DEPARTMENT OF CORRECTIONS GENERAL OFFICE

REPORT DIGEST

DEPARTMENT OF CORRECTIONS
GENERAL OFFICE

FINANCIAL AND COMPLIANCE AUDIT

(In accordance with the Single Audit Act and OMB Circular A-133)

For the Year Ended:
June 30, 1999

Summary of Findings:

Total this audit 18
Total last audit 20
Repeated from last audit 9

Release Date:
March 15, 2000

State of Illinois
Office of the Auditor General

WILLIAM G. HOLLAND
AUDITOR GENERAL

To obtain a copy of the Report contact:
Office of the Auditor General
Attn: Records Manager
Iles Park Plaza
740 E. Ash Street
Springfield, IL 62703
(217)782-6046 or TDD (217) 524-4646

This Report Digest is also available on
the worldwide web at
http://www.state.il.us/auditor

SYNOPSIS

The Department is not using its statutory authority to request reimbursement from inmates to cover the costs of their incarceration.

The Department purchased annuities to prepay workers’ compensation claims from appropriations without specific statutory authority.

The Department utilized the services of a broker to aid in the purchase of annuities without a formal written contract describing the nature of services, the compensation to be received, or disclosures required by the Illinois Procurement Code.

The Department improperly paid fiscal year 1999 costs of $5,403,000 from fiscal year 1998 appropriations.

The Department is not reporting the value of State housing benefits as income to employees as required by Internal Revenue Service regulations.

The Department did not maintain adequate internal controls at Community Correctional Centers to assure accounting records were properly maintained.

The Department did not have an automated payroll timekeeping system for use at its various correctional centers.

{Expenditures and Activity Measures are summarized on the next page.}

DEPARTMENT OF CORRECTIONS - GENERAL OFFICE

FINANCIAL AND COMPLIANCE AUDIT

For The Year Ended June 30, 1999

EXPENDITURE STATISTICS	FY 1999		FY 1998	FY 1997
Total Expenditures(All Treasury Held Funds)	$220,633,290		$198,912,203	$163,038,413
OPERATIONS TOTAL % of Total Expenditures	$201,318,823 91.2%		$181,317,724 91.2%	$145,998,717 89.5%
Personal Services % of Operations Expenditures Average No. of Employees Average Employee Salary	$61,813,516 30.7% 1,441 $42,896		$57,511,111 31.7% 1,442 $39,883	$48,597,130 33.3% 1,304 $37,268
Other Payroll Costs (FICA, Retirement) % of Operations Expenditures	$41,946,340 20.8%		$36,117,335 19.9%	$32,812,898 22.5%
Contractual Services % of Operations Expenditures	$51,531,810 25.6%		$37,959,377 20.9%	$33,326,062 22.8%
Claims and Settlements % of Operations Expenditures Repairs and Maintenance % of Operations Expenditures Electronic Data Processing % of Operations Expenditures Telecommunications % of Operations Expenditures Commodities % of Operations Expenditures	$9,486,677 4.7% $7,928,158 3.9% $6,049,926 3.0% $5,360,267 2.7% $4,161,226 2.1%		$10,019,980 5.5% $9,388,916 5.2% $12,800,612 7.1% $4,726,925 2.6% $2,814,387 1.6%	$9,363,420 6.4% $3,745,456 2.6% $6,382,100 4.4% $3,904,159 2.7% $1,413,973 1.0%
All Other Operations Items % of Operations Expenditures	$13,040,903 6.5%		$9,979,081 5.5%	$6,453,519 4.4%
GRANTS AND PROGRAMS % of Total Expenditures	$19,314,467 8.8%		$17,594,479 8.8%	$17,039,696 10.5%
Cost of Property and Equipment	$83,730,295		$84,480,810	$74,349,318
SELECTED ACTIVITY MEASURES	FY 1999	FY 1998		FY 1997
ADULT CENTERS Average Population Rated Capacity Population in Excess of Capacity Average Annual Costs	41,136 30,274 10,862 $18,500	38,862 27,444 11,418 $17,483		37,129 26,906 10,223 $17,271
JUVENILE CENTERS Average Population Rated Capacity Population in Excess of Capacity Average Annual Costs	2,174 1,366 808 $36,061	2,115 1,366 749 $32,237		1,996 1,314 682 $29,432
COMMUNITY CENTERS Average Population Rated Capacity Population in Excess of Capacity Average Annual Costs	1,379 1,220 159 $17,129	1,359 1,168 191 $17,645		1,287 1,168 119 $16,455
AGENCY DIRECTOR During Audit Period: Mr. Odie Washington (through January 21, 1999) Mr. Donald Snyder (effective January 21, 1999) Currently: Mr. Donald Snyder

An average of $1.34 for the year per inmate was reimbursed to the Department for the cost of incarceration

Community Correctional Center inmates reimbursed the Department $1,693,460

Department has procedures to recover costs from inmate trust funds, but no collections were made during fiscal year 1999

Use of current funds to pay future claims

Department does not have statutory authority to purchase investments/annuities

Department did not have a formal written agreement with a broker used to negotiate purchases of annuities

Department prepaid $5,403,000 in fiscal year 1999 computer charges from fiscal year 1998 appropriations

Department prepaid amount without any supporting vendor invoice or other documentation to support expenditure

Department did not report income as required by the IRS

Internal control weaknesses at community correctional centers

Need to develop an automated payroll timekeeping system

INTRODUCTION

This report presents our financial and compliance audit of the Department of Corrections' General Office, and our audit of the entire Department under the Single Audit Act of 1996. The Department administers 33 correctional facilities - 26 adult centers, 7 youth centers and 11 community correctional centers.

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

COSTS OF INCARCERATION NOT BEING COLLECTED FROM INMATES

During fiscal year 1999, the direct cost of incarcerating inmates at Juvenile and Adult facilities totaled almost $856 million. Reimbursements from inmates incarcerated at these institutions, excluding fees collected from Community Correctional Centers (CCC) and Electronic Detention (ED), totaled only $57,818, or .007%, or an average of $1.34 per inmate per year.

The Department collected reimbursements for the cost of incarceration from three sources during the audit period, all from sources "inside" the Department:

Inmates working for Correctional Industries at adult institutions reimburse the Department 3% of monthly wages in excess of $25 per month. During fiscal year 1999 the Department received $57,818 from inmates working for Correctional Industries.

Inmates at CCC’s are required to remit 20% of their earnings from private employers as "maintenance fees". This totaled $1,693,460 in fiscal year 1999.

Inmates on ED are required to remit 20% of their earnings from private employers as "maintenance fees". This totaled $369,394 in fiscal year 1999.

The Unified Code of Corrections states: "Convicted persons committed to Department correctional institutions or facilities shall be responsible to reimburse the Department for the expenses incurred by their incarceration at a rate to be determined by the Department."

The Department has procedures to recover costs from inmate assets on deposit in Department held trust funds in excess of $2,000, but no collections were pursued or deposited during fiscal year 1999. Presently, the Department has no formal procedures to identify assets or income maintained by an inmate outside of their Department trust fund. We noted the following:

There are no procedures at the time of inmate intake to identify assets, no financial analysis is conducted, no credit check is obtained, and there is no identification of potential responsible parties performed.

There are no procedures for billing inmates or responsible parties.

The Department does not look beyond the inmate’s trust fund for money that can be used as reimbursement, while many inmates are transferring money to bank accounts outside the facility.

Department officials stated it would not be cost beneficial to pursue further reimbursements from inmates. However the Department has not performed a formal cost benefit analysis to support this assertion. (Finding 4, pages 23-24)

We recommended the Department look beyond an inmate’s individual trust fund and make an effort to recover as much money as possible for the cost of incarceration in compliance with the State statute.

Department officials partially accepted the recommendation and indicated they would notify the Attorney General if they became aware of any inmate having substantial assets. In addition, Department management responded it did not feel the legislation was intended to direct the Department to investigate routinely the financial status of inmates.

PURCHASE OF ANNUITIES FOR PAYMENT OF WORKERS’ COMPENSATION CLAIMS

Without specific statutory authority to do so, the Department purchased annuities to pay future workers’ compensation claims, circumventing State fiscal year appropriation constraints. The Department is responsible for the administration and payment of all workers’ compensation claims relating to Department employees and receives an annual appropriation to pay outstanding claims. These claims have historically been paid when currently due in accordance with the workers’ compensation settlement. Many settlements contain provisions for fixed payments to be made over a future period of time, sometimes for the claimant’s life.

Beginning in fiscal year 1996, the Department began purchasing annuities from current year appropriations through lump sum payments to insurance companies to fund some of these future year claims. These lump sum payments totaled $3,626,118 for fiscal years 1996, 1997 and 1998. The Department purchased an annuity in fiscal year 1999 payable over 10 years for a lump sum payment of $106,625.

The Department obtained annuity quotes from insurance companies by individual claimant, then selected individual claimants and annuity payments to expend its remaining appropriations. These annuities appear to constitute "investments", most of which have nominal interest rates of between 4% and 5.5%. The annuity purchased in fiscal year 1999 had an interest rate of 4.84%.

The process of purchasing annuities allows the Department to utilize all of its current appropriations through the arbitrary prepayment of future liabilities. (Finding 5, pages 25-26)

We recommended the Department comply with fiscal year constraints and pay current year obligations from current year appropriations. If proper appropriation authorization to continue this practice is obtained, the Department should also review its lack of specific statutory authority to invest appropriated Treasury funds before continuing to purchase annuities.

Department officials partially accepted the recommendation and stated the purchase of an annuity in a claim settlement was a sound business decision. In this context, the Department did not feel that it was paying future year obligations with current year appropriations. Further, in regard to the technical issue of authority to purchase an "investment" Department officials note this matter has not been resolved and agree to pursue such resolution.

NO WRITTEN CONTRACT FOR BROKERAGE SERVICES USED TO PURCHASE ANNUITIES

Beginning in fiscal year 1996, the Department began using a broker to bid annuity contracts to settle workers’ compensation claims. The broker was responsible for obtaining bids from insurance companies to provide specified annuities. The broker worked with the Department to select the most favorable annuity to settle the claim. No payments were made to the broker directly from the Department. We found there was no formal written contract between the Department and the broker describing the nature of services, the compensation to be received, or disclosures required by the Illinois Procurement Code.

Department officials indicated they were originally solicited by this broker with the idea of purchasing annuities. Since there was no direct payment to the broker, Department officials did not realize the importance of a formal written contract or the potential need to bid these services. Potentially other brokers could have charged less commission or fees, providing more favorable returns to the State on these annuity purchases. (Finding 6, pages 27-28)

If the Department establishes its authority to purchase annuities, we recommended the Department enter into a formal written contract with any broker used to negotiate annuity purchases. We also recommended that such services be bid, if applicable, and that the contracts include all disclosures required by the Illinois Procurement Code.

Department officials accepted the recommendation and indicated they have been in contact with the Department of Central Management Services for guidance in the procurement of settlement annuities. The Department also noted it will comply with the Illinois Procurement Code in any future purchases.

IMPROPER FISCAL YEAR EXPENDITURES

The Department improperly prepaid fiscal year 1999 costs totaling $5,403,000 from fiscal year 1998 appropriations, in violation of the State Finance Act.

Department officials stated they were notified mid-way through the fiscal year 1999 budget process that their Department of Central Management Services (DCMS) computer charges would nearly double in fiscal year 1999. Department officials stated they requested additional funds be appropriated to cover the increase, but were denied by the Bureau of the Budget. They indicated the Bureau of the Budget instructed them to utilize fiscal year 1998 appropriations to prepay a portion of fiscal year 1999 charges.

The Department was not invoiced by DCMS, however it remitted $5,403,000 to DCMS voluntarily on August 27, 1998, four days before the end of the fiscal year 1998 lapse period.

The State Finance Act prohibits advance payment for goods or services unless the goods or services are being procured pursuant to a formal written contract that requires advance payment. In addition, the goods or services are to be delivered or received prior to the expiration of the lapse period of the fiscal year in which the expenditure is charged. Department officials stated they made this advance payment based on their interpretation of the State Finance Act which allows internal service funds to bill users in advance based on estimated charges in accordance with rules issued by the billing agency. However DCMS’s rules state DCMS shall not issue undocumented advance billings for the purpose of intentionally expending a user agency’s remaining appropriation. (Finding 7, pages 29-30)

We recommended the Department operate within the budgetary constraints outlined in the appropriation process.

Department officials agreed with our recommendation and stated stated they believe at the time they acted properly within the provisions of the State Finance Act.

STATE HOUSING BENEFITS NOT PROPRELY REPORTED AS INCOME

The Department is providing several employees with State housing at a reduced cost. Currently it has approximately 62 employees living in State-owned housing. The Department charges up to $120 per month for employee houses and $27 per month for guard dormitory rooms and pays all utility costs. The Department could not provide a fair market value for this housing.

Although the practice of renting housing to employees below market value appears proper, the Department failed to report the value of the housing that was not paid for by the employee as income to those employees, as required by Internal Revenue Service regulations.

Department officials stated housing is provided as a benefit to many of its guards and wardens and they do not feel they should have to report the value as income. (Finding 8, pages 31-32)

We recommended the Department determine the fair market value of the housing benefits provided and report the excess value of State housing benefits to employees as required by Internal Revenue Service regulations.

Department officials accepted our recommendation and responded that the Department provides housing to certain employees for the convenience of the Department. In addition, they indicated housing provided on prison property does not have a fair market value and the administrative directive on the use of State-owned housing is being revised pursuant to Internal Revenue Service regulations.

CONTROL WEAKNESSES AT COMMUNITY CENTERS

In addition to 33 correctional centers, the Department operates a work release program for approximately 1,350 inmates who are housed in 11 community correctional centers.

During our audit fieldwork at the community centers, we noted the following internal control weaknesses.

Revenue, expenditures and cash balances reported on the Resident Benefit Fund Revenue and Expenditures summary did not agree to the cash receipts and disbursement ledgers.

Bank reconciliations were not properly prepared.

Cash receipts and disbursements were not properly categorized.

Due to/due from accounts in the Residents’ Benefit fund and Residents’ Trust fund did not balance.

Resident financial folders did not contain all required documents. (Findings 11 and 12, pages 36-38) This finding has been repeated since 1994.

We recommended the Department improve controls over accounting functions and resident files at community correctional centers.

Department officials accepted our recommendation and stated community correctional centers are going to be reclassified as adult transition centers and will be satellites of correctional centers. They indicated this would provide more resources for oversight of the business operations. (For previous Department responses, see Digest footnote #1.)

OUTDATED MANUAL PAYROLL SYSTEM

The Department-wide payroll timekeeping system is not automated. Each of the 33 large correctional centers employs several hundred employees, and the related timekeeping system is maintained manually. Facility employees sign in and out, and the sign-in sheets are sent to the timekeeping clerk. Other information, including notification of absence and call-in reports, is also forwarded to the timekeepers. No automation is involved except for the processing of payroll warrants. Officials indicate that there are insufficient funds available to develop a Department-wide system to replace the outdated manual system used for over 14,000 employees.

Prudent business practices suggest that controls available through automated timekeeping systems can provide greater efficiency and reduce the potential for costly errors or employee abuse. (Finding 17, page 43)

We recommended the Department implement an automated timekeeping system.

The Department accepted our recommendation and stated funding for the automation of Department-wide timekeeping has been included in the fiscal 2001 budget request.

OTHER FINDINGS

The remaining findings are less significant and are being given attention by the Department. We will review the Department’s progress toward the implementation of our recommendations in our next audit.

Mr. Mark Krell, Chief Auditor of the Department of Corrections, provided the agency’s responses.

AUDITORS’ OPINION

Our auditors stated the Department’s financial statements as of June 30, 1999 were fairly presented.

_____________________________________

WILLIAM G. HOLLAND, Auditor General

WGH:RPU:pp

SPECIAL ASSISTANT AUDITORS

Sikich Gardner & Co, LLP were our special assistant auditors on the audit of the General Office.

DIGEST FOOTNOTES

#1 CONTROL WEAKNESSES AT COMMUNITY CENTERS – Previous Department Responses

1998: Recommendations accepted. The Department has established a central business office for the Community Services Division (CSD). The CSD business administrator will implement monitoring and follow-up procedures to ensure better performance and greater accountability by field accounting personnel. In addition, the Department will ensure that financial folders are maintained for each resident and that proper documents are maintained in the residents’ financial folders.

1996: Recommendations accepted: The Department indicated that corrective action had been addressed relating to many of the exceptions identified in the findings.

1994: Recommendations accepted: The Department indicated that corrective action had been addressed relating to many of the exceptions identified in the findings.