.“.I,_ ..-...-..-. _._..._“I -~.- _,..._I_ .---. --_-I__ -..--...- - _..---- FINANCIAL AUDIT ~ ;‘I)V;‘;llt)(,l’ 1 ff!j() Department of Veterans Affairs Financial Statements for Fiscal Years 1989 and 1988 _-- HI 1111111 II 142659 ----.” .-.,........ -- --..^.._ I.--- ------ GAO,‘At’Ml~-91-O _I _---- --~ -.._. - _---- .__ _-_ . ..- “-. .._-__. “_.. ..-.-- _-“----l- United States GAO General Accounting Office Washington, D.C. 20648 Comptroller General of the United States B-226801 November 14,lQQO To the President of the Senateand the Speaker of the Houseof Representatives This report presents the results of our financial audit of the Department of Veterans Affairs (VA) for the fiscal years ended September30, 1989 and 1988. Our audit results are summarized in this letter and described in greater detail in our opinion on VA'S consolidated financial statements and in our reports on VA'S internal control structure and its compliance with laws and regulations. (Seeappendixes I through III.) VA'S financial statements are presented as appendix IV. In addition to the audit reports normally required by generally accepted government auditing standards, we present later in this letter a discus- sion and analysis of VA'S financial operations. We have also included a statement analyzing VA'S appropriation activity and a summary of VA'S self-assessmentof internal controls under the Federal Managers’ Finan- cial Integrity Act (FMFIA). (Seeappendixes V and VI.) We believe that a financial statement which analyzes appropriation activity is a desirable addition to the standard set of financial statements. It provides a fuller reporting of the relationship between accrual-basedstatements and the status of appropriations used. We also believe that a summary of an agency’sFMFIA report should be part of the agency’s annual report and eventually be included within the scopeof the independent auditor’s work and report. We believe these additions will provide the Congressand the President greater insight into and understanding of an agency’sfinancial affairs. Taken together, this information represents the kind of financial disclo- sure that should be made in an annual report by the head of an execu- tive agency, department, or government corporation to the Congressand the President. In this report, we prepared the financial information to provide an illustration of how such information could be similarly presented in other agencies’reports. The only difference would be that, similar to the financial statements presented in this report, the prepara- tion of the additional financial information would be the responsibility of agency managementand the independent auditor would attest to its fair presentation. In our opinion, except for property and equipment, VA'S consolidated Results in Brief financial statements for fiscal years 1989 and 1988 are fairly stated in Page1 GAO/AFMD-91-6DepartmentofVeteransAffairs B.226201 accordancewith generally acceptedaccounting principles (GAAP). The property and equipment amounts shown in the financial statements are not accurate primarily becauseof missing or undocumented values of the assetsand the inconsistent adherenceto capitalization and deprecia- tion policies by VA’S field personnel. The weaknessesin VA’S control over its property and equipment accounts are discussedin our report on internal control structure, which is included in appendix II. VA’S financial statements report certain accrued expensesaggregating nearly $5 billion at September30, 1989, that will have to be funded principally from future appropriations. These expenses(employee annual leave earned but not taken, life insurance premiums for disabled veterans that are funded by appropriations, and losseson guaranteed housing credit loans) are customarily financed through appropriated funds in the year payment is required. In addition, VA disclosed in the notes to its financial statements that the present value of the currently authorized compensation and pension benefits to veterans, which will also have to be funded by future appropriations, amounted to about $136 billion at September30, 1989. Our discussion and analysis of VA’S financial operations, which was basedon the audited financial statements and statistical data, budget reports, and other VA program data over the 4-year period ending with .,fiscalyear 1989, shows the following: l VA’S net operatingcosts decreasedslightly from fiscal year 1988 to fiscal year 1989, when they were $27.9 billion, whereas they increasedby $1.6 billion over the 4 fiscal years from 1986 to 1989. However, such costs, when measuredin 1986 constant dollars, decreasedby $1.6 bil- lion, or 6.1 percent, during the 4-year period. . Costs related to VA’S health care program grew at a moderate 6.3 percent annually between fiscal years 1986 and 1989, but this increaseis in the context of a continuing decline in the number of veterans served and the occupancy rates in acute care hospitals. Hospital acute care costs,mea- sured on a per patient day basis, have increased 9.2 percent annually. Health care costs can be expected to continue rising at or above this level. However, VA is studying the possible realignment, or changeof mission, for its medical facilities, which may influence future funding levels. l Veterans benefit costs,which are comprised primarily of compensation and pension benefits, stayed basically constant during fiscal years 1986 through 1989, ranging from about $15.3 billion to $16.9 billion a year. However, such benefits could increase significantly in the future due to Page 2 GAO/APMJMl-6 Department of Veterans Affairs recent court rulings declaring certain citizens of the Philippines eligible for full U.S. veterans benefits and requiring benefit payments to those Filipino recipients to be paid at the samerates that other recipients are paid. l About $2.5 billion of the nearly $6 billion in accrued expensesat Sep- tember 30,1989, that will have to be paid during future years, princi- pally with appropriations, represents accrued losseson’outstanding guaranteed loans under VA’S housing credit assistanceprogram. . VA’S life insurance program is securewith $12.2 billion in reserve. These reservesconsist of (1) amounts determined under GAAP neededto pay the actuarially determined guaranteed life insurance policy benefits, exclusive of future premium and investment income ($9.1 billion), and (2) additional amounts VA must hold in reserve to comply with the stat- utes which establish VA’S reserve requirements ($3.1 billion). This latter amount, under current VA practices, will eventually be distributed to policy holders through dividends or policy enhancements.The Congress can anticipate, though, the need to continue funding, through appropria- tions, certain unallocated administrative expensesrelating to the VA life insurance program and certain premium subsidies and policy claims under several insurance plans. The total of such appropriations amounted to about $41 million in fiscal year 1989. l VA has serious problems collecting its receivables and therefore provided a reserve for doubtful accountsof $3.2 billion as of September30,1989. VA’S self assessmentof its accounting systems under FMFIA’haa identified eight areas where its major accounting systems fail to conform with accounting principles and standards for government agencies.These areas include, for example, weaknessesin the controls over property and equipment accounts,security controls at automatic data processing (ADP) centers, and the inability to adequately control funds and effec- tively detect duplicate payments for the loan guaranty program. As a result of our audit tests, we are not aware of any information which would contradict the matters included in VA’S FMFIA reports, and our summary of these reports is included in appendix VI. In our report on VA’S internal control structure, we are recommending that the Secretary of Veterans Affairs direct the Chief Veterans Benefits Director and various responsible assistant secretariesto take certain actions to correct weaknesseswe reported concerning property and ‘Under the FederalManagersF’inancialIntegrity Act of 1982I31 U.S.C.3612ib)and(c)l agencies must evaluate and report on their agencyinternal control and accountingsystemsto the President and the Congrea9eachyear. Page 8 GAO/AFMD-91-6Department of Vetenam Affairm E226Sol equipment accounts,ADP security controls, and the recovery of erro- neousveterans benefit payments. This discussionand analysis presents information on VA’S operating Discussion and costs and major assetsfor fiscal years 1986 through 1989. It is a narra- Analysis of VA’s tive presentation of the results of an analytical review of financial data EnaCid position aJnd for each of VA’S programs. Important aspectsof VA’S financial operations are discussedand relevant trends are pointed out. For someprograms, Operations financial data are related to other measuresof performance. In addition, we have included information, where appropriate, to make the Congress aware of critical areas, such as VA’S debt collection activities or whether a program may need significant future funding. Highlights of VA’s VA’S net operating cost2for fiscal year 1989 was $27.9 billion, which rep- Financial Operations resents approximately 2.6 percent of the U.S. government’s net oper- ating cost for that year. Table 1 shows VA’S total cost of operations during the 4 years beginning with fiscal year 1986, a period during which it served a declining veterans population. Table 1: Net Cost of Operating VA’s Programs for Fiscal Year, 1986 Through Dollars in billions 1989 Net operating cost for fiscal year Program 1980 1987 1988 1989 Health care $9.5 $10.0 $10.5 $11.4 Benefits 15.4 15.3 15.5 15.9 Housing credit assistance 0.7 1.6 1.8 ( 0.2) Life insurancea 0.0 0.0 0.0 0.0 Administration 0.7 0.7 0.8 0.8 Total net operating costs $26.3 $27.6 $28.6 927.9 ‘While VA’s life insurance program operated at slightly greater or less than break-even throughout the 4 years, these operating results are shown as zero due to rounding. Although VA’S net operating cost decreasedslightly between fiscal year 1988 and 1989, it grew at an average annual rate of 2 percent over the 4-year period from fiscal year 1986 through fiscal year 1989. However, during this period, VA’S net cost of operations, when calculated in 1986 ‘As used in this report, unless otherwise stated, the term “net operating cost” for health, benefits, and other nonbusiness-type operations is defined as the sum of expenses and benefit payments minus reimbursements and revenues, and before appropriations. For business-type programs, such as the howing credit and life insurance programs, “net operating cost” represents the net loss of the pw gram, also before appropriations. Page 4 GAO/APMDSlS Department of Veterans AH&n B-228891 constant dollars, decreased6.1 percent, or $1.6 billion overall. Figure 1 depicts VA'S net operating costs in both current and constant dollars for the 4-year period. Flgure 1: VA’8 Net Operating Coat8 in Current and Conrtant Dollar8 for Fiscal a2 Dollars In billlonr Year8 1986 Through 1989 a0 24 22 1088 1987 1989 F+l ysars - Current dollars I 1-1 Constant dollars Note: Constant dollars were computed by deflating current dollar levels using the consumer price as the deflator. VA'S totalassetsat the end of fiscal year 1989 were valued at $36.2 bil- lion-down $601 million from the previous year. Aside from cash with the U.S. Treasury of $4.9 billion, receivablesof $3 billion, and future financing sourcesof $4.8 billion, VA'S major assetswere comprised of two major categories.The first category is investments derived pri- marily from VA'S life insurance program. These investments, which amounted to $13.2 billion at September30, 1989, are mainly in special non-marketable U.S. Treasury bonds. The secondcategory is property and equipment, which is used primarily to provide medical care to vet- erans. Although the amount is not considered accurate, basedon our audit, the value of property and equipment at the end of fiscal year 1989, as reported by VA, was almost $8.4 billion. Page 5 GAO/AFMD-914 Department of Veterans Affairs VA’s Health Care Costs The health care program operated by VA is the nation’s largest health Growing at Nominal Rate care system and includes 172 hospitals, 236 outpatient clinics, 122 nursing homes,and 29 domiciliary care units. All of the hospitals and But Could Change domiciliary care units and most of the outpatient clinics are organized into 172 medical centers. In addition, VA health care is acquired under contractual and grant arrangements with private and state medical providers. VA'S health care program employs over 226,000 full- and part- time health care workers, which is more than 90 percent of VA'S total employees. The cost of operating this health care program increased $1.9 billion, or 6.3 percent annually, from fiscal years 1986 to 1989, reaching $11.4 bil- lion. The maJority (62 percent) of VA'S health care costs are for personnel servicesand benefits of its approximately 226,000 health care workers-a complement of employeesthat has remained at about the samelevel in recent years. Lesseramounts finance the cost of supplies, materials, and contractual services(27 percent) and rent, communica- tions, utilities, depreciation, and other expenses(11 percent). In recent years, VA has provided fewer episodesof inpatient care in its hospitals while nursing care and other serviceshave increased slightly. Between fiscal years 1986 and 1989, the inpatient occupancy rate of hospitals, as reported by VA, declined from 73.4 percent to 68.8 percent and the average daily censusof hospital inpatients declined from 66,940 to 49,040. Meanwhile, the averagedaily censusof nursing home patients increased from 10,482 in fiscal year 1986 to 11,468 in fiscal year 1989, In addition, the daily patient censusfor domiciliary care units increased from 6,767 to 6,316 during the 4-year period. Although VA reduced its hospital staffing levels of “full-time equivalent employees” about 9 percent in responseto the reduced demand during that period, VA'S total staffing of health care workers remained about the samewith more workers used for other health care services.Recent appropriations for medical care have specified minimum funding levels *, for personnel compensation and benefits object classifications. For ‘x, example, the supplemental appropriations act for fiscal year 1989 (Public Law 101-46) required that not less than $6.8 billion shall be .I available for those classifications, and the conferencereport (H. R. Rep. 101-89)on a related bill directed VA to proceed towards a medical care, full-time equivalent employee staffing level of 194,700.Accordingly, VA'S flexibility to reduce the total number of health care workers may be limited. Page 6 GAO/AF’Mb918 Department of Veterans Affairs B228801 VA spent about $1.2 billion in fiscal year 1989 to acquire land, buildings, and equipment, most of which was related to providing veterans health care. In addition, VA spent about $460 million in fiscal year 1989 to maintain its medical facilities. VA hospital construction projects were mostly aimed at replacing, relocating, or modernizing facilities. VA's long- range plans relating to medical facilities call for spending about $9.8 bil- lion to repair or replace aging facilities. The declining occupancy rate raises questions about the continuing need for the present size of the aging VA hospital system-many of whose facilities were constructed more than 40 years ago and are deteriorating. Whether the need for hospital facilities and staffing will continue to be the sameas in the past or whether reductions can be made are major considerations in structuring the future alignment of VA'S medical facili- ties. Significant potential may exist for consolidation of hospital facili- ties and closure of older, less efficient units. In this regard, in April 1990, VA established a Commissionon the Future Structure of Veterans Health Care. The Commissionhas been charged with reviewing the missions and programs of every VA medical facility to ascertain whether programmatic improvements or enhancementscan be realized through facility realignments or major mission changes.Unfor- tunately, the results of the Commission’swork are not expected until late 1991. Veterans Benefits Costs Various entitlement programs provide veterans with a number of bene- Have Remained Constant fits. Compensationis paid to veterans with disabilities resulting from or coincident with military service and to survivors of service-connected But Face an Uncertain deaths. Pensionsare paid to low-income, wartime veterans who are 66 Future years old or older or who have becomepermanently and totally dis- abled, as well as to qualified survivors of deceasedwartime veterans. Other veterans benefits cover education, rehabilitation, and burial services. The cost of operating veterans benefits programs increased an average of 1.1 percent annually for fiscal years 1986 through 1989. For fiscal year 1989, the cost of operating these programs was $16.9 billion, com- pared with $16.6 billion the previous year. About 96 percent of fiscal year 1989’snet operating costs for these pro- grams, or $16.2 billion, related to disability compensation and pension Page 7 GAO/AF’MD918 Department of Veterans Affah B-226901 benefits. The remaining 4 percent related to other veterans benefit costs, such as education, vocational training and rehabilitation, burial, and clothing allowances. Two factors could affect the growth (or reduction) of VA’S compensation and pension program costs.These factors are the number of veterans who receive benefits and the amounts these veterans receive. Together, these factors have acted to maintain compensationand pension costs at a generally consistent level during the past 4 fiscal years. The number of recipients decreasedan averageof 2.1 percent each year from fiscal year 1986 to 1989, whereas the average amount paid per recipient increasedabout 4 percent annually during that period. The increase in the amount paid to recipients is attributable to cost-of-living adjustments and legislative changesin the amounts paid to recipients. The effect of these factors is likely to result in VA’S annual compensation and pension program costs, at least for the next several years, remaining at levels comparable to those of the last 4 fiscal years unless the benefit amounts are significantly changedthrough legislation or other action. For example, one area of uncertainty that could significantly affect the amount of annual VA benefit payments involves certain recent court rul- ings. These recent rulings3 may increasecompensation and pension pay- ments by as much as $1.6 billion annually, which represents 10 percent of benefit payments for fiscal year 1989. If not reversed by a higher court, these rulings would (1) make membersof the Philippine Common- wealth Army and recognizedguerrilla forces eligible for full U.S. vet- erans benefits as a result of their U.S. service during World War II, rather than the partial benefits previously provided,,and (2) require benefit payments to those Filipino recipients to be paid at the samerates that other recipients are paid, rather than the previous one-half rate paid to those Filipinos. The present value of the authorized compensation and pension benefits to veterans as of September30, 1989, which will be payable over future years, is not recorded in VA’S financial statements. Federal accounting principles governing the recording of such liabilities’ are undergoing reexamination by the General Accounting Office (GAO). The present interpretation of this matter by GAO is that disclosure of the estimated 13 F. Supp. 436 (D.D.C.), reconsideration denied, States Veterans Administration, 713 F. Supp. Page 8 GAO/AFMD-916 Department of Veterans Affah ‘ B220201 value of such future benefit payments, or entitlements, is required but need not be recorded in the financial statements. Accordingly, VA has not recorded the liability for such future payments in its financial state- ments. However, VA disclosedthe estimated present value of these bene- fits, not counting the potential effect of the court rulings relating to Filipino benefit recipients, in the notes to its financial statements. The amount disclosedwas $135.2 billion as of September30, 1989. The estimated liability for these future payments is not currently funded. Rather, payments for benefits that becomedue in a particular fiscal year are financed from that year’s appropriation. Therefore, future tax revenuesor other resources,such as public borrowings, will have to be made available to finance payments of the future liability as it becomesdue. Housing Credit Assistance VA'S housing credit program provides for the partial guaranty of home for Veterans Will Require mortgage loans that eligible veterans or qualified survivors of veterans borrow from private lenders. At the end of fiscal year 1989, VA reported Substantial Future more than 3.9 million guaranteed home loans outstanding, with a total Appropriations face amount of $152 billion, of which VA had guaranteed about $60 bil- lion, VA has also extended direct loans to home-buying veterans in cer- tain rural areas where the veterans cannot find commercial lenders. As of September30, 1989, VA was holding direct loans with a face value of $1.2 billion, including “vendee” loans, which are direct loans on proper- ties that VA acquired through foreclosure and then resold. VA'Shousing credit assistanceprogram can incur expensesor lossesin several ways: (1) payments made either to fully satisfy vendor claims or to acquire foreclosed property, (2) expensespaid to maintain and sell acquired property, and (3) lossesincurred when foreclosed properties are sold. In addition, lossescan be experienced if VA sells its vendee loans for less than the face value of the loans and if it pays for defaults on any of these loans which may have been sold with recourse.Reve- nues received from such sourcesas loan origination fees and interest income from direct loans currently reduce housing program losses. The cumulative net operating lossesof VA'S housing credit assistance program for fiscal years 1986 through 1989 amounted to $3.9 billion. Table 2 summarizesthe housing program’s net income or loss for these years. Page 9 GAO/AFMD-91-6Department of Veterans Affaira B-226801 Table 2: VA’8 Housing Credit Assistance Program’s Nat Income or Loss for Fiscal Dollars in millions Year8 1988 Through 1989 Fiscal year Revenue/expense category 1988 1987 1988 1989 4-E% Revenues Fees $258 $341 $135 $141 $875 interest income 184 191 168 165 708 Reimbursements ( 1) ( 45) ( 66) 7 ( 105) Total Revenues 441 487 237 313 1,478 Operating Expense@ 1,094 2,132 2,032 110 5,388 Net Operating Income (Loar) ($663) ($1,645) ($1,795) $203 ($3,890) BFluctuations in the amount of operating expenses were caused by changes in the total provision for losses, which is determined through a statistical methodology based on historical default experience and economic forecasting. The provision for losses increases in those years where adverse conditions occur, such as increasing default rates and adverse statistical and economic indicators, and decreases when the conditions improve. In addition, a decrease occurred in the provision for losses during fiscal year 1989 due to a change, which the auditors approved, in the statistical methodology used to esti- mate the losses on guaranteed loans. As of September30, 1989, $2.7 billion of the 4-year cumulative net loss of the housing credit assistanceprogram represented estimated accrued loan lossesthat are payable in the future. VA’S financial statements show this net loss as a liability for losseson guaranteed 10ans.~About $2.5 billion of this liability will result in a demand on future financing sources. Appropriations will be required to finance most of this demand. This is consistent with the $2.3 billion in appropriations and transfers the Con- gress approved during fiscal years 1986 through 1989 to finance claims and operating expensesfor the housing credit assistanceprogram that were in excessof finances generatedby the program. However, becauseof recent legislative changesin the program, the demand for appropriations oriJotherfinancing for VA’S Loan Guarantee Fund, which is part of the houpng credit assistanceprogram, may be even greater in the future. The’Veterans Home Loan Indemnity and Restructuring Act of 1989 (Public Law 101-237,Title III) required that, starting in 1990, most new guaranteed or insured loan origination fees 4Before fiscal year 1986, VA reported the housing credit program on a budgetary basis, whereby loan losses were recorded 89 payment was required. Beginning in fiscal year 1986, VA changed to an accrual basis of accounting for loan losses and established a reserve for the estimated cost that it would bear as loans already guaranteed default in the future. Page 10 GAO/AF’MD-918Department of Veterans Affah~ E229991 be deposited in a new fund-the Guarantee and Indemnity Fund. The Loan Guarantee Fund will not, therefore, have a significant amount of loan origination fees as a sourceof financing. These fees amounted to $876 million during the 4 fiscal years from 1986 to 1989. Future requirements for appropriations may, however, be easedsome- what if the downward trend in the number of direct and guaranteed loans and in loan defaults experienced in fiscal year 1989 continues. Between fiscal years 1988 and 1989, the number of guaranteed loans outstanding decreasedfrom 4 million to 3.9 million, and the number of guaranteed loans in default dropped from 139,400to 130,276.The per- centageof loans in default during this 4year period has ranged from 3.2 percent to 3 a6 percent. In addition, the amount of appropriations required for the housing credit program is affected by the number and types of loan sales.VA’S experience with loan saleshas demonstrated that loans sold with recourseprovide a greater amount of initial cash than those sold without recourse.VA’S financial advisors for the two without-recourse loan salesin fiscal year 1988 estimated that VA would have increased its initial cash proceedsby about $200 million had the salesbeen made with recourse agreements.Thus, using recourse contracts for selling loans could have given the loan guaranty fund a substantial amount of addi- tional cash receipts in fiscal year 1088. This would have resulted in the fund’s requiring $200 million less in appropriated funds for that year. Veterans’ Life Insixance VA administers five plans to provide life insurance to veterans of dif- Program Is Secure ferent war eras, including World Wars I and II, and the Korean Conflict. VA also supervisesthree life insurance plans, operated by commercial insurance companies,which provide coverageto active military per- sonnel and veterans. Of the five life insurance plans that VA administers, only Service-DisabledVeterans Insurance remains open for new policy issues.The other four are no longer writing new policies. VA’slife insurance program receivesrevenue primarily from life insur- ance premiums received from policyholders and interest earned on investments. Costs are incurred for this program when it pays claims and dividends to policyholders. In addition, the life insurance program has administrative expenses,but the majority of these costs are paid with VA’S appropriated funds and are not allocated to the life insurance program. Page 11 GAO/~918 Department of Vetmane Affh Over the 4 fiscal years from 1986 to 1989, the life insurance program, as intended by the Congress,has operated at a near break-even level. That is, revenuesgenerated by the program were generally sufficient to pay benefit payments and dividends to policyholders. In this regard, the life insurance program’s fiscal year 1989 expenses were $2 million less than receipts-excluding certain unallocated, administrative expenses.During the preceding 3 fiscal years, the life insurance program’s expenseswere greater than receipts ranging from $16 million to $20 million, These differences were largely attributable to the Service-DisabledVeterans Insurance plan, which is intended to receive appropriated funds to finance the portion of policyholders’ pre- miums applicable to the service-connecteddisability of the veteran. The veteran, or policyholder, pays the standard premium rate for the life insurance coverage.Two other government insurance plans, the National Service Life Insurance and the United States Government Life Insurance plans, also receive limited appropriations for payment of claims traceable to the extra hazards of military service. Table 3 sum- marizes the results of operating VA’S life insurance program during the period from fiscal year 1986 to 1989. Table 3: Operatlng Result8 of VA’8 Llte lnrurance Program for Flecal Yean 1986 Dollars in millions Through 1989 Fiscal year Revenue/exDense cateaorv 1988 1987 1988 1989 Revenues Premiums $848 $878 $874 $871 Interest income 1.166 1.192 1.230 1.274 Reimbursements ( 3) ( 8) 79 43 Total Revenues 2.011 2.082 2.182 2.188 ExpensesandLosses Loss reserve provision 191 230 313 222 Claim payments 931 919 933 959 Total Expenses and Losses 1,122 1,149 1,248 1,181 Net Qaln Over Expenses $889 $913 $938 $1,007 Pollcv Dividends 9907 8929 $958 91.005 VA’slife insurance program is in a secureposition. Revenuesof about $2 billion have stayed reasonably constant between fiscal years 1986 Page 12 GAO/AFMD-914 Department of Veterana Affairs &229!391 and 1989-rising about $200 million during that period. Life insurance program investments, which generated 68 percent of the program’s rev- enue in fiscal year 1989, are principally in special U.S. bonds and experi- encedan averagereturn of about 9.7 percent in fiscal years 1988 and 1989. However, life insurance premiums, which constituted 40 percent of revenuesin fiscal year 1989, are declining as the program has matured. Most veteran policyholders are paying premiums at the capped maximum rate or are no longer required to pay premiums. In addition, costs related to claim payments and dividends remained steady. For fiscal year 1989, claim payments were about $969 million, which were slightly higher than claim payments made during the pre- ceding 3 fiscal years. Except for fiscal year 1986, the amounts paid as dividends to policyholders were slightly higher than the amounts paid to life insurance claimants. VA has provided adequate reservesfor future life insurance policy bene- fits and participating policyholders’ interest.6These reserveswere $9.1 billion and $3.1 billion, respectively, at September30, 1989. The reservesplus VA'S life insurance program revenuesare expected to be sufficient to pay future claims and dividends. Thus, VA can expect to maintain its life insurance activities without additional financial assis- tance from appropriations. The Congresscan anticipate, though, the need to continue funding, through appropriations, the VA life insurance program’s unallocated administrative expenses,which were $27.2 million in fiscal year 1989, and the premium subsidies and certain claims under several government life insurance plans, which were about $13.6 million in fiscal year 1989. VA’s General VA’S general administrative costs were $800 million in fiscal year 1989- Administrative Costs Have about the sameamount as was incurred in fiscal year 1988. In addition, about $1.I5million of general administrative costs is allocated annually Not Grown Significantly to VA'S life insurance program to cover certain insurance plans. The remaining general administrative costs are not allocated to the life insurance or other VA programs. 6As discussed in our opinion on VA’s financial statements (appendix I), VA’s current practices will eventually cause the reserve for participating policyholders interest to bc distributed to policyholders in the form of dividends or policy enhancements. Page 12 GAO/AF’MD-91-6Department of Veterans Affah B22wol The unallocated general administrative costs represent 2.9 percent of VA’stotal operating costs and increasedby $100 million between fiscal years 1986 and 1989. These unallocated costs are composedof the fol- lowing types of expenses:salaries and employee benefits (70 percent); rents, utilities, and communications (17 percent); and other expenses (13 percent). The Congresscan anticipate the continuing need to finance VA’S general administrative activities through appropriations. However, these costs have not grown significantly in recent years and are expected to remain at comparable levels in the near future. VA Has Serious Credit At the end of fiscal year 1989, VA had $6.2 billion in amounts due the Management Problems government from advancesand accounts and loans receivable. These assetsincreased$1.2 billion from fiscal year 1986 to 1989. VA’S allow- ance for doubtful accountsrelated to its-receivablesis considerable, amounting to $3.2 billion at September30,1989. This represents 52 per- cent of aggregatedaccountsand loans receivable at that time-a sub- stantial increase from 34 percent in fiscal year 1986. Figure 2 compares VA’S total receivableswith receivablesit expects to collect after consid- ering its allowance for doubtful accounts for fiscal years 1986 through 1989. Page 14 GAO/MMD816 Department of Veterana Affahn 5226801 Figure 2: VA’8 Gross and Net Recelvabler for Flrcal Years 1986 7.6 Dollars in bllliorm Through 1989 7.0 2.5 2.0 1.6 1.0 0.5 0 1988 1987 1986 1959 Flaoal yaars - Gross receivables -I I I Net receivables Note: In this figure, net receivables equal gross receivables less the provision for doubtful accounts. Therefore, the area between the two lines represents the provision for doubtful accounts. Figure 2 reflects VA'S serious credit managementproblems. In this con- nection, total bad debt lossesfor uncollectible accounts and loans aggre- gated $3.1 billion for fiscal years 1986 through 1989. Further evidence of VA’S credit managementproblems is indicated by the large percent- agesof sometypes of receivablesfor which VA has established doubtful account reserves.For instance, as of September30, 1989, about $776 million was receivable from individuals for amounts due primarily on education loan defaults and compensation and pension benefit over- payments; from third-party insurers for health care; and from veterans for hospital servicescopayment billings. VA’S reserve for doubtful accounts on these assetswas 37 percent. As of September30,1989, about $3.6 billion of the $4.7 billion in loan receivableswas for loans due under the housing credit assistanceprogram. VA’S reserve for doubtful accountson the housing credit loans was 73 percent. Page 15 GAO/AFMD-91-6Department of Veterans Affaira 5226801 We have reported on VA’s serious credit managementproblems many times in the past. Most recently, we reported in April 19906that much remains to be done to ensure that a comprehensivegovernmentwide credit managementprogram as set forth by the Office of Management and Budget in Circular A-129 is fully implemented. The report included recommendationsto the Secretary of Veterans Affairs for improving VA’S credit management. In that report, we also recommendedto the Congressthat the Debt Col- lection Act of 1982!;beamendedto require agencies,including VA, to use certain credit managementtechniques. In addition, we recommended that the Congressrequire agenciesto provide it annually with audited financial information on their receivables and delinquencies for its use in making budgetary decisionsto supply new funds. As demonstrated in this discussionand analysis and the appendixes to this report, it is important for the Congressto have reliable information on receivables and delinquencies to assesshow well agencies,such as VA, are doing in collecting amounts owed to the government and the extent to which these government assetscan be collected. The above discussion and analysis is basedprimarily on accounting data Scopeand included in VA’S audited consolidated financial statements for fiscal Methodology years 1986 through 1989. However, certain analyses required the use of statistical and financial data, such as daily hospital occupancy rates, from other sources.We obtained these data from VA’S various budget reports and program systems, which were not subject to our audit and independent verification. Thus, we are not expressing any views on the accuracy of these other statistical and financial data. Our analysis is focused on the following financial attributes: the overall cost of VA’S operations and the operating cost of each major program and financing sourcesand their effect on VA’S financial position. We also consideredthe efficiency of VA’S assetutilization and the liquidity and solvency of VA’S business-typeprograms. %redit Management: Deteriorating Credit Picture Emphasizes Importance of OMB’s Nine-Point Pro- gram (GAO/AFMD -90 - 12, April 16,199O). Page 16 GAO/AFMD-91-6 Department of Veterans Affalra Et.226601 As previously stated, the information in this report reflects the kind of financial disclosure we believe should be made in an annual report to the President and the Congressby the head of each executive agency and government corporation. Such information reflects accountability for government programs and resourcesand can be useful for oversight and decisionmaking when assessingdepartment programs and deter- mining public policy. With improved financial reporting as an objective, we plan to continue working with agencies,such as VA, and the Office of Managementand Budget to have the issuanceof annual audited finan- cial statements permanently adopted as a requirement for all agenciesof the federal government. We are sending copiesof this report to the Chairmen of interested con- gressional committees and subcommittees,the Director of the Office of Managementand Budget, the Secretary of Veterans Affairs, and the heads of other federal agencies.Copieswill be made available to others upon request. Charles A. Bowsher Comptroller General of the United States Page 17 GAO/AF’MD-91-6Department of Veterans Affaim Contmts Letter 1 Appendix I 22 Opinion Letter Appendix -- II 27 Report on Internal Inconsistent Adherence to Property and Equipment Capitalization and Depreciation Policies Continues 30 Control Structure Certain ADP Software Maintenance and Data Integrity 32 Control WeaknessesContinue Controls Ineffective in Preventing Erroneous Benefit 33 Payments on Behalf of DeceasedRecipients Weak Controls Impede RecoveringErroneous Benefit 34 Payments Conclusions 36 Recommendations 36 Other Opportunities for Improvement 37 Agency Comments 37 Appendix III 38 Report on Compliance With Laws and Regulations Appendix IV 40 Financial Statements Consolidated Statements of Financial Position Consolidated Statements of Operations 40 41 Consolidated Statements of Changesin Financial Position 42 and Reconciliation to Budget Notes to Financial Statements 43 Supplemental Schedules 68 Scheduleof Assets, Liabilities, and Equity by Major 69 Program as of September30,1989 Scheduleof Assets, Liabilities, and Equity by Major 70 Program as of September30,1988 Scheduleof Expenses,Dividends, Revenue,and Financing 71 Sourcesby Major Program for Fiscal Year 1989 Scheduleof Expenses,Dividends, Revenue,and Financing 72 Sourcesby Major Program for Fiscal Year 1988 Page 18 GAO/AFMD-BlS Department of Vetaran~ Afhirm Content8 Scheduleof Sourcesand Usesof Resourcesand 73 Reconciliation to Budget by Major Program for Fiscal Year 1989 Scheduleof Sourcesand Usesof Resourcesand 74 Reconciliation to Budget by Major Program for Fiscal Year 1988 Budgeted and Actual Outlays by Function and Program 76 for Fiscal Year 1989 Budgeted and Actual Outlays by Function and Program 76 for Fiscal Year 1988 Appendix V 77 Statement of VA’s What Are Expired Appropriation, Surplus Authority, “M”, and Merged Surplus Accounts? 77 Appropriation Accounting for VA’s Appropriations During Fiscal Year 78 Authority 1989 Relationship of Appropriation Tables With Audited 81 Financial Statements Appendix VI 82 Summary of VA’s Background VA Reports Annually on Material Weaknesses 82 83 Federal Managers’ Material Internal Control Weaknesses 84 Financial Integrity Act Additional Special ConcernsAlso Reported 87 Reports Tables Table 1: Net Cost of Operating VA’s Programs for Fiscal 4 Years 1986 Through 1989 Table 2: VA’s Housing Credit Assistance Program’s Net 10 Income or Loss for Fiscal Years 1986 Through 1989 Table 3: Operating Results of VA’s Life Insurance Program 12 for Fiscal Years 1986 Through 1989 Table V. 1: Statement of VA Appropriations Used and 79 Remaining Available for Obligation or Expenditure During Fiscal Year 1989 Table V-2: Statement of VA’s Surpluses From Expired 80 Appropriations-Fiscal Year 1989 Table VI. 1: Categoriesof Reported Material 83 Weaknesses- 1983 Through 1989 Page 19 GAO/AFMD-91-6Department of Veterans Affaira contents IFigures Ngure 1: VA’s Net Operating Costsin Current and 6 Constant Dollars for Fiscal Years 1986 Through 1989 Figure 2: VA’s Grossand Net Receivablesfor Fiscal Years 16 1986 Through 1989 Abbreviations ADP automated data processing CARD centralized accountsreceivable division Disbursing, Accounting and Budgeting System DFC data processingcenter EFT electronic funds transfer FMFIA Federal Managers’ Financial Integrity Act GAAP generally acceptedaccounting principles GAO General Accounting Office IG inspector general OME! Office of Managementand Budget VA Department of Veterans Affairs SSA Social Security Administration hi@20 GAO/AF’MD@M Deplummt of VeteMl Affair8 . Page 21 GAO/AFMD-916 Department of Vetemu Affah Appendix I Q? inion I&ter unu.edStaten GeneralAccounting Offlce GAO Washington,D.C.20546 Comptndler Geneml of the Unlted States B-226801 To the Secretary Department of Veterans Affairs We have audited the accompanying consolidated statements of financial position of the Department of Veterans Affairs (VA) as of September 30, 1989 and 1988, and the related consolidated statements of operations and changes in financial position and reconciliation to budget for the fiscal years then ended. These consolidated financial statements are the responsibility of VA's management. our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. Also, in accordance with those standards and as an integral part of our audits, we, with assistance from VA's Inspector General, reviewed VA's internal control structure and its compliance with laws and regulations, and we are reporting separately on the results of these reviews. Our audits included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. COSTS OF LAND, BUILDINGS, AND EQUIPMENT Our opinion on VA's consolidated financial statements remains qualified as to the amounts reported for land, buildings, equipment, and related expense accounts. This qualification could be removed if VA were to establish the missing or undocumented values by appraisal or some other reasonable basis and install and maintain adequate property Page22 Appendix I Opinion Letter B-226801 accounting records that provide accountability. The 172 medical centers and related facilities which provide medical care to veterans comprise the majority of VA’s reported property. We believe that the failure to establish proper accountability is a material internal control weakness which requires correction to ensure adequate financial management of VA’s assets, a proper recording of the cost of operating the medical centers, and the preparation of satisfactory consolidated financial statements. CHANGES IN LIFE INSURANCE PROGRAMREPORTING Our opinion, dated April 14, 1989, on VA’s fiscal year 1988 and 1987 consolidated financial statements, was also qualified because the statements presented life insurance policy reserves which were calculated in accordance with statutorily-required assumptions rather than generally accepted accounting principles (GAAP) , which would have more fairly presented the amount of reserves needed to pay future insurance policy benefits. As described in note 6, in fiscal year 1989, VA adopted the policy of presenting these reserves in its financial statements in accordance with GAAP and restated its 1988 consolidated financial statements to make the change retroactive to that year. Accordingly, this qualification was removed from our opinion on the 1988 consolidated financial statements as presented herein. VA changed to GAAP reporting of its life insurance reserves because these principles are the preferred practice in the insurance industry for the public reporting of life insurance transactions and the resulting reserves and liabilities, As a result of this change, VA’s reserve for insurance policy benefits, which is now presented in accordance with GAAP, has been reduced by 82.9 billion. The reduction of this reserve and related changes create a new reserve of approximately $3.1 billion which, consistent with GAAP, is called “Participating Policyholders’ Interest in Accumulated Participating Earnings.” However, this $3.1 billion reserve is not immediately payable by VA under existing statutes. Although VA has adopted the policy of reporting the reserves that are realistically required to pay future insurance policy benefits, it is still required by the applicable statutes to hold the $3.1 billion in reserve. Page 28 GAO/AF’lKDBl4 Department of Veterans Affaim Appendtx I Opinion Letter B-226801 VA no longer issues new life insurance policies under the programs associated with the $3.1 billion. VA presently pays dividends to its policyholders , and provides insurance policy enhancements such as "paid-up" and "reduction-in" policy premiums, which are based upon the amount of its total accumulated premiums and earnings in excess of its statutory reserves. As the number of policies decreases, the reserves required under either GAAP or VA's statutes will gradually decrease to zero. Accordingly, under current VA practices, the $3.1 billion reserve will eventually be distributed to policyholders in the form of dividends or policy enhancements. OPINION ON VA'S CONSOLIDATED FINANCIAL STATEMENTS In our opinion, except for the effect of adjustments, if any, that might have been necessary had we been able to perform the necessary auditing procedures to substantiate the asset and related expense accounts, as discussed in paragraph three above, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Department of Veterans Affairs as of September 30, 1989 and 1988, the results of its operations , and the changes in its financial position and reconciliation to budget for the fiscal years then ended, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The supplemental schedules to the consolidated financial statements are presented for purposes of additional analysis. The supplemental schedules have been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, except for the same qualification mentioned above, are fairly stated in all material respects in relation to the basic consolidated financial statements taken as a whole. VA'S HOUSING CREDIT PROGRAM In our fiscal year 1988 and 1987 report on VA's consolidated financial statements (GAO/AFMD-89-691, we expressed concern that, for the loan guaranty fund component of its housing credit program, VA might require increased assistance from the Congress over the next several years if certain Y Page 24 GAO/AFMD-@l-6DePartment of Veterans Affah , Appendlr I Opinion Letter B-226801 conditions worsened. The conditions did not worsen in 1989. The principal condition, home loan foreclosures, improved in fiscal year 1989, with home loan foreclosures decreasing from about 49,000 in fiscal year 1988, to about 43,000 in 1989. This was the first year that VA experienced a lessening of home loan foreclosures since 1980. Accordingly, only about $780 million in appropriations was needed to supplement the financing of the loan guaranty fund’s operations during fiscal year 1989, versus the approximately $900 million requested in VA’s budget. VA anticipate8 that this improvement will continue but that it will still need annual appropriations to operate the fund for several years. For example, VA estimates that it will need about $558.5 million in appropriations for the loan guaranty fund during fiscal year 1990. VA’s fiscal year 1991 budget submission includes a request for $512.2 million for the fund. Establishment of an Additional Fund-- the Guaranty and Indemnity Fund On December 18, 1989, the Veterans Home, Loan Indemnity and Restructuring Act of 1989 (Public Law 101-237, Title 111) established an additional revolving fund called the Guaranty and Indemnity Fund , which is available to operate VA’s programs for guaranteed or insured loans closed on or after January 1, 1990. Among other things, this legislation changed the veteran’s loan origination fee on each loan guaranteed, insured, or made by VA from 1 percent to a percentage that varies from zero to 1.25 percent, depending on the veteran’s status and amount of downpayment made on a loan. These fees are to be credited to the Fund. The Act also added the requirement for the federal government to credit the Fund with certain amounts for each loan guaranteed, insured, or made through the Fund. A bill introduced in the Congress (S. 2100) would make technical corrections to the amounts the federal government must credit to the Fund. Both VA and the Congressional Budget Off ice (CBO) estimate that the fees and credits required by the legislation will not be sufficient to finance the operations of the Fund for the long term. This cash insufficiency will not be apparent for a number of years because outlays for losses will not be required until that time. VA estimates that the Fund will require direct appropriations beginning in fiscal year 1995, while CBO estimates that such appropriations will not be required until fiscal year 1999. Page 28 GAO/AF’MJS918Department of Veterans Affaira Amendh I oplnjon I&t.er B-226801 CERTAIN EXPENSES AND BENEFIT COMMITMENTS REQUIRE CONGRESSIONAL APPROPRIATIONS VA’s consolidated financial statements reflect accrued expenses aggregating approximately $5 billion at September 30, 1989, that will be funded principally from future appropriations. About one-half of this amount represents losses incurred under the housing credit program referred to in the preceding section of this report. In addition, the present value of commitments for compensat on and pension benefits to veterans which will also have to be funded from appropriations in future years aggregated approximately $135 billion at September 30, 1989. Payment of these expenses and benefits requires congressional appropriations of future tax revenues or 0 her sources, such as public borrowing. The accounting for these items is explained in notes 1 and 4. Charles A. Bowsher f- Comptroller General of the United States April 20, 1990 Page 26 GAO/AFMD-91-9Department of Veterana Affaira Appendix II &port on Internd Control Structure We have audited the consolidated financial statements of the Depart- ment of Veterans Affairs as of and for the year ended September30, 1989, and have issued our report thereon dated April 20,lQQO.We con- ducted our audit in accordancewith generally acceptedgovernment auditing standards. As required by these auditing standards and as part of our audit, we obtained an understanding of and assessedVA’S internal control structure to the extent we considerednecessaryin planning and performing our audit. Our consideration of the internal control structure was made to determine our auditing procedures for the purpose of expressing an opinion on VA’S consolidated financial statements and not to provide assurancesabout the adequacy of the overall internal control structure. The consideration of an internal control structure for finan- cial auditing planning purposes by itself is not sufficient for expressing an overall opinion about the design and operation of an entity’s internal control structure as a whole or of any specific elements, but such a con- sideration may discloseweaknessesin specific aspectsof the control structure. The purpose of this report is to describe VA'Sinternal control structure that we considered and to communicate the results of our consideration and tests of the policies and procedures comprising the structure. This report pertains only to our consideration of VA'Sinternal control struc- ture for the year ended September30,1989. Our report on VA'Sinternal accounting controls for the year ended September30,1988, is presented in GAO/AF'MD-~~-~~, dated September 16, 1989. The managementof VA is responsible for establishing and maintaining a system of internal administrative and accounting controls (in effect, an internal control structure) in accordancewith the Accounting and Auditing Act of 1960 and the Federal Managers’ Financial Imegrity Act (FMFIA) of 1982. (Seeappendix VI for a discussionof VA'Sreporting on the status of its internal control and accounting systems in accordance with the FMFIA'Srequirements.) In fulfilling this responsibility, estimates and judgments by management are required to assessthe expected benefits and related costs of internal control structure policies and procedures. The objectives of an internal control structure are to provide managementwith reasonable,but not absolute, assurancethat (1) obligations and costs are in compliance with applicable laws, (2) funds, property, and other assetsare safeguarded against waste, loss, and unauthorized use or misappropriation, and (3) assets,liabilities, revenues,and expenditures applicable to agency Page 27 GAO/AFMD-916 Department of Veterana Affairs Report on Int4unal Control Structure operations are properly recorded and accountedfor to permit the prepa- ration of accountsand reliable financial and statistical reports and to maintain accountability over agency assets.Becauseof inherent limita- tions in any internal control structure, errors or irregularities may nev- ertheless occur and not be detected. Also, projection of any evaluation of the structure to future periods is subject to the risk that procedures may becomeinadequate becauseof changesin conditions, a ‘lapsein the degreeof adherenceto the procedures,or a deterioration in the effec- tiveness of the design and operation of policies and procedures. For purposes of this report, we have classified the VA’S significant internal control policies and procedures over accounting applications, such as purchases,entitlements and loan processing,payroll, revenue and receipts, and life insurance policy premiums and payment processing,into the following areas: . medical care and construction; l veterans benefits; l housing credit assistance; l life insurance; and l administration and other, including all payroll. For all the areas listed, we obtained an understanding of the design of relevant policies and procedures that comprise the control structure, determined whether they have been placed in operation, and assessed control risk. We also performed tests of control proceduresthat were sufficient to evaluate their operational effectiveness for all of the areas listed above. In the medical care area, the control testing was substan- tially performed for us by VA'S Inspector General (IG). The IG also supple- mented our control testing in the veterans benefits area. However, neither we nor the IG tested control procedures for all functions within the areas. For example, in the veterans benefits area, we tested the processingof compensation and pension benefits; however, we did not test control procedures relative to the national cemetery operational component of VA'S veterans benefits. Furthermore, we did not assessthe internal control structure in certain miscellaneousfunds, such as the General Post Fund and the Supply Fund. For these excluded areas, it was more efficient to expand our audit tests to substantiate the balances of accounts associatedwith the respective control area. Substantive audit tests, which we also performed to someextent for all of the con- trol areas listed, can also serve to identify weaknessesin internal control structures. Page 28 GAO/AFMD-91-6Department of Veteram Af’fhhu lrppendix rf Report on Internal control Structure We consideredVA’S FMFIAreports, as well as the IG’s reports on financial matters and internal accounting control policies and procedures, in making our risk assessment.As previously stated, we also relied on the IG’S testing of controls in the medical care area and certainOcontrolsin the veterans benefits area. Our consideration of the internal control structure, made for the limited purpose described in the first paragraph, would not necessarily disclose all matters in the internal control structure that might be reportable conditions and, accordingly, would not necessarily discloseall reportable conditions that are also consideredto be material weaknessesas defined below. For this reason, we do not express an opinion on VA’S internal control structure, taken as a whole, or within the functional areas listed above. However, our study and evaluation disclosedthat, despite imple- mentation of certain corrective actions, two matters involving the design or operation of the internal control structure disclosed as reportable conditions in our fiscal year 1988 report continue to exist and warrant disclosing in this report. Thesetwo conditions involve l accounting for VA’S property and equipment and related depreciation and l VA’S controls over automated data processing(ADP) software mainte- nance and data integrity. In addition, we noted two other matters involving VA’S internal control structure and its operation that we are presenting in this report as reportable conditions. These matters involve weaknessesin VA’S internal control procedures ability to . prevent erroneous veterans benefit payments from continuing after the death of a veteran or other benefit recipient and . recover erroneous benefit payments made after the death of the benefit recipient. Reportable conditions involve matters coming to our attention relating to significant deficiencies in the design or operation of the internal con- trol structure that, in our judgment, could adversely affect VA’S ability to record, process,summarize, and report financial data consistent with the assertions of managementin the financial statements. Only the first condition, VA’S property and equipment and depreciation accounting, is Page 29 GAO/AFM@OlS Department of Veterans Affairs Appendix ll Report on htemal C4mtrolStmcture consideredto be a material weaknessfrom the standpoint of the poten- tial effect on the fair presentation of the financial statements.’ Under government auditing standards, a reportable condition is a material weaknesswhen the design or operation of specific elements of the internal control structure do not reduce to a relatively low level the risk that errors or irregularities, in amounts that would be material in rela- tion to the financial statements being audited, may occur and not be detected within a timely period by employeesin the normal course of performing their assignedfunctions. Our opinion on VA’s consolidated financial statements was qualified as a result of the material weakness in VA’S ability to account for its property and equipment. Our fiscal year 1989 audit disclosedthat property accounting weak- Inconsistent nessesfound in our fiscal year 1988 audit continued. In our fiscal year Adherencet0 PrOpefiy 1988 report on internal accounting controls, we reported that VA had and Equipment issued revised instructions to assist VA field units in implementing its capitalization and depreciation policies and had made other improve- Capitalization and ments in property accounting. However, we reported that there con- Depreciation Policies tinued to be inconsistent adherenceto managementpolicies with respect Continues to the capitalization and depreciation of buildings, which led to inaccu- rate “real” property account balances.This problem was due, in part, to VA’S real property accounting system. This manual system doesnot pro- vide for either a consistent capitalization of improvements to buildings and other structures or a centralized review of the amounts recorded. Our fiscal year 1988 audit and previous audits identified the following problems with VA’S real property accounting: . Items purchased with operating funds were expensedrather than capi- talized in accordancewith generally acceptedaccounting principles2 am1 VA’S policy. l Construction project costs were transferred from work-in-process to completed facilities either before utilization or not until a significant period of time had elapsed after a completed facility was placed in use. ‘The consideration of materiality differs under FMFIA from that in an audit of financial statements in accordance with generally accepted government auditing standards. Under the latter, the auditor considers materiality in relation to the financial statement amounts As prescribed in the Office of Management and Budget’s implementing guidance for FMFIA, materiality for FMFIA purposes should be considered in relation to factors such as an actual misstatement of a specified amount ($10 million) or percentage (6 percent) of a budget line item, or nonconformance in a subsidiary or program system that prevents compliance of the primary accounting system with government accounting standards. 2Generally accepted accounting principles for federal agencies are contained in title 2 of GAO’s policy and Procedures Manual for Guidance of Federal Agencies. Page 30 GAO/AF’MD-0143Department of Veterans Affhh Report on hWn8l Control Structure l Depreciation was not calculated in accordancewith generally accepted accounting principles and VA’S policy. During our fiscal year 1989 audit we found that the above problems with construction work-in-process costs and related depreciation still existed. For example, our tests at the VA Finance Center identified $141.7 million in construction appropriations work-in-process costs as of September30,1989, on sevenprojects that should have been capitalized in fiscal years 1988 and 1989 but were not. Our testing at five medical centers also identified $3 1.8 million in other construction projects that were not timely transferred from the work-in-process account to the buildings account in fiscal year 1989 and $15.2 million in fiscal year 1989 construction coststhat were transferred prematurely to the build- ings account in fiscal years 1987 and 1989. Delays in capitalizing com- pleted construction projects causeunderstatements of depreciation accounts,while premature capitalization actions causeoverstatements of depreciation accounts. In addition, consistent with the weaknesseswe identified as a result of our fiscal year 1988 audit, we further identified instances of capitaliz- able maintenance and repair improvement coststhat were expensed.For example, we found instances where capitalizable architectural and engi- neering costs and VA contract labor costs were expensed.We also identi- fied casesof inconsistent accounting for asbestosremoval costs.For example, at two medical centers, two asbestosremoval projects costing $2.2 million were capitalized and at three other centers, three projects costing about $468 thousand were expensed. We believe that these conditions are primarily the result of (1) the lack of understanding of VA'S capitalization requirements by both VA medical center fiscal and facilities engineering personnel, and (2) VA'S inability to ensure that these fiscal and engineering personnel use standard proce- dures and guidelines to timely and properly capitalize construction costs and related depreciation. Our fiscal year 1989 financial audit also disclosedthat differences con- tinue to exist between the automated nonexpendable(equipment) prop- erty system and the corresponding general ledger control account. Although required by generally acceptedaccounting principles, someVA medical centers either did not always perform periodic reconciliations of these accountsor did not make adjustments to correct discrepancies when identified. Also, VA'S nonexpendableproperty system (i.e., the sub- sidiary record which supports the general ledger equipment control Page 31 GAO/AFMD-91-6Department of Veterans Affairs Appendix II Report on In~rnal C4mtrol Structure account) continues to contain individual equipment items costing less than $6,000, although the generally acceptedaccounting principle sets the capitalization threshold at $6,000 and above.VA officials have stated that they included items below the $6,000 capitalization threshold in order to improve accountability. However, including these items will continue to causeVA'S reported value for capitalized equipment to be overstated unless a separate system is established to maintain account- ability over items with capitalizable values of less than $6,000. Becauseof these control weaknesses,the $8.4 billion reported value of land, buildings, and equipment as of September30, 1989, is not accu- rate. The deficiencies also affect the accuracy of the reported deprecia- tion expenseallocable to the use of the buildings and equipment. However, we were unable to quantify the extent to which VA'S reported values for property and equipment and related depreciation expense were misstated. VA has included a fixed assetmodule (designedto include both real prop- erty and equipment) in its new financial managementsystem. This new system is targeted for implementation by the end of fiscal year 1992. However, development plans for the new system do not provide for (1) correcting the current recorded values of real property, and (2) improving coordination between field station facilities engineering personnel, acquisition and material managementpersonnel, and finance office personnel. Without first taking these actions, the new system will not be effective in correcting VA'S problems in real property and equip- ment accounting. Certain ADP Software GAO/AFMD-89-69, September 16, 1989), our fiscal year 1989 audit disclosed Maintenance and Data weaknesseswith ADP software maintenance, data integrity controls, and Integrity Control system documentation and application controls at VA'S data processing centers. Specifically, our fiscal year 1989 audit disclosedthe following WeaknessesContinue instances in which the sameor similar ADP internal control weaknesses continued to exist. l At the Austin Data ProcessingCenter (DPC), we found that there con- tinues to be a lack of independent testing of somemodifications to existing application software, In the payroll area, for example, we found that in-house programmers rather than independent system auditors performed tests on about one-third of the software program changes made in the last 6 months of calendar year 1989. In these cases,the Page 32 GAO/AFMDBl-tl Department of Veterans Affidra Appendix II Report on Internal control Structure system auditors certified program changesbasedon a review of output provided by programmers, tested by programmers, using test files that could be changedby programmers. l We also found that the Austin DPC continued to have inadequate control over accessto payroll, personnel, financial, and loan information. We found, for instance, that ten system programmers and one contractor employee had unrestricted accessto all VA’S computer resourceswhen such accesswas not justified. In addition, we also found that the Austin DPC continued to lack a formal and operationally-tested contingency plan to guide its operations in the event of a catastrophe. . At the Hines DPC, we found continuing inadequate system documenta- tion and weak application controls over benefit payment transactions. For example, during our 1989 audit, we found that transaction counts could not always be reconciled between software programs becausethe various programs used different methods to count records. . At the Philadelphia DPC, we found that only 2 of the 11 ADP control weaknessesthat we identified during our fiscal year 1987 and fiscal year 1988 audits have been corrected. The remainder were not addressedor received only partial correction. Among the examples of control weaknessesthat have not been corrected are (1) the lack of doc- umented, operationally-tested contingency plans, and (2) the lack of a policy requiring recertification of sensitive computer application pro- grams on a regular schedule. VA also identified many of the samedata processingcontrol problems in its December31, 1989, FMFIA report and plans to take corrective action. (Seeappendix VI). VA has erroneously made compensation and pension payments on behalf Controls Ineffective in of deceasedveterans and their survivors becauseits control procedures Preventing Erroneous do not provide for the consideration of all sourcesof death information Benefit Payments on in determining whether benefit payments should be continued. VA relies primarily on voluntary reporting by relatives or others and notice of Behalf of Deceased death information from its other programs without also obtaining death Recipients information from other readily available sources-the Social Security Administration (%A). The death information VA currently relies on is not accurate because(1) voluntarily provided death information is not received in all casesand (2) all recipients of VA compensation and pen- sion payments are not necessarily recipients of other VA services.Conse- quently, VA cannot effectively identify when to terminate benefit Page 33 GAO/AFMD916 Department of Vetemna Affairs Appendix II Report on Jntmnal Cmtrol Strum payments. Accordingly, VA continued to make unauthorized compensa- tion and pension benefit payments sometimesfor as long as 7 years, until the neededdeath information was received. As shown in VA’S consolidated financial statements, VA provided more than $16 billion in veterans’ benefits during fiscal year 1989, of which more than $16.1 billion was for disability compensation and pension benefits. VA had about 3.6 million casesof such benefit payments during fiscal year 1989. Sinceonly the benefit recipient is entitled to the bene- fits, payments should be terminated promptly when the recipient dies. However, if surviving relatives or other knowledgeable persons do not report benefit recipients’ deaths to the VA in a timely manner, or VA does not obtain death information as a result of the beneficiary’s partici- pating in other VA programs, VA continues making the benefit payments. We analyzed six casesof erroneous benefit payments which one field station had identified and initiated collection action. These erroneous payments, which involved casesunder VA’S service-connecteddisability and service-connecteddeath compensationprograms, totaled $160,663. The two largest payments were $44,466 and $64,800. Of the total, $136,817 has not been recovered by VA. In all six cases,VA did not have timely knowledge of the benefit recipient’s death. This resulted in the benefit payments being continued for various periods-6 years after the death of the benefit recipients in two casesand 7 years in one case. Another recent GAO report discussesthis matter in greater detail.3 In general, this report showed (1) the feasibility of VA obtaining SSAdeath information and the potential for utilizing the information to prevent the continuing payment of erroneous benefit payments after the death of the benefit recipient, (2) the potential total annual erroneous pay- ments to be an estimated $6.7 million, and (3) GAO’S recommendation to resolve the problem. Accordingly, we are not making any recommenda- tions with respect to this weaknessin this report. centralized accountsreceivable division (CARD) has responsibility for Weak Controls Impede VA’S collecting compensation and pension accountsreceivable representing Recovering Erroneous erroneous benefit payments made after the death of the recipient. The Eknefit Payments division doesnot have effective procedures to ensure recovery of such payments made by the U.S. Treasury through checksor the electronic v 3Veterans’ Benefits: VA Needs Death Information F’rom Social security to Avoid Erroneous Payments (GAO/HRDQQ-~~O, JOY27,1990). Page 84 GAO/AFMDolS Department of Veterans Affah Appendix II Report on Internal Control Structum transfer of funds to financial institutions for deceasedrecipient accounts. Financial institutions (such as banks) are liable4 for all of the payments by electronic transfer that are made after the death of the recipient of a federal government benefit. To recover such payments, the U.S. Trea- sury (after being notified of erroneous payments by the applicable pro- gram agency) sendsa Notice of Reclamation (form TFS 133) to the respective financial institutions requesting return of the outstanding amount.6This action may result in full, partial, or no recovery. If the financial institution doesnot return the full amount of the outstanding balance,the institution is required to identify for the Veterans Adminis- tration the names and addressesof individuals who withdraw from the account after the benefit recipient’s death. The federal program agency is responsible for attempting the collection of any outstanding amount from the withdrawer. If the program agency is unsuccessful,the U.S. Treasury may recover the remaining amount by debiting the financial institution’s federal reserve account6 Our test of accountsreceivable at the end of fiscal year 1989 and subse- quent inquiries with CARD officials indicate that CARD doesnot have effective procedures to l initiate initial recovery efforts against financial institutions and l take follow-up action for recovery from financial institutions where CARD attempts to collect the payments from personswho have drawn down the deceasedrecipient’s account have been unsuccessful. As a result of centralizing this function at CARD, the division has experi- encedproblems becauseit lacks current policy and procedural guidance. VA’S central office is aware of the problems and is in the processof developing guidance. In addition, approximately 16,000 current accountsare being reviewed to determine the status of any amounts owed VA, collection efforts taken to date, and the need for any follow-up efforts. VA estimates the value of these accountsto be about $3 million. 431 C.F.R. ilO. 164Fed. Reg. 60,618 (1989)]. ‘The sum of all payments received after death or 1egaJincapacity, minus any amount returned to, or recovered by, the government. 6The financial institution can limit ita liability if it did not know about the death when the payments were deposited. Page 35 GAO/AF’MD-918Department of Veterans Affah Report on Internfd Ckmtrol Structure VA continues to experience problems with inconsistent adherenceto Conclusions managementcapitalization and depreciation policies. VA has also con- tinued to capitalize equipment items that do not meet managementcapi- talization policies. Theseproblems have led to inaccurate reporting of the value of VA’S equipment and property. VA has also continued to expe- rience weaknessesin its controls over computer software maintenance, data integrity, and test contingency plans at its data processingcenters. Finally, VA lacks sufficient internal control policy and procedural gui- danceto identify and collect erroneous benefit payments made to deceasedveterans. As a result, an estimated $3 million in erroneous ben- efit payments may have been outstanding at the end of fiscal year 1989. We recommendthat the Secretary of Veterans Affairs direct the Recommendations . Assistant Secretary for Finance and Planning to revise existing internal control and accounting policies and procedures for VA’S property, equip- ment, and related depreciation to meet the requirements of generally acceptedaccounting principles; l Assistant Secretariesfor Finance and Planning and Acquisition and Facilities to jointly develop policies and procedures for properly recording and reporting transactions affecting the capitalization of VA’S construction and maintenance and repair projects to be followed at VA’S Finance Center as well as at all field engineering stations; . Assistant Secretariesfor Finance and Planning and for Acquisition and Facilities to jointly establish policies and procedures to (1) remove all equipment items from the equipment system data basethat do not meet VA’S capitalization threshold, (2) distinguish the capitalized equipment from non-capitalized equipment for accounting purposes,(3) reconcile and make necessaryadjustment for the capitalized equipment compo- nent of the equipment property system to agreewith the general ledger control account balance, and (4) determine an appropriate method for maintaining the general control account and the subsidiary system in balance; . Assistant Secretary for Information ResourcesManagementand the Chief Benefits Director to jointly revise existing automated data processinginternal control policy and procedures to ensure that each of VA’S three data processingcenters provide for (1) independent testing of all software program code changes,(2) limiting programmers’ accessto systems’ operating programs and production programs and data files to that which is necessaryto carry out their job requirements, and (3) a documented and operationally-tested contingency plan; and Page 36 GAO/APMD-91-6Department of Veterans Affaira - Report on Intmnal Control Stroetura l Assistant Secretary for Finance and Planning and the Chief Benefits Director to jointly issue policy and procedural guidance to ensure the prompt identification and recovery of all erroneous benefit payments. During the course of our audit, we identified other matters involving the Other Opportunities internal control structure and its operation which do not affect the fair for Improvement presentation of the consolidated financial statements. These matters nonethelesswarrant management’sattention and will be reported sepa- rately to VA. Although we did not obtain formal agency commentson this report, we Agency Comments did provide appropriate VA officials with a draft of the report and have incorporated their comments where appropriate. VA officials generally agreed with our findings and recommendations.In addition, VA officials advised us of corrective actions they plan to implement relative to our recommendationsin fiscal years 1991 and 1992. We believe VA’S planned actions, if successfully implemented, will addressthe identified problems. Page 37 GAO/AFWD-916Department of Vetmans Affaim Appendix III Report on ComplianceWith Laws and Regulations We have audited the consolidated financial statements of the Depart- ment of Veterans Affairs for the fiscal years ended September30, 1989 and 1988, and have issued our opinion thereon. This report pertains only to our consideration of VA’S compliance with laws and regulations for the year ended September30,1989. Our report on compliance with laws and regulations for the year ended September30,1988, is presented in GAO~AFMD-89-69,dated September 161989. We conducted our audit in accordancewith generally acceptedgovern- ment auditing standards. These standards require that we plan and per- form the audit to obtain reasonableassuranceabout whether the financial statements are free of material misstatement. The management of VA is responsible for compliance with laws and regulations applicable to VA. As part of obtaining reasonableassuranceas to whether the con- solidated financial statements were free of material misstatement, we selectedand tested transactions and records to determine the organiza- tion’s compliance with provisions of the following laws and regulations which could have a material effect on VA’S financial statements if not complied with: . Federal Employees CompensationAct (6 U.S.C.6322) and specific authority for special VA employee rates (38 U.S.C.4107); . Anti..Deficiency Act (31 USC. 1341, 1342, and 1611-1619); 9 legislation concerning recording obligations and balancesavailable for obligation (31 U.S.C. 1601 and 1602) and related regulations; l Debt Collection Act of 1982 (31 U.S.C.3302,3711, and 3717), related regulations, and specific legislation relating to collecting amounts owed to VA (38 USC. 3114 and 3116); l Prompt Payment Act (31 U.S.C.3901-3906) and related regulations; l legislation concerning veterans compensation for service-connecteddis- ability or death (38 U.S.C.310,314,316,331, and 336), pensions either for nonservice-connecteddisability or death or for service (38 U.S.C. 602,603,606,621 and 641), and regulations concerning evidence required to establish eligibility for benefits; l legislation concerning veterans insurance (38 U.S.C.Chap. 19 and educa- tional assistance(38 U.S.C.Chaps. 32,34-36); and l regulations concerning veterans guaranteed home mortgage loans. Becauseof the purpose for which our tests of compliance were made, the laws and regulations tested did not cover all the requirements that VA has to comply with. The results of our tests for fiscal year 1989 indi- cate that, for the items tested, VA complied with those provisions of laws and regulations which could have a material effect on the financial Page 38 GAO/AF‘MD-914Department of Veterana Affah statements. With respect to transactions not tested, nothing cameto our attention that causedus to believe that VA had not complied, in all mate- rial respects,with those sameprovisions. Page 89 GAO/AFMD-916 Department of Veteram Affaim Appendix IV l?ina;ncidStatements Conaoltdatsd Statement8 of Financial Porltlon Aa Of September 30,198s AND 1988 (Dollars In Thousands) 1989 ‘R-$j ABSETS: cash wiul U.S. Trmwry l nu al hard s 4,944,590 s 6,3W,884 hlvanon, Awounta, uld Loam rl@o&*, ml (IldO 8) 3,030,615 3,094,016 Imwtmonb (note 7) 13,160,114 12,861,064 Forwlaad Prqmty H&f for sat. 679,343 616,833 Land, Wdings, and Equ@mont Nal 04 Aowmulatad Deprodntbn (nd* 9) 6,396,514 7.72G,G63 othuAawts 164,557 156,665 Futun Rnandng sourcn (nota 1) J 4,796,035 $ S,612,S49 TOTAL AsslFr5 $35.169.766 S35.6S2.157 __II UABIUTIES, TRUST FUND BALANCES, AND EQUITY: Aocounb Payabte. Prlndpdly to tha P&lb $ 1.124,230 s 1.099294 Auwad compensatlal l nrl Pendon R.&its 56,700 724,086 Aocruad Payrotl and Payrd Ralatod Lla6llltba 1.171.729 1 .lG2.511 Dkldondo on Crodll or Dopdl (not0 6) 667,393 765,238 lnwranca Dh4dands Payabk (not. 6) 1,030.663 697,184 othuLhbltiun 376,214 346,127 LlabUky for Fdud Empbyw Compuwdiw~ Ad (note 1) I,21 1,066 1.024,309 Llabltny for Losw* on Gwranbad Loam (note 5) 2.872.667 3.063.466 lnwranor PoYcy Rewr (nti 6) 9.111.644 6,69G.316 Rnsrva lor Putbpdtn~ Pdbyhdda Intuod 3.069.419 3.126.659 BormwIngo from Tmuury 1.730.078 1.730.076 TOTAL LIABILITIES 22,421,441 23,491,192 TRUST FUND BALANCES 671,670 746,443 EOUtTY OF THE U.S. QOVERNMENT: Unrwked App+tbw Inwrted Cqital 8.563,501 8,111,422 Defurad Approprbtlcwrr 263.650 275,763 Unobligdod Bdancu 1,210.631 1.210.724 unddlvomd orduo 1,999,47S 1.816.613 TOTAL EQUITY OF THE U. 8. QOVERNMENT 12,067,457 11.414.622 TOTAL LIABILITIES. TRUST FUND BALANCES. AND EQUITY 336,166,76S S3tw52.157 ltm l uxn+w~ying note8 an an inh?gralparl of them datemenb. Sqpk+montalschdulea include financial informdoion by majorprogram area Page 40 GAO/AFMD-91-6Department of Veterans Affdm Appendix Iv Financial Stntementa Conrolldated Statements of Operation8 For Fiscal Years 1989 AND 1988 (Dollars In Thousands) 1989 (Rasrated) 198.9 OPERATING EXPENSES AND INSURANCE PROVISIONS: Operaring Expenses by Category: Pemonnel Compensation and Frlngo Benefii $ 7.901.100 S 7,515,281 Veterenr Benefits 16.244.282 15,939,277 Claims and Indemnities 1,290,059 3.276.447 DeFeciation 667,344 412.099 Supplies and Materials 1,820,715 1.655.902 Contractual Services 1.447.612 1.472,964 Rent. Communications, and Utllitlol 569,723 532,269 other 157,130 68.350 Total Operating Expensea 30.117,965 30,892,569 Insurance Prov~sioris Dividends to Policyholders 991,022 952.507 Solvbemen’s Qroup Life Inwrsnce Reaorvos 13,761 3.416 Total Insurance Provisions 1.004.763 955.923 $31.122.746 $31,646.512 OPERATING REVENUE AND FINANCING SOURCES: Operating Revenues: Premium Income $ 671.235 $ 673.812 Interest In-me 1 .l39.742 1,397,700 Loan Oriiginatian fee* 141,067 136.116 Reimbursements and Other 599,449 546,242 Total Operating Revenue 3,051,463 2.951,972 Financing by Source: Appropriations and Financing Sources Realized 26.905.979 27.425.521 Funds to be Provided by Future Financing Sources (1 .017,507) 1.196.272 Tra&~a. Reimbursements, and Other 162,793 214,747 Total Finanang Sources 26,071.265 26.696.540 331.122,746 $31,646.512 Page 41 GAO/APMD-91-6Department of Veterans Affairs -~ Appendix IV FYnanctalStatement0 Connolideted Statements of Changes in Financial Position and Reconciliation to Budget For Fiscal Years 1989 AND 1988 (Dollars In ThousancJs) (Restated) 1988 196.3 NET USE OF RESOURCES: oprdhg Exporlse6 $30,117.965 $30.692,569 items Requiring (Providing) Fundr: Decroaw (Increase) in Future Lbbility Praviaiono (Note 1) 562.326 (1 s336.772) Deprodrtbn (687.344) (412.OQQ) bweaw in Accounts Receivable (206.312) (91,713) Dowear in Accounb Pay&b and Accruala 509,010 166.200 Revm~r Aooounled lor . . Ofkdting Cdbctions (2,155.413) (2.141.162) Furwls Used By Opnatlonr 26,158,232 27,097,053 Nordperdlng Uses: Dividends (note 6) 991,022 952.507 Acqukutkm d Land. Buildin9a, and Equipment 1 .154,466 1.090.664 Purchased Fore&wed Property Held for Sale 1.463,169 1.630,545 Iuwnce md Repurdm~ d Loans and Liens 1.164.916 1.174.472 Other, Net (50.312) (23,441) Financing Adiiiibe: Sale d Foreclosed PrqMy Held fof Sab (1.714.651) (1.661.606) Sab d Loarl~. without R6coume (433,331) @Qww Loan/Lbn RepaymenWOptbrul Iricwno Settlements (302,363) (3=,w7) Revonwr Cdlected for Treasury (430,269) (336,924) NET USE OF BUDGETARY RESOURCES (OUTLAYS) 30,040,661 29.270,976 SOURCES OF BUDGETARY RESOURCES PROVIDED Current Year @proprbtii, Mjusted 29.260.543 26.363.176 Contract Authority and Reappropriation 64.343 (121.192) Proceeds d Loan Salea with Recourse 369,258 Interest on Oovernment Securitlier 1,033.241 996.165 Net lrenslom. Retmburaemonts. mcl Cthor (236.492) (362,838) Funds Returned to Treasury (206.040) (163,662) TOTAL RESOURCES PROVIDED 29.Q31.595 29.062866 DECREASE IN U.S. TREASURY AND IMPREST FUNDS (109.066) (2Q6.290) Funds Exchanged for U.S. Gowmmont SeaMties (333,206) (411,468) NET DECREASE IN U.S. TREASURY AND IMPREST FUNDS (442.294) (619.759) U.S. TREASURY AND IMPREST FUNDS: B+ning d Year 5,366,6&o 6,006,643 End of Year $4,944,5QO s538Ws4 Page 42 GAO/AF’MD-91-6Department of Veterans Affairs APPmdix Iv Flnanclal Btatemente Note8 to Flnanclal Statements NOTE 1: SIGNIFICANT ACCOUNTING POLICIES EntityandBasisof Consolidation In fulfilling its mission to provide veterans with care, support, and recognition, the Department of Veterans Affairs maintains 15 general funds, 11 revolving funda, 5 trurt funds, 5 deposit funds, and 5 clearing accounts. The financial activities of these funds have been classified into the following functional areas: Medical and Construction; Veterans Benefits; Housing Credit Assistancer Life Insurance; and Administration. Some of the trust and revolving fund activities for the insurance and housing credit assistance programs are augmontad by budget appropriations. The consolidated financial statements account for all funds for which VA is responsible and present on the accrual basis of accounting as required by the GAO Policy and Procedures Manual for Guidance of Federal Agencies: Title 2. All significant intra-agency balances and transactions have been eliminated in consolidation. Recognition of Financing Sources The current congressional budgetary process under which VA operates does not distinguish between capital and operating expenditures. For budgetary purposes, both are recognized as a use of budgetary resources (outlays) as paidr however, for financial reporting purposes under accrual accounting, operating expenses are recognized currently, while expenditures for capital and other long-term assets are capitalized and not recognized aa expenses until they are consumed in VA’s operations. Financing sources for these expenses, which derive from both current and prior year appropriations and operations, are recognized on this same basis. The consolidated statement of changes in financial position and reconciliation to budget presents a reconciliation of operating expenses on an accrual basis with budgetary expenditures. For certain accrued expensss (e.g., annual leave earned but not taken, insurance premiums for disabled veterans funded by appropriations, losses on guaranteed loans), current or prior year appropriations are not available to fund the expenses: however, such expenses are customarily financed ( funds appropriated, or, for a portion of the loan losses, revenues received) in the year payment is required. An amount due from future finaicing sources is therefore recognized in operations each year for that year’s accrued amount of such expanses. The cumulative amount of these accruals io reflected in the consolidated statement of financial position as an asset, future financing sources. The total smount of the future financing sources account is also reflected in the liability section of this statement as part of various liability accounts, primarily accrued payroll and related liabilities and liabilities for federal employees compensation act and losses on guaranteed loans. Page 43 GAO/AFMD-91-6Department of Veterana Affah Appendix IV Flnanclal Statements Operating Revenue AndOtherFinancing Sources Recognition Intoroet income, which is earned primarily from the investments of VA’s life insurance program, is recognized on the accrual basis. Insurance premiums are recognized as revenue when due. Loan origination fees, which during fiscal year (PY) 1989 were charged to veterans at a rate of one percent of the loan principal, were recognized as revenues at the time of the guaranty. Cash WiththeDepartment of theTreasury AndOnHand VA does not maintain cash in commercial bank accounts. Cash receipts and disbursements are processed by the Department of the Treasury. The balance in the Treasury represents the right to draw on the Treasury for allowable expenditures. Cash advanced to imprest fund cashiers totaled $8.8 million as of September 30, 1989, and $9.0 million as of September 30, 1988. Commitments VA has obligations remaining at the end of each year for goods and services which have been ordered but not yet received (undelivered orders). Aggregate undelivered orders amounted to $1,999,475,000 and $1.816,613,000 as of September 30, 1989. and September 30, 1988, respectively. Of these amounts, $943.535.000 in FY 1989, and $1.011.475.000 in FY 1988 related to construction projects of both long- and short-term duration. The remainder was principally comprised of obligations for medical supplies and equipment that were incurred by VA in the normal course of fulfilling its mission. Property andEquipment The majority of the reported property represents facilities and equipment used to provide medical care to veterans. Property and equipment, including transfers from other Federal agencies, are valued at cost. Expenditures for major additions, replacements, and alterations are capitalized. Routine maintenance is recognized as an expense when incurred. Costs of construction are capitalized as Construction in Progress until completed and then transferred to the appropriate property account. Buildings are depreciated using the straight line method over estimated useful lives ranging from 25 to 40 years, based upon the American Hospital Association’s estimate of useful lives of hospital assets. Equipment is depreciated using the straight line method over useful lives, which, for most equipment, range from 5 to 20 years. Page 44 GAO/APMD-91-9Department of Veterans AfYaba Appendix IV Fhandal Statementa Accrued Compensation andPension Benefits Compen8ation And pOnsiOn benefits are accrued when veterans have satisfied VA’s eligibility criteria. Thio accrual pertains only to benefits due and pcryable in a particular fiscal year. (See Note 4 for a description of VA’s future liability under its compensation and pension program.) Losses onGuaranteed Loans Upon foreclosure of a guaranteed loan, VA may be required to pay the maximum claim, acquire the property, or acquire the property and pAy less than the maximum claim pursuant to criteria established in title 38, U.S.C. S. 1816. Thus, when VA acquires the property, the cost is comprised of the claimed smount paid the lender less net proceeds from the sale of the property. VA incurs an additional cost for direct home (vendee) loans. issued upon the sale of foreclosed properties that subsequently default. Estimated losses on anticipated defaults of guaranteed loans are recorded as expenses when the loans are guaranteed. Simultaneously, a liability provision is established, representing the estimated cost of defaults for those guaranteed loans which experience indicates will default in the future. A portion of this provision is subsequently reclassified as a reduction to (1) direct home loans receivable when such loans are issued (see Note 8); (2) foreclosed property held for sale when property is acquired, in order to record such property at its net realizable value; and (3) investments in subordinate securities to reflect the estimated loss of principal for the securities due to their subservient position. The remainder of the provision for loan losses is classified as a liability for future loan losses. Annual, Sick,andOtherTypes of Leave Annual leave is accrued as it is earned, and the accrual is reduced as leave is taken. At least once per year, the balance in the accrued annual leave account is adjusted to reflect current pay rates of cumulative annual leave earned but not taken. Sick and other types of leave are expensed as taken. Insurance Program Liabilities Insurance program liabilities are recorded for unpaid claims in process, for experience-based estimates of claims incurred but not reported, and for incurred death and permanent disability installment claims. These liabilities are included in Accounts Payable. Page 46 GAO/AF’MD-918Department of Veterans Affairs Appendix N F+lxuancMStatements Dividends Payable Dividends from VA’s insurance programs are recorded as a liability when declared by the Secretary of Veterans Affairs. Dividends are normally declared when fund balances are in excess of statutorily required insurance claim r*serves. TrustFund Balances Trust fund balances are comprised of the Port-Vietnam Educational Assistance Trust Fund, Servicemen’s Group Life Insurance (SGLI) Trust Fund, and the General Post Fund. These funds are accounted for separately and can be used only for specified purposes. Since they are not available to fund general purpose governmental activities they are excluded from VA’s equity accounte. Invested Capital Invested Capital includes VA’s investment in plant, property, and equipment. Deferred Appropriations Deferred Appropriations include benefit overpayment accounts receivable for which outlay authority is not available until collection. Workers Compensation Legal actions brought by employees of VA for on-the-job injuries fall under the Federal Employees Compensation Act (FECA), administered by the Department of Labor (DOL). DOL bills each Agency annually as DOL claims are paidi however, payment on these bills lo deferred two years to allow for funding through the budget process. Using actuarial estimates provided by the DOL, VA has recorded FECA liabilitias for balances billed to VA by DOL and for estimates of the present value of the long-term payments related to cases on hand at the end of the fiscal year. NOTE 2: INTRAGOVERNMENTAL FINANCIAL ACTIVITIES VA’s financial activities interact with and are dependent upon those of the Federal Government as a whole. Thus, VA’s financial statements do not reflect the results of all Einancial decisions and activities applicable to VA, aa if VA were a stand-alone entity. Page 46 GAO/AFMD-918 Jkqwtment of Veteran6 Affairs A~pendtxN Financial Statements VA's consolidated Department's financial proportionate statements are not intended share of the Federal deficit to report or of public the 1 borrowing, including interest thereon. Financing for budget appropriations reported on VA's statement of operations could derive from tax revenues or public borrowing or both: the ultimate source of this financing, whether it be tax revenues or public borrowing, has not been specifically allocated to VA. Financing for major and minor construction projects was obtained through budget appropriations. To the extant that this financing was derived from public borrowing, no interest has been capitalized because such borrowings ace recorded in total by the Department of the Treasury and are not allocated to individual Departments and Agencies. Since the Department of the Treasury does not charge Agencies interest on borrowings from the Treasury, VA does not recognize interest costs related to foreclosed property in its financial records. In FY 1989, VA held foreclosed properties for an estimated average of 6.5 months. Based on this estimate and the average interest rate for the public debt (9.0 percent), the holding costs associated with the foreclosed property held for sale were approximately $59 million in FY 1989. VA's Housing Credit Assistance program has a liability of $1.7 billion to the Department of the Treasury. These funds were originally provided to support the Direct Loan Fund, but were subsequently transferred to the Loan Guaranty Fund and have since been fully used. The liability which is owed by the Direct Loan Fund bears no interest Or specific payment date. Legislation has been proposed in the "Department of Veterans Affairs FY 1991 Budget Submission" consisting of a technical amendment to waive this liability. During FY 1989, many of VA's employees continued to participate in the contributory Civil Service Retirement System (CSRS), to which VA makes matching contributions: however, VA does not report CSRS assets, accumulated plan benefits, or unfunded liabilities, if any, applicable to its employees because this data in total is reported only by the Office of Personnel Management. On January 1, 1987, the new Federal Employees Retirement System (FERS) went into effect pursuant to Public Law 99-335. Employees hired after December 31, 1983, are automatically covered by FERS, while employees hired prior to December 31, 1983 may elect to either join FERS or remain in CSRS. One of the primary differences between FERS and CSRS is that FERS offers a savings plan to which VA will automatically contribute one percent of basic pay, as wall as, match employee contributions up to an additional four percent of basic pay. Employees participating in FERS are covered under the Federal Insurance Contributions Act (FICA) for which VA contributes a matching amount to the Social Security Administration. Page 47 GAO/AFMD-91-6Department of Veterans Af’fdre Appendix Iv l%ancial Stntemenm VA's total contributions for CSRS and FERS participants. including contributions to the Social Security Administration, during FY 1989 and FY 1988 were as follows: 19a9 1908 CSRS s266,504,389 $274,869.684 FERS 284,554,646 221,139,124 FICA 142,646,157 120,831,572 Total VA contributions While VA has no liability for future payments to employees under these programs, the Federal Government is liable for future payments to employees through the various Agencies administering the programs. 0 Certain legal matters to which VA may be a named party are administered and, in some instances, litigated and paid by other Federal agencies. These primarily relate to allegations of medical malpractice but also include other tort claims and contract disputes. Generally, amounts (more than $2,500 for Federal Tort Claims Act cases) to be paid under any decision, settlement, or award pertaining to these litigations are funded from a special appropriation called the Judgment Fund, which is maintained on deposit with the Department of the Treasury. Since VA, except for contract dispute payments, is not required to reimburse the Judgment Fund for payments made on VA's behalf, the amount of payments from the fund for VA are not reflected in VA's statements. Amounts paid from the Judgment Fund on behalf of VA were $42 million and $35 million in FY 1969 and FY 1988, respectively. Amounts requiring reimbursements to the Judgment Fund by VA for contract dispute payments were $6.1 million and $.8 million in FY 1969 and FY 1968, respectively. NOTE 3: RESTATEMENT OFFISCAL YEAR 1988 STATEMENTS The FY 19813 consolidated statement of financial position and consolidated statement of operations and changes in financial position and reconciliation to budqet have been restated to present VA Life Insurance Reserves on a Generally Accepted Accounting Principles (GAAP) basis. These reserves had been presented on a statutory basis. The principal change was to introduce a new liability entitled Participating Policyholders Interest. (See Note 6 for a complete explanation of this change.) NOTE 4: FUTURE LIABILITY FORCOMPENSATION AND PENSIONS Veterans or their dept idents receive compensation benefits if the veteran was disabled or died from military service-connected cause. War veterans or their dependents receive pension benefits if the veteran was disabled or died from nonservice-connected :auses or is age 65 or older. Certain pension benefits are subject to specific income limitations. Page 48 GAO/APMDBlS Department of Veterana Affairs A~niuxIv lbandal Statement0 The compenration and pension benefits for FY 1909 and FY 1988 were: Plraal Yanr Compensation Pension 1989 $11,210.351.000 $3,845,134,000 19lR $10,864,549,000 $3,826,974,000 VA has a future liability for benefits expected to be paid in future fiscal yoara to vototans and, if applicable, their survivors who have met or are l xpocttid to meet defined eligibility criteria. The future liability of the compensation and ponrion programs is not currently funded, nor is there any intent to do 80, Rather, payments for benefits that become due in a particular fiscal year are financed from that year’s appropriation; in effect, on (1 pay-ar-you-go basis. Payments of the future liability as it becomes due rely on congrosrional authorization of future tax revenues or other methods such a8 public borrowing for their financing. The CUtuto liability for compensation and pension benefits represents the pra$Oat value, wing an 9.0 percent discount rate. of projected annual benefit pmymentr . Projected benefit payments were based on assumed cost of living inmoaner ranging from 3.6 percent to 4.7 percent for 1990-1994 and 3.3 percent tO 4.0 porcoat for succeeding years. In addition, the mortality and l ccosrion ratw used in calculations were based on trends in the current veteran population. giaco calculation was not based on an independent actuarial study, there &xirtr a risk that the assumptions and methods underlying it may not be reflective of actual economic and demographic trends affecting veterans. Tb preront value of the estimated future liability for compensation and pension bonofits payable for the next five fiscal years and succeeding fiscal yeara are a8 follows (dollars in thousands): 1990 $ 14,021.180 1991 12,652,843 1992 11,450,555 1993 10,383,477 1994 9,462,396 1995 and succeeding 77,276,309 _______--____ Total Wo liability for future compenration and pension benefits has been included in the Consolidated Statement of Financial Position. Page 49 GAO/AFMD-918 Department of Veterans Affairs Appendix IV Flttancial Statements NOTE 5: HOUSING CREDIT ASSISTANCE PROGRAM - COST OFGUARANTEED LOAN DEFAULTS Activities under the VA housing credit assistance program primarily involve the partial guaranty of residential mortgage loans issued to eligible veterans by private lenders. In addition, VA originates direct loans to veterans, 60116 foreclosed property on credit terms (vendee loans) and monitors foreclosure settlements for ultimate claims reimbursement to VA. Residential loans guaranteed by VA are originated by private lenders and are not recorded in the financial statements of VA. The face amount of such loans outstanding as of September 30. 1989 and September 30, 1988 was $152 billion and $150 billion. respectively, and the guaranteed amount of outstanding loans as of both September 30, 1989 and September 30, 1988 was approximately $60 billion. The guaranty, in effect, transfers some or all of the risk of default from the lender to VA. At the time of default, VA has the option to either pay the guarantee amount or pay a reduced amount and acquire the property from the lender. VA assumes this risk to provide a benefit to the veteran who obtains a mortgage with interest rates that are usually lower than conventional mortgage rates and with no downpayment. Vendee andDirectLoans The total amounts of vendee loans and loans of the direct loan program as of September 30. 1989 and 1988, (dollars in thousands) are: Vendee loans $1.177.452 $1,056,100 Direct loans 60,343 71.312 frL237.wi Provision for Losses One element of the cost of the mortgage loan benefit that VA provides to veterans is the present value of the cost VA will bear as loans already guaranteed default in the future. This cost is reflected in the financial statements as a liability Eor losses on guaranteed loans and as an offset to the value of certain related assets. The unfunded portion of this liability is also reported in the Consolidated Statement of Financial Position as an amount due from Future Financing Sources. Y Page 60 GAO/AF’MD-916 Department of Veterans Affairs Appendix IV FYnancial St&.ements The provision for lesser on guaranteed loans is based upon historical loan foreclosure results applied to the average loss on defaulted loans. The provision calculation is also based on the use of the average interest rate of the U.S. interest-bearing debt as a discount rate on the assumption that VA’s outstanding guaranteed loans will default over a twelve-year period as follows (dollars in thousands)r 1990 $ 837,065 1991 639,024 1992 485,247 1993 351,027 1994 251,600 1995 and succeeding 416,291 The discount rate used in the computation was 8.9 percent for FY 1989 and 8.8 percent for FY 1988. The components of the provisions are as follows (dollars in thousands): Year ended September 30, 1989 1986 Offsets against loans receivable $ 116,352 $ 156,077 Offsets against foreclosed property held for sale 100,407 144,081 Offset against investments 90,638 45.824 Liability for losses on guaranteed loans 2,672.857 3,663,488 Impact of Provision onFuture Appropriations The projected cost of guaranteed loan defaults will not necessarily reflect VA’s future appropriation requests over the next 12 years, because those requests will also include anticipated inflows and outflows of resources for nonoperating use such as for transfer, purchase and sale of properties, and issuance and repayment of loans, sale of loans, and the receipt of the one percent funding fee. To the extent that revolving fund revenues are not sufficient to fund future costs, financing will have to be obtained from future appropriations or other congressionally approved sources. Page 51 GAO/APMD-B16 Department of Veterans Affairs Recourse loansales During FY 1988, VA sold approximately $379 million in loans with recour8o marketing agreements for $365 million. Under the terms of the agreement@. VA will repurchase the loans sold if default occurs. Any losses from defaulta of repurchased loans are borne by VA, which has estimated the potential lors on the amount of such loans outstanding and has recorded this loss as a composeat of the provisions for loan losses at approximately $568 million and $647 million as of September 30, 1989 and September 30, 1988. respectively. There were no recourse loan sales during FY 1989. Non-recourse loansales * During FY 1989 and FY 1986. VA conducted five nonrecourse loan salea. The components of the sales are susxsarized as follows (dollars in thousands): -----Fy 1988----e- ------my igag-------- American American American American Housing Housing Housing Trust whole Trust I Trust II Trust III Trust IV Loans Totpl Loans receivable sold $308,937 $234,346 $276,103 $364,670 $58,134 $1,244,190 Proceeds from Sale: Cash* 185.557 134,284 171,165 236,208 49,432 776,646 Investment in subordinated certificates of securities 105,059 91,391 94,557 116,695 0 407.702 290,616 225,675 265,722 352,903 49.432 $1,184,34&l Loss on loans receivable sold $.L&321$8.6711612.381$11.767Z *Information presented does not reflect the transaction expenses incurred to sell the loans. Page 52 Appendix IV Financial Statimente American Housing TrustI On June 29, 1988 VA completed its first sale of non-recourse loans to the American Housing Trust (AHT I). Under the terms of the sale, VA sold approximately $309 million of its vendee loans to AHT I, which in turn, sold the loan6 a6 mortgage pass-through certificates. The mortgage pass-through certificates consisted of seven senior classes of certificates that were offered to the public and subordinate certificates that were assigned to VA as partial proceeds from the sale of the loans. The face value of the subordinate certificates at the time of sale was approximately $105 million. Principal and interest payments on the senior certificates are guaranteed by the American Loan Guarantee Association. Under the securities structure, principal and interest payments to VA are subordinate to payments to ths senior certificate holders. American Housing TrustII On September 23. 1988, VA completed its second sale of nonrecourse loans to the American Housing Trust (AHT II). Under the terms of the sale, VA sold approximately $234 million of its vendee loans to AHT II, which in turn, sold the loans as mortgage pass-through certificates. The mortgage pass-through certificates consisted of two senior classes of certificates that were offered to the public and subordinate certificates that were assigned to VA as partial proceeds from the sale of the loans. The face value of the subordinate certificates at the time of sale was approximately $91 million. Principal and interest payments on the senior certificates are guaranteed by the American Loan Guarantee Association. Under the securities structure, principal and interest payments to VA are subordinate payments to to the senior certificate holders. American Housing TrustIII On February 23. 1989, VA completed its third sale of non-recourse loans to the American Housing Trust (AHT III). Under the terms of the sale, VA sold approximately $278 million of its vendee loans to AHT III, which in turn, sold the loans as mortgage pass-through certificates. The mortgage pass-through certificates consisted of four senior classes of certificates that were offered to the public and subordinated certificates that were assigned to VA as partial proceeds from the sale of the loans. The face value of the subordinate certificates at the time of sale was approximately $95 million. Principal and interest payments on the senior certificates are guaranteed by the American Loan Guarantee Association. Under the securities structure, principal and interest payments to VA are subordinate payments to to the senior certificate holders. Page 53 GAO/AFMD-91-6 Department of Veterans Affairs Appendix IV Flnanclal Statement33 American Housing TrustIV On August 24, 1969, VA completed its fourth sale of nonrecourse loans to the American Housing Trust (AHT IV). Under the terms of the sale, VA sold approximately $364 million of its vendee loans to AHT IV, which in turn, sold the loans a6 mortgage pass-through certificates. The mortgage pass-through certificates consisted of three classes of certificates that were offered to the public and subordinated certificates that were assigned to VA as partial proceeds from the sale of the loans. The face value of the subordinate certificates at the time of sale was approximately $117 million. Principal and interest payments on the senior certificate6 are guaranteed by the American Loan Guarantee Association. Under the securities structure, principal and interest payments to VA are subordinate payments to to the senior certificate holders. Whole Loans On March 23, 1969. VA sold more than $56 million in seasoned vendee loans without recourse. OffsetForLosses oninvestments AS of September 30, 1969, and September 30, 1966, an allowance has been recorded to reflect the estimated loss of principal as a result of the subordinated position. The estimated allowance computation was based upon historical loan defaults. The net investment balances are as follows: As of September 30, 1969 American American American American Housing Housing Housing Trust Trust I Trust II Trust III Trust IV Total Investment in subordinated certificates of securities $104.887 $91,391 $94.557 $116,695 $407,530 Allocation of loss provision 24,473 17,221 I 21 753 27,191 90,638 Net investment uuuu$74.170 Page 54 GAO/APMD91-6 Department of Veterana Affaira As of September 30, 1988 American American Housing Housing Trust I Trust II Total Inveetmont in rubordinated certificates of wcurities 3105,059 $91,391 $196.450 Allocation of low provirion 18,786 27,036 45,624 Wet inveltmeat uudzA$64.355 $150.626 Tbo invontmentr are carried at cost, adjusted for the estimated foreclosures, becaure the fair market value cannot be determined. Foreclosed property heldfor sale Tbo VA acquires property from homeowners who default on guaranteed or vendee loans. An allowance for losses has been recorded based on historical loss data, ar follow8 (dollars in thousands): As of September 30, 1989 1988 Forecloled property held for sale $779,750 $962,914 Allocation of loas provision 100,407 144,081 Net 6579.34-3 Guarantee Commitments AS of September 30, 1988, VA had outstanding commitments to guarantee loans which will originate in PY 1990. The number of commitments could not be determined, as VA has granted authority to various lenders to originate VA loans that meet established criteria without prior VA approval. Page 55 GAO/AFMD-916 Department of Veterans Affairs Appendix IV Nnanclal Statements Participation Certificates During FY 1968, the final series of Federal Asset Financing Trust (FAFT) Participation Certificates (PCs) mature& A final principal payment of $146 million was made to the sinking fund administered by the Government National Mortgage Association (GNUA), in order to end VA’s involvement in the Participation Sales Act of 1966 (P. L. 89-429). Over the life of FAIT, VA transforred interest payments to GNMA for coverage of the periodic intorest payments on the PCs. GNMA invested funds not needed to meet current interest payments on behalf of VA. When the final series matured in August 1988, VA received $165 million from GNMA as VA’s share of interest income to the investment. SUJJSEQUENT EVENT - GUARANTY AND INDEMNITY FUND On December 18, 1989. legislation was enacted (Public Law 101-237) which established a new fund (the Guaranty and Indemnity Fund) to finance the operation of VA’s loan guaranty program for loans made on or after January 1, 1990. except manufactured (mobile) home loans and most administrative co6ts of operating the program. This legislation, which, among other things, also increased the required loan origination fee in cases where there is no downpayment on a loan and decreased the fee for guaranteed loans with a downpayment, will change the operating results and cash flow requirements of not only the direct and loan guaranty funds but also the overall loan guaranty program. This legirlation will not change the unfunded loss (about $2.7 billion) incurred on the outstanding direct and guaranteed loans as of September 30, 1989. Page 58 GAO/AF’MD-91-6 Department of Veterana Affaire Appendix IV Flnanclal Statementa NOTE 6: INSURANCE PROGRAMS VA administers the following life insurance’programs that provide permanent (whole life) and term coverage: National Service Life Insurance (NSLI): United States Government Life Insurance (USGLI): Veteran5 Special Life Insurance (VSLI); Veterans Reopened Insurance (VRI); and Service-Disabled Veterans Insurance (SDVI) . Data on insurance in force for each of these programs is as follows2 Insurance In Force As of September 30, 1989 and 1988 Number of Amount of Principal policies insurance veterans group (thousands) (millions) covered Prourem 1989 yJ 1989 1988 __ NSLI 2.737 2,624 $21,025 $21,317 ww II USGLI 43 48 159 178 WWI VSLI 306 327 2.839 2,909 KOREA VRI 124 127 041 869 WW II/KOREA SDVI 173 176 1,572 1,599 WW II/KOREA/ VIETNAM TOTAL u&i 2&l&i $26,442$26.952 Insurance Reserves In CY 1989, VA adopted the policy of presenting insurance reserves in the financial statements in accordance with generally accepted accounting principles (GAAP) for the federal sector (GAO Policy and Procedures Manual for Guidance of Federal Agencies: Title 2). The FY 1988 financial statements have been restated to make the change retroactive to that year. Prior to this change, the insurance reserves as reflected in the financial statements were based on assumptions prescribed by Federal statute. Thus, the reserves as presented in FY 1988 and earlier statements were based on statutory standards and were called "statutory insurance reserves," Insurance reserves for NSLI, USGLI, VSLI, VRI, and SDVI are designed to earmark funds that will be required to pay guaranteed policy benefits over future premiums and investment income. The reserves are based on an actuarial computation of the present value of amounts that will be required to pay the guaranteed policy benefits. The two most important factors used to compute t&ore reserves are assumed investment yields and mortality rates. Under statutory standards, which are oriented toward solvency considerations, these factors are generally very conservative, thereby resulting in a higher reserve requirement and smaller profits for distribution to owners or, in VA's case, policyholders prior to claims for the guaranteed policy benefits. For VA's insurance programs, these factors are prescribed by Federal statutes and VA will therefore continue utilizing the statutory determined reierves for policyholder dividend considerations. Page 57 GAO/AFMD-918 Department of Veterans Affairs Appendix N Pinandal St&ementa GAAP-determined reserves are oriented toward allocation of revenues, costs, and expenses and are computed based on recent mortality experience and interest assumptions. For VA's GAAP insurance reserves, interest rate assumptions ranged from 1.0 percent to 8.5 percent; these percentages are expected to hold true for at least the next 10 years. The GAAP mortality assumptions are based on actual mortality experience of VA’s insurance programs, with a provision for adverse deviation. The statutory required interest rates range from 2.3 percent to 4.5 percent, while the statutory mortality assumptions include the American Experience Table, the 1941 Commissioner's Standard Ordinary (CSO) Table, and the 1958 CSO Basic Table. (Actual average investment yield for VA’s insurance program securities was 9.69 percent as of September 30, 1909, and 9.67 percent as of September 30, 1988.) Aa a result of these differences, the insurance policy reserves under GAAP are lower than insurance policy reserves computed with statutory assumptions. The difference in the GAAP insurance reserves aAd statutory reserves for VA's whole life policies with participating rights (NSLI. USGLI, VSLI, and VRI) represents future benefits (dividends) that inure to program participants based on statutory requirements and practices. This difference is called Participating Policyholders' Interest in Accumulated Participating EarniAga, commonly referred to as Participating Policyholders' Interest. Since the difference will inure to policyholders, it is presented in the liability section of the Consolidated Statement of Financial Position as a liability to participating policyholders. The GAAP insurance reserve balances as of September 30, 1989, are shown below (dollars in thousands): Disability Death Income and GAAP Death Benefit Waiver of Reserve Proqram Benefits Annuities Premium Other Total NSLI S6.207,685 9409,994 $704,965 $176,144 S7,576,7aa USGLI 92,449 25,963 1.678 981 121,071 VSLI 578,620 3,132 114,546 3,914 700,212 SDVI 273,593 1,486 129,038 404,117 VRI 280,033 1,247 26,376 307,656 TOTAL $441.8.22 AiAL!u The GAAP insurance reserve balances as of September 30, 1988, are shown below (dollars in thousands): Disability Death Income and GAAP Death 3enefit Waiver of Reserve Prosram Benefits Annuities Premium Other Total NSLI $5,915.734 $432.333 $836.172 $190, a74 $7.375,113 USGLI 103,629 20,697 2,234 1,090 135,650 VSLI 534,224 3.484 119,481 3,362 660,551 SDVI 266,395 2,294 148,269 416,958 VRI 273,744 1,289 27,013 302,046 TOTAL $468,097L1.133.169$195.325- Page 68 GAO/AFMD-916 Department of Veterans Af’faim Appendix N Financial Statements the Participating Policyholders' Interest as of September 30, 1969, and September 30, 1966, in the five insurance programs are shown below (dollars in thousands)8 Participating Policyholders' Interest Proqram 9./30/89 9/30/88 NSLI $2,445,533 $2,504,541 VSGLI 42,743 46,896 VSLI 424,402 416,462 SDVI VRI 156,661 160,660 TOTAL The statutory insurance reserve balances as of September 30, 1969. are shown below (dollars in thousands): Disability Death Income and Statutory Death Benefit Waiver of Reserve Proqram Benefits Annuities Premium Other Total NSLI $6.527.424 $409,994 $704,965 $176,144 $9,090,527 USGLI 130,221 25,963 1,678 981 156,843 VSLI 954,650 3,132 114,546 3,914 1,076,242 SDVI 273,593 1,486 129,036 404,117 VRI 414,573 1,247 26,376 442,196 TOTAL i2ls&2z-s181.039~ The statutory insurance reserve balances as of September 30, 1986, are shown below (dollars in thousands): Disability Death Income and Statutory Death Benefit Waiver of Reserve Program Benefits Annuities Premium Other -- Total NSLI $6,311,932 $432,333 $836,172 $190,874 $9,771,311 USGLI 144,990 26,697 2,234 1,090 177,019 VSLI 904,009 3,484 119,481 3,362 1,030,416 SDVI 266,395 2,294 148,269 416,958 VRI 414,976 1,289 27,013 443,280 TQTAL &&?.0“2.392 6468.097-169m berating expenses as reflected in the Schedule of Expenses, Dividends, Revenues, and FiAanCing Sources are also affected by the use of GAAP rather than statutory principles. Under GAAP, the operating expenses were $103 million higher in FY 1989, and $104 million higher in FY 1986. Page 69 GAO/AFMD-918 Department of Veterans Affairs , ApmmUx IV Ifhndal Statementa Certain premium item0 are also accounted for differently under GAAP than under statutory principles. Specifically, the liability for unearned advance premiums and the receivable that is set up for uncollected premiums are all lower under GAAP principles. PolicyDividends The Secretary of Veterans Affairs annually determines the excess funds avai lab10 for dividend payment. Dividends to be paid are based on an actuarial analysis of the individual programs as of the end of the preceding calendar year. Dividends are declared on a calendar year basis and are paid on policy anniversary dates. Policyholders may receive their dividends in cash, use them to pay premiums in advance, repay loans, purchase paid-up insurance, or place them in an interest bearing account. Dividends payable shown in the Consolidated Statement of Financial Position represents the amount of dividends potentially payable in the next twelve months. Dividends shown in the Consolidated Statement of Changes in Financial Position and Reconciliation to Budget represents the amount of dividenda paid in the last twelve months. Dividends to policyholders shown in the Consolidated Statement of Operations represents the amount of dividends paid in the preceding twelve months plus the change in the SGLI trust fund balance. A provision for dividends is charged to operations and an insurance dividend payable is established when gains to operations exceed those necessary to maintain the solvency of the insurance programs. These excess earnings are distributed to policyholders in the form of divibends. During FY 1989 and FY 1908, total dividends declared for all insurance programs amounted to $1.004,930 and $960,600, respectively. Dividends paid during FY 1989 and FY 1988 were as follows (dollars in thousands): Dividends Paid Program -.1989 1988 NSLI $855,243 $823,485 USGLI 11,133 12,132 VSLI 91,906 83,769 VRI 32,740 33,121 TOTAL The payment of termination dividends in the VRI program began in 1985 to ensure that those whose insurance was terminating receive an equitable share of surplus. Termination dividends are included in the above figures and amount to approximately $250,000 paid in FY 1989 and $250,000 paid in FY 1988. Insurance Cash Surrender Value All whole life policies build cash surrender values equal to policy reserves ply6 any dividends held on account. Policyholders may borrow up to 94 percent of the cash surrender value or use it to purchase paid-up insurance at a reduced amount. Page 60 GAO/AFMD-918 Department of Veterans Affeh Appendix IV Finadd Statements Group Life Insurance Program VA supervises the administration of the Servicemen’s Group Life Insurance (SCM) and Veterans Group Life Insurance (VGLI) programs and directly administers the Veterans’ Mortgage Life Insurance (VMLI) program. SGLI is supervised by Vh but directly administered by Prudential Life Insurance Company of America, which provides group life insurance coverage and pays all claims and expenses associated with the program. This coverage is provided to active members of the Military Services, to cadets attending service academies, and to active members of the Armed Forces Reserves, National Guard, and Reserved Officer Training Corp. VA’s responsibilities are to establish premium rates and to act as the transfer agent for premiums paid by payroll deductions and for extra hazard costs paid by the service organizations involved. VA also determines the adeguacy of the SGLI insurance policy reserves maintained by Prudential. If excess reserves exist, VA can both lower premium rates and withdraw excess funds. To date, VA has withdrawn approximately 894 million from these reserves. These funds, together with investment interest earned, are held in a trust fund. which on September 30, 1989, had a balance a $165.3 million. On Soptembsr 30, 1988, this balance was $151.5 million. This balance is used as a premium stabilization fund to augment premium payments remitted by the Lnsureds. SGLI Insurance In Force 1989 1988 Number of Policies 3,475,004 3,509,029 Amount (in millions) $172.855.9 $174.537.1 VGLI provides S-year term insurance to all servicemen separated from active duty, usually at the end of their 120-day free SGLI coverage. At the end of the term period of VGLI insurance, the veteran has the right to obtain an individual life insurance policy at a standard rate Erom any company participating in the SGLI program. VGLI Insurance In Force 1909 1988 Number of Policies 298,552 282.195 Amount fin millions) $13.335.7 $12,066.8 Y Page 61 GAO/AFMD9143 Department of Veterans Affairs Appendix Iv Finandal Statement4 The Veterans Mortgage Life Inrurance (VMLI) program is administered directly by VA. Utiar this program. severely disabled veterans can obtain insurance coverage of up to $40,000 on the outstanding balance of their home mortgage. Cov4rage ceases at age 70. Premiums are based on standard mortality tables and are deducted from the veteran’s monthly compensation payment. Administrative exponsos and the additional cost Of insuring these medically-impaired lives are borne by the Government through appropriations. WI.1 Insurance In Force 1989 1988 Number of Policies 5,190 5,416 Amount (in millions) $171.1 $165.5 Insurance Administrative Expenses Except for the SGLINGLI and VRI programs, administrative costs are not charged to VA life insurance programs, Administrative costs charged to the SGLINGLI program were $324,000 in 1989 and $306,000 in 1988. Administrative coots charged to the VRI program were $1,156,000 in 1989 and $1.304.000 in i98a. Administrative costs for the other insurance programs (USGLI, NSLI, VSLI, SDVI) borne by VA appropriations totaled $27,212,000 in 1989 and $25,980,000 in i98a. NOTE 7: INVESTMENTS Insurance program investments, which comprise most of VA’s investments, are in non-marketable U.S. Treasury special bonds and certificates. Interest rates for Treasury special securities are based on average market yields for similar Treasury issues. The special bonds, which mature during various years through the year 2002, are generally held to maturity unless needed to finance insurance claims and dividends. The certificates are short-term in nature and are either redeemed or replaced at maturity, depending upon the cash needs of the insurance program. As of September 30, 1969, investment securities consist of the following (dollars in thousands): Insurance Other Security Interest Ranqe Programs Proqrams Total Special Bonds 6.375-13.750 $12,764,482 $12,764,482 Bonds 7.875-8.5s $ 2,251 2,251 Notes 6.75-14.25s 26,433 26,433 Treasury Bills 7.9-8.37s 40,000 40,000 Other Various 316,948 316,948 iiJdaaa$385.632 Page 62 GAO/AFMD-91-6 Department of Veterans AtYaks Appendix IV Pim3nela.lStatementi . As of September 30, 1988. investment securities consisted of the following (dollars in thousands): Insurance Other Security Interest Range Proqrams Proqrams Total Special Bonds 5.87!i-13.75% $12.304.372 $12,304,372 Certificates 8.75-10% 140,743 140,743 Bonds 7.875-8.5% $ 2,251 2,251 Notes B.375-14.625% 21,006 21,006 Treasury Bills 6.7-7.5s 32,000 32,000 Other Various 150,682 150,682 -wi612.651.054 Other VA programs with investments are Housing Credit and Medical Programs. All Insurance and Medical program investments are in securities issued by the Department of the Treaoury. Houoing Credit program investments are in trust certificates that were issued by the American Housing Trust, a private entity not associated in any way with the Government. NOTE 8: RECEIVABLES Accounts Non-Federal accounts receivable principally represent amounts due from individuals for Education Loan defaults, Compensation and Pension overpayments. and amounts due from third party insurers for health care of veterans. The latter totaled to $176,758,000 and $157.224.000 as of September 30. 1969, and September 30, 1988. Federal accounts receivable are mostly accrued interest payments due on VA investments, from the Department of the Treasury. Although VA is an active participant in Federal Debt Collection programs such as the IRS Income Tax Refund Offset, Federal Salary Offset, Litigation, Referral to Credit Reporting Agencies, and Referral to Private Collection Agencies, there are still a number of accounts where all possible collection actions will be unsuccessful. Based on VA’s experience, an allowance for losses ha8 been established at approximately 50 percent for outstanding Medical and Benefit Program debts from individuals and at 100 percent for Housing Credits debts reported for individuals. Advances Non-Federal advance payments are, principally, advances to VA construction vcontractorsI grant recipients, beneficiaries, and VA employees engaged in official travel. Federal advance payments are mostly to the General Services Administration for the procurement of supplies and equipment. Page 63 GAO/APMJIb91-6Department of Veteran8 Affairs Appendix IV Pinaneial Statements Current loans receivable are amounts due under VA's Housing Credit Assistance Program, including Home Loan Guaranty and Direct Loan defaults, amounting to $2.511,453,000 and $1,971,100,000 as of September 30, 1989, and September 30, 1988, respectively. Allowances for loss on these loans receivable resulting from defaults were $2,508,942,000 and $1.969.072,000 as of September 30. 1989, and September 30, 1988, respectively. The remaining allowance for loss relates to active home loans and is based on the Provision for Losses computation (see Note 5 for a full disclosure of the Provision for losses computation). Non-current loans receivable represent amounts due from loans and liens against VA-issued life insurance policies and also amounts owed to VA's Housing Credit Assistance Program beyond the next 12 months. Insurance policy loans do not have a fixed repayment schedule. Home loans have a firm repayment schedule over the life of the loans, which is generally 30 years; however, it is VA practice to sell these home loans rather than hold them to maturity. (See Note 5 for a complete explanation of VA's loan sales.) Home loans authorized but not closed amounted to $96,719,000 and $138,239,000 as of September 30, 1989, and September 30, 1988. respectively. RECAP OFTHE TYPE OFRECEIVABLES AND RELATED ALLOWANCES The tables below recap the receivables and allowances after a reclassification OP the Housing Credit program defaults from accounts to loans receivable. The receivables as of September 30, 1989, consist of: Current Non-Current Total Accounts : Individuals/Corporations $ 985,780 $ -o- $ 985,788 Federal Government 387,576 -o- 387,576 Less: Allowances for Loss 510,041 -o- 510,041 Accounts Receivable, net 863,323 -o- 863,323 Advances: Individuals/Corporations 52,464 -o- 52,464 Federal Government 92,681 -o- 92,681 Total Advances 145,145 -o- 145,145 Loans Individuals 2,872,029 1,793,241 4,665,270 Less: Allowances for Loss 2,540.447 102,676 2,643,123 Loans, Net 331.582 1.690.565 2,022,147 Net Receivables Y Page64 GAO/AF’MD-91-6Department of Veterans Affnirs Appendix N Financial Statements The receivables as of September 30, 1988, consist of: Cur rent Non-Current Total Accounts : Individuals/Corporatfons $ 940,079 s 132 $ 940,211 Federal Government 368,401 461 368,862 Less: Allowances for Loss 494,048 494,048 Accounts Receivable, net 814,432 593 815,025 Advances I Individuals/Corporations 53,432 -o- 53,432 Federal Government 133,660 -o- 133,660 Total Advances 187,092 -o- 187,092 Loans Individuals 2.587.658 1.644.686 4,232.344 Lesst Allowances for Loss 2.015.799 124 644 2,140,443 Loans, Net 571,859 1,520,042 2,091,901 Net Receivables NOTE 9: PROPERTY AND EQUIPMENT FixedAssets The majority of the reported property represents facilities and equipment used to provide medical care to veterans. Property and equipment, including transfers from other Federal agencies, are valued at cost. Expenditures for major additions, replacements, and alterations are capitalized. Routine maintenance is recognized as an expense when incurred. Costs of construction are capitalized as Construction in Progress until completed and then transferred to the appropriate property account. Buildinqs are depreciated using the straight line method over estimated useful live6 ranging from 25 to 40 years, based upon the American Hospital Association's estimate of useful lives of hospital assets. Equipment is depreciated using the straight line method over useful lives, which, for most equipment, range from 5 to 20 years. Current year depreciation amounted to $687,344,000 in FY 1989 and $412.100.000 in FY 1988. Property and equipment consisted of the following as of September 30, 1989 (dollars in thousands): Accumulated Net Book cost Depreciation Value Land 8 100,624 $ 100,624 Buildings 6,600,981 1,950,577 4,650,404 Equipment 3,313,322 1.871.124 1,442,198 Other 866,746 337,392 529,354 w Construction in Progress 1,673,934 1,673,934 TOTAL Page 66 GAO/AFMD-814 Department of Veteran8 Affaira AppendLxIV Flnaneial Statements Property and eqUipm@nt consisted of the following as of September 30, 1988 (dollars in thourands)r Accumulated Bet Book cost Depreciation Value Land 8 91,955 0 8 91,955 Buildings 6,201.962 1,888,078 4,313.884 Equipment 3.059.15s 1,543,620 1.515.535 Other 802.186 313,077 489,109 Construction in Progress 1.319.480 _1_.319,480 TOTAL $11.474.738 ti3.744.7115 97-729.961 Leases VA leases facilities, primarily office space and medical facilities, from General Services Administration (GSA). These leases are cancellable without penalty. In addition, VA has operating leases with the public for office, data processing, and other equipment. In FY 1989 and FY 1988, rent expenses for such leases from GSA amounted to approximately $90 million each year; while leases from the public amounted to $68 million and $65 million, respectively. Subsequent Events Rurricane Hugo caused wind, rain, and flood damage to VA Medical Centers on the east coast. Particularly hard hit was the Medical Center in Charleston, South Carolina. The California earthquake caused structural damage to VA Medical Centers in the Northern California area. The Medical Center in Palo Alto, California suffered the most severe damage. Public Law 101-130 brought relief in the form of funds from The President's Unanticipated Needs for Natural Disasters Account. The FY 1990 Medical Care Appropriation received $16.6 million to offset immediate repairs and emergency operating costs ($1.0 million for hurricane and $15.6 million for earthquake relief). The FY 1990 Najor Construction Projects Appropriation received $41.2 million for earthquake related projects. Page 66 GAO/AFMD-@l-gDepartment of Vetew Affah Appendix IV Financial Stat8menta NOTE 10: CONTINGENCIES VA is a party in various administrative proceedings. legal actions, and tort claims brought by or against it, primarily relating to allegations of medical malpractice: however, such legal settlements of tort claims awards in excess Of $2,500, as well as, contract disputes are paid from a Government wide Judgment Fund appropriation maintained by the Department of the Treasury, with an agency having to reimburse the fund for only contract dispute payments (eee Note 2). Contract dispute act cases that were pending as of September 30, 1989, and which will ultimately result in payment out of VA appropriations, if the cases are decided against the government, totaled approximately $12.5 million. VA is involved in several legal actions, which. if decided against VA, would Ultimately be charged to VA Appropriations. Although VA is unable to predict the final outcome of the lawsuits, VA's ultimate liability could be in the tens of millions of dollars. If such judgments were to occur. VA would most likely be required to seek supplemental appropriations from Congress. In the opinion of VA’s management and Office of General Counsel, the ultimate resolution of legal actions still pending as of September 30. 1989. will not materially affect VA’s operations or financial position, especially when consideration is given to the availability of the Judgment Fund appropriation to pay some court settled legal cases. Page 67 GAO/AFMD-916 Department of Veterana Affah Supplemental Schedules The following four schedules provide further detail, by major program area, of (1) assets, liabilitiecl, and Government equity3 (2) revenue, financing source8, and expenses? (3) sources and uses of funds by major program area2 and (4) budgeted and actual outlays. 0 Ihe medical program area includes financial data for the medical care progwun, including VA’s 172 medical facilities, medical research and administration, and construction. The construction program was included because most of its activities relate to medical facilities. 0 The veterans benefits area includes compensation, pension, and education programs as well as burial and miscellaneous assistance and veterans job training programs. 0 Housing credit assistance includes both VA’s loan guaranty and direct loan programs. 1 0 The administration area includes costs of managing the Department as a whole and the National Cemetery System. Also included are costs of managing the Supply Fund and automated data processing systemr. Except the cost charged to three of the life insurance programs (SGLI/VGLI & VRI) personnel compensation and fringe benefits for employees involved in veterans benefits, housing credit assistance, and life insurance have not been allocated to these major program areas and are included in the Administration and Other section. Page 68 GAO/APMD-918 Department of Veterans Affairs Appendix Iv Finandal Statements Schedule of Aeretr, Llabilitler, and Equlty by Mejor Program a8 of September 30,1999 (Dollars In Thousands) ASWiTS: cmh with U.8. Tr4uury WI6 a) h4md s3.644.94s 5895,677 $219,028 $18,658 3367,182 $4944,590 Mv4mr. Aomunb, 4nd Lolln nowhblo. Nu 335.418 232.611 993.419 1,331.975 87.192 3,930,615 I-b m684 31Q,948 12,764,462 13,15&l 14 Fwodo.4d Prcqmy Ha&l for srk 679,343 879943 tan4 Bundhp, ud Rqqnwlt Not of Acoumubbd Dqmddon 8,392,493 4,111 6,398,614 cttiwAaob 23,341 1,049 130,167 154,567 Futun An4ndng &uraa 1,776.732 20484,717 386,707 188,879 4,795,035 TOTAL ASSET $14.240.622 $978,288 $4.693,456 $14,482,871 $75s,531 s35.159,768 LlASIUflES. TRUST FUND SAIANCES, AND EQUITV: Aomunb Pay&la, PrlndfMy to the PWb 5844,957 $16 $88,541 $167,242 3223.481 Sl,124,236 Acuud~uuonuldPoMbn~ 56.700 56,700 Aacwod Payrdl Md P4yrdl Rehtod Lhwuln 1.074,471 97.250 1 ,I 71,729 Wd4ndoonCr4dit4rD4pdt 867.393 e67,393 Inwr4nce Dluld4nd8 Pay&a 1,030,8&3 1,030,963 cthuLi4bwn 249,028 14,225 70,772 50.191 376,214 Udtlffty for Faderal Em@oyem Coqmrtbn Ad 1.102.090 198,999 I,21 1 pee lJ&llyy for Lone4 on Quamnbad LOMS 2872,057 2,w2.857 Inwr4nw Pdloy Reuwm 9.111.844 9.111.844 ftwuw for Putb!@ng Pdbyiwklm Itiu& 3.069,419 3.989.419 BormwlngI tram Tnuuly 1,730,078 1.739.078 TOTAL LIABILITIES 3,061,544 56.715 4,505,701 14.317.553 479.928 22.421,441 TRUST FUND BALANCES 28.782 477,TIo 186,318 571.870 EOUIW OF THE U.S. QOVERNMENT: Untulhed &+rqnidbn: Invrbd CIplbl 8,427,788 155,713 8,593,501 odwruf A#mprbtbn* 263,860 263.059 UndrHgabd Sahncu 840,999 174.318 1 a7.763 7,574 1,210,631 urxbywrufchrbm 1,991,621 5.637 1 112,316 1 s99.475 TOTAL EOUITY OF THE U.S. OOVERNMENT 11,159,297 443,803 187,764 275,893 12,067,457 TOTAL LlA8ILlTIES. TRUST FUND SALANCES. AND EQUIN $14,249,623 $978,288 34.693.455 $14.482.871 $7W,531 $35,159,76B Page 69 GAO/~916 Department of Vetemne Affaira Appendix Iv Financial Statements Schedule of Assets, Liabilities, and Equity by Major Program as of September 30, 1988 (Dollars In Thousands) ASSETS: Csah with U.S. Trouury and on hand $3,524,677 $1,213,776 $316.747 $ 16,328 $311,156 $5,366.664 Advawss, Accounts, and Loans Ftecehr&le, Net 325,132 266,020 1 ,015,793 1.357.625 109.246 3.094.016 Invadmsnts 55,257 150,662 12.445.115 12.661.054 Forwlowd Property Held tar Sale 616.633 616.633 Land, Euiidinge. and Equpment Net of Accumulated Depreciation 7.727.063 2,660 7.729.963 othu Auots 23,102 1,225 134,536 156.665 Futum Fin#mcin(l Sources 1,751,5T7 67,259 3.450.553 376.717 146,434 6.612.540 TOTAL ASSETS $13,407.028 $1.567.056 $5.754.606 $14.196,210 $704,256 335MQ.157 UABIUTIE5. TRUST FUND BALANCES, AND EOUITV: LIABILITIES: Acmunts Payable. Principally lo the Public $ 622.631 $ 44 $ 103,351 $ 172,447 I 200,621 $ 1,099,294 Aouusd CoqsnaaUon and Pen&w BeneMs 724.066 724,066 Aermsd Payroll and PDyroll Ae*ld Liabilitk 1,010.436 82.075 1.102.511 Dlvklendr on Credit 01 Deposit 765,236 765.236 Inrumnco Dhrionds Payable 997.164 997.164 CXhr Liabiliiir 190,492 34,005 73.954 47,676 346,127 Ulbility for Federal Employees Compensstion Ad 932.121 92,166 1,024.309 LhbMty for Loas on Guaranteed Loans 3,66!3,466 3.663.466 lnwnnce Policy Reserve 6,690.316 6.660.316 Rowwe for Partic@tion Pokyholdom Interest 3.126.559 3.126.659 soortowirlgs from Trsesury 1,730,076 1,730.076 TOTAL LIABILITIES 2.755.660 724,130 5.530,922 14.047,700 432,560 23,4ei.i92 TRUST FUND SAUNCES 24.108 570,625 151,510 746,443 EOUITY OF THE U.S. GOVERNMENT Unrealked AFgropriatlons: Inveatai Capital 7,941,342 170,060 6.111.422 Dotamd A~rc+wiatnna 275,763 275,763 Uncbllgad Salancos 967.041 223.663 1,210.724 Und&wad Ordam 1,696.657 16,337 3 101,616 1.616.613 TOTAL EOUI’W OF THE U.S. GOVERNMENT - 10~327,040 292,100 223,666 271,696 11.414.522 TOTAL LIABILITIES, TRUST FUN0 BALANCES, AND EQUITY $13.407.026 $1.567,065 $5.754,606 $14,199.210 $704.256 $35.652.157 Page 70 GAO/AFMD-916 Department of Veterana AfMrs Appendix N FYnancla.lStatementa Schedule of Expenaea, Dividends, Revenue, and Flnanclng Sources by Major Program for Fiscal Year 1989 (Dollan in Thouundr) HatId Cf82 Admin. Cons& “z%z Assbt8nc8 I”W”E utdothw &t&i OPERATIN EXPENSES AND DIVIDENDS: Ex@8nNs By cm8goly: Pwwnn6lCompanutionandFrlr?goBwuflta $7,266.797 s 1.061 563%222 s7,901,100 v- emelils SlS.244,292 16,244282 clama Md ImnlIioa 274 Sloe,@56 1.179.565 243 1.290.059 CkprroLtron 596,525 819 6S7,344 &p@uN uul M8t8flals 1.603354 17.161 1820.715 cantrNlud s8nrlan 1.370.966 133 76.491 1.447.612 Rmnt.Communlo8llonr. 6nd Utllltir 416,692 266 150.765 569.723 ant 126.565 28.565 157,130 TMJ Opmthg Expwm 11,676,395 16244,262 109.956 1.161.c65 997.266 39,117,965 InwrutwProvibrw 991,022 991,022 8QuRN8Nb 13,761 13.701 lot6lDlvldwd 1.004.763 l.cu4.7S3 511.875,395 sie.244.262 $109.956 S2.165.649 $907.266 531.122.746 OP&;WlN$ REVENUE AND RNANCINC 0@8r8ung RwMlcn: Prrmtumlncome 871.235 S 671.235 Inter*#Incoma $165,336 1.274.404 lA39.742 LoanOri@wkmFwa 141,057 141,057 Rehbura8m8nls and Other S 302.812 S 132,356 6.466 42.461 s115.331 599,449 ToWCwatingfievenue 302.612 132.350 312,881 2,188,103 115.331 3.051.463 fltunang by sourca: Appropr*Uonr6ndRnrncin0Sou~6Ralliud 11347.429 lfJ,Ol6,392 762.911 7.756 771.491 2&905,979 .FUnrh,tOkPlWkkd byFuturoFlnancingSour~ 25,154 (67,259) ol6wW (10,010) 20,444 (1.017,507) Tmn6f6m,R6hbur66mmt6.andOth6r 182,793 182,793 Tol8lRMndrlQsourws 11,372.333 16.111.926 6?02,925~ w54) 791.935 268.071.265 $11,675,395 $16.244.262 5109.956 S2.lS!w49 S907,286 S31,122,748 Page 71 GAO/AF’hD9lS Department of Veterans Affdra Appendix XV Finrndal Statementa Schedule of Expenses, Dividends, Revenue, and Financing Sources by MaJor Program for Fiscal Year 1988 (Dollars In Thousands) hwlwl Hod Admin Cd# l.ua conat& “s2s Aaristance lnauranoa &l”, Consolidated OPERATINQ EXPENSES AND DIVIDENDS: Exponao~ By catagory: Por84nrwl compenution and Frlnga SmHb s 6$03,251 $ 1.176 $6lO,W5 S 7,516,261 votuana' Banatlb $16.939,277 16,939.277 Clahlr and Indunnitlr 124 62.031.637 1,244,416 308 3,276,447 oqwadatbn 411,796 301 412.009 mgplin and Matsrlub 1.639,364 18,648 1,656.902 cor4raotual suvlwa 1,399.564 145 73,255 1,472.96.4 R*re. oommu~uorla, and ulllltlu 393.764 200 136.215 632.269 0ul.r mm 26,780 66.360 Totdoparaung Erpnur 10.607.41s 15,w9,277 2,031,537 1,246.026 666.332 30.692.669 In9uruloProvldonr! Dkiduwla lo Pdbyilm 962.507 052,507 6Ql.l Rwwva 3,416 3,416 Total Dh‘ldanda 856S23 956,923 510807.416 S16.WQ.277 62.031.537 62,201.961 5668.332 631.646.612 OPBRATINQ REVENUE AND FINANCINQ SOURCES: opuallwJ Rwanuar: PrmhrmIncwl. 3 673,012 $ 873.812 Intarrt income 5 166,143 1229,557 1.397.700 LoclnOd@natbnFees 135,116 135.116 R*lmburNm.nta and ahu s 314.643 s 106.133 . . , 168.161\ 76.646 5109.799 645.242 ToWCswaUmRwww~ 314.643 106.133 237.060 2.162.317 109.739 2.B51.672 10.211.4Kl 15.6OQ.366 040.194 14,066 750.434 27.426521 261,322 47,012 664,263 5,676 a.ow 1.196,272 274,747 274.747 TohI Fimdng Swrcee lO,402.n2 15.w1.144 1.794.467 lw34 766.533 26,696,640 $10,607,416 61S,WQ,277 62.031.537 32,201,861 3666,332 $31,646,512 Page 72 GAO/AFMD-916 Department of Veterans Affdra Appendix N Finfmdal Statements Schedule of Sources and Uses of Resource8 and Reconciliation to Budget by Major Program for Fiscal Year 1989 (Dollar8 in Thousands) Houri A&dwlmd Cd% Admin. COnwli- cwfmmtb “E& Aadstama I”SU”~ UldtMw datad NET USE OF RSSOURCU): OpUbfU: *r*iw - $11.675.395 $16,244,282 3109.956 51.161066 5907.288 330.117,965 l~mu fbqulrlng (ProMding) Fur&z (Inueue) Decmam In Futun u6Mky Proviwu (16w69) mo.631 (221.528) (16.610) 562,326 Deproclmkm W6,5~s) W@ (667.344) IrKmaN (rhomaN) In AcwunN Recmv~r wi526) (6.879) (167.290) 2.444 (20,SSB) (206,312) Doura~ (Incmme) In Accoum8 Plyable and Accrue8 (89.3(5) 874,399 34.576 (66.6S6) (31.922) 509,010 Rwrnurr Acoounlad for u ottMnlllg cdlaclloM (302.612) (315,149) (312.661) (1,109,240) (115.331) (2.155.413) Rerourcar UNd (Provided) by op+rauoM 10.401.118 16.596853 654,992 (215,954) 721,425 269156,232 Non-oparcm~ lJse8: Dlv~nda 891.022 991.022 AcquirJtionr ol Land. Bulklingr. 6nd Equipmrnl 1.127.907 26.559 1.154466 Purchaw 04 Foreclored Property Held for SU6 1,463,169 1,463.w lwumw l d Rrpurchuo of LOM~ UKI Lbu (2.566) 1.073.002 114,504 l.l64,Bl6 Other. Nal W) (45,355) (4.372) W,W Flrunclng Acwhiaa: 58h ol Foreclowd Pro~wly Hold for Sal. (1,714.851) (1,714.851) Sak ol Loma. wllhout Racoutu. NOI (433.331) ww31) LowLien Rop6ymrnWOpl lncom6 S6tllem6M8 (139.624) (162.559) (302.353) Rwonwr Collecbd for Trouury w5,lw (264,266) (430.269) NET USE OF SUWETARY RESOURCES (OUTLAYS) 11.362.438 16,309,799 677.619 727,013 743.612 30,040.561 SOURCES OF SUDQSTARV RESOURCES PROVIDED InM4gewy Tmnetm (15,000) (4.250) 4,250 15.000 0 Cuwom Year Agpropdatlon. Adjusted 11.663.957 16.996.060 776,100 9x20 793.216 b.260.543 ccnlmcl hlhorny 84.343 ’ s4343 lntrrom on Qovemmont S6a~rlUn 1 B33.241 1 sO33.241 NI( Trandem. Rolmbursonwnto, 6n-d OIhor 46215 w4.288) WI (236,492) Funda Rdumad to Trruuy (199.726) (175) (8,139) WMW TOTAL RESOURCES PROVIDED 11,515,445 16,7W,700 776.100 1.046.711 799.636 29,961,505 INCREASE (DECREASE) IN U.S. TREASURY AND IMPREST FUNDS 133.008 (51 WQW (99,7lQ) 31B,695 55,028 w*w Funda Exchanged for U.S. Qovernmrnl SowIth (13,840) (319.388) (333,206) NE7 INCREASE (DECREASE) IN U.S. TREASURY AN0 IMPREST FUNDS 119,166 (516.099) (09,719) 330 56.026 (442.204) U.S. TREASURY AND IMPREST PUNDS: Soginnlw ol Year 3,524.W i ,213.m 310.747 16,326 311.156 5.366.664 End 01 YOU $3844.045 6695.677 6219.026 $16,656 6367,162 64$44.590 Page 73 GAO/AFMD91-6 Department of Veterans Affah . Appendlr Iv Plnanclal Statements Schedule of Sourcer and UDOSof Re8ourcer ancl Reconciliation to Budget by Major Program for Fiscal Year 1988 (Dollam In Thousands) min VStUSfW “2 uh al cmsu Bmeftts Assbtmcs hlsursncs ES: OpdOllS: opwa~ng Eywn- $10,eo7,416 $16,839.277 32,031,637 31,24e.o29 3899,332 630,892,sw Mm. Rqulrlq (Provkhg) Fmdc hcroass In FUIUW LhbiMy Prov&brm (7W74) (OWJW) (312,769) (7.149) (1,33w72) Dsprsdaltcn (411,798) Pw (412,099) lncmas4 (Dscruu) in AcocwlsRowlwbb 6.643 (23#71) (10%~) (1.W 37.624 (91.713) Dowuu (l-) In Aowmls Payablb and Aauuab (133,613) 568,960 (138.871) (@ww (13299) 186.200 RwmussAcwunmtorss otbdungcollactkms (314.643) (382.9w (237,080) (1,096,751) (109,799) (2,141,152) rlosoUrws tJud (Prwkbd) by oprdm8 9.880.830 16.098,878 603,127 (261.002) 776,422 27.097.063 t4on4pwallng usos: DMdmds 962.507 962,#)7 llbiuomdLand. %Il Idhgl, u-d EWmsnt 1,070,337 12,327 1 .ow.w4 Purchma d Famobud Prqxrty Held for Sal* 1,63o,s46 1 .ww46 bswnco md R~rdlass d Losns and Llem (13,492) 1 ,oao,psl, 107,300 1 .I 74.472 Other, Nst w4 (36.662) 13.961 (23.441) Rnsnoing Adlvlth &Is d Forwbud Frqady Hold tar Sala (1.es1,608) (I ,661.809) &lad Loam wilhoul R~~~IuBo. Nal (-%W P==+) y&%y&gmAwl (179,645) (173,781) (353,w) Rsvmws cotlsdsd tar hasury (119.751) (220.173) (339.924) NET USE OF WWETARY RESOURCES (OUTUYS) lO,W9,572 16,856.Oll 1.139,039 035.643 991,714 2%27O,Q78 OF BUWETARV RESOURCES PROVIDED Inlra-sgmcy Trandon 21,730 wA~0) 173,270 0 currml Ysar Apprcprisuon, +sled 10,932,746 16,724,930 916,400 14,290 774.810 28.3e3.176 Conlrad Adhorlly snd Rea~fw+tion (2484q (81.343) (12.909) (121,192) Proawls d Loan Salu Wlh Rocouru 389,269 389,269 Inlsrssl on Qovarnmml SooudUa 998,165 996.186 Nd Transtom, Ralmbumml mu, sd olhor 11,704 (220.173) 0 wJ*e) cam (362,638) Fumls Rolunnd lo Trassury (177,323) W’ PW? w,882) OURC IE9 10, 94,009 1.012.4 2n.wo .002.688 INCREA U.S. TRFE=-‘IN URY AND IMPREST FUNDS (7wJ4) www 198,846 378,812 mw c-.=9 Funds Exohangad for U.S. Qovmunmt Secwitloa W*lTI) (379.292) (411,489) -6 @muBE) IN U.S. TREASURY AND IMPREST FUNDS (108.741) @36,~~) 198,846 (lm’ mrsr) (619,750) U.S. TREASURV AND IMPAEST FUND& Bsglnnlng d Year 3.633,618 1.849.306 119.902 19.808 394,010 8,006,643 %nd St Year 33,624.W $1,2l3.7% 3318.747 $18.329 $311 .l SB $Li.386.@34 Page 74 GAO/AFMD-91-6Department of Vetmans Affairs APpendlr N Plnandal Statmnente Budgeted and Actual Outlays by Function and Program for Fiscal Year 1989 (Dollam In lhouaanda) Budg4t4douu4ys Prvsldmtb Aotwl BUd#4l awz oul*ys HOSPITAL AND MEDICAL CARE: Mutld Can 3102DB.22Q $10,334,433 s10,5t4.533 MuJidudProdhdbReoo4mh 202.134 206.096 194,840 Msdlcsl MmhbtraUm 46.966 46,721 45,004 construction 644,fm em,teo 799,019 Propned L+lJlon 2mQQ All Othr (79Pm’ (61 mw (W1113) Tctat Hapil4l md Mdbsl cua 11.034.203 1 t 351,749 11*32,433 BENEFITS: lnwms Swwily tar VUuans: caqmr4tkm 10.371.ooa 10,799,209 11,349.333 PMdWU a,wamo 3,814.390 4.924.002 Burbl and CRhsr 0mdUs 144,300 149,616 142,133 ProPond Lqidalion 329,433 Rslntllsd EnMJmtod for Suwlvors 9,799 939 sutwal Illsawl. 3aady 14,999,333 14.379,907 16.818.4W Educdon, Tmln!ng, and RahnblWlom Ro@Mm4r6 smdns (Q.I. Sal) 008.100 37moo a79,i66 Poet-ViMurn Em Eduoetbn 8m46 72,530 lOS.118 Votwmr Jab Training 4.961 to.ws 14,311 AllOlhU (216,832) (9,919) (6.797) PrapoedL4@dkil (203 8ublMl Edudon, Trdnlng, and RehablUtaUon us.882 499,197 49aso7 Total fh.Hb 16.483.496 15,339,194 t 0,300,700 MOUSINQ CREDIT ASSISTANCIE: Loan Qusrmly eu3.~ 1.111,300 997,782 PfoPo@W~ 330,123 Dlrwl Loans w.@9 caw (19,943) Total Mowing Cd? Assbtwm 1.333,323 1 .o3woo (177,819 INSURANCE PROQRAMS a71,134 73e.tm 727,ota PropocHdWJorkm 4.230 Tow InwmM Progruns 676.394 738,190 727,013 ADMINISTRATION othar8mdhsmd&rvloss 776,696 770,354 74a.et 2 T&l Mmlnbtraion 778,696 779.364 743,812 TOTAL VETERAN ADMINISTRATION 929,69w94 323.133.337 8m0~0,~1 tWumwtwfoutl~ucwdedwik b ~h~~~bl%Iwk~~~~;hon,~v~~~ou~~b lY~ia&esndamthtea bfLd4timdthsAnbUklW*wyAd~ “2C. 1341). Y Page 71 QAO/AFND-91-6Department of Veterana Affaira Appendix IV FYnmdal Statementa Budgeted and Actual Outlay, by Function and Program for Fiscal Year 1988 (Dollars In Thousands) Pmldmt’a EM&d AOtUd BudaN Bill ouu~y* HOSPITAL AND MEDICAL CARE: $9247,794 $10,083.229 $10~048.310 207.076 208.703 191230 43,991 4%u3 40.483 618.263 671.313 uWe8 All olhr (199.781) W,les) (%ocn) Tohi WospiW ud Mdbal Cam 10.615.333 10,849,643 10,839,573 BENEFITS: lnomw 5wurny tar vuums: -JvJ.ndm 10,369,000 10,367,9oO 1t,2ei1,wll PWl9kUU 3,839.soo 3,(536,8oO a,934,32i Burlal md Olhr Bmdlb 141,687 141.688 141,674 PmFoaed ~alauon 236,46o -ti EnlMmmd for 8.034 (ms) 14.68L637 14343.422 t 6327.699 EduwUcn, frslnllng, and Rdwbilhatbn: Raadjtlslnmnl Buldlb (CM. eq 646,000 664.100 7oo,ooe Po8bViobum Era Eduaatbn 17.74o sMoo 28.6w Votsrms Job Training 5.498 31.7a7 262I All Ohr (=2@w (217320) P.404) pew& 202,134 Subwd Eduodlon, Training, and Rehdlith 643,074 626,717 527.412 TOWEWldlb 16228.711 14.870.139 11,W6,011 HOUSINQ CREDIT ASSISTANCE: Loan Qusrsnly 263,soo 568.100 t ,218,842 Frapoud LqlrlaUon (389.823) lxrsd Leans (2ww (nmo) cro*eo4) TOW Hcudng CrdiI Adst~ncm (I W923) m1,too t.139,038 INSURANCE PROORAMS 668,298 699,297 696.64 pmpoudw- 425o TOW I~~MOB Programs mzM8 599.297 w&6(3 ADMINISTRATION OlhU-udSONb4S w4,me 803,088 sot ,714 Total Mmln*b~ 804,698 603,088 aol.714 Page 76 GAO/m9143 Department of Veteran Affairs Appendix V Statementof VA’s Appropriation Authority To provide an annual accounting and reporting of appropriations, we are presenting statements which show the status of VA’S (1) appropria- tions authority, including “M” accounts,and (2) unobligated surpluses, including merged surplus, during fiscal year 1989. We believe that the Congressand agency managementneed a greater assurancethat unused and unliquidated appropriations are accountedfor properly, Part of achieving such an assuranceis to report summary activity and year-end balancesof agencies’appropriation authority with the audited financial statements. We have utilized VA as an example of the model report struc- ture that we believe should be included as part of the basic statements in federal agencies’financial statements. In order to streamline a cumbersomeprocessfor certifying separate What Are Expired payments from appropriation account balancesthat were being main- Appropriation, tained forever, the Congress,in 1966, established the current system of Surplus Authority, expired appropriation, surplus authority, “M”, and merged surplus accounts for federal agency use in recording and accounting for transac- “M”, and Merged tions affecting appropriations which are no longer available for new Surplus Accounts? obligations. At the end of the period that an unexpired appropriation is available for new obligation (1 year for annual and 2 or more years for multiple-year appropriations), two separate actions take place. First, with respect to the obligated appropriations that remain unliquidated (obligated bal- ances),the balancesare reclassified as expired appropriation accounts in the agencies’records. Second,the portion of the appropriation that has not been obligated (unobligated balances)is withdrawn to the US. Treasury, where it is designated as surplus authority. The expired appropriation and surplus authority balanceseach retain their fiscal year identity for 2 years. After 2 years, any remaining expired appropriation balancesare transferred to “M” accounts,and any remaining surplus authority balancesare transferred to merged sur- plus accounts.Surplus authority balances,however, are available during the 2 years for restoration to an expired appropriation for funding an increase in a valid obligation or an unexpected related charge that can be clearly associatedwith the given fiscal year and appropriation. “M” accounts are accountsinto which obligated balancesunder appro- priations are transferred at the end of the secondfull fiscal year fol- lowing expiration, The obligated balances,however, remain on an Page 77 GAO/AFMD-91-0Department of Veterans Af’f’ah 8tntament of VA’r Appropr&don Authority agency’sbooks. The “M” accounts allow for the payment of obligations charged, or chargeable,to appropriation accountsthat are over 2 years old. Merged surplus accounts are part of Treasury’s general fund. They represent the undisbursed and unobligated balancesof prior year appro- priations that have been transferred from surplus authority or that have resulted from downward adjustments of obligations in the “M” accounts.The merged surplus accounts are maintained by appropriation type without regard to the fiscal year in which the appropriation was made. Under limited circumstances,merged surplus funds are available for restoration to the applicable agency’s “M” account to pay upward adjustments in obligations or previously unrecorded prior obligations. VA accountsfor all of its funds to show availability and usagefor opera- Accounting for VA’s tions and capital assetsduring a year. However, year-by-year transac- Appropriations During tion data have not been easily available to date. VA, similar to most Fiscal Year 1989 federal agencies,begins each fiscal year with (1) obligated appropria- tion balancesthat were reserved in the prior fiscal years to pay for undelivered orders and (2) multiple-year and no-year appropriations that are unexpired (still available for initial obligations). In addition, new appropriations are provided for the current fiscal year. VA may also obtain restoration of funds from surplus authority or merged surplus accounts.The total appropriations, depending on purpose, are applied to finance operations and capital assets.Any amount not required is with- drawn to surplus accounts at Treasury. At year-end, the excessof appropriation amounts available over the amounts applied or with- drawn remains in VA’S records. We have developedtwo statements, included in tables V.1 and V.2, which show unexpired expired, and no-year appropriations, as well as surplus authority and “M” and merged surplus accounts available to VA. As such, managers and the Congresswill be provided a vehicle to better track and monitor these accounts. As shown in table V.l under the column labeled totals, VA began fiscal year 1989 with $3.0 billion in appropriations, comprised of $1.8 billion in unliquidated, obligated balances(undelivered orders) and $1.2 billion in unobligated and unexpired appropriations. In addition, VA received new annual, multiple-year and no-year appropriations to finance the majority of its operational and capital needs($29.3 billion in fiscal year 1989) and a restoration of certain amounts from its merged surplus Page 70 GAO/AFMLb91-6 Department of Veterans Affairs Appendix V Statement of VA’sAppropriation Authority account with the U.S. Treasury ($3,4 million), Accordingly, VA had total appropriations available for its use of $32.3 billion during fiscal year 1989. Table V.l: Statement of VA Appropriation8 Ueed and Remaining Available for Obligation or Expenditure During Fiscal Year 1989 Dollars in thousands Annual and multiple-year appropriation accounts Unexpired Expired item .I-. .,.-I_...I-- --. 1989 1988 1987 M Account No-year Totals Appropriations .---.- .._..--- _-_provided: ---..-- Balance of undelivered ._--.-_ ---. - -.--..---_~-- orders at 1O-l -88 $72,586 $448,134 $87,868 $72,325 $1 ,135,701 $1,816,614 Balance of..__~ unobligated amounts at 10-l -88 14,629 N/A N/A 1798 1,195,916 1,210,724 1989 appropriations (net of increases and decreases) 12.020,060 N/A N/A N/A 17.240.483 29.260.543 Restorations N/A 0 0 3,439 N/A 3,439 Amounts available -_...---.._ ---.. .- --.. I_._- .-_- --- 12,107,275 448,134 87,868 75,943 19,572,100 32,291,320 Less appropriations applied: --.--_-..~..-----~ Operations 11,123,174 97,659 (12,788) (6,058)b 16,659,285 27,861,272 Capital assets 165,262 252,043 40.912 34,896 661.353 1 ,154,466 Withdrawals to surplus accounts with Treasury at year-end --.__- 2,297 25,295 21 ,011 16,873 N/A 65,476 Undelivered orders transferred to M account N/A N/A 38.733 138.733) N/A N/A Amounts remaining $818,S42 $73,137 $0 $68,965 $2,251,482 $3,210,108 Distribution of amounts -__- ll_---...^_...-- ..-__ remaining: -.___-_- Balance of undelivered orders at g-30-89 $793.581 $73.137 $N/A $68.965 $1 aO63.792 $1,999.475 Balance of unobliaated amounts at g-30-89 22,961 N/A N/A N/A 1,187.670 $1,210,631 Total $816,542 $73,137 $0 $68,985 $2,251,462 $3,210,106 Note: The entry N/A (not applicable) indicates that amounts are not normally reported for these categories. Ttepresents an unobligated balance of an appropriation resulting from an excess of receivables over payables and is unavailable for new obligations. bRepresents refunds and deobligations of previously expensed items. Table V. 1 also shows the application of the appropriations authority available during fiscal year 1989 and the amounts available at year-end. Thus, the statement accounts for the total appropriation authority available to VA during fiscal year 1989. Of the $32.3 billion appropria- tion authority available to VA during the fiscal year, VA used $27.9 billion Page 79 GAO/APMD-914 Department of Veterans Affaira Appendx V Statement ot VA%Appropriation Authority to finance operations and $1.2 billion to finance acquisition of capital assets.In addition, $66.6 million was withdrawn to VA’S surplus authority and merged surplus accountswith the US. Treasury, resulting in an amount remaining at year-end for carryover to the subsequent year of $3.2 billion. Also shown is the required transfer to VA’S “M” account of $38.7 million obligated appropriations that remained unliqui- dated 2 years after the appropriations expired in 1987. The $3.2 billion remaining available at the end of fiscal year 1989 was comprised of $2.0 billion of obligated appropriations covering undeliv- ered orders and $1.2 billion of unobligated balancesin unexpired multiple-year and no-year appropriations that remained available to VA for new obligations subsequentto fiscal year 1989. Table V.2: Statement of VA’8 SurDlu8es From Expired Aoorooriations-Fiscal Year 1989 Dollars in thousands --. Annual and multiple-year expired appropriations Merged Item -~- 1989 198W 1987” surplus No-year Totals Balance 1O-1 -88 ---~ N/A $4,141 $120,594 $1,249,567 N/A $1 ,374,302b Amounts withdrawn current year-end 2,297 25,295 21 ,011 16,873 N/A 65,476 Reduction for amounts restored in 1989 N/A 0 0 (3,439) WA (3,439) _~- Transferred -_ to merged .-.- surplus N/A N/A (141,605) 141,605 WA N/A- Balance g-30-89 $2,297 $29,436 $0 $1,404,607 N/A $1 ,436,33gb Note: The entry N/A (not applicable) indicates that amounts are not normally reported for these categories aFigures for 1988 and 1987 represent surplus authority. bDoes not include a total amount of $917,127,364 for certain other appropriations and funds such as personal funds of patients, miscellaneous benefit and insurance expenses, and trust funds that are unidentifiable by appropriation number. ‘Equals the cumulative amount of unobligated appropriations in surplus authority that was transferred to VA’s merged surplus account at the end of the year as legally required. Table V.2 shows the status, including fiscal year transactions, of VA’S unobligated appropriations surpluses with the U.S. Treasury for fiscal year 1989. The amounts withdrawn at current year-end of $65.6 million reflect the portions of appropriations that were withdrawn from VA at the end of fiscal year 1989. These amounts were added to VA’S surplus authority and merged surplus balanceswith the U.S. Treasury accounts, as shown on table V.1. In addition, the merged surplus balance was reduced for the $3.4 million that was restored to VA’S “M” account, Page 60 GAO/AFMD-91-6Department of Veterans Attdra - Appendix V Statement of VA’sAppropriation Authority resulting in a year-end total surplus authority and merged surplus account balance as of September30, 1989, of $1.4 billion. The table also includes a transaction which shows the cumulative amount of unobli- gated appropriations in surplus authority that was transferred, as legally required, to the merged surplus account after 2 years in expired status. Relationship of The $3.2 billion remaining available at the end of fiscal year 1989- undelivered orders of $2.0 billion and unobligated balancesof $1.2 bil- Appropriation Tables lion-is reported in the equity section of the consolidated statement of With Audited financial position. In addition, the appropriations used to finance capital assets($1.2 billion) and VA’S 1989 adjusted appropriations of $29.3 bil- Financial Statements lion are reported on the consolidated statement of changesin financial position and reconciliation to budget for fiscal year 1989. As indicated in our opinion on VA’S financial statements, our audit of the statements of financial position and changesin financial position and reconciliation to budget disclosedthat these balancesare fairly presented in the finan- cial statements in accordancewith generally acceptedaccounting principles, We believe that statements of the status of agencies’appropriations sim- ilar to tables V.1 and V.2 need to be included as basic statements in fed- eral agencies’annual financial statements. These statements of appropriations would then be within the scopeof a financial audit of the agencies’financial statements and as such the auditor’s opinion would provide the Congressand agency managementformal assurancethat amounts and transactions affecting undelivered orders and unobligated balancesare fairly presented on the statements. Page 81 GAO/APMD91-9 Department of Veterana Affti Appendix VI Summary of VA’s Federal Managers’F’inmcial Integrity Act Reports This appendix summarizesthe open internal control and accounting system weaknessesand related corrective actions information contained in VA'S 1983 through 1989 Federal Managers’FinanciaI Integrity Act (EMFIA) reports. The act requires that the reports reflect the results of VA management’sassessmentsand detailed reviews of the internal control systems operating within all department programs, activities, organiza- tions, and functions; and of the agency’sfinancial managementsystems’ conformance with accounting principles, standards, and other require- ments established by the Comptroller General of the United States. With regard to the relationship between our audit and the financial managementsystem review and reporting requirements of FMFIA, our audit primarily focused on the internal control and accounting systems neededto produce VA'S financial statements. As such, we did not examine all of the financial managementsystems that VA must consider when planning and conducting its FMFIA reviews and when preparing its annual FMFIA report. We are, therefore, not in a position to attest to the adequacy of all financial managementrelated disclosuresin the F’MFIA reports. In the future, however, we believe that auditors, when conducting finan- cial audits, should examine all of an agency’sfinancial managementsys- tems and attest to the adequacy of the financial managementsystem representations made in the FMFLA report. This additional audit reporting will provide the Administration and the Congresswith a more complete picture of the integrity and reliability of an agency’sfinancial systems, reports, and other related information. The Federal Managers’ Financial Integrity Act was enacted in September Background 1982 to strengthen internal control and accounting systemsthroughout the federal government and help reduce fraud, waste, abuse,and misap- propriation of federal funds. The act provided, for the first time, the requirement for agency managersto identify and remedy long-standing internal control and accounting systems problems. Section 2 of the act requires that agency systems of internal control comply with internal control standards prescribed by the Comptroller General and provide reasonableassurancethat . obligations and costs are in compliance with applicable laws; l funds, property, and other assetsare safeguarded against waste, loss, unauthorized use, or misappropriation; and Page112 GAO/AFMD-916DepartmentofVeteraneAfYah Smmnary of VA’sFederal Managed IQancial Integrity Actlteporta l revenuesand expenditures applicable to agency operations are properly recorded and accountedfor to permit the preparation of accounts and reliable financial and statistical reports and to maintain accountability over the assets. Section 4 of the act requires that the agency head’s annual Financial Integrity Act report include a separate report on whether the agency’s accounting systems conform to the Comptroller General’s accounting principles, standards, and related requirements. The weaknessesreported by VA over the past years encompassgeneral VA Reports Annually managementactivities as well as specialized servicesor programs. We on Material have categorizedthe material weaknessesVA has reported in its annual Weaknesses reports to the President and the Congress,as follows. Table VI.1: Categories of Reported Material Weaknesres-1983 Through 1989 1983 1984 1985 1988 1987 1988 1989 &t&&Hed data processing X X X X X X Eligibility“. and _. entitlement _....___ ..-.---- X X X Cr.&Jit management ._~..._... . . _. . ..__.. -_I_-- X X X X X X Personnel and organizational management X X X X Pro&remeni’- -~ __-..--.-.-_-- X X X X X X Propert\, management X X X X X X X Cash management . -- X X X X X X Accountina and financial svstems X X X X X X X In its fiscal year 1989 report, VA (1) disclosednew material weaknesses, (2) listed previously identified internal control and accounting system weaknesseswhich remain to be corrected, and (3) reported having cor- rected weaknesses.A total of 28 material weaknesseswere reported as uncorrected in 1989 under Sections2 and 4 of the act. Eleven of these were identified during the 1989 review. Of the remaining 17 previously identified weaknesses,14 were reported between 1983 and 1986. In addition, in its 1989 report, VA reported completing corrective actions during 1989 on four previously reported material weaknesses,and it downgraded the credit managementcategory weaknessto an area of “significant concern.” Page 83 GAO/AFMD-916 Department of Veterans Affairs Summary of VA’sFederal Manix@m’ Financial Intelpfity Act l@orta In its 1989 Federal Managers”‘Financia1Integrity Act report, VA identi- Material Internal fied 20 material internal control weaknessesrequiring correction under Control Weaknesses Section 2 of the act. Four of the weaknesseswere reported in such func- tional categoriesits ADP, Property, and Personneland Organizational Management.The remaining 16 weaknesseswere reported within the category entitled Program or Project Management.The following is a brief discussionof someof the weaknessesin each category and the planned corrective actions. Automated Data Two weaknesseswere identified. The first related to a need, first Processing reported in 1984, for backup processingcapacity at an alternate site if a catastrophic event were to occur. VA noted that although neededfunding had not been approved, the agency had identified the applicable systems and necessaryrequirements and anticipated developing a detailed plan for backing up critical systems by the beginning of fiscal year 1992. The secondweakness,first reported in 1988, was that VA neededto improve its operating system and security software controls at its Austin Data ProcessingCenter. This finding was identified earlier by GAO, the VA Inspector General, and the President’s Council on Integrity and Efficiency. VA reported that it had completed 65 of 66 actions neededto correct this weaknessand expected to complete the remaining actions by November 1989. Property Management One uncorrected weaknesswas unsatisfactory internal controls over linen inventory, which led to lossesestimated at approximately $4 mil- lion for the first 6 months in 1988. For corrective action, VA planned to analyze the 1988 linen inventory to contact those sites with the highest lossesand then develop an action plan to addressthe internal control problems related to the linen losses. Personnel and In 1989, VA identified a new material weaknessin this category. VA cited GAO and IG reports which identified a number of payroll problems at VA Organizational field stations. Examples of problems cited include failure to comply with Management VA policy in making cash payments and problems ensuring that all authorized loans are received and processed.VA managementbelieves its Y inability to retain competent payroll clerks becauseof grade restrictions further inhibits its ability to ensure controls are properly executed. Their action plan to correct the weaknessincludes complying with Page 84 GAO/AFMD-918 Department of Veterans Affkh Appendix VI Libmmaq of VA’s Federal Managed Flnanti Int@rkyActEeports existing VApolicies, preparing reconciliations, processingloans, and improving accuracy and completeness. Program/Project This category contained 14 material weaknesses,9 identified in 1989 Management and 6 identified from 1983 through 1988. Examples of weaknessesin this category include (1) undocumented construction changesresulting in one project being 6 years late and incurring $19 million in extra costs, (2) ineffective ADP support resulting in loan servicing problems and excessiveforeclosure rates, (3) ineffective monitoring of lenders making loans guaranteed by VA under its home loan program, (4) the failure to obtain authority to obtain income data from the Internal RevenueSer- vice and the Social Security Administration in order to reduce the number of beneficiary overpayments, (6) failure to verify physicians’ credentials and state licenses,and (6) failure to reconcile general ledger accounts and perform related follow-up activities for three financial managementsystems. VA reported that corrective actions for each of these weaknessesare in various stagesof completion. Corrective actions range from conducting reviews and audits, obtaining more up-to-date software, submitting cer- tifications that policies and procedures are being implemented, to revising existing policies. VA anticipates that corrective actions will be completed between fiscal year 1990 and fiscal year 1995. Accounting and Financi .a1 In its 1989 report, VA reported that its financial managementsystems Management System had achieved overall compliance with the requirements specified in the act, They reported a total of 44 financial managementsystems in opera- Weaknesses tion involving activities such as payroll/personnel; administration; con- struction; financial reports and budget formulation; compensation, pension, and education activities; loan guaranty activities; and insur- ance activities. VA reports 42 of these systems are accounting systems. During 1989, VA identified no new accounting system weaknesses.It did, however, report that eight previously identified weaknessesunder Sec- tion 4 of the act had still not been corrected, five of which had been first reported in 1986. Weaknesseswere reported, in priority order, in six dif- ferent systems. Examples of weaknessesand proposed corrective actions are as follows: l Personnel and Accounting Integrated Data System. As early as 1986, VA reported that this system was not easily adaptable to meeting changing Page 86 GAO/APMD9143Department of Veterans Affdm user needsand that there were no clearly defined and well-documented audit trails and processingcontrols. To correct these problems, VA is redesigning the system and expects that full corrective actions will be implemented by fiscal year 1992 or 1993. l Loan Guaranty System. This system had two uncorrected weaknesses. The first, reported in 1986, was that VA'Sdecentralized funding process for loan guaranty programs failed to provide VA'Scentral office with adequate fund control over the $3.6 billion project obligations in the program. In its 1989 report, VA stated that its new Disbursing, Accounting and Budgeting System (DABS), which is part of a larger mod- ernization initiative at VAtargeted for completion in 1996, will provide centralized fund control when implemented in 1991. The secondweaknesswas related to controls over the estimated $1.3 billion in disbursementsprocessedby the loan guaranty system. VA reported that controls over disbursements have been essentially manual and that becauseit operates in a decentralized environment, the ability to detect duplicate payments is questionable. VA believes that implemen- tation of the DAIWsystem, in 1991, will correct this weakness. l Centralized Accounting System for Constructing Appropriations. In 1986, VA reported that this system was unable to easily adapt to changing user requirements and external requirements during the system’s life cycle. The system was designedin the 1960s and lacks fea- tures which facilitate prompt system maintenance. VA plans to replace this system with its new Financial ManagementSystem in 1992. . Centralized Accounting for Local ManagementSystem. Two weaknesses were reported for this system. The first weakness,first identified in 1986, was similar to the problem of inflexibility reported for the Cen- tralized Accounting System for Construction. VA expects that the new Financial ManagementSystem, scheduledfor completion in 1992, will correct this weakness. The secondweaknesswas first identified in 1988 and concernsthe need for controls over assets.VA stated that controls over real property are essential to the production of reliable financial statements and that its failure to consistently implement capitalization and depreciation policies had resulted in a qualified GAOopinion on its consolidated financial statements for 1986 and 1987. To illustrate, due to the lack of docu- ments supporting the cost of many items and the lack of consistent adherenceto managementpolicies relating to the capitalization and depreciation of buildings, account balanceswere inaccurate. VA reported Page 86 GAO/AFMD-916 Department of Veterans Af’fahm lE4wmmy of VA’r Federal Managed Finandd rntegrlty Act Reports that its new Financial ManagementSystem, scheduled for 1992 imple- mentation, will include a fixed assetsmodule to standardize real prop- erty recordkeeping on a departmentwide basis. l Compensation,-Pension,and Education System. VA reports identifying, for the first time in 1986, problems in this system which processesover $16 billion annually. In its 1989 FMFIA report, VA cites weaknessesidenti- fied by GAO during financial statement audits. For example, VA referred to a 1989 GAO conclusion that VA had not developed basic controls in its benefits systems to help ensure that payment transactions were prop- erly processed.It also stated that someof those problems have existed for years. Corrections to this system are included in a larger plan to improve the delivery of veterans benefits and servicesthrough tech- nology. VA believesthat although the entire project and system conver- sion to an integrated environment will not occur until 1996 or 1997, two milestones for the Compensation and PensionSystem will be the conver- sion of its master files to disk by 1991 and implementation of new mod- ernized systems at all Department sites by the end of fiscal year 1994. . Insurance System, In 1986, VA first identified this system, which accounts for five government insurance programs totaling about $28 bil- lion in coverageto 3.6 million policyholders, as having material weak- nesses.It reported that this 1960ssystem is coded in an obsolete computer language and, as recently as 1988, was found to lack formal documentation supporting the Department’s life insurance statements. VA reported in 1989 that by the middle of 1990 the documentation problem should be corrected. However, it reported that full correction of all material weaknessesin this system is not expected until 1992 or 1993. In addition to reporting material internal control and accounting system Additional Special weaknesses,VA’S 1989 FMFIAreport also disclosedsevenareas identified Concerns Also by the Office of Managementand Budget (OMB) and VA officials as highly Reported vulnerable to fraud, waste, or abuse.These “high risk” areas include the following: . Physician Employment Screening.This issue concernsthe need to verify physicians’ credentials and certifications and was reported as a material internal control weaknessunder the program managementcategory in 1989. . Drug Control. Drug stock managementand inventory control problems were identified in 1983 and were reported by VA as a material internal control weaknessin the program managementcategory. Page 87 GAO/AFMD-91-6Department of Veterans Affaira Appendix VI Summary of VA’sFederal Managers’ F’inancial Integrity Act Reports 9 Departmental Follow-up Systems.This issue concernsVA’S lack of an adequate follow-up system to track the correction of problems identified in audits and internal control assessments. l Oversight and Review in VA Loan Guaranty Program. OMBseesthis as a high-risk area becauseof the program’s similarities to the Department of Housing and Urban Development’s Federal Housing Administration pro- gram and has urged the Secretary to consider a concentrated review of the VA program’s internal controls and operations. 9 Proceduresfor Constructing Health Care Facilities. VA reported this high-risk area as a material internal control weaknessin its 1989 report under the program/project managementcategory. In its 1989 report, VA stated that the weaknesswas first identified in 1983 and corrected in 1989. However, it goeson to say that contracting and contract adminis- tration remains a material weaknessand that VA has developed a correc- tive action plan for this area. . Compensationand Pension.OMBhas indicated that the integrity of VA’S compensation and pension programs requires further assurance.VA reports in 1989 that it has recognizedthe need to establish a nationwide income verification system to eliminate or significantly reduce benefit overpayments causedby misreporting of income by pension benefi- ciaries, This concern was reported as a material internal control weak- nessin VA’S 1989 report under the program/project management category. l Review of Internal Controls. The internal controls review processis viewed by both OMBand VA as a high priority. VA reports that the review processis being redefined to provide reasonableassurancethat proper attention is paid to each of VA’S problem areas and that a linkage is established between material weaknessesand their legislative, bud- getary, or other resource solutions. As previously stated, we are advocating that, similar to a discussion and analysis of operating results, agenciesinclude summaries of their annual FMFIA reports in their future annual reports. We believe it would be ben- eficial to the Congress,the President, and other users to receive an annual report complete with an independent auditor’s attestation of management’srepresentations in the form of an opinion on the financial statements and on the FMFIA report. Finally, as a result of our audit, we are not aware of any information which would contradict the matters included in VA’S FMFIA reports and summarized in this appendix. (B17079) Page 88 GAO/AF’MD-91-6Department of Veterans AfYdra Ordt~rs may also be placed by calling (202) 275-6241. i _“.,...._ .__.. ..- ._^_.. ._. _ ___..___...... ..________--. . .“._I _..._ . .._ ..-. “_ .._ ll.-._.- .._... I- -_..-_ __-- ~--...“._.“~” ..-... l_.l” . “_ ..- . _ -..-. _
Financial Audit: Department of Veterans Affairs Financial Statements for Fiscal Years 1989 and 1988
Published by the Government Accountability Office on 1990-11-14.
Below is a raw (and likely hideous) rendition of the original report. (PDF)