[Final Audit Report on the Lower Colorado River Basin Development Fund, Bureau of Reclamation]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 96-I-1033

Title: Final Audit Report on the Lower Colorado River Basin Development
       Fund, Bureau of Reclamation

Date: July 30, 1996

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United States Department of the Interior

OFFICE OF INSPECTOR GENERAL
Washington, D.C. 20240

MEMORANDUM

TO:            The Secretary

FROM:                     Wilma A. Lewis
                     Inspector General

SUBJECT SUMMARY:    Final Audit Report for Your Information - "Lower Colorado River
Basin Development Fund, Bureau of Reclamation" 
(No.96-I-1033)

Attached for your information is a copy of the subject final audit report. The objective of the
audit was to determine whether the Bureau of Reclamation complied with requirements
pertainingto the Lower Colorado River Basin Development Fund's receipts and expenditures
for fiscal year 1995.

We concluded that the Bureau of Reclamation had generally complied with the legislative
requirements that apply to the receipt and expenditure of Development Fund monies for fiscal
year 1995. However, we did note that internal controls over the Development Fund could
be strengthened if the Bureau would formulate written procedures to account for
Development Fund receipts and expenditures. We also determined that the Bureau had not
submitted its required annual reports to the Congress on Development Fund activity for fiscal
years 1994 and 1995.

The Bureau concurred with our recommendations by submitting the required project reports
for fiscal years 1994 and 1995 to the Congress on May 28, 1996, and by agreeing to develop
written procedures and guidelines to account for Development Fund receipts and
expenditures by December 31, 1996.

If you have any questions concerning this matter, please contact me or Mr. Robert J.
Williams, Acting Assistant Inspector General for Audits, at (202) 208-5745.

Attachment

W-IN-BOR-O01-96

United States Department of the Interior
OFFICE OF THE INSPECTOR GENERAL
Washington,  D.C. 20240

AUDIT REPORT

Memorandum

To:   Commissioner, Bureau of Reclamation

Subject: Final Audit Report on the Lower Colorado River Basin Development Fund,
Bureau of Reclamation (No. 96-I-1033)

INTRODUCTION

This report presents the results of our review of the Bureau of Reclamation's Lower
Colorado River Basin Development Fund, established by the Colorado River Basin Project
Act (Public Law 90-537), as amended. The objective of the review was to determine
whether the Bureau complied with requirements pertaining to the Development Fund's
receipts and expenditures for fiscal year 1995.

BACKGROUND

On September 30, 1968, the Congress enacted the Colorado River Basin Project Act to
provide funding for the comprehensive development of the water resources of the upper
and lower Colorado River basins. The Act directed the Secretary of the Interior to
construct, operate, and maintain the Central Arizona Project for the primary purpose of
providing irrigation and municipal and industrial water to Arizona and New Mexico. The
Act also authorized the establishment of the "Lower Colorado River Basin Development
Fund, " a separate revolving find in the U.S. Treasury, to account for the receipt and
expenditure of Project monies. The Act further required the Secretary to prepare annual
reports "to the Congress on the status of Project revenues, costs, and repayment. The
Congress also enacted additional legislative requirements for the Development Fund,
which are included in the Hoover Power Plant Act of 1984 (Public Law 98-381) and the
Colorado River Basin Salinity Control Acts (Public Laws 93-320 and 98-569).

 
Development Fund receipts include related Project construction appropriations from the
Congress and sums advanced by non-Federal entities for carrying out the provisions of the
Colorado River Basin Project Act; all revenues collected in connection with the operation
of authorized Project facilities, such as the Navajo Generating Station; and any "surplus"
Federal power revenues from the Boulder Canyon Project pursuant to the Hoover Power
Plant Act of 1984.

Development Fund expenditures include payments for Project construction, operation,
maintenance, and replacement expenses; repayment to the U.S. Treasury for Federal
investment costs, with interest based on the unamortized balance of the electric power
supply and municipal and industrial water supply features; repayment of a share of the
reimbursable Colorado River Basin Salinity Control Act costs to the U.S. Treasury; and
repayment to the Upper Colorado River Basin Fund for power purchases required to meet
Hoover Darn contractual obligations during the period that the Glen Canyon Darn reservoir
was filled.

From October 1968 through September 1995, Bureau records indicate that collections and
appropriations deposited in the Development Fund totaled $4.4 billion: $2.9 billion of
construction appropriations; $1.3 billion of power revenues; and $200 million of water
sales, repayment by the Central Arizona Water Conservation District,1 and miscellaneous
revenues. During the same period, expenditures from the Development Fund totaled
$4.3 billion: distributions of $2.8 billion from construction appropriations; outlays of
$1.2 billion for operations, maintenance, and replacement expenses; and disbursements
of $300 million for miscellaneous items, such as the repayment of the Navajo Generating
Station investment and the interest on the unamortized electric power and municipal and
industrial water investment. For fiscal year 1995, Development Fund collections and
outlays were about $246 million and $225 million, respectively (see Appendix 1).

SCOPE OF AUDIT

We conducted our review from October 1995 through February 1996 at the Bureau's
Lower Colorado Regional Office in Boulder City, Nevada, and at the Phoenix Area Office
in Phoenix, Arizona. To meet our objective, we reviewed documents pertaining to fiscal
year 1995Development Fund receipts and expenditures and interviewed Bureau program
officials and officials from the Office of the Solicitor's Phoenix field office about the
legislative requirements and the lawsuits affecting the Development Fund.2

lThe Arizona State Legislature created the Central Arizona Water Conservation District in 1971 as
the single
entity to contract with the Bureau for the operation and maintenance of the Project and for the
repayment of
most of the reimbursable Project construction costs.

2In July 1995, the District filed a lawsuit against the Government over various repayment and
operational
issues associated with the Project. In August 1995, the Government responded by filing a lawsuit
against
the District. Many of the repayment and operational issues under litigation could impact the financial
condition of the Project and future Development Fund receipts and expenditures (the fiscal year 1995
impacts
are contained in Appendix 1).

2

 
Our audit was made inaccordance 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 to accomplish our
objective. In planning our audit, we reviewed the Department of the Interior's Annual
Statement and Report, required by the Federal Managers' Financial Integrity Act, for
fiscal year 1994 and determined that the Department did not report any material
weaknesses related to the objective and scope of our audit. We also evaluated the
Bureau's system of internal controls related directly to the Development Fund and found
that the Bureau had not: (1) formulated written procedures to account for Development
Fund receipts and expenditures and (2) submitted its required annual reports to the
Congress on Development Fund activity. These weaknesses and recommended corrective
actions are discussed in the Results of Audit section of this report. The recommendations,
if implemented, should improve the internal controls in these areas.

PRIOR AUDIT COVERAGE

Neither the General Accounting Office nor the Office of Inspector General has audited the
Development Fund within the past 5 years. However, the independent accounting firm
of Ernst & Young reviewed the Development Fund's costs related to Project construction
for the District. In the May 28, 1993, report "Schedule of Construction and Other Costs
and Other Financial Information, " Ernst & Young addressed Development Fund
construction costs for fiscal years 1991 and 1992. The report concluded that the Schedule
presented fairly the costs of the Project as of September 30, 1991, and 1992.

RESULTS OF AUDIT

Overall, we found that the Bureau generally complied with the legislative requirements that
apply to the receipt and expenditure of Development Fund monies for fiscal year 1995.
However, we did note that internal controls over the Development Fund could be
strengthened if the Bureau would formulate written procedures to account for Development
Fund receipts and expenditures. In addition, we found that the Bureau had not submitted
its required annual reports to the Congress on Development Fund activity for fiscal
years 1994 and 1995.

Accounting Procedures

The Bureau's Lower Colorado Region had not formulated written procedures to ensure the
consistent accounting treatment of Development Fund receipts and expenditures.
Generally accepted accounting principles prescribe that a system of administrative and
accounting controls be established to ensure consistent accounting treatment of revenues
and expenses in differing accounting periods. Although the Department and the Bureau
had established general accounting policies and procedures, specific instructions to guide
Bureau officials through the various legislative requirements for the Development Fund
were not formulated. The Bureau relied on one person to account for Development Fund
receipts and expenditures and to consolidate data obtained from various sources without

3

 
the benefit of any written procedures. Although not required by legislation, we believe
that procedures are needed to describe the proper accounting treatment for each source of
the Development Fund's receipts and expenditures. Such procedures should incorporate
the legislative requirements and Solicitor's opinions that impact the Development Fund.
These procedures would help strengthen internal controls by ensuring the continuity of
accounting treatment and help expedite the timely generation of required financial
statements and annual reports.

Annual Reports

At the time of our review, the Bureau's Lower Colorado Region had not completed its
required Central Arizona Project annual reports for fiscal years 1994 and 1995. The
Colorado River Basin Project Act states that "the Secretary shall report to the Congress, "
on an annual basis, the status of (1) the revenues from and the cost of constructing,
operating, and maintaining the Project for the preceding fiscal year; (2) the current Federal
investment allocated to power, irrigation, and other purposes; and (3) the current and
projected Project repayment. The Region's Finance Team Leader advised us that the
submission of the fiscal year 1994 report to the Secretary was delayed because the Bureau
and the District were in negotiations to resolve disputed repayment and operational issues,3
which the Region wanted to conclude before submitting the 1994 report to the Secretary.
The Team Leader also told us that the fiscal year 1995 report was in progress and would
be completed upon receipt of the Bureau's current Project cost allocation information.
Since the Bureau had not completed its reports, the Secretary has not been able to submit
the information to the Congress. We believe that the timely submittal of the annual reports
is necessary to keep the Congress apprised of the financial condition of the Development
Fund and the status of the Project's repayment.

Recommendations

We recommend that the Commissioner, Bureau of Reclamation, direct the Lower Colorado
Region to:

  1. Develop written procedures to account for Development Fund receipts and
expenditures.

  2. Complete the Project's annual reports for fiscal years 1994 and 1995 and submit
the reports to the Secretary.

3The negotiations between the Bureau and the District involved repayment and operational issues,
including
debt restructuring; the District's repayment obligation; and the extent of the Government's
responsibility for
Project operation, maintenance, and replacement costs. The negotiations were discontinued in June
1995,
after which the District and the Government filed lawsuits against each other.

4

 
Bureau of Reclamation Response and Office of Inspector General Reply

The June 7, 1996, response (Appendix 2) from the Commissioner, Bureau of Reclamation,
stated concurrence with Recommendation 1 and compliance with Recommendation 2.

Based on the response, we considered Recommendation 2 resolved and implemented and
Recommendation 1 resolved but not implemented. Accordingly, Recommendation 1 will
be referred to the Assistant Secretary for Policy, Management and Budget for tracking of
implementation, and no further response to the Office of Inspector General is required (see
Appendix 3).

The legislation, as amended, creating the Office of Inspector General requires semiannual
reporting to the Congress on all audit reports issued, 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

 
APPENDIX 1
Page 1 of 2

SCHEDULE OF SOURCE AND DISPOSITION OF THE LOWER
COLORADO RIVER BASIN DEVELOPMENT FUND FOR THE
   FISCAL YEAR ENDED SEPTEMBER 30, 1995

Fiscal 1995 Activity   Total
    ($000's)   ($000's)

Beginning Cash Balance at October 1, 1994

Source*

Collections/Revenue:
Navajo Power
Hoover Power
Water Salesl
Operation and Maintenance Advances by the District
Stage I Repayment by the District2
Construction Appropriations
Miscellaneous
Subtotal

Disposition*

Outlays:
Construction
Operations - Navajo Power
Operations - Other
Interest on Unpaid Investment - Stage I

Transfers:
Repayment of Investment3
Salinity Control
Hoover Deficiency4
Subtotal

Change in Cash Balance

Ending Cash Balance at September 30, 1995

$82,383
11,674
  0
1,010
34,332
116,253
  193
$245,845

101,943
67,755
4,810
42,738

  0
5,834

$224,613

$79,837

*The accompanying footnotes are on page 2 of this appendix.

6

 
APPENDIX 1
Page 2 of 2

lThe Central Arizona Water Conservation District and the Government disagree on whether water
sales
revenues should be credited to the Development Fund. In an August 1987 operation and maintenance
transfer
contract for the Central Arizona Project, the Bureau allowed the District to retain all interim water
sales
revenues to fund the Project's operation and maintenance costs prior to the "notice of completion.
" Because
the Bureau issued its "notice of substantial completion" on September 30, 1993, the Government
believes
that the District's failure to credit the water sales revenues to the Development Fund is a violation
of Project
legislation. This issue is the subject of the pending lawsuits.

2The District and the Government disagree on various repayment issues: the actual repayment
ceiling
provided for in the amended repayment contract, the allocation of certain Project costs to the
District's
repayment obligation, and the Bureau's cost allocation procedure. In December 1994, the Bureau
billed the
District $54.1 million as its annual repayment obligation. In January 1995, the District submitted a
payment
of $34.3 million, a difference of $19.8 million. This issue is the subject of the pending lawsuits.

3Based on the Bureau's cost allocation procedure, the District's repayment obligation due in January
1995
included $46.8 million of interest. The District's payment of $34.3 million was credited to the U.S.
Treasury
as interest on the unpaid Project investment. Since the payment was not sufficient to cover the
interest due,
none of the Project investment principal was repaid. This issue is the subject of the pending lawsuits.

4This transfer reimburses the Upper Colorado River Basin Fund for power purchases required to
meet
deficiencies in generation at Hoover Dam during the period that the Glen Canyon Dam Reservoir
was filled.
Annual transfers of $1,533,000 will be made from the Lower Colorado River Basin Development
Fund to
the Upper Colorado River Basin Fund until 1999.

 
IN REPLY
REFER TO:
D-501O
ADM-8.00

                       APPENDIX 2


      BUREAU OF RECLAMATION
       WASHINGTON, D.C. 20240

To:

From:

Subject:

         MEMORANDUM
Office of Inspector General
Attention: Assistant I
Eluid L. Martinez
Commissioner
Draft Audit Report on Lower Colorado River Basin   pment Fund, Bureau of

   Reclamation, Assignment No. W-IN-BOR-001-96, Dated April 1996
The Bureau of Reclamation offers the following comments in response to the recommendations in
the
subject report.
Recommendation 1
Develop written procedures to account for Development Fund receipts and expenditures.
  Response
  Concur. Written procedures and guidelines are being developed to improve the overall
  financial management program in the Lower Colorado Region. Specific procedures to
  account for the Lower Colorado River Basin Development Fund receipts and expenditures
  will be developed and incorporated into these procedures.
  The responsible official is the Lower Colorado Regional Finance Manager. The target date
  for implementation is December 31, 1996.
Recommendation 2
Complete the Project's annual reports for fiscal years 1994 and 1995 and submit the reports to the
Secretary.
  Response
  Complied. The Project reports for fiscal years 1994 and 1995 were transmitted to the
  Congress on May 28, 1996.
If you have questions or require additional information, please contact Luis Maez at (303)236-3289,
extension 245.

cc:  Assistant Secretary - Water and Science, Attention: Margaret Carpenter

                8

 
APPENDIX 3

STATUS OF AUDIT REPORT RECOMMENDATIONS

Finding/
Recommendation
Reference    Status        Action Required

1    Resolved; not   No further response to the Office of
   implemented.   Inspector General is required.  The
          recommendation will be referred to the
          Assistant Secretary for Policy, Management
          and Budget for tracking of implementation.

2

Implemented.   No further action is required.

 
   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
1550 Wilson Boulevard            1-800-424-5081 or
Suite 402                (703) 235-9399
Arlington, Virginia 22210

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

Outside the Continental United States

Caribbean Region

U.S. Department of the Interior        (703) 235-9221
Office of Inspector General
Eastern Division - Investigations
1550 Wilson Boulevard
Suite 410
Arlington, Virginia 22209

North Pacific Region

U.S. Department of the Interior
Office of Inspector General
North Pacific Region
238 Archbishop F.C. Flores Street
Suite 807, PDN Building
Agana, Guam 96910

(700) 550-7279 or
COMM 9-011-671-472-7279

 
1550 Wilson Boulevard   E
Suite 402
Arlington, Virginia 22210