FEMA Cerro Grande Claims: Payments Properly Processed, but	 
Reported Payments Somewhat Overstated (08-MAY-03, GAO-03-623).	 
                                                                 
The Cerro Grande Fire Assistance Act mandated that GAO annually  
audit all claim payments made to compensate the victims of the	 
Cerro Grande Fire in northern New Mexico. For this second report 
on this topic, GAO determined whether the Federal Emergency	 
Management Agency (FEMA), which is now a part of the Department  
of Homeland Security, (1) had revised its policies and procedures
to address prior GAO recommendations and processed and paid	 
claims consistent with that guidance and (2) properly reported	 
such payments to the Congress.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-623 					        
    ACCNO:   A06838						        
  TITLE:     FEMA Cerro Grande Claims: Payments Properly Processed,   
but Reported Payments Somewhat Overstated			 
     DATE:   05/08/2003 
  SUBJECT:   Accounting errors					 
	     Claims settlement					 
	     Damage claims					 
	     Federal aid to states				 
	     Internal controls					 
	     Payments						 
	     Strategic planning 				 
	     Reporting requirements				 

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GAO-03-623

                                       A

Report to the Committee on Appropriations, U. S. Senate, and the Committee
on Appropriations, House of Representatives

May 2003 FEMA CERRO GRANDE CLAIMS Payments Properly Processed, but
Reported Payments Somewhat Overstated

GAO- 03- 623

Letter

May 8, 2003 The Honorable Ted Stevens Chairman The Honorable Robert C.
Byrd Ranking Minority Member Committee on Appropriations United States
Senate The Honorable C. W. Bill Young Chairman The Honorable David R. Obey
Ranking Minority Member Committee on Appropriations House of
Representatives On July 13, 2000, the President signed into law the Cerro
Grande Fire Assistance Act (CGFAA). 1 CGFAA established the Office of
Cerro Grande Fire Claims (OCGFC) and directed the Federal Emergency
Management Agency (FEMA) 2 to expeditiously investigate victims* claims,
determine damages, and compensate the victims of the Cerro Grande fire in
northern New Mexico. CGFAA also requires FEMA to submit an annual report
to the Congress by August 28 that provides information on claims submitted
during the year. CGFAA, as amended, 3 requires that we audit all claim

payments made under the act, including subrogation claims 4 made by
insurance companies, and report the results of our audit within 120 days
of the issuance of FEMA*s annual report. In this our second report under
CGFAA, we determined whether FEMA (1) implemented new policies and
procedures to address our prior report*s recommendations and processed and
paid fire claims in accordance with applicable policies and procedures

and (2) properly reported such payments to the Congress. 1 Pub. L. 106-
246, Div. C, Title I, 114 Stat. 511, 583 (2000). 2 As of March 2003, FEMA
became part of the Emergency Preparedness and Response Directorate of the
Department of Homeland Security. 3 Pub. L. 107- 73, Title IV, S: 428, 115
Stat. 651, 697 (2001).

4 A subrogation claim is the right of one who has paid an obligation that
another should have paid to be indemnified by the other. In this case,
insurance companies and possibly others paid claims that the federal
government is responsible for paying.

We did not review any subrogated claim payments as part of this audit
because as of January 15, 2003, the end of our fieldwork, no subrogated
claims payments had been made. 5 However, FEMA did report to the Congress
that as of September 7, 2002, insurance companies had submitted 4,553
subrogated claims totaling approximately $103 million. 6 FEMA also
reported that as soon as 95 percent of all nonsubrogee claims have been
paid, and when funds become available, 7 payments for subrogation claims
will be made to insurers expeditiously. We will review payments made for

subrogated claims as part of our next audit. Results in Brief FEMA revised
its policies and procedures to address our prior report*s

recommendations and processed and paid fire claims in accordance with its
applicable policies and procedures. In response to our prior audit report,
issued in July 2001, 8 FEMA implemented corrective actions to address our
recommendations to (1) document all steps and procedures performed by
claims reviewers to determine the validity of a claim and the amount
recommended for payment, (2) incorporate all existing informal guidance
into a set of formal policies and procedures, and (3) establish
standardized policies and procedures to address claims for which no policy

had existed. Based on the results of our statistical testing, we found
that claims were processed, approved, and paid in accordance with FEMA*s
revised policies and procedures. However, as discussed below, we found

that claimed amounts approved but not yet paid were not properly tracked
in OCGFC*s payment approval system. FEMA*s second annual report to the
Congress, dated December 16, 2002, included somewhat overstated claim
payment information. FEMA*s report

5 CGFAA specifies that nonsubrogee claims, to the maximum extent
practicable, be paid before subrogee claims. 6 OCGFC stated that the
amount represents either the amount of claims processed and approved by
the claims reviewer or, if not processed, the amount submitted by the
claimants.

7 In its transmittal letter dated December 16, 2002, which accompanied its
annual report to the Congress, FEMA stated that an additional $155
million, including $5 million in administrative costs, was needed. In
February 2003, FEMA was appropriated an additional $90 million, of which
$5 million is available for administrative purposes.

8 U. S. General Accounting Office, Federal Emergency Management Agency:
Weaknesses Exist in the Cerro Grande Fire Assistance Claim Validation
Process, GAO- 01- 848 (Washington, D. C.: July 13, 2001).

was based on claimed amounts approved for payment, as reported in its
payment approval system, rather than amounts actually paid, as reported in
FEMA*s accounting system. FEMA officials said they believed the amounts to
be the same, but had not reconciled the data and were not aware of a $12
million difference between the two systems, which was almost 3

percent of amounts reported paid. FEMA is currently attempting to
reconcile the approved claim amounts with the amounts actually reported as
paid. We found that the primary reason for the difference was
overstatements of claimed amounts approved for payment in OCGFC*s payment
approval system. This overstatement was caused by approved claim amounts
that were being appealed, replaced by other claims, or otherwise not paid
that were not removed from or adjusted in the payment approval system. As
a result, the claim payment information reported to the Congress does not
provide a completely accurate picture of Cerro Grande claim payment
activity for the year. In addition, the erroneous approved claims data
were used to determine FEMA*s request for additional appropriated funding.
Because $90 million, rather than the $155 million FEMA stated it needed,
was appropriated to FEMA, it does not appear that the errors resulted in
an appropriation in excess of the amount needed to pay claims.

In reviewing FEMA*s fiscal year 2002 financial statements, we also noted
that FEMA*s estimate of its unfunded claims liability increased
significantly compared to the prior year* from $36.5 million as of
September 30, 2001, to $127.5 million as of October 2, 2002. 9 While
FEMA*s external auditors found that FEMA used a reasonable methodology to
calculate the current year liability, they were unable to explain the
reason for the differences in the two estimates since FEMA changed the
methodology but did not provide a crosswalk between the two approaches.
The auditors noted this lack of analysis of the change in methodology as a
weakness in their report on internal controls for fiscal year 2002. In
April 2003, FEMA officials stated that FEMA would award a contract to
perform an analysis to determine the dollar impact on the liability
estimate due to changes in methodology, assumptions, systems, data, or
other factors, from fiscal years 2002 through 2001. 9 In January 2003,
FEMA*s auditor used the correct payment data, plus other adjustments,

and proposed an adjustment to the October 2, 2002, unfunded liability,
with which FEMA*s management concurred. This resulted in a reduction of
$21.7 million.

We are making two recommendations that, if properly implemented, will
improve FEMA*s ability to track claims it approves and pays and help
ensure the accuracy of amounts approved and paid in its systems, in
reports to the Congress, and in amounts used to request additional
funding. In commenting on a draft of the report, the Acting Director of
the Recovery

Division of the Department of Homeland Security*s Emergency Preparedness
and Response Directorate agreed with our recommendations and outlined
several corrective actions that it is currently undertaking to address
these issues.

Background On May 4, 2000, the National Park Service initiated a
prescribed burn on federal land at Bandelier National Monument, New
Mexico, in an effort to

reduce the threat of wildfires in the area. The plan was to burn up to 900
acres. On May 5, 2000, the prescribed burn exceeded the capabilities of
the National Park Service, spread to other federal and nonfederal land,
and was characterized as a wildfire. On May 13, 2000, the President issued
a major disaster declaration, and subsequently, the Secretary of the
Interior and the National Park Service assumed responsibility for the fire
and the loss of federal, state, local, tribal, and private property. The
fire, known as the Cerro Grande fire, burned approximately 48,000 acres in
four counties and two Indian pueblos, destroyed over 200 residential
structures, and forced the evacuation of more than 18,000 residents.

On July 13, 2000, the President signed CGFAA into law. Under CGFAA, each
claimant is entitled to be compensated by the United States government for
certain injuries and damages that resulted from the Cerro Grande fire. The
Congress appropriated $455 million to FEMA for the payment of such claims
and $45 million for the administration of the Cerro Grande program. In
March 2002, FEMA requested, but did not receive, additional appropriated
funding of $80 million to cover excess claims and administrative costs. In
December 2002, FEMA revised its estimate and requested additional
appropriated funding of $155 million, including $5 million for
administrative costs. The revised estimate was based on

more complete claim information since the final date to submit claims
passed on August 28, 2002. In February 2003, FEMA was appropriated an
additional $90 million, of which $5 million may be made available for
administrative purposes.

CGFAA requires that FEMA submit an annual report to the Congress that
provides information about claims submitted under the act. This annual
report is to include the amounts claimed, a description of the nature of
the claims, and the status or disposition of the claims, including the
amounts paid. FEMA*s report is to be issued annually by August 28. CGFAA,
as amended, requires that we conduct annual audits on the payment of all
claims made and report the results of the audits to the Congress within
120

days of FEMA*s issuance of its annual report. The act also requires that
our report include a review of all subrogation claims for which insurance
companies have been paid. On January 8, 2003, FEMA notified us that it had
issued the annual report to the Congress through a transmittal letter
dated December 16, 2002, 10 and FEMA provided us a copy of the annual
report on January 9, 2003. We are publishing our report within 120 days of
FEMA*s notification of its issuance.

CGFAA required that FEMA promulgate and publish implementing regulations
for the Cerro Grande program within 45 days of enactment of the law. On
August 28, 2000, FEMA published Disaster Assistance: Cerro Grande Fire
Assistance; Interim Final Rule in the Federal Register (Interim Final
Rules). 11 FEMA modified the Interim Rule with a set of

implementing policies and procedures on November 13, 2000. FEMA updated
these policies and procedures in January and March 2001. After reviewing
public comments on the interim rule, FEMA finalized and published Disaster
Assistance: Cerro Grande Fire Assistance Final Rule (Final Rule) on March
21, 2001. 12 Since our prior report, FEMA revised and implemented policies
and procedures, which are discussed later in this

report. The claims payment process is initiated when an injured party
submits a Notice of Loss (NOL) 13 to OCGFC. After the NOL is received,
claim reviewers contact the claimant to discuss the claim, explain the
claims process, and determine the best means to substantiate the loss or
damages.

10 In its fiscal year 2002 financial statement audit, FEMA*s external
auditors reported the late submission of the annual report as an instance
of noncompliance with CGFAA in their report on compliance with laws and
regulations. 11 65 FR 52260, 44 C. F. R. Part 295 (2000).

12 66 FR 15948, 44 C. F. R. Part 295 (2001). 13 The NOL describes in
general terms the types of injury and/ or damages a claimant has incurred
as a result of the fire.

The claim reviewer then assigns a claim number and enters the information
into OCGFC*s claim- processing database, the Automated Claim Information
System (ACIS). The claims reviewer then begins the process of verifying
the victim*s claim. Once completed, the claims reviewer prepares a claim
payment recommendation package, which specifies that a claimant*s injuries
or damages occurred as a result of the Cerro Grande fire

and that claimed amounts are eligible for compensation under CGFAA. The
claim reviewer also inputs reserve amounts equal to the total claimed
amounts it expects to be paid into the claim- processing database and a
claims supervisor reviews and approves each recommendation package. This
review, among other things, is intended to ensure that a proper
investigation of the claim occurred and that the proper documentation
exists.

Following the approval of the claim payment recommendation package, an
Approval for Payment form is completed and sent to an OCGFC authorizing
official for review and approval. The amounts approved for payment are
then added to a Schedule of Payments that is forwarded to the Comptroller.
The Comptroller reviews a sample of requested and approved payments

and then approves the Schedule of Payments and records the approved
amounts in OCGFC*s payment approval system before sending it on to FEMA*s
Disaster Finance Center (DFC) for additional manual processing and final
approval for the Department of the Treasury to disburse the funds. FEMA
records all payments in its accounting system, the Integrated Financial
Management Information System, which is not linked to OCGFC*s payment
approval system.

In addition to this process, which is used for both partial payments 14
and final payments, prior to processing a final payment, the claims
reviewer prepares a Proof of Loss form. This form summarizes all amounts
recommended for payment, including those amounts previously paid through a
partial payment. The Proof of Loss form must be signed by the claimant
subject to the provisions of 18 U. S. C. S:1001, which establishes
criminal penalties for false statements. Once a signed Proof of Loss form
is received, an OCGFC authorized official sends a Letter of Final
Determination to tell the claimant the total amount of compensation being
offered under CGFAA. Accompanying this letter is a Release and
Certification form that the claimant signs if he or she accepts the OCGFC

compensation determination, thereby releasing the federal government from
any additional claims arising from the Cerro Grande fire. 15 Upon receipt
of the signed Release and Certification form, FEMA will process and mail a
claimant*s final payment.

Scope and In performing our review, we considered the Standards for
Internal

Control in the Federal Government. 16 To reaffirm our understanding of the
Methodology

claim review and payment process established by OCGFC and to follow up on
the changes made to this process since our last report, we interviewed
FEMA officials and analyzed data used (1) in FEMA*s annual report to the
Congress, (2) by KPMG during its audit of FEMA*s financial statements, and
(3) by FEMA to determine the estimated claim liability. We also reviewed

the following:  the requirements of CGFAA,  the final regulations
published in the Federal Register,

 FEMA*s policies and procedures manual, 14 In order to get assistance to
fire survivors as soon as possible, CGFAA allows for claimants to receive
partial payments before the start of the rebuilding process. Partial
payments may be based upon actual receipts or estimates. Final payments
are made only after the entire claims review process is completed.

15 Section 295.34 of the final rule published in the Federal Register
provides for the reopening of claims, not withstanding the submission of a
Release and Certification form, under certain circumstances.

16 U. S. General Accounting Office, Standards for Internal Control in the
Federal Government, GAO/ AIMD- 00- 21. 3.1 (Washington, D. C.: November
1999).

 the independent actuarial report estimating FEMA*s total claim liability
for fiscal year 2001,

 a summary of FEMA*s unpaid claim liability estimates for fiscal year
2002,

 FEMA*s fiscal years 2001 and 2002 audited financial statements, and 
the current year Cerro Grande trial balance and other documentation
concerning the Cerro Grande program. We also obtained, reviewed, and
considered the results of numerous desk

reviews, by FEMA*s Office of Inspector General, of claims approved for
payment. Finally, we selected two statistical samples from the population
of all partial and final claim payments to determine whether FEMA

processed, approved, and paid the Cerro Grande fire claims in accordance
with its applicable policies and procedures. To determine whether FEMA
implemented corrective actions to address our prior year recommendations
and OCGFC processed and paid claims in accordance with the revised
policies and procedures, we followed up on FEMA*s corrective actions and
performed certain tests to ensure that policies and procedures were being
followed. We reviewed the revised policies and procedures to ensure that
they were incorporated into FEMA*s policies and procedures or modified in
its claim- processing contract, and performed tests of both claims
approved for payment by OCGFC and amounts paid by DFC, as reported by
FEMA, as follows.

 We selected a dollar unit (statistical) sample of 95 claims totaling
$311, 232,388 that were approved for payments from a population of 15,394
reported partial and final claim amounts that had been approved for
payment from August 28, 2000 (inception), through September 7, 2002, to
test specific control activities, such as adequacy of supporting
documentation, evidence of claims manager and approving official

review, and actual payment by FEMA. We obtained and reviewed related
supporting documentation for the approved claim payments that were
selected from OCGFC*s payment approval system.

 We selected a dollar unit (statistical) sample of 77 claim payments
totaling $152,493,242 from a population of 47,674 actual payments made by
FEMA from August 28, 2000, through September 7, 2002, to verify that only
approved claims were paid. We obtained and reviewed related

supporting documentation for the claim payments that were selected from a
database of claim payments made by DFC as reported in FEMA*s accounting
system. In order to determine whether FEMA properly reported claim payment
information to the Congress, we compared its reported payment information
to the claimed amounts that were approved by OCGFC for payment from its
payment approval system and to the actual claim payments made by DFC and
reported in FEMA*s accounting system. We also obtained and reviewed
supporting documentation and discussed the

unreconciled differences we identified with FEMA officials. As mentioned
previously, we did not audit subrogated claim payments since none were
paid. We did, however, obtain a report from OCGFC indicating that as of
January 15, 2003, 3, 847 of 4,561, or 84 percent, of the subrogated claims
totaling approximately $103 million had been submitted

and approved for payment, but not yet paid. Our work was conducted in
Santa Fe, New Mexico; Denton, Texas; 17 and Washington, D. C., from
September 2002 through January 2003 in accordance with generally accepted
government auditing standards. We requested agency comments on a draft of
this report from the Under

Secretary of the Department of Homeland Security*s Emergency Preparedness
and Response Directorate. The Department of Homeland Security*s Office of
Inspector General provided certain technical comments orally, which we
have incorporated as appropriate. The Acting Director of the Recovery
Division of the Department of Homeland Security*s Emergency Preparedness
and Response Directorate also provided written comments in response to our
draft on behalf of FEMA and OCGFC, which are reprinted in appendix I. We
discussed the written comments in the

*Agency Comments and Our Evaluation* section of this report. 17 In
December 2002, OCGFC closed its headquarters operations in Santa Fe, New
Mexico, and moved the remaining claims operations to FEMA*s National
Processing Center in Denton, Texas.

Policies and Since our last audit report, FEMA implemented corrective
actions and

Procedures for Claims revised its policies and procedures to address
issues related to its controls

over the claims review process. Based on the results of our statistical
Processing Improved

testing, claims were processed, approved, and paid in accordance with and
Followed

FEMA guidelines that were established and in place at the time the claims
were reviewed and processed. 18 In response to our July 2001 report, FEMA
implemented corrective actions

to address our recommendations related to its policies and procedures. In
that report, we recommended that FEMA (1) require claims reviewers to
document all steps and procedures they perform to determine the validity
of a claim and the amount recommended for payment, (2) review and
consolidate all existing informal guidance and incorporate this guidance
into a set of formal policies and procedures, and (3) establish
standardized policies and procedures to address claims for which no policy
currently exists. During this review, we confirmed that FEMA had done
this. Specifically, FEMA*s improvements consisted of revising its policies
and procedures and issuing a new task order.  FEMA revised its contract
with its claims reviewers and issued a new

task order. This task order required that certain documentation obtained
related to claims verification or attempts the claims reviewer made to
obtain this sort of documentation 19 be placed in each claim file. The
required documentation consists of items such as proof of identity, proof
of ownership or occupancy at the time of the fire, systems used to verify
or estimate values, proof of vehicle ownership (title or registration) at
the time of the fire, and verification of insurance as part of efforts to
preclude duplicate reimbursements for losses. The task order also required
evidence of supervisory review, with the signatures of the claims manager
and approving official on the Approval for Payment form. Based on the
results of our statistical testing, we found that all claim files
submitted after the implementation of the new task

18 We did not identify any control weaknesses in our review of the 95
statistically selected approved claims. 19 Claims reviewers are now
required to include documentation of all telephone conversations and
attempts to contact or obtain support from claimants in the notes
maintained in ACIS. In cases where documentation submitted is
insufficient, the claims reviewers will perform the independent
investigations necessary to make recommendations to FEMA.

order contained the required documentation and evidence of supervisory
review.

 In April 2002, FEMA issued revised guidelines to ensure that all
existing informal guidance was incorporated into a set of formally
documented policies and procedures and distributed them to all staff
members responsible for the claims review and award determination process.
FEMA stated that the revised guidelines were distributed to all staff
members and that it now has a process to review its policy manual monthly
and incorporate new policies or policy changes into it as needed. We
reviewed the new guidelines and verified that the previously informal and
unofficial policies that the claim reviewers used had been incorporated.

 FEMA also developed various policies and procedures to cover situations
for which none previously existed. For example, to address claimants*
concerns about the declining value of residential property as a result of
the fire, FEMA determined the decline to be temporary and developed
policies and procedures to compensate claimants only for losses suffered
if their residential property was sold at less than fair market value. 20
Policies and procedures were also developed to address the unique aspects
of compensation under CGFAA, such as legal issues regarding who is a
proper claimant if the injured party is now deceased and compensation for
lost rental income. We reviewed the new guidelines and verified that such
policies and procedures were incorporated.

The improvements FEMA made to its claims processing function help ensure
that paid claims are valid and reasonable. However, as discussed in the
next section, we found four errors related to FEMA*s tracking and

reporting of amounts approved and paid. 20 Fair market values were
established in PricewaterhouseCooper*s Economic Study of the Los Alamos
Post- Fire Residential Real Estate Market (Final Report).

Reported Claim FEMA*s report to the Congress overstated the amount of
claim payments

Payment Information made under CGFAA through September 7, 2002, by about
$12 million, or 3

percent of reported payments. CGFAA requires FEMA to issue a report Was
Somewhat detailing the amounts claimed, a brief description of the nature
of the Overstated

claims, and their status or disposition, including the amount of any
payments. For its most recent annual report to the Congress, FEMA used the
information contained in OCGFC*s payment approval system, which contains
amounts approved for payment by OCGFC. However, there were

errors in this system that overstated the amounts actually paid by DFC to
claimants by approximately $12 million. The overstated approved claim data
were also used to determine FEMA*s December 2002 requests for additional
appropriations. However, since FEMA received less than it requested, this
error likely did not result in an appropriation in excess of amounts
needed to pay claims.

The overstatement of the claims paid amount was not identified by FEMA
because it did not reconcile the amounts OCGFC approved for payment to the
actual DFC payment data 21 and was not aware of the differences between
the two databases. As a result, FEMA incorrectly reported in its

annual report to the Congress that $418 million was paid on claims through
September 7, 2002, instead of the almost $406 million actually paid, as
summarized in FEMA*s accounting system for activity through the same date,
a difference of $12 million, or about 3 percent of amounts reported paid.

Most of the difference was due to FEMA*s treatment of claimed amounts that
were approved for payment and/ or appealed claims. When approved amounts
are not fully paid because of appeals or other reasons, the payment
approval system continues to show the entire claimed amount that was
approved for payment even though the approved amount or a portion of it
has, in fact, been withheld from payment, canceled and not paid, or
replaced by a new claim request. FEMA did not remove these amounts from
its system or adjust the total approved amounts not yet paid. As a result,
OCGFC*s payment approval system overstates approved claims

designated as paid. 21 As part of FEMA*s fiscal year 2002 financial
statement audit, its auditors determined that amounts were correctly
reported as paid by DFC in FEMA*s accounting system. In addition, our
review of the 77 statistically selected claim payments verified the
accuracy of the amounts paid by DFC and no control weaknesses were
identified.

For example, as part of our review of the 95 statistically selected
approved claims, we found 4 claims in which the approved amounts reported
in OCGFC*s payment approval system were larger than the actual payments
made by DFC. 22 In one case, a claim file included more than $1.8 million
in approved payments, while the actual amount paid was $919,802. 23 OCGFC
records on this case showed that it originally approved $934, 802 for a
final payment. However, when the claimant appealed the amount, OCGFC
approved the claimant*s request to pay $919,802 as a partial payment
pending the appeal. OCGFC prepared and approved a second claim without
canceling the original claim or removing the original amount from its
payment approval system. This one oversight alone overstated the approved
claim amounts by $934,802. As of February 2003, FEMA officials began
manually reconciling the payment data between the two systems and
identifying the errors in the payment approval system.

The overstated payment amounts were also used to determine FEMA*s request
for additional funding from the Congress. In December 2002, FEMA requested
additional funding of $155 million for fiscal year 2002, including $5
million for administrative costs. 24 However, only $90 million was
appropriated to FEMA. 25 Thus, it does not appear that the overstated
payments resulted in an appropriation in excess of the amounts needed to
pay estimated claims.

22 We did not statistically estimate the total amount in error since the
reconciliation between the two systems revealed that $12 million was the
actual dollar amount of the total errors in the payment approval system.

23 The claimant originally submitted a claim with total damages and losses
in the amount of $1.6 million. 24 The request was based on FEMA*s original
calculation of its October 2, 2002, unfunded liability, which was for
$149.2 million. 25 In February 2003, the VA, HUD and Independent Agencies
Appropriations Act appropriated FEMA an additional $90 million, of which
$5 million may be made available for administrative purposes (Pub. L. 108-
07, Div. K, 2003).

We also noted that FEMA*s estimate of unfunded claims liability had
increased significantly compared to the prior year. In January 2003, FEMA
revised its estimated unpaid Cerro Grande claims liability as of October
2,

2002, and calculated an estimated unpaid claim liability of $177.5
million, of which $127.5 million was unfunded. 26 This compares to an
actuarially determined estimate calculated by an independent accounting
firm of $260.1 million as of September 30, 2001, of which $36.5 million
was

unfunded. As part of the audit of FEMA*s fiscal year 2002 financial
statements, its auditors assessed FEMA*s methodology for calculating its
estimated unfunded liability for fiscal year 2002 and attempted to
determine the reason for the $91 million increase in the liability since
the prior year.

The auditors determined that FEMA*s fiscal year 2002 methodology was
reasonable, but were unable to explain the reason for the difference in
the two estimates since FEMA used a different methodology to calculate the
estimate than had been previously used, but did not provide a *crosswalk*
between the two approaches. The auditors reported this as a weakness in
FEMA*s process for estimating the remaining liability for the Cerro Grande

program in its internal control report for fiscal year 2002. The weakness
specifically related to a lack of (1) an impact analysis for the change in
estimating methodology and (2) supporting documentation for certain
factors and assumptions, for which FEMA eventually re- created the
documentation to support the calculation. 27 In April 2003, FEMA officials

stated FEMA is in the process of awarding a contract to perform an
analysis to determine the dollar effect on the increased claim liability
estimate due to changes in methodology, assumptions, systems, data, or
other factors, from fiscal year 2001 to fiscal year 2002.

26 The unfunded liability was adjusted for the overstated payments plus
another adjustment as part of the fiscal year 2002 audit of FEMA*s
financial statements. Therefore, FEMA*s initial estimate of the unfunded
liability of $149.2 million was decreased to $127.5 million.

27 The auditors recommended that FEMA (1) perform an analysis to determine
the dollar impact on the liability estimate due to changes in methodology,
assumptions, systems, data, or other factors, from fiscal years 2002
through 2001, and (2) ensure that supporting documentation for program
estimates that are used for financial reporting purposes be maintained as
part of the estimate documentation file. FEMA agreed with the

recommendation.

Conclusion FEMA*s actions to strengthen its policies and procedures over
its claim approval process helped ensure that paid claims were valid and
reasonable. However, weaknesses in how the Emergency Preparedness and
Response Directorate records and tracks approved claims in its payment
approval system resulted in an overstatement of approved claims, which had
a

cascading effect on payment amounts reported to the Congress and used to
calculate requests for additional funding. While the amount of the
overstatement was relatively insignificant, left unchecked, the weaknesses
in the payment approval system could result in larger errors in future
reports to the Congress and requests for additional funding.

Recommendations for We recommend that the Secretary of the Department of
Homeland Security

Executive Action direct the Emergency Preparedness and Response
Directorate to

 complete the reconciliation of the amounts approved for payment in its
payment approval system to amounts actually paid in FEMA*s accounting
system and correct all identified errors in its payment

approval system and  perform monthly reconciliations of the approved
claim amounts in its

payment approval system with the actual amounts reported in its accounting
system as paid by DFC for as long as both systems are used to track and
report paid amounts or request additional funding.

Agency Comments and FEMA, in a letter from the Acting Director of the
Recovery Division of the

Our Evaluation Department of Homeland Security*s Emergency Preparedness
and Response Directorate, agreed with our recommendations and described

specific corrective actions currently under way to address each one. For
example, the Acting Director indicated that OCGFC has substantially
completed the reconciliation of the amounts approved for payment in its
payment approval system to amounts actually paid in FEMA*s accounting
system and intends to implement monthly reconciliations beginning this
month. We will perform a follow- up review of these activities as part of
our

review of the Cerro Grande annual report that is due to the Congress on
August 28, 2003. The Department of Homeland Security*s comments are
reprinted in appendix I.

We are sending copies of this report to the congressional committees and
subcommittees responsible for issues related to FEMA and the Department

of Homeland Security; the Secretary of the Department of Homeland
Security, the Under Secretary of the Department of Homeland Security*s
Emergency Preparedness and Response Directorate; and the Inspector

General of the Department of Homeland Security. Copies will also be made
available to others upon request.

If you have any questions about this report, please contact me at (202)
512- 9508 or Steven Haughton, Assistant Director, at (202) 512- 5999. The
other key contributor to this assignment was Christine Fant.

Linda M. Calbom Director, Financial Management and Assurance

Appendi xes Comments from the Department of Homeland

Appendi x I Security

(190078)

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a

GAO United States General Accounting Office

FEMA implemented corrective actions to address the recommendations from
GAO*s prior report to strengthen its policies and procedures. GAO found
that claims were processed, approved, and paid in accordance with FEMA*s
established applicable guidelines, providing adequate supporting
documentation and evidence of supervisory reviews. However, as discussed
below, claimed amounts approved for payment but not paid were not properly
tracked in the Office of Cerro Grande Fire Claims* (OCGFC) payment
approval system. FEMA*s report to the Congress included somewhat
overstated claim

payment information. The report used claimed amounts approved by OCGFC for
payment, rather than amounts actually paid by FEMA. This occurred because
FEMA had not reconciled the approved amounts from its payment approval
system to amounts paid per its accounting system and was not aware of the
differences, which amounted to about $12 million, or 3 percent of total
reported payments, as of September 7, 2002. FEMA is currently attempting
to reconcile the approved amounts with the paid amounts. This difference
resulted because approved amounts that were not paid when claims were
delayed for appeal or canceled for other reasons were not removed from or
adjusted in the payment approval system. As a result, the claim payment
information reported to the Congress does not

provide a completely accurate picture of OCGFC claim payments. This
information was also used by FEMA to determine its request for additional
funding. Since FEMA received less than it requested, this error likely did
not result in an appropriation in excess of amounts needed to pay claims.

During its review, GAO also noted that FEMA*s estimate of its unfunded
claims liability increased by $91 million from September 30, 2001, to
October 2, 2002. While FEMA*s external auditors found that FEMA used a
reasonable methodology to calculate the most recent estimate, they were
unable to explain the reason for the increase in the estimate. This
occurred because FEMA changed the methodology used but did not provide a
crosswalk

between the two approaches. In April 2003, FEMA officials stated that they
planned to contract for an analysis to be performed to determine the
effect that the change in methodology and other factors had on the
calculation of the estimated liability.

FEMA CERRO GRANDE CLAIMS

Payments Properly Processed, but Reported Payments Somewhat Overstated

www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 623. To view the full report,
including the scope and methodology, click on the link above. For more
information, contact Linda Calbom at (202) 512- 9508 or calboml@ gao. gov.
Highlights of GAO- 03- 623, a report to the

Committee on Appropriations, U. S. Senate, and the Committee on
Appropriations, House of Representatives May 2003

The Cerro Grande Fire Assistance Act mandated that GAO annually audit all
claim payments made to

compensate the victims of the Cerro Grande Fire in northern New Mexico.
For this second report on this topic, GAO determined whether the Federal
Emergency

Management Agency (FEMA), which is now a part of the Department of
Homeland Security, (1) had revised its policies and procedures to address
prior GAO

recommendations and processed and paid claims consistent with that
guidance and (2) properly reported such payments to the

Congress. To improve FEMA*s ability to accurately report claims status,
including amounts paid, and request additional funding, GAO recommends
that the Secretary of Homeland Security require the

Emergency Preparedness and Response Directorate to  reconcile claim
amounts

approved to amounts paid and correct all identified errors in its payment
approval system and

 perform monthly reconciliation of the claims in both systems. The
Department of Homeland Security*s Emergency

Preparedness and Response Directorate concurred with our recommendations
and indicated that it has several actions under way to address them.

Page i GAO- 03- 623 CGFAA Claim Payments

Contents Letter 1

Results in Brief 2 Background 4 Scope and Methodology 7 Policies and
Procedures for Claims Processing Improved and

Followed 10 Reported Claim Payment Information Was Somewhat Overstated 12

Conclusion 15 Recommendations for Executive Action 15 Agency Comments and
Our Evaluation 15

Appendix

Appendix I: Comments from the Department of Homeland Security 17

Abbreviations

ACIS Automated Claim Information System CGFAA Cerro Grande Fire Assistance
Act DFC Disaster Finance Center FEMA Federal Emergency Management Agency
NOL Notice of Loss OCGFC Office of Cerro Grande Fire Claims

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Appendix I

Appendix I Comments from the Department of Homeland Security Page 18 GAO-
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Appendix I Comments from the Department of Homeland Security

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