Financial Management: Implementation of the Cash Management Improvement
Act (Letter Report, 01/08/96, GAO/AIMD-96-4).
The Cash Management Improvement Act seeks to promote equity in the
exchange of funds between the federal government and the states. This
legislation was enacted in response to allegations that states either
drew cash advances well before federal funds were needed to make
payments or used their own funds to satisfy federal program needs and
were not reimbursed promptly by federal agencies. GAO found that the act
has heightened awareness of cash management at both the state and
federal levels. The Treasury Department, federal agencies, and the
states have made substantial progress in implementing the act. By
revising the act's regulations to streamline the process and by
emphasizing the results of single audits as a way to oversee state
activities and enforce the act's requirements, the Treasury's Financial
Management Service should be able to improve the act's effectiveness and
help alleviate any concerns about administrative burden.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: AIMD-96-4
TITLE: Financial Management: Implementation of the Cash Management
Improvement Act
DATE: 01/08/96
SUBJECT: Budget obligations
Cash management
Auditing procedures
Reporting requirements
Debt
State-administered programs
Interest rates
Federal aid to states
Electronic funds transfer
Intergovernmental fiscal relations
IDENTIFIER: National School Lunch Program
Special Supplemental Food Program for Women, Infants, and
Children
WIC
Food Stamp Program
USDA Puerto Rico Nutrition Assistance Program
Unemployment Insurance Program
Job Training Partnership Act Program
JTPA
Job Opportunities and Basic Skills Training Program
JOBS Program
HHS Child Support Enforcement Program
HHS Low Income Home Energy Assistance Program
Social Services Block Grant
California
Colorado
Florida
Indiana
Maryland
New York
Ohio
Pennsylvania
Texas
Tennessee
District of Columbia
Georgia
Supplemental Security Income Program
**************************************************************************
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Cover
================================================================ COVER
Report to the Congress
January 1996
FINANCIAL MANAGEMENT -
IMPLEMENTATION OF THE CASH
MANAGEMENT IMPROVEMENT ACT
GAO/AIMD-96-4
Implementation of CMIA
(901673)
Abbreviations
=============================================================== ABBREV
CMIA - Cash Management Improvement Act
FMS - Financial Management Service
HHS - Department of Health and Human Services
OMB - Office of Management and Budget
TSA - Treasury-State Agreement
Letter
=============================================================== LETTER
B-270258
January 8, 1996
To the President of the Senate and the
Speaker of the House of Representatives
The Cash Management Improvement Act (CMIA) of 1990, as amended
(Public Law 101-453), focuses on promoting equity in the exchange of
funds between the federal government and the states. It addresses
the flow of billions of dollars monthly to states to administer
numerous federal programs involving payments to individuals or
vendors. This legislation responds to previously alleged instances
in which either the states drew cash advances well before federal
funds were needed to make payment or states used their own funds to
satisfy federal program needs and were not reimbursed in a timely
manner by the federal agencies.
The act required the Secretary of the Treasury, along with the
states, to establish equitable funds transfer procedures, and
provided that states would pay interest to the federal government if
they draw funds in advance of need and that the federal government
would pay interest to states if the federal program agency does not
reimburse the states in a timely manner when states use their own
funds.
The act provides a framework for calculating interest liabilities of
the state and federal government and calls for an annual exchange of
the net interest owed by either party. The three key agents in the
exchange are the Department of the Treasury's Financial Management
Service (FMS), federal program agencies, and the 56 states and
territories.\1 This report, which is required by CMIA, assesses these
entities' implementation during 1994--the first year of the act.
During fiscal year 1994 (which, for the majority of states, included
9 months of the states' first fiscal year under CMIA), the federal
government obligated over a reported $150 billion in federal funds to
the states for programs covered under the act.
--------------------
\1 The act defines "state" to mean the 50 states, the District of
Columbia, and the 5 territories (American Samoa, Commonwealth of the
Northern Mariana Islands, Guam, Puerto Rico, and the Virgin Islands).
This report adopts the act's definition.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
We found that the three key agents of CMIA had established structures
and processes to implement the act and had made substantial progress
in achieving the act's purpose of equitable, timely funds transfers.
The first year of implementation of CMIA resulted in a cumulative net
state interest liability due to the federal government of
approximately $34 million--comprised of over $41 million owed by the
states offset by $4.7 million and $2.5 million owed the states by the
federal government for interest and reimbursable costs, respectively.
Although some funds transfers were not interest neutral, taken in
context, this liability is very small compared to the over $150
billion obligated in fiscal year 1994 for the programs covered under
CMIA. In fact, much of the state interest liability was beyond state
agencies' immediate control and was instead attributed to certain
states' laws which require that they have the federal funds in the
bank before they make any associated disbursements. Four of the 12
states that we visited had a state interest liability totaling $18.5
million which primarily resulted from the states' adherence to such
laws.
FMS and the federal program agencies adequately carried out their
responsibilities under the act. In addition, the 12 states we
visited generally complied with CMIA requirements and indicated that
the act had heightened their awareness of cash management. However,
several state officials viewed some of the administrative tasks to
implement CMIA as burdensome. CMIA envisioned added costs and
authorized states to submit claims to FMS for much of the associated
administrative efforts. The level of effort in completing tasks,
such as preparing Treasury-State Agreements (TSAs) and annual
reports, developing clearance patterns, and computing interest
liabilities should be less onerous now that the states have
established the initial processes for generating this information.
Finally, we found that the Office of Management and Budget's (OMB)
published guidance for planning audits under the Single Audit Act of
1984 does not contain suggested audit procedures for testing
compliance with CMIA requirements. As a result, we found that 1994
Single Audit Act reports for the states we visited lacked consistency
and comprehensiveness in checking for compliance with Treasury
regulations.
BACKGROUND
------------------------------------------------------------ Letter :2
Prior to CMIA, the timing of federal funds transfers to states was
governed by the Intergovernmental Cooperation Act, Public Law 90-577.
That law allowed a state to retain for its own purposes any interest
earned on federal funds transferred to it "pending its disbursement
for program purposes."
The House Committee on Government Operations, when considering the
CMIA legislation in 1990, noted that the Intergovernmental
Cooperation Act had been "the source of continuing friction between
the states and the Federal Government." The House Committee stated
that under the Intergovernmental Cooperation Act, "the States need
not account to the Federal Government for interest earned on Federal
funds disbursed to the states prior to payment of program
beneficiaries." Several years earlier, in 1988, when the Senate
Committee on Governmental Affairs had looked into this matter, it
found that as a result, "some administering departments at the state
level were drawing down Federal funds too far in advance of need,
costing the Federal Government foregone interest."
Both committees pointed out, however, that whenever the federal
government complained that states profited unduly from early
drawdowns, states would recite "numerous instances where they lose
interest opportunities because the Federal Government is slow to
reimburse them for moneys the states advance to fund Federal
programs." At the request of the Senate Committee, a Joint
State/Federal Cash Management Reform Task Force, comprised of
financial management representatives from six states and six federal
agencies, including OMB and Treasury, was formed in 1983 to seek fair
and equitable solutions to the aforementioned problems relating to
the transfer of funds between the federal government and the states.
Its work contributed to passage of CMIA in October 1990.
The House Committee expected that CMIA would "provide a fair and
equitable resolution to those differences." It would do so, according
to the committee, by establishing "equitable cash transfer
procedures, procedures whereby neither the Federal nor state
governments profit or suffer financially due to such transfers."
CMIA, as enacted in 1990, requires the federal government to schedule
transfers of funds to states "so as to minimize the time elapsing
between transfer of funds from the United States Treasury and the
issuance or redemption of checks, warrants, or payments by other
means by a state," and expects states to "minimize the time elapsing
between transfer of funds from the United States Treasury and the
issuance or redemption of checks, warrants, or payments by other
means for program purposes." To accomplish this goal, CMIA directed
the Secretary of the Treasury to negotiate agreements with the
individual states to specify procedures for carrying out transfers of
funds with that state. It authorized the Secretary to issue
regulations establishing such procedures for states with which the
Secretary has been unable to reach agreement.
The Senate Governmental Affairs Committee explained when considering
a 1992 amendment to CMIA that the act is "meant to provide a
self-enforcing incentive for both state and Federal agencies to time
the transfer of Federal funds as closely as possible to their actual
disbursement for program purposes, so that neither... will lose the
time value of their funds." The "self-enforcing incentive" that the
Senate Committee refers to is the act's interest liability provision.
States are required to pay interest to the United States on federal
funds transferred to the state from the time those funds are
deposited to the state's account until the time the state uses the
funds to redeem checks or warrants or make payments by other means
for program purposes. If a state advances its own funds for program
purposes prior to a transfer of federal funds, the state is entitled
to interest from the United States from the time the state's own
funds are paid out to redeem checks or warrants, or make payments by
other means, until the federal funds are deposited to the state's
bank account.
CMIA requires each state to calculate any interest liabilities of the
state and federal government and calls for an annual exchange of the
net interest owed by either party. Other key requirements of the act
and/or Treasury\2 rules and regulations are as follows:
The Department of the Treasury must establish rules and regulations
for implementing CMIA.
States and FMS may enter into Treasury-State Agreements (TSAs) that
outline, by program, the funding technique and the clearance
pattern\3 states will use to draw down\4 funds from the federal
government. If any state and FMS do not enter into such an
agreement, FMS will designate the funding technique and the
interest calculation method to be used by that state.
States may claim reimbursement from Treasury annually for allowable
direct costs relating to development and maintenance of
clearance patterns and the calculation of interest.
States must prepare and submit to FMS an annual report that
summarizes by program the results of the interest calculation
from drawdowns and may include any claims for reimbursement of
allowable direct costs.
The federal program agencies are required to (1) schedule transfers
of funds to the states so as to minimize the time elapsing
between the disbursement of federal funds from the U.S.
Treasury and the issuance and redemption of checks, warrants, or
payments by other means by a state and (2) upon Treasury's
request, review annual reports submitted by the states for
reasonableness and accuracy.
During fiscal year 1994 (which, for the majority of states, included
9 months of the states' first fiscal year under CMIA), the federal
government obligated over a reported $150 billion in federal funds to
the states for programs covered under the act. (See table 1.) These
programs were funded by the Departments of Health and Human Services
(HHS), Labor, Education, Agriculture, Transportation and the Social
Security Administration. We did not independently verify the amounts
in table 1.
Table 1
Federal Program Funding Provided to the
States During the First Year of CMIA
(Dollars in thousands)
Fiscal year 1994 Responsible
Programs included in first actual obligations federal program
year of CMIA \a \b,c agency
------------------------------ ------------------ ------------------
National School Lunch $ 4,346,099 Agriculture
Food Program for Women, 3,304,925 Agriculture
Infants & Children
Food Stamp Program 1,520,083 Agriculture
Nutrition Assistance for 1,078,528 Agriculture
Puerto Rico
Unemployment Insurance 2,489,631 Labor
Job Training Partnership 2,484,985 Labor
Highway Planning & 20,718,690 Transportation
Construction
Chapter 1-Local Education 6,335,067 Education
Agencies
Special Education 2,661,605 Education
Rehabilitation Services 1,967,630 Education
Family Support Payments to 12,651,300 HHS
States
Job Opportunities & Basic 872,976 HHS
Skills Training
Child Support Enforcement 1,789,492 HHS
Low-Income Home Energy 1,437,392 HHS
Assistance
Foster Care 2,605,500 HHS
Social Services Block Grant 2,807,000 HHS
Medical Assistance 81,211,439 HHS
Prevention & Treatment of 1,164,789 HHS
Substance Abuse
======================================================================
Total $151,447,131
----------------------------------------------------------------------
\a The Pell Grant program was covered under CMIA during the first
year. However, the Treasury regulations granted a grace period for
colleges and universities which states that, unless otherwise
specified in a Treasury- state agreement, the regulations do not
apply to a state institution of higher education prior to a state's
1995 fiscal year. Approximately 5 states included the Pell Grant
program in their TSA for their 1994 fiscal year.
\b Obligations represent amounts expected to be distributed by the
federal government to the states and territories during the period
October 1, 1993 through September 30, 1994.
\c The Supplemental Security Income program is a reverse flow program
whereby the federal government makes payments on behalf of the state.
The federal government will incur an interest liability if state
funds are in a federal government account prior to the day a federal
agency pays out funds for program purposes. A federal interest
liability will accrue from the day state funds are credited to the
federal government's account to the day the federal agency pays out
the state funds for program purposes.
Source: Office of Management and Budget's Budget Information for
States, Fiscal Year 1996.
--------------------
\2 While the Secretary of the Treasury is responsible for managing
funds disbursement under CMIA, this responsibility has been
designated to FMS.
\3 Funding techniques are procedures to minimize the time between the
transfer of funds from the Treasury and the payment of funds for
program purposes by the state. A clearance pattern shows the
proportion of a total amount disbursed that is debited against a
state's bank account each day after the disbursement.
\4 A drawdown is a process whereby a state requests and receives
federal funds.
OBJECTIVES, SCOPE, AND
METHODOLOGY
------------------------------------------------------------ Letter :3
Our objective was to report, as required under the act, on CMIA's
implementation. Specifically, we determined whether
as required under the act, the Department of the Treasury developed
rules and regulations for implementing the act;
the Treasury-State Agreements (TSAs) were negotiated in accordance
with CMIA provisions and Treasury rules and regulations;
the states we visited followed the funding techniques and clearance
patterns approved by FMS in requesting and transferring funds;
for the states we visited, interest was assessed to the federal
government and states, in accordance with CMIA and Treasury
rules and regulations;
claims submitted by the states we visited for reimbursement of
allowable direct costs incurred in implementing CMIA were
prepared in accordance with Treasury regulations;
the states submitted all required annual reports to FMS; and
the federal program agencies (1) scheduled transfers of funds to
the states so as to minimize the time elapsing between the
disbursement of federal funds from the U.S. Treasury and the
issuance and redemption of checks, warrants, or payments by
other means by a state and (2) upon Treasury's request, reviewed
annual reports submitted by the states for reasonableness and
accuracy.
To accomplish these objectives, we (1) performed walkthroughs of how
funds flow from the federal government to the states and how the
states distribute the funds for program purposes, (2) interviewed
state officials, (3) tested transactions, (4) interviewed state
auditors, and (5) reviewed Single Audit Act reports.
The Single Audit Act of 1984 requires each state or local government
that receives $100,000 or more in federal financial assistance in any
given year to have an annual\5 comprehensive single audit of its
financial operations, including tests to determine whether the entity
complied with laws and regulations that may have a material effect on
its financial statements or its major programs, as defined in the
Single Audit Act. The Office of Management and Budget (OMB)
publishes guidance to assist auditors in planning audits under the
Single Audit Act of 1984.
We also reviewed Treasury's regulations, implementation plans, and
procedures for reviewing TSAs and annual reports. In addition, we
sent a questionnaire to all states to obtain their views on CMIA
implementation and summarized the results of the 54 completed and
returned questionnaires.
To determine if the federal program agencies and the states were
properly implementing CMIA, we also documented systems used to
process selected transactions of eight major programs (National
School Lunch, Unemployment Insurance, Chapter 1-Local Education,
Family Support Payments to States, Social Services Block Grant,
Medical Assistance, Highway Planning and Construction, and
Supplemental Security Income). These programs were selected on the
basis of federal funding levels and the amount of interest
liabilities incurred during the first year of CMIA implementation.
It was not part of our scope to assess the adequacy of the accounting
systems states and federal program agencies used to carry out their
CMIA requirements.
The period covered by the audit was the states' 1994 fiscal year,
which, for almost all of the states, was the period from July 1, 1993
through June 30, 1994. The first required annual reports were due by
December 31, 1994, and the first interest exchange between the states
and the federal government occurred on or about March 1, 1995.
The 12 states selected for detailed audit work were chosen primarily
because they received relatively large amounts of federal funds,
incurred comparatively large federal or state interest liabilities,
and, in some cases, were denied interest and direct costs
reimbursement claims submitted to FMS. We included states that
reported interest liabilities to or from the federal government
(California, Colorado, Florida, Indiana, Maryland, New York, Ohio,
Pennsylvania, Texas, and Tennessee) and states that reported no state
or federal interest liabilities (District of Columbia and Georgia).
We also visited the Departments of Health and Human Services, Labor,
Education, Agriculture, Transportation and the Social Security
Administration because they process requests for funds for the
programs we selected for audit and review federal interest
liabilities relating to these programs.
We conducted our audit between April and September 1995 at 12 states,
6 federal program agencies, and FMS. We performed our work in
accordance with generally accepted government auditing standards.
While we performed limited testing of the reasonableness of the
calculated interest liability and reimbursement of the direct costs
for the 12 states visited, our audit scope did not include an
assessment of the accuracy and completeness of the $34 million net
interest liability (comprised of $41.6 million of state interest
liabilities offset by a $4.7 federal interest liability and $2.5
million in states' claims for direct costs reimbursement), nor did we
test the accuracy of program disbursements made by the states.
We provided a draft of this report to Treasury's FMS for review and
comment. FMS agreed with our findings and conclusions.
--------------------
\5 Entities may arrange for biennial audits under certain conditions
specified in the act.
THE THREE KEY AGENTS OF CMIA
HAVE MADE PROGRESS IN ACHIEVING
THE ACT'S PURPOSE
------------------------------------------------------------ Letter :4
Our review showed that the Department of the Treasury, federal
program agencies, and the states have made substantial progress in
achieving the act's purpose of timely transfers of funds. Most state
officials acknowledged that CMIA has helped heighten their awareness
of cash management, but several expressed concern over what they
viewed as added administrative burden.
While the three key agents have made progress in implementing CMIA,
three of the states we visited consistently did not comply with
certain Treasury rules and regulations. Some of the noncompliance
situations resulted in an understatement in the states' reported
state interest liability. However, because it was outside the scope
of our audit, we did not attempt to project the total understatements
resulting from these noncompliances. We communicated these
noncompliances to FMS, and it informed us that it will take
appropriate actions to address the noncompliances.
FINANCIAL MANAGEMENT SERVICE
AND FEDERAL PROGRAM AGENCIES
---------------------------------------------------------- Letter :4.1
As amended, CMIA directed that by July 1, 1993, or the first day of a
state's fiscal year beginning in 1993, whichever is later, the
Secretary of the Treasury was to make all reasonable efforts to enter
into a written agreement with each state that receives a transfer of
federal funds. This agreement was to document the procedures and
requirements for the transfer of funds between federal executive
branch agencies and the states. In addition, the Secretary was to
issue rules and regulations within 3 years relating to the
implementation of CMIA.
FMS officials have made substantial efforts to enable successful
implementation. They
published final rules and regulations for implementing CMIA;
contracted for development of clearance patterns that could be used
by states that did not develop their own;
developed and issued an Implementation Guide, Federal and State
Review Guides, and a Treasury-State Agreement Form Book;
negotiated first year TSAs, within the time period specified in the
act, with all but two states and second year agreements with all
but one state;
reviewed the documentation for reimbursement of allowable direct
costs over $50,000 submitted by the states;
received first-year annual reports from all the states and
submitted them to program agencies for review of federal
interest liabilities claimed;
issued several policy statements intended to clarify regulations;
submitted to OMB suggested language on CMIA-related audit
objectives and procedures for inclusion in the planned revisions
to the Compliance Supplement for Single Audit Act reviews; and
developed plans to revise the CMIA regulations to streamline
processes to make them more flexible.
As part of its revision of the CMIA regulations, FMS plans to allow
for greater variation in funding techniques and to delete
descriptions and examples of the four current funding techniques from
the regulations. Thus, according to FMS, states will be able to
choose a technique that meets their needs. FMS also plans to
eliminate the prohibition on reimbursable funding to provide states
with greater flexibility in funding techniques.
In the same regard, we found that the federal program agencies met
their responsibilities under the act to transfer funds in a timely
manner. This is evidenced by the relatively small (approximately
$4.7 million) federal interest liability incurred in the first year
of the act's implementation.
STATES
---------------------------------------------------------- Letter :4.2
State officials generally credit CMIA with heightening their
awareness of cash management matters. Even though several of them
said that they had been practicing cash management techniques prior
to CMIA, they still believed that CMIA was instrumental in focusing
attention on when federal funds should be requested. Of the 54
states responding to our questionnaire, 41 stated that CMIA raised
their level of awareness regarding cash management. Thirty-two said
that CMIA is needed to ensure financial equity in the transfer of
funds. The 12 states we visited were generally making a good effort
to comply with CMIA requirements.
The following sections describe actions states have taken and provide
additional details on actions taken by the 12 states we visited and
the noncompliance situations we found at 3 of the states.
Treasury-State Agreement: All but 2 of the 56 states and all of the
12 states visited signed a first year TSA with FMS.
Clearance Pattern Methodology: Nine of the states we visited
developed their own clearance patterns based on techniques described
in the Treasury regulations. Three chose to accept a clearance
pattern time provided by FMS based on a study done under contract for
the federal government. In an effort to be efficient, a few states
are testing clearance patterns on a quarterly basis, even though they
are not required by Treasury regulations to recertify their clearance
patterns more frequently than every 5 years.
Adherence to Agreed to Drawdown Techniques: For all the programs
included in our review, we tested to determine whether states we
visited were drawing down federal funds in accordance with the terms
contained in their agreements. Generally, we noted that drawdowns
complied with agreement terms. However, in one state, the agreed
upon drawdown techniques were consistently not followed for six of
the seven programs tested. For example, two programs were
consistently drawing funds several days prior to the TSA specified
schedule. According to program officials, the agreed upon funding
techniques negotiated by the state treasurer's office did not reflect
the actual timing of when these funds were clearing accounts.
Therefore, the program officials drew the funds in what they thought
was a more accurate manner.
In addition, the state filed an amended annual report with FMS
reducing its net state liability from about $500,000 to $60,000. The
state informed FMS that it had followed its agreed upon funding
techniques in all its programs and, therefore, was reducing its
previously reported interest liability. However, as mentioned above,
we found that the state was consistently not following its agreed
upon funding techniques.
In another state, our work showed that no attempt was made to draw
down in accordance with the funding technique for 5 of the programs
tested. According to program officials, they were unaware of the
techniques specified in the agreement because they were not consulted
before the agreement was approved nor had they seen the agreement
after it went into effect. In this case, no federal interest
liability was created since funds were being transferred to the
states in a timely manner whenever they were requested. However, in
the transactions we looked at, this did result in the state
consistently using its own money to fund programs until it received
federal funds.
Interest Calculation: Ten of the 12 states we visited computed
interest liabilities. Both states that did not make such
computations told us they had no interest liabilities to compute.
However, our review showed that one of these states should have
computed an interest liability on certain refunds it received.
Our tests of interest calculations showed some problems. For
example, one state claimed a federal interest liability because it
did not receive federal funds by the time specified in the TSA. FMS
denied a significant portion of this claim because it concluded that
the state was not requesting funds in time for the federal government
to provide them as called for in the agreement. We attempted to
determine the reasonableness of the state's claim, but state
officials told us that they no longer had sufficient documentation to
support their claim.
Direct Cost: The Treasury regulations authorize states to claim
reimbursement for direct costs incurred for developing and
maintaining clearance patterns and computing interest liabilities.
Reimbursable direct costs were claimed by 11 of the 12 states we
visited. FMS denied a significant portion of the direct cost claims
for two of these states. FMS denied a portion of the claims because
the documentation submitted did not support costs allowable under
CMIA. One state has appealed the decision and the other is
considering an appeal. In those cases where reimbursement was
approved, our review of supporting documentation indicated that the
states had reasonable support for their claims.
Annual Reports: All 56 states submitted an annual report to FMS for
the first year's activities.
SOME STATES VIEW CERTAIN
PROCEDURES AS BURDENSOME
---------------------------------------------------------- Letter :4.3
While overall states see benefits from CMIA, such as a heightened
awareness of cash management, some expressed concern about what they
perceived as an additional burden of the act. In 24 of the 54
responses to our questionnaire and 7 of the 12 states we visited,
officials expressed their view that the additional administrative
tasks associated with implementing the act are burdensome. In
addition, officials at 2 of the states we visited stated that the
CMIA regulations were inflexible.
Some of the issues cited by the states included:
Administrative tasks needed to comply with CMIA, such as preparing
TSAs and annual reports, developing clearance patterns,
computing interest liabilities, tracking refunds, and compiling
direct costs, are burdensome to their operations.
Three states said that the Treasury was being inflexible by not
allowing them to use the reimbursable funding technique, which
is a method of transferring federal funds to a state after the
state has paid out its own funds for program purposes. After
June 30, 1994, Treasury regulations prohibited reimbursable
funding, except where mandated by federal law. One state said
that it believed that the act itself does not specifically
prohibit reimbursable funding and that some federal assistance
programs must use it as a necessity. It said that using another
funding technique that requires estimating cash needs in advance
and reconciling later to actual expenditures creates an
unnecessary administrative burden. It also said that the cash
needs for some programs cannot be estimated due to fluctuating
activities. As we discussed earlier, FMS is planning to revise
the CMIA regulations to allow for the use of reimbursable
funding.
A Treasury policy statement requires that average clearance
patterns be calculated out until 99 percent of the funds have
cleared through the bank account. Some of the states said that
this degree of precision was unnecessary because it requires
them to make excessive small dollar amount draws.
Treasury regulations require states to compute interest on refunds
for which the federal share is $10,000 or more. Several of the
states said that monitoring all programs covered by CMIA for
refunds was burdensome given that most of these refunds relate
to one federal program. We determined that over 90 percent of
all state interest liabilities from refunds reported by the
states in the first year annual reports related to one federal
program.
Some states said that the Treasury regulatons should allow
reimbursement for all direct costs related to implementing CMIA
and not just those costs related to the three specific
categories identified in the regulations.
We did not determine the extent of burden created by the added
administrative tasks placed on the states as a result of implementing
CMIA. However, it should be noted that the states can submit claims
for reimbursement for some of the efforts required. Also, some of
the tasks, such as preparing TSAs and annual reports, developing
clearance patterns, and computing interest liabilities should be less
onerous now that the initial processes for generating this
information have been established.
FIRST-YEAR EXCHANGE OF FUNDS
INDICATES ACT IS WORKING
------------------------------------------------------------ Letter :5
Under CMIA, a state is authorized to draw down funds based on
approved funding techniques. If the state requests funds early,
interest is due the federal government. Conversely, if the federal
government fails to transfer funds on time, the state is due
interest. Ideally, under the act, the transfer of funds would be
interest neutral, with neither the federal government nor the states
incurring any interest liability. The first year of implementation
of CMIA resulted in a cumulative net state interest liability due to
the federal government of approximately $34 million. Taken in
context, this liability is relatively small compared to the over $150
billion reported as obligated in fiscal year 1994 for the programs
covered by the act. Table 2 summarizes the components of the $34
million net state interest liability.
Table 2
Components of the Net State Interest
Liability Resulting from CMIA's First
Year of Implementation
(Dollars in thousands)
Net
state
Claims for (federal
State Federal reimbursemen )
interest interest t interest
liabilit liabilit of direct liabilit
State y y costs y
-------------------------- -------- -------- ------------ --------
Alaska $ 7.9 $ (24.5) $(31.7) $(48.3)
Alabama 282.3 (10.3) (72.3) 199.7
Arkansas 0.5 (0.0) (0.0) 0.5
American Samoa 0.0 (0.0) (0.0) 0.0
Arizona 345.3 (0.0) (46.6) 298.7
California 6,409.1 (696.7) (130.3) 5,582.1
CNMI\a 0.3 (0.5) (0.4) (0.6)
Colorado 111.0 (0.0) (50.0) 61.0
Connecticut 47.7 (55.5) (18.7) (26.5)
District of Columbia 0.0 (0.0) (20.5) (20.5)
Delaware 56.5 (56.8) (45.0) (45.3)
Florida 3,949.6 (34.7) (51.0) 3,863.9
Georgia 0.0 (0.0) (36.3) (36.3)
Guam 0.0 (0.0) (0.0) 0.0
Hawaii 134.6 (37.0) (205.7) (108.1)
Idaho 0.1 (0.0) (15.7) (15.6)
Illinois 1,678.2 (244.3) (36.7) 1,397.2
Indiana 8,609.3 (0.9) (83.7) 8,524.7
Iowa 515.4 (0.0) (31.3) 484.1
Kansas 579.0 (11.5) (60.2) 507.3
Kentucky 439.9 (133.6) (183.0) 123.3
Louisiana 161.6 (39.7) (6.1) 115.8
Maine 63.8 (7.1) (65.5) (8.8)
Maryland 249.9 (828.9) (54.6) (633.6)
Massachusetts 101.9 (4.8) (116.5) (19.4)
Michigan 102.9 (370.4) (6.4) (273.9)
Minnesota 52.4 (117.0) (121.0) (185.6)
Mississippi 19.5 (11.1) (58.2) (49.8)
Missouri 707.8 (24.8) (24.3) 658.7
Montana 17.6 (6.8) (17.5) (6.7)
Nebraska 18.6 (2.7) (4.1) 11.8
Nevada 67.4 (81.0) (43.0) (56.6)
New Hampshire 1.6 (1.1) (67.8) (67.3)
New Jersey 222.6 (117.4) (25.7) 79.5
New Mexico 0.7 (12.3) (56.1) (67.7)
New York 1,758.7 (138.6) (53.9) 1,566.2
North Carolina 1,647.7 (49.6) (100.3) 1,497.8
North Dakota 0.0 (0.0) (0.0) 0.0
Ohio 963.8 (0.0) (0.0) 963.8
Oklahoma 47.6 (13.7) (0.0) 33.9
Oregon 0.0 (52.5) (0.0) (52.5)
Pennsylvania 519.0 (311.4) (230.5) (22.9)
Puerto Rico 6.5 (123.1) (18.5) (135.1)
Rhode Island 393.2 (39.1) (0.0) 354.1
South Carolina 900.3 (24.8) (68.8) 806.7
South Dakota 1.4 (4.0) (14.3) (16.9)
Tennessee 332.7 (160.4) (1.7) 170.6
Texas 8,309.7 (0.0) (21.9) 8,287.8
Utah 24.3 (181.8) (76.7) (234.2)
Vermont 27.8 (84.9) (8.1) (65.2)
Virgin Islands 0.0 (0.0) (0.0) 0.0
Virginia 995.7 (53.2) (50.0) 892.5
Washington 1.6 (1.0) (2.7) (2.1)
West Virginia 525.3 (0.0) (46.3) 479.0
Wisconsin 272.2 (543.0) (36.5) (307.3)
Wyoming 0.0 (0.0) (0.0) 0.0
======================================================================
Total $41,682. $(4,712. $(2,516.1) $34,453.
5 5) 9
----------------------------------------------------------------------
\a Commonwealth of the Northern Mariana Islands.
Interest claims are submitted by program. FMS denied 47 claims by 15
states for interest (approximately $6.4 million). Reasons cited
included insufficient documentation and repeated failure to follow
the funding technique specified in the TSA. As of October 1995, 8 of
the 15 states had appealed those denials to FMS. Of the 8 states
that filed claims to appeal these denials, all but 2 have been
resolved. FMS denied a portion of direct cost reimbursement claims
submitted by 10 states because the costs were not eligible for
reimbursement under Treasury rules and regulations, or the supporting
documentation contained both eligible and ineligible costs which
could not be separately identified. Three states submitted claims to
appeal the denials; two of these states' appeals were subsequently
approved based on additional supporting documentation provided to
FMS.
As indicated previously, most of the states visited computed interest
liabilities in accordance with TSAs, and the majority of the programs
reviewed had interest neutral funding techniques, whereby neither the
federal government nor the states incur interest. Much of the state
interest liability was beyond state agencies' immediate control and
was instead attributed to certain states' laws which require that
they have the federal funds in the bank before they make any
associated disbursements, as opposed to when the check clears the
bank. Four of the 12 states we visited had a state interest
liability totaling $18.5 million which primarily resulted from the
states' adherence to such laws.
SINGLE AUDIT COVERAGE
------------------------------------------------------------ Letter :6
OMB publishes guidance to assist auditors in planning audits under
the Single Audit Act of 1984. The guidance, entitled, Compliance
Supplement for Single Audits of States and Local Governments, was
last updated in September 1990 and does not address CMIA, which was
enacted in October 1990. OMB plans to issue a revised Compliance
Supplement during fiscal year 1996 which will address CMIA
requirements. We reviewed and generally supported a draft of the
proposed revisions to the Compliance Supplement relating to cash
management. However, we suggested that the Compliance Supplement
also include provisions to determine that clearance patterns were
properly established and verified by the appropriate state official.
The fiscal year 1994 single audit reports for the states we visited
lacked consistency and comprehensiveness in checking for compliance
with CMIA requirements. Auditors in some of the states we visited
said that they obtained knowledge about CMIA by obtaining FMS'
guidelines to state governments and attended cash management and
audit conferences where CMIA was discussed. The auditors also said
that they intended to expand work in their next audits to cover other
aspects of CMIA requirements such as clearance pattern establishment
and compliance with drawdown techniques contained in the TSA.
FMS officials informed us that they do not routinely receive a copy
of single audit reports from each state. Under the single audit
concept, audited entities are only required to submit single audit
reports to federal agencies that directly provide them funds and the
Single Audit Clearinghouse, Governments Division, of the Commerce
Department. Since FMS is not a funding agency, entities would not be
required to submit reports to FMS. However, FMS may obtain copies of
single audit reports from the Federal Audit Clearinghouse. Since
some states comply with Single Audit Act requirements by arranging
for single audit reports for each state department and agency that
receives federal assistance, rather than one single audit for the
entire state, FMS would in those cases need to obtain multiple
reports for a given state.
FMS officials also informed us that they do not routinely review the
reports they do receive for CMIA findings. In our June 1994 report\6
on the single audit process, we pointed out that single audit reports
are not user friendly. We recommended that the auditors include a
summary of their determinations concerning the entity's financial
statements, internal controls, and compliance with laws and
regulations. The summary information would be useful because single
audit reports generally contain seven or more reports from the
auditor. We also recommended that the results of all single audits
be made more accessible by having the Federal Audit Clearinghouse
compile the results in an automated database. We believe that more
useful information on compliance with cash management requirements,
particularly when summarized in an accessible database, would provide
FMS officials with a better basis for reviewing and acting on CMIA
issues.
--------------------
\6 Single Audit: Refinements Can Improve Usefulness (GAO/AIMD-94-133
June 21, 1994).
CONCLUSIONS
------------------------------------------------------------ Letter :7
The Cash Management Improvement Act has heightened awareness of cash
management at both the state and federal levels. Treasury, the
federal agencies, and the states have made substantial progress in
implementing the act. By implementing its plans to begin revising
CMIA regulations to streamline the process and placing greater
emphasis on using the results of single audits as a means of
overseeing state activities and enforcing CMIA requirements, FMS
should be able to further improve the act's effectiveness and help
alleviate any concerns about administrative burden.
We are also sending this report to the Secretary of the Treasury; the
Commissioner of the Financial Management Service, Department of the
Treasury; the Director of the Office of Management and Budget; and
the Chairmen and Ranking Minority Members of the House Committee on
Government Reform and Oversight, Subcommittee on Government
Management, Information and Technology and Senate Committee on
Governmental Affairs. We will also send copies to others on request.
This report was prepared under the direction of Gregory M. Holloway,
Director, Governmentwide Audits, who may be reached at (202) 512-9510
if you or your staffs have any questions. Other major contributors
to this report were Gary T. Engel, Senior Assistant Director; J.
Lawrence Malenich, Assistant Director; and Johnny R. Bowen, Senior
Audit Manager.
Gene L. Dodaro
Assistant Comptroller General
*** End of document. ***