Internal Controls: Oversight of Longshore Special Fund Needs Improvement
(Letter Report, 10/29/1999, GAO/AIMD-00-15).

Pursuant to a congressional request, GAO reviewed issues concerning
financial reporting and internal controls related to the Special Fund
established by the Longshore and Harbor Workers' Compensation Act
(LHWCA), focusing on: (1) the feasibility of actuarially calculating the
unfunded liability of the LHWCA Special Fund; (2) whether controls exist
to prevent inappropriate claims from being referred to the Special Fund;
(3) whether recipient data are matched against other agencies' databases
to reduce the risk of payments being made to ineligible recipients; (4)
whether there are equitable distributions of assessments among the
insurance carriers/self-insured employers as compared to their claim
levels; and (5) the status of changes to the Longshore computer systems.

GAO noted that: (1) although an estimate of $2.5 billion has been
characterized as the potential unfunded liability of the LHWCA Special
Fund, this is not a sound actuarial estimate; (2) the Department of
Labor (DOL) official who developed this estimate said that he prepared
it for discussion purposes; (3) the estimate did not take into
consideration expected future revenue from annual assessments, which,
according to the official, would eliminate this estimated unfunded
liability; (4) while it is theoretically feasible to actuarially
calculate the unfunded liability of the Special Fund, the time and
expense involved in performing such a calculation may not be warranted,
given that: (a) there is no provision under LHWCA for financing the
Special Fund with appropriated funds; (b) under LHWCA, neither the
United States nor the Secretary of Labor is liable for compensation
payments in the amount greater than the money deposited in or belonging
to the Special Fund; and (c) participating employers and insurance
carriers are now required to disclose their future liabilities related
to this fund in the notes to their financial statements, acknowledging
that they are responsible for any future liability of this fund; (4)
internal controls have been established by DOL to prevent inappropriate
cases from being referred to the Special Fund; (5) DOL management had
not matched its recipient data in the Special Fund database against data
in other agencies' databases; (6) however, DOL's Office of the Inspector
General (OIG) officials told GAO that as part of the Special Fund's
fiscal year 1999 financial statement audit, the OIG, in cooperation with
the Social Security Administration (SSA), would be performing a match of
the recipient data in the Special Fund database with SSA's death index
to determine whether benefit payments were made to deceased individuals;
(7) DOL is susceptible to the risk that the distribution of assessments
among participating self-insured employers and insurance carriers will
not be proportional to their claim levels as intended by LHWCA; (8) the
data used as the basis for computing the annual assessment are
self-reported by the self-insured employers and insurance carriers,
which increases the risk of inaccurate claim information; and (9) with
respect to the Longshore computer systems, DOL officials told GAO that
changes to enhance accountability and functionality were planned or had
recently been completed.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-00-15
     TITLE:  Internal Controls: Oversight of Longshore Special Fund
	     Needs Improvement
      DATE:  10/29/1999
   SUBJECT:  Internal controls
	     Accounting standards
	     Government liability (legal)
	     Data integrity
	     Data bases
	     Reporting requirements
	     Management information systems
	     Funds management
	     Computer matching
	     Workers compensation
IDENTIFIER:  Longshore and Harbor Workers Compensation Act Special Fund
	     Y2K
	     DOL Black Lung Program
	     Federal Employees Compensation Act Program
	     Longshore and Harbor Workers Compensation Act Program

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Report to the Chairman of the Subcommittee on Workforce Protections,
Committee on Education and the Workforce, House of Representatives

October 1999

INTERNAL CONTROLS

Oversight of Longshore Special Fund Needs
Improvement
*****************

*****************

GAO/AIMD-00-15

                                                 Accounting and Information
                                                        Management Division

B-283563

October 29, 1999

The Honorable Cass Ballenger
Chairman, Subcommittee on Workforce Protections
Committee on Education and the Workforce
House of Representatives

Dear Mr. Chairman:

On February 24, 1999, you requested that we review certain issues
concerning financial reporting and internal controls related to the
Special Fund established by the Longshore and Harbor Workers' Compensation
Act (LHWCA). This Special Fund was designed to encourage employers to hire
disabled maritime workers by limiting an employer's liability should a
disabled worker sustain a second injury. Funded primarily by annual
assessments levied by the Department of Labor (DOL) on self-insured
employers and insurance carriers subject to LHWCA, the Special Fund is
audited annually. However, the audited financial statements do not address
the potential unfunded liability faced by this program, which has been
estimated to be as high as $2.5 billion. 

This report addresses (1) the feasibility of actuarially calculating the
unfunded liability of the LHWCA Special Fund, (2) whether controls exist
to prevent inappropriate claims from being referred to the Special Fund,
(3) whether recipient data are matched against other agencies' databases
to reduce the risk of payments being made to ineligible recipients,
(4) whether there are equitable distributions of assessments among the
insurance carriers/self-insured employers as compared to their claim
levels, and (5) the status of changes to the Longshore computer systems.

Results in Brief

Although an estimate of $2.5 billion has been characterized as the
potential unfunded liability of the LHWCA Special Fund, this is not a
sound actuarial estimate. The DOL official who developed this estimate
said that he prepared it for discussion purposes. It was a simple
arithmetic projection based on the benefits paid as of December 1998 and
did not include all of the elements of an actuarial projection, such as
cases reported but not yet paid, historical payment trends, established
mortality assumptions, and cost-of-living adjustments. In addition, the
estimate did not take into consideration expected future revenue from
annual assessments, which, according to the official, would eliminate this
estimated unfunded liability. While it is theoretically feasible to
actuarially calculate the unfunded liability of the Special Fund, the time
and expense involved in performing such a calculation may not be
warranted, given that (1) there is no provision under LHWCA for financing
the Special Fund with appropriated funds, (2) under LHWCA, neither the
United States nor the Secretary of Labor is liable for compensation
payments in the amount greater than the money deposited in or belonging to
the Special Fund, and (3) participating employers and insurance carriers
are now required to disclose their future liabilities related to this fund
in the notes to their financial statements, acknowledging that they are
responsible for any future liability of this fund. 

Internal controls have been established by DOL to prevent inappropriate
cases from being referred to the Special Fund. For example, DOL has
procedures that require each case be reviewed by various levels of DOL
officials who are knowledgeable about the requirements of LHWCA to ensure
that, prior to the case's acceptance into the Special Fund, (1) the
recipient had a preexisting permanent impairment, (2) the second injury
was job related, and (3) the combination of the two injuries/disabilities
worsened the initial impairment. 

At the time of our review, DOL management had not matched its recipient
data in the Special Fund database against data in other agencies'
databases, such as the Social Security Administration's (SSA) death index.
However, DOL's Office of the Inspector General (OIG) officials told us
that as part of the Special Fund's fiscal year 1999 financial statement
audit, the OIG, in cooperation with SSA, would be performing a match of
the recipient data in the Special Fund database with SSA's death index to
determine whether benefit payments were made to deceased individuals.
Regularly performing matches with this database should reduce the risk of
paying benefits to deceased individuals. 

DOL is susceptible to the risk that the distribution of assessments among
participating self-insured employers and insurance carriers will not be
proportional to their claim levels as intended by LHWCA. The formula used
to calculate the Special Fund's annual assessment is prescribed by
statute, with the intention of arriving at prorated assessments. However,
the data used as the basis for computing the annual assessment are self-
reported by the self-insured employers and insurance carriers, which
increases the risk of inaccurate claim information. Inaccurate reporting
of claim information would lead to the distribution of the assessments not
reflecting the true prorated activities of the participating companies.
Beginning in fiscal year 1992, DOL annually performed a limited number of
audits of the self-reported data. These audits disclosed instances of
underreporting that resulted in disproportionate distributions of
assessments among the self-insured employers and insurance carriers. In
addition, we found that cases in which a recipient's former employer (the
employer who referred the case to the Special Fund) became insolvent and
was no longer in existence were not monitored, therefore presenting the
risk that benefit payments could be made to ineligible recipients. 

With respect to the Longshore computer systems, DOL officials told us that
changes to enhance accountability and functionality were planned or had
recently been completed. At the time of our review, DOL was developing a
new automated system to address an OIG recommendation related to internal
control weaknesses/Footnote1/ regarding the reporting and authorization of
payments to rehabilitation service providers. According to DOL, the system
was implemented in September 1999. In addition, since July 1998, two of
DOL's computer systems used for the LHWCA program were upgraded in order
to comply with requirements related to the Year 2000 (Y2K) computing
problem and to provide user-friendly enhancements such as drop-down menus
and icons.

In order to reduce the risk of Special Fund payments being made to
deceased or otherwise ineligible recipients and of assessments being
disproportionally distributed among participating self-insured employers
and insurance carriers, we are recommending that DOL (1) implement a
regular program of matching recipient data from the Special Fund to SSA's
death index, (2) develop and implement procedures to adequately monitor
the continuing eligibility of certain cases, and (3) develop and implement
a more comprehensive plan to provide increased audit coverage of LHWCA
payment data submitted by self-insured employers and insurance carriers. 

We made recommendations to the Secretary of Labor to reduce the risk of
(1) Special Fund payments being made to deceased or otherwise ineligible
recipients and (2) disproportionate distribution of assessments among the
self-insured employers and insurance carriers. In commenting on a draft of
this report, DOL generally agreed with our findings and recommendations.

Background

LHWCA, which was enacted in 1927, established a federal compensation
system for longshore and other specific classes of workers whose injuries
occur upon navigable waters of the United States or adjoining facilities
such as piers and dry docks. Section 44 of LHWCA established the Special
Fund. The National Office of the Longshore Programs (NOLP), which is
administered by the Office of Workers' Compensation Programs (OWCP),
within the Employment Standards Administration of DOL, has administrative
responsibility for the Special Fund. The Special Fund encourages employers
to hire workers who have suffered a previous partial permanent disability
by limiting the employers' liability in the event of a second injury. The
Special Fund is used primarily for these "second-injury" payments,
whereas, the self-insured employer and/or insurance carrier is responsible
for the first injury payments. The Special Fund also extends benefits to
dependents if any work related injury results in an employee's death. 

When eligible workers sustain a second injury, employers are responsible
for the first 104 weeks of compensation payments, before payments can be
made from the Special Fund. The Special Fund is primarily (approximately
98 percent during fiscal year 1998) funded by annual assessments levied by
the Secretary of Labor on self-insured employers and insurance carriers
subject to LHWCA. Other funding, about $2 million, is generated annually
from investments in short-term U.S. Treasury bills. Miscellaneous fines
and penalties provide additional sources of revenue; however, these are
not material to the operation of the fund. DOL's OIG annually audits the
Special Fund. 

According to DOL officials, there are approximately 850 self-insured
employers and insurance carriers authorized to participate in the LHWCA
Special Fund program. Of those, 27 companies are responsible for 70
percent of the annual assessments for the Special Fund. Furthermore, the
three largest self-insured employers are responsible for 15 percent of the
Special Fund's annual assessment.

In calendar year 1998, DOL officials calculated a total assessment of
$119 million that they allocated to 483 of the 850 authorized self-insured
employers and insurance carriers. The companies' total prior year LHWCA
benefit payments are used as the basis for the allocation of the annual
assessment. If a company reports that it did not make any LHWCA payments
in the prior year, and no second injury payments were made from the
Special Fund on its behalf in the same year, the company is excluded from
the current year's annual assessment.

According to DOL's fiscal year 1998 audited financial statements, the
Special Fund had assets consisting of $50 million in U.S. Treasury bills
as of September 30, 1998. In addition, the fund collected approximately 
$117 million in revenue during fiscal year 1998, $115 million from the
assessments and about $2 million from interest on investments. The
financial statements also indicated an accounts receivable balance of
$2 million, which represented unpaid annual assessments and overpayments
to recipients. Administrative services for operating the Special Fund are
funded through direct federal appropriations. 

Scope and Methodology

To determine the feasibility of actuarially calculating the unfunded
liability of the Special Fund, we reviewed relevant statutes and
regulations and interviewed DOL officials, including the Chief Actuary. In
addition, we reviewed the components of actuarial liabilities for other
programs, such as DOL's federal employees' compensation and the Department
of Veterans Affairs' future compensation disability benefits. To determine
what controls exist to prevent inappropriate cases from being referred to
the Special Fund, we interviewed DOL officials and an insurance company
president. We also reviewed DOL's procedures related to the referral of
cases to the Special Fund. To determine whether recipient data are matched
against other agencies' databases, we interviewed DOL officials. To
determine if the assessments were distributed on a pro-rata basis, we
reviewed the mandated formula and DOL's most recent calculation of the
annual assessment. We also discussed this issue with managers of self-
insured employers, an insurance company president, and an attorney who
represents employers affected by LHWCA. To determine the status of changes
to the Longshore computer systems, we discussed the changes with a DOL
official. In addition, we examined DOL's audited consolidated financial
statements for fiscal years 1997 and 1998, and the Special Fund's audited
financial statements for fiscal years 1996 and 1997./Footnote2/

We did not (1) audit the data underlying DOL's calculation of the annual
assessment or (2) test the controls that prevent inappropriate cases from
being referred to the Special Fund. We performed our work from April 1999
through September 1999 in accordance with generally accepted government
audit standards. We requested written comments from the Secretary or her
designee. The Assistant Secretary for Employment Standards at Labor
provided us with written comments, which are discussed in the "Agency
Comments" section and are reprinted in
appendix I.

Calculation of the Unfunded Liability

In an effort to determine the cumulative amount of future Special Fund
benefit payments of self-insured employers and insurance carriers over the
average life expectancy of current recipients, a DOL official developed a
simple arithmetic projection based on the benefits paid as of December
1998. Although the resulting estimate of $2.5 billion has been
characterized as the estimated unfunded liability of the LHWCA Special
Fund, it does not include all of the elements of an actuarial projection,
such as cases reported but not yet paid, historical payment trends,
established mortality assumptions, or cost-of-living adjustments. In
addition, it does not take into consideration estimated future revenue
from annual assessments, which, according to the official, will eliminate
the liability. 

While it would be theoretically feasible to calculate the unfunded
liability of the Special Fund using an actuarially sound methodology, the
time and expense involved in performing such a calculation may not be
warranted given that (1) there is no provision under LHWCA for financing
the Special Fund with appropriated funds, (2) under LHWCA, neither the
United States nor the Secretary of Labor is liable for compensation
payments in the amount greater than the money deposited in or belonging to
the Special Fund, and (3) self-insured employers and insurance carriers
are required to disclose their future liabilities for second injury fund
assessments in their annual financial statements, acknowledging that they
are responsible for any future liability of the fund./Footnote3/ 

The $2.5 billion estimate described above was developed for discussion
purposes by the NOLP official responsible for the day-to-day
administration of the Special Fund. The estimate was a projection of
future Special Fund payments based on the workers' compensation benefits
paid as of December 1998, which resulted in a $2.5 billion estimate of the
Special Fund's future obligations. This estimate was not developed for
financial reporting purposes because the NOLP official understood that
there was no unfunded liability for the federal government related to the
Special Fund. Rather, his interest arose after the American Institute of
Certified Public Accountants issued Statement of Position 97-3, which
requires the Special Fund's self-insured employers and insurance companies
to disclose their unfunded liability related to the Special Fund. To
determine how much these companies might cumulatively disclose, the
official created a projection of current payments using arbitrary life
expectancies of 21 years for post-1972 cases and 11 years for the pre-1972
cases to estimate the Special Fund's future obligations. The official also
determined that the expected future revenue from assessments, related to
these December 1998 cases, would offset the estimated future obligations. 

Although DOL has the expertise necessary to calculate the unfunded
liability, it does not have an actuarial model developed for this
calculation. According to DOL's Chief Actuary, the process of developing
an actuarially sound estimate could take up to 9 months and the cost would
be in excess of $150,000. He stated that the process would require an
actuary to create experience tables using at least 12 years of data on the
payments already made from the Special Fund, including (1) the ages of the
injured workers, (2) the nature of the injuries, and (3) the dates of
death or cessation of payments by the fund. The actuary would then use the
experience tables to develop the actuarial model that would calculate the
estimated unfunded liability.

Pursuant to enactment of authorizing legislation, the federal government
may assume liabilities for which it has no prior legal responsibility in
order to provide for the public's general welfare. Statement of Federal
Financial Accounting Standards (SFFAS) No. 5 refers to these actions as
"government-acknowledged events." Although the costs of government-
acknowledged events may ultimately become the responsibility of the
federal government, according to SFFAS No. 5, the cost should not be
reported on the face of the financial statements until the criteria for 

recognizing the liability have been met./Footnote4/ Since, at this time,
the criteria have not been met, no unfunded liability should be recorded
on the Special Fund's financial statements.

If, in the future, either (1) the federal government assumes
responsibility for liabilities over and above the Special Fund's assets,
thereby meeting SFFAS No. 5 criteria for reporting the liability, or (2)
it is determined that calculating the unfunded liability would assist the
Congress in overseeing the soundness of the Special Fund, an actuarial
estimate of the unfunded liability may be warranted.

Controls Over Referral of Cases

The Department of Labor has established controls over the referral of
cases to the Special Fund. These controls include several levels of review
for each case referred to the Special Fund to ensure that the cases meet
the mandated criteria. To be accepted into the Special Fund, a case must
meet three conditions: (1) there must have been a preexisting permanent
impairment, not necessarily work related, (2) the second injury must have
occurred on the job, and (3) the combination of the two
injuries/disabilities must have worsened the initial impairment. Employers
can apply to the Director of their district office to have the injured
workers' cases transferred to the Special Fund, after the employers have
paid 104 weeks of compensation payments to the injured workers.
Eligibility for the Special Fund is determined first by a DOL District
Director or, in cases of dispute, an Administrative Law Judge. If the
Director or Judge determines that the case is eligible, a Compensation
Order is issued, which requires that the Special Fund assume
responsibility for future payments to the injured worker. Compensation
Orders issued by the District Director are forwarded to the national
office for final approval by a Claims Examiner. If the application is
denied, the self-insured employer or insurance carrier may appeal.

The NOLP official told us there is a strong incentive for companies not to
submit invalid claims since annual assessments are calculated, in part,
based on the number of cases that each company has in the Special Fund. In
addition, since self-insured employers and insurance carriers must pay the
first 104 weeks of benefits prior to referring the cases to the Special
Fund, they take steps to detect fraudulent claims through monitoring
efforts such as surveillance, reevaluation, and verification of the status
of the beneficiary's condition.

Data Matching

At the time of our review, DOL's management was not matching the Special
Fund's recipient information with any other federal agency's databases.
However, plans were underway to perform a match with SSA's death index,
which will reduce the risk of deceased individuals being issued benefit
payments from the Special Fund. This kind of matching procedure is used in
the DOL/OWCP Black Lung Program, which has an agreement with SSA to
provide the death index database to DOL on a monthly basis. DOL matches
the death index against Black Lung recipient data to determine whether any
of the Black Lung recipients are deceased. Once the match has been
completed, Black Lung officials provide the database to officials of the
Federal Employees Compensation Act (FECA) program, who then perform a
comparison of FECA recipient data to the death index. According to the
OWCP official responsible for ensuring that the comparison is performed
for FECA, the matching procedure produces about 30 matches each time. 

We were told by the OIG that prior year financial statement audits of the
Longshore Special Fund uncovered payments made to deceased individuals.
Accordingly, the OIG added a new procedure to the fiscal year 1999 audit
program to detect such payments. The OIG provided SSA a data file
containing Special Fund recipient information that SSA will match against
its death index. 

Calculation of Assessments

The formula for calculating the annual assessments against insurance
carriers and self-insured employers is prescribed by statute./Footnote5/
The formula requires DOL to (1) estimate the probable expenses of the
Special Fund for the upcoming calendar year and the amount of payments
required to maintain adequate reserves in the fund and (2) allocate a
portion of the annual assessments to the individual insurance carriers and
self-insured employers based on each company's share of the prior year's
total LHWCA related payments made by all employers subject to LHWCA, and
each company's share of the prior year's second injury payments made by
the Special Fund. The allocation process was designed to result in a
prorated distribution of the annual assessment to the individual companies
based on their activities under LHWCA. However, inaccurate reporting by
companies has resulted in disproportionate distributions of assessments
among the insurance carriers and self-insured employers. In addition,
inadequate monitoring of certain Special Fund cases by DOL may have
contributed to some companies paying more than their true prorated share
of the annual assessments. 

Underreporting was disclosed by DOL audits conducted during fiscal years
1992 through 1998. The process for allocating the annual assessment to the
applicable self-insured employers and insurance carriers relies on the
accuracy of LHWCA payment information obtained from these companies.
However, the lesser the amount of LHWCA payments a company reports, the
lower that company's portion of the assessments will be. 

DOL contracts with an Independent Public Accounting firm (IPA) to perform
a few audits (seven to eight audits a year) of the data reported on the
Report of Payments (Form LS-513)/Footnote6/ submitted by the self-insured
employers and insurance carriers. During fiscal years 1992 through 1997,
the audits performed by the IPA generated $27 million in collected
reassessments due to underreporting. According to a DOL official, an
additional $4 million in assessments was recovered as a result of the
fiscal year 1998 audits. The overall annual assessments are reduced by the
amount of the reassessment collections received in the same year, which
results in lower assessments for the individual self-insured employers and
insurance carriers. Broader audit coverage (for example, covering the 27
companies that represent 70 percent of the assessments) would most likely
generate more reassessments due to identification of underreporting,
resulting in lower future assessments. In addition, as self-insured
employers and insurance carriers become aware of these audits, they are
likely to report their payment data more accurately, which should result
in future distributions of assessments more accurately reflecting prorated
activity under LHWCA. 

The NOLP official told us that the self-insured employers and insurance
carriers are primarily responsible for monitoring the continued
eligibility of the Special Fund beneficiaries. As previously discussed,
these companies have an incentive to monitor the cases that they submit to
the Special Fund because they must pay the first 104 weeks of benefits,
and the payments related to their cases in the Special Fund are directly
proportional to their share of the annual assessment. Their monitoring
efforts include surveillance, reevaluation, and verification of the status
of the beneficiary's condition. The self-insured employers and insurance
carrier we spoke with stated that such monitoring takes place. According
to DOL regulations, if a change in the recipient's condition is disclosed
and a self-insured employer or insurance carrier intends to pursue a
modification of the award of compensation, the company must involve DOL.
The NOLP official stated that compensation awards have been reduced based
on the review of evidence submitted by the self-insured employers and
insurance carriers; however, this rarely occurs. 

Because DOL relies on the monitoring activities of the self-insured
employers and insurance carriers, DOL performs only minimal monitoring of
the Special Fund's active cases. According to a NOLP official, all Special
Fund recipients are required to submit a Report of Earnings (LS-200) to
DOL annually. Recipients are required to report all earnings during the
period specified on the LS-200. The NOLP official stated that although DOL
does not verify the accuracy of the information submitted, it does enforce
the requirement for each recipient to report. If the LS-200 is not
completed and returned, DOL suspends the recipient's benefit payments.
When requested, DOL will provide the self-insured employers and insurance
carriers copies of the LS-200 forms. 

The officials we spoke to expressed concern regarding the lack of adequate
monitoring of the "orphaned" cases./Footnote7/ There are about 500 of
these "orphaned" cases, which, according to DOL officials, account for about
$10 million to $12 million in benefits annually. Since the companies that
referred these cases to the Special Fund are no longer in existence, the
only monitoring of the "orphaned" cases occurs when DOL verifies that each
recipient submitted an LS-200. This lack of adequate monitoring increases
the likelihood of payments being made to ineligible recipients. The cost
of any resulting improper payments becomes an additional burden to the
companies responsible for contributing to the annual assessment because
these payments are included in the total annual assessment and allocated
to the self-insured employers and insurance carriers. The NOLP official
recognized the need for additional monitoring of "orphaned" cases, but
stated that DOL does not have the resources to do so.

Changes to Longshore Computer Systems

In addition to paying the second injury benefits, the Special Fund is
available for paying the costs of certain rehabilitation services. DOL is
currently developing an automated computer system to strengthen existing
controls over the reporting and authorization of payments made from the
Special Fund to rehabilitation service providers in response to DOL/OIG
reported weaknesses identified in the Special Fund's fiscal year 1997
financial statement audit report, dated May 14, 1998. The reported
weaknesses pertain to the controls over the national office's final
authorization for payment when bills are submitted by the district
offices. Specifically, the weaknesses identified were (1) bills submitted
for payment to the national office were not compared to a list of valid
recipients or authorized service providers, (2) the total amount of
rehabilitation bills submitted by the district offices was not compared to
the total amount of rehabilitation bills paid by the national office, and
(3) bills paid were not compared to the available amounts obligated by the
Rehabilitation Specialist. According to the OIG's audit report, these
weaknesses may have contributed to the fraudulent payment of more than
$500,000 to fictitious rehabilitation vendors over a 4-year period.

The OIG recommended strengthening internal controls for recording,
authorizing, and paying for rehabilitation service costs by implementing
an automated rehabilitation payment system. The recommendation stated that
at a minimum, the system should include the following controls: 
(1) compare bills submitted to a centralized list of eligible recipients
and authorized service providers, with adequate controls over the ability
to add recipients/vendors to the list, (2) compare the amount of bills
submitted by the district offices to the amount paid by the national
office, and (3) ensure that amounts obligated and accounts payable are
timely and accurately reported and that payments do not exceed amounts
obligated.

DOL management, in its response to the audit report, agreed with the OIG's
recommendation. DOL is currently developing a computer system to be used
by NOLP, which we were told will allow the national office to view amounts
approved and obligated by the district offices for rehabilitation services
before payments are authorized. We were also told that the system will
compare bills submitted for payment to a list of eligible providers.
According to DOL, the system was implemented in September 1999. 

The Longshore and Harbor Workers' Compensation Program currently uses two
computer systems: (1) the Longshore Special Fund System (LSFS) and (2) the
Longshore Case Management System (LCMS). These systems were originally
developed and implemented in 1985. In response to changing technology and
the Y2K problem, DOL has instituted changes to both systems. LSFS is a
benefit payments system, which is also used to allocate the annual
assessments to the applicable insurance carriers and self-insured
employers. LCMS is a management case tracking system. Employers are
required to report all LHWCA claims to a district office within 10 days of
the date of an employee's injury or death, or within 10 days of the date
the employer becomes aware of the injury or death. Once reported, the case
is entered into LCMS. The district offices use the LCMS to monitor the
timeliness of the insurance carriers' and self-insured employers'
compensation payments to beneficiaries. 

Both of these systems were upgraded to mitigate Y2K problems and
accommodate new, user-friendly technology. The upgraded LSFS was placed in
service in July 1998 and the upgraded LCMS was implemented in March 1999.
These upgraded systems serve the same purposes as the old systems, with
the added advantages of modern hardware and software in order to comply
with requirements related to the Y2K computing problem. Additionally,
these systems were upgraded with new, user-friendly enhancements, such as
drop-down menus, icons, and toolbars.

Conclusions

While DOL has procedures related to reducing the risk of inappropriate
cases being referred to the Special Fund, DOL has not developed and
implemented adequate procedures to reduce the risk of improper payments
being made to deceased or otherwise ineligible recipients. However, DOL
plans to match Special Fund recipient data with SSA's death index to
identify payments being made to deceased recipients. Until DOL establishes
sufficient monitoring of "orphaned" cases and expands its auditing of
payment data submitted by self-insured employers and insurance carriers to
detect underreporting, DOL cannot guarantee that the distribution of
assessments among employers and carriers will accurately reflect their
activity under LHWCA. 

Recommendations

We are making recommendations to the Secretary of Labor to reduce the risk
of (1) Special Fund payments being made to deceased or otherwise
ineligible recipients and (2) disproportionate distribution of assessments
among the self-insured employers and insurance carriers.

To reduce the risk of Special Fund payments being made to deceased or
otherwise ineligible recipients, we recommend that the Secretary of Labor
direct the Assistant Secretary for Employment Standards Administration to
take the following actions.

o Implement a regular program of matching recipient data from the Special
  Fund to the SSA's death index. The match should be done monthly, in
  conjunction with the match of the Black Lung and the FECA recipient
  data match with SSA's death index.

o Develop and implement procedures to adequately monitor the continuing
  eligibility of the "orphaned" cases. The monitoring techniques employed
  should be similar to those used by self-insured employers and insurance
  carriers.

To help achieve the intended prorated distribution of assessments among
the self-insured employers and insurance carriers, we recommend that the
Secretary of Labor direct the Assistant Secretary for Employment Standards
Administration to develop and implement a more comprehensive plan to
expand DOL's auditing of LHWCA payment data submitted by self-insured
employers and insurance carriers. 

Agency Comments and Our Evaluation

In written comments on a draft of this report, DOL generally agreed with
our observations and recommendations for improving the internal controls
over the Special Fund. DOL plans to implement matching procedures in
October 1999 in concurrence with our recommendation. DOL supports the
recommendation for expansion of the auditing of LHWCA payments. While DOL
views additional monitoring of "orphaned" cases as a challenge, it said it
will look for ways to increase monitoring efforts in this area.

We are sending copies of this report to Senator James M. Jeffords and
Senator Edward M. Kennedy, and to Representative William L. Clay,
Representative William F. Goodling, and Representative Major R. Owens in
their capacities as Chairmen or Ranking Minority Members of Senate and
House Committees. We are also sending copies to the Honorable Alexis M.
Herman, Secretary of Labor; the Honorable Jacob J. Lew, Director of the
Office of Management and Budget; and the Honorable Bernard E. Anderson,
Assistant Secretary of the Employment Standards Administration of the
Department of Labor. Copies will be made available to others upon request.
If you have any questions or wish to discuss the issues in this report,
please contact me at (202) 512-4476. Key contributors to this report are
listed in appendix II.

Sincerely yours,

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Gloria L. Jarmon
Director, Health, Education, and Human
  Services Accounting and Financial Management Issues

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/Footnote1/-^The internal control weaknesses and related recommendations
  were initially cited in DOL/OIG's fiscal year 1997 consolidated
  financial statement audit report.
/Footnote2/-^The Special Fund's fiscal years 1996 and 1997 audit report
  was the most recent audit report issued, as of August 1999. DOL/OIG
  conducted an audit of the Special Fund for fiscal year 1998; however,
  the report had not been issued as of August 30, 1999.
/Footnote3/-^American Institute of Certified Public Accountants Statement
  of Position 97-3, "Accounting by Insurance and Other Enterprises for
  Insurance-Related Assessments." This Statement of Position was issued on
  December 10, 1997, and is effective for fiscal years beginning after
  December 15, 1998.
/Footnote4/-^According to SFFAS No. 5, the federal entity should not
  record the liability and expense until the following two criteria have
  been met: (1) the Congress has appropriated or authorized (i.e., through
  authorizing legislation) resources and (2) an exchange occurs or
  nonexchange amounts are unpaid as of the reporting date (e.g., payments
  to beneficiaries), whichever applies.
/Footnote5/-^33 U.S.C. ****ITCCentury Book:xa4**** 944 (c) (2).
/Footnote6/-^All self-insured employers and insurance carriers authorized
  to participate in the Special Fund are required to submit a Form LS-513
  "Report of Payments" annually, indicating the total amount of payments
  they made related to LHWCA. During fiscal year 1998, 483 companies were
  assessed.
/Footnote7/-^"Orphaned" cases are those in which the former employer
  (company that referred the case to the Special Fund) has become
  insolvent or is no longer in existence, and beneficiaries continue to
  receive payments. 

COMMENTS FROM THE DEPARTMENT OF LABOR
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GAO CONTACT AND STAFF ACKNOWLEDGEMENTS
======================================

GAO Contact

Gloria L. Jarmon, (202) 512-4476

Acknowledgments

In addition to the contact named above, Alana Stanfield, Bonnie Derby,
Suzanne Lightman, and David Engstrom made key contributions to this report.

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