OFFICE OF MANAGEMENT & ENTERPRISE SERVICES M E M O R A N D U M DATE: JANUARY 23, 2018 TO: DENISE NORTHRUP FROM: LYNNE BAJEMA RE: RECOMMENDED RESTRICTIONS FOR OSDH As discussed, after spending some time at the Department of Health, Jennie Pratt and Ashley Neel documented accounting issues they found along with several recommendations that were going to be presented in an exit interview that did not take place. Some of these recommendations are only suggestions to management. The full report prepared by Jennie and Ashley is attached. There are a couple of recommendations from their report that should be immediately required of OSDH, from a central oversight perspective. This memo addresses those items. 1. Segregation of restricted federal funds – A separate fund (4xx) should be established for each OSDH program that involves advance federal funding or rebates (such as the Ryan White fund). These moneys should be held separately and not comingled with other programs. OSDH should work with CAR to get the class fundings established with the correct balances. 2. Proper funding of payroll in HCM system – Years ago OSDH was allowed to use an alternative payroll funding process that was agreed upon by the Office of State Finance. A description of that process is attached. While Jennie was assigned to OSDH, it was discovered that the agreed-upon process was modified by OSDH and they are now funding all payroll with their 400 fund and not properly correcting that funding. As a result, the alternative procedure should not be allowed to continue and OSDH should correctly assign funding by employee in the HCM system. Two attachments: OSDH Notes and Recommendations OSDH Payroll Funding Summary Health Department Notes and Recommended Actions Prepared for OSDH Management Team Prepared by Jennie Pratt, Director of Statewide Accounting and Ashley Neel, Budget Analyst Includes comments on practices noted while engaged at OSDH. This covers only the areas researched during the time assigned there. Ryan White Payment • • • • • OSDH pays their entire payroll out of their 40000 class fund and department 7540019 in the OMES PeopleSoft (PS) system. They then complete payroll corrections in PS to move payroll to the correct funds and departments as budget and cash is available in the internal OSDH. Because of this practice, there can be a lag between when the payroll is paid and when the payroll corrections occur, causing a temporary large decrease in the 40000 fund on the OMES side. Internally, the Ryan White funds needed were present since OSDH does not post payroll on their internal system until it can be paid from the correct source. However, OSDH was unable to post the needed payroll corrections in PS to move the expenditures from the 40000 fund to the correct funds because of a lack of cash in the destination funds at both the OMES and Health Department levels. As such, when it came time to pay the Ryan White payment, the 40000 fund on the OMES side was still carrying old payroll costs and did not have the cash needed to make the payment. Payroll Correction Lag • • • • • As mentioned above, OSDH pays their entire agency payroll out of class fund 40000 and department 7540019, following up with OMES payroll corrections to move the expenditures to the correct class fund and department. Based on conversations with Mike Truitt, there is normally a week lag between the time when the payroll is paid and the OSDH finance team properly assigns each person’s payroll to the correct funding source. At that time, the correctly divided payroll is then entered into OSDH’s internal system, Fiscal, where it must both budget and cash check. Once posted in the internal system, a manual transfer (aka a payroll correction) is then sent to OMES, moving the expenditures from 400007540019 to the proper class fund and department. If a payroll expenditure is rejected, it shows up in the Payroll Not Posted (PNP) file created by the internal accounting system. This file is continually being ran through the system in an attempt to post those payroll expenditures which have not posted. It is only after the expenditures are posted in the OSDH internal system that the corresponding payroll corrections are made in PS. OSDH has increasingly struggled to post payroll expenditures to the correct fund, mainly the 21000 fund, creating a large time lag between original payroll and the related correction. • • According to the last manual transfers/PNP file we have seen, most of the unposted payroll resides in the 21000 fund. The result is a large amount of payroll costs in the 40000 fund on PS which cannot be moved to the proper fund. The last amount in the manual transfers/PNP file was $8,960,868.38 with $7.4 million coming from FY-2018. (as of January 2, 2018, these numbers appear to be approximately $7.4M total with $5.9M coming from FY-2018) Please Note: This amount does include small amounts that need to be corrected to funds other than 21000. Payroll Corrections for Cash Flow • • • • OSDH is using payroll corrections in the PS system to facilitate cash flow, and it appears they have been doing this for several years, going back to at least FY-2010. Apparently, when it becomes apparent that there will not be enough cash in 40000 to cover the upcoming payroll, OSDH will move payroll expenses on PS to other funds to increase the cash in the 40000 fund. This is documented and then reversed at a later date as funds become available. Based on the latest documentation we have obtained and conversations with OSDH Finance, there are no outstanding transactions of this sort for FY-2018. However, it has been used extensively in the past, and it is likely this will be used again. Internal Fund Borrowing • • • • • OSDH has a complex fund structure that goes much deeper than the OMES class fund system. For example, OMES shows a class fund of 40000. OSDH has this fund split at least 27 ways which are not reflected in the PS system. OSDH Finance seems to view these class funds as separate distinct funds to themselves regardless of whether OMES views them as separate funds. Some,of the “borrows” that OSDH seeks to pay back seem to actually be intra-fund versus inter-fund. For example, based on a spreadsheet updated 12/8/2017, there is approximately $6.4 million which was borrowed from various 210 sub-funds to supplement other 210 subfunds. There may be no legal need to repay the 2xx borrows from external sources, such as the $30M, since they are intra-fund. The main fund in question is 21000 which is the Public Health Special Fund created in 63 O.S §1-107. That statute states “All monies accruing to the credit of said fund are hereby appropriated and may be budgeted and expended by the Commissioner for the purpose of maintaining and operating the State Department of Health, and in administering and executing the laws pertaining to the duties and functions of the State Department of Health.” As such, we suggest that legal counsel examine whether these intra- fund loans within state funds are required to be paid back. Recommendations: • Based on the preliminary findings above, it would seem difficult for OSDH to move forward without some segregation of funds, an updated financial system, and a renewed focus on an organized and comprehensive cash management strategy. 1. We would suggest that the Ryan White funds that consist of rebates be separated into its own fund as to avoid mingling those funds with reimbursement monies which fall under different rules. 2. We would also suggest discussions start concerning the use of the projects module of PeopleSoft financials to replace their current financial system. 3. Develop a defined cash management strategy that does not rely on moving expenditures from one fund to another to free up cash (aka borrowing). 4. Investigate properly funding employees (using a load) in HCM to properly fund payroll initially. 5. As note in the section on Internal Fund Borrowing, we would recommend that legal counsel determine whether the intra- fund borrowing within state funds has to be paid back. 6. We recommend that the methodology used for the reconciliations of the OSDH internal records to the Statewide Accounting System be re-evaluated to ensure that meaningful reconciliations are being done. For example, on the expenditure reconciliation, it seems to have a formula being used which puts the difference between OSDH and OMES as a reconciling item. This means that the reconciliation reports no differences. We did not have the chance to clarify further why this was being done. We were not able to get to the deposit or cash reconciliations to see if they were valid. 7. OSDH needs to have someone to tie the separate divisions of OSDH finance and budget into an overall view and be able to understand how the agency financial data relates to the Statewide Accounting System. Oklahoma Department of Health Summary of Payroll Funding Arrangement Prepared by Jennie Pratt from notes and memory. I don’t recall being in the meetings with Health regarding the coding of their employees when they went into the PS payroll system which I believe was in October 2006. However, during the implementation of PeopleSoft, there was apparent arrangement to allow OSDH to fund all of their employees on a predetermined set percentage. This was due to the fact that the time required to change each employee’s funding to where they actually worked would be too time consuming to process payroll timely. So as an alternative, OSDH would fund all employees based on where their actual payroll paid in the prior year. For instance, if 30% was funded from appropriated funds, 45% was funded from federal funds and the remaining 25% was funded from revolving funds in the prior year, they would set every employee up with that funding: 19x – 30% 400 – 45% 210 – 25% Each year this would be evaluated to determine if the class funding or percentage needed to be changed. Subsequent to processing the payroll, Health would process a payroll funding correction to correctly align the payroll cost to where the employees actually worked. Apparently, over time OSDH deviated from that agreed-upon process and began funding all employees out of a single class and department (40000 7540019) and were not providing complete payroll funding corrections. The changes in process at OSDH and the fact that the funding was not being corrected in its entirety each month was not something that could be detected at OMES and we were still under the impression that Health was timely providing payroll funding corrections to charge the payroll to the correct funding stream in which the employee worked. During the temporary assignment at the Department of Health I found out that this was not the case. For one thing, the payroll funding corrections appear to be changing the funding to where the employee was budgeted from, not where they worked. The reason I mention this is that since the budget is set at the beginning of the year they could fund each employee according to where they are budgeted without needing payroll funding corrections since they are only correcting to the budget amount anyway. OSDH is not providing complete payroll funding corrections. They are only correcting the costs that have posted into their supplementary system. This is not something we can see from a central perspective and only became apparent when on temporary assignment at OSDH. For instance, the 210 fund has 6 funding strings on the state accounting system. OSDH’s internal system may have 100 or more funding streams, all with controls that prevent posting in excess of cash. So they may have $2M of payroll that needs to be corrected to the 210 fund, but only $500K of that can post in their system due to their system controls. Since only $500K of the payroll could be posted on their system, the correction to us would only include that $500K. The remaining $1.5M would still be funded (incorrectly) from the 400 fund on the state system. Where this is very alarming from OSDH’s perspective is that when an actual payment cannot be posted in their detail system because the cash is not available at that detail level, they are simply not posting it at all. They are tracking on spreadsheets. So they may process a payroll of $5.8 million on our system that posts out of the 400 fund, but only a fraction of that payroll is actually posted into their internal system. That is where the PNP (payroll not posted) term is originating. Another area of concern we saw while at the agency was that they were at times posting a ‘general’ payroll funding correction just to free up cash or budget in the 400 fund to process a payroll. When talking to Mike Truitt, it appears that they were doing this to expedite the posting so that payroll could run. These entries should all have been reversed with the correct ‘detail’ payroll funding correction sent at a later date and posted in the state system. This is not a practice that OMES advocated or even realized was happening. My perception is that they were doing this to ‘realign’ cash to get the new payroll they were processing to post with the intent to reverse the entry in the very near future. Examples of this type of activity would be journal IDs MT0003435 and MY0003436. This practice needs to be vetted through OMES management to determine if it will be allowed.