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Audit Report - A-07-97-52004


Office of Audit

Incentive Payments Claimed by the Colorado Department of Human Services for its Disability Determination Services (A-07-97-52004) 1/20/98

TABLE OF CONTENTS

EXECUTIVE SUMMARY

INTRODUCTION

RESULTS OF REVIEW

DDS INCENTIVE PAYMENTS WERE NEVER APPROVED BY SSA

• SSA Has Clear Authority to Approve or Disapprove DDS Incentive Payments

• SSA Has Established Precedence in the Incentive Proposal Review Process

• The SSA Approval Process Provides Assurance that SSA and DDS Goals Are Congruent

DDS INCENTIVE PAYMENTS DID NOT COMPLY WITH THE APPLICABLE COST PRINCIPLES IN OMB CIRCULAR A-87

• DDS Incentive Payments Were Not Funded from the Personal Services Appropriation as Required by Colorado Legislation

• The 1 Percent State Incentive Payment Legislative Guideline Should Have Been Applied to the DDS Personal Services Appropriation

DDS INCENTIVE PAYMENTS WERE NOT ALLOCATED UNIFORMLY AMONG FEDERAL AND NONFEDERAL ACTIVITIES

CONCLUSIONS AND RECOMMENDATIONS

APPENDICES

APPENDIX A - Colorado Attorney General`s Comments (not available online)

APPENDIX B - Major Contributors to This Report  

EXECUTIVE SUMMARY

OBJECTIVE

The objective of this audit was to determine the amount and allowability of incentive payments made under the Colorado pay-for-performance pilot legislation.

BACKGROUND

Section 24-50-104(8)(d)(I) of the Colorado Revised Statutes created, in the State personnel system, a performance-based pay pilot program under which an employee or team of employees could participate on a voluntary basis, subject to the approval of the head of the State agency in which the employee or team is employed. The pilot program provided for team-based performance incentives consisting of bonuses that could be awarded to each employee on a team of employees participating in the pilot program.

The Colorado Disability Determination Services (DDS) submitted a team-based

pay-for-performance proposal to its parent Agency, the Department of Human Services (DHS), in December 1995. The proposal was approved by DHS in February 1996, but not submitted to the Social Security Administration (SSA) for approval until June 1996. SSA notified DDS to deobligate funding for potential DDS incentive payments resulting from the proposal until the pertinent legal issues could be assessed. However, apparently acting on advice of the Colorado Attorney General, the DDS, on December 31, 1996, paid $234,895 to 125 employees.

Our audit found that the incentive payments were never approved by SSA. On December 6, 1996, the SSA Office of General Counsel issued a legal opinion to the Associate Commissioner for Disability on the incentive payments, declaring them unallowable under applicable cost principles contained in Office of Management and Budget (OMB) Circular A-87 because the incentive payments were to be funded from a source other than the amount obligated for personal services as required by the Colorado legislation. Therefore, DDS was notified on January 15, 1997 that the incentive payments were unallowable. Our audit also found that the incentive payments were not uniform (as required by OMB Circular A-87) with respect to both federally and nonfederally funded team awards.

RESULTS OF REVIEW

. DDS INCENTIVE PAYMENTS WERE NEVER APPROVED BY SSA

. DDS INCENTIVE PAYMENTS DID NOT COMPLY WITH THE APPLICABLE COST PRINCIPLES IN OMB CIRCULAR A-87

. DDS INCENTIVE PAYMENTS WERE NOT ALLOCATED UNIFORMLY AMONG FEDERAL AND NONFEDERAL ACTIVITIES

RECOMMENDATIONS

• DDS should refund to SSA $234,895 used for unallowable incentive payments.

• DDS should ensure that future incentive payment proposals comply with applicable State and Federal regulations and are approved by SSA prior to payment.

AGENCY COMMENTS

The Colorado Attorney General`s office agreed that DDS paid incentives of $234,895 to 125 DDS employees in December 1996, but did not agree with the recommendation to refund those incentives to SSA. The State disagreed with SSA`s legal basis to approve or disapprove DDS incentive payments. The State also contends that although it was not formally required to notify SSA of the impending payments, it did so informally several months prior to the June 21, 1996 formal submission.

Regarding the precedent citations in the audit report of SSA`s disapproval of the Washington and Texas incentive proposals, Colorado indicated that the States of Kentucky, Florida, and Utah also used incentive payment plans. The State also believes that the DDS appropriation of $13,959,997 should have been entirely allocated to personal services. Finally, the State indicated that the pilot program, although available to all State employees, cannot be uniform as some employees may qualify and others may not.

OIG RESPONSE

SSA has clear authority to approve or disapprove DDS incentive payments. Section 221(f) of the Social Security Act (Act) indicates that money paid to a State under section 221(e) should be used solely for the purpose for which it is paid, i.e. to make disability determinations, and that money paid but not so used should be returned to the trust fund. The $234,895 of incentive payments paid by DDS to its employees were not necessary costs of making disability determinations, and therefore could not be funded.

Washington and Texas were cited as precedents for the necessity of SSA`s approval in the incentive proposal review process because the circumstances of SSA rejecting their proposals involved payment from documented savings, similar to the Colorado DDS proposal. Three other incentive proposals by Kentucky, Florida, and Utah were cited by Colorado in its response. We noted that only one of those proposals, Kentucky, was similar to the Colorado proposal and Kentucky required in its incentive legislation that any incentive payments conform to applicable Federal regulations.

Colorado cited DDS`s legislative appropriation of $13,959,997 for State Fiscal Year (FY) 1996 as the appropriate amount for its personal services figures. However, the $13,959,997 appropriation included funding for other costs to operate DDS in addition to personal services costs. Internal personal services planning documents cite $7,776,366 to fund DDS for FY 1997 during which the incentive payments were made and $7,656,986 for FY 1996. Finally, we realize that incentive payments by their nature cannot be uniform to all State employees. However, these payments were clearly biased to Federal awards, and even more biased to DDS. Please refer to the sections entitled Agency Comments and OIG Response for more details. See Appendix A for the full text of the Colorado Attorney General`s comments.

 

INTRODUCTION

"A State agency that participates in team-based performance incentives under the pilot program may fund the performance incentives with not more than 1 percent of the State agency`s annual appropriation for personal services. A State agency may have one or more teams of employees participating in the team-based performance incentives under the pilot program."

Chronology of DDS Actions Preceding Incentive Payments

On December 19, 1995, the Colorado DDS submitted a pay-for-performance team proposal to its parent agency, the DHS. The proposal specified $617,688 of total anticipated savings in consultative examinations (CE) and all other costs for the 9-month period October 1, 1995 through June 30, 1996, compared to similar costs for the period October 1, 1994 through June 30, 1995. The savings included $496,706 for medical costs, and $120,982 for all other costs. The proposal stipulated that DDS would retain half of the savings, or $308,844, for incentive payments to its employees, and the other half would be returned to SSA. The proposal was approved by DHS on February 23, 1996.

On June 21, 1996, DDS submitted the same proposal to SSA Region VIII for approval. On August 2, 1996, the Associate Commissioner for Disability notified the Region VIII Commissioner and on August 20, 1996, the Region VIII Commissioner, in turn, notified DDS that it should not obligate funds or make any incentive payments until the pertinent legal issues could be assessed.

On September 27, 1996, the SSA Region VIII Commissioner noted that DDS had obligated funds in the third quarter of FY 1996 for incentive payments in direct violation of the August 20, 1996 directive. DDS was formally notified that the unauthorized funds for incentive payments should be deobligated.

On December 6, 1996, the SSA Office of General Counsel issued a legal opinion to the Associate Commissioner for Disability on the incentive payments, declaring them unallowable under applicable cost principles contained in OMB Circular A-87 because they were to be funded from a source other than the amount obligated for personal services as required by the Colorado legislation.

On December 17, 1996, the original $617,688 in estimated savings was decreased to $469,791. The revision was based on an increase in actual CE costs to $58.31 per case for the period October 1, 1995 through June 30, 1996 compared to the original estimate of $52.87 per case. One-half of the $469,791, reduced the amount of potential incentive payments from $308,844 to $234,895.

On December 11, 1996, the Colorado Attorney General’s office, in a letter to DHS, stated that it ". . . would not advise against the department`s going ahead with these payments . . . ." Acting on this advice, on December 31, 1996, DDS paid $234,895 in incentive payments to 125 employees. The incentive payments were based on a combination of monthly salaries and each employee`s rating for the 6-month period January through June 1996.

On January 8, 1997, the Associate Commissioner for Disability gave the Region VIII Commissioner final notice that, based on the December 6, 1996 legal opinion, the incentive payments were unallowable. On January 15, 1997, the Region VIII Commissioner notified DDS that the incentive payments were unallowable.

On January 16, 1997, SSA requested that the Office of the Inspector General audit the incentive payments made under the Colorado pay-for-performance pilot. Our audit corroborated SSA`s legal opinion rendering the incentive payments unallowable because the payments were funded from a source other than the amount obligated for personal services as required by the Colorado legislation. Our audit also found that the incentive payments were neither approved by SSA nor uniform with respect to both Federal and nonfederal team awards.

SCOPE AND METHODOLOGY

Our methodology included a 100 percent review of the incentive payments made on December 31, 1996 to determine how they were computed and paid. We also developed all pertinent issues presented by SSA in its legal opinion pertaining to the allowability of the DDS incentive payments. We reviewed the facts in conjunction with the applicable regulations, and presented our conclusions. Specifically, we reviewed the following information:

1. The amount and number of incentive payments made to DDS employees on December 31, 1996. We also reviewed DDS`s method of computing incentive payments, using the base period of October 1, 1995 through June 30, 1996.

2. Colorado Senate bill 94-222, which amended section 24-50-104 of the Colorado Revised Statutes by adding sections 24-50-104(8)(d)(I) and 24-50-104(8)(d)(II) and created a performance-based pay pilot program.

3. State and Federal regulations applicable to incentive payments.

4. Related DDS incentive proposals and SSA’s actions on those proposals.

5. Applicable correspondence among DDS, DHS, the State Attorney General`s office, and SSA.

Audit field work was conducted during February 1997 at the Colorado DDS and the SSA Region VIII office in Denver, Colorado, and continued via telecommunications from our Kansas City field office during March and April 1997. Our audit was performed in accordance with generally accepted government auditing standards.

RESULTS OF REVIEW

We determined that on December 31, 1996, DDS paid incentives of $234,895 to 125 employees. Authority for the payments was based on a pay-for-performance plan which was approved by DHS, DDS`s State parent agency. However, DDS did not receive approval from SSA before making the incentive payments. SSA has clear authority to approve or disapprove DDS expenditures and has established precedence in reviewing and rejecting incentive payment proposals which were based on savings, not obligated DDS funds. Furthermore, the DDS incentive payments did not comply with applicable cost principles in OMB Circular A-87, dated May 4, 1995, entitled, "Cost Principles for State, Local and Indian Tribal Governments."

The cost principles require costs to be authorized (or not prohibited) under State laws or regulations and uniformly applied to both Federal and other governmental activities. The incentive payments were funded from surplus funds, or savings, but not from DDS’s personal services appropriation as required by the Colorado pay-for-performance pilot legislation. The incentive payments were not uniformly allocated among Federal and other governmental activities.

DDS INCENTIVE PAYMENTS WERE NEVER APPROVED BY SSA

DDS never obtained the required SSA approval for incentive payments made to employees. This situation may have been caused, at least in part, by the Colorado Attorney General’s tacit approval of the incentive payments. DDS paid the incentive payments before SSA formally notified DDS that the payments were unallowable.

DDS relied primarily on communications with DHS, rather than SSA, in developing the proposal and obtaining approval for the pay-for-performance pilot. DDS submitted the proposal to DHS in December 1995 and obtained approval on February 23, 1996. However, DDS did not formally present the proposal to SSA until June 21, 1996.

Therefore, SSA was at a disadvantage in attempting to be timely in its review of the proposed incentive payments. SSA, in an August 20, 1996 letter from the Region VIII Commissioner to the DDS Director, specified that no incentive payments should be made until pertinent legal issues could be assessed.

SSA Has Clear Authority to Approve or Disapprove DDS Incentive Payments

Section 221(a)(1) of the Act indicates that a State may elect to make disability determinations on behalf of the Commissioner. Section 221(e) of the Act entitles a State that has elected to make disability determinations to receive payment from the trust funds for the cost to the State of making those disability determinations.

Furthermore, section 221(f) of the Act requires that money paid to a State under section 221(e) be used solely for the purpose for which it is paid and that money paid but not so used should be returned to the trust funds. SSA`s approval is clearly required by 20 Codified Federal Register, Chapter III, sections 404.1626(d) and 416.1026(d) dated April 1, 1997 which state, "The State may not incur or make expenditures for items of cost not approved by us or in excess of the amount we make available to the State."

SSA Has Established Precedence in the Incentive Proposal Review Process

The Washington DDS, in 1988, requested SSA approval for a Teamwork Incentive Program proposal for providing cash awards to DDS employees to be funded out of documented savings achieved by DDS. SSA declined to approve the proposal because Federal funds can only be used for necessary costs in making disability determinations and that, by definition, only the funding amount obligated by DDS can be considered in a necessary cost determination.

SSA used the same basis as that used in Washington to deny a Texas State Employee Incentive Program (SEIP) proposal in 1991. SSA again stated that Federal funds must be used only for necessary costs in making disability determinations.

The Associate Commissioner for Disability, in an August 20, 1991 memorandum, to the Dallas Regional Commissioner, noted that the predominate characteristic of the SEIP was that awards were to be paid from documented savings achieved by suggestions for streamlining DDS processes. Since savings were not based on funds obligated, the costs were not considered necessary and the proposal was denied. A subsequent Texas achievement bonus program proposal was approved in 1992 because it was open to all State employees and was to be funded not from savings, but from the regular DDS salary appropriation.

The SSA Approval Process Provides Assurance that SSA and DDS Goals Are Congruent

To ensure that DDSs make accurate and timely disability decisions, SSA needs to review and approve or disapprove any potential incentive payments. Without that involvement, there is no assurance that DDS performance goals and/or cost-cutting measures, which could be linked to potential incentive payments, are congruent with SSA goals. With the advent of the Government Performance and Results Act (GPRA) of 1993, Public Law 103-62, 107 Stat. 285, SSA must now pay particular attention to DDS performance. Since DDS performance and potential incentive payments may be linked, SSA needs to ensure that DDS goals are congruent with Federal criteria on claims processing times and accuracy rates, and GPRA goals.

DDS INCENTIVE PAYMENTS DID NOT COMPLY WITH THE APPLICABLE COST PRINCIPLES IN OMB CIRCULAR A-87

The DDS incentive payments did not comply with applicable cost principles contained in OMB Circular A-87. To be allowable under Federal awards, costs must meet the following two factors:

1. section C.1.c. states that costs must "Be authorized or not prohibited under State or local laws or regulations," and

2. section C.1.e. states that costs must "Be consistent with policies, regulations, and procedures that apply uniformly to both Federal awards and other activities of the governmental unit."

DDS Incentive Payments Were Not Funded from the Personal Services Appropriation as Required by Colorado Legislation

DDS did not fund its incentive payments from its personal services budget as required by the Colorado legislation, but instead funded the payments directly from surplus funds, or savings in CEs and all other costs. The CE medical expense budget authorization was specifically for medical costs to purchase CEs and the other cost budget authorization provided for communications, maintenance, travel and supplies. Neither of these funding sources was related to the State agency`s annual appropriation for personal services.

Section 24-50-104(8)(d)(II) of the Colorado Revised Statutes specifies that, "A State agency that participates in team-based performance incentives under the pilot program may fund the performance incentives with not more than 1 percent of the State agency’s annual appropriation for personal services." Since DDS did not fund the incentive payments from the personal services appropriation, it was in violation of section C.1.c of OMB Circular A-87 which states that costs must ". . . be authorized or not prohibited under State or local laws or regulations."

The 1 Percent State Incentive Payment Legislative Guideline Should Have Been Applied to the DDS Personal Services Appropriation

The State has defined State agency as not just the DDS, but the entire DHS. Using the State’s definition, DDS would have been well within the 1 percent guideline if it had based the incentive payments on the DHS appropriation for personal services for the State FY July 1, 1995 through June 30, 1996. This calculation would have resulted in $1,540,022 being authorized for incentive payments.

However, we noted that SSA established precedence by approving the Texas SEIP based on an incentive payment allocation from the Texas DDS’s personal services appropriation (see page 6). We believe that, instead of using savings as a basis for the incentive payments, the Colorado DDS should have calculated the maximum amount of incentive payments by applying 1 percent to its personal services appropriation. This calculation, for the budget period July 1, 1995 through June 30, 1996, would have resulted in maximum incentive payments of $76,570 (1 percent times $7,656,986), or $158,325 less than the $234,895 actually paid.

DDS INCENTIVE PAYMENTS WERE NOT ALLOCATED UNIFORMLY AMONG FEDERAL AND NONFEDERAL ACTIVITIES

Since the Colorado pay-for-performance pilot legislation was enacted on May 31, 1994, the State of Colorado paid $98,770 in incentive awards to 408 employees for the period July 1, 1994 through June 30, 1995. None of those payments were made for federally funded activities. The State of Colorado paid $357,805 to 461 employees during the period July 1, 1995 through June 30, 1996. Of this amount, $261,605 was Federal ($234,895 to the DDS and $26,710 to the Department of Higher Education, Student Loan Program).

Federal awards were 4.7 times greater than nonfederal awards. Furthermore, DDS awards were 5.7 times greater than nonfederal awards. The awards appeared to be disproportionately allocated for Federal activities, with particular emphasis on DDS. Therefore, the DDS incentive payments were not uniformly allocated among Federal and other governmental activities in accordance with the uniformity requirement established in OMB Circular A-87, section C.1.c. 

CONCLUSIONS AND RECOMMENDATIONS

DDS did not receive SSA`s approval before paying $234,895 of incentive payments. SSA has clear authority to approve or disapprove DDS expenditures and has established precedence in rejecting proposals based on savings, and not obligated personal services funds. Furthermore, the DDS incentive payments did not comply with OMB Circular A-87. The cost principles require costs to be:

1. authorized (or not prohibited) under State laws or regulations, and 2. uniformly applied to both Federal and other governmental activities. The incentive payments were funded from surplus funds, or savings, not from the DDS personal services appropriation as required by the Colorado pay-for-performance pilot legislation. Finally, the incentive payments were not uniformly allocated among Federal and other governmental activities.

RECOMMENDATIONS

6. DDS should refund to SSA $234,895 used for unallowable incentive payments.

7. DDS should ensure that future incentive payment proposals comply with applicable State and Federal regulations and are approved by SSA prior to payment.

AGENCY COMMENTS

The Colorado Attorney General`s office provided comments to our findings and recommendations. They agreed that the Disability Determination Services (DDS) paid incentives of $234,895 to 125 DDS employees in December 1996 but did not agree with the recommendation to refund those incentives to SSA. The State disagreed with SSA`s legal basis to approve or disapprove DDS incentive payments. The State also contends that, although it was not formally required to notify SSA of the impending payments, it did so informally several months prior to the June 21, 1996 formal notification.

Regarding the precedent citations in the audit report of SSA`s disapproval of the Washington and Texas incentive proposals, Colorado indicated that the States of Kentucky, Florida, and Utah also used incentive payment plans. The State also believes that the DDS appropriation of $13,959,997 for State FY 1996 would have applied to DDS personal services. Finally, the State indicated that the pilot program, although available to all State employees, cannot be uniform as some employees may qualify and others may not.

OIG RESPONSE

SSA has clear authority to approve or disapprove DDS incentive payments. Section 221(f) of the Social Security Act (Act) indicates that money paid to a State under section 221(e) should be used solely for the purpose for which it is paid, i.e. to make disability determinations, and that money paid but not so used should be returned to the trust fund. The $234,895 of incentive payments paid by DDS to its employees were not necessary costs of making disability determinations, and therefore could not be funded.

We cited the States of Washington and Texas as precedents for the necessity of SSA`s approval in the incentive proposal review process because the circumstances of SSA rejecting their proposals involved payment from documented savings, similar to the Colorado DDS proposal. Only one of the other three State incentive proposals cited in the response, Kentucky, was similar to the Colorado proposal. The Florida and Utah proposals differed from Colorado in that proposed incentive payments were not based on processing time and accuracy goals, but on specific targets of increased productivity, while maintaining accuracy and processing time standards. Furthermore, unlike Colorado, neither the Florida nor Utah proposals authorized the use of savings to justify incentive payments.

We noted that the Kentucky proposal was similar to the Colorado proposal in that cost savings could be allocated to salary incentives. However, Kentucky required in its incentive legislation that any incentive payments conform to applicable Federal regulations. Furthermore, Kentucky required, in its recommendation for State approval, that paying incentives would require documenting baselines for savings, processing time, and cost per case and relating those items to one another.

Colorado cited the DDS legislative appropriation of $13,959,997 for State FY 1996 as the appropriate amount for DDS personal services. However, the $13,959,997 appropriation included funding for other costs to operate DDS in addition to personal services costs. Internal personal services planning documents cite DDS allocations as $7,776,366 for FY 1997 during which the incentive payments were made and $7,656,986 for the FY 1996 proposal period.

We recognize that the State is in a better position to interpret the legislated 1 percent requirement wherein it believes that the requirement should be applied to the entire DHS agency instead of just DDS. However, we again invoke the precedent established by Texas (see pages 5-6) wherein incentives were approved by SSA only if the costs of the program came from the DDS personal services appropriation. SSA`s approval of the Texas achievement bonus program was based on sound accounting principles wherein the incentive payments were matched against the costs of individuals generating those incentives. Using generally accepted accounting principles and matching revenue with expenses during the proposal period of October 1, 1995 through June 30, 1996, the maximum incentives allowable to Colorado would have been $76,570 ($7,656,986 times 1 percent).

We also noted that since SSA did not approve the Colorado incentive payments, there was no assurance that DDS performance goals and/or cost-cutting measures, which could be linked to potential incentive payments, were congruent with SSA goals.

Finally, we realize that incentive payments, by their nature, cannot be uniformly applied to all State employees. However, the Colorado incentive payments were clearly biased to Federal awards, and even more biased toward the Colorado DDS (see page 8). We continue to recommend that the DDS refund to SSA $234,895 used for unallowable incentive payments. We further recommend that DDS ensure that future incentive payments comply with applicable State and Federal regulations and be approved by SSA prior to payment.

APPENDICES

APPENDIX B

MAJOR CONTRIBUTORS TO THIS REPORT 

Office of the Inspector General

Bill Fernandez Director, Program Audits (Western Division)
Fred Uehling Deputy Director, Program Audits
Ronald Bussell Auditor

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