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Auditor: State system to handle stimulus funds is ‘high risk’

State Auditor Elaine Howle says California's system of handling billions of dollars of federal stimulus money is at a "high risk," in part because so much money is coming in so quickly.

Howle told the governor and legislative leaders that earlier reviews raised concerns of problems of internal controls at some state agencies — including the Department of Social Services, the Department of Health Care Services and the Employment Development Department — prompting her to declare the state's fiscal administration system is at a "high risk" of making errors in handling the funding.

Some of those issues have since been resolved.

"More than one year ago we fully corrected the auditor's finding…," said Health Care Services spokesman Norman Williams. "Strong actions have been taken to address the remaining findings, ensuring that none of the issues in question will have any impact on the department's ability to properly claim increased federal funding."

"We simply don't agree with the Bureau of State Audits' assessment," said Lizelda Lopez of the Department of Social Services. "None of the findings previously identified by the BSA will have any bearing on the Department's administration of ARRA funds. The Department's financial systems and controls are excellent and pose no risks for tracking of ARRA funds."

In an April 22 letter, Howle cited the "vast amount of funds California expects to receive under the Recovery Act in the current and next fiscal year, the extensive requirements that the recovery act places on recipients of these funds, the limited amount of time the state has to spend some of these funds, and the risk that California may lose Recovery Act funds if it fails to comply with the requirements."

But Howle, the Legislature's fiscal watchdog over the state bureaucracy, said the unprecedented magnitude of the federal funding requires the tightest controls over every aspect of distributing and reporting the federal money. The earlier audit reported dozens of findings related to internal-control problems in various agencies.

She plans to report a detailed risk assessment at a meeting this month of the Joint Legislative Audit Committee, the two-house committee that provides broad supervision to Howle's office and assigns audits.

"We've been working together on this, and she's developing a matrix of all the departments. We will know which programs will be at most risk," said Alyson Huber, D-Lodi, the chairwoman of the Audit Committee. The term "high risk," she added, is not a judgment on a department but an acknowledgment that there is a potential for problems. "It is a process of looking at the departments, and making sure they have those internal controls."

Howle has the authority to order audits of high-risk operations. By designating the state's entire system of handling federal funding as "a statewide high-risk issue area," she is invoking her authority to conduct audits on merits and to make them a high priority. When she performs those reviews or audits, she notifies the committee of her actions.

Howle is not the only high official concerned about the huge infusion of stimulus money.

Gov. Schwarzenegger appointed Los Angeles City Controller Laura Chick to track California's huge stimulus package and make sure the funds are distributed correctly. Chick, whose audits of Los Angeles municipal government often have embarrassed local officials there, now will serve as an inspector geneeral and direct her attention to the federal money. The governor earlier appointed two people in his administration – a top deputy in the Department of Finance and the head of the Office of Planning and Research – to track the stimulus money.

Of the $787 billion economic jump-start package approved by the Democrat-controlled Congress and signed into law by President Obama, California is expected to receive some $81.4 billion, which includes $35.4 billion in tax breaks and $46 billion for programs.

Of the $46 billion, some $29 billion will go to state programs or state-private programs, another $5.8 billion will be shared between federal and non-state entities and the destination of the remaining $12.2 billion has not yet been determined, although it likely will go to state and local agencies.

The state says that 14 agencies are expected to receive federal money immediately, and at least three will each get more than $300 million.

The largest single recipient of federal money is the Medi-Cal Program, a state-federal program that provides health care to 6.7 million Californians, is scheduled to obtain more than $10 billion.

A comprehensive state audit completed for the 2006-07 fiscal year – the most recent period for which findings were available – identified dozens of findings related to "internal controls over federal funds." A sampling of 46 of those findings is available at the auditor's web site, http://www.bsa.ca.gov/. The auditor also intends to post a more detailed list of high-risk findings later this week. 

Howle said examples of those findings included an issue of a federal program at the state Department of Health Care Services, in which "business users had the ability to change data and disable any controls on the system, thus removing the ability to trace actions of the user."

In another example, the Employment Development Department, Howle said, "did not follow the U.S. Department of Labor's instructions for reporting training costs for one of its federal programs and could not demonstrate the accuracy and completeness of the information it received from its field offices that was used to calculate several figures ultimately reported to the federal government."

Separate audit reports showed that the Department of Social Services, "among other weaknesses, had inefficient and costly controls over cash receipts, lacked a comprehensive information technology solution to manage accounts receivable and cash receipts, and was late in recording manual cash disbursements."


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