DENVER – City departments account for their direct costs, such as staff, contracts with vendors and the purchase of equipment and supplies. In addition, they also account for indirect costs, such as occupying space in city buildings and using central services such as information technology and payroll.
A new report from Denver Auditor Timothy M. O’Brien, CPA, finds errors in how certain central services indirect costs are allocated to various departments and agencies, resulting in incorrect reimbursements from the state and between departments. Further, the report states that increased oversight and involvement by the Budget and Management Office is needed to ensure the precision of the process and final product.
“We need to ensure accurate oversight for the city’s books to ensure each agency and the state are all appropriately charged for city services or programs funded by grants,” Auditor O’Brien said.
The Budget Management Office is responsible for oversight and management of the contract with MGT Consulting Group; the organization that is hired to calculate the annual Citywide and Federal Cost Allocation Plans.
The audit team found errors in how costs were allocated. Specifically, the 2017 Citywide Cost Allocation Plan underbilled the Denver Airport for central services by approximately $108,000. As a result, the city’s general fund received less money than it should have due to the incorrect calculation.
The audit team also found inconsistencies in department numbers and descriptions used to identify them in the allocation plans due to insufficient review. Additionally, the audit team found errors in the plan that led to the misallocation of expenses. The team found seven accounts that were incorrectly allocated and expected to pay approximately a total of $18,000. These accounts were inactive or being used as placeholders for future use. None were tied to departments actually using central services. For example, inactive accounts had names such as NOT USED. These placeholder accounts are included in cost allocation plans because the city might use them actively in a future year, however they should not be allocated any indirect costs in years when they are inactive.
These errors are a sign that the Budget Management Office’s review process is not detecting errors in the Citywide Cost Allocation Plan, which could mislead city management about the true costs of city functions. For example, an error in the plan’s summary page overstated two departments’ indirect costs by more than $40 million. Had these two departments relied on this information, they would have overestimated the cost of indirect expenses. After our team found the error, MGT released a revised plan with corrected figures.
In addition to the allocation schedule within the city, every year the State of Colorado Department of Human Services reimburses the City of Denver for certain services such as the use of motor pools, computer centers, purchasing and accounting. This reimbursement is calculated in the Federal Cost Allocation Plan which follows the rules and guidelines set forth in Title 2 of the Code of Federal Regulations Part 200 commonly known as the Uniform Guidance. Our audit found the city’s Budget Management Office does not have a process to ensure the right amount of money gets paid back from the state according to these federal guidelines. This led to the Budget Management Office submitting an incorrect reimbursement report to the state of Colorado in 2017.
This resulted in an overstatement of expenses by more than $36,000. MGT told the audit team the error happened because the amount submitted to the state was from a draft and did not reflect accurate information. In March of 2018, the city submitted a corrected reimbursement schedule; however, the state still has not completed the process to settle the difference.
Lack of oversight and involvement from the Budget and Management Office resulted in errors and inconsistencies in the city’s 2017 Federal Cost Allocation Plan. The audit also found other issues with inconsistent application of federal guidelines and incorrect adjustments for income and credits.
The Budget Management Office needs to develop a documented procedure to review and ensure the accuracy of reimbursements requested from the state and city departments. The audit recommends the Budget Management Office develop a well-documented review process to ensure submitted reimbursement requests are supported, accurate and complete.
“I expect the Budget Management Office to watch its contractor closely enough to avoid unnecessary errors,” Auditor O’Brien said.
The Budget Management Office agreed with all six of our recommendations to help clean up the cost allocation process and avoid errors in the future.