[Audit Report on Interfund Loans and Federal Grant Balances, Government of the Virgin Islands]
[From the U.S. Government Printing Office, www.gpo.gov]
Report No. 98-I-670
Title: Audit Report on Interfund Loans and Federal Grant Balances,
Government of the Virgin Islands
Date: September 9, 1998
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U.S. Department of the Interior
Office of Inspector General
AUDIT REPORT
INTERFUND LOANS AND
FEDERAL GRANT BALANCES,
GOVERNMENT OF THE VIRGIN ISLANDS
REPORT NO. 98-I-670
SEPTEMBER 1998
MEMORANDUM
TO: The Secretary
FROM: Richard N. Reback
Acting Inspector General
SUBJECT SUMMARY: Final Audit Report for Your Information
- "Interfund Loans and Federal Grant Balances,
Government of the Virgin Islands" (No. 98-I-670)
Attached for your information is a copy of the subject final audit report. The objective of the
review was to determine (1) all amounts borrowed by the General Fund from special fund
accounts during fiscal years 1995, 1996, and 1997 and (2) the outstanding balances of such
interfund loans and the unobligated balances of Federal grant accounts. This report also
updated preliminary information presented in our December 1997 advisory report "Status of
Interfund Loans and Other Obligations, Government of the Virgin Islands" (No. 98-I-187).
We found that the Government, as of September 30, 1998, had outstanding operations-
related obligations (excluding bonded debt) totaling $588 million, which included
$120 million for unauthorized and unrecorded interfund loans that may include Federal
funds; the Virgin Islands Office of Management and Budget maintained a tracking system
for Federal grants received by the Government, even though this system relied on
information provided by individual operating agencies of the Government and was not
current or reliable; the Department of Public Works did not fully use Federal grants of about
$38.1 million it had received during the period of 1984 to 1997; and the Government,
although it had made some improvements in its operations, continued to have problems in
the areas of overall financial management, expenditure control, revenue collection, and
program operations.
The report contained 20 recommendations, which, although they would not solve the
Government's immediate financial crisis, could provide a basis for the Government to
initiate long-term improvements in its daily operations and in its overall financial condition.
Based on the response to the recommendations, we considered 6 recommendations resolved
and implemented and 3 recommendations unresolved. Also based on the response, we
requested additional information for the remaining 11 recommendations.
If you have any questions concerning this matter, please contact me at (202) 208-5745 or
Mr. Robert J. Williams, Assistant Inspector General for Audits, at (202) 208-4252.
Attachment
Honorable Roy L. Schneider V-IN-VIS-005-97
Governor of the Virgin Islands
No. 21 Kongens Gade
Charlotte Amalie, Virgin Islands 00802
Subject: Audit Report on Interfund Loans and Federal
Grant Balances, Government of the
Virgin Islands (No. 98-I-670)
Dear Governor Schneider:
This report presents the results of our review of interfund loans and Federal grant balances
of the Government of the Virgin Islands. The objective of our audit, as amended, was to
determine (1) all amounts borrowed by the General Fund from special fund accounts during
fiscal years 1995, 1996, and 1997 and (2) the outstanding balances of such interfund loans
and the unobligated balances of Federal grant accounts. This report also updates preliminary
information presented in our advisory report "Status of Interfund Loans and Other
Obligations, Government of the Virgin Islands" (No. 98-I-187), which was issued on
December 22, 1997.
Based on our review, we concluded that (1) the Government, as of September 30, 1997, had
outstanding operations-related obligations of about $588 million; (2) complete, current, and
reliable information on the balances of Federal grants awarded to the Government was not
readily available; and (3) the Government had not taken adequate steps to correct
long-standing financial management problems that had an adverse impact on its financial
condition. Specially, we found that:
- The Government, as of September 30, 1997, had outstanding operations-related
obligations (excluding bonded debt) totaling $588 million as follows: $120 million for
unauthorized and unrecorded interfund loans; $21 million for authorized and recorded
interfund loans; $150 million for disaster-related loans received from the Federal Emergency
Management Agency after Hurricanes Hugo and Marilyn; $141 million for retroactive salary
increases and fringe benefits for fiscal years 1991 through 1997; $76 million for income tax
refunds for tax years 1994 through 1996; at least $67 million for goods and services provided
by approximately 4,000 vendors; and $13 million for the Government Employees Retirement
System for the Early Retirement Incentive, Training and Promotion Act of 1994 and regular
retirement contributions for September 1997. In January 1998, the Legislature approved and
the Governor signed into law Act No. 6197, which authorized the Government to obtain a
short-term (10-month) loan of $106 million to pay $64 million in outstanding income tax
refunds and $42 million in outstanding vendor invoices. Regarding the Government's
overall financial condition, the effect of Act No. 6197 was to convert accounts payable of
$106 million into loans payable of $106 million that would accrue interest at the rate of
6.9 percent annually. The Government said that it intended to liquidate the $106 million loan
from the proceeds of bonds that were issued in May 1998.
- Although the Virgin Islands Office of Management and Budget maintained a
tracking system for Federal grants received by the Government, this system relied on
information provided by individual operating agencies of the Government and was not
current or reliable. Financial information on Federal grants contained in the Financial
Management System operated by the Department of Finance also was not current or reliable.
Our review of Federal grant accounting practices at the four Government agencies that
receive the largest amount of Federal grant funds on a recurring annual basis disclosed that
the Department of Health and the Department of Human Services generally maintained
effective control over their grant funds and did not have any material amounts of unobligated
grant funds; the Department of Education did not liquidate outstanding encumbrances or
submit grant Financial Status Reports for its fiscal year 1997 consolidated block grant
($17 million) within the time frames required by the Code of Federal Regulations; and the
Department of Public Works did not fully use grants of about $38.1 million it had received
during the period of 1984 to 1997 for the establishment and operation of the public bus
transportation system ($6.6 million), the purchase of buses for elderly and handicapped
persons ($0.8 million), various environmental protection projects ($17 million), and various
highway improvement and construction projects ($13.7 million).
- Although the Government has made some improvements in its operations, long-
standing problems still existed in the areas of overall financial management, expenditure
control, revenue collection, and program operations. We believe that these long-standing
problems have a negative impact on the Government's overall financial condition and that
significant improvements in these areas could have been achieved if the Government had
implemented audit recommendations made by the Office of Inspector General and the Virgin
Islands Bureau of Audit and Control.
To correct these conditions, we have made 20 recommendations that, although they will not
solve the Government's immediate financial crisis, could provide a basis for the Government
to initiate long-term improvements in its daily operations and in its overall financial
condition.
On June 4, 1998, we discussed a preliminary draft of this report with the Commissioner and
other officials of the Department of Finance, who generally concurred with the
recommendations but disagreed with our conclusion that, as a result of the unrecorded
interfund loans of $120 million, Federal funds may have been used to cover an overdraft in
the Special and Other Funds bank account. On June 22, 1998, the Commissioner of Finance
also provided us with a written response (Appendix 5) to the preliminary draft report, which
disagreed with our conclusions that (1) unrecorded interfund loans of $120 million were not
authorized by the Legislature and (2) Federal funds may have been used to cover an overdraft
in the Special and Other Funds bank account. In its response, Finance also stated that it had
begun actions to implement several of the audit recommendations.
On June 30, 1998, we transmitted the draft of this report to the Governor of the Virgin
Islands requesting a response by August 7, 1998. On August 20, 1998, we received the
response from the Governor that was dated August 7, 1998. Based on the response received,
we consider 6 of the report's 20 recommendations resolved and implemented, 3
recommendations unresolved, and request additional information for 11 recommendations
(see Appendix 6).
The Inspector General Act, Public Law 95-452, Section 5(a)(3), as amended, requires
semiannual reporting to the U.S. 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.
In view of the above, please provide a response, as required by Public Law 97-357, to this
report by October 9, 1998. The response should be addressed to Caribbean Office, Federal
Building - Room 207, Charlotte Amalie, Virgin Islands 00802. The response should provide
the information requested in Appendix 6.
Sincerely,
Richard N. Reback
Acting Inspector General
CONTENTS
Page
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . 1
BACKGROUND. . . . . . . . . . . . . . . . . . . . . 1
OBJECTIVE AND SCOPE . . . . . . . . . . . . . . . . 3
PRIOR AUDIT COVERAGE. . . . . . . . . . . . . . . . . 4
FINDINGS AND RECOMMENDATIONS . . . . . . . . . . . . . . 6
A. INTERFUND LOANS AND OTHER OBLIGATIONS . . . . . 6
B. FEDERAL GRANT BALANCES. . . . . . . . . . . . . .19
C. LONG-STANDING PROBLEMS. . . . . . . . . . . . . .27
APPENDICES
1. CLASSIFICATION OF MONETARY AMOUNTS . . . . . . . .31
2. SUMMARY OF OUTSTANDING OBLIGATIONS AS
OF SEPTEMBER 30, 1997, AND JANUARY 31, 1998. . . .32
3. GOVERNOR OF THE VIRGIN ISLANDS RESPONSE TO
THE DRAFT ADVISORY REPORT. . . . . . . . . . . . .33
4. OFFICE OF INSPECTOR GENERAL REPLY TO GOVERNOR'S
RESPONSE TO THE DRAFT ADVISORY REPORT. . . . . . .36
5. GOVERNOR OF THE VIRGIN ISLANDS RESPONSE TO THE
DRAFT REPORT . . . . . . . . . . . . . . . . . . .43
6. STATUS OF AUDIT REPORT RECOMMENDATIONS . . . . . .54
INTRODUCTION
BACKGROUND
The Government has three main checking accounts: the General Fund bank account (at the
Chase Manhattan Bank), which is used for the general revenues and operating expenses of
the Government; the Special and Other Funds bank account (at the Banco Popular de Puerto
Rico), which is used for revenues and expenses related to special programs such as Federal
grant programs and a variety of specially funded local programs; and the Payroll Fund bank
account (at the Chase Manhattan Bank), which is a "zero balance" clearing account. Each
pay period, sufficient monies from the General Fund and the special funds are deposited into
the Payroll Fund bank account and used to pay employee salaries and other related payroll
expenses, such as withholding and Federal Insurance Contributions Act (FICA) taxes,
retirement contributions, and health insurance premiums.
In accordance with generally accepted government accounting principles, the General Fund
and each of the Government's special funds should have complete sets of general ledger
accounts, which consist of balance sheet accounts (assets, liabilities, and equities) and
operating accounts (revenues and expenditures). These general ledger accounts are
maintained in the computerized Financial Management System maintained by the
Department of Finance and are used as the basis for preparing annual financial statements
of the Government. Generally accepted government accounting principles require the
issuance of a comprehensive annual financial report, and the Single Audit Act of 1984
requires that audited financial statements be issued as part of an overall audit of all Federal
financial assistance within 12 months of the end of each fiscal year. However, the most
recent audited financial statements and single audit report issued by the Government were
for the fiscal year ended September 30, 1994.
Interfund Loans
Since at least March 1995, the Government of the Virgin Islands has experienced financial
difficulties that have resulted in cash flow problems and the need for interfund loans to meet
regular operating expenses. In March 1995, the Legislature, anticipating that the
Government of the Virgin Islands would not be able to meet payroll costs in March and
August 1995 (which had three Government paydays), passed Act No. 6068, which the
Governor signed into law. The Act authorized the Governor, through the Commissioner of
Finance, "to borrow, on a temporary, short-term basis, an amount not to exceed $15 million
for the exclusive purpose of meeting the recurring payroll cost of the Government of the
Virgin Islands when the Governor determines that the revenues collected are insufficient to
cover any payroll which comes due during such insufficiency." The Act further stated, "No
short-term loan may be made which cannot be retired with revenues collected for the fiscal
year in which it was obtained." The Act had an expiration date of September 30, 1995.
However, in November 1996, the Legislature passed Act No. 6128, which the Governor
signed into law and which (among other provisions) retroactively extended the period to
repay any funds borrowed under the authority of Act No. 6068 to September 30, 1997.
Based on the authority provided by Act No. 6068, the Government, during the period of
March to September 1995, borrowed a total of $20 million from special fund accounts to
meet its payroll obligations. Of the $20 million borrowed, only $8.5 million had been repaid
($5 million in June 1995 and $3.5 million in July 1997) as of September 30, 1997. Thus,
$11.5 million remained outstanding.
Despite the borrowing authority provided by Act No. 6068, the Government has not been
able to meet its operating expenses with current operating revenues. This situation was
exacerbated by a general economic downturn and by the impact of Hurricanes Marilyn in
September 1995 and Bertha in July 1996. The fiscal year 1998 Executive Budget consisted
of estimated General Fund revenues totaling $361.9 million and General Fund
expenditures totaling $459.5 million, or a revenue shortfall of $97.6 million. Also, the
payment of any portion of the outstanding obligations discussed in this report would increase
that shortfall accordingly.
Federal Grants
The Federal Grants Management Unit within the Virgin Islands Office of Management and
Budget is responsible for (1) monitoring recipient compliance with financial and
performance objectives of Federal grant awards and (2) developing programs and policies
to ensure the effective application of Federal funds. To comply with these responsibilities,
the Federal Grants Management Unit maintains a grant tracking system that is based on
information that the Unit requests from Government agencies on a quarterly basis regarding
grant award, drawdown, and balance amounts. Federal Grants Management Unit officials
told us that they requested this information directly from the grantee agencies because they
did not consider information contained in the Government's Financial Management System
to be accurate, current, complete, and reliable. The grant tracking system is used by the
Office of Management and Budget for budget and grant management purposes.
As of March 1997 (the most recent data available from the Federal Grants Management Unit
as of January 31, 1998), the grant tracking system contained information on approximately
400 Federal grants, totaling $427 million (exclusive of long-term Federal grants for health
facilities construction and Federal Emergency Management Agency (FEMA) disaster loans),
that were awarded during fiscal years 1993 through 1997. In addition, drawdowns reported
against the grants totaled $272 million, leaving reported balances totaling $155 million
available for drawdown. However, as discussed in Finding B, these grant balances were not
necessarily available for expenditure by the Government because the amounts were
inaccurate or the funds were committed for specific projects or programs.
OBJECTIVE AND SCOPE
The original objective of our audit was to determine the status of interfund loans and other
outstanding obligations of the Government as of September 30, 1997, and the unobligated
balances of Federal grant accounts as of March 31, 1997. However, because of inappropriate
interfund loan transfers found during our fieldwork, our objective was amended to determine
(1) all the amounts borrowed by the General Fund from special fund accounts during fiscal
years 1995, 1996, and 1997 and (2) the outstanding balances of such interfund loans and the
unobligated balances of Federal grant accounts. With respect to the interfund loans portion
of the audit, the scope of the audit was extended to January 31, 1998, to consider the
$106 million loan negotiated by the Government to pay income tax refunds and vendor
invoices. With respect to the Federal grants portion of the audit, the scope of the audit was
qualified to the extent that we did not audit the costs claimed against Federal grants to
determine whether these costs were reasonable, allowable, or allocable in accordance with
grant terms and conditions because the objective of that portion of the audit was limited to
determining the unobligated balances of grants. We generally relied on information
compiled by the Virgin Islands Office of Management and Budget but expanded the scope
of our review to include limited testing of Federal grant transactions at the Departments of
Health, Human Services, Education, and Public Works (the four Government agencies that
receive the largest amount of Federal grants on a recurring annual basis). The audit was
conducted from September 1997 through January 1998 at the Department of Finance, the
Office of Management and Budget, the Bureau of Internal Revenue, the Government
Employees Retirement System, and the four largest grantee agencies.
Our 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.
We included an evaluation of internal controls to the extent we considered necessary to
accomplish the audit objective. The internal control weaknesses identified were related to
the recording of interfund loans and the establishment of a grants management system to
monitor the financial and compliance aspects of Federal grants. The control weaknesses are
discussed in the Findings and Recommendations section of this report. The
recommendations, if implemented, should improve the internal controls in these areas.
PRIOR AUDIT COVERAGE
Since November 1985, the Office of Inspector General has issued five reports on financial
management within the Government of the Virgin Islands as follows:
- The December 1997 advisory report "Status of Interfund Loans and Other
Obligations, Government of the Virgin Islands" (No. 98-I-187) was issued to provide
Government of the Virgin Islands officials with preliminary information on the status of
interfund loans and other outstanding obligations to allow them to make informed decisions
on the Government's finances. Although the advisory report did not contain any
recommendations, the Governor was provided with the opportunity to respond to the
advisory report before it was issued in final form. However, the Governor did not provide
a response until after the final report was issued. The Governor's response to the advisory
report (Appendix 3) and the Office of Inspector General's reply to the Governor
(Appendix 4) are discussed in Finding A of this report.
- The September 1994 special report "Status of Improvements in Financial
Management and Program Operations, Government of the Virgin Islands" (No. 94-I-1284)
(1) presented a summary of long-standing problems in financial management, expenditure
control, revenue collection, and program operations; (2) recognized the corrective actions
taken by the Government of the Virgin Islands and the then-Office of Territorial and
International Affairs (now the Office of Insular Affairs) of the U.S. Department of the
Interior to address those problems; and (3) provided the Government with a series of
suggested goals and corrective actions to address the remaining problem areas. The
suggested improvement goals are discussed in Finding C of this report.
- The April 1994 special report "Bonded Debt of the Government of the Virgin
Islands and its Autonomous Agencies" (No. 94-I-513) stated that, as of March 31, 1993, the
Government and its autonomous agencies had outstanding bonds totaling $445.6 million.
The report also stated that from 1994 through maturity, the remaining debt service
requirement on those bonds, including $423.3 million of interest, would total $868.9 million,
or about $8,600 in bonded debt for every resident of the Virgin Islands. The report further
stated that, as of August 1993, the Government and its autonomous agencies had issued an
additional $13.9 million in bonds and had been authorized or were planning to issue
$232.3 million more in bonds. The report concluded that, in general, pledged revenues
should be sufficient to meet the debt service requirements of the then-outstanding bonds but
that the issuance of the additional $232.3 million in bonds could adversely affect the ability
of the Government's Internal Revenue Matching Fund, the Water and Power Authority's
water system, and the Port Authority's aviation division to meet further debt service
requirements. The report did not contain any recommendations. However, since the report
was issued, the Government has been authorized by the U.S. Congress to restructure its
bonded debt, allowing the issuance of additional bonds. As of September 30, 1997, the
Virgin Islands Water and Power Authority was seeking an increase in its bond ceiling from
$130 million to $220 million. Additionally, in May 1998, the Government's Public Finance
Authority issued $541 million in bonds, the proceeds of which are to be used to refinance
$257 million in existing Public Finance Authority bonds, pay off a $106 million bank loan
that the Government secured in January 1998 to pay a portion of outstanding income tax
refunds and vendor invoices, and fund various capital improvement projects.
- The August 1993 audit report "Implementation of the Financial Management
System, Government of the Virgin Islands" (No. 93-I-1382) concluded that although the
System was designed to provide an on-line environment for the Government's accounting
system, improved cash management capabilities, greater control over Federal grant funds,
and overall compliance with generally accepted accounting principles, the System (which
was implemented by the Government in fiscal year 1989) did not produce accurate and
timely financial statements and reports and did not meet generally accepted accounting
principles and various Federal financial reporting requirements. This occurred because of
undetected data entry errors, data transmission problems, the lack of a nontechnical user
manual, insufficient user training, and the inability of the System to handle the number of
users and volume of transactions. Our current review showed that the System did not
provide accurate, current, reliable, and complete data with respect to Federal grants.
- The November 1985 special report "Government of the Virgin Islands 1985
Operating Deficit" (No. V-TG-VIS-30-85) stated that the fiscal year 1985 deficit was in
excess of $50 million and that proposed deficit reduction initiatives of $46.9 million were
undertaken too late in the fiscal year to have any impact on the deficit, the Government was
meeting cash-flow requirements by deferring payments of payroll-related employee/employer
contributions and by borrowing from other special purpose funds within the Division of
Treasury (about $4.2 million outstanding as of May 1985), the actual financial condition of
the Government was unknown, and the existing financial crisis was exacerbated by financial
information that was not current or accurate. The report recommended that the Governor
prepare a detailed deficit reduction plan identifying specific areas of expenditure reduction
and sources of revenues to resolve the deficit, request assistance from the then-Assistant
Secretary for the Office of Territorial and International Affairs to establish a Federal/local
task force to address financial management system problems, and require that local managers
who administer Federal grant programs review the status of all current grants to ensure that
those funds were used for their intended purposes.
Our current review has shown that the same types of problems continued to exist
in that (1) the General Fund could end fiscal year 1998 with an operating deficit of as much
as $97 million unless additional revenue sources are found or expenditures are held to levels
below those appropriated by the Legislature; (2) the level of interfund borrowing to meet
cash-flow requirements has increased more than thirty-threefold (from $4.2 million to
$141 million) since the issuance of the November 1985 report; and (3) the financial condition
of the Government is still unknown because, as of January 31, 1998, audited financial
statements had not been issued for fiscal years 1995 and 1996, although they should have
been issued within 12 months of the end of each fiscal year.
FINDINGS AND RECOMMENDATIONS
A. INTERFUND LOANS AND OTHER OBLIGATIONS
We found that although the Legislature, in March 1995, authorized the Governor to borrow
funds not to exceed $15 million to meet payroll costs, the Government borrowed and
recorded $20 million based on that authorization and borrowed an additional $120 million
during the period of April 1995 to July 1997 which was not authorized by the Legislature or
recorded in the Government's financial records. As of September 30, 1997, the Government
had outstanding operations-related obligations (excluding bonded debt) totaling
$588 million. Title 33, Sections 3101 and 3108, of the Virgin Islands Code contains
prohibitions against deficit spending. However, the outstanding obligations existed because
the Government did not have sufficient General Fund revenues to meet all operating
expenses and made it a priority to meet its biweekly payroll. In addition, the Department of
Finance did not implement sound financial management practices to ensure that interfund
loans and other obligations were recorded in the official financial records, and it did not
inform the Legislature of the unrecorded interfund loans until our audit was initiated. As a
result, as of September 30, 1997, the Government had a total operations-related debt of about
$588 million, or $226 million more than the projected General Fund operating revenues of
$362 million for fiscal year 1998. In addition, because the Department of Finance borrowed
$120 million from the Special and Other Funds bank account to cover biweekly payroll costs
but did not record those loans in the financial records of the Government, the balances of
individual special fund accounts maintained in the Department of Finance's Financial
Management System were not accurate. Moreover, there was little assurance that Federal
funds were not used to pay for General Fund payroll-related expenditures because Federal
and local funds were commingled in the Special and Other Funds bank account.
Interfund Loans
As of September 30, 1997, the Government had outstanding interfund loans totaling about
$141 million, which consisted of unauthorized and unrecorded loans of $120 million and
additional interfund loans of $21 million that were legally authorized and recorded in the
financial records.
Unauthorized Interfund Loans. We found that because the Government was
unable to meet its biweekly payroll and payroll-related expenses, the Department of Finance
established the practice of borrowing but not recording in its financial records amounts from
the Special and Other Funds bank account to cover the payroll-related expenses for FICA
taxes and health insurance premiums. Department of Finance officials told us that although
the practice of making interfund loans to meet payroll-related expenses had been occurring
for a number of years, during the past 3 fiscal years the Department was unable to reimburse
the Special and Other Funds bank account before the end of each fiscal year because of a
decline in General Fund revenues. As of September 30, 1997, the Payroll Fund owed the
Special and Other Funds bank account a total of $120 million. There was no legislative
authorization to borrow this money, and these "unauthorized loans" had not been recorded
against individual special fund accounts. Accordingly, the balances maintained by the
Department of Finance's Financial Management System for the General Fund and special
fund accounts were not accurate. Specifically, the financial records for the General Fund
should include a Due to Other Funds liability account for the $120 million in loans, and the
financial records for each special fund should include a Due From Other Funds asset account
for its appropriate share of the $120 million in loans.
According to the Department of Finance's Accounting Manual, the Payroll Fund was
established so that "payroll costs chargeable to various funds may be segregated and
consolidated." Furthermore, Department of Finance officials told us that the Payroll Fund
operated as a zero balance fund, or "wash account." Therefore, according to Department of
Finance officials, amounts should have been transferred to the Payroll Fund bank account
from the General Fund bank account on a biweekly basis to cover the payroll and payroll-
related expenses. However, because of an insufficient balance in the General Fund bank
account, the Government used the Special and Other Funds bank account to pay for the
payroll-related expenses. In order for the Payroll Fund to operate as a zero balance fund, the
Department of Finance prepared checks from the Payroll Fund bank account to reimburse
the Special and Other Funds bank account for amounts borrowed. These checks were held
by the Department of Finance's cashier awaiting authorization from Division of Treasury
officials to deposit the checks into the Special and Other Funds bank account when there
were sufficient General Fund revenues to cover the checks. Accordingly, as of
September 30, 1997, the Department of Finance's cashier held, at the Department's offices
on St. Thomas, 87 checks, totaling $120 million, that were written against the Payroll Fund
bank account for expenses related to pay periods from April 24, 1995, through July 31, 1997.
The checks were made payable to either the FICA Taxes Withheld Fund ($91 million) or the
Health Insurance Fund ($29 million). (Both funds are part of the Special and Other Funds
bank account.) Based on our review of the financial information contained in the
Department of Finance's Financial Management System for the FICA Taxes Withheld Fund
and the Health Insurance Fund for fiscal years 1995 through 1997, we found that the two
funds had a combined deficit of about $130 million for fiscal years 1995 through 1997. (The
$10 million difference could be accounted for by other interfund transactions and
transactions in transit that should be reconciled during the year-end process when the
financial statements for these fiscal years are prepared.)
According to Title 3, Chapter 11, of the Virgin Islands Code, the Department of Finance is
responsible for providing "general supervision over, and custody of, the special and public
trust funds." Furthermore, according to the Department of Finance's Accounting Manual,
the "Special Fund" group consists of about 400 funds "created to account for certain types
of revenues specifically earmarked for certain activities of the Government, and also for
grants and/or contributions to finance certain special programs sponsored by the Insular
Government or jointly with the Federal Government." In addition to most Federally funded
programs, many locally funded programs are accounted for through the Special and Other
Funds bank account, including the Internal Revenue Matching Fund (pledged for debt service
on most Government bonds), the Health Revolving Fund (used to finance hospital
operations), the Tourism Advertising Revolving Fund (used to promote the tourism industry),
the Transportation Trust Fund (used to finance highway construction and repairs), and the
Paternity and Child Support Revolving Fund (used to receive and distribute child support
payments). Therefore, the Special and Other Funds bank account contained both local and
Federal funds. According to the Accounting Manual, "The use of the revenues and receipts
credited to these [special] funds are restricted to the purposes determined by the provisions
of the legislation or directives creating them, and expenditures and obligations against these
funds shall be made only in accordance with such provisions."
We reviewed the activity in the Special and Other Funds bank account and found that the
Department of Finance maintained three accounts, one savings account and two checking
accounts, at Banco Popular de Puerto Rico's St. Thomas branch. One of the checking
accounts was referred to as the "old" account, and the other was referred to as the "new"
account. According to the Department of Finance's Acting Director of Treasury, the savings
account contained only local funds not immediately earmarked for expenditure, such as
proceeds from the Internal Revenue Matching Fund. As of September 30, 1997, the savings
account had a balance of $23 million. With respect to the checking accounts, we found that
electronic transfers of Federal funds were credited to either the "old" or the "new" checking
account but that checks could be written only against the "new" account. Therefore,
electronic transfers of Federal funds received into the "old" account were transferred to the
"new" account by means of debit and credit memoranda. In addition, daily local collections
were deposited into the "new" account.
For purposes of our review, we concentrated our audit efforts on the "new" checking account
and found that the account was overdrawn on 143 days during fiscal years 1996 and 1997,
including by $12 million on December 4, 1995. We also found that the bank started to
charge the Government for overdrafts in November 1996 and that, through September 30,
1997, such charges totaled about $12,150.
We also analyzed the electronic transfers of Federal grant funds received by the "new"
checking account during fiscal years 1996 and 1997 and found 182 unidentified electronic
transfers of Federal funds, totaling $25 million, for which a Statement of Remittance had
not been prepared. Accordingly, these 182 transactions were not recorded in the Financial
Management System and credited to the appropriate special fund accounts.
During legislative hearings on April 7, 1998, the Commissioner of Finance stated that he
"categorically denie[d]" that Federal and local funds "were commingled" with respect to the
$120 million in unauthorized interfund loans. However, we found 76 instances in which the
Special and Other Funds bank account was overdrawn on days when Federal funds
(157 electronic transfers, totaling $18.8 million) were received and should have been
available in the account. For example, on October 10, 1996, the Department of Education
requested and received an electronic transfer of Federal funds to pay for educational supplies
totaling $479,000. The Department of Finance processed a check on October 11, 1996, to
pay for the educational supplies, but the check was not released to the vendor until
October 15, 1996. We found that the Special and Other Funds checking account was
overdrawn during the 4 business days between October 10 and 15, 1996, although the
October 10, 1996, electronic fund transfer of $479,000 should have been available in the
bank account at least until October 15, 1996, the date that the check was released by the
Department of Finance. Therefore, we concluded that the electronic transfer of Federal funds
earmarked for educational supplies for the Department of Education was used to fund the
overdrawn status of the checking account during the period of October 10 to 15, 1996.
We believe that this example and the 75 other instances in which the Special and Other
Funds bank account was overdrawn on days when Federal funds were received support our
conclusion that Federal funds were used to cover the overdrawn condition of the Special and
Other Funds bank account, which would not have occurred if the $120 million in
unauthorized and unrecorded interfund loans had not been made. As a result, the
unauthorized loans restricted the amount of funds available for the payment of expenses of
Federal programs funded through special fund accounts.
In our opinion, the unrecorded loans of $120 million from the Special and Other Funds bank
account were not authorized by the Legislature and were therefore improper. In addition, the
unauthorized loans may be in violation of Title 33, Section 3101, of the Virgin Islands Code,
which states:
No officer or employee of the Virgin Islands shall make or authorize an
expenditure from, or create or authorize an obligation under, any
appropriation or fund in excess of the amount available therein; nor shall any
such officer or employee involve the government in any contract or obligation
for the payment of money for any purpose, in advance of appropriations made
for such purpose, unless such contract or obligation is authorized by law.
[Emphasis added.]
Further, the Government's failure to record these loans in its financial records as liabilities
of the General Fund and receivables of the special funds was contrary to generally accepted
accounting principles. Specifically, Section 1100.101 of the Codification of the Government
Accounting and Financial Reporting Standards states:
A government accounting system must make it possible both: (a) to present
fairly and with full disclosure the financial position and results of financial
operations of the funds and account groups of the governmental unit in
conformity with generally accepted accounting principles and (b) to
determine and demonstrate compliance with finance-related legal and
contractual provisions.
In addition to the requirements imposed by laws, regulations, contractual obligations, and
generally accepted accounting principles, the Government, in our opinion, has a trust
responsibility to the residents of the Virgin Islands to accurately record and report on all of
its financial activities. This responsibility includes recording in the financial records of the
respective funds all known outstanding obligations, including the obligations discussed in
this report.
Authorized Interfund Loans. We also found that, as of September 30, 1997,
certain special funds were owed about $21 million for authorized interfund loans, which
consisted of $11.5 million that was still outstanding on the loans of $20 million made in
accordance with Act No. 6068 (see Background section of this report) and an additional
$9.6 million borrowed by the Government in 1996. Regarding the $9.6 million in loans, the
Government, in March 1996, borrowed $3.1 million from the AMPAC (American Property
and Casualty Insurance Company) Settlement bank account, which was established with
funds from the settlement of a case against an insurance company that defaulted on
policyholder claims after Hurricane Hugo in 1989. The $3.1 million was used as an
allotment to the University of the Virgin Islands for operating expenses. Additionally, in
August 1996, the Government borrowed $6.5 million from the St. John Capital Improvement
Fund for General Fund expenses. These two loans were outstanding as of September 30,
1997. All of these loans were recorded in the financial records of the related funds.
Other Outstanding Obligations
In addition to the interfund loans totaling $141 million, we found that, as of September 30,
1997, the Government had other outstanding obligations totaling $447 million as follows:
- FEMA was owed about $150 million for Community Disaster Loans provided
to the Government. Specifically, in May 1996, FEMA denied the Government's request to
convert the $44.3 million outstanding balance (including interest) of the 1989 Hurricane
Hugo loan to a grant. In addition, the Government had not requested that FEMA convert
the $96.5 million outstanding balance (including interest) of the 1995 Hurricane Marilyn loan
to a grant. The Government also owed FEMA $9.5 million (including interest) on a
State-Share Loan that was provided to allow the Government to meet the state matching
requirement for FEMA disaster assistance funds.
- Governmental employees were owed $141 million for the estimated cost of
salary increases and related fringe benefits based on union negotiations (concluded and
pending) for fiscal years 1992 through 1997.
- Taxpayers were owed $76 million for income tax refunds for tax years1994
through 1996, which consisted of $23 million for tax years 1994 and prior years, $26 million
for tax year 1995, and $27 million for tax year 1996.
- Vendors were owed at least $67 million, which consisted of $61 million for
miscellaneous disbursement vouchers and purchase orders (for about 4,000 vendors)
processed but not paid by the Department of Finance during March to September 1997,
$4 million for about 1,000 vendor payments for which checks had been prepared but
insufficient funds precluded the checks from being issued to the vendors, and $2 million for
about 1,000 vouchers that had been rejected by the accounts payable system because of data
entry errors or insufficient data (these vouchers were pending completion of processing). Of
the $61 million for miscellaneous disbursement vouchers and purchase orders that were
processed but not paid, $12 million represented amounts owed by the General Fund to 16 of
the Government's special funds.
- The Government Employees Retirement System was owed $13 million, which
consisted of $7 million for unfunded portions of the Early Retirement Incentive, Training and
Promotion Act of 1994 and $6 million for Government contributions and loan payments to
the Retirement System for the two pay periods in September 1997.
A summary of outstanding obligations as of September 30, 1997, and the estimated
obligations as of January 31, 1998, is presented in Appendix 2. Although total obligations
decreased by $6 million during the intervening 4 months, the $106 million bank loan that
was approved in January 1998 only postponed the payment of $106 million in obligations
to future periods, with an additional obligation to pay interest on the $106 million loan.
Response to Advisory Report
On November 21, 1997, we requested that the Government respond, by December 3, 1997,
to the draft advisory report on the status of interfund loans and other obligations (see Prior
Audit Coverage section of this report). The draft advisory report further stated that the
Government's comments had to be submitted by that date to ensure that they would be
included in the final version of the report. However, we did not receive the response from
the Governor, dated December 1, 1997, and postmarked December 29, 1997, until
January 6, 1998. Therefore, the Governor's comments were not included in the final version
of the advisory report.
Governor's Response. In response to the draft advisory report, the Governor's
response (see Appendix 3) expressed "strong objection" to the conclusions of the report and
stated that the Administration did not make $120 million in unauthorized interfund loans
during the period of April 1995 to September 30, 1997. The response stated that "our records
for that same period show that over $41 million was already borrowed before April 1, 1995"
and "the fact is that this total represents amounts borrowed that remain unpaid, and the
amounts legally authorized to be transferred from other funds to support operating expenses
of the General Fund." The response also stated that "at the start of Fiscal Year 1995,
October 1, 1994, the General Fund owed $34.5 million to the Payroll Fund for further
disbursement to the FICA and the Health Insurance Funds."
In addition, the response stated, "During Fiscal Years 1995 through 1997, legislation was
enacted authorizing borrowings and transfers of $49.9 million to support the operating
expenses of the General Fund, which includes payroll." The five legislative acts referred to
in the response as authorizing a total of $49.9 million in interfund borrowing and transfers
were Act Nos. 6075, 6078, 6084, 6086, and 6119. Finally, the response "seriously"
questioned the "figure of $574 million [as stated in the draft advisory report] as the 'general
operating obligations' of the Government." The response stated, "Only the current portion
of the long-term debt is considered for accounting purposes, as general operating
obligations."
Office of Inspector General Reply. We replied to the Governor's response to the
draft advisory report in a letter dated February 5, 1998 (see Appendix 4). In the letter, we
stated that "our review of the 87 checks showed that, although they were dated from
September 9, 1995, through September 12, 1997, the checks were for repayment of FICA and
health insurance expenses related to the pay periods April 11-24, 1995, through July 18-31,
1997." Our reply also stated, "If, as stated in [the Governor's] response, 'over $41
million was already borrowed before April, 1995,' then that $41 million was in addition to,
not a part of, the $120 million discussed in our report." Our reply further noted that the
Governor's statement that "at the start of Fiscal Year 1995, October 1, 1994, the General
Fund owed $34.5 million to the Payroll Fund for further disbursement to the FICA and the
Health Insurance Funds" raises concerns about the accuracy of the General Purpose Financial
Statements included in the single audit report for the fiscal year ended September 30, 1994,
because the financial statements and the accompanying notes did not include reference to an
amount of $34.5 million that the General Fund owed to the Payroll Fund as of September 30,
1994 (which would have been carried forward to beginning balances on October 1, 1995).
In regard to the five legislative acts, with appropriations totaling $49.9 million, referred to
in the Governor's response to the advisory report, our reply described in detail the reasons
for our conclusion that those legislative acts did not authorize loans of the type included in
the $120 million in unauthorized interfund loans reported in the advisory report (and in this
report). We indicated that the only exception we were inclined to make was that Act
No. 6078 authorized the transfer of $6 million from "any funds available in the Treasury of
the Government of the Virgin Islands to offset the decrease in revenue" that occurred as a
result of an authorized rollback in 1994 real property taxes to the 1992 rate of assessment.
However, we stated that we would offset this $6 million against the reported $120 million
in unauthorized interfund loans only when the transfer was recorded in the official financial
records of the Government.
Finally, we did not identify the $570 million (as reported in the final advisory report but
adjusted to $588 million in this report) as "general operating obligations" but as a "total
operating debt," with the intention of differentiating it from bonded debt, which is generally
incurred for the purpose of funding capital improvement projects. All of the items included
in the $570 million amount were incurred either as a result of the Government's general
operations or to finance general operating expenses. However, to more clearly identify the
nature of the obligations that were the subject of our review, we have referred to these debts
as "operations-related obligations" in this report.
Response to Preliminary Draft Report
In the June 22, 1998, response (Appendix 5) to the preliminary draft of this report from the
Commissioner of Finance, the response stated that Title 23, Section 1125, of the Virgin
Islands Code authorized the Governor "to utilize all available resources of the Territory while
under a State of an Emergency." However, because that authorization is contained in a
section of the Virgin Islands Code (titled the "Virgin Islands Territorial Emergency
Management Act") that pertains specifically to the proclamation of a state of emergency to
"activate the disaster preparation, response and recovery aspects of the territorial and
interjurisdictional emergency and major disaster plans," we do not believe it was applicable
to the use of "all available resources" to meet regular payroll-related expenses. In addition,
the unrecorded interfund loans of $120 million were made during the period of April 1995
(5 months before Hurricane Marilyn) through July 1997 (22 months after Hurricane
Marilyn). Therefore, the entire amount would not have been related to the state of
emergency that existed after the hurricane. Further, the Government received FEMA
Community Disaster Loans totaling $50 million after Hurricane Hugo (September 1989) and
$127 million after Hurricane Marilyn (September 1995) to compensate the Government for
the decline in revenues that occurred during the 3 years immediately following each
hurricane. One of the primary uses of the disaster loan funds was to meet payroll expenses
during the hurricane recovery period. Therefore, any additional borrowing by the
Government to meet General Fund payroll expenses during the 3-year period after Hurricane
Marilyn would not, in our opinion, have come under the "state of emergency" provisions of
Title 23, Section 1125, of the Virgin Islands Code.
The response also "vehemently" objected to our conclusion that Federal funds were used to
cover the overdrawn condition of the Special and Other Funds bank account, stating that we
"neglected to review the group of bank accounts that provide funding for Special and Other
Funds obligations." However, our report (page 8) states that we found that there were only
three bank accounts related to Special and Other Funds activities: (1) a savings account that,
according to the Acting Director of Treasury, contained only local funds (including Internal
Revenue Matching Fund monies) that were not immediately earmarked for expenditures; (2)
an "old" checking account that was inactive except for occasional electronic transfers of
Federal funds that were subsequently transferred to a "new" checking account; and (3) the
"new" checking account, which was the active account used for regular receipts and
disbursements pertaining to Special and Other Funds. Regardless of the existence of the
savings account and the "old" checking account, we believe that the examples cited in the
report in which the "new" checking account was overdrawn on days when electronic fund
transfers of Federal funds were received clearly indicate that those Federal funds were not
immediately available for expenditure because of the overdrawn condition of the "new"
checking account.
Finally, the response stated that "the Department has always maintained that cash from the
local portion of the Special and Other Funds group of bank accounts has been supplementing
the Federal portion." Specifically, the response stated that the Department's review of
Federal accounts related to the Department of Public Works shows that during the period of
October 1, 1995, through July 31, 1997, disbursements of Federal funds exceeded Federal
receipts. While we agree that some Federal programs of the Department of Public Works
operate on a reimbursable basis and therefore require the initial use of local funds, such
reimbursable funding is the exception. Based on our limited review of the grant accounting
practices of the Departments of Health, Human Services, Education, and Public Works (see
Finding B), we found that these agencies generally operated on an "advance" funding basis
and that, in particular, the Departments of Health and Human Services requested drawdowns
of Federal funds in advance of the payment of expenditures related to their Federal programs.
Despite the cited disagreements with our audit conclusions, the response to the preliminary
draft report stated that the Department of Finance (1) was in the process of recording all
interfund borrowings and transfers from the Special and Other Funds account to the General
Fund account, (2) was in the process of establishing a separate bank account for all Federally
funded programs, (3) had issued policy memoranda to departments and agencies to request
that they provide the Department with sufficient information to identify the source of Federal
electronic fund transfers, (4) had contacted U.S. Treasury officials to determine whether any
interest liability exists with regard to Federal funds drawn down in advance of need (see
Finding B), and (5) will assess current and future financial accounting and reporting needs
of the Government (see Finding C).
Recommendations
We recommend that the Governor of the Virgin Islands:
1. Require the Department of Finance to record in the Financial Management
System the $120 million borrowed by the General Fund from the Special and Other Funds
bank account to pay FICA taxes and health insurance premiums for pay periods during April
1995 to July 1997. Specifically, the Department should process journal entry transactions
to establish a Due to Other Funds liability account in the General Fund in the amount of
$120 million and a Due From Other Funds receivables account in each of the special funds
from which monies were borrowed for each fund's appropriate share of the $120 million
interfund loan. In addition, the Department of Finance should provide a report to the
Legislature explaining the uses made of the amounts borrowed without legislative
authorization and the status of repayment so that informed decisions on the Government's
finances can be made as they pertain to the fund accounts affected by this unauthorized
interfund debt.
2. Require the Department of Finance and the Office of Management and Budget
to develop and submit for legislative approval a plan of action to liquidate the $120 million
unauthorized interfund debt. The plan of action should ensure that any Federal funds
included in the borrowed amounts are given first priority for repayment in full; any special
funds that were subject to legislative, contractual, or other legally binding restrictions as to
use are given second priority for repayment in full; and any special funds that were subject
to administrative restrictions as to use are given third priority for repayment in full. Further,
if the plan of action proposes that amounts borrowed from unrestricted funds not be repaid,
the Department of Finance should obtain retroactive approval from the Legislature for the
transfer of such amounts.
3. Require the Department of Finance to repay the $11.5 million outstanding balance
of amounts borrowed from special funds in accordance with Act No. 6068. Specifically, the
Department should set aside the necessary General Fund revenues, process the appropriate
bank transaction to transfer the funds from the General Fund to the special funds from which
the amounts were originally borrowed, and process journal entry transactions to record the
repayment in the Financial Management System. In addition, the Department of Finance
should provide a report to the Legislature explaining the uses made of the amounts borrowed
in accordance with Act No. 6068 and the status of repayment so that informed decisions on
the Government's finances can be made as they pertain to the fund accounts affected by this
authorized interfund debt.
4. Require the Department of Finance to establish a separate bank account at a
suitable local banking institution to segregate and separately account for all Federal funds
received and all expenditures of Federal funds made by the Government. In addition, the
Department of Finance should transfer to the new bank account all amounts currently
maintained in the Special and Other Funds bank accounts that were from Federal sources.
Further, the Department should amend all drawdown agreements with Federal grantor
agencies to ensure that future drawdowns, whether made by electronic fund transfers or by
any other means, are deposited into the new bank account.
5. Require the Department of Finance to consolidate the "old" and "new" Special
and Other Funds checking accounts maintained at Banco Popular de Puerto Rico's
St. Thomas branch.
6. Require the Department of Finance to analyze any unidentified electronic fund
transfers of Federal funds in the two existing Special and Other Funds bank accounts to
identify the source and appropriate fund account to which each transfer should be recorded
and process journal entry transactions to record such electronic fund transfers in the Financial
Management System.
7. Require the Department of Finance to transfer $6 million from any "available"
special funds to the General Fund in accordance with Act No. 6078 and to process journal
entries to record the transfer in the Financial Management System. In addition, the
Department of Finance should provide a report to the Legislature explaining the uses made
of the amounts transferred in accordance with Act No. 6078 so that informed decisions on
the Government's finances can be made as they pertain to the fund accounts affected by this
authorized interfund transfer.
8. Establish, jointly with the Legislature and with participation by private sector
representatives, a special task force to address and develop a plan of action to liquidate the
Government's $588 million (as of September 30, 1997) outstanding operations-related
obligations.
Governor of the Virgin Islands Response and Office of Inspector General Reply
On June 30, 1998, we transmitted a draft of this report to the Governor of the Virgin Islands
requesting a response by August 7, 1998. On August 20, 1998, we received a response
(Appendix 5), dated August 7, 1998, from the Governor of the Virgin Islands. The response
concurred with Recommendations 1, 3, 4, 5, 6, 7, and 8 and did not concur with
Recommendation 2. Based on the response, we consider Recommendations 4 and 5 resolved
and implemented and Recommendation 2 unresolved and request additional information for
Recommendations 1, 3, 6, 7, and 8 (see Appendix 6).
Recommendation 2. Nonconcurrence.
Governor of the Virgin Islands Response. The response stated that "[t]he amount
utilized by the General Fund from Special and Other Funds to pay General Fund obligations
was well within our legal authorization, and that the Department [of Finance] did not
illegally borrow $120 million from Special and Other Funds."
Office of Inspector General Reply. As discussed in greater detail in the following
paragraphs, we do not believe that the various laws cited by the Governor and the
Commissioner of Finance in responses to prior versions of this report granted authorization
for the $120 million in loans from the Special and Other Funds. Because the response did
not indicate that any actions would be taken to repay the borrowed amounts, we consider the
recommendation unresolved.
General Comments on Finding
The Governor's August 7, 1998, response provided additional comments. The Governor's
comments and our reply are as follows:
Governor of the Virgin Islands Response. In his response, the Governor essentially
reiterated disagreement, as stated in the June 22, 1998, response from the Commissioner of
Finance to the preliminary draft report (pages 13-15), with our conclusions that the
unrecorded interfund loans totaling $120 million were not legally authorized and that at least
a portion of the $120 million of loans may have involved Federal funds. The response again
cited Title 23, Section 1125, of the Virgin Islands Code and several legislative acts as
evidence that authorization for the interfund loans was provided by law. Additionally, the
response cited a review conducted by the Department of Finance of Federal grant drawdowns
and expenditures related to the Department of Public Works as evidence that, contrary to our
conclusion, local funds were used to supplement Federal grants. Further, the response stated
that although a total amount of $20 million was borrowed in accordance with Act No. 6068,
the outstanding amount at any time never exceeded the $15 million limit stated in the Act.
Office of Inspector General Reply. As discussed in reply to the Commissioner of
Finance's June 22, 1998, response to the preliminary draft report (pages 13-15 of the report),
it is our opinion, based on our review of the legislation cited by the Governor and the
Commissioner, and our discussions with officials of the Legislature of the Virgin Islands,
that the unrecorded interfund loans totaling $120 million were outside the scope and intent
of the cited legislation. Additionally, we have noted that, although some of the Federal grant
programs administered by the Department of Public Works operate on a cost-reimbursement
basis, such reimbursement funding is the exception. Based on our limited review of grant
accounting practices at the Departments of Health, Human Services, Education, and Public
Works (see Finding B), we found that these agencies generally operated on an advance
funding basis and that, in particular, the Departments of Health and Human Services
requested drawdowns of Federal funds in advance of the payment of expenditures related to
their Federal programs. Based on our analysis of the timing and availability of Federal fund
drawdowns, we continue to believe that, because of the unrecorded interfund loans of
$120 million, Federal funds were not always available for grant program expenses on the
dates on which the drawdowns were made. However, because of the potentially significant
effect of this issue, we have decided to perform comprehensive audits of several major
Federally funded programs during fiscal year 1999. We believe that these audits should
provide a clearer understanding of the effect that interfund loans may have on Federally
funded programs within the Government of the Virgin Islands. With regard to the statement
that the outstanding balance of loans made in accordance with Act No. 6068 never exceeded
the $15 million limit stated in the Act, we have added footnote 1 (page 2 of the report) to
clarify this issue.
B. FEDERAL GRANT BALANCES
We found that (1) the tracking system for Federal grants maintained by the Virgin Islands
Office of Management and Budget and the Financial Management System maintained by the
Department of Finance did not accurately reflect the unobligated balances of Federal grants
and (2) Federal grants awarded to the Government of the Virgin Islands were not always
administered efficiently and effectively. The Code of Federal Regulations contains criteria
applicable to the Cash Management Improvement Act and the liquidation of obligations, and
circulars issued by the U.S. Office of Management and Budget contain policies, regulations,
and guidance related to the management of Federal grant programs. These requirements
were not always complied with because (1) the Virgin Islands Office of Management and
Budget did not have sufficient personnel to effectively administer all of the Federal grants
awarded to the Territory; (2) the Department of Finance did not receive the information
needed to prepare Statements of Remittance for all electronic transfers of Federal funds and
record, in a timely manner, the receipt of Federal funds in its Financial Management System;
and (3) the Department of Education's internal "cumbersome procurement process" impeded
the negotiation of contracts for goods and services and expenditure of grant funds in a timely
manner. As a result of these deficiencies, (1) the Virgin Islands Office of Management and
Budget had to rely on Government agencies to provide it with information relative to the
Government's approximately 400 Federal grant awards, totaling $427 million; (2) there were
at least 76 instances in which Federal grant funds, totaling $18.8 million, were not
immediately available for their intended purposes; (3) the Department of Public Works had
not used Federal grants of $38.1 million that were received for the establishment and
operation of the public bus transportation system ($6.6 million), the purchase of buses for
elderly and handicapped persons ($0.8 million), various environmental protection projects
($17 million), and various highway improvement and construction projects ($13.7 million);
and (4) the Department of Education, as of January 31, 1998, had not submitted the required
annual Financial Status Report pertaining to its $17 million block grant for the fiscal year
ending September 30, 1997.
Office of Management and Budget
The Office of Management and Budget's Federal Grants Management Unit maintained
information on approximately 400 Federal grants, totaling $427 million. However, because
the Unit's staffing was reduced from four to two grant analysts during the period of
October 1, 1996, to January 31, 1998, the Unit relied on unaudited information from grantee
agencies as the primary source of information for its Federal grants tracking system. In
addition, the Unit maintained copies of grant award documents only for 3 years and did not
maintain copies of electronic transfers of Federal funds (except for grants administered by
the Office of Management and Budget, such as Department of the Interior grants for health
care facilities construction and Federal Emergency Management Agency grants for disaster
assistance). We found that, because of an insufficient number of staff to corroborate and
analyze Federal grant information received from grantee agencies, there was little assurance
that the grant balances compiled by the Unit were accurate or represented amounts that were
available for expenditure. For example, grant amounts in the tracking system (1) did not take
into consideration grant funds that had been obligated but not expended; (2) were not deleted
when the grant periods had expired, although the remaining grant balance should have
reverted to the Federal grantor agencies, since the grant funds were not spent and extensions
to use the funds had not been requested from the grantor agency; and (3) did not take into
consideration grant funds that could not be used because a required local match had not been
identified or appropriated for expenditure.
Although the objective of our audit was to determine the unobligated balances of Federal
grant accounts, with the anticipation of identifying unused Federal grant funds that could be
reprogrammed for other approved purposes, we were unable to obtain this information from
a single, central source within the Government. Accordingly, we expanded our review to
include limited testing of transactions at the Departments of Health, Human Services,
Education, and Public Works (the four agencies that received the most Federal funds on an
annual basis) to corroborate account balances for Federal grants. Because we were unable
to obtain specific information from the Office of Management and Budget with respect to
Federal grant account balances, we believe that the Office should require all Government
agencies to routinely provide the Federal Grants Management Unit with copies of all
applications for Federal grants, all Federal grant awards, and all electronic transfers of
Federal funds. In addition, we believe that the Federal Grants Management Unit should be
provided with a sufficient number of staff and other resources needed for the Unit to develop
and implement a more comprehensive and up-to-date grants management system.
Department of Finance
The Department of Finance was responsible for preparing Statements of Remittance for
electronic transfers of Federal funds from the U.S. Treasury and for recording Statements of
Remittance and expenditure information in the Financial Management System. We found
that the Department of Finance had made significant improvements in recording expenditure
information but that additional improvements were needed in recording the receipt of Federal
funds. Specifically, in accordance with its internal procedures, the Department of Finance
prepared a Statement of Remittance for electronic transfers of Federal funds only when the
grantee agency provided fund transfer information to the Department. However, some
agencies did not provide the Department with the necessary information. Therefore,
Statements of Remittance could not be prepared by the Department for all electronic transfers
of Federal funds, and, because the Statement of Remittance was the document used to record
the fund information into the Financial Management System, there was little assurance that
all Federal funds received through electronic transfer were recorded. As discussed in
Finding A, we found that 182 electronic fund transfers, totaling $25 million, had not been
identified and recorded to the appropriate accounts for Federal grant drawdowns made during
fiscal years 1996 and 1997. Therefore, individual Federal grant accounts in the Financial
Management System did not contain accurate, current, complete, and reliable information.
This deficiency occurred, at least in part, because the Department of Finance's Accounting
Manual did not contain specific regulations regarding the processing of electronic transfers
of Federal grant funds.
To remedy the lack and/or untimeliness of recording electronic transfers of Federal funds in
the Financial Management System, the Department of Finance, in March 1997, hired an
individual to specifically review and identify the sources of electronic transfers of Federal
funds that were received by the bank but were not recorded in the Financial Management
System and to prepare Statements of Remittance to record the transfers in the Financial
Management System. However, we found that the individual was not given a complete
listing of all unidentified electronic transfers of Federal funds and that, as of January 31,
1998, the recording of Statements of Remittance for all Government deposits had been
completed only through May 1997. As detailed in Finding A, we also found 76 instances in
which Federal funds (157 electronic transfers, totaling $18.8 million) were not available for
approved purposes because the Special and Other Funds bank account was overdrawn on the
days when those funds were received.
Further, the Department of Finance did not comply with the Cash Management Improvement
Act (31 CFR 205), which states that "a state and a federal agency shall minimize the time
elapsing between the transfer of funds from the United States Treasury and the pay out of
funds for program purposes by a state, whether the transfer occurs before or after the pay out"
and that "a state will incur an interest liability to the federal government from the day federal
funds are credited to a state account to the day the state pays out the funds for programs
purposes." Specifically, we found that checks processed by the Department of Finance for
payments to vendors under Federal grant programs administered by the Department of
Education took as long as 200 days between the receipt of an electronic transfer of Federal
funds and the release of the check to the vendor. For example, on February 4, 1997, the
Department of Education requested and received an electronic transfer of Federal funds to
pay for operating supplies and travel-related expenditures totaling $115,000, of which
$74,000 was for St. Thomas invoices. During the period of February 4 to July 17, 1997, the
Department of Finance processed checks to pay for the expenditures, but the checks were not
released until various dates during the period of February 14 through August 22, 1997, with
at least one check being issued up to 200 days after the electronic transfer of Federal funds
was received. In addition, the Department of Finance did not recognize a liability for interest
owed the Federal Government for the days that the Federal funds were on deposit in the
Government of the Virgin Islands bank account but not used. Therefore, the Department of
Finance did not comply with the requirements of the Cash Management Improvement Act
with respect to the timely release of Federal funds and the recognition of an interest liability
to the Federal Government.
Based on the results of our review, we believe that the Department of Finance should be
required to timely identify all electronic transfers of Federal funds (see
Recommendation A.6) and to record this information in the Government's Financial
Management System in a timely manner. In addition, we believe that the Department of
Finance's Treasury Division, in compliance with the Cash Management Improvement Act,
should be required to compute the interest liability for electronic transfers of Federal funds
not immediately released for payment and to remit those amounts to the U.S. Treasury. We
also believe that the Department of Finance should be required to establish a separate
checking account to be used exclusively for the receipt and disbursement of Federal funds
(see Recommendation A.4).
Departments of Health and Human Services
The Federal Grant Manager was the official in the Department of Health with primary
responsibility for the financial administration of Federal grants, totaling about $14 million
annually, for the Women, Infants and Children (WIC) Supplemental Food Program; the
Medical Assistance Program; and various health-related block grants and categorical grants,
such as those related to mental health and drug abuse treatment programs.
The Deputy Commissioner of Fiscal Services was the official in the Department of Human
Services with primary responsibility for the financial administration of Federal grants totaling
about $18 million annually for the Child Care block grant, the Food Stamp Program, the
Headstart Program, and a human services-related block grant.
We found that the Departments of Health and Human Services maintained adequate
financial oversight of their Federal grants, generally submitted required financial reports in
a timely manner, and provided the Office of Management and Budget with requested
information pertaining to Federal grants. Our review also disclosed that these departments
did not have any significant unobligated balances of Federal grant funds that could be
reprogrammed for other approved purposes.
Department of Public Works
Federal grants awarded to the Government of the Virgin Islands by the U.S. Department of
Transportation's Federal Transit Administration and Federal Highway Administration and
the U.S. Environmental Protection Agency were administered by the Transportation Office,
the Federal-Aid Highway Program Office, and the Environmental Services Division, all of
which are in the Department of Public Works.
Federal Transit Administration Grants. During the period of 1984 to 1997, the
Transportation Office received 22 Federal grants, totaling $17 million, primarily to provide
public bus transportation for Virgin Islands residents and bus service for elderly and
handicapped persons. The Transportation Office contracted with a private company to
provide public bus transportation in the Virgin Islands and contracted for the purchase of
specialized buses so that local nonprofit organizations could provide bus services to elderly
and handicapped persons.
We found that the Transportation Office did not maintain pertinent documents for the
effective oversight of the Federal Transportation Administration grants, including grant
award documents, expenditure documents, documents to verify the electronic transfer of
Federal funds, and financial status reports. The most recent financial status report, which we
obtained from the grantor agency, was for the period ending December 31, 1991. In addition,
the Transportation Office was unable to access the computerized database maintained by its
grantor agency because of computer problems. Accordingly, we contacted the grantor
agency and obtained information that was in its Grants Management Information System as
of January 8, 1998. Because of this lack of oversight and the Government's inability to
negotiate additional contracts with suppliers of buses, these available Federal funds were not
used in an efficient and effective manner to expand and improve the level of transportation
services.
For example, during the period of April 1984 to March 1997, the Transportation Office was
awarded 11 Federal grants, totaling $12.9 million, from the Federal Transit Administration
to provide bus service in the Territory. However, as of January 31, 1998, the Federal Transit
Administration's records indicated that $6.6 million was unused and was available for public
bus transportation programs in the Virgin Islands. However, the local news media reported
that the company which had the contract to provide public bus transportation had terminated
its contract in January 1998 because it had not received payment from the Government.
Similarly, during the period of August 1991 to September 1997, the Transportation Office
was awarded seven Federal grants, totaling $927,000, from the Federal Transit
Administration for the purchase of specialized buses for elderly and handicapped persons.
However, the Federal Transit Administration's records as of January 31, 1998, indicated that
$830,000 was unused and available for the purchase of the specialized buses. In November
1997, the Transportation Office initiated requisitions for the purchase of four specialized
buses, totaling $207,000, but as of January 31, 1998, none of the buses had been received.
Federal Highway Administration Grants. Although the Federal-Aid Highway
Program Office hired qualified personnel to oversee the highway projects, we found, based
on records at the Department of Public Works, that the Federal-Aid Highway Program Office
had 52 projects, totaling $37.5 million, for which $13.7 million remained unexpended as of
March 31, 1998. Although the Federal-Aid Highway Program Office allocated its Federal
awards to approved projects on a yearly basis, projects took several years to complete
because of the extensive planning, design, and right-of-way acquisition phases associated
with highway projects. As a result, grant funds for such highway projects as the
Christiansted Bypass project on St. Croix remained available but unused for as long as
7 years.
Environmental Protection Agency Grants. During the period of 1984 to 1995, the
Environmental Services Division was responsible for the administration of five Federal
grants, totaling $20 million, for solid waste treatment, used oil disposal, and wastewater
treatment projects. As of January 31, 1998, only $3 million had been expended against these
Federal grants. For example, we found that, although a Federal grant totaling $11 million
was awarded in 1984 for the construction of a wastewater treatment facility, the facility's
design, which was the responsibility of the Government of the Virgin Islands, had not been
approved by the U.S. Environmental Protection Agency and that the costs to construct the
facility had increased between 1984 and 1998 to $23 million. The Director of Environmental
Services said that the additional $12 million needed to construct the facility would be secured
through the Government's refinancing of bonds, which was concluded in May 1998.
Department of Education
With respect to Federal grants, the Department of Education was primarily responsible for
the administration of a $17.6 million block grant, which was awarded for a 2-year period
(October 1995 to September 1997). The block grant was allocated among approximately
20 projects within the Department of Education and 1 project within the Department of
Health. We found that the Department of Education had not submitted its annual Financial
Status Report as of January 31, 1998, for the fiscal year ended September 30, 1997, because
the Department had not liquidated all of the encumbrances against the block grant. In
addition, the Department had not submitted, to the grantor agency, a request for extension
of time to file the annual report and to liquidate encumbrances, as required by the Code of
Federal Regulations.
The Code of Federal Regulations (34 CFR 80) states: "A grantee must liquidate all
obligations incurred under the award not later than 90 days after the end of the funding
period . . . to coincide with the submission of the annual Financial Status Report (SF-269).
The Federal agency may extend this deadline at the request of the grantee." However, a
Department of Education official told us that the Department did not comply with the Code's
requirement because the Department did not become aware of the requirement until the
Government's single audit report for the fiscal year ended September 30, 1994, was issued
in December 1996 and that the Department was hampered in liquidating obligations in a
timely manner because of the "cumbersome procurement process." For example, in
November 1995, the Department of Education initiated a purchase for educational supplies
by processing a "Requisition-Order-Invoice-Voucher" form. However, the document was
not returned to the Department of Education for payment purposes until October 1996, and
it took almost 1 year to liquidate the obligation for the educational supplies after initiation
of the purchase.
The Department of Education's Director of Business Affairs told us that the procurement
process was as follows: (1) a school initiates a requisition to purchase an item, (2) the
requisition is approved by the Insular Superintendent of the district, (3) the requisition is sent
to the Department's Procurement Division for a list of vendors, (4) the requisition is
transmitted to the Department's Business Office for certification of funds, (5) the requisition
is transmitted to the Department of Property and Procurement for solicitation of bids, (6) the
requisition is transmitted to the Department of Finance for the identification of an
encumbrance number, (7) the requisition is returned to the Department of Education's
Procurement Division for mailing to the vendor, (8) the vendor signs an acceptance copy of
the requisition and ships the items to the Department's warehouse, (9) the warehouse
receives the items and processes the receiving reports, (10) the items are transmitted to the
school and a school official signs the receiving report, and (11) the Department's
Procurement Division sends the receiving report to the Business Office for transmittal to the
Department of Finance for payment. This process routinely took over 1 year to complete.
We believe that to effectively use available Federal grant funds, the Government needs to
establish a comprehensive grant management system. In addition, we believe that the
Department of Education, in cooperation with the Department of Property and Procurement,
should conduct an analysis of its internal procurement process in an attempt to streamline the
procedures without compromising existing controls. Further, the Department should request
extensions to file its annual Financial Status Reports and liquidate outstanding encumbrances
if it cannot accomplish these tasks within the 90-day time frame specified in the Code of
Federal Regulations.
Recommendations
We recommend that the Governor of the Virgin Islands:
1. Require the Office of Management and Budget to develop and implement a
comprehensive Federal grant management system that requires all Government agencies to
provide the Office with copies of all applications for Federal grants and other grant award
and drawdown information; uses this input from Government agencies as the basis for a
Federal grant database that includes, for each grant, the grant program name, the Catalog of
Federal Domestic Assistance (CFDA) number, the Federal grantor agency name, the grantor
agency's internal grant number, the Virgin Islands grantee agency name, the Virgin Islands
Financial Management System account number, the grant period, the total grant award
amount, the total amount of drawdowns made against the grant, and copies of annual
financial reports; monitors the use of Federal grant funds within required time frames and
compliance with local matching requirements; and ensures that Government agencies submit
required annual and other grant financial status reports in a timely manner.
2. Require the Office of Management and Budget to provide the Federal Grants
Management Unit with the staff and resources necessary for effective implementation of the
recommended comprehensive Federal grant management system.
3. Require the Department of Finance to establish procedures, as a part of the
Accounting Manual, to ensure that electronic fund transfers are promptly identified and
recorded, through the use of Statement of Remittances, to the appropriate fund accounts upon
receipt from the Federal grantor agencies or any other sources. The procedures should
require Government agencies that receive monies through electronic fund transfers to provide
the Department of Finance, immediately upon notification from the Federal grantor agency
or other source, with photostatic copies of approved electronic fund transfer documents and
any other pertinent information needed by the Department of Finance to record the transfers
in the Financial Management System.
4. Require the Department of Finance to establish procedures to determine the
amount of interest income earned on future electronic transfers of Federal funds that are not
immediately released for payment and remit the interest income amounts to the U.S.
Treasury, as required by the Code of Federal Regulations (31 CFR 205).
5. Require the Transportation Office, Department of Public Works, to maintain, for
Federal grants that it administers, Federal grant program files which include copies of all
applications for Federal grants; award, drawdown, and other pertinent grant management
information; and copies of grant financial status reports.
6. Require the Department of Public Works to develop a plan of action to effectively
use Federal Transit Administration, Federal Highway Administration, and U.S.
Environmental Protection Agency funds that are available for approved projects.
7. Require the Department of Education, in cooperation with the Department of
Property and Procurement, to undertake a study of its internal requisition and vendor
payment processes, with the objective of streamlining and automating as many functions as
possible. Also, sufficient internal controls should be instituted to safeguard against
unauthorized or improper purchases of goods and services and payments to vendors.
Governor of the Virgin Islands Response and Office of Inspector General
Reply
On June 30, 1998, we transmitted a draft of this report to the Governor of the Virgin Islands
requesting a response by August 7, 1998. On August 20, 1998, we received a response
(Appendix 5), dated August 7, 1998, from the Governor of the Virgin Islands. The response
concurred with all seven recommendations. Based on the response, we consider
Recommendations 1, 2, 3, and 7 resolved and implemented and request additional
information for Recommendations 4, 5, and 6 (see Appendix 6).
C. LONG-STANDING PROBLEMS
The Government of the Virgin Islands needs to make Governmentwide procedural changes
to correct long-standing problems in the areas of financial management, expenditure control,
revenue collection, and program operations that have an impact on its financial condition.
Our September 1994 special report on the status of financial management improvements (see
Prior Audit Coverage section of this report) discussed these long-standing problems and
presented goals for improvement for the Government. Although the Government's responses
to audit recommendations have generally addressed the specific findings and questioned
costs discussed in the prior audit reports, the Government has not made extensive changes
in its operating procedures and practices to prevent similar problems and questioned costs
from recurring and has not established a plan of action to achieve the improvement goals
discussed in the 1994 report. In our opinion, the continued existence of these long-standing
problems has contributed to the Government's current financial crisis, as evidenced by the
$588 million in operations-related obligations as of September 30, 1997 (see Finding A).
oals for Improvement
In the September 1994 special report on the status of financial management improvements,
we presented four goals that the Government should strive to achieve in order to realize
long-term improvements in financial management, expenditure control, revenue collection,
and program operations. These improvement goals were based on our analysis of the
recommendations that we made in audit reports on specific agencies and programs of the
Government and are summarized as follows:
- Effective financial management should include the ability to (1)
accurately account for
Federal and local funds and property and provide timely and accurate reports to Government
managers and grantor agencies; (2) establish budgets based on realistic revenue projections,
make allotments based on actual revenues, limit expenditures to approved allotment and
appropriation levels, and control bonded and other long-term debt; (3) establish and maintain
a central clearinghouse for Federally funded programs, ensure compliance with the Single
Audit Act and specific grant program requirements, and accurately record grant program
transactions; and (4) maintain an active, independent, and objective internal audit function.
- Effective procurement and supply management should include the ability to (1) procure
quality goods and services at the lowest cost and in accordance with applicable Federal and
local procurement regulations and (2) provide goods and services to agencies and pay
vendors and contractors within reasonable time frames.
- Effective revenue collection should include the ability to (1) accurately determine and
account for all funds due the Government and (2) promptly assess and collect such funds.
- Effective program operations should include the ability to (1) provide basic services
and infrastructure facilities in an efficient and effective manner and (2) recruit qualified
personnel needed to carry out program objectives and establish a comprehensive personnel
merit system for all employees.
With regard to the Government's current financial difficulties, we believe that if the
Government had taken long-term corrective actions in response to the recommendations
made in about 150 audit reports we have issued since October 1982 (when the Office of
Inspector General assumed responsibility for Federal audit oversight in the Virgin Islands),
the Government would have been in a better financial position as of September 30, 1997.
Specifically, our audit reports have repeatedly included recommendations for the
Government to improve financial management, improve its ability to maximize revenue
collections, reduce operating expenses (particularly in the area of procurement), and increase
the efficiency and effectiveness of program operations. Although the Government, in its
responses to our audit recommendations, has generally addressed the specific problems or
the questioned costs discussed in the audit reports, it often has not addressed recommended
long-term changes in its operating procedures. The Virgin Islands Bureau of Audit and
Control has also made recommendations in about 290 audit and memorandum reports issued
since May 1982 (when that Bureau was established) that, if implemented, could have resulted
in improved financial management practices within the Government. Further, the
Government's single audit reports, which have reported on the results of independent audits
of Federal financial assistance received by the Government during fiscal years 1982 through
1994, have included recommendations to address Governmentwide internal control
weaknesses that adversely impact the administration of Federal grant funds.
We further believe that the Government will be able to correct its current financial crisis
only by making significant changes in its financial management practices. Specifically, the
Government should monitor and report on its financial condition through audited financial
statements issued in a timely and accurate manner, aggressively collect amounts owed,
comply with competitive procurement requirements, control the number of its employees and
the related payroll costs, and promote more efficient and effective program operations. All
of these issues relate to the four improvement goals presented in the September 1994 special
report. Although achievement of those improvement goals will not resolve the
Government's immediate financial difficulties, we continue to believe that the improvement
goals represent a basis for establishing a comprehensive plan of action to bring long-term
improvements in Government operations that would ultimately benefit all Virgin Islands
residents.
Recommendations
We recommend that the Governor of the Virgin Islands:
1. Require the Department of Finance to perform an assessment of the current and
projected future financial accounting and reporting needs of the Government and seek the
funding necessary to upgrade the Financial Management System's computer and software
accordingly. In performing the needs assessment, input should be obtained from all user
agencies and such factors as the number of on-line users, the volume of transactions,
compliance with the financial reporting requirements of generally accepted accounting
principles and the Single Audit Act, and the special financial information needs and reporting
requirements of agency management should be considered. Also, provisions should be made
to ensure that users are properly trained and that a user-friendly operating manual for the
Financial Management System is developed and distributed to all users.
2. Develop and implement an audit followup system to ensure that agencies implement
agreed-to audit recommendations (whether made by the Office of Inspector General, the
Virgin Islands Bureau of Audit and Control, internal auditors, or contracted independent
auditors) or provide reasonable justification as to why the recommendations cannot or should
not be implemented. As options, the budget process could be used to provide incentives for
agencies to fully implement audit recommendations, and/or the Special Assistant to the
Governor for Policy and Audit Resolution could report to the Governor, on at least a
semiannual basis, the agencies that did not implement audit recommendations so that the
Governor could follow up with the agency heads to require implementation.
3. Require and provide the Department of Property and Procurement with the authority
to strictly enforce competitive procurement requirements. To the maximum extent possible,
advertised invitations for bids should be used for the procurement of goods and construction
services. In instances where emergency or other circumstances make formal advertised bids
impractical for construction contracts and for all professional services contracts, requests for
proposals and competitive negotiations should be used by following the requirements
established in Title 31, Section 239(10), of the Virgin Islands Code and Title 31,
Section 239-4, of the Virgin Islands Rules and Regulations. Also, special contingency plans
should be developed to provide a mechanism for the Government, with a reasonable level
of competition and management oversight, to obtain emergency debris removal and repair
services in the event of future hurricanes or other natural disasters.
4. Establish an interagency task force, in coordination with a competitively selected
outside collection agency, to review and update the accounts receivable records of all
revenue-generating agencies of the Government; write off accounts that are deemed to be
uncollectible; attempt to collect outstanding accounts that are deemed to be collectible; and
establish procedures to ensure that bills are promptly issued for all amounts owed the
Government, accounts receivable records are kept up to date, and effective collection
enforcement actions are undertaken for all amounts owed the Government. Also, a control
mechanism should be established that would require each revenue-generating agency of the
Government to submit a quarterly report to the Office of Management and Budget which
identifies the outstanding balance of accounts receivable for each type of revenue collected
by the agency and require the Office of Management and Budget to summarize this
information, at least on a semiannual basis, in a report to the Governor of any agency that
was allowing its accounts receivable balances to increase significantly.
5. Require the Division of Personnel, in cooperation with the Office of Collective
Bargaining and with participation by employee union representatives, to undertake a
comprehensive review of the existing personnel merit system to include developing rules and
regulations for collective bargaining; updating job classifications and job descriptions;
consolidating the Government's many salary and wage schedules; and resolving conflicts
between existing laws concerning the types of positions that can be filled through
appointments to unclassified positions.
Governor of the Virgin Islands Response and Office of Inspector General Reply
On June 30, 1998, we transmitted a draft of this report to the Governor of the Virgin Islands
requesting a response by August 7, 1998. On August 20, 1998, we received a response
(Appendix 5), dated August 7, 1998, from the Governor of the Virgin Islands. The response
concurred with all five recommendations. Based on the response, we consider
Recommendations 2 and 5 unresolved and request additional information for
Recommendations 1, 3, and 4 (see Appendix 6).
Recommendation 2. Concurrence.
Governor of the Virgin Islands Response. The response stated that a "Quality
Assurance Unit" was being developed "within the Department of Finance to provide the
additional monitoring, procedural and review activities relative to the administration and
conduct of operational units which internally and externally impact the timeliness of all
financial reporting."
Office of Inspector General Reply. Although the proposed development of a "Quality
Assurance Unit" within the Department of Finance is a positive step with regard to ensuring
timely financial reporting, it does not fully address the recommendation, which calls for a
Governmentwide audit followup system to ensure that Government agencies implement
agreed-to audit recommendations. Therefore, we consider the recommendation unresolved.
Recommendation 5. Concurrence.
Governor of the Virgin Islands Response. The response stated that "the Division of
Personnel has been working with the Office of Management and Budget and the Office of
Collective Bargaining to establish a uniform listing of position classes within the merit
system" and that "rules and regulations [have been developed] which govern relationships
among the Division of Personnel, the Office of Collective Bargaining, and union
representatives."
Office of Inspector General Reply. Although the proposed actions are positive steps
with regard to improving personnel management practices, they do not fully address the
recommendation, which calls for a comprehensive review of the Government's personnel
merit system not just position classifications and labor-management relations. Therefore, we
consider the recommendation unresolved.
APPENDIX 1
CLASSIFICATION OF MONETARY AMOUNTS
Finding
A. Interfund Loans and Other Obligations
Interfund Loans
B. Federal Grants
Department of Public Works
Funds To Be
Questioned Put To
Costs* Better Use**
$120 million*
$38.1 million**
____________________
* This amount represents a commingling of Federal and local funds. Therefore, a breakdown as to
Federal
or local funds cannot be determined.
** This amount represents Federal funds.
APPENDIX 2
SUMMARY OF OUTSTANDING OBLIGATIONS
AS OF SEPTEMBER 30, 1997,
AND JANUARY 31, 1998
Audited Unaudited
Outstanding Outstanding
Balances as of Balances as ofIncrease or
Description Sept. 30, 1997Jan. 31, 1998
(Decrease)
(Amounts in Millions)
Unauthorized Interfund Loans
Owed Special Funds $120 $120 0
Authorized Interfund Loans
Owed Special Funds 21 21 0
Community Disaster Loans
Owed FEMA 150 162 $12
Retroactive Salary Increases
Owed Employees 141 109 (32)
Income Tax Refunds
Owed Taxpayers 76 26 (50)
Payments on Invoices
Owed Vendors 67 25 (42)
Retirement Contributions
Owed Retirement System 13 13 0
Authorized Loans for Tax Refunds
and Vendor Payments
Owed Banks 0 106* 106
Total Operations-Related Obligations $588 $582 ($6)
____________________
* Does not include interest accrued at 6.9 percent a year.
APPENDIX 3
Page 1 of 3
GOVERNOR OF THE VIRGIN ISLANDS RESPONSE
TO THE DRAFT ADVISORY REPORT
____________________
* Although the Governor's response was dated December 1, 1997, it was postmarked December 29,
1997, and received by the Office of Inspector General on January 6, 1998.
APPENDIX 4
Page 1 of 7
OFFICE OF INSPECTOR GENERAL REPLY
TO THE GOVERNOR'S RESPONSE
TO THE DRAFT ADVISORY REPORT
APPENDIX 5
Page 1 of 11
GOVERNOR OF THE VIRGIN ISLANDS RESPONSE
TO THE DRAFT REPORT
APPENDIX 6
Page 1 of 2
STATUS OF AUDIT REPORT RECOMMENDATIONS
Finding/Recommendation
Reference
A.1, A.3, A.6, A.7,
and A.8
A.2
A.4 and A.5
B.1, B.2, B.3, and B.7
B.4, B.5, and B.6
C.1, C.3, and C.4
Status
Management
concurs;
additional
information
needed.
Unresolved.
Implemented.
Implemented.
Management
concurs;
additional
information
needed.
Management
concurs;
additional
information
needed.
Action Required
Provide an action plan that includes a
target date for implementing each
recommendation.
Reconsider the recommendation and
provide a response that addresses the
actions to be taken to liquidate the
$120 million in loans from the Special
and Other Funds. If concurrence is
indicated, provide an action plan that
includes a target date and the title of the
official responsible for implementation.
If nonconcurrence is indicated, provide
specific reasons for the nonconcurrence.
No further action required.
No further action required.
Provide an action plan that includes a
target date for implementing each
recommendation.
Provide an action plan that includes a
target date for implementing each
recommendation.
APPENDIX 6
Page 2 of 2
Finding/Recommendation
Reference
C.2
C.5
Status
Unresolved.
Unresolved.
Action Required
Reconsider the recommendation and
provide a response that addresses the
actions to be taken to develop a
comprehensive audit followup system. If
concurrence is indicated, provide an
action plan that includes a target date and
the title of the official responsible for
implementation. If nonconcurrence is
indicated, provide specific reasons for the
nonconcurrence.
Reconsider the recommendation and
provide a response that addresses the
actions to be taken to perform a
comprehensive review and upgrade of the
personnel merit system. If concurrence is
indicated, provide an action plan that
includes a target date and the title of the
official responsible for implementation.
If nonconcurrence is indicated, provide
specific reasons for the nonconcurrence.
ILLEGAL OR WASTEFUL ACTIVITIES SHOULD BE REPORTED TO THE OFFICE OF
INSPECTOR GENERAL BY:
Sending written documents to:
Within the Continental United States
U.S. Department of the Interior
Office of Inspector General
1849 C Street,N.W.
Mail Stop 5341
Washington, D.C. 20240
Calling:
Our 24 hour
Telephone HOTLINE
1-800-424-5081 or
(202) 208-5300
TDD for hearing impaired
(202) 208-2420 or
1-800-354-0996
Outside the Continental United States
Caribbean Region
U.S. Department of the Interior
Office of Inspector General
Eastern Division- Investigations
1550 Wilson Boulevard
Suite 410
Arlington, Virginia 22209
Calling:
(703) 235-9221
North Pacific Region
U.S. Department of the Interior
Office of Inspector General
North Pacific Region
238 Archbishop F.C. F'lores Street
Suite 807, PDN Building
Agana, Guam 96910
Calling:
(700) 550-7428 or
COMM 9-011-671-472-7279