Report 2012-603 Summary - August 2014

High Risk Update

State Agencies Credited Their Employees With Millions of Dollars Worth of Unearned Leave

HIGHLIGHTS

Our review of the California Leave Accounting System (leave accounting system) highlighted the following:

State agencies credited employees with roughly 197,000 hours—valued at nearly $6.4 million as of December 2013—of unearned leave between January 2008 and December 2012.
Because of the absence of clear statutory language, in the event of litigation the State is at risk of not recovering the funds that represent inappropriately credited leave hours.
The leave accounting system lacks sufficient automated controls to prevent state agencies from processing erroneous transactions.
- One state agency inappropriately credited an employee with eight hours of sick leave each month for 10 years in addition to her monthly accrual of annual leave.
- One state agency erroneously gave an employee 1,212 hours of holiday credit in December 2012, worth more than $33,000, instead of the eight hours to which she was entitled.
Some state agencies misinterpreted collective bargaining agreements related to the number of leave hours their employees should earn.
Of the 14 locations we visited, only two performed procedures to ensure that their staff properly entered information from time sheets into the leave accounting system.

RESULTS IN BRIEF

State agencies have credited their employees with millions of dollars worth of unearned leave because the State has weak controls over its accounting of employees' leave records. The California State Controller's Office (state controller) maintains the California Leave Accounting System (leave accounting system) to track leave activity for employees at participating departments, agencies, California State University (CSU) campuses, and other entities (state agencies). While the state controller is responsible for maintaining and supporting the leave accounting system, each participating state agency retains ownership of its data stored within the system and is responsible for the data's accuracy and completeness. When we performed a statewide electronic analysis of the leave accounting system, we found that state agencies credited employees with roughly 197,000 hours of unearned leave between January 2008 and December 2012.¹ As of December 2013 the value of these erroneous leave hours was nearly $6.4 million, an amount that will likely increase over time as employees receive raises or promotions. These errors also include nearly 16,000 hours of sick leave, which state employees can convert to state service credit when they retire, ultimately increasing the State's pension payments.

Additionally, unclear guidance in state law puts the State at risk of additional costs. Specifically, state agencies must initiate collection efforts on overpayments within three years from the date of overpayment. However, state law does not explicitly define when an overpayment occurs. Both the California Department of Human Resources (CalHR) and CSU consider overpayments of leave to occur when employees use the erroneous leave to cover absences from work or cash out unearned leave hours. Because of the absence of clear statutory language, in the event of litigation the State is at risk of not recovering the funds that represent inappropriately credited leave hours.

The large number of errors occurred in part because the leave accounting system lacks sufficient automated controls to prevent state agencies from processing erroneous transactions. According to the state controller, the leave accounting system has automated controls to ensure the accuracy of certain types of monthly accruals, such as sick leave and vacation leave. However, these automated controls do not always prevent state agencies from crediting state employees with unearned leave. For example, for more than 10 years the California Department of Education (Education) inappropriately credited one employee with eight hours of sick leave each month in addition to her monthly accrual of annual leave. An employee can elect to receive vacation and sick leave benefits or the annual leave benefit, but an employee cannot receive both benefits. Thus, Education gave this employee 968 leave hours to which she was not entitled.

To improve the controls over the leave accounting system, the state controller could aid state agencies in detecting erroneous transactions by generating additional exception reports that identify unexpected or atypical leave transactions. For example, when we prepared an exception report, we identified one instance in which Coalinga State Hospital erroneously gave an employee 1,212 hours of holiday credit, worth more than $33,000, instead of the eight hours to which she was entitled. Without exception reports, state agencies may not detect overpayments of this nature.

Further, we identified two state agencies that misinterpreted collective bargaining agreements related to the number of leave hours employees should earn. State law and collective bargaining agreements establish state employees' leave benefits. For example, collective bargaining agreements establish the total compensation in pay and leave credits that employees should receive for working on holidays. However, the California Science Center (Science Center) misinterpreted the language in these agreements. As a result, between January 2008 and December 2012, it erroneously gave its employees more than 4,500 hours of holiday credit to which they were not entitled. In another instance, Chula Vista Veterans Home misinterpreted collective bargaining agreements and consequently gave its employees twice the number of holiday credits that they were entitled to for a holiday in March 2012. We believe that CalHR should provide additional guidance to state agencies to avoid these types of misinterpretations.

Although the state controller maintains data in its leave accounting system, individual state agencies are responsible for ensuring the accuracy of these data. To determine the procedures state agencies follow for ensuring that accuracy, we visited 14 locations administered by the California Department of State Hospitals, the California Department of Veterans Affairs (Veterans Affairs), and the Science Center. Although each of the locations verified the accuracy of the information their employees recorded on their time sheets, only two locations performed procedures to ensure that their staff properly entered the information from the time sheets into the leave accounting system and even those procedures were limited. Without sufficient processes to verify the accuracy of the data they enter, state agencies may make erroneous leave accounting transactions that remain undetected or are never identified.

RECOMMENDATIONS

The Legislature should amend state law to clarify the statute of limitations for recovering the overpayment of leave credits.

To correct the erroneous leave hours we identified in our analysis of the leave accounting system, CalHR should work with the state controller and all state agencies under its authority to review and take the appropriate action to correct the errors by January 2015.

To correct the erroneous leave hours we identified in our analysis of the leave accounting system related to the CSU, CSU's Office of the Chancellor should work with the CSU campuses to review and take the appropriate action to correct the errors by January 2015.

To improve the accuracy of information in the leave accounting system and to ensure that state agencies do not improperly credit employees with leave in the future, the state controller should do the following:

Implement additional controls by June 2015 to prevent the leave accounting system from processing the types of inappropriate transactions we identified in our statewide electronic analysis. For example, it could develop cost effective controls in the leave accounting system that would prevent employees from receiving annual leave and sick leave during the same pay period.
Work with CalHR to establish procedures by January 2015 for updating the criteria it uses to produce the monthly exception reports to ensure that the criteria reflect changes in state law and collective bargaining agreements.
Using criteria provided by CalHR, develop monthly exception reports that identify transactions in the leave accounting system that are inconsistent with the guidelines established in state law and collective bargaining agreements, such as instances in which state employees receive too many personal holidays or too much holiday credit. By June 2015 begin providing each state agency's human resources management with the transactions identified in the exception reports for review and correction as necessary.

To ensure that state agencies accurately account for their employees' leave benefits, CalHR should do the following:

Consolidate guidance by January 2015 regarding the appropriate amount of leave that employees should earn each month and provide these criteria to the state controller to use when developing the leave accounting system's monthly exception reports. For example, CalHR should identify the number of holiday credit hours that employees covered by each collective bargaining agreement should receive for working on a holiday.
Work with the state controller to establish procedures by January 2015 for updating these criteria to ensure that they reflect any changes to state law and collective bargaining agreements.
Provide additional guidance to state agencies by January 2015 on interpreting the provisions of the collective bargaining agreements related to the amount of leave employees earn. For example, CalHR could provide scenarios to illustrate the number of hours employees should earn under common circumstances.
Develop guidelines and procedures by January 2015 requiring all state agencies to verify information their personnel specialists enter into any system they use to track state employees' leave transactions.

AGENCY COMMENTS

In its response to this review, CalHR, CSU's Office of the Chancellor, Veterans Affairs, and the Science Center responded to the review indicating they agreed with the recommendations directed to each of them. Although the state controller indicated that it embraced many of the recommendations, it did not agree with the findings or the depth and completeness of our audit methodology.

¹ There may be circumstances relating to specific transactions that result in those transactions being appropriate or there may be additional errors that we did not identify. However, to account for all errors would have required a manual review of all state employees' time sheets.

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