DOL Annual Report, Fiscal Year
Performance and Accountability Report
Management's Discussion & Analysis
Financial Performance Overview
Improving financial management continues to be high priority at DOL and an essential element of demonstrating accountability and enhancing services provided to the public. With the added impetus of tightening budgetary resources, improvements initiated under the President's Management Agenda continue to mature from externally driven "initiatives" to internally embraced "ways of doing our business better." Pivotal to driving better performance results through enhanced financial management practices has been DOL's ongoing efforts to better inform day-to-day decision making with reliable cost information.
In a July 2007 study of managerial cost accounting (MCA) practices in ten agencies, GAO found that only three agencies, including DOL, had implemented an MCA system entity-wide (GAO-07-679). The GAO Report commended DOL and the other agencies for having a strong leadership that supports MCA implementation. DOL's ongoing efforts to improve its MCA tool, Cost Analysis Manager (CAM), are creating an instrument of change that managers increasingly value and use in their decision making.
CAM allows agencies to identify, accumulate, and assign costs to outputs and bring relevant cost information to the desktops of managers throughout the department. An indispensable tool for improving program performance, CAM improves accountability and transparency for how well tax dollars are spent. One of DOL's remaining challenges is the validation of labor distribution and performance data, where labor cost is often the most predominant factor when determining the cost of an activity.
In FY 2007, DOL used CAM for costing quarterly performance indicator results using continual refinements for more accurate reporting. Throughout the year, DOL expanded the use of CAM by developing cost models for several programs, including one model that calculates the marginal rate of return on investment. Broader use of CAM is also being seen in the support of other budget activities. In DOL's FY 2007 PAR, CAM provides net costs for 89 percent of the performance indicators.
The Debt Collection Improvement Act of 1996 (DCIA) designated the Department of the Treasury as the central agency for collection of Federal debts over 180 days delinquent. The Department applies cross-services to all delinquent debts in accordance with this statute. Debt management accounts for a relatively small part of our financial management activity. The majority of debts managed by the Department relate to the assessment of fines and penalties in our enforcement programs. As of the end of 3rd quarter FY 2007, DOL referred $65.2 million, which represents 57 percent of all delinquent debt required to be referred to Treasury for collection. The Department continues to monitor and aggressively pursue its debt greater than 180 days old.
The Department continues to make improvements in its efforts to meet guidance and regulations outlined in the Prompt Payment Act (PPA). The PPA requires Executive agencies to pay commercial obligations within discrete time periods and to pay interest penalties when those time constraints are not met. During FY 2007, approximately $1.2 billion in gross payments were made. Included in this amount was just over $355,000 in interest penalty fees. Also during FY 2007, there were over 111,000 payments made to vendors and travelers. Of this amount, 3,352 invoices were paid late resulting in only 3 percent of the total payments incurring interest penalties. This is the same percentage rate that was reported by the Department for FY 2006.
The Department continues to work aggressively with its agencies to increase the number of vendors receiving payments through electronic fund transfer (EFT). The total number of vendors receiving EFT payments in FY 2007 increased by 4 percent to 99 percent as the fiscal year ends. Although our Employment Standards Administration is continuing to promote EFT payments for their benefit and medical programs, their percentage rates continues to remain below Treasury's goal of 98 percent.
Analysis of Financial Statements
The principal financial statements summarize the Department's financial position, net cost of operations, and changes in net position, provide information on budgetary resources and financing, and present the sources and disposition of custodial revenues for FY 2007 and FY 2006. Highlights of the financial information presented in the principal financial statements are shown below.
The Department's Balance Sheet presents its financial position through the identification of agency assets, liabilities, and net position. The Department's total assets increased from $83.6 billion in FY 2006 to $92.8 billion in FY 2007. The increase in total assets primarily was accounted for in the Department's investments. The Department invests in non-marketable, special issue Treasury securities balances held in the Unemployment Trust Fund. The Department did not experience major changes in liabilities during FY 2007. Liabilities totaled $19.8 billion at the end of FY 2006 and $21.3 billion in FY 2007. Beginning in FY 2006, agencies were required to report earmarked non-exchange revenue and other financing sources, including appropriations. The Department was also required to report the portions of cumulative results of operations and unexpended appropriations on the face of the Balance Sheet.
Net Cost of Operations
The Department's total net cost of operations in FY 2007 was $48.3 billion, an increase of $3.4 billion from the prior year. This increase was attributable to the following crosscutting programs:
Income Maintenance programs continue to comprise the major portion of costs. These programs include costs such as unemployment benefits paid to individuals who are laid off or out of work and seeking employment, as well as payments to individuals who qualify for disability benefits due to injury or illness suffered on the job. Income maintenance increased by $3 billion from FY 2006 to FY 2007. There are two reasons for the increase. The Unemployment Trust Fund weekly reimbursement rate increased by 4.5% and the Energy Benefit Program actuarial liability increased by $1 billion.
Employment and Training programs comprise the second largest cost. These programs are designed to help individuals deal with the loss of a job, research new opportunities, find training to acquire different skills, start a new job, or make long-term career plans.
Statement of Budgetary Resources. This statement reports the budgetary resources available to DOL during FY 2007 and FY 2006 to effectively carry out the activities of the Department as well as the status of these resources at the end of each fiscal year. The Department had direct obligations of $52 billion in FY 2007, an increase of $1.7 billion from FY 2006.
Limitations on the Principal Financial Statements. As required by the Government Management Reform Act of 1994 (31 USC 3515 (b)), the principal financial statements report the Department's financial position and results of operations. While the statements have been prepared from the Department's books and records, in accordance with formats prescribed by OMB, the statements differ from the financial reports used to monitor and control budgetary resources, which are prepared from the same books and records. The statements should be read with the realization that they are a component of the U.S. Government, a sovereign entity, and that liabilities reported in the financial statements cannot be liquidated without legislation providing resources to do so.
The Department successfully implemented the internal control requirements outlined in the revised OMB Circular A-123, Management's Responsibility for Internal Controls, Appendix A. The Department's A 123 compliance builds upon existing successes in financial management, including the Quarterly Financial Management Certification program, which requires managers at all levels to attest to the adequacy of effective management controls over program resources, financial systems, and financial reporting. The Department's approach to the A-123 requirement is compliance at managed cost, sustainability by reducing compliance mindset and reliance on outside parties to discover errors and problems, and improvement in effectiveness and efficiency of agency programs.
Disclosure of Federal Information Security Management Act (FISMA) Significant Deficiencies
FISMA requires the Office of Inspector General (OIG) to perform annual independent evaluations of the DOL information security program and practices based upon audits of a subset of DOL's identified major information systems. The objective of the audits is to determine if security controls over the systems are in compliance with FISMA requirements.
Based on the audits performed during FY 2007, the OIG identified two significant deficiencies. One significant deficiency relates to access control weaknesses covering eight financial and non-financial information systems. None of the systems had an individual significant deficiency; however, when taken together the OIG stated that an access control significant deficiency exists at the Department level. Management has determined that the deficiencies relating to financial systems did not rise to the level of a significant deficiency. The other significant deficiency relates to a lack of an effective information security program in one other non-financial system. The OIG recommended that DOL: (1) implement an enhanced Department wide monitoring program to address the first deficiency, and (2) establish an information security program to address the second deficiency, with both programs designed to afford management reasonable assurance of compliance with DOL security controls, policies and procedures. In its response to the audit report, DOL stated that it has already taken certain corrective actions and is in the process of taking additional corrective actions to address the recommendations.
Financial Management Systems and Strategy
During FY 2007, DOL continued to pursue its financial management systems strategy to improve reporting, accountability, and decision-making, while furthering implementation of key provisions of the President's Management Agenda, e-Gov requirements, and other regulatory mandates. The Department seeks to maintain financial management systems, processes, and controls that ensure financial accountability, provide useful information to management, and satisfy Federal laws, regulations, and guidance.
DOL's existing enterprise architecture for financial management consists of a central, mainframe-based core accounting system, DOLAR$. DOLAR$ receives and transmits financial data through both manual and automated processes from numerous feeder systems. These feeder systems include PeoplePower, CAM, eProcurement, systems maintained by program agencies to oversee the Department's benefits programs, and others.
DOLAR$ has been in use for over 18 years and was implemented prior to the passage of numerous significant laws affecting Federal financial management, including the Chief Financial Officers Act of 1990, the Government Performance and Results Act of 1993 (GPRA), the Government Management Reform Act of 1994 (GMRA), the Clinger-Cohen Act of 1996, the Reports Consolidation Act of 2000, and the Federal Information Security Management Act of 2002 (FISMA). It is no longer cost-effective to upgrade DOLAR$, which is a mainframe, COBOL-based system, to continue to meet the new requirements intended to enhance accountability and results through improved financial management that have been and will continue to be promulgated by Congress, OMB, the Department of the Treasury, and the Federal Accounting Standards Advisory Board.
In 2004, the Department began an effort to supersede DOLAR$ with a commercial off-the shelf (COTS) financial management system that would ensure sufficient flexibility to comply with new requirements and meet the Department's future needs. In FY 2007, an assessment of this effort, which included a comprehensive cost-benefit analysis (CBA). indicated that migration to a shared service provider (SSP) would better meet the Department's needs. In FY 2008, DOL will issue a solicitation to both public and private providers whose services comport with the requirements of the FMLoB for serving as an SSP. The timely replacement of DOLAR$ is critical to continuing to meet DOL's financial management needs and support the Secretary's 21st century and competitive workforce priorities. The completion of this initiative will provide managers with the financial information and metrics they need to manage their programs efficiently and effectively.
Improved financial performance through the reduction of improper payments continues to be a key financial management focus of the Federal government. At DOL, developing strategies and the means to reduce improper payments is a matter of good stewardship. Accurate payments lower program costs. This is particularly important as budgets have become increasingly tight.
Over the past several years, identifying and reducing improper payments has been a major financial management focus of the Federal government. A key PMA component is to improve agency financial performance through reductions in improper payments. OMB originally provided Section 57 of Circular A-11 as guidance for Federal agencies to identify and reduce improper payments for selected programs.1 The Improper Payments Information Act of 2002 (IPIA) broadened the original erroneous payment reporting requirements to programs and activities beyond those originally listed in Circular A-11. In August 2006, OMB issued Circular A-123, Appendix C - Requirements for Effective Measurement and Remediation of Improper Payments.
IPIA defines improper payments as those payments made to the wrong recipient, in the wrong amount, or used in an improper manner by the recipient. IPIA requires a Federal agency to identify all of its programs that are high risk for improper payments. It also requires the agency to implement a corrective action plan that includes improper payment reduction and recovery targets and to report annually on the extent of its improper payments for high risk programs and the actions taken to increase the accuracy of payments.
To coordinate and facilitate the Department's efforts under IPIA, the Chief Financial Officer (CFO) is the Erroneous Payment Reduction Coordinator for the Department. The OCFO works with program offices to develop a coordinated strategy to perform annual reviews for all programs and activities susceptible to improper payments. This cooperative effort includes developing actions to reduce improper payments, identifying and conducting ongoing monitoring techniques, and establishing appropriate corrective action initiatives.
Due to the inherent differences in managing and accounting for funds in the benefit, grant and other programs, the Department conducted its FY 2007 risk assessment using different methodologies to assess their improper payment risk. Per OMB guidance, two benefit programs Unemployment Insurance (UI) and Federal Employees' Compensation Act (FECA), and one grant program Workforce Investment Act (WIA), are deemed to be high risk irrespective of the determined improper payment error rate. This determination is based on the fact that the annual outlays for each of these programs exceed $2 billion.
In FY 2007 and consistent with prior years, programs with FY 2006 outlays totaling less than $200 million were deemed to be low risk, unless a known weakness existed in the program management based on reports issued by oversight agencies such as the Department's Inspector General (IG) and/or the U.S. Government Accountability Office (GAO). Hence, these programs were not statistically sampled. For benefit programs with outlays greater than $200 million, the Department conducted sampling to determine the improper payment rates. This sampling included FECA, UI, Black Lung Disability Trust Fund, and Energy Employees Occupational Illness Compensation Fund. UI was the only program determined to be susceptible to high risk2 as a result of this approach. However, the Department is also reporting on FECA's improper payment rate, since it is required per OMB guidance.
As mentioned earlier, the Department used a separate methodology to assess the risk of improper payments in grant programs. The Department analyzed all FY 2005 Single Audit Act Reports3 to identify questioned costs, which were used as a proxy for improper payments, and to estimate an approximate risk for the Department's grant programs. The improper payment rate was determined by calculating the projected questioned costs and dividing this total projection by the corresponding outlays.4 All error rates were determined to be well below the 2.5 percent threshold; therefore, no grant programs were determined to be susceptible to risk as a result of this approach. However, like FECA, the Department is reporting on WIA's improper payment rate since it is required per OMB guidance, even though its improper payment rate is well below the 2.5 percent threshold.
Challenges for IPIA Compliance
Like many other Federal agencies, the Department faces challenges in meeting its improper payment reduction and recovery targets, particularly with programs that are sensitive to the U.S. economy fluctuations or natural disasters, such as the UI program. Furthermore, meeting improper payment reduction and recovery targets of programs such as UI and WIA are contingent upon the cooperation and support of State agencies and other outside stakeholders who are intricately involved in the day-to-day management of these programs' activities.
Accomplishments and Plans for the Future
The Department met its reduction and recovery targets for improper payments. The estimated improper payment error rates were 9.71 percent for UI, 0.1 percent for FECA and 0.08 percent for WIA for FY 2007.
The Department's analytical studies indicate that earlier detection of recoverable overpayments, especially those where claimants have returned to work but continued to claim benefits, is the most cost-effective way to address improper payments. Early detection allows agencies to stop benefit payments for a claimant who has returned to work and to recover these overpayments more readily. The Department estimates that the forty-five states that crossmatch UI beneficiaries with the State Directory of New Hires (SDNH) or the National Directory of New Hires (NDNH) instead of UI wage records prevented approximately $75 million of overpayments in each of the past two fiscal years. A pilot study showed that a cross-match using the NDNH is more effective than the SDNH in identifying individuals no longer eligible to receive UI benefits, by including benefit year earnings for out-of-State employers, Federal agencies, and multi-State employers that report all of their new hires to a single state. The Department provided states with funds to implement these NDNH cross-matches; as of September 30, 2007, thirty-five states have implemented the NDNH crossmatch, and seven others have signed the computer-matching agreement with the Department of Health and Human Services that is the prelude to connecting with the NDNH. The remaining states are in the planning process. All States are required to use NDNH crossmatches as part of their Benefit Accuracy Measurement programs by January 1, 2008.
In FY 2005, the Department began providing States funds to conduct Reemployment and Eligibility Assessment (REAs) with UI beneficiaries, to reduce improper payments both by speeding claimants' return to work and by detecting and preventing eligibility violations. Twenty states received funds to continue REAs during FY 2006, and the Department has sought $40 million to expand the number to about forty in FY 2008. A solicitation of grant applications has been sent to all States. The REAs in the twenty states are estimated to return about $66 million to the UI trust fund. An impact evaluation of nine states' REA programs will be published in fall 2007.
To address the second largest cause of overpayments errors in handling separation issues the Department has two efforts underway. First, funding has been provided to states to support the training of approximately 400 adjudicators to address improper payments that result from nonmonetary determination errors. Secondly, the Department is facilitating the design and implementation of an automated system - Unemployment Insurance Separation Information Data Exchange System (UI SIDES). UI SIDES is expected to provide more timely and complete separation information from large multi-State employers or Third Party Agencies (TPAs) to make more accurate benefit eligibility decisions.
1Section 57 identified Unemployment Insurance (UI), Federal Employees' Compensation Act (FECA), and Workforce Investment Act (WIA) as programs required to report annual erroneous payments.
2MB Implementation Guidance, M-03-13, further defined programs to be susceptible to risk if the improper payment rate exceeded 2.5 percent and the amount of overpayment exceeded $10 million. This guidance is now superseded by Appendix C of Circular A-123, which continues to define susceptibility to risk in the same manner.
3The Single Audit Act of 1996 provides for consolidated financial and single audits of State, local, non-profit entities, and Indian tribes administering programs with Federal funds. The most recent year available for Single Audit Reports is 2005.
4The grant programs assessed were the WIA program, the State Unemployment Insurance and Employment Service Operations (SUIESO) program, and DOL's other grants as a group. To estimate the rate of improper payments for WIA, SUIESO and the other grants as a group, the Department divided the amount of questioned costs from the FY 2005 single audit reports by the amount of the applicable direct outlays. The FY2007 improper payment rate was assumed to be similar to the FY2005 rate and was applied to the program outlays for FY 2007 to determine the amount of estimated improper payments for FY 2007.