oversight

Internal Controls: Oversight of Longshore Special Fund Needs Improvement

Published by the Government Accountability Office on 1999-10-29.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                 United States General Accounting Office

GAO              Report to the Chairman of the
                 Subcommittee on Workforce Protections,
                 Committee on Education and the
                 Workforce, House of Representatives

October 1999
                 INTERNAL
                 CONTROLS

                 Oversight of
                 Longshore Special
                 Fund Needs
                 Improvement




GAO/AIMD-00-15
United States General Accounting Office                                             Accounting and Information
Washington, D.C. 20548                                                                   Management Division



                                    B-283563                                                                        Leter




                                    October 29, 1999

                                    The Honorable Cass Ballenger
                                    Chairman, Subcommittee on Workforce Protections
                                    Committee on Education and the Workforce
                                    House of Representatives

                                    Dear Mr. Chairman:

                                    On February 24, 1999, you requested that we review certain issues
                                    concerning financial reporting and internal controls related to the Special
                                    Fund established by the Longshore and Harbor Workers’ Compensation Act
                                    (LHWCA). This Special Fund was designed to encourage employers to hire
                                    disabled maritime workers by limiting an employer’s liability should a
                                    disabled worker sustain a second injury. Funded primarily by annual
                                    assessments levied by the Department of Labor (DOL) on self-insured
                                    employers and insurance carriers subject to LHWCA, the Special Fund is
                                    audited annually. However, the audited financial statements do not address
                                    the potential unfunded liability faced by this program, which has been
                                    estimated to be as high as $2.5 billion.

                                    This report addresses (1) the feasibility of actuarially calculating the
                                    unfunded liability of the LHWCA Special Fund, (2) whether controls exist
                                    to prevent inappropriate claims from being referred to the Special Fund,
                                    (3) whether recipient data are matched against other agencies’ databases to
                                    reduce the risk of payments being made to ineligible recipients,
                                    (4) whether there are equitable distributions of assessments among the
                                    insurance carriers/self-insured employers as compared to their claim
                                    levels, and (5) the status of changes to the Longshore computer systems.



Results in Brief                    Although an estimate of $2.5 billion has been characterized as the potential
                                    unfunded liability of the LHWCA Special Fund, this is not a sound actuarial
                                    estimate. The DOL official who developed this estimate said that he
                                    prepared it for discussion purposes. It was a simple arithmetic projection
                                    based on the benefits paid as of December 1998 and did not include all of
                                    the elements of an actuarial projection, such as cases reported but not yet
                                    paid, historical payment trends, established mortality assumptions, and
                                    cost-of-living adjustments. In addition, the estimate did not take into
                                    consideration expected future revenue from annual assessments, which,



                                    Page 1                         GAO/AIMD-00-15 Oversight of Longshore Special Fund
B-283563




according to the official, would eliminate this estimated unfunded liability.
While it is theoretically feasible to actuarially calculate the unfunded
liability of the Special Fund, the time and expense involved in performing
such a calculation may not be warranted, given that (1) there is no
provision under LHWCA for financing the Special Fund with appropriated
funds, (2) under LHWCA, neither the United States nor the Secretary of
Labor is liable for compensation payments in the amount greater than the
money deposited in or belonging to the Special Fund, and (3) participating
employers and insurance carriers are now required to disclose their future
liabilities related to this fund in the notes to their financial statements,
acknowledging that they are responsible for any future liability of this fund.

Internal controls have been established by DOL to prevent inappropriate
cases from being referred to the Special Fund. For example, DOL has
procedures that require each case be reviewed by various levels of DOL
officials who are knowledgeable about the requirements of LHWCA to
ensure that, prior to the case’s acceptance into the Special Fund, (1) the
recipient had a preexisting permanent impairment, (2) the second injury
was job related, and (3) the combination of the two injuries/disabilities
worsened the initial impairment.

At the time of our review, DOL management had not matched its recipient
data in the Special Fund database against data in other agencies’ databases,
such as the Social Security Administration’s (SSA) death index. However,
DOL’s Office of the Inspector General (OIG) officials told us that as part of
the Special Fund’s fiscal year 1999 financial statement audit, the OIG, in
cooperation with SSA, would be performing a match of the recipient data in
the Special Fund database with SSA’s death index to determine whether
benefit payments were made to deceased individuals. Regularly performing
matches with this database should reduce the risk of paying benefits to
deceased individuals.

DOL is susceptible to the risk that the distribution of assessments among
participating self-insured employers and insurance carriers will not be
proportional to their claim levels as intended by LHWCA. The formula used
to calculate the Special Fund’s annual assessment is prescribed by statute,
with the intention of arriving at prorated assessments. However, the data
used as the basis for computing the annual assessment are self-reported by
the self-insured employers and insurance carriers, which increases the risk
of inaccurate claim information. Inaccurate reporting of claim information
would lead to the distribution of the assessments not reflecting the true
prorated activities of the participating companies. Beginning in fiscal year



Page 2                          GAO/AIMD-00-15 Oversight of Longshore Special Fund
B-283563




1992, DOL annually performed a limited number of audits of the self-
reported data. These audits disclosed instances of underreporting that
resulted in disproportionate distributions of assessments among the self-
insured employers and insurance carriers. In addition, we found that cases
in which a recipient’s former employer (the employer who referred the case
to the Special Fund) became insolvent and was no longer in existence were
not monitored, therefore presenting the risk that benefit payments could be
made to ineligible recipients.

With respect to the Longshore computer systems, DOL officials told us that
changes to enhance accountability and functionality were planned or had
recently been completed. At the time of our review, DOL was developing a
new automated system to address an OIG recommendation related to
internal control weaknesses1 regarding the reporting and authorization of
payments to rehabilitation service providers. According to DOL, the system
was implemented in September 1999. In addition, since July 1998, two of
DOL’s computer systems used for the LHWCA program were upgraded in
order to comply with requirements related to the Year 2000 (Y2K)
computing problem and to provide user-friendly enhancements such as
drop-down menus and icons.

In order to reduce the risk of Special Fund payments being made to
deceased or otherwise ineligible recipients and of assessments being
disproportionally distributed among participating self-insured employers
and insurance carriers, we are recommending that DOL (1) implement a
regular program of matching recipient data from the Special Fund to SSA’s
death index, (2) develop and implement procedures to adequately monitor
the continuing eligibility of certain cases, and (3) develop and implement a
more comprehensive plan to provide increased audit coverage of LHWCA
payment data submitted by self-insured employers and insurance carriers.

We made recommendations to the Secretary of Labor to reduce the risk of
(1) Special Fund payments being made to deceased or otherwise ineligible
recipients and (2) disproportionate distribution of assessments among the
self-insured employers and insurance carriers. In commenting on a draft of
this report, DOL generally agreed with our findings and recommendations.




1
The internal control weaknesses and related recommendations were initially cited in
DOL/OIG’s fiscal year 1997 consolidated financial statement audit report.




Page 3                              GAO/AIMD-00-15 Oversight of Longshore Special Fund
             B-283563




Background   LHWCA, which was enacted in 1927, established a federal compensation
             system for longshore and other specific classes of workers whose injuries
             occur upon navigable waters of the United States or adjoining facilities
             such as piers and dry docks. Section 44 of LHWCA established the Special
             Fund. The National Office of the Longshore Programs (NOLP), which is
             administered by the Office of Workers’ Compensation Programs (OWCP),
             within the Employment Standards Administration of DOL, has
             administrative responsibility for the Special Fund. The Special Fund
             encourages employers to hire workers who have suffered a previous partial
             permanent disability by limiting the employers’ liability in the event of a
             second injury. The Special Fund is used primarily for these “second-injury”
             payments, whereas, the self-insured employer and/or insurance carrier is
             responsible for the first injury payments. The Special Fund also extends
             benefits to dependents if any work related injury results in an employee’s
             death.

             When eligible workers sustain a second injury, employers are responsible
             for the first 104 weeks of compensation payments, before payments can be
             made from the Special Fund. The Special Fund is primarily (approximately
             98 percent during fiscal year 1998) funded by annual assessments levied by
             the Secretary of Labor on self-insured employers and insurance carriers
             subject to LHWCA. Other funding, about $2 million, is generated annually
             from investments in short-term U.S. Treasury bills. Miscellaneous fines and
             penalties provide additional sources of revenue; however, these are not
             material to the operation of the fund. DOL’s OIG annually audits the Special
             Fund.

             According to DOL officials, there are approximately 850 self-insured
             employers and insurance carriers authorized to participate in the LHWCA
             Special Fund program. Of those, 27 companies are responsible for 70
             percent of the annual assessments for the Special Fund. Furthermore, the
             three largest self-insured employers are responsible for 15 percent of the
             Special Fund’s annual assessment.

             In calendar year 1998, DOL officials calculated a total assessment of
             $119 million that they allocated to 483 of the 850 authorized self-insured
             employers and insurance carriers. The companies’ total prior year LHWCA
             benefit payments are used as the basis for the allocation of the annual
             assessment. If a company reports that it did not make any LHWCA
             payments in the prior year, and no second injury payments were made from




             Page 4                         GAO/AIMD-00-15 Oversight of Longshore Special Fund
              B-283563




              the Special Fund on its behalf in the same year, the company is excluded
              from the current year’s annual assessment.

              According to DOL’s fiscal year 1998 audited financial statements, the
              Special Fund had assets consisting of $50 million in U.S. Treasury bills as of
              September 30, 1998. In addition, the fund collected approximately
              $117 million in revenue during fiscal year 1998, $115 million from the
              assessments and about $2 million from interest on investments. The
              financial statements also indicated an accounts receivable balance of
              $2 million, which represented unpaid annual assessments and
              overpayments to recipients. Administrative services for operating the
              Special Fund are funded through direct federal appropriations.



Scope and     To determine the feasibility of actuarially calculating the unfunded liability
              of the Special Fund, we reviewed relevant statutes and regulations and
Methodology   interviewed DOL officials, including the Chief Actuary. In addition, we
              reviewed the components of actuarial liabilities for other programs, such
              as DOL’s federal employees’ compensation and the Department of Veterans
              Affairs’ future compensation disability benefits. To determine what
              controls exist to prevent inappropriate cases from being referred to the
              Special Fund, we interviewed DOL officials and an insurance company
              president. We also reviewed DOL’s procedures related to the referral of
              cases to the Special Fund. To determine whether recipient data are
              matched against other agencies’ databases, we interviewed DOL officials.
              To determine if the assessments were distributed on a pro-rata basis, we
              reviewed the mandated formula and DOL’s most recent calculation of the
              annual assessment. We also discussed this issue with managers of self-
              insured employers, an insurance company president, and an attorney who
              represents employers affected by LHWCA. To determine the status of
              changes to the Longshore computer systems, we discussed the changes
              with a DOL official. In addition, we examined DOL’s audited consolidated
              financial statements for fiscal years 1997 and 1998, and the Special Fund’s
              audited financial statements for fiscal years 1996 and 1997.2

              We did not (1) audit the data underlying DOL’s calculation of the annual
              assessment or (2) test the controls that prevent inappropriate cases from


              2
               The Special Fund’s fiscal years 1996 and 1997 audit report was the most recent audit report
              issued, as of August 1999. DOL/OIG conducted an audit of the Special Fund for fiscal year
              1998; however, the report had not been issued as of August 30, 1999.




              Page 5                                GAO/AIMD-00-15 Oversight of Longshore Special Fund
                     B-283563




                     being referred to the Special Fund. We performed our work from April 1999
                     through September 1999 in accordance with generally accepted
                     government audit standards. We requested written comments from the
                     Secretary or her designee. The Assistant Secretary for Employment
                     Standards at Labor provided us with written comments, which are
                     discussed in the “Agency Comments” section and are reprinted in
                     appendix I.



Calculation of the   In an effort to determine the cumulative amount of future Special Fund
                     benefit payments of self-insured employers and insurance carriers over the
Unfunded Liability   average life expectancy of current recipients, a DOL official developed a
                     simple arithmetic projection based on the benefits paid as of December
                     1998. Although the resulting estimate of $2.5 billion has been characterized
                     as the estimated unfunded liability of the LHWCA Special Fund, it does not
                     include all of the elements of an actuarial projection, such as cases
                     reported but not yet paid, historical payment trends, established mortality
                     assumptions, or cost-of-living adjustments. In addition, it does not take into
                     consideration estimated future revenue from annual assessments, which,
                     according to the official, will eliminate the liability.

                     While it would be theoretically feasible to calculate the unfunded liability
                     of the Special Fund using an actuarially sound methodology, the time and
                     expense involved in performing such a calculation may not be warranted
                     given that (1) there is no provision under LHWCA for financing the Special
                     Fund with appropriated funds, (2) under LHWCA, neither the United States
                     nor the Secretary of Labor is liable for compensation payments in the
                     amount greater than the money deposited in or belonging to the Special
                     Fund, and (3) self-insured employers and insurance carriers are required to
                     disclose their future liabilities for second injury fund assessments in their
                     annual financial statements, acknowledging that they are responsible for
                     any future liability of the fund.3

                     The $2.5 billion estimate described above was developed for discussion
                     purposes by the NOLP official responsible for the day-to-day
                     administration of the Special Fund. The estimate was a projection of future


                     3
                      American Institute of Certified Public Accountants Statement of Position 97-3, “Accounting
                     by Insurance and Other Enterprises for Insurance-Related Assessments.” This Statement of
                     Position was issued on December 10, 1997, and is effective for fiscal years beginning after
                     December 15, 1998.




                     Page 6                               GAO/AIMD-00-15 Oversight of Longshore Special Fund
B-283563




Special Fund payments based on the workers’ compensation benefits paid
as of December 1998, which resulted in a $2.5 billion estimate of the Special
Fund’s future obligations. This estimate was not developed for financial
reporting purposes because the NOLP official understood that there was no
unfunded liability for the federal government related to the Special Fund.
Rather, his interest arose after the American Institute of Certified Public
Accountants issued Statement of Position 97-3, which requires the Special
Fund’s self-insured employers and insurance companies to disclose their
unfunded liability related to the Special Fund. To determine how much
these companies might cumulatively disclose, the official created a
projection of current payments using arbitrary life expectancies of 21 years
for post-1972 cases and 11 years for the pre-1972 cases to estimate the
Special Fund’s future obligations. The official also determined that the
expected future revenue from assessments, related to these December
1998 cases, would offset the estimated future obligations.

Although DOL has the expertise necessary to calculate the unfunded
liability, it does not have an actuarial model developed for this calculation.
According to DOL’s Chief Actuary, the process of developing an actuarially
sound estimate could take up to 9 months and the cost would be in excess
of $150,000. He stated that the process would require an actuary to create
experience tables using at least 12 years of data on the payments already
made from the Special Fund, including (1) the ages of the injured workers,
(2) the nature of the injuries, and (3) the dates of death or cessation of
payments by the fund. The actuary would then use the experience tables to
develop the actuarial model that would calculate the estimated unfunded
liability.

Pursuant to enactment of authorizing legislation, the federal government
may assume liabilities for which it has no prior legal responsibility in order
to provide for the public’s general welfare. Statement of Federal Financial
Accounting Standards (SFFAS) No. 5 refers to these actions as
“government-acknowledged events.” Although the costs of government-
acknowledged events may ultimately become the responsibility of the
federal government, according to SFFAS No. 5, the cost should not be
reported on the face of the financial statements until the criteria for




Page 7                          GAO/AIMD-00-15 Oversight of Longshore Special Fund
                         B-283563




                         recognizing the liability have been met.4 Since, at this time, the criteria have
                         not been met, no unfunded liability should be recorded on the Special
                         Fund’s financial statements.

                         If, in the future, either (1) the federal government assumes responsibility
                         for liabilities over and above the Special Fund’s assets, thereby meeting
                         SFFAS No. 5 criteria for reporting the liability, or (2) it is determined that
                         calculating the unfunded liability would assist the Congress in overseeing
                         the soundness of the Special Fund, an actuarial estimate of the unfunded
                         liability may be warranted.



Controls Over Referral   The Department of Labor has established controls over the referral of cases
                         to the Special Fund. These controls include several levels of review for
of Cases                 each case referred to the Special Fund to ensure that the cases meet the
                         mandated criteria. To be accepted into the Special Fund, a case must meet
                         three conditions: (1) there must have been a preexisting permanent
                         impairment, not necessarily work related, (2) the second injury must have
                         occurred on the job, and (3) the combination of the two injuries/disabilities
                         must have worsened the initial impairment. Employers can apply to the
                         Director of their district office to have the injured workers’ cases
                         transferred to the Special Fund, after the employers have paid 104 weeks of
                         compensation payments to the injured workers. Eligibility for the Special
                         Fund is determined first by a DOL District Director or, in cases of dispute,
                         an Administrative Law Judge. If the Director or Judge determines that the
                         case is eligible, a Compensation Order is issued, which requires that the
                         Special Fund assume responsibility for future payments to the injured
                         worker. Compensation Orders issued by the District Director are
                         forwarded to the national office for final approval by a Claims Examiner. If
                         the application is denied, the self-insured employer or insurance carrier
                         may appeal.

                         The NOLP official told us there is a strong incentive for companies not to
                         submit invalid claims since annual assessments are calculated, in part,
                         based on the number of cases that each company has in the Special Fund.


                         4
                          According to SFFAS No. 5, the federal entity should not record the liability and expense
                         until the following two criteria have been met: (1) the Congress has appropriated or
                         authorized (i.e., through authorizing legislation) resources and (2) an exchange occurs or
                         nonexchange amounts are unpaid as of the reporting date (e.g., payments to beneficiaries),
                         whichever applies.




                         Page 8                               GAO/AIMD-00-15 Oversight of Longshore Special Fund
                 B-283563




                 In addition, since self-insured employers and insurance carriers must pay
                 the first 104 weeks of benefits prior to referring the cases to the Special
                 Fund, they take steps to detect fraudulent claims through monitoring
                 efforts such as surveillance, reevaluation, and verification of the status of
                 the beneficiary’s condition.



Data Matching    At the time of our review, DOL’s management was not matching the Special
                 Fund’s recipient information with any other federal agency’s databases.
                 However, plans were underway to perform a match with SSA’s death index,
                 which will reduce the risk of deceased individuals being issued benefit
                 payments from the Special Fund. This kind of matching procedure is used
                 in the DOL/OWCP Black Lung Program, which has an agreement with SSA
                 to provide the death index database to DOL on a monthly basis. DOL
                 matches the death index against Black Lung recipient data to determine
                 whether any of the Black Lung recipients are deceased. Once the match has
                 been completed, Black Lung officials provide the database to officials of
                 the Federal Employees Compensation Act (FECA) program, who then
                 perform a comparison of FECA recipient data to the death index.
                 According to the OWCP official responsible for ensuring that the
                 comparison is performed for FECA, the matching procedure produces
                 about 30 matches each time.

                 We were told by the OIG that prior year financial statement audits of the
                 Longshore Special Fund uncovered payments made to deceased
                 individuals. Accordingly, the OIG added a new procedure to the fiscal year
                 1999 audit program to detect such payments. The OIG provided SSA a data
                 file containing Special Fund recipient information that SSA will match
                 against its death index.



Calculation of   The formula for calculating the annual assessments against insurance
                 carriers and self-insured employers is prescribed by statute.5 The formula
Assessments      requires DOL to (1) estimate the probable expenses of the Special Fund for
                 the upcoming calendar year and the amount of payments required to
                 maintain adequate reserves in the fund and (2) allocate a portion of the
                 annual assessments to the individual insurance carriers and self-insured
                 employers based on each company’s share of the prior year’s total LHWCA


                 5
                     33 U.S.C. § 944 (c) (2).




                 Page 9                          GAO/AIMD-00-15 Oversight of Longshore Special Fund
B-283563




related payments made by all employers subject to LHWCA, and each
company’s share of the prior year’s second injury payments made by the
Special Fund. The allocation process was designed to result in a prorated
distribution of the annual assessment to the individual companies based on
their activities under LHWCA. However, inaccurate reporting by companies
has resulted in disproportionate distributions of assessments among the
insurance carriers and self-insured employers. In addition, inadequate
monitoring of certain Special Fund cases by DOL may have contributed to
some companies paying more than their true prorated share of the annual
assessments.

Underreporting was disclosed by DOL audits conducted during fiscal years
1992 through 1998. The process for allocating the annual assessment to the
applicable self-insured employers and insurance carriers relies on the
accuracy of LHWCA payment information obtained from these companies.
However, the lesser the amount of LHWCA payments a company reports,
the lower that company’s portion of the assessments will be.

DOL contracts with an Independent Public Accounting firm (IPA) to
perform a few audits (seven to eight audits a year) of the data reported on
the Report of Payments (Form LS-513)6 submitted by the self-insured
employers and insurance carriers. During fiscal years 1992 through 1997,
the audits performed by the IPA generated $27 million in collected
reassessments due to underreporting. According to a DOL official, an
additional $4 million in assessments was recovered as a result of the fiscal
year 1998 audits. The overall annual assessments are reduced by the
amount of the reassessment collections received in the same year, which
results in lower assessments for the individual self-insured employers and
insurance carriers. Broader audit coverage (for example, covering the 27
companies that represent 70 percent of the assessments) would most likely
generate more reassessments due to identification of underreporting,
resulting in lower future assessments. In addition, as self-insured
employers and insurance carriers become aware of these audits, they are
likely to report their payment data more accurately, which should result in
future distributions of assessments more accurately reflecting prorated
activity under LHWCA.


6
 All self-insured employers and insurance carriers authorized to participate in the Special
Fund are required to submit a Form LS-513 “Report of Payments” annually, indicating the
total amount of payments they made related to LHWCA. During fiscal year 1998, 483
companies were assessed.




Page 10                               GAO/AIMD-00-15 Oversight of Longshore Special Fund
B-283563




The NOLP official told us that the self-insured employers and insurance
carriers are primarily responsible for monitoring the continued eligibility of
the Special Fund beneficiaries. As previously discussed, these companies
have an incentive to monitor the cases that they submit to the Special Fund
because they must pay the first 104 weeks of benefits, and the payments
related to their cases in the Special Fund are directly proportional to their
share of the annual assessment. Their monitoring efforts include
surveillance, reevaluation, and verification of the status of the beneficiary’s
condition. The self-insured employers and insurance carrier we spoke with
stated that such monitoring takes place. According to DOL regulations, if a
change in the recipient’s condition is disclosed and a self-insured employer
or insurance carrier intends to pursue a modification of the award of
compensation, the company must involve DOL. The NOLP official stated
that compensation awards have been reduced based on the review of
evidence submitted by the self-insured employers and insurance carriers;
however, this rarely occurs.

Because DOL relies on the monitoring activities of the self-insured
employers and insurance carriers, DOL performs only minimal monitoring
of the Special Fund’s active cases. According to a NOLP official, all Special
Fund recipients are required to submit a Report of Earnings (LS-200) to
DOL annually. Recipients are required to report all earnings during the
period specified on the LS-200. The NOLP official stated that although DOL
does not verify the accuracy of the information submitted, it does enforce
the requirement for each recipient to report. If the LS-200 is not completed
and returned, DOL suspends the recipient’s benefit payments. When
requested, DOL will provide the self-insured employers and insurance
carriers copies of the LS-200 forms.

The officials we spoke to expressed concern regarding the lack of adequate
monitoring of the “orphaned” cases.7 There are about 500 of these
“orphaned” cases, which, according to DOL officials, account for about
$10 million to $12 million in benefits annually. Since the companies that
referred these cases to the Special Fund are no longer in existence, the only
monitoring of the “orphaned” cases occurs when DOL verifies that each
recipient submitted an LS-200. This lack of adequate monitoring increases
the likelihood of payments being made to ineligible recipients. The cost of


7
 “Orphaned” cases are those in which the former employer (company that referred the case
to the Special Fund) has become insolvent or is no longer in existence, and beneficiaries
continue to receive payments.




Page 11                             GAO/AIMD-00-15 Oversight of Longshore Special Fund
                       B-283563




                       any resulting improper payments becomes an additional burden to the
                       companies responsible for contributing to the annual assessment because
                       these payments are included in the total annual assessment and allocated
                       to the self-insured employers and insurance carriers. The NOLP official
                       recognized the need for additional monitoring of “orphaned” cases, but
                       stated that DOL does not have the resources to do so.



Changes to Longshore   In addition to paying the second injury benefits, the Special Fund is
                       available for paying the costs of certain rehabilitation services. DOL is
Computer Systems       currently developing an automated computer system to strengthen existing
                       controls over the reporting and authorization of payments made from the
                       Special Fund to rehabilitation service providers in response to DOL/OIG
                       reported weaknesses identified in the Special Fund’s fiscal year 1997
                       financial statement audit report, dated May 14, 1998. The reported
                       weaknesses pertain to the controls over the national office’s final
                       authorization for payment when bills are submitted by the district offices.
                       Specifically, the weaknesses identified were (1) bills submitted for payment
                       to the national office were not compared to a list of valid recipients or
                       authorized service providers, (2) the total amount of rehabilitation bills
                       submitted by the district offices was not compared to the total amount of
                       rehabilitation bills paid by the national office, and (3) bills paid were not
                       compared to the available amounts obligated by the Rehabilitation
                       Specialist. According to the OIG’s audit report, these weaknesses may have
                       contributed to the fraudulent payment of more than $500,000 to fictitious
                       rehabilitation vendors over a 4-year period.

                       The OIG recommended strengthening internal controls for recording,
                       authorizing, and paying for rehabilitation service costs by implementing an
                       automated rehabilitation payment system. The recommendation stated that
                       at a minimum, the system should include the following controls:
                       (1) compare bills submitted to a centralized list of eligible recipients and
                       authorized service providers, with adequate controls over the ability to add
                       recipients/vendors to the list, (2) compare the amount of bills submitted by
                       the district offices to the amount paid by the national office, and (3) ensure
                       that amounts obligated and accounts payable are timely and accurately
                       reported and that payments do not exceed amounts obligated.

                       DOL management, in its response to the audit report, agreed with the OIG’s
                       recommendation. DOL is currently developing a computer system to be
                       used by NOLP, which we were told will allow the national office to view
                       amounts approved and obligated by the district offices for rehabilitation



                       Page 12                         GAO/AIMD-00-15 Oversight of Longshore Special Fund
              B-283563




              services before payments are authorized. We were also told that the system
              will compare bills submitted for payment to a list of eligible providers.
              According to DOL, the system was implemented in September 1999.

              The Longshore and Harbor Workers’ Compensation Program currently uses
              two computer systems: (1) the Longshore Special Fund System (LSFS) and
              (2) the Longshore Case Management System (LCMS). These systems were
              originally developed and implemented in 1985. In response to changing
              technology and the Y2K problem, DOL has instituted changes to both
              systems. LSFS is a benefit payments system, which is also used to allocate
              the annual assessments to the applicable insurance carriers and self-
              insured employers. LCMS is a management case tracking system.
              Employers are required to report all LHWCA claims to a district office
              within 10 days of the date of an employee’s injury or death, or within 10
              days of the date the employer becomes aware of the injury or death. Once
              reported, the case is entered into LCMS. The district offices use the LCMS
              to monitor the timeliness of the insurance carriers’ and self-insured
              employers’ compensation payments to beneficiaries.

              Both of these systems were upgraded to mitigate Y2K problems and
              accommodate new, user-friendly technology. The upgraded LSFS was
              placed in service in July 1998 and the upgraded LCMS was implemented in
              March 1999. These upgraded systems serve the same purposes as the old
              systems, with the added advantages of modern hardware and software in
              order to comply with requirements related to the Y2K computing problem.
              Additionally, these systems were upgraded with new, user-friendly
              enhancements, such as drop-down menus, icons, and toolbars.



Conclusions   While DOL has procedures related to reducing the risk of inappropriate
              cases being referred to the Special Fund, DOL has not developed and
              implemented adequate procedures to reduce the risk of improper payments
              being made to deceased or otherwise ineligible recipients. However, DOL
              plans to match Special Fund recipient data with SSA’s death index to
              identify payments being made to deceased recipients. Until DOL
              establishes sufficient monitoring of “orphaned” cases and expands its
              auditing of payment data submitted by self-insured employers and
              insurance carriers to detect underreporting, DOL cannot guarantee that the
              distribution of assessments among employers and carriers will accurately
              reflect their activity under LHWCA.




              Page 13                       GAO/AIMD-00-15 Oversight of Longshore Special Fund
                      B-283563




Recommendations       We are making recommendations to the Secretary of Labor to reduce the
                      risk of (1) Special Fund payments being made to deceased or otherwise
                      ineligible recipients and (2) disproportionate distribution of assessments
                      among the self-insured employers and insurance carriers.

                      To reduce the risk of Special Fund payments being made to deceased or
                      otherwise ineligible recipients, we recommend that the Secretary of Labor
                      direct the Assistant Secretary for Employment Standards Administration to
                      take the following actions.

                      • Implement a regular program of matching recipient data from the
                        Special Fund to the SSA’s death index. The match should be done
                        monthly, in conjunction with the match of the Black Lung and the FECA
                        recipient data match with SSA’s death index.
                      • Develop and implement procedures to adequately monitor the
                        continuing eligibility of the “orphaned” cases. The monitoring
                        techniques employed should be similar to those used by self-insured
                        employers and insurance carriers.

                      To help achieve the intended prorated distribution of assessments among
                      the self-insured employers and insurance carriers, we recommend that the
                      Secretary of Labor direct the Assistant Secretary for Employment
                      Standards Administration to develop and implement a more
                      comprehensive plan to expand DOL’s auditing of LHWCA payment data
                      submitted by self-insured employers and insurance carriers.



Agency Comments and   In written comments on a draft of this report, DOL generally agreed with
                      our observations and recommendations for improving the internal controls
Our Evaluation        over the Special Fund. DOL plans to implement matching procedures in
                      October 1999 in concurrence with our recommendation. DOL supports the
                      recommendation for expansion of the auditing of LHWCA payments. While
                      DOL views additional monitoring of “orphaned” cases as a challenge, it said
                      it will look for ways to increase monitoring efforts in this area.

                      We are sending copies of this report to Senator James M. Jeffords and
                      Senator Edward M. Kennedy, and to Representative William L. Clay,
                      Representative William F. Goodling, and Representative Major R. Owens in
                      their capacities as Chairmen or Ranking Minority Members of Senate and
                      House Committees. We are also sending copies to the Honorable Alexis M.
                      Herman, Secretary of Labor; the Honorable Jacob J. Lew, Director of the



                      Page 14                        GAO/AIMD-00-15 Oversight of Longshore Special Fund
B-283563




Office of Management and Budget; and the Honorable Bernard E.
Anderson, Assistant Secretary of the Employment Standards
Administration of the Department of Labor. Copies will be made available
to others upon request. If you have any questions or wish to discuss the
issues in this report, please contact me at (202) 512-4476. Key contributors
to this report are listed in appendix II.

Sincerely yours,




Gloria L. Jarmon
Director, Health, Education, and Human
 Services Accounting and Financial Management Issues




Page 15                        GAO/AIMD-00-15 Oversight of Longshore Special Fund
Appendix I

Comments From the Department of Labor                                    AA
                                                                          pppen
                                                                              enx
                                                                                dd
                                                                                 iix
                                                                                 e Is




             Page 16    GAO/AIMD-00-15 Oversight of Longshore Special Fund
Appendix I
Comments From the Department of Labor




Page 17                          GAO/AIMD-00-15 Oversight of Longshore Special Fund
Appendix II

GAO Contact and Staff Acknowledgements                                                               Appendix
                                                                                                            I




GAO Contact           Gloria L. Jarmon, (202) 512-4476




Acknowledgments       In addition to the contact named above, Alana Stanfield, Bonnie Derby,
                      Suzanne Lightman, and David Engstrom made key contributions to this
                      report.




(916291)      Leter   Page 18                       GAO/AIMD-00-15 Oversight of Longshore Special Fund
Ordering Information

The first copy of each GAO report and testimony is free.
Additional copies are $2 each. Orders should be sent to the
following address, accompanied by a check or money order made
out to the Superintendent of Documents, when necessary, VISA and
MasterCard credit cards are accepted, also.

Orders for 100 or more copies to be mailed to a single address are
discounted 25 percent.

Orders by mail:

U.S. General Accounting Office
P.O. Box 37050
Washington, DC 20013

or visit:

Room 1100
700 4th St. NW (corner of 4th and G Sts. NW)
U.S. General Accounting Office
Washington, DC

Orders may also be placed by calling (202) 512-6000
or by using fax number (202) 512-6061, or TDD (202) 512-2537.

Each day, GAO issues a list of newly available reports and
testimony. To receive facsimile copies of the daily list or any list
from the past 30 days, please call (202) 512-6000 using a touchtone
phone. A recorded menu will provide information on how to obtain
these lists.

For information on how to access GAO reports on the INTERNET,
send an e-mail message with “info” in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov
United States                       Bulk Rate
General Accounting Office      Postage & Fees Paid
Washington, D.C. 20548-0001           GAO
                                 Permit No. GI00
Official Business
Penalty for Private Use $300

Address Correction Requested