Report 2013-107 Summary - October 2013

Accounts Outside the State's Centralized Treasury System

Processes Exist to Safeguard Money, but Controls for These Accounts Need Strengthening

HIGHLIGHTS

Our audit of state accounts that exist outside of California's Centralized Treasury System (treasury system) and their oversight highlighted the following:

Weaknesses in the control agencies' tracking of these state bank accounts that exist outside the treasury system (outside accounts) have created potential problems.
- The California State Controller's Office failed to include all the State's departments, agencies, and other entities (state agencies) that have outside accounts in its annual reporting on such agencies.
- The Office of the State Treasurer has uncertainty about the existence of sufficient collateral—safeguards in the form of securities deposited at outside institutions—for all the balances in outside accounts.
About $8.9 billion of the reported $9.3 billion in outside accounts as of June 30, 2012, belonged to accounts authorized under state laws and generally serve valid purposes.
With the exception of the California Department of Forestry and Fire Protection (Cal Fire), the state agencies we tested segregated key accounting and reporting duties to safeguard collecting, recording, and reporting revenue.
Although the state agencies we tested generally have adequate controls over outside accounts, an agency may still bypass state rules as well as its own policies such as Cal Fire did when it had $3.7 million deposited in an unauthorized outside account.

RESULTS IN BRIEF

As of the end of fiscal year 2011-12, the State's departments, agencies, and other entities (state agencies) kept about $9.3 billion in nearly 1,400 outside accounts, state bank accounts that are usually authorized by statute to hold money outside California's Centralized Treasury System (treasury system) or, less commonly, are approved by the California Department of Finance (Finance) for state agencies that request to separate certain funds from treasury system money. For most of this money, state agencies have properly created and maintained the accounts. Likewise, Finance, the Office of the State Treasurer (state treasurer), and the California State Controller's Office (state controller)—the control agencies tasked with overseeing the outside accounts—have generally fulfilled their respective responsibilities for authorizing and then reporting on these outside accounts. Nonetheless, weaknesses in the control agencies' tracking of these outside accounts have created potential problems. These weaknesses include the state controller's failure to include all the state agencies that have outside accounts in its annual reporting on such agencies as well as the state treasurer's uncertainty about the existence of sufficient collateral—safeguards in the form of securities deposited at outside institutions—for all of the balances in outside accounts. For example, for four of the last five fiscal years, the state controller failed to note that the California Public Employees' Retirement System did not submit required annual reports for its outside accounts, resulting in understatements of the amounts in outside accounts that averaged $4.7 million each year. Although the control agencies have recently taken steps to correct such problems by developing an action plan and improving reporting forms and instructions, they need to further strengthen their tracking of and reporting on state agencies holding these funds.

Funds in outside accounts generally serve valid purposes, such as safeguarding money held in trust. Of the reported $9.3 billion in outside accounts as of June 30, 2012, about $8.9 billion belonged to accounts authorized under state laws. In some outside accounts with significant balances, state agencies hold money to comply with specific provisions in bond contracts. For example, the California Housing Finance Agency (CalHFA) has outside accounts that fulfill the requirements of its bond funds' contracts by holding bondholders' money in trust and by investing that money to ensure that CalHFA can pay the bonds' interest. Other outside accounts serve as trust accounts for such funds as the ScholarShare Trust, which allows California families to save for college by making tax-advantaged contributions. Additionally, some statutorily authorized accounts are established to increase operational efficiency. Specifically, the California State University (CSU) system established its outside accounts to streamline its accounting processes, expedite its annual financial reporting, and obtain a better return on its investments. As of June 30, 2012, CSU's largest account, the Statewide Investment Fund Trust, held $1.8 billion.

Additionally, specific statutory authority allows state agencies to seek approval from Finance to open outside accounts that have benefits and efficiencies not available through the treasury system, such as the ability to process credit card receipts. Of California's nearly 1,400 outside accounts, about 225 received approval from Finance, including the California Raisin Marketing Board (raisin board), which had about $5.6 million in outside accounts as of June 30, 2012. The raisin board conducts fairs and other commodity-promoting activities, and the ability to pay its obligations promptly, afforded by outside accounts, allows it to obtain first-class services and rates and to pay temporary workers on their last day of work. On the other hand, the State must weigh the benefits of allowing state agencies to establish and use these accounts against the possibility of state agencies mismanaging them, for these funds are subject mainly to controls within the state agencies, with fewer statewide controls over them than over funds in the treasury system.

Fortunately, state agencies have generally complied with state requirements for establishing outside accounts. The state treasurer's staff recently reviewed the authorities that state agencies cited for establishing the various outside accounts they have created and found that it agreed with these authorities for most of the accounts. Furthermore, the agencies that established eight of the 11 accounts we tested cited appropriate statutory authority, and two others had received Finance approval. However, the remaining account, discussed later, was established without statutory authority or Finance approval. Also, the internal controls over the handling of revenue at the state agency level were generally adequate for 10 of the 11 accounts we tested. Specifically, with the exception of the California Department of Forestry and Fire Protection (Cal Fire), the state agencies we tested, such as the raisin board, segregated key accounting and reporting duties to safeguard collecting, recording, and reporting revenue.

Although the state agencies we tested during our audit generally have adequate controls over outside accounts, an agency may still bypass state rules as well as its own policies. For instance, Cal Fire had $3.7 million in settlement payments for the cost of fire suppression and investigation (cost recovery revenues) deposited into an outside account, the Wildland Fire and Investigation Training and Equipment Fund (Wildland Fire Fund), that was neither authorized by statute nor approved by Finance. Further, it did not subject the money in this outside account to its own internal controls, nor did it track or monitor the account's revenues adequately. Specifically, the management of Cal Fire's law enforcement unit bypassed Cal Fire's accounting and budgeting processes by failing to submit a request to its accounting office to establish the account and by diverting and spending cost recovery revenues without submitting the appropriate request to increase its budget appropriations. As a result, this portion of Cal Fire's cost recovery revenue was not subject to Cal Fire's normal internal controls or to oversight by the control agencies or the Legislature, leaving Cal Fire open to possible misuse of these revenues. Additionally, we found that Cal Fire lacks adequate controls to safeguard cost recovery revenues. As the result of a decentralized process, staff at regional and local program offices collect these payments without adequate oversight; therefore, Cal Fire cannot ensure that these payments are deposited to the correct account. Finally, Cal Fire approved the purchase of equipment costing $1.7 million, but did not follow state policies for accounting for, or safeguarding the equipment. Specifically, Cal Fire did not maintain a list of equipment, tag equipment, or conduct periodic inventories. As a result, Cal Fire cannot be certain that the equipment has not been lost or stolen.

RECOMMENDATIONS

To improve the State's control over outside accounts, the control agencies should take the following steps:

Within the next 60 days, Finance, the state treasurer, and the state controller should implement the policies and procedures they developed to ensure the receipt of outside account reports in each reporting period and to enhance monitoring efforts.
Within the next six months, the state treasurer and the state controller should develop policies and procedures to each maintain a list of all outside accounts and should annually reconcile these lists with one another.

For the State to better monitor outside accounts, the Legislature should consider requiring the state controller to expand its reporting on outside accounts to include information on accounts opened during the last fiscal year. Reported details should include the authority, name, and balance of the new outside accounts.

To safeguard cost recovery program revenue, Cal Fire should do the following within the next six months:

Implement adequate segregation of duties for its cost recovery program revenues. For example, it should require that cost recovery payments be mailed to its accounting office, as are other payments.
Develop policies and procedures requiring personnel not affiliated with the cost recovery program to reconcile expected cost recovery payments to deposits.
Develop a process to track civil cost recovery cases statewide to monitor compliance with policies as well as to monitor collection status.

To ensure that state agencies do not misdirect cost recovery revenues in the future, the Legislature should specify that these revenues include any money received as a result of cost recovery efforts, and should require that these revenues be deposited in the state treasury.

To ensure that it possesses all equipment purchased with Wildland Fire Fund money, Cal Fire should:

Compile a complete list of equipment purchased with the funds and reconcile it to accounting records.
Tag all equipment purchased through the Wildland Fire Fund.
Perform a periodic inventory of equipment.

AGENCY COMMENTS

The agencies agreed with our recommendations and in some cases outlined steps to implement them.