[Final Audit Report on Followup of Recommendations Concerning the  Recovery of Operation and Maintenance Program Expenses, Bureau of Reclamation]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 95-I-1376

Title: Final Audit Report on Followup of Recommendations Concerning
       the  Recovery of Operation and Maintenance Program Expenses,
       Bureau of Reclamation

Date:     September 29, 1995

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 U.S. Department of the Interior
Office of Inspector General
  Washington, D.C.  20240



                         September 29, 1995


MEMORANDUM

TO:                 The Secretary

FROM:                Wilma A. Lewis
                     Inspector General

SUBJECT SUMMARY:  Final Audit Report for Your Information - "Followup
                            of Recommendations Concerning the Recovery of
                            Operation and Maintenance Program Expenses,
                            Bureau of Reclamation" (No. 95-I-1376)    

Attached for your information is a copy of the subject final audit report.

The Bureau of Reclamation has made progress in implementing corrective actions
recommended in our December 1991 audit report on the recovery of operation and
maintenance program expenses, but further actions are needed to fully implement
all the recommendations. Of the seven recommendations in our prior report, we
found that four were implemented and three were partially implemented. The
recommendations were considered partially implemented because the Bureau had
not:  revised and/or implemented operation and expense allocations for three
projects; developed accounting guidelines for recovering the replacement cost of
major project facilities, updated replacement lists, or indexed original or estimated
property costs for inflation; and recovered from project beneficiaries the costs of
assessing the overall condition and operational readiness of project facilities. As a
result, the Bureau has not recovered an additional $14.8 million of operation and
maintenance expenses from project beneficiaries since our prior report. In addition,
if corrective actions are not taken in a timely manner, the Bureau will not recover
costs of about $4.7 million annually.

Besides the requirement that the Bureau should fully implement the prior
recommendation concerning the revision and implementation of operation and
maintenance expense allocations for three projects, we recommended that the
Bureau: implement a revised expense allocation for a project not included in our
prior review, publish proposed regulations and implement an administrative fee as
a means of recovering operation and maintenance expenses from project
beneficiaries; ensure that a region develops administrative and accounting guidelines
for recovering the replacement cost of major project facilities; and revise the
Reclamation Instructions to require regions to recover the costs associated with
performing operation and maintenance reviews.

 
Since the Bureau did not respond to the draft report by the established due dates,
the report's five new recommendations are considered unresolved.

If you have any questions concerning this matter, please contact me at
(202) 208-5745.

Attachment

                  

 
W-IN-BOR-006-94

United States Department of the Interior
 OFFICE OF INSPECTOR GENERAL
          Headquarters Audits
      1550 Wilson Boulevard
                Suite 401
        Arlington, VA 22209
                                   September 29, 1995


                  MEMORANDUM AUDIT REPORT

To:             Assistant Secretary for Water and Science

From:          Marvin Pierce
          Acting Assistant Inspector General for Audits

Subject:   Final Audit Report on Followup of Recommendations Concerning the 
           Recovery of Operation and Maintenance Program Expenses, Bureau of
           Reclamation (No. 95-I-1376)
                       
                                INTRODUCTION

This report presents the results of our followup review of recommendations
contained in the audit report entitled "Recovery of Operation and Maintenance
Program Expenses, Bureau of Reclamation" (No. 92-I-269), issued in December
1991. The objective of the followup review was to determine whether the Bureau
of Reclamation had satisfactorily implemented the corrective actions recommended
in the report and whether any new recommendations were warranted. We concluded
that the Bureau has made progress in implementing corrective actions but that
further actions are needed to fully implement all the recommendations. If these
actions are not taken in a timely manner, the Bureau will not recover costs of about
$4.7 million annually. In addition, the Bureau has not recovered an additional
$14.8 million of operation and maintenance expenses from project beneficiaries since
our prior audit.

BACKGROUND

The Bureau of Reclamation is responsible for constructing, operating, and
maintaining water projects throughout the 17 western states. Bureau water projects
were constructed either for a single purpose, such as irrigation water delivery, or for
multiple purposes, such as hydroelectric power, municipal and industrial water
deliveries, and flood control.  The Bureau generally operates and maintains
multipurpose projects, whereas water districts operate and maintain single purpose
projects.

 The purpose of the Bureau's operation and maintenance program is to ensure
reliable water delivery, improve system efficiencies, extend the useful life of projects,
and secure repayment of reimbursable project costs.  In fiscal year 1994, the
Bureau's total estimated operation and maintenance expense obligations were
$317 million. For multipurpose operation and maintenance expenses, which do not
benefit a specific purpose, the Bureau determines the amount of operation and
maintenance expenses that is reimbursable by allocating the joint expenses to the
various project purposes. Generally, the expenses allocated to the purposes of
irrigation, municipal and industrial water delivery, and power generation are
reimbursable, while the expenses allocated to the purposes of flood control,
recreation, and fish and wildlife management are nonreimbursable. The Bureau bills
the water users for reimbursable expenses through water rates or periodic
assessments.

SCOPE OF AUDIT

The scope of our followup audit was limited to reviewing actions taken on the
recommendations made in the December 1991 report. Accordingly, we limited our
review to the six main projects (see Appendix 3) discussed in our prior report. To
accomplish our objective, we reviewed documents and records pertaining to: (1) the
bases for allocating expenses between reimbursable and nonreimbursable project
purposes; (2) water rate computations for the recovery of operation and maintenance
expenses; and (3) billing practices, including the assessment of interest and penalties
on unpaid operation and maintenance expenses for fiscal years 1992, 1993, and 1994.
We interviewed program and administrative personnel responsible for allocating,
assessing, and recovering operation and maintenance expenses and officials
responsible for implementing the prior audit recommendations.

The audit was performed at the Bureau's five regional offices and the Denver Office
(see Appendix 3). This review was made, as applicable, in accordance with the
`Government Auditing Standards," issued by the Comptroller General of the United
States. Accordingly, we included such tests of records and other auditing procedures
that were considered necessary under the circumstances. Because of the limited
scope and objective of our review, internal controls were reviewed only to the extent
that they affected corrective actions taken on the recommendations.

We also reviewed the Department's Annual Statement and Report, required by the
Federal Managers' Financial Integrity Act, for fiscal year 1993 to determine whether
any reported weaknesses were within the objective and scope of our audit. As a
result of our prior audit report the Department reported inadequate policies and
procedures for the recovery of operation and maintenance program expenses as a
material weakness. The actions identified by the Bureau to correct the material
weakness were originally scheduled for completion by 1992 but were rescheduled for
implementation at various dates through 1995. We determined that because of the
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weakness, Government revenues continued to decrease because the identified actions
were not fully implemented, as discussed in the Results of Audit section of this
report.  Our followup recommendations, if implemented, should correct the
weaknesses identified at the sites reviewed.

PRIOR AUDIT COVERAGE

Our prior audit concluded that the Bureau did not fully recover or assess all
reimbursable operation and maintenance expenses. This occurred because the
Bureau: (1) did not properly follow allocation policies and guidelines; (2) deferred
the recovery of or understated expenses; (3) inappropriately delayed billings or did
not bill certain users for annual operation and maintenance expenses; and (4) did not
properly assess delinquent charges. In addition, the Bureau had not established
guidelines requiring in-depth, periodic reviews of the operation and maintenance
expense allocations of projects. The report concluded that as a result the Bureau
had not recovered approximately $6.5 million of fiscal year 1990 operation and
maintenance expenses and would continue to lose about $3.9 million of these
expenses annually unless corrective actions were taken. The Bureau originally
agreed to implement the report's seven recommendations by December 31, 1992, but
subsequently rescheduled the implementation dates for four of the recommendations
to dates ranging from December 1993 through September 1995. As of December
1994, the Office of the Assistant Secretary for Policy, Management and Budget
classified only Recommendation 2 as still being tracked for implementation by
September 1995.

Our office and the General Accounting Office have also issued five other audit
reports that addressed aspects of the recovery of operation and maintenance
expenses (see Appendix 4). The reports concluded that the Bureau needed to
update operation and maintenance expense allocations; simplify the cost allocation
methodology; improve internal controls over debt collection; and accrue, assess, and
collect penalties and interest on delinquent payments.

RESULTS OF AUDIT

We found that of the seven recommendations contained in our prior audit report,
four were implemented and three were partially implemented (see Appendix 2).
Recommendations were not fully implemented because the Bureau had not:
(1) revised operation and maintenance expense allocations; (2) developed accounting
guidelines for property replacement factors; and (3) recovered the costs of
performing reviews of operation and maintenance activities on project facilities. We
also found that two regions did not comply with contractual agreements for issuing
billings and assessing interest and penalties on late payments. As a result, the
Bureau has not recovered $14.8 million of reimbursable expenses from project

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beneficiaries for fiscal years 1992 through 1994 and may not recover costs exceeding
$4.6 million annually.

Recommendation 1. Establish guidelines requiring an in-depth, period review of
the operation and maintenance expense allocation of each project to ensure that the
reimbursable expense allocations conform to Reclamation Policies and guidelines.

The prior audit found that if the Bureau had had guidelines requiring an in-depth,
periodic review of each project's allocation base, appropriate allocations could have
been developed to charge reimbursable operation and maintenance expenses in a
more accurate manner.  The Bureau originally agreed to issue guidelines by
September 30, 1992, but subsequently extended the implementation date to
September 1994. Our followup review found that the Bureau issued the guidelines
in December 1994; therefore, we consider this recommendation implemented.

Recommendation 2. Revise the operation and maintenance expense allocations for
the projects included in our review, determine the allowability for recovering those
fiscal year 1990 reimbursable operation and maintenance expenses allocated to
nonreimbursable Purposes. and bill the water users accordingly.

Our prior report found that the Bureau inappropriately allocated up to $3 million
in reimbursable operation and maintenance expenses to nonreimbursable project
purposes in fiscal year 1990 for four projects (Yuma Area Projects, the Rio Grande
Project, the Boise Project, and the Pick-Sloan Missouri Basin Program). The Bureau
agreed to implement the recommendations by September 1995.

Our followup review disclosed that the Bureau had revised the operation and
maintenance expense allocations for the Yuma Area Projects, the Rio Grande
Project, and the Boise Project but had not implemented the revised allocations for
the Yuma Projects and the Rio Grande Project. As a result of the almost 3-year
delay in issuing the guidelines and revising the projects' allocations, the Bureau has
not recovered an estimated $13 million in operation and maintenance expenses from
project beneficiaries for fiscal years 1992 through 1994 and will continue to lose an
estimated $4.6 million annually until the revised allocations have been implemented.
In addition, the Bureau did not determine the allowability for recovering those fiscal
year 1990 reimbursable operation and maintenance expenses allocated to
nonreimbursable purposes for the four projects included in our prior review.
Therefore, we consider the recommendation partially implemented.

Yuma Area Projects. The prior report concluded that the Bureau's Lower
Colorado Region had allocated over 98 percent of its total expenses for operating
and maintaining the Yuma Area Projects to nonreimbursable purposes because the
Bureau had exempted the water users from paying these costs. As such, the Bureau
did not collect up to $2 million in additional reimbursements for fiscal Year 1990
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activities that directly benefited the Colorado River water users.  Our followup
review found that the Region had developed an administrative fee designed to
recover the costs of managing the water storage and delivery systems of the Lower
Colorado River. The fee includes provisions for the recovery of operation and
maintenance expenses for the Yuma Area Projects. The Region estimated that
through application of the fee, it would recover about $13.4 million annually from
all the Lower Colorado River water users.  However, the fee is contained in
proposed regulations that Bureau officials estimated would not be implemented until
at least fiscal year 1997 because of controversial provisions relating to interstate
water marketing.

Until the fee is implemented, the Bureau will not recover an estimated $3.5 million
annually in operation and maintenance expenses from the Yuma Projects'
beneficiaries. Based on the Region's current water usage information, we estimated
that the Region had not collected expenses totaling about $10.5 million from the
Yuma Area Projects for fiscal years 1992 through 1994. According to a Regional
official, the Region is reluctant to assess and collect these expenses before the
administrative fee is implemented because contracts with the water users do not
allow for the collection of these expenses. However, our review disclosed that the
four major contracts for the Yuma Projects permitted the collection of operation and
maintenance expenses from water users.

Rio Grande Project. The prior audit concluded that the Bureau's Upper
Colorado Region overallocated operation and maintenance expenses to
nonreimbursable project purposes for the Rio Grande Project.  This occurred
because irrigation allocations for the Project's Elephant Butte Dam and Reservoir
were reallocated to nonreimbursable Project purposes, such as recreation and flood
control. As a result, the Bureau would not recover over $503,000 of fiscal year 1990
expenses for the Project. Our followup review found that the Bureau's Denver
Office revised the expense allocation for the Elephant Butte Dam and Reservoir
during fiscal year 1994. However, the Region had not implemented the revised
allocation because the Denver Office did not issue the new guidelines until
December 15, 1994. In addition, an attorney advisor in the Intermountain Regional
Office, Office of the Solicitor requested that the revised allocation not be
implemented because of a pending lawsuit between the Bureau and the Elephant
Butte Irrigation District. Until the revised allocation is implemented, the Region will
not recover an estimated $40,000 annually. Based on the Region's current water
usage information, we estimated that the Region did not collect expenses totaling
about $121,000 for fiscal years 1992 through 1994.

Boise Project.  The prior audit concluded that the Pacific Northwest Region
did not allocate operation and maintenance expenses on the Boise Project in
accordance with guidelines developed by a Bureau task force. As a result, the
Bureau would not recover over $164,000 of fiscal year 1990 reimbursable expenses.
5

Our followup review found that in fiscal year 1993, the Pacific Northwest Region
revised and implemented the expense allocation in accordance with the task force
guidelines. This has resulted in the Region's collecting an additional $101,000 of
reimbursable expenses for the Boise, Minidoka, and Hungry Horse Projects in 1993.

Pick-Sloan Missouri Basin Program. The prior report concluded that the
Great Plains Region's allocation of operation and maintenance expenses for the
Pick-Sloan Missouri Basin Program resulted in an excess allocation of expenses to
nonreimbursable purposes. As a result, the Bureau would not recover fiscal year
1990 expenses of $256,000. Our followup review found that the Region did not
revise the operation and maintenance expense allocation for the Program. According
to Regional officials, the allocation was not revised because the Region was waiting
for the Bureau's Denver Office to issue new allocation guidelines, which were issued
on December 15, 1994. Until the allocation is revised and implemented, the Region
will not recover an estimated $200,000 annually in operation and maintenance
expenses from the Program beneficiaries. Based on the Region's current water usage
information, we estimated that the Region did not collect expenses totaling about
$497,000 for fiscal years 1992 and 1993 and an estimated $200,000 for fiscal
year 1994.

Our prior audit also disclosed that reimbursable expenses of $440,000 for
hydrothermal integration were inadvertently charged to nonreimbursable accounts
by the Great Plains Region. Subsequent to our audit, the Region transferred all
hydrothermal integration expenses for fiscal years 1989 to 1994 to the reimbursable
power account. As a result, the Government will recover at least $895,500 in
reimbursable expenses.

  Central Valley Project.  The prior audit did not include the Mid-Pacific
Region's Central Valley Project because the Bureau was in the process of proposing
its 1988 revision to the Project's cost allocation. We conducted a limited review of
the Project as part of our followup audit and found that the revised cost allocation
was not implemented because the Region needed to modify the allocation to address:
(1) public comments and concerns received on its proposed revision;
(2) recommendations made in the March 1992 General Accounting Office report
"Bureau of Reclamation Central Valley Project Cost Allocation Overdue and New
Method Needed" (No. GAO/RCED-92-74) to simplify and expedite the cost
allocation methodology; and (3) the requirements of the Central Valley Project
Improvement Act of 1992. According to the Region's Economist, the Project's cost
allocation is still being revised. Once the allocation has been revised, it will be sent
for public comments, finalized, and approved by the Regional Director. The Region
expects the Project's revised cost allocation and the reallocation of fiscal year 1995
operation and maintenance expenses to be implemented by December 31, 1995. The
Region will not recover an estimated $842,000 annually in operation and
maintenance expenses from Project beneficiaries until the revised allocation is
6

implemented. Based on the Project's revised allocation percentages, we determined
that the Region did not recover expenses totaling about $1.7 million for fiscal years
1992 and 1993.

Recommendation 3.  Obtain a legal opinion as to the need for Congressional
approval to revise the basis for allocating operation and maintenance expenses on
the Pick-Sloan Missouri Basin Program. If Confessional approval is required, it
should be requested.

We consider the recommendation implemented because the Bureau determined that
it has the authority to revise the basis for allocating operation and maintenance
expenses on the Pick-Sloan Missouri Basin Program without Congressional approval.

Recommendation 4. Discontinue the Practice of capitalizing total annual operation
and maintenance expenses on partially completed projects that have been placed in
service.

The prior audit found that the Bureau's Lower Colorado Region developed an
interim water rate that deferred the Government's recovery of about $4.1 million in
reimbursable operation and maintenance expenses during construction of the Central
Arizona Project. The Region's decision to capitalize and defer repayment of the
operation and maintenance expenses did not comply with the Secretary's decision on
the water allocation for the Central Arizona Project, which required Project water
to be marketed during interim periods to expedite the Project's repayment obligation.
Although capitalizing the expenses enables the Government to recover its interim
operation and maintenance costs, reimbursement was not expedited because the
obligation was to be repaid over the Project's 50-year repayment period. The Bureau
agreed to develop a policy by September 30, 1992, directing all of its regions to
discontinue the capitalization practice unless the revenue stream from marketing
water or services did not cover expenses. Our followup review disclosed that a
Bureauwide policy was established in October 1993. Therefore, we consider this
recommendation implemented.

Recommendation 5. Update guidelines for estimating the property replacement
factors and develop accounting  guidelines for such replacement factors.

The prior audit found that the Mid-Pacific Region's water rate for the Central Valley
Project included an expense factor that was not sufficient to fund replacements of
Project property. The report concluded that: (1) the Region had not adjusted the
Project's expense factor to reflect property changes that had occurred since 1982; and
(2) the Project's expense factor would only accumulate funds to replace property at
its estimated or original cost. The Bureau agreed to update its guidelines for
estimating the factors and to develop guidelines to account for such factors.

7

Our followup review found that the Bureau had issued final draft Reclamation
Instructions in March 1994 but that the Instructions did not fully address the issues
identified with the Central Valley Project's replacement factor. Specifically, the
revision did not provide and the Region did not develop administrative and
accounting guidelines for recovering the replacement cost of major replacement
items, for updating the replacement list for property changes and new items
acquired, or for indexing original or estimated property costs for inflation. A
Mid-Pacific Regional official stated that because of other priorities, the development
of replacement factor guidance was considered a lower priority item. The Region
said that it was planning to implement the necessary corrective actions by
September 30, 1995, to ensure that the replacement factor included in the water
rates provides sufficient funds to replace project property. Therefore, we consider
this recommendation partially implemented.

Recommendation 6.  Revise Reclamation Instructions to require recovery of
expenses incurred for reviewing the adequacy of operation and maintenance activities
on project facilities.
The prior audit found that the Bureau did not bill water users for its reviews of
operation and maintenance activities. These periodic reviews provided an indirect
benefit to the water users by independently assessing the overall condition and
operational readiness of project facilities. The report concluded that fiscal year 1990
billings would increase by $1 million if the Bureau charged the water users for review
expenses. The Bureau agreed to revise Reclamation Instructions by June 30, 1992,
to require the regions to recover the expenses incurred for reviewing operation and
maintenance activities. However, the Bureau stated that it would not attempt to
obtain reimbursement from entities whose repayment and water service contracts did
not have provisions for or did not specifically preclude the collection of these
expenses.

In September 1992, the Bureau issued an Interim Reclamation Instruction
(No. 233.1.17) on the recovery of expenses for reviewing operation and maintenance
activities, which was to be implemented for fiscal year 1993. The Interim Instruction
stated that review expenses would be recovered from the water users as project
operation and maintenance costs unless specifically prohibited by contract language.
The Interim Instruction also stated:

For existing contracts where the contract is silent on the [review of
operation and maintenance] cost recovery issue, costs are to be paid by
project beneficiaries because the absence of specific language is
considered to be nonprohibitive.

However, our followup review found that in May 1993, the Bureau made significant
changes to the Interim Instructions which delayed the recovery of review expenses

8

until fiscal year 1994. For contracts that were silent on the water users' responsibility
to pay such costs, the revised Instruction stated that review expenses were not to be
sought until formal rules and regulations addressing cost recovery were publicized.
As a result of the delay, the regions will not recover an estimated $44,000 in 1994
and annually from the 56 project beneficiaries whose contracts are silent on the
users' responsibility to pay for operation and maintenance review costs. In addition,
the Bureau did not recover about $1.8 million in review expenses for fiscal years
1992 through 1994.

Our followup review also showed that three regions had not fully implemented
corrective actions to recover $43,900 in review expenses. Specifically, the Upper
Colorado Region had not established accounting procedures and set up accounts to
accumulate review expenses or billed and collected $2,100 in costs for performing the
reviews. Also, the Great Plains Region had not billed $20,600 of the $28,100 spent
for the reimbursable reviews performed during fiscal year 1994, but the Region said
that it plans to bill these costs during fiscal year 1995. Further, the Pacific Northwest
Region had not billed or collected any of the $21,200 spent on the eight reviews
performed during fiscal year 1994 because cost data were lost at fiscal year-end.
Subsequent to our review, the Region forwarded data to its finance office to bill for
six reviews, totaling $14,700, and was in the process of billing for the remaining two
reviews.

While the Mid-Pacific Region's review requirements and practices remained the
same, the four other regions had taken some actions to reduce costs to the water
users for the reviews or to charge some reimbursable review expenses to
nonreimbursable programs as follows:

  - The Great Plains and the Pacific Northwest Regions extended their 3-year
review cycle to 6 years and 5 years, respectively, for minor facilities. However, the
Lower Colorado Region limited the extension of the review cycle (6 years) for minor
facilities only to those water users who disputed being charged for the review
expenses. Subsequent to our review, the Region changed the policy to review the
condition of facilities on a case-by-case basis to determine the frequency of reviews.

  - The Pacific Northwest Region eliminated the Denver Office's participation
in performing reviews, limited the Region's participation to major facilities reviews,
and designated responsibility for performing minor facilities reviews to its area
offices.

  - The Upper Colorado Region's policy combined its reviews of minor facilities
that have been transferred to water users with its "management reviews" of the Water
Conservation Program. The Regional policy is to perform the reviews every 5 years.
Although Regional officials stated that they intend to charge the reimbursable review
portion to the water users and the nonreimbursable portion to the Water
9

Conservation Program, there are no formal procedures in place to ensure that the
costs will be properly charged. In addition, the Region limited the Denver Office's
and its own participation in major reviews to those facilities that have been identified
as unique or having complex problems, combined its major facilities reviews with the
assessments performed under the Safety Evaluation of Existing Dams Program, and,
charged some of the reimbursable review expenses to the Dams Program. As a
result, the Region significantly reduced reimbursements from the water users. For
example, the Region's fiscal year 1991 program costs for performing facilities reviews
were about $125,350, whereas in fiscal year 1994, program costs for performing
reviews of the same group of facilities were only about $16,770. As such, a review
completed in 1991 cost the Region about $8,050 when funded by the Government.
The same review performed in 1994 cost $432 when charged directly to the water
users.

Since the Instructions were not revised properly, we consider the recommendation
only partially implemented.

Recommendation 7. Direct the regions to comply with Reclamation Policies and
contractual agreements for issuing operation and maintenance expense billings and
for assessing  penalties on late payments.

The prior audit found that the Bureau inappropriately delayed the billing of certain
users for annual operation and maintenance expenses and did not properly assess
delinquent charges, resulting in a loss to the Government of over $47,000. The
Bureau's September 25, 1991, memorandum directed the regions to comply with
Bureau policy and contractual agreements. The Bureau also stated that it would
follow up on regional compliance as part of the fiscal year 1992 cash
management/debt collection management control review.

Our followup review disclosed that the Bureau did not perform the 1992
management control review but did perform a Departmentwide fiscal year 1994 cash
management and debt collection functional review, the results of which were issued
on June 22, 1994. The functional review included the five regional offices in our
prior audit and identified no weaknesses related to the billing and collection of
operation and maintenance expenses.  Our followup review found, however, that
internal control and compliance weaknesses relating to billing and assessing penalties
for late payments still existed at the Mid-Pacific and the Pacific Northwest Regions,
resulting in late payment penalties and interest charges totaling $73,000 not being
collected.

  Mid-Pacific Region. At the Mid-Pacific Region, we reviewed the Region's
monthly aging reports of outstanding accounts that were over $10,000 and more than
l-year old. Of the 12 accounts reviewed, we found that 2 accounts related to the
payment of operation and maintenance expenses were more than 18 months
10

delinquent in payment to the Bureau and that the water contractors were still
receiving project water. The contracts between the Bureau and the water contractors
state that no water will be made available to contractors during any period in which
the contractors may be in arrears in the advance payment of any water rate charges
due the United States. Reclamation Instructions also require that when collection
efforts by the operating office have not produced payment, the matter should be
referred to the Solicitor's field office. We found that Regional administrative
personnel did not follow up on delinquent accounts and forward delinquent bills to
the Denver Office because they thought that it was the Denver Office's responsibility
to enforce collection. The Region had continued to supply water and had not
enforced collection or followed up on delinquent billings because Regional officials:
(1) were unaware of the delinquent accounts; (2) did not have sufficient staff or time
to perform the required followup; and (3) considered collection enforcement a lower
priority than billing. As a result, the Region has not collected late payment penalties
and interest charges totaling about $5,000 for fiscal years 1992 through 1994.

  Pacific Northwest Region. Our followup review found that the Region did not
assess or collect interest charges for delinquent payments from one of the Yakima
Project districts because of an administrative error, resulting in a loss to the Region
of about $2,000. In addition, we recently completed an audit of the recovery of
operation and maintenance costs of the Columbia Basin Project (Assignment
No. W-IN-BOR-002-94), which disclosed that the Region had not billed the water
districts in a timely manner or assessed and collected penalties and interest charges
on delinquent payments. As a result the Government lost about $70,400 related to
operation and maintenance expenses for the 3-year period ending December 31,
1993. This matter and the monetary amount were discussed in the Columbia Basin
Project audit report.

Since the Bureau directed the Region to comply with Reclamation policies and
contractual agreements, we consider the recommendation implemented. However,
because our followup review found that weaknesses still existed in the Mid-Pacific
and the Pacific Northwest Regions, we made a new recommendation (No. 5) to
ensure that these two regions comply with Bureau policy and contractual agreements.

Recommendations

We recommend that the Commissioner, Bureau of Reclamation:

  1. Publish proposed regulations and implement the administrative fee in
order to collect management expenses from all Lower Colorado River water
beneficiaries.

  2. Approve and implement the revised Central Valley Project operation and
maintenance expense allocation and bill the water users accordingly.
11

  3. Ensure that the Mid-Pacific Region develops administrative and accounting
guidelines for recovering the replacement cost of major replacement items. These
guidelines should include updating the list of replacements to incorporate items
acquired since the replacement factor was developed, adding new items as they are
acquired, and indexing original or estimated property costs for inflation.

  4. Revise the Reclamation Instructions to require regions to recover costs
associated with performing operation and maintenance reviews except when
legislation or contractual agreements specifically prohibit the collection of these
expenses. These Instructions should include establishing procedures to accumulate
and account for all direct and indirect review expenses and to bill and collect the
expenses from the water users.

  5. Ensure that the Mid-Pacific and the Pacific Northwest Regions comply
with Reclamation policies and contractual agreements for issuing operation and
maintenance expense billings and for assessing interest and penalties on late
payments, including the requirement to not deliver project water to water districts
that are delinquent in their payments.

On May 22, 1995, a draft of this report was provided to the Bureau for comment,
and a July 6, 1995, written response was requested. Our office subsequently granted
the Bureau extensions to July 21 and September 13, 1995, in which to respond. Our
discussions with Bureau officials had indicated that the Bureau was planning to
concur with all of the report's recommendations and was developing target dates for
implementation. However, as of September 22, 1995, the Bureau's written response
had not been received. Accordingly, all of the recommendations are considered
unresolved.

In accordance with the Departmental Manual (360 DM 5.3), we are requesting a
written response to this report by November 30, 1995. The response should provide
the information requested in Appendix 5.

The legislation, as amended, creating the Office of Inspector General requires
semiannual reporting to the Congress on all audit reports issued, the monetary
impact of audit findings (Appendix 1), actions taken to implement audit
recommendations, and identification of each significant recommendation on which
corrective action has not been taken.

cc:  Commissioner, Bureau of Reclamation
  Chief, Division of Management Control and
  Audit Follow-up
  Audit Liaison Officer, Water and Science
  Audit Liaison Officer, Bureau of Reclamation

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                                                               APPENDIX 1


                CLASSIFICATION OF MONETARY AMOUNTS


                              Potential         Lost Revenues
                           Additional           (Fiscal Years
Finding Area/Project          Revenues*               1992 - 1994)


Allocation of Operation and Maintenance Expenses

Yuma Area Projects
Rio Grande Project
Pick-Sloan Missouri Basin Program
Central Valley Project

Operation and Maintenance Review Expenses

Reimbursable Expenses,
Silent Contracts

Billing Delays and Payment Delinquencies

Mid Pacific Region
Pacific Northwest Region

Total

$3,489,000
40,000
200,000
842,000

44,000
44,000

$10,468,000
121,000
697,000
1,685,000
1,784,000
44,000

  5,000
  2.000

"The amounts represent the recurring operation and maintenance expenses that will not be
recouped annually from project beneficiaries if corrective actions are not taken.

13

 
                                                                           APPENDIX 2


          SUMMARY OF RECOMMENDATIONS AND CORRECTIVE
      ACTIONS FOR AUDIT REPORT "RECOVERY OF OPERATION
                     AND MAINTENANCE PROGRAM EXPENSES,
                                BUREAU OF RECLAMATION"


Recommendations

1.  Establish guidelines requiring an in-depth,
periodic review of the operation and maintenance
expense allocation of each project to ensure that
the reimbursable expense allocations conform to
Reclamation policies and guidelines.

2. Revise the operation and maintenance expense
allocations for the projects included in our review,
determine the allowability for recovering those
fiscal year 1990 reimbursable operation and
maintenance  expenses  allocated to
nonreimbursable purposes, and bill the water users
accordingly.

3. Obtain a legal opinion as to the need for
Congressional approval to revise the basis for
allocating operation and maintenance expenses on
the Pick-Sloan Missouri Basin Program. If
Congressional approval is required, it should be
requested.

4. Discontinue the practice of capitalizing total
annual operation and maintenance expenses on
partially completed projects that have been placed
in service.

5. Update guidelines for estimating the property
replacement factors and develop accounting
guidelines for such replacement factors.

6. Revise Reclamation Instructions to require
recovery of expenses incurred for reviewing the
adequacy of operation and maintenance activities
on project facilities.

7. Direct the regions to comply with Reclamation
policies and contractual agreements for issuing
operation and maintenance expense billings and
for assessing penalties on late payments.

Status of Recommendations
and Corrective Actions

Implemented. Guidelines were issued on
December 15, 1994.

Partially implemented. The expense allocation for
one project has not been revised, and revised
expense allocations for two projects have not been
implemented. The Bureau's revised target date is
September 1995.

Implemented. The Bureau determined that it has
the legal authority to revise the Program's expense
allocation.

Implemented. The Bureau established a policy in
October 1993 to discontinue the practice of
capitalizing operation and maintenance expenses.

Partially implemented.  Guidelines were not
developed to ensure that the replacement factors
were sufficient to replace project property.

Partially implemented.  Interim Reclamation
Instructions were revised in September 1992 but
were subsequently changed which reduced and
delayed the recovery of expenses.

Implemented. Regions were directed to comply
with Bureau policy and contractual agreements but
were not complying.

14

 
                                                                     APPENDIX 3

                      OFFICES VISITED AND CONTACTED


Office/Project                                                                            Location

Denver Office                                                               Lakewood, Colorado

Lower Colorado Region
  Yuma Area Projects                                                    Boulder City, Nevada

Upper Colorado Region
  Rio Grande Project                                                      Salt Lake City, Utah

Great Plains Region*
  Pick-Sloan Missouri Basin Program                          Billings, Montana

Pacific Northwest Region*
  Boise Project
  Columbia Basin Project                                             Boise, Idaho

Mid-Pacific Region
  Central Valley Project                                               Sacramento, California

"Contacted only.

15

                                           APPENDIX
                                          Page 1 of 2
                                   

                                    PRIOR AUDIT COVERAGE

The Office of Inspector General and the General Accounting Office have issued five
audit reports that addressed aspects of the recovery of operation and maintenance
expenses as follows:

  - The September 1993 Office of Inspector General report "Pick-Sloan Missouri
Basin Program Cost Allocation, Bureau of Reclamation" (No. 93-1-1641) concluded
that Program beneficiaries did not pay an equitable share of the operation and
maintenance costs for the use of existing multipurpose facilities. The report stated
that until the Program's cost allocations were updated to reflect "realistic
development expectations," operation and maintenance costs would continue to be
allocated inequitably among Program beneficiaries and the taxpayers would pay a
disproportionate share of Program and financing costs. The report also stated that
in 1991, taxpayers paid for an estimated $2 million in operation and maintenance
costs that should have been borne by power beneficiaries. We recommended that
the Bureau modify the allocation of operation and maintenance costs to initiate
recovery of these amounts as soon as possible. As discussed in the Results of Audit
section of our current report, we found that the Bureau still had not modified the
Pick-Sloan operation and maintenance allocation.

  - The December 1992 Office of Inspector General report "Bureau of
Reclamation Combined Statement of Financial Position as of September 30, 1991"
(No. 93-I-367) concluded that although the Bureau's automated accounting system
was designed to provide its management with details on the collection status of
individual bills, the regions had not entered this information into the system for all
outstanding bills. As a result, Bureau management had no means of reviewing and
monitoring the collection efforts in a timely manner to ensure that all necessary debt
collection actions were taken for each individual account and to initiate action to
write off accounts as uncollectible when warranted. As discussed in the Results of
Audit section of our current report, we found that the Bureau's Mid-Pacific and
Pacific Northwest Regions were not monitoring debt collection efforts to ensure that
necessary actions were taken.

  - The September 1991 Office of Inspector General report "Implementation of
the Federal Financial System, Bureau of Reclamation" (No, 91-1-1445) concluded
that the Bureau did not assess and record interest receivables effectively and process
accounts receivable transactions efficiently. In addition, the Bureau did not assess
and record in the system $330,000 in interest related to delinquent accounts

16

                                         APPENDIX 4
                                        Page 2 of 2

receivable. As discussed in the Results of Audit section of this report, we found that
the Bureau's Mid-Pacific and Pacific Northwest Regions were not assessing penalties
on delinquent accounts.

  - The December 1987 Office of Inspector General report "Bureau of
Reclamation's Compliance With the Federal Managers' Financial Integrity Act of
1982, Fiscal Year 1987" (No. 88-22) concluded that three of the four Bureau reviews
did not include sufficient testing to identify material weaknesses. The report
identified significant internal control weaknesses for debt collection in both the
Pacific Northwest and the Mid-Pacific Regions that were not disclosed by the
Bureau's internal reviews. The report also stated that interest and administrative
charges were not assessed by the Mid-Pacific and the Pacific Northwest Regions for
32 delinquent bills totaling $405,116. At an annual rate of 7 percent, the amount of
interest would be $28,358 per year. As discussed in the Results of Audit section of
our current report, we found that the Bureau's Mid-Pacific and Pacific Northwest
Regions were not assessing penalties on late payments.

  - The March 1992 General Accounting Office report "Bureau of Reclamation
Central Valley Project Cost Allocation Overdue and New Method Needed" (No.
GAO/RCED-92-74) concluded that the Bureau had not met the Congressionally
mandated deadline for updating the Central Valley Project's cost allocation and
noted two fundamental problems in the Bureau's cost allocation method: (1) the
reliance on assumptions and subjective judgments about costs and benefits relating
to each project purpose that were open to question; and (2) the need for data that
were not always available or that were time-consuming to generate. The report
recommended that the Bureau adopt a cost allocation methodology which was less
complicated and more timely and which relied on existing data. As discussed in the
Results of Audit section of our current report, we found that the Project's cost
allocation is still being revised and that the Mid-Pacific Region expects the revised
cost allocation and the reallocation of fiscal year 1995 operation and maintenance
expenses to be implemented by December 1995.

17

 
                                          APPENDIX 5

          STATUS OF AUDIT REPORT RECOMMENDATIONS

Finding/Recommendation
   Reference                                           Status                             Action Required

1, 2, 3, 4, and 5                           Unresolved.                         Provide a response
                                                                                                indicating concurrence or
                                                                                                nonconcurrence with each
                                                                                                recommendation.   If
                                                                                                concurrence is indicated,
                                                                                                provide an action plan that
                                                                                                identifies the target date and
                                                                                                title of  the  official
                                                                                                responsible  for
                                                                                                implementation.   If
                                                                                                nonconcurrence is indicated,
                                                                                                provide specific reasons for
                                                                                                the nonconcurrence.



18

 
                                       ILLEGAL OR WASTEFUL ACTIVITIES
                                               SHOULD BE REPORTED TO
                                   THE OFFICE OF INSPECTOR GENERAL BY

Sending written documents to:                                             Calling:

Within the Continental United States

U.S. Department of the Interior                                          Our 24-hour
Office of Inspector General                                                Telephone HOTLINE
P.O. Box 1593                                                                    1-800-424-5081 or
Arlington, Virginia 22210                                                  (703) 235-9399

                                                                                           TDD for the hearing impaired
                                                                                            (703) 235-9403 or
                                                                                           1-800-354-0996

                                       Outside the Continental United States

                                                       Caribbean Area

U.S. Department of the Interior                            (809) 774-8300
Office of Inspector General
Caribbean Region
Federal Building & Courthouse
Veterans Drive, Room 207
St. Thomas, Virgin Islands 00802

                                                    North Pacific Region



U.S. Department of the Interior                                     (700) 550-7279 or
Office of Inspector General                                           COMM 9-011-671-472-7279
North Pacific Region
238 Archbishop F.C. Flores Street
Suite 807, PDN Building
Agana, Guam 96910

 
Toll Free Numbers
1-800-424-5081
TDD 1-800-354-0996

FTS/Commercial Numbers
703-235-9399
TDD 703-235-9403

HOTLINE

P.O. BOX 1593
Arlington, Virginia 22210