[Audit Report on Costs Recovered Through Net Receipts Sharing Deductions, Minerals Management Service and Bureau of Land Management]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 98-I-79

Title: Audit Report on Costs Recovered Through Net Receipts Sharing
       Deductions, Minerals Management Service and Bureau of Land
       Management

Date: October 22, 1997

                  **********DISCLAIMER**********

This file contains an ASCII representation of an OIG report.  No attempt has been made to
display graphic images or illustrations.  Some tables may be included, but may not resemble
those in the printed version.

A printed copy of this report may be obtained by referring to the PDF file or by calling the Office
of Inspector General, Division of Acquisition and Management Operations at (202) 208-4599.
                  ******************************

C-IN-MOA-002-96

United States Department of the Interior

OFFICE OF INSPECTOR GENERAL
Washington, D.C. 20240

AUDIT REPORT

Memorandum

To:       Director, Bureau of Land Management
     Director, Minerals Management Service

From:   Robert J. Williams
          Assistant Inspector General for Audits

Subject: Audit Report on Costs Recovered Through Net Receipts Sharing Deductions,
Minerals Management Service and Bureau of Land Management (No. 98-I-79)

INTRODUCTION

This report presents the results of our review of costs recovered through net receipts sharing
deductions.  The objective of this review was to determine whether the Minerals
Management Service, the Bureau of Land Management, and the Department of Agriculture's
U.S. Forest Service properly identified and allocated onshore mineral leasing program costs
and deducted the appropriate amounts from the states' mineral leasing receipts.

BACKGROUND

Three Federal agencies are involved in administering the Federal onshore mineral leasing
program as follows: the Bureau of Land Management issues leases, monitors production,
and ensures compliance with lease terms for most Federal land, including certain Forest
Service land; the Forest Service coordinates with the Bureau to monitor production and to
ensure compliance with lease terms for Forest Service land; and the Minerals Management
Service collects and distributes revenues generated under the program.

Net receipts sharing is an administrative process in which Federal and state governments
share the cost of managing the Federal onshore mineral leasing program. The Service, the
Bureau, and the Forest Service are responsible for identifying their respective program
appropriation and allocating the identified amounts among the states. On a monthly basis,

 
the Service deducts these amounts as the net receipts costs from the states' mineral leasing
receipts.

Before fiscal year 1991, the Federal Government bore the full costs of administering the
program, which have averaged about $120 million annually for the three Federal agencies.
However, beginning in fiscal year 1991, the Congress required the states to pay a portion of
these program costs. The Congress, with cost data provided by the three agencies, set the
amount of the cost deductions at $33.4 million, $34.2 million, and $38.0 million,
respectively, in the Department of the Interior's budget appropriation acts for fiscal years
1991,1992, and 1993.

The Omnibus Budget Reconciliation Act of 1993 (Public Law 103-66, Title X, Subtitle C,
Section 10201) legislatively instituted a multistep process for net receipts sharing and
established, as of fiscal year 1994, the general methodologies for identifying and allocating
the amount of the enacted appropriation to be deducted from the states' mineral receipts (the
process is detailed in Appendix 1). These methodologies, which involved computing

were reviewed and approved by a major public accounting firm. The program cost
deductions for fiscal years 1994, 1995, and 1996 were $26.5 million, $25.7 million, and
$23.7 million, respectively (cost deductions by individual state are in Appendix 2). The
decrease in cost deductions beginning in fiscal year 1994 reflects the change in the methods
required under the Act, as well as certain revisions in the Service's cost identification and
allocation procedures (see the Results of Audit section).

In fiscal year 1995, the Service distributed $477.5 million in mineral leasing revenues to
37 states. Six western states accounted for 94 percent of these distributions as follows:
Wyoming, 45 percent; New Mexico, 25 percent; Colorado, 7 percent; Utah, 7 percent;
California, 5 percent; and Montana, 5 percent. The states' share of revenues is a percentage
determined by statute and is based on land category, such as public domain or acquired
lands, and also by the source of revenues, such as oil and gas lease rents, coal royalties, or
other mineral bonuses. For example, the Mineral Leasing Act of 1920, as amended, provides
for each state to receive 50 percent of revenues generated by Federal mineral leases located
on public lands within the state. (Alaska is an exception; that is, under its Statehood Act,
Alaska receives a 90 percent distribution of mineral leasing revenues in the State.) About
99 percent of mineral lease revenues are distributed under the Act. Other revenue
distribution percentages ranging from 25 to 100 percent are stipulated in separate minerals
legislation. For example, states receive 25 percent of mineral revenues derived from
acquired National Forest lands (16 U.S.C. 499) and 75 percent of mineral revenues from
lands administered by the U.S. Army Corps of Engineers (33 U.S.C. 701C-3).

program. Each Federal agency develops its own cost pool for the net receipts sharing process.

2

 
offices. The report included an explanation of the net receipts sharing process but did not
make any recommendations.

Additionally, other organizations have examined selected aspects of the net receipts sharing
process as follows:

- In 1991, the Service contracted with a major public accounting firm to evaluate the
methodology used to allocate the Federal onshore program costs to the states.  The firm

issued two reports in November 1991 which stated that the Service's cost accounting
methodology and cost distribution computations were reasonable. The Service used the
same methodology upon passage of the Omnibus Budget Reconciliation Act of 1993.

- In August 1995, the Associate Director for Royalty Management, Minerals
Management Service, formed a peer review group consisting of Service personnel and a
representative from the Office of Inspector General to determine whether the cost
identification and cost allocation methodologies were valid and resulted in equitable cost
deductions for the states. This review was limited to an examination of the fiscal year 1995
cost deduc tions. The group concluded that the fiscal year 1995 cost deductions were
overstated because the Service used inappropriate cost identification and allocation
procedures for the Audit Divisions2 and the Systems Management Division (see the Results

of Audit section). The group recommended that the Service: (1) use a more accurate basis
to identify and allocate costs among onshore, Indian, and offshore mineral leases and
(2) replace the separate cost pools used for the revenue and cost methods with a single cost
pool based on actual onshore program costs. Both recommendations had been implemented
for the net receipts sharing computations for fiscal year 1997.

RESULTS OF AUDIT

We found that the cost sharing deductions were computed efficiently and deducted from the
states' mineral leasing receipts on a timely basis. However, the methodologies used by the
three agencies to determine the amount of cost deductions for fiscal years 1994 through 1996
did not result in an equitable distribution of mineral leasing program costs. Specifically, we

found that the three agencies inaccurately identified and allocated certain mineral leasing
program and related general administrative costs to their respective cost pools for deduction
purposes. Additionally, the cost pools for the Bureau and the Forest Service included
preleasing costs that may not be an allocable cost to the states. The Omnibus Budget
Reconciliation Act of 1993 established general methodology requirements for the
development of cost deductions to the states' mineral leasing receipts. However, in the 3
years after passage of the Act, the three agencies had not adopted policies or operating

2The Audit Divisions consist of the Dallas Compliance Division, the Houston Compliance
Division, and the
Lakewood Compliance Division.

4

 
procedures to ensure that the process provided equitable cost deductions. As a result, the
costs of $75.9 million that were deducted from the states' mineral leasing receipts during
fiscal years 1994 through 1996 were overstated by $8.8 million, or 11.6 percent (see
Appendix 4).

Minerals Management Service

To comply with the net receipts sharing provisions of the Act, the Minerals Management
Service has refined its practices since fiscal year 1996 to better identify the amount of cost
deductions charged to the states. Specifically, the actions taken as a result of the peer review

group formed by the Associate Director for Royalty Management (see Prior Audit Coverage
section) should result in substantially better identification of cost deductions for fiscal year
1997. However, for fiscal years 1994 through 1996, the Service inaccurately identified
certain program and related general administrative costs as allocable deductions and did not
initiate timely actions to correct the inaccuracies. The overstated cost deductions relating to
these issues totaled $7,627,403. The amounts presented below are not an itemized
breakdown of this total but are presented for illustrative purposes as follows:

- The Service allocated the portion of its appropriation that related to the onshore
program to the states by using different cost pools for the revenue and the cost allocation

methods.

We found that a disparity resulted because the cost pools developed for the

revenue method were significantly higher than those developed for the cost method
($54.9 million versus $44.5 million for fiscal year 1994, $56.8 million versus $45.7 million
for fiscal year 1995, and $59.7 million versus $32.8 million for fiscal year 1996). We
determined that the cost pools for the revenue method were overstated and that the cost pools
for the cost method were generally accurate. Since the net receipts cost deductions for most

states were based on the revenue allocation method (see Appendix 2), the overstated cost
pools caused an overcharge of cost deductions to these states. In our opinion, only one cost
pool should have been developed for the program regardless of whether the revenue or the
cost allocation method was used to determine the cost deductions. Moreover, the Act did not
stipulate that a unique cost pool be established for each allocation method. Service officials
maintained that since the Service established the two cost pool methodology in consultation
with the Congress, any change would require Congressional approval. Nevertheless, the
methodology resulted in an overallocation of program costs to most states. To illustrate the
effect on the cost deductions, the amounts of overstated deductions for five states for fiscal
year 1996 are presented in Table 1.

 
Table 1. Overstated Cost Deductions for
    Fiscal Year 1996

State
Alaska
California
Colorado
Montana
Utah

costs        Audited
Charged        Amount
$266,833        $146,719
799,487        439,602
1,126,917        619,641
78 1,742        429,845
989,344        543,996

Overstated
Costs
$120,114
359,885
507,276
351,897
445,348

Service officials said that they had recognized the inequity of using separate cost pools and
obtained Congressional approval to use one pool for the Service's fiscal year 1997 net
receipts computations. However, for fiscal years 1994 through 1996, the use of separate cost
pools resulted in excess cost allocations to the states and excess deductions from the states'
royalty receipts.

- The peer review group found that the Service overstated cost deductions for fiscal year
1995 because of inaccurate methods of identifying and allocating the costs under the cost
allocation method for the Audit Divisions and the Systems Management Division.
Specifically, the group determined that, under the cost method, onshore program costs for
the Audit Divisions were based on the number of producing leases and that the costs for the
Systems Management Division were based on the number of report lines processed. Neither
of these bases represented an accurate measure of the work performed and the costs incurred
on behalf of the Royalty Management Program for the states. However, the Service
corrected this situation for the net receipts computations for fiscal year 1996. The Audit
Divisions currently allocate costs based on revenues generated by the leases, whereas the
Systems Management Division allocates costs based on the number of on-line users of the
Royalty Management Program's automated systems. As a result of these changes, the cost
allocations for both divisions are currently representative of the work performed.

- General administrative costs pertaining to the fiscal year 1996 cost pool under the
revenue method were overstated by $2 million, resulting in a $114,000 overcharge to the
states. The overstatement was the result of a mathematical error in computing general
support service costs. The error could have been prevented had the Service established and
implemented a formal procedure to independently verify its computations.

- The Service did not make timely adjustments to correct certain deficiencies in the net
receipts process. For example, the Service did not revise its methodology for identifying and
allocating the fiscal year 1994 cost deductions, even though the cost pool under the revenue
method ($54.9 million) and the cost method ($44.5 million) showed a wide disparity.

6

 
Additionally, the peer review group's recommendations in fiscal year 1995 to improve the
cost identification and allocation procedures for the Audit Divisions and the Systems
Management Division and to use a single cost pool for the revenue and cost methods were
not implemented until 1 and 2 years, respectively, after the deficiencies were identified.

We also noted that the Service's procedures adopted for fiscal year 1996 for identifying and
allocating general administrative costs to the Royalty Management Program under the cost
method were complex and time-consuming. Specifically, the Service attempted to identify,
with a high degree of precision, the cost components of administrative operations, general
support services, policy and management improvements, and executive direction. Although
we acknowledge that the Service made efforts to identify these costs and that the Service's
process did result in accurate cost determinations, we believe that indirect costs could be
allocated through a standard overhead rate based on agency direct costs without the desired
level of precision being lost. A standard overhead rate is administratively simple to compute
and is an accepted cost accounting practice.

Bureau of Land Management

The Bureau of Land Management consistently followed a cost accounting methodology for
its computations for fiscal years 1994 through 1996. Although we found that the Bureau was
reasonably effective in allocating its appropriation to the states, the Bureau did not accurately
identify certain program and general administrative costs. The overstated cost deductions
caused by these issues totaled $1,206,563. The amounts presented are not an itemized
breakdown of this total but are presented for illustrative purposes as follows:

- The Bureau did not accurately estimate its appropriation associated with Indian lease
management on the net receipts computation work sheets. To identify the states' share of
allocable costs in the Energy and Minerals Management budget activity, the Bureau had to
exclude all amounts associated with Indian lease management. This required the Bureau to
estimate the amounts because Indian mineral leasing activities were not identified separately
in the Bureau's budget system. In addition, at the time that cost deductions were computed
and submitted to the Minerals Management Service for a particular fiscal year, only about
10 to 11 months of cost data were available. As such, the Bureau determined Indian mineral
leasing costs for the remaining I- to 2-month period based on an estimated percentage of the
Bureau's yearly expenditures for Indian mineral leasing costs. However, we found that the
percentages were not accurate relative to historical cost data, which could have been used to
more accurately project these year-end costs. Specifically, using historical data, we
determined that the Bureau overestimated the Indian lease management costs in its
computations by $261,000 (6.7 percent) for fiscal year 1994 and by $142,000 (4.7 percent)
for fiscal year 1996 and that it underestimated the costs by $579,000 (19.4 percent) for fiscal
year 1995. The overall effect was a net overstatement of onshore program costs, which
resulted in an overcharge of cost deductions to the states.

 
- The Bureau did not correctly allocate its support costs to the states. Specifically, costs
associated with the following areas were allocated primarily to the states: personnel leave
surcharge; Bureauwide permanent changes of station; and general administration and
operation of the Bureau's National Training Center, National Business Center, and
Washington Office. Instead, an appropriate share of these support costs should have been
allocated to the program areas of Indian lease management and mineral material sales
management. The effect of not allocating costs to the Bureau programs was an overcharge
of the cost deductions to the states.

- The Bureau used an overhead rate of 19 percent instead of 18 percent in its
computations for fiscal years 1994 through 1996, which resulted in an overcharge of the cost
deductions to the states. The Bureau's billing rate for cost-recoverable and cost-reimbursable
projects was 18 percent during fiscal years 1994 through 1996, a rate that we believe should
have been used for cost deduction purposes.

During our review, we noted that the Bureau had not corrected the cost accounting
deficiencies cited in this section for establishing its cost deductions for fiscal year 1997.

U.S. Forest Service

The U.S. Forest Service used a methodology in fiscal years 1994 and 1995 and initially in
fiscal year 1996 that did not equitably allocate costs to the states. The methodology was
based on each state's respective percentage of national forest acreage less national wilderness
and national recreation area acreage. Forest Service officials said that they used this method
because the Forest Service's accounting system did not record costs by national forest until
fiscal year 1995 and that therefore acreage was the best available allocation basis. However,
the method did not allocate costs equitably because mineral leasing costs are not the result
of the amount of acreage of public land holdings but of the amount of mineral leasing
activity. The effect of this issue was an understatement of cost deductions that totaled
$43,670 for fiscal years 1994 through 1996 .

Additionally, the Forest Service had not established adequate policies or procedures for the
net receipts sharing process. In a March 1996 letter, the Royalty Policy Committee requested
the Forest Service to provide an explanation of the agency's cost allocations.3 To respond
to the Committee's request, the Forest Service had to reconstruct the process, as key
individuals had left the agency and the cost allocation methodology was not documented.
As a result, the Forest Service reexamined its process and initiated improvements to its
methodology. However, because of uncertainties regarding the accuracy of the 1996 cost

on the Department's management of Federal and Indian mineral leases, revenues, and other
mineral-related
issues. The Committee includes representatives from Federal, state, and tribal governments;
allottee
organizations; and mineral industry associations.

8

 
deductions, the Forest Service revised its original computations twice. Each of the three
schedules used a different cost allocation basis, which resulted in substantially different
deductions to the states. We concluded that the final schedule used by the Forest Service,
which incorporated its recently enhanced accounting system to accumulate costs by
individual national forest, represented an accurate method of identifying each state's share
of program costs.

Preleasing Costs

We found that costs associated with preleasing activities were included in the cost pools of
the Bureau of Land Management and the Forest Service for fiscal years 1994 through 1996.
However, neither the budget nor the accounting systems of the Bureau and the Forest Service
specifically identified the amount of preleasing costs incurred for fiscal years 1994 through
1996. In fiscal year 1992 (the latest year that actual data were available), the Bureau incurred
preleasing costs of $855,000. Bureau budget officials stated that preleasing costs were fairly
stable from year to year.

Preleasing activities consisted primarily of preparing environmental impact statements and
environmental assessments to determine the suitability of an area for mineral leasing
operations. The two agencies conducted these evaluations to comply with the environmental
protection mandates of the National Environmental Policy Act of 1969. However, these
costs may not be an allocable cost deduction. The Omnibus Budget Reconciliation Act
amended the Mineral Leasing Act (30 U.S.C. 191, Section 35) and stipulated that net receipts
deductions consist "of the portion of the enacted appropriation allocable to the administration
of all laws providing for the leasing of any onshore lands or interest in land owned by the
United States for the production of the same types of minerals leasable under this [Mineral
Leasing] Act or of geothermal steam, and to enforcement of such laws." Since
environmental work is completed before the land is leased and leasing may not occur in areas
considered unsuitable for mineral operations, some of the state government officials we
interviewed said that the Omnibus Budget Reconciliation Act precludes these costs from
being included in the cost pools. As such, we believe that the Bureau should obtain legal
advice on whether preleasing costs should be allocated to the states through the net receipts   .

sharing process.

State Involvement

During our visits and contacts, we found that state government officials strongly opposed the
concept of net receipts sharing. These officials were concerned that program costs may be
"excessive" in relation to the benefits the states receive, and some questioned the authority
of the Federal Government to assess the cost deductions. In addition, state government
officials told us that they were not sufficiently informed about the decision-making and cost-
methodology processes and expressed concern about the accuracy of the cost deduction

9

 
computations and the Federal Government's responsiveness to their requests for detailed
explanations of the computations. However, Minerals Management Service and Bureau
officials stated that the Federal Government has maintained an open line of communication
with the states and has fully responded to the states' requests for information concerning net
receipts. In view of the differences of opinion concerning communications, we believe that
the Federal Government should ensure that the methodologies used by the three agencies are
communicated frequently and clearly to the states.

Conclusion

We concluded that the three agencies essentially complied with their responsibilities to
implement the net receipts sharing provisions of the Omnibus Budget Reconciliation Act.
However, we further concluded that the agencies did not develop the administrative
procedures required to accurately identify and allocate the onshore mineral leasing program
costs. We recognize that determining these costs is particularly difficult because the
agencies' budgeting processes and accounting systems were not designed for accumulating
costs in the detail required for net receipts sharing purposes. In view of this difficulty, we
believe that the three agencies should establish written policies and procedures which
facilitate the accumulation and computation of the states' cost deductions.

Recommendations

We recommend that the Directors of the Minerals Management Service and the Bureau of
Land Management:

  1. Establish policies and procedures which effectively and consistently guide the net
receipts sharing process consistent with the findings outlined in this report. The Forest
Service should be invited to participate in this effort, and all of the agencies should improve
communications with the affected state governments.

We recommend that the Director, Bureau of Land Management:

2. Request an opinion from the Office of the Solicitor on whether preleasing costs are
an allocable cost deduction to the states.

Minerals
Reply

In the July 1

Management Service Response and Office of Inspector General

5, 1997, response (Appendix 5) to the draft report from the Director, Minerals

Management Service, the Service concurred with Recommendation 1, stating that it would
"coalesce and update its existing net receipts sharing policies and procedures into a single
document and provide [the document] to the Bureau of Land Management and the Forest

10

 
Service," as well as provide the document to the states. However, additional information is
requested for the recommendation (see Appendix 7).

Service's Additional Comments on Audit Report

In its response, the Minerals Management Service stated that our report would benefit from
"some clarification of the facts" and that our report "suggests" that the Service did not take
timely action to correct inequities in the net receipts process once they were identified. The
Service also stated that it "took action . . . on the one item that it had the authority to change
(i.e., allocations of system and audit costs based on lease counts)" and that the "other change
(i.e., use of one cost pool) required the concurrence of Congress."

Our report addressed the identified inequities of two separate cost pools and the effect that
those inequities had on net receipts sharing deductions during fiscal years 1994 through
1996. To correct these inequities, the Service requested and received approval for the use
of one cost pool in its fiscal year 1997 Senate appropriations subcommittee report. While
we do not take issue with the Service's contention that Congressional approval was required
to effect the changes, the fact remains that, although discovered in fiscal year 1995, the
inequity was not corrected until fiscal year 1997. The result was that for fiscal years 1994
through 1996, the states were overcharged as set forth in Appendix 4.

In its response to the draft report, the Service also stated that if the cost deductions for fiscal
years 1994 through 1996 are to be recalculated, the recalculation should include the costs of
audits pertaining to Section 205 of the Federal Oil and Gas Royalty Management Act. The
Service said that it had excluded audit costs from its net receipts cost pools but that the audit
costs were an allocable charge to the Federal onshore mineral leasing program and therefore
should have been included in the cost pools for the 3 years included in our review.  The
Service further stated that "including these costs would significantly mitigate the
`overcharges' and in some instances may result in undercharges."

We used the Service's cost allocation methodology as it existed from fiscal years 1994 to
1996 in computing the overcharges to the states. This methodology, as described by the
former Director of the Service in written testimony to the Congress in 1993, did not include
audit costs, which the Service previously and currently recovers through cost sharing
agreements with the states. In its response, the Service stated that the new methodology
approved by the Congress in fiscal year 1997 should include audit costs. The Service's
contention in this regard confirms our position that the Service needs to articulate and
document what costs should be allowable as cost deductions and how those costs are to be
allocated before such a methodology is submitted to the Congress for its approval.

The Service also said that our draft report "implie[d]" that it "failed to keep State government
officials sufficiently informed on net receipts sharing decisions and processes." The Service

11

 
further stated that it maintained an "open line of communication" with the states and that it
had many meetings on the subject.

Our report stated that "state government officials told us that they were not sufficiently
inforrned about the decision-making and cost-methodology processes and expressed concern
about the accuracy of the cost deduction computations."  We also stated that "Minerals
Management and Bureau officials stated that the Federal Government has maintained an
open line of communication with the states and has fully responded to the states' requests
for information concerning net receipts." The apparent difference of opinion regarding the

sufficiency of the information that the Service provided to the states, combined with the
Federal Government's responsibility to keep the states informed, led to our recommendation
to "improve communications with the affected state governments."

The Service also said that it believes it should continue to use its established procedures
regarding the identification and allocation of general administrative costs instead of a general
administrative overhead rate. While we acknowledge that a change is not required, we
believe that, instead of the complex and cumbersome method currently used, the Service
should explore more efficient methodologies, such as the development of a standard
overhead rate based on direct costs, for distributing general administrative expenses.

Bureau of Land Management Response and Office of Inspector General

Reply

In the July 16, 1997, response (Appendix 6) to the draft report from the Deputy Director,
Bureau of Land Management,  the Bureau indicated concurrence with the two

recommendations directed to it. Based on the response, we consider Recommendation 1
resolved and implemented and Recommendation 2 resolved but not implemented (see
Appendix 7).

Bureau's Additional Comments on Audit Report

In its response, the Bureau noted that our report stated that "the three agencies had not
adopted policies or operating procedures to ensure that the process provided equitable cost
deductions"; that the Bureau "consistently followed a cost accounting methodology for its
computations"; and that "[tlhis would seem to imply that the Bureau of Land Management
had adopted an [acceptable] operating procedure." The Bureau disagreed that the process
did not provide equitable cost deductions because we calculated the overcharges related to
the Bureau at only $1,206,563 of over $200 million. Therefore, according to the Bureau, our
report should have shown the "I- percent difference" to be "an estimation that deserves
positive comment." The Bureau also stated:

While the OIG [Office of Inspector General] contends that a portion [of the
cost deductions charged] should be prorated to Indian minerals management
in general, employees are not hired to work solely on Indian lease
management. In many cases, such work is only a minor part of their job and

12

 
would result in a small deduction. Having said this we nevertheless believe
that the OIG did point out a methodological flaw with respect to mineral

material sales.

We concluded that the Bureau consistently followed a cost accounting methodology for its
computations for fiscal years 1994 through 1996. As such, we believe that the report (page
7) adequately presents the Bureau's efforts. However, the fact that the Bureau was consistent
in identifying and allocating costs does not obviate the need for improvements in the
methodology. Although the $1.2 million in overcharges may not be material to the Bureau,
the individual amounts may be significant to the states that were overcharged.

In regard to the overcharges resulting from Indian lease management costs, the Bureau stated
that the effect of the overcharges is "virtually insignificant." As stated in our report (page
7), using historical cost data readily available to the Bureau, the states were overcharged by
as much as $579,000 in the cost pool for fiscal year 1996. We do not consider any
overcharges to the states to be insignificant. In addition, we disagree with the Bureau's
statement that charges for support costs were "appropriate." Support costs allocable to
Indian lease management and mineral material sales are not, as the Bureau states, "part of
the operations of a mineral leasing program" because these efforts (permanent change-of-
station transfers; leave surcharges; and administrative costs for training, finance, and
headquarters operations) do not solely benefit the states and should not be included in net
receipts deductions.

The Bureau disagreed with our statement that it had not corrected the cost accounting
deficiencies cited when establishing its deductions for fiscal year 1997, stating that it had not
started work on its 1997 cost deductions. However, our report said that the Bureau had not
corrected the deficiencies for establishing its fiscal year 1997 deductions; that is, the
corrections should be made before the work on the fiscal year 1997 calculations was started.
We had explained and clarified this issue at our exit conference with Bureau officials.

In accordance with the Departmental Manual (360 DM 5.3), we are requesting the Mineral
Management Service's written comments to this report by November 24, 1997. The
response should provide the information requested in Appendix 7.

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

We appreciate the assistance of officials from the Minerals Management Service and the
Bureau of Land Management in the conduct of our audit.

13

 
APPENDIX 1

NET RECEIPTS SHARING PROCESS

Under the Omnibus Budget Reconciliation Act of 1993, each state's cost deduction for net
receipts sharing is computed in a multistep process as follows:

Step 1

Prior year appropriation for the Federal Onshore Mineral Leasing Program times
50 percent equals one-half of the appropriation.

COST ALLOCATIONS

Step 2  Revenue Method

   to a state divided by total mineral revenues disbursed to all states) times the
   state's share of mineral revenues as established by law (averages about 50
   percent) equals the cost deduction.

Step 3

Cost Method

by the cognizant agency times the state's share of mineral revenues as established
by law (averages about 50 percent) equals the cost deduction.

The actual cost deduction is the lower of the amounts computed under the revenue method
or the cost method. The Minerals Management Service deducts the full year amount of cost
deductions in approximately 12 equal amounts from each state's monthly distribution of
mineral receipts.

identify the amount of the appropriation attributable to the onshore program.

*The Minerals Management Service used cost accounting procedures to identify the amount of
the
appropriation attributable to the onshore program.

14

 
                        APPENDIX 2
                         Page 1 of 4
NET RECEIPTS SHARING COST DEDUCTIONS TO STATES
   FOR FISCAL YEARS 1994,1995, AND 1996

        Fiscal Year 1994

State
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Florida
Georgia
Idaho
Illinois
Indiana
Kansas
Kentucky
Louisiana
Maryland
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
South Carolina
South Dakota
Tennessee
Texas

revenue

*The cost deduction represents the lower amount of the cost or
(rounded to four decimal places in this schedule).

multiplied

by the

state 9 s

revenue

distribution

percentage

15

 
State

Utah
Virginia
Washington
West Virginia
Wisconsin
Wyoming
TOTAL

APPENDIX 2
Page 2 of 4

Fiscal Year 1994 (Continued)

Cost      Revenue
Method     Method

Revenue
Distribution
Percentage

cost

Deduction

16

 
APPENDIX 2
Page 3 of 4

Fiscal Year 1995

State
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Florida
Georgia
Idaho
Illinois
Indiana
Kansas
Kentucky
Louisiana
Maryland
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
South Carolina
South Dakota
Tennessee
Texas
Utah
Virginia
Washington
West Virginia
Wisconsin
Wyoming
TOTAL

17

 
APPENDIX 2
Page 4 of 4

Fiscal Year 1996

State
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Florida
Georgia
Idaho
Illinois
Indiana
Kansas
Kentucky
Louisiana
Maryland
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
South Carolina
South Dakota
Tennessee
Texas
Utah
Virginia
Washington
West Virginia
Wisconsin
Wyoming
TOTAL

18

 
APPENDIX 3

COST ALLOCATION METHODOLOGIES
     BY FEDERAL AGENCY

Minerals Management Service

From fiscal years 1994 through 1996, the Service developed the net receipts sharing cost
deductions by computing two separate cost pools. First, for the cost method, the Service
calculated the Federal onshore mineral leasing program cost pool by subtracting the costs to
administer offshore and Indian leases from the prior year's Royalty Management Program
appropriation for its separate divisions and by adding the prior year's general administrative
costs. The Service then allocated the costs to the states using a method keyed to each
division's specific work load. Second, for the revenue method, the Service determined a
separate onshore program cost pool by multiplying the prior year's Royalty Management
Program appropriation by the percentage of onshore producing leases. The Service then
allocated the costs based on each state's percentage of onshore mineral leasing receipts.
Beginning in fiscal year 1997, the revenue allocation method used the same cost pool
developed for the cost allocation method. The Service accounts for about 32 percent of the
Federal agencies' total onshore program costs.

Bureau of Land Management

Since fiscal year 1994, the Bureau has computed a single cost pool by subtracting Indian
lease management costs, reimbursements for filing fees, and mineral material sales program
costs from the prior year's Energy and Minerals Management appropriation. Allowances are
added to the cost pool for the leave surcharge; Bureauwide permanent changes of station; and
costs for general administration and operation of the National Training Center, the National
Business Center, and the Washington Office. Under the cost method, the Bureau allocates
the cost pool to the states based on the budgeted cost targets for the Bureau's state offices.
For state offices serving multiple states, the cost pool is further allocated using a weighted
average based on the number of producing leases in each applicable state office. Under the
revenue method, the Bureau allocates the cost pool in the same manner as the Service. The
Bureau accounts for about 58 percent of the Federal agencies' total onshore program costs.

U.S. Forest Service

For fiscal years 1994 and 1995 and initially in fiscal year 1996, the Forest Service's onshore
program cost pool consisted of the prior year's Leasable Minerals Program appropriation
with an allowance for general administration. Under the cost method, the Forest Service
allocated the cost pool to the states based on each state's national forest acreage less national
wilderness and national recreation area acreage. Beginning in fiscal year 1996, the cost pool
and the allocation to states were based on onshore program costs recorded for each national
forest. Under the revenue method, the Forest Service allocated the cost pool in the same
manner as the Service. The Forest Service accounts for about 10 percent of the Federal
agencies' total onshore program costs.

19

 
APPENDIX 4

State

   NET RECEIPTS SHARING
OVERCHARGED COST DEDUCTIONS FOR
   FISCAL YEARS 1994~1996*

FY 1994

FY 1995

FY 1996

Total

*This schedule does not include any adjustments for preleasing costs. Also, six states (Georgia,
Indiana, North Carolina. South Carolina,
Tennessee, and Wisconsin) were excluded because they had overcharged cost deductions totaling
less than $35 each for the 3-year
period.

20

 
JIJL-234.997 08~24

OIG Central Audits

303 2368211   P. 02/14

APPENDIX 5

United States Department of the Interior Page ' Of 3

h6INEw btAl%GEMENT SERVICE
    Wahington, DC 20240

JUL I 5 1997

Memorandum

Assistant Inspector GenerEll for Audits

Subject:

Offke of Inspector Gemal Draft Audit Report C-IN-MOA-002-96, `cCosts
Recovered Throu& Net Receipts Sharing Deductions, Minerals Management
Service and Bureau of Land Management'

I appreciate the ~ppartunity to respond to this draft report on our costs recovered through the net
receipts sharing dedutions progam with the States, We are in agreement with Reccnmmnda~ion
1 of the report; Recommendation 2 does not apply ID Minerals Management Service.

We're sending you our general comments on the audit findings and specific arm on
xaecommerndzbtioa 10

Please contact Betthe Montgomery 4tt (202) 208-3976 if you have a.~~y fbrthcx questions.

Attachment

21

 
APPENDIX 5
Page 2 of 3

  MINERALS MANAGEMENT SERVICE RESPONSE TO DRAFT AUDIT REPORT
   "COSTS RECOVERED THROUQH NET RECEIPTS SHARING DEDWTIONS
I  M;NERALS WtNAGEMEN'I' SERVICE AND BUREAU OF LAND MANAGEMENT"

Audit Agency: Office of Inspector General (OIG)

Audia Number: C-INWMOA-002-96

\Ne generally agree with the recommendations of this draft repcrt, H~wm,m, we
believe some clarification of the facts would be beneficial and offer the following
comments.

The draft report suggests that the Minerals Management Service (MMS) was remiss
in not initiating timely actions to correti net receipt sharing inequities O~CCS ahey
were identified by an internal review. M1MS took action commencing in FY 1996 on
the one item that it had the authority to change (Le., allocarlons of system and
audit casts based cn lease counts). The other change (i.e., use of twa cxxt PO&)
requiredI the concurrence of Congress. After extensive briefings, the Senate
Appropriationc Subcommittee far Interior and Related Agencies inclded specific
language in their W 1997 Subcommittee repon authatiting the change. Therefore,
beglnnlng with FY 1997 payments, MMS eliminated the dual cost pool
methodology. Earlier application of this new methodology without Congressional
approval, zs implied in the draft report, would have been ill-advised.

' If the new methodology is to be applied to net receipt share deductions made in FY
1994 through 1996 as shown in Appendix 4, it should be recalculated to include
costs of audits under Section 205 of the Federal Oil and Gas Royalty hhmag~~mt
Act of 1982. These costs were never included in the reimbursement formula for
those years, even Though they clearly were costs incurred in the States. Inetuding
these costs would significantly mitigate the "overcharges" and in some instances
may result in undercharges. In addition, there may be other categories of costs,
6uah at2 MM5 audit, where we havez understated our cost to States. We will
reevaluate thase allocations in FY 1998.

The draft report implies that MMS failed to keep State government officials
sufficiently informed on net receipts sharing decisions and processes. We
understand the States oppose net receipts sharing. Nonetheless, we believe MMS
has macfe considerable efforts to ensure States are familiar with our methodology.
Not only did we maintain an open line of communication with the States and fully
respond ta their questions, aa acknowledged in the repart, but we briefed rRe Stara
and Tribal Royalty Audit Committee on our approach in May 1995, and again met
with State representatives in July 1995 to walk them through the entire neat

1

22

 
JUL-23-1997 88324

QIG Central Audits

383 2368211   P. 84A.4

UL'13'Y I

ia:j I

APPENDIX 5
Page 3 of 3

receipts sharing process. As a follswup to that meeting, we also requested
comr&nts from the States on the changes MMS was proposing ta its
`nethodologies for calculating net receipts sharing costs. At the request of the
Sra?,es, we extended the deadline for comments which delayed the timing of our
Congressional briefings. Later in the same year, we invited Wyoming and New
Mexico staff groups to visit the Royalty Management Program to review our casts
and procedures. Over several days, we provided comprehensive briefings on
virtually all Royalty Management issues of interest to the State representatives.

We would concur with OIGk observation that our 1996 procedures for idenrlfylng
and allocating general admirristrative costs were campiex and perhaps time
consuming. However, the draft report also acknowledges that our process did
result in accurate cost determinations. We understand our approach is consistent
with most private sector cost accounting systems, and because it is generally
accepted to.be a more accurare method of assessing casts than using a standard
overhead rate, we believe it should be continued.

I - Establish policies and procedures which effectively and consistently guide the
net receipts sharing process consistent with the findings outlined in thk repcm.
The Forest Service should be invited to participate in this effort, and the agencies
should improve communications wirh the affected State governments.

AGREE- MMS will coalesce and update its existing net receipts sharing policies and
procedures into a single document and provide it to the Bureau of Land
Management and the Forest Service.

While MMS believes that it has always communicated openly, honestly, and
frequently with States cancerning the methods used to determine their deductions
under Net Receipts Sharing, we alsa recognize Thar communlcatlons can always be
improved. rhecefare, as in the past, we will continue to apprise State officials of
their deductions and the methodolog)r used to derive them,, but this year we will
also provide the States a capy of the consolidated policies end procedures for their

information and use.

2. Obtain an opinion from the Office of the So
are an allocable cost deduction to the States.

(This recommerrdatiorr does not apply zo MMS,,

icitor m whether preleasing costs

2

23

 
07/17/97   12:s   e97032359395          OIG DO1         +++ CR AUDIT

United States Department of the Interior

BUREAU OF LAND MANAGEMENT
    Washington, D.C. 20240

APPENDIX 6
-Page 1 of 3

In Reply Refer TO:
1245 (WO-300)

MEMOR4NDUM

To .
  .
  rb Assistant Inspector General for Audits
     .
Tbtlgh:  6     7&l&&+-
      Bob Armstrong. 1         JUL I 7 I997
      Assistant Secretary, Land and Minerals
              ,
~~~y&+~
     .    Ditector, Bureau of Land Managem
     .
Subject:   l&sponse to Draft Audit Report on C  Recovered Through Net Receipts
      Sharing Deductions, M~IIEAS Management Service and Bureau of Land
     Managhxnt, May 1997 (Assignment NO. C-IN-MOA-002-96)

Thank you for the opportunity to respond to the subject draft audit report. In general, we
believe that the report determined that the Bureau of Land Management's (BLM) process for
calculating costs applicable to each State under the net receipts sharing program is sound.

The report indicates that improvements could be made in the methodology BLM uses to
determine net receipts sharing costs. The statistics shown by the audhs indicate, however,
that Over a 3-year period the discrepancies they cite amollnt to about $1.2 million out of over
$200 miIlian, subject to application of the law, or less than a l-percent detiation. & the law
requires ody an &mate, we believe that a more positive statement shouid be made about the
work we have done.

Attached is our response to the specific recommendations, along with our coxnmeats on

specific points made in the report.

If you have any questions, please contact Michael H. Schwartz, Senior Pmgram haiyst, at
(202) 452-5198 or Gwen Midgette, BLM Audit Liaison Officer, at (202) 452-7739.

24

 
07/17/97   12:57   D97032359395

OK DO1        =+++ CR AUDIT       @003~004

APPENDIX 6
-Page 3 of 3

`The B&I strongly believes that, since both hd use pluming and National Environmental Policy
Act compliance must be completed before a lease may be issued, there should be no question that
such costs are deductible under net receipts sharing.

The responsible official for implementation is the Assistant Director for Minerals, Realty, and
Resource Protection. A written request will be in the Solicitois Office by July 31, 1997, asking
that an opinion be provided to the BLM by the end of September 1997.

Attachmat

26

 
APPENDIX 7

STATUS OF AUDIT REPORT RECOMMENDATIONS

Finding/Recommendation
  Reference

Status        Action Required

Minerals Management Service

1

Management concurs;
additional information
needed.

The Minerals Management
Service should provide an
action plan that includes target
dates and titles of officials
responsible for implementation.

Bureau of Land Management

1

Implemented.

Resolved, not
implemented.

No further action is required
by the Bureau of Land
Management.

No further response to the
Office of Inspector General is
required. The
recommendation will be
referred to the Assistant
Secretary for Policy,
Management and Budget for
tracking of implementation.

27

 
ILLEGAL OR WASTEFUL ACTIVITIES
   SHOULD BE REPORTED TO
THE OFFICE OF INSPECTOR GENERM, BY:

Sending written documents to:            Calling:

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

Our 240hour
Telephone HOTLINE
l-800-424-5081 or
(202) 208-5300

TDD for hearing impaired
(202) 208-2420 or
l-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

North Pacific Region

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

(700) 550-7428 or
COMM 9-O11-671-472-7279

 
Toll Free Numbers:

l-800-424-5081        b w
TDD l-800-354-0996     5
            c m

FTS/Commercial Numbers:

w
F

(202) 208-5300        c
TDD (202) 208-2420     t D D

1849 C Street, N.W.
Mail St ,op 5341
Washin .eton, D.C. 20240