the propriety of administrative expenditures relating to the Maryland Energy Assistance Program (MEAP) and the Electric Universal Service Program (EUSP), and of energy assistance benefits provided to low-income households. Recorded administrative expenditures totaled approximately $9 million for the period from July 1, 1999 to June 30, Our audit included the related activities performed by the Department of Human Resources Office of Home Energy Programs and of selected local administering agencies. We conducted this audit in response to a request made in April 2001 by the Chairmen of the Senate Budget and Taxation Committee and the House Committee on Appropriations. Based on our tests, administrative expenditures recorded as charges to the programs were properly approved and supported. However, our tests disclosed that expenditures totaling approximately $2.4 million were either misclassified or improperly recorded in the State s accounting records. For example, administrative expenditures were improperly recorded as program benefit expenditures or not properly allocated between the programs. Consequently, since the accounting records could not be relied upon to provide accurate expenditure information, we were unable to conclude, with reasonable certainty, whether the Office s administrative expenditures were limited to 10 percent or less of total program funding. If such costs exceeded 10 percent, it would result in either the State paying the excess and/or a reduction in the amounts available for program expenditures. Lack of established guidelines specifying the expenditures that comprise MEAP and EUSP administrative expenditures and how administrative costs that benefit both programs were to be allocated between the programs were major factors contributing to the unreliable accounting records.

4 The Office s process for procuring and monitoring the information technology contract related to the upgrade of the energy assistance information technology system was inadequate. For this contract, which totaled approximately $771,000, the Office did not document its technical evaluation process and did not adequately monitor the vendor s progress in completing the system upgrade. Inadequate monitoring of the vendor may have contributed to the ineffective implementation of the upgraded system in August The Office s procedures for processing energy assistance applications did not ensure that benefits were always awarded in the proper amount. For example, procedures had not been established to identify all sources of applicant income. Finally, Code of Maryland Regulations relating to MEAP and EUSP contained inconsistencies, for no apparent reason, in the treatment of household income, which is a critical factor in determining eligibility for energy assistance benefits. We wish to acknowledge the cooperation extended to us by the Office of Home Energy Programs and the local administering agencies during the audit. Respectfully submitted, Bruce A. Myers, CPA Legislative Auditor 2

5 Table of Contents Executive Summary 5 Background Information 9 Federal and State Laws and Regulations 9 Agency Responsibilities 9 Awarding of MEAP and EUSP Benefits 10 MEAP and EUSP Information Technology System 11 Scope, Objectives, and Methodology 15 Findings and Recommendations 17 Propriety of Administrative Expenditures Finding #1 Expenditures Were Not Always Properly Recorded in the 17 State s Accounting Records, Resulting in Uncertainty as to Whether the Amount of the Related Administrative Expenditures Exceeded Established Limitations Finding #2 The Office Had Not Obtained Audited Financial 19 Statements from Each Private Local Administering Agency or Conducted On-Site Monitoring Reviews at Each Agency Process for Procuring and Monitoring Contracts and Vendor Payments Finding #3 The Selection of the Vendor Awarded the Information 21 Technology System Enhancement Contract Was Not Sufficiently Documented and Mandatory System Requirements Were Not Addressed in a Related Contract Extension Finding #4 The Office Did Not Sufficiently Monitor the Progress of 23 the System Enhancement Contractor and the Related Contract Did not Require Payments to be Based upon Deliverables Finding #5 Invoices Were Not Always Sufficiently Detailed or 24 Supported Finding #6 The Plan Developed to Redesign the Information 24 Technology System Did Not Contain Interim Deadlines 3

6 Procedures for Processing Energy Assistance Applications and Awarding Benefits Finding #7 Procedures Had Not Been Established to Identify 27 Unreported Applicant Household Income, and MEAP and EUSP Regulations Concerning the Treatment of Household Income Were Inconsistent Finding #8 Local Administering Agencies Did Not Always Award 29 Benefits in the Proper Amounts or Obtain Documentation Supporting Applications Agency Response Appendix 4

7 Executive Summary Objectives We had three specific audit objectives: 1. To review Maryland Energy Assistance Program (MEAP) and Electric Universal Service Program (EUSP) administrative expenditures recorded as charges during fiscal years 2000 and 2001 and determine whether these expenditures were valid administrative charges to the programs, were properly authorized and supported and did not exceed 10 percent of energy assistance program funding, in accordance with limitations imposed by Federal regulations and the Public Service Commission. 2. To assess the adequacy of the Department of Human Resources process for procuring and monitoring information technology contracts relating to the energy assistance program. 3. To assess the adequacy of procedures for processing energy assistance applications during fiscal year 2001, and determine whether assistance payments were made only on behalf of eligible applicants in the proper amounts. Conclusions Administrative expenditures totaled $8,960,141 for the period July 1, 1999 to June 30, Based on our tests, administrative expenditures were generally properly approved and supported. Although we determined that most of these costs were valid costs of the programs, our tests disclosed that expenditures totaling $2,373,000 were either misclassified or improperly recorded. For example, certain administrative costs totaling approximately $481,000 for fiscal year 2000 were erroneously recorded as program benefit expenditures. Conversely, for fiscal year 2001, we identified certain program benefit expenditures totaling approximately $962,000 that were misclassified in the State s accounting records as administrative expenditures. Consequently, since the Office s accounting records could not be relied upon to provide accurate expenditure information, we were unable to conclude, with reasonable certainty, whether the Office s administrative expenditures were limited to 10 percent or less of total program funding, in accordance with Federal guidelines and Public 5

8 Service Commission directives. If such costs exceeded 10 percent, it would result in either the State paying the excess or a reduction in the amounts available for program benefits. The Office s lack of established guidelines specifying the expenditures that comprise MEAP and EUSP administrative expenditures and how administrative costs that benefit both programs were to be allocated between the programs was a major factor contributing to the unreliable accounting records. The Office s process for procuring and monitoring information technology contracts relating to the energy assistance program was not sufficient for one of three contracts that we reviewed. The amount of this contract and two subsequent contract extensions totaled $771,358. For example, the Office did not document its evaluation of the technical proposals submitted by the three firms that bid on the contract to upgrade the energy assistance information technology system, and did not adequately monitor the vendor s progress in completing the system upgrade. Also, related contract extensions lacked schedules of project deliverables that would have enabled the Office to determine whether amounts paid to the vendor were commensurate with vendor progress. Inadequate monitoring of the vendor may have contributed to the ineffective implementation of the upgraded system in August Additionally, for two of the three contracts tested, the Office did not obtain documentation to substantiate the validity of labor charges included on vendor invoices and such invoices were not always sufficiently detailed to enable verification with contract terms. The Office had not established adequate procedures for processing energy assistance applications and did not always award benefits in the proper amounts. Specifically, adequate procedures had not been established to identify sources of income not reported by applicants. In addition, Code of Maryland Regulations relating to MEAP and EUSP contained inconsistencies, for no apparent reason, in the treatment of household income, which is a critical factor in determining eligibility for energy assistance benefits. Finally, our test of 100 energy assistance applications processed during fiscal year 2001 with assistance benefits awarded totaling $62,227 disclosed that benefits for 14 applicants were not awarded in the proper amount, resulting in a net overpayment of assistance benefits totaling $6,148. 6

9 Recommendations We recommend that the Office establish guidelines addressing the treatment of MEAP and EUSP administrative expenditures, and that such expenditures be properly recorded in the State s accounting records. We also recommend that the Office properly document contract procurement decisions and adequately monitor vendors progress in completing contractual obligations. To ensure the propriety of payments to vendors for contractual services, we recommend that the Office include schedules of project deliverables in contracts, obtain documentation supporting labor charges on vendor invoices and require such invoices to be submitted in sufficient detail to facilitate a verification of amounts billed with contract terms. Finally, we recommend that the Office establish adequate procedures over energy assistance application processing, address inconsistencies in the Code of Maryland Regulations concerning applicant household income and award assistance benefits only on behalf of eligible applicants in the proper amounts. 7

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11 Background Information Federal and State Laws and Regulations The Federal Low Income Home Energy Assistance Act of 1981 established the Low Income Home Energy Assistance Program (LIHEAP) for the purpose of assisting low-income households with home heating costs. In accordance with the Act, the Federal Department of Health and Human Services adopted regulations governing the operation of the LIHEAP. The regulations provide, in part, that not more than 10 percent of program funding may be spent on administration of the program, and that administrative expenditures in excess of 10 percent of program funding are the responsibility of the State. Article 41, Section of the Annotated Code of Maryland established the Maryland Energy Assistance Program (MEAP) to administer the LIHEAP. In addition, Chapters 3 and 4, Laws of Maryland, 1999, required the Public Service Commission to establish a Universal Services Program to provide assistance to low-income electric customers. The law charged the Commission with oversight responsibility for the Program but assigned responsibility for administering the Program to the Department of Human Resources. The Commission issued an order dated January 28, 2000 establishing the Electric Universal Services Program (EUSP) to assist low-income electric customers with bill payment, retirement of electric bill arrearages and weatherization assistance. The Commission limited fiscal year 2001 administrative expenditures to not more than 10 percent of program funding. The EUSP began providing assistance on July 1, MEAP and EUSP regulations have been adopted in the Code of Maryland Regulations, Title 7. Agency Responsibilities Responsibility for operating MEAP and the bill payment and arrearage retirement components of EUSP rests with the Department of Human Resources Office of Home Energy Programs. Since a similar program existed under the Department of Housing and Community Development, that Department administers the weatherization assistance component of EUSP, which is outside the scope of our audit. According to the Office s records as of August 1, 2001, MEAP and EUSP funding and expenditures during fiscal years 2000 and 2001 were as follows: 9

12 Fiscal Year 2000 MEAP Fiscal Year 2001 EUSP Fiscal Year 2001 Program Funding $24,059,984 $35,620,103 $34,000,000 10% Administrative $2,405,998 $3,562,010 $3,400,000 Allowance Recorded Administrative $1,698,973 $3,869,450 $3,391,718 Expenditures (1) Recorded Administrative 7.06% 10.86% 9.98% Expenditures as a Percentage of Program Funding Recorded Program Expenditures (2) $26,206,673 $34,659,390 $28,707,642 (1) Recorded administrative expenditures exclude overhead costs (such as employee salaries of Department units that provide support services to the Office). (2) Recorded program expenditures may exceed program funding because prior year s obligations were paid in the subsequent year. MEAP funding is derived from an annual LIHEAP block grant while EUSP is funded through surcharges assessed to industrial, commercial and residential electric customers. Awarding of MEAP and EUSP Benefits Low-income households apply for MEAP and EUSP bill payment and arrearage retirement assistance by submitting an application to one of twenty local administering agencies. Generally, the agencies are local departments of social services or private community assistance agencies. Applicants must meet eligibility criteria, such as limitations on total household income. Agency personnel obtain documentation to verify certain information recorded on the application, such as total household income, residency status and household size. The applicant s information is entered into the Office s automated system, which determines the applicant s eligibility and, if eligible, calculates the amount of assistance that will be awarded. 10

13 The amount of assistance awarded depends upon the applicant s total household income, household size, the type of fuel used by the applicant for heating and the amount of electricity used by the applicant. The Office s procedures provide that local administering agency supervisory personnel review the application, supporting documentation and the information entered on the system and approve the application on-line. Approved applications are batched and submitted electronically to the Office for payment. Energy assistance benefits are paid directly to the applicant s energy supplier or to the applicant s landlord if utilities are included in the applicant s rental payments. According to the Office s records as of August 7, 2001, the Office provided MEAP, EUSP bill payment and EUSP arrearage retirement assistance to low-income households during fiscal year 2001, as follows: MEAP EUSP Bill Payment EUSP Arrearage Retirement Number of Households 76,065 64,923 25,933 Receiving Assistance Average Benefit Per Household $456 $309 $287 MEAP and EUSP Information Technology System In April 1999, the Office contracted with a vendor to enhance the existing MEAP information technology system. The Office procured the vendor s services through the statewide Network Management Services (NMS) agreement at an initial cost of $293,610. The Department of Budget and Management established the statewide NMS agreement so that State agencies could obtain related services, such as enhancing information technology systems, from competent vendors in a cost effective and timely manner. With the establishment of EUSP, the Office opted to integrate the EUSP application process into the existing information technology system and, as a result, extended its contract with the vendor in January 2000 at a cost of $259,722. Due to delays in completing the project, the Office extended the contract with the vendor a second time in June 2000 for an additional $218,026. Therefore, the total contract costs for this system enhancement were $771,358. The Office implemented the enhanced information technology system in August 2000; however, system performance failed to meet the Office s expectations. As the volume of energy assistance applications increased in November 2000, the system experienced additional operating deficiencies and a backlog of unprocessed applications grew. By late January 2001, the backlog totaled 11

14 approximately 25,000 applications. To prevent the delay in processing applications from resulting in the termination of energy services to low-income households during the winter months, the Public Service Commission issued an order on February 6, 2001 that placed a moratorium on the termination of energy services for low-income customers until March 31, To address continuing application processing delays caused by unresolved system operating deficiencies, the Office contracted with another vendor on January 31, 2001 to record the backlogged applications into the system. The vendor entered approximately 26,400 applications over a 3-week period at a cost to the Office of $322,965. However, the local administering agencies still had to process the applications (for example, obtain documentation of income from the applicants) and applications still required review and approval by agency supervisory personnel. Consequently, energy assistance benefits were not awarded to many eligible applicants until several months after the vendor had recorded the applications in the system. In March 2001, the Department of Budget and Management contracted with a consultant to evaluate the MEAP/EUSP information technology system and the Department of Human Resources network as a whole. The Office incurred the cost of the contract, which totaled $185,000. The consultant s reports, released in March and April 2001, identified numerous deficiencies including the following: The Office did not clearly define system requirements and expectations and the vendor did not follow a best practice application development methodology. A project management team had not been established. Rather, one Office employee, with limited information technology expertise, was responsible for monitoring the project. Sufficient testing and quality assurance checks were not conducted throughout the course of system development. The consultant s recommendations to improve system performance were incorporated into a seven-phase system redesign plan developed by a project management team consisting of representatives from the Office, the Department s Office of Information Technology and the local administering agencies. The redesign plan is intended to correct the problems and make the system fully operational by June 30, Until that time, the existing system, which 12

15 continues to experience operational deficiencies, will be used to process energy assistance applications. However, local administering agency personnel advised us that they do not anticipate experiencing further significant application processing delays. Specifically, the amount of applicant data that will need to be entered into the system during fiscal year 2002 will be significantly reduced because the local administering agencies will only have to enter limited data for applicants already in the system. 13

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17 Scope, Objectives, and Methodology Scope We conducted a performance audit of administrative costs recorded as charges to the Maryland Energy Assistance Program (MEAP) and the Electric Universal Service Program (EUSP), and of related energy assistance benefits provided to low-income households. Our audit included the related activities performed by the Department of Human Resources Office of Home Energy Programs and the local administering agencies in Baltimore City, and Baltimore and Harford Counties. The audit was conducted under the authority of the State Government Article, Section of the Annotated Code of Maryland and was performed in accordance with generally accepted government auditing standards. Objectives The objectives of our audit were: (1) to review MEAP and EUSP administrative expenditures made during fiscal years 2000 and 2001 and determine whether these expenditures were valid administrative charges to the programs, were properly authorized and supported, and did not exceed 10 percent of energy assistance program funding; (2) to assess the adequacy of the Department s process for procuring and monitoring information technology contracts relating to the energy assistance program; and (3) to assess the adequacy of procedures for processing energy assistance applications during fiscal year 2001, and determine whether assistance payments were made only on behalf of eligible applicants in the proper amounts. Our performance audit did not include a review to determine the extent, if any, to which costs (administrative and assistance benefits) attributable to either program were charged to other departmental units and programs. In this regard, certain costs (such as employee salaries of Department units that provide support services to the Office) were not considered by the Office to be administrative costs of the programs. Additionally, our audit did not include a review of the weatherization assistance component of EUSP, which was administered by the Department of Housing and Community Development, or the collection of EUSP surcharges by utility companies and the transfer of those funds to the Comptroller of the Treasury. Methodology To accomplish our objectives, we reviewed applicable Federal and State laws and regulations as well as policies and procedures established by the Department of Human Resources and the local administering agencies. We also reviewed the calculation of the percentage of MEAP and EUSP costs spent on the administration of the programs and conducted related tests of administrative and program costs. Additionally, we reviewed the Office s process for procuring 15

18 information technology contracts, monitoring vendor performance and compliance with these contracts, and for processing the related vendor payments. Finally, we interviewed local administering agency personnel involved in determining applicant eligibility for energy assistance benefits and conducted tests of benefits awarded on behalf of low-income households. The performance audit was conducted in response to a request made in April 2001 by the Chairmen of the Senate Budget and Taxation Committee and the House Committee on Appropriations. Our fieldwork was conducted from April 2001 to August The Office s response to our findings and recommendations appears as an appendix to our report. As prescribed in the State Government Article, Section of the Annotated Code of Maryland, we will advise the Office regarding the results of our review of its responses. 16

19 Findings and Recommendations Propriety of Administrative Expenditures Conclusions Administrative expenditures were generally properly approved and supported, and represented valid charges to the programs. However, based on our tests, numerous administrative and program expenditures were either misclassified in the State s accounting records or not properly allocated between the programs. Specifically, our test of MEAP and EUSP expenditures totaling $8,289,714 made during fiscal years 2000 and 2001 disclosed that expenditures totaling $615,168 and $1,757,811, respectively, were not properly recorded as administrative or program expenditures. These amounts include administrative expenditures that were charged entirely to either MEAP or EUSP when the expenditures should have been shared by the programs. Since the Office s accounting records could not be relied upon to provide accurate expenditure information, we were unable to conclude, with reasonable certainty, whether the Office s recorded administrative expenditures were limited to 10 percent or less of total program funding. Finally, the Office was not properly monitoring local administering agencies administrative expenditures since it did not always obtain audited financial statements or conduct on-site monitoring reviews. Finding #1 MEAP and EUSP expenditures were not always properly recorded in the State s accounting records, resulting in uncertainty as to whether the amount of the related administrative expenditures exceeded limitations imposed by Federal regulations and the Public Service Commission. Analysis Our tests of 140 MEAP and EUSP administrative and program expenditures totaling $8,289,714 made during fiscal years 2000 and 2001 disclosed that 106 expenditures totaling $615,168 and $1,757,811, respectively, were not properly classified in the State s accounting records or properly allocated between the programs. We noted the following: Program expenditures totaling $961,525 for fiscal year 2001 (that is, energy assistance benefit payments) were misclassified in the accounting records as expenditures for administration of the programs (such as costs incurred by the 17

20 local administering agencies). We also noted that administrative expenditures totaling $480,718 for fiscal year 2000 were erroneously recorded as program expenditures. Administrative expenditures totaling $151,815 for fiscal year 2001 were charged entirely to either MEAP or EUSP even though the related goods or services benefited both programs. Such expenditures should have been allocated between the programs. Administrative expenditures totaling $644,471 for fiscal year 2001 that should have been charged to EUSP were misclassified in the accounting records as MEAP administrative expenditures. When the Office s fiscal year 2001 accounting records are adjusted for the aforementioned misclassifications, MEAP administrative expenditures, as a percentage of fiscal year 2001 funding, were reduced from percent to 6.77 percent. Similarly, EUSP administrative expenditures increased from 9.98 percent to percent. Although our tests also identified errors in the Office s fiscal year 2000 accounting records, MEAP administrative expenditures did not exceed the 10 percent limitation either before or after taking the effect of the errors into consideration. Since it is likely that other misclassifications and improper allocations of expenditures have occurred and since, due to time constraints, our audit did not include tests of all recorded expenditures, we cannot conclude with reasonable certainty as to whether program administrative expenditures for fiscal year 2001 exceeded limitations on MEAP and EUSP administrative expenditures imposed by Federal regulations and the Public Service Commission. Federal regulations provide that the Office may spend up to 10 percent of MEAP grant awards in a given fiscal year to administer the program, but that administrative expenditures that exceed 10 percent of program funding are the responsibility of the State. Additionally, the Public Service Commission restricted EUSP administrative expenditures for fiscal year 2001 to 10 percent of program funding. If such costs exceeded 10 percent, it would result in either the State paying the excess and/or a reduction in the amounts available for program expenditures. A major factor contributing to the unreliable accounting records was the lack of established guidelines concerning the treatment of administrative expenditures. For example, the Office had not established guidelines specifying how shared administrative costs that benefited both programs (such as the purchase of computer equipment) were to be allocated between MEAP and EUSP. 18

21 We also noted that overhead costs (such as employee salaries of Department units that provide support services to the Office) were not considered by the Office to be administrative costs of the programs. Consequently, the actual costs of administering MEAP and EUSP may be higher than what is reflected in the Office s records. Recommendation #1 We recommend that the Office properly record MEAP and EUSP expenditures in the State s accounting records. We also recommend that the Office ensure that administrative expenditures charged to the programs do not exceed 10 percent of program funding, in accordance with Federal regulations and Public Service Commission mandates. Finally, we recommend that the Office establish guidelines addressing the treatment of administrative expenditures. Finding #2 The Office had not obtained audited fiscal year 2000 financial statements from each private local administering agency and had not conducted on-site monitoring reviews at each of the agencies during fiscal year Analysis The Office had not obtained audited fiscal year 2000 financial statements attesting to the propriety of the administrative expenditures incurred by each of the local administering agencies. As of August 6, 2001, audited financial statements for fiscal year 2000 had not been received from 5 of the 12 private local administering agencies and, for one agency, the Office had also not received fiscal year 1999 audited financial statements. Additionally, there was no evidence to suggest that the Office had contacted the agencies in an effort to obtain outstanding fiscal year 2000 financial statements. The Office also had not conducted on-site monitoring reviews during fiscal year 2001 at 5 of the 20 agencies (2 of these 5 agencies had also not submitted fiscal year 2000 financial statements). These reviews assess the overall operations of the agencies and include a verification of administrative expenditures reported by the agency to supporting documentation (such as payroll records) maintained by the agency. With the absence of audited financial statements and on-site monitoring reviews, there is limited assurance that the administrative expenditures incurred by the local administering agencies and charged to the Office are proper. 19

22 The Office s procedures require that each local administering agency submit audited financial statements attesting to the propriety of administrative expenditures and that on-site monitoring reviews of each agency be conducted annually. Recommendation #2 We recommend that the Office obtain audited financial statements attesting to the propriety of administrative expenditures for each of the local administering agencies. Additionally, we recommend that the Office conduct an on-site monitoring review of each agency at least once each fiscal year. 20

23 Process for Procuring and Monitoring Contracts and Vendor Payments Conclusions The services of the two vendors contracted to eliminate the backlog of assistance applications and to evaluate the failed implementation of the system (which cost $322,965 and $185,000, respectively) were properly procured and monitored. However, the procurement of the contract for the information technology system upgrade was flawed and the Office had not adequately monitored the vendor s progress in completing the system upgrade. Also, related contract extensions did not contain schedules of project deliverables that would have enabled the Office to determine whether amounts paid to the vendor were commensurate with vendor progress. We believe that the Office s inadequate monitoring of this vendor significantly contributed to the ineffective implementation of the upgraded system in August Total obligations for this contract were $771,358 and, as of June 30, 2001, related payments, including accrued expenditures, were $751,331. Additionally, for two of the three contracts reviewed (including the system upgrade contract), the Office did not obtain documentation to substantiate the validity of labor charges included on vendor invoices and such invoices were not always sufficiently detailed to enable verification with contract terms. Finally, the plan developed to redesign the information technology system did not contain interim deadlines to provide a basis for monitoring progress in completing the system redesign. Finding #3 The selection of the vendor awarded the information technology system enhancement contract was not sufficiently documented and mandatory system requirements were not addressed in a related contract extension. Analysis The Office did not sufficiently document its decision to award the information technology system enhancement contract in April 1999, and a related contract extension did not adequately address all contractual requirements. Our review of the procurement of this contract disclosed the following deficiencies: The Office did not sufficiently document how it evaluated the technical and price components of the three proposals submitted to select the vendor awarded the contract. We were advised by Office personnel that the contract award was based on several criteria including the technical approach that each 21

24 firm would follow to enhance the system, each firm s demonstrated understanding of the scope of the system enhancement, and each firm s technical proficiency and experience in completing similar projects. However, the Office did not document how each firm was ranked using these evaluation criteria. Furthermore, the successful vendor s bid significantly exceeded the bids of the two other vendors that submitted proposals. The successful vendor did not submit resumes of personnel that would be assigned to the system upgrade project. Consequently, it is unclear how the Office evaluated the technical proficiency of the vendor without knowledge of the educational background and work experience of the firm s employees that would be assigned to the project. The proposals submitted by the two other vendors contained resumes of key personnel that would be assigned to the project. In January 2000, the Office developed a contract extension request identifying 21 mandatory requirements, including the expansion of the existing system to incorporate processing of EUSP assistance applications. However, the vendor s related $259,722 proposal, which was the basis for the contract extension, did not identify any of the 21 mandatory requirements. Consequently, the Office lacked assurance that the vendor understood and would be able to satisfy these mandatory contract requirements. The information technology system enhancement contract was awarded through a statewide Network Management Services (NMS) agreement. The Department of Budget and Management established this agreement through a competitive bid process so that State agencies could obtain related services, such as information technology system upgrades, from competent vendors in a cost effective and timely manner. Agencies desiring to use the agreement must submit a technical service request to the Department of Budget and Management. The request is then submitted to the vendors participating in the statewide agreement and the vendors submit proposals directly to the State agency requiring the service. Recommendation #3 We recommend that, for future technology contracts, the Office document and retain the results of award decisions, including the results of technical evaluations. We also recommend that the Office obtain resumes of the key personnel of firms submitting proposals to enhance its evaluation of the technical proficiency of the firms. Finally, we recommend that the Office ensure that all mandatory contract requirements are adequately addressed in contracts. 22

25 Finding #4 The Office did not sufficiently monitor the vendor s progress of the contract to enhance the information technology system. Also, the related contract extensions did not include project deliverables as a basis for determining whether amounts paid were commensurate with the vendor s progress. Analysis The Office did not sufficiently monitor the vendor s progress in completing the system enhancements. Specifically, during the period from June 1999 to July 2000, the vendor provided the Office with only four weekly status reports, all of which were submitted during the months of June and July 1999, even though the contract required the vendor to report its progress weekly. Other documented monitoring of the vendor s progress by the Office was informal (consisting primarily of notes taken during telephone calls and occasional memoranda) and sporadic. For example, there was no documentation of any monitoring by the Office of the vendor s progress subsequent to May Furthermore, the January and June 2000 contract extensions, valued at $259,722 and $218,026, respectively, that were entered into with the vendor to complete the enhancement of the energy assistance information technology system, did not contain schedules of project deliverables. Without a schedule of project deliverables, the Office could not determine if the amounts paid to the vendor, which were based primarily on labor hours reported, were commensurate with the vendor s progress. The Office s inadequate monitoring of the vendor may have contributed to the ineffective implementation of the energy assistance information technology system in August Recommendation #4 We recommend that the Office adequately monitor the progress of contractors in completing contracts. Additionally, we recommend that, for future information technology contracts, the Office include schedules of project deliverables to provide a basis to ensure that payments made are commensurate with vendor progress. 23

26 Finding #5 The Office did not verify labor hours and rates for two vendors even though such charges accounted for 95 percent of vendor payments. Analysis Our review of invoices totaling $1,074,296 submitted during fiscal years 2000 and 2001 by the vendors contracted to enhance the information technology system and eliminate the backlog of assistance applications disclosed the following: The invoice submitted by one vendor, which included labor charges totaling $320,307, did not include a breakdown of those charges by labor category (such as data entry or programmer). Consequently, although total labor charges did not exceed those allowed by the contract, it was not possible to compare the charges billed with the dollar limit established in the contract for each labor category, or to evaluate the level of effort provided by the vendor. The Office did not obtain contractor employee time sheets to substantiate the validity of labor hours billed by the two vendors. Such charges accounted for over 95 percent of total payments made to the vendors. Since payments to these vendors were based on time and materials rather than on providing specified deliverables, closer monitoring of contractor invoices was warranted. Recommendation #5 We recommend that the Office require vendor invoices to be sufficiently detailed to enable verification with contract terms. We also recommend that the Office obtain vendor employee time sheets, at least on a test basis, to substantiate the validity of labor charges included on vendor invoices. Finding #6 The seven-phase plan developed to redesign the MEAP/EUSP information technology system did not contain interim deadlines to provide a basis for assessing progress in completing the system redesign. Analysis The seven-phase plan developed to redesign the MEAP/EUSP information technology system did not contain interim deadlines to provide a basis for assessing progress in completing the system redesign. The redesign plan is 24

27 intended to make the system fully operational by July 1, 2002 and was developed by a project management team consisting of representatives from the Office, the Department s Office of Information Technology and the local administering agencies. As of July 25, 2001, phase one of the seven-phase plan had been completed and work was continuing on phase two. However, without interim deadlines, there is no basis for periodically determining whether sufficient progress is being made toward the targeted completion date. Local administering agency personnel serving on the project management team expressed concern about the minimal progress made as of July 2001 and questioned whether the targeted completion date was attainable. In March 2001, the Department of Budget and Management contracted with a consultant to evaluate the MEAP/EUSP information technology system. The consultant identified numerous deficiencies relating to system implementation and operation and made recommendations to improve system performance. The redesign plan is intended to address many of the issues raised in the consultant s report. Recommendation #6 We recommend that the Office incorporate deadlines into the seven-phase plan developed to redesign the MEAP/EUSP information technology system. We also recommend that the Office periodically assess progress made in redesigning the system based on the established deadlines. 25

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29 Procedures for Processing Energy Assistance Applications and Awarding Benefits Conclusions The Office had not established adequate procedures for processing energy assistance applications and did not always award benefits on behalf of applicants in the proper amounts. Specifically, procedures had not been established to identify sources of income not reported by applicants, and the Code of Maryland Regulations relating to MEAP and EUSP contained inconsistencies, for no apparent reason, between the two programs in the treatment of household income. In addition, our test of 100 energy assistance applications processed during fiscal year 2001, with assistance benefits awarded totaling $62,227, disclosed that benefits for 14 applicants were not awarded in the proper amounts, resulting in a net overpayment of assistance benefits totaling $6,148. Our test also disclosed that, for 33 applicants, there was no evidence that the local administering agencies had sighted copies of social security cards, as required, to help verify the household size reported by the applicant. Finding #7 The local administering agencies had not established adequate procedures to identify sources of household income not reported by applicants and Code of Maryland Regulations for MEAP and EUSP contained certain inconsistencies in the treatment of household income. Analysis Local administering agencies had not established adequate procedures to identify sources of household income, such as interest on bank accounts, not reported by applicants. Energy assistance applicants are required to list income for each household member on the application. In addition, the local administering agencies generally required adult household members that reported no income to sign an affidavit certifying that they had no income during the preceding 30 days. Our tests disclosed that salaries and wages and social security benefits were typically reported; however, other types of income, such as individual retirement account withdrawals or interest on savings accounts, were rarely noted. In this regard, the application does not prompt the applicant to report other income sources and intake workers, who take applications in person, were not required to inquire about the existence of other sources of income. 27

30 Additionally, Code of Maryland Regulations for MEAP and EUSP contained certain inconsistencies regarding to the treatment of household income between the two programs. For example: EUSP regulations specify that income from retirement accounts (such as Individual Retirement Accounts) is to be included in household income, but MEAP regulations are silent as to the treatment of retirement accounts. EUSP regulations include several sources of income (such as monetary gifts and loans) in household income that are not addressed in the MEAP regulations. MEAP regulations include all child support payments in household income while EUSP regulations specify that child support payments paid pursuant to a court order are not countable in household income. MEAP regulations include all public assistance payments in household income. EUSP regulations include Temporary Cash Assistance payments in household income but specifically exclude income from foster care grants, foster child care payments and welfare avoidance grants. Household income is a critical factor in establishing an applicant s eligibility for energy assistance benefits and the same application is used for both MEAP and EUSP. Consequently, no distinction is made in countable income for purposes of determining assistance awards. Office personnel advised us that the inconsistent treatment of household income in the Regulations was not intentional. Recommendation #7 We recommend that the Office ensure that the local administering agencies establish procedures to identify sources of household income not reported by applicants. We also recommend that the Office address inconsistencies in the Code of Maryland Regulations relating to the treatment of household income for MEAP and EUSP. 28

31 Finding #8 The local administering agencies did not always award energy assistance benefits to applicants in the proper amounts or obtain required documentation to help verify applicant household size. Analysis The local administering agencies did not always award energy assistance benefits to applicants in the proper amounts or obtain required documentation to help verify applicant household size. Our test of 100 energy assistance applications processed during fiscal year 2001 with awards totaling $62,227 disclosed that benefits were not awarded in the proper amounts for 14 applicants, resulting in a net overpayment of benefits totaling $6,148. Improper benefit amounts were awarded in these 14 cases because local administering agency personnel had either recorded erroneous data in the information technology system or did not obtain documentation (such as proof of income) substantiating eligibility and thus the applicant should have been denied benefits. Our test also disclosed that, for 33 applicants, there was no evidence that the local administering agencies had sighted copies of social security cards, as required, to help substantiate the household size reported by the applicant, which is a critical factor in determining eligibility for assistance. Code of Maryland Regulations specifies the documentation that the local administering agencies must obtain to verify information reported by energy assistance applicants. Failure to obtain required documentation could result in the local administering agency making an improper eligibility determination or awarding benefits in improper amounts. Recommendation #8 We recommend that the Office ensure that the local administering agencies award energy assistance benefits to applicants in the proper amounts. We also recommend that the local administering agencies document that they sighted the required social security cards. 29

32

33 Bruce A. Myers, Legislative Auditor Page 2 As indicated in the audit report, tests of original transactions confirmed that expenditures were properly approved and supported. However, the Department recognized during the fiscal year that there were some expenditure coding errors of original transactions. The Department subsequently corrected miscoded transactions in the accounting records by journal entry. The audit did not test those related transactions. Based on a Department review of all recorded fiscal year 2001 expenditure transactions, the Department s record of MEAP and EUSP expenditures, were as follows: MEAP Fiscal Year 2001 State Fiscal Year Program Funding $36,448, % Administrative Allowance $3,644, Recorded Administrative Expenditures Cash (1) $3,056, Recorded Administrative Expenditures as a Percentage of Program 8.38% Funding Reported Program Expenditures Cash (1) $33,887, Total Reported Expenditures Cash (1) $36,943, Year End Administrative Expenditure Accrual $315, Year End Program Expenditure Accrual $1,042, Total Reported Expenditures Cash and Accrued (2) (3) $38,301, EUSP Fiscal Year 2001 State Fiscal Year Program Funding $34,000, % Administrative Allowance $3,400, Recorded Administrative Expenditures Cash and Accrued $2,757, Recorded Administrative Expenditures as a Percentage of Program 8.11% Funding Reported Program Expenditures Cash and Accrued $29,568, Total Reported Expenditures Cash and Accrued (2) $32,326, (1) Cash Basis for Federal Grant Reporting (2) Financial Management Information System (FMIS) DAFR6000 Report - June 30, 2001, Appropriation # C0112 (3) Accounts receivable of $1,853, recorded for FFY 4 th quarter funding and benefit refunds in SFY 02. FFY o1 projected MEAP carry-forward $76, Expenditures have been identified in the Department s reviews that were recorded to incorrect project codes in fiscal year The effect of the errors decreased MEAP administrative expenditures as a percentage of funding to 7.82% and increased EUSP administrative expenditures as a percentage of funding to 9.60%. The Department was confident that it had not over expended the administrative allowance maximums for EUSP or MEAP even though the accounting records had to be corrected. Once recognized, the Department initiated procedures as stated above to prevent discrepancies in the future.

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