oversight

FEMA Cerro Grande Claims: Payments Properly Processed, but Reported Payments Somewhat Overstated

Published by the Government Accountability Office on 2003-05-08.

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

             United States General Accounting Office

GAO          Report to the Committee on
             Appropriations, U.S. Senate, and the
             Committee on Appropriations, House of
             Representatives

May 2003
             FEMA CERRO
             GRANDE CLAIMS
             Payments Properly
             Processed, but
             Reported Payments
             Somewhat Overstated




GAO-03-623
             a
                                               May 2003


                                               FEMA CERRO GRANDE CLAIMS

                                               Payments Properly Processed, but
Highlights of GAO-03-623, a report to the      Reported Payments Somewhat
Committee on Appropriations, U.S.
Senate, and the Committee on                   Overstated
Appropriations, House of Representatives




The Cerro Grande Fire Assistance
                                               FEMA implemented corrective actions to address the recommendations
Act mandated that GAO annually
audit all claim payments made to               from GAO’s prior report to strengthen its policies and procedures. GAO
compensate the victims of the                  found that claims were processed, approved, and paid in accordance with
Cerro Grande Fire in northern New              FEMA’s established applicable guidelines, providing adequate supporting
Mexico. For this second report on              documentation and evidence of supervisory reviews. However, as discussed
this topic, GAO determined                     below, claimed amounts approved for payment but not paid were not
whether the Federal Emergency                  properly tracked in the Office of Cerro Grande Fire Claims’ (OCGFC)
Management Agency (FEMA),                      payment approval system.
which is now a part of the
Department of Homeland Security,               FEMA’s report to the Congress included somewhat overstated claim
(1) had revised its policies and               payment information. The report used claimed amounts approved by
procedures to address prior GAO
                                               OCGFC for payment, rather than amounts actually paid by FEMA. This
recommendations and processed
and paid claims consistent with                occurred because FEMA had not reconciled the approved amounts from its
that guidance and (2) properly                 payment approval system to amounts paid per its accounting system and
reported such payments to the                  was not aware of the differences, which amounted to about
Congress.                                      $12 million, or 3 percent of total reported payments, as of September 7, 2002.
                                               FEMA is currently attempting to reconcile the approved amounts with the
                                               paid amounts. This difference resulted because approved amounts that were
                                               not paid when claims were delayed for appeal or canceled for other reasons
To improve FEMA’s ability to                   were not removed from or adjusted in the payment approval system. As a
accurately report claims status,               result, the claim payment information reported to the Congress does not
including amounts paid, and                    provide a completely accurate picture of OCGFC claim payments. This
request additional funding, GAO
                                               information was also used by FEMA to determine its request for additional
recommends that the Secretary of
Homeland Security require the                  funding. Since FEMA received less than it requested, this error likely did not
Emergency Preparedness and                     result in an appropriation in excess of amounts needed to pay claims.
Response Directorate to
                                               During its review, GAO also noted that FEMA’s estimate of its unfunded
•    reconcile claim amounts                   claims liability increased by $91 million from September 30, 2001, to October
     approved to amounts paid and              2, 2002. While FEMA’s external auditors found that FEMA used a reasonable
     correct all identified errors in          methodology to calculate the most recent estimate, they were unable to
     its payment approval system               explain the reason for the increase in the estimate. This occurred because
     and                                       FEMA changed the methodology used but did not provide a crosswalk
•    perform monthly                           between the two approaches. In April 2003, FEMA officials stated that they
     reconciliation of the claims in           planned to contract for an analysis to be performed to determine the effect
     both systems.
                                               that the change in methodology and other factors had on the calculation of
The Department of Homeland                     the estimated liability.
Security’s Emergency
Preparedness and Response
Directorate concurred with our
recommendations and indicated
that it has several actions under
way to address them.
www.gao.gov/cgi-bin/getrpt?GAO-03-623.

To view the full report, including the scope
and methodology, click on the link above.
For more information, contact Linda Calbom
at (202) 512-9508 or calboml@gao.gov.
Contents



Letter                                                                                                              1
                         Results in Brief                                                                           2
                         Background                                                                                 4
                         Scope and Methodology                                                                      7
                         Policies and Procedures for Claims Processing Improved and
                           Followed                                                                                 10
                         Reported Claim Payment Information Was Somewhat
                           Overstated                                                                               12
                         Conclusion                                                                                 15
                         Recommendations for Executive Action                                                       15
                         Agency Comments and Our Evaluation                                                         15


Appendix
           Appendix I:   Comments from the Department of Homeland Security                                          17




                         Abbreviations

                         ACIS         Automated Claim Information System
                         CGFAA        Cerro Grande Fire Assistance Act
                         DFC          Disaster Finance Center
                         FEMA         Federal Emergency Management Agency
                         NOL          Notice of Loss
                         OCGFC        Office of Cerro Grande Fire Claims



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                         Page i                                                 GAO-03-623 CGFAA Claim Payments
A
United States General Accounting Office
Washington, D.C. 20548



                                    May 8, 2003                                                                                    Leter




                                    The Honorable Ted Stevens
                                    Chairman
                                    The Honorable Robert C. Byrd
                                    Ranking Minority Member
                                    Committee on Appropriations
                                    United States Senate

                                    The Honorable C.W. Bill Young
                                    Chairman
                                    The Honorable David R. Obey
                                    Ranking Minority Member
                                    Committee on Appropriations
                                    House of Representatives

                                    On July 13, 2000, the President signed into law the Cerro Grande Fire
                                    Assistance Act (CGFAA).1 CGFAA established the Office of Cerro Grande
                                    Fire Claims (OCGFC) and directed the Federal Emergency Management
                                    Agency (FEMA)2 to expeditiously investigate victims’ claims, determine
                                    damages, and compensate the victims of the Cerro Grande fire in northern
                                    New Mexico. CGFAA also requires FEMA to submit an annual report to the
                                    Congress by August 28 that provides information on claims submitted
                                    during the year. CGFAA, as amended,3 requires that we audit all claim
                                    payments made under the act, including subrogation claims4 made by
                                    insurance companies, and report the results of our audit within 120 days of
                                    the issuance of FEMA’s annual report. In this our second report under
                                    CGFAA, we determined whether FEMA (1) implemented new policies and
                                    procedures to address our prior report’s recommendations and processed
                                    and paid fire claims in accordance with applicable policies and procedures
                                    and (2) properly reported such payments to the Congress.



                                    1
                                     Pub. L. 106-246, Div. C, Title I, 114 Stat. 511, 583 (2000).
                                    2
                                     As of March 2003, FEMA became part of the Emergency Preparedness and Response
                                    Directorate of the Department of Homeland Security.
                                    3
                                     Pub. L. 107-73, Title IV, § 428, 115 Stat. 651, 697 (2001).
                                    4
                                     A subrogation claim is the right of one who has paid an obligation that another should have
                                    paid to be indemnified by the other. In this case, insurance companies and possibly others
                                    paid claims that the federal government is responsible for paying.




                                    Page 1                                                         GAO-03-623 CGFAA Claim Payments
                   We did not review any subrogated claim payments as part of this audit
                   because as of January 15, 2003, the end of our fieldwork, no subrogated
                   claims payments had been made.5 However, FEMA did report to the
                   Congress that as of September 7, 2002, insurance companies had submitted
                   4,553 subrogated claims totaling approximately $103 million.6 FEMA also
                   reported that as soon as 95 percent of all nonsubrogee claims have been
                   paid, and when funds become available,7 payments for subrogation claims
                   will be made to insurers expeditiously. We will review payments made for
                   subrogated claims as part of our next audit.



Results in Brief   FEMA revised its policies and procedures to address our prior report’s
                   recommendations and processed and paid fire claims in accordance with
                   its applicable policies and procedures. In response to our prior audit
                   report, issued in July 2001,8 FEMA implemented corrective actions to
                   address our recommendations to (1) document all steps and procedures
                   performed by claims reviewers to determine the validity of a claim and the
                   amount recommended for payment, (2) incorporate all existing informal
                   guidance into a set of formal policies and procedures, and (3) establish
                   standardized policies and procedures to address claims for which no policy
                   had existed. Based on the results of our statistical testing, we found that
                   claims were processed, approved, and paid in accordance with FEMA’s
                   revised policies and procedures. However, as discussed below, we found
                   that claimed amounts approved but not yet paid were not properly tracked
                   in OCGFC’s payment approval system.

                   FEMA’s second annual report to the Congress, dated December 16, 2002,
                   included somewhat overstated claim payment information. FEMA’s report

                   5
                    CGFAA specifies that nonsubrogee claims, to the maximum extent practicable, be paid
                   before subrogee claims.
                   6
                    OCGFC stated that the amount represents either the amount of claims processed and
                   approved by the claims reviewer or, if not processed, the amount submitted by the
                   claimants.
                   7
                    In its transmittal letter dated December 16, 2002, which accompanied its annual report to
                   the Congress, FEMA stated that an additional $155 million, including $5 million in
                   administrative costs, was needed. In February 2003, FEMA was appropriated an additional
                   $90 million, of which $5 million is available for administrative purposes.
                   8
                    U.S. General Accounting Office, Federal Emergency Management Agency: Weaknesses
                   Exist in the Cerro Grande Fire Assistance Claim Validation Process, GAO-01-848
                   (Washington, D.C.: July 13, 2001).




                   Page 2                                                GAO-03-623 CGFAA Claim Payments
was based on claimed amounts approved for payment, as reported in its
payment approval system, rather than amounts actually paid, as reported in
FEMA’s accounting system. FEMA officials said they believed the amounts
to be the same, but had not reconciled the data and were not aware of a
$12 million difference between the two systems, which was almost 3
percent of amounts reported paid. FEMA is currently attempting to
reconcile the approved claim amounts with the amounts actually reported
as paid. We found that the primary reason for the difference was
overstatements of claimed amounts approved for payment in OCGFC’s
payment approval system. This overstatement was caused by approved
claim amounts that were being appealed, replaced by other claims, or
otherwise not paid that were not removed from or adjusted in the payment
approval system. As a result, the claim payment information reported to
the Congress does not provide a completely accurate picture of Cerro
Grande claim payment activity for the year. In addition, the erroneous
approved claims data were used to determine FEMA’s request for
additional appropriated funding. Because $90 million, rather than the $155
million FEMA stated it needed, was appropriated to FEMA, it does not
appear that the errors resulted in an appropriation in excess of the amount
needed to pay claims.

In reviewing FEMA’s fiscal year 2002 financial statements, we also noted
that FEMA’s estimate of its unfunded claims liability increased significantly
compared to the prior year—from $36.5 million as of September 30, 2001,
to $127.5 million as of October 2, 2002.9 While FEMA’s external auditors
found that FEMA used a reasonable methodology to calculate the current
year liability, they were unable to explain the reason for the differences in
the two estimates since FEMA changed the methodology but did not
provide a crosswalk between the two approaches. The auditors noted this
lack of analysis of the change in methodology as a weakness in their report
on internal controls for fiscal year 2002. In April 2003, FEMA officials
stated that FEMA would award a contract to perform an analysis to
determine the dollar impact on the liability estimate due to changes in
methodology, assumptions, systems, data, or other factors, from fiscal
years 2002 through 2001.




9
 In January 2003, FEMA’s auditor used the correct payment data, plus other adjustments,
and proposed an adjustment to the October 2, 2002, unfunded liability, with which FEMA’s
management concurred. This resulted in a reduction of $21.7 million.




Page 3                                                GAO-03-623 CGFAA Claim Payments
             We are making two recommendations that, if properly implemented, will
             improve FEMA’s ability to track claims it approves and pays and help
             ensure the accuracy of amounts approved and paid in its systems, in
             reports to the Congress, and in amounts used to request additional funding.
             In commenting on a draft of the report, the Acting Director of the Recovery
             Division of the Department of Homeland Security’s Emergency
             Preparedness and Response Directorate agreed with our recommendations
             and outlined several corrective actions that it is currently undertaking to
             address these issues.



Background   On May 4, 2000, the National Park Service initiated a prescribed burn on
             federal land at Bandelier National Monument, New Mexico, in an effort to
             reduce the threat of wildfires in the area. The plan was to burn up to 900
             acres. On May 5, 2000, the prescribed burn exceeded the capabilities of the
             National Park Service, spread to other federal and nonfederal land, and was
             characterized as a wildfire. On May 13, 2000, the President issued a major
             disaster declaration, and subsequently, the Secretary of the Interior and the
             National Park Service assumed responsibility for the fire and the loss of
             federal, state, local, tribal, and private property. The fire, known as the
             Cerro Grande fire, burned approximately 48,000 acres in four counties and
             two Indian pueblos, destroyed over 200 residential structures, and forced
             the evacuation of more than 18,000 residents.

             On July 13, 2000, the President signed CGFAA into law. Under CGFAA,
             each claimant is entitled to be compensated by the United States
             government for certain injuries and damages that resulted from the Cerro
             Grande fire. The Congress appropriated $455 million to FEMA for the
             payment of such claims and $45 million for the administration of the Cerro
             Grande program. In March 2002, FEMA requested, but did not receive,
             additional appropriated funding of $80 million to cover excess claims and
             administrative costs. In December 2002, FEMA revised its estimate and
             requested additional appropriated funding of $155 million, including
             $5 million for administrative costs. The revised estimate was based on
             more complete claim information since the final date to submit claims
             passed on August 28, 2002. In February 2003, FEMA was appropriated an
             additional $90 million, of which $5 million may be made available for
             administrative purposes.




             Page 4                                        GAO-03-623 CGFAA Claim Payments
CGFAA requires that FEMA submit an annual report to the Congress that
provides information about claims submitted under the act. This annual
report is to include the amounts claimed, a description of the nature of the
claims, and the status or disposition of the claims, including the amounts
paid. FEMA’s report is to be issued annually by August 28. CGFAA, as
amended, requires that we conduct annual audits on the payment of all
claims made and report the results of the audits to the Congress within 120
days of FEMA’s issuance of its annual report. The act also requires that our
report include a review of all subrogation claims for which insurance
companies have been paid. On January 8, 2003, FEMA notified us that it
had issued the annual report to the Congress through a transmittal letter
dated December 16, 2002,10 and FEMA provided us a copy of the annual
report on January 9, 2003. We are publishing our report within 120 days of
FEMA’s notification of its issuance.

CGFAA required that FEMA promulgate and publish implementing
regulations for the Cerro Grande program within 45 days of enactment of
the law. On August 28, 2000, FEMA published Disaster Assistance: Cerro
Grande Fire Assistance; Interim Final Rule in the Federal Register
(Interim Final Rules).11 FEMA modified the Interim Rule with a set of
implementing policies and procedures on November 13, 2000. FEMA
updated these policies and procedures in January and March 2001. After
reviewing public comments on the interim rule, FEMA finalized and
published Disaster Assistance: Cerro Grande Fire Assistance Final Rule
(Final Rule) on March 21, 2001.12 Since our prior report, FEMA revised and
implemented policies and procedures, which are discussed later in this
report.

The claims payment process is initiated when an injured party submits a
Notice of Loss (NOL)13 to OCGFC. After the NOL is received, claim
reviewers contact the claimant to discuss the claim, explain the claims
process, and determine the best means to substantiate the loss or damages.


10
 In its fiscal year 2002 financial statement audit, FEMA’s external auditors reported the late
submission of the annual report as an instance of noncompliance with CGFAA in their
report on compliance with laws and regulations.
11
     65 FR 52260, 44 C.F.R. Part 295 (2000).
12
     66 FR 15948, 44 C.F.R. Part 295 (2001).
13
  The NOL describes in general terms the types of injury and/or damages a claimant has
incurred as a result of the fire.




Page 5                                                   GAO-03-623 CGFAA Claim Payments
The claim reviewer then assigns a claim number and enters the information
into OCGFC’s claim-processing database, the Automated Claim
Information System (ACIS). The claims reviewer then begins the process
of verifying the victim’s claim. Once completed, the claims reviewer
prepares a claim payment recommendation package, which specifies that a
claimant’s injuries or damages occurred as a result of the Cerro Grande fire
and that claimed amounts are eligible for compensation under CGFAA.
The claim reviewer also inputs reserve amounts equal to the total claimed
amounts it expects to be paid into the claim-processing database and a
claims supervisor reviews and approves each recommendation package.
This review, among other things, is intended to ensure that a proper
investigation of the claim occurred and that the proper documentation
exists.

Following the approval of the claim payment recommendation package, an
Approval for Payment form is completed and sent to an OCGFC authorizing
official for review and approval. The amounts approved for payment are
then added to a Schedule of Payments that is forwarded to the Comptroller.
The Comptroller reviews a sample of requested and approved payments
and then approves the Schedule of Payments and records the approved
amounts in OCGFC’s payment approval system before sending it on to
FEMA’s Disaster Finance Center (DFC) for additional manual processing
and final approval for the Department of the Treasury to disburse the
funds. FEMA records all payments in its accounting system, the Integrated
Financial Management Information System, which is not linked to
OCGFC’s payment approval system.




Page 6                                        GAO-03-623 CGFAA Claim Payments
              In addition to this process, which is used for both partial payments14 and
              final payments, prior to processing a final payment, the claims reviewer
              prepares a Proof of Loss form. This form summarizes all amounts
              recommended for payment, including those amounts previously paid
              through a partial payment. The Proof of Loss form must be signed by the
              claimant subject to the provisions of 18 U.S.C. §1001, which establishes
              criminal penalties for false statements. Once a signed Proof of Loss form is
              received, an OCGFC authorized official sends a Letter of Final
              Determination to tell the claimant the total amount of compensation being
              offered under CGFAA. Accompanying this letter is a Release and
              Certification form that the claimant signs if he or she accepts the OCGFC
              compensation determination, thereby releasing the federal government
              from any additional claims arising from the Cerro Grande fire.15 Upon
              receipt of the signed Release and Certification form, FEMA will process
              and mail a claimant’s final payment.



Scope and     In performing our review, we considered the Standards for Internal
              Control in the Federal Government.16 To reaffirm our understanding of the
Methodology   claim review and payment process established by OCGFC and to follow up
              on the changes made to this process since our last report, we interviewed
              FEMA officials and analyzed data used (1) in FEMA’s annual report to the
              Congress, (2) by KPMG during its audit of FEMA’s financial statements, and
              (3) by FEMA to determine the estimated claim liability. We also reviewed
              the following:

              • the requirements of CGFAA,

              • the final regulations published in the Federal Register,

              • FEMA’s policies and procedures manual,

              14
               In order to get assistance to fire survivors as soon as possible, CGFAA allows for claimants
              to receive partial payments before the start of the rebuilding process. Partial payments may
              be based upon actual receipts or estimates. Final payments are made only after the entire
              claims review process is completed.
              15
               Section 295.34 of the final rule published in the Federal Register provides for the
              reopening of claims, not withstanding the submission of a Release and Certification form,
              under certain circumstances.
              16
               U.S. General Accounting Office, Standards for Internal Control in the Federal
              Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).




              Page 7                                                  GAO-03-623 CGFAA Claim Payments
• the independent actuarial report estimating FEMA’s total claim liability
  for fiscal year 2001,

• a summary of FEMA’s unpaid claim liability estimates for fiscal year
  2002,

• FEMA’s fiscal years 2001 and 2002 audited financial statements, and

• the current year Cerro Grande trial balance and other documentation
  concerning the Cerro Grande program.

We also obtained, reviewed, and considered the results of numerous desk
reviews, by FEMA’s Office of Inspector General, of claims approved for
payment. Finally, we selected two statistical samples from the population
of all partial and final claim payments to determine whether FEMA
processed, approved, and paid the Cerro Grande fire claims in accordance
with its applicable policies and procedures.

To determine whether FEMA implemented corrective actions to address
our prior year recommendations and OCGFC processed and paid claims in
accordance with the revised policies and procedures, we followed up on
FEMA’s corrective actions and performed certain tests to ensure that
policies and procedures were being followed. We reviewed the revised
policies and procedures to ensure that they were incorporated into FEMA’s
policies and procedures or modified in its claim-processing contract, and
performed tests of both claims approved for payment by OCGFC and
amounts paid by DFC, as reported by FEMA, as follows.

• We selected a dollar unit (statistical) sample of 95 claims totaling
  $311,232,388 that were approved for payments from a population of
  15,394 reported partial and final claim amounts that had been approved
  for payment from August 28, 2000 (inception), through September 7,
  2002, to test specific control activities, such as adequacy of supporting
  documentation, evidence of claims manager and approving official
  review, and actual payment by FEMA. We obtained and reviewed
  related supporting documentation for the approved claim payments that
  were selected from OCGFC’s payment approval system.

• We selected a dollar unit (statistical) sample of 77 claim payments
  totaling $152,493,242 from a population of 47,674 actual payments made
  by FEMA from August 28, 2000, through September 7, 2002, to verify
  that only approved claims were paid. We obtained and reviewed related



Page 8                                       GAO-03-623 CGFAA Claim Payments
     supporting documentation for the claim payments that were selected
     from a database of claim payments made by DFC as reported in FEMA’s
     accounting system.

In order to determine whether FEMA properly reported claim payment
information to the Congress, we compared its reported payment
information to the claimed amounts that were approved by OCGFC for
payment from its payment approval system and to the actual claim
payments made by DFC and reported in FEMA’s accounting system. We
also obtained and reviewed supporting documentation and discussed the
unreconciled differences we identified with FEMA officials.

As mentioned previously, we did not audit subrogated claim payments
since none were paid. We did, however, obtain a report from OCGFC
indicating that as of January 15, 2003, 3,847 of 4,561, or 84 percent, of the
subrogated claims totaling approximately $103 million had been submitted
and approved for payment, but not yet paid.

Our work was conducted in Santa Fe, New Mexico; Denton, Texas;17 and
Washington, D.C., from September 2002 through January 2003 in
accordance with generally accepted government auditing standards. We
requested agency comments on a draft of this report from the Under
Secretary of the Department of Homeland Security’s Emergency
Preparedness and Response Directorate. The Department of Homeland
Security’s Office of Inspector General provided certain technical comments
orally, which we have incorporated as appropriate. The Acting Director of
the Recovery Division of the Department of Homeland Security’s
Emergency Preparedness and Response Directorate also provided written
comments in response to our draft on behalf of FEMA and OCGFC, which
are reprinted in appendix I. We discussed the written comments in the
“Agency Comments and Our Evaluation” section of this report.




17
 In December 2002, OCGFC closed its headquarters operations in Santa Fe, New Mexico,
and moved the remaining claims operations to FEMA’s National Processing Center in
Denton, Texas.




Page 9                                              GAO-03-623 CGFAA Claim Payments
Policies and            Since our last audit report, FEMA implemented corrective actions and
                        revised its policies and procedures to address issues related to its controls
Procedures for Claims   over the claims review process. Based on the results of our statistical
Processing Improved     testing, claims were processed, approved, and paid in accordance with
                        FEMA guidelines that were established and in place at the time the claims
and Followed            were reviewed and processed.18

                        In response to our July 2001 report, FEMA implemented corrective actions
                        to address our recommendations related to its policies and procedures. In
                        that report, we recommended that FEMA (1) require claims reviewers to
                        document all steps and procedures they perform to determine the validity
                        of a claim and the amount recommended for payment, (2) review and
                        consolidate all existing informal guidance and incorporate this guidance
                        into a set of formal policies and procedures, and (3) establish standardized
                        policies and procedures to address claims for which no policy currently
                        exists. During this review, we confirmed that FEMA had done this.
                        Specifically, FEMA’s improvements consisted of revising its policies and
                        procedures and issuing a new task order.

                        • FEMA revised its contract with its claims reviewers and issued a new
                          task order. This task order required that certain documentation
                          obtained related to claims verification or attempts the claims reviewer
                          made to obtain this sort of documentation19 be placed in each claim file.
                          The required documentation consists of items such as proof of identity,
                          proof of ownership or occupancy at the time of the fire, systems used to
                          verify or estimate values, proof of vehicle ownership (title or
                          registration) at the time of the fire, and verification of insurance as part
                          of efforts to preclude duplicate reimbursements for losses. The task
                          order also required evidence of supervisory review, with the signatures
                          of the claims manager and approving official on the Approval for
                          Payment form. Based on the results of our statistical testing, we found
                          that all claim files submitted after the implementation of the new task



                        18
                         We did not identify any control weaknesses in our review of the 95 statistically selected
                        approved claims.
                        19
                         Claims reviewers are now required to include documentation of all telephone
                        conversations and attempts to contact or obtain support from claimants in the notes
                        maintained in ACIS. In cases where documentation submitted is insufficient, the claims
                        reviewers will perform the independent investigations necessary to make recommendations
                        to FEMA.




                        Page 10                                                 GAO-03-623 CGFAA Claim Payments
     order contained the required documentation and evidence of
     supervisory review.

• In April 2002, FEMA issued revised guidelines to ensure that all existing
  informal guidance was incorporated into a set of formally documented
  policies and procedures and distributed them to all staff members
  responsible for the claims review and award determination process.
  FEMA stated that the revised guidelines were distributed to all staff
  members and that it now has a process to review its policy manual
  monthly and incorporate new policies or policy changes into it as
  needed. We reviewed the new guidelines and verified that the
  previously informal and unofficial policies that the claim reviewers used
  had been incorporated.

• FEMA also developed various policies and procedures to cover
  situations for which none previously existed. For example, to address
  claimants’ concerns about the declining value of residential property as
  a result of the fire, FEMA determined the decline to be temporary and
  developed policies and procedures to compensate claimants only for
  losses suffered if their residential property was sold at less than fair
  market value.20 Policies and procedures were also developed to address
  the unique aspects of compensation under CGFAA, such as legal issues
  regarding who is a proper claimant if the injured party is now deceased
  and compensation for lost rental income. We reviewed the new
  guidelines and verified that such policies and procedures were
  incorporated.

The improvements FEMA made to its claims processing function help
ensure that paid claims are valid and reasonable. However, as discussed in
the next section, we found four errors related to FEMA’s tracking and
reporting of amounts approved and paid.




20
 Fair market values were established in PricewaterhouseCooper’s Economic Study of the
Los Alamos Post-Fire Residential Real Estate Market (Final Report).




Page 11                                             GAO-03-623 CGFAA Claim Payments
Reported Claim        FEMA’s report to the Congress overstated the amount of claim payments
                      made under CGFAA through September 7, 2002, by about $12 million, or 3
Payment Information   percent of reported payments. CGFAA requires FEMA to issue a report
Was Somewhat          detailing the amounts claimed, a brief description of the nature of the
                      claims, and their status or disposition, including the amount of any
Overstated            payments. For its most recent annual report to the Congress, FEMA used
                      the information contained in OCGFC’s payment approval system, which
                      contains amounts approved for payment by OCGFC. However, there were
                      errors in this system that overstated the amounts actually paid by DFC to
                      claimants by approximately $12 million. The overstated approved claim
                      data were also used to determine FEMA’s December 2002 requests for
                      additional appropriations. However, since FEMA received less than it
                      requested, this error likely did not result in an appropriation in excess of
                      amounts needed to pay claims.

                      The overstatement of the claims paid amount was not identified by FEMA
                      because it did not reconcile the amounts OCGFC approved for payment to
                      the actual DFC payment data21 and was not aware of the differences
                      between the two databases. As a result, FEMA incorrectly reported in its
                      annual report to the Congress that $418 million was paid on claims through
                      September 7, 2002, instead of the almost $406 million actually paid, as
                      summarized in FEMA’s accounting system for activity through the same
                      date, a difference of $12 million, or about 3 percent of amounts reported
                      paid.

                      Most of the difference was due to FEMA’s treatment of claimed amounts
                      that were approved for payment and/or appealed claims. When approved
                      amounts are not fully paid because of appeals or other reasons, the
                      payment approval system continues to show the entire claimed amount
                      that was approved for payment even though the approved amount or a
                      portion of it has, in fact, been withheld from payment, canceled and not
                      paid, or replaced by a new claim request. FEMA did not remove these
                      amounts from its system or adjust the total approved amounts not yet paid.
                      As a result, OCGFC’s payment approval system overstates approved claims
                      designated as paid.



                      21
                       As part of FEMA’s fiscal year 2002 financial statement audit, its auditors determined that
                      amounts were correctly reported as paid by DFC in FEMA’s accounting system. In addition,
                      our review of the 77 statistically selected claim payments verified the accuracy of the
                      amounts paid by DFC and no control weaknesses were identified.




                      Page 12                                                GAO-03-623 CGFAA Claim Payments
For example, as part of our review of the 95 statistically selected approved
claims, we found 4 claims in which the approved amounts reported in
OCGFC’s payment approval system were larger than the actual payments
made by DFC.22 In one case, a claim file included more than $1.8 million in
approved payments, while the actual amount paid was $919,802.23 OCGFC
records on this case showed that it originally approved $934,802 for a final
payment. However, when the claimant appealed the amount, OCGFC
approved the claimant’s request to pay $919,802 as a partial payment
pending the appeal. OCGFC prepared and approved a second claim
without canceling the original claim or removing the original amount from
its payment approval system. This one oversight alone overstated the
approved claim amounts by $934,802. As of February 2003, FEMA officials
began manually reconciling the payment data between the two systems and
identifying the errors in the payment approval system.

The overstated payment amounts were also used to determine FEMA’s
request for additional funding from the Congress. In December 2002,
FEMA requested additional funding of $155 million for fiscal year 2002,
including $5 million for administrative costs.24 However, only $90 million
was appropriated to FEMA.25 Thus, it does not appear that the overstated
payments resulted in an appropriation in excess of the amounts needed to
pay estimated claims.




22
 We did not statistically estimate the total amount in error since the reconciliation between
the two systems revealed that $12 million was the actual dollar amount of the total errors in
the payment approval system.
23
 The claimant originally submitted a claim with total damages and losses in the amount of
$1.6 million.
24
  The request was based on FEMA’s original calculation of its October 2, 2002, unfunded
liability, which was for $149.2 million.
25
 In February 2003, the VA, HUD and Independent Agencies Appropriations Act
appropriated FEMA an additional $90 million, of which $5 million may be made available for
administrative purposes (Pub. L. 108-07, Div. K, 2003).




Page 13                                                 GAO-03-623 CGFAA Claim Payments
We also noted that FEMA’s estimate of unfunded claims liability had
increased significantly compared to the prior year. In January 2003, FEMA
revised its estimated unpaid Cerro Grande claims liability as of October 2,
2002, and calculated an estimated unpaid claim liability of $177.5 million, of
which $127.5 million was unfunded.26 This compares to an actuarially
determined estimate calculated by an independent accounting firm of
$260.1 million as of September 30, 2001, of which $36.5 million was
unfunded. As part of the audit of FEMA’s fiscal year 2002 financial
statements, its auditors assessed FEMA’s methodology for calculating its
estimated unfunded liability for fiscal year 2002 and attempted to
determine the reason for the $91 million increase in the liability since the
prior year.

The auditors determined that FEMA’s fiscal year 2002 methodology was
reasonable, but were unable to explain the reason for the difference in the
two estimates since FEMA used a different methodology to calculate the
estimate than had been previously used, but did not provide a “crosswalk”
between the two approaches. The auditors reported this as a weakness in
FEMA’s process for estimating the remaining liability for the Cerro Grande
program in its internal control report for fiscal year 2002. The weakness
specifically related to a lack of (1) an impact analysis for the change in
estimating methodology and (2) supporting documentation for certain
factors and assumptions, for which FEMA eventually re-created the
documentation to support the calculation.27 In April 2003, FEMA officials
stated FEMA is in the process of awarding a contract to perform an
analysis to determine the dollar effect on the increased claim liability
estimate due to changes in methodology, assumptions, systems, data, or
other factors, from fiscal year 2001 to fiscal year 2002.




26
  The unfunded liability was adjusted for the overstated payments plus another adjustment
as part of the fiscal year 2002 audit of FEMA’s financial statements. Therefore, FEMA’s
initial estimate of the unfunded liability of $149.2 million was decreased to $127.5 million.
27
   The auditors recommended that FEMA (1) perform an analysis to determine the dollar
impact on the liability estimate due to changes in methodology, assumptions, systems, data,
or other factors, from fiscal years 2002 through 2001, and (2) ensure that supporting
documentation for program estimates that are used for financial reporting purposes be
maintained as part of the estimate documentation file. FEMA agreed with the
recommendation.




Page 14                                                  GAO-03-623 CGFAA Claim Payments
Conclusion            FEMA’s actions to strengthen its policies and procedures over its claim
                      approval process helped ensure that paid claims were valid and reasonable.
                      However, weaknesses in how the Emergency Preparedness and Response
                      Directorate records and tracks approved claims in its payment approval
                      system resulted in an overstatement of approved claims, which had a
                      cascading effect on payment amounts reported to the Congress and used to
                      calculate requests for additional funding. While the amount of the
                      overstatement was relatively insignificant, left unchecked, the weaknesses
                      in the payment approval system could result in larger errors in future
                      reports to the Congress and requests for additional funding.



Recommendations for   We recommend that the Secretary of the Department of Homeland Security
                      direct the Emergency Preparedness and Response Directorate to
Executive Action
                      • complete the reconciliation of the amounts approved for payment in its
                        payment approval system to amounts actually paid in FEMA’s
                        accounting system and correct all identified errors in its payment
                        approval system and

                      • perform monthly reconciliations of the approved claim amounts in its
                        payment approval system with the actual amounts reported in its
                        accounting system as paid by DFC for as long as both systems are used
                        to track and report paid amounts or request additional funding.



Agency Comments and   FEMA, in a letter from the Acting Director of the Recovery Division of the
                      Department of Homeland Security’s Emergency Preparedness and
Our Evaluation        Response Directorate, agreed with our recommendations and described
                      specific corrective actions currently under way to address each one. For
                      example, the Acting Director indicated that OCGFC has substantially
                      completed the reconciliation of the amounts approved for payment in its
                      payment approval system to amounts actually paid in FEMA’s accounting
                      system and intends to implement monthly reconciliations beginning this
                      month. We will perform a follow-up review of these activities as part of our
                      review of the Cerro Grande annual report that is due to the Congress on
                      August 28, 2003. The Department of Homeland Security’s comments are
                      reprinted in appendix I.

                      We are sending copies of this report to the congressional committees and
                      subcommittees responsible for issues related to FEMA and the Department


                      Page 15                                       GAO-03-623 CGFAA Claim Payments
of Homeland Security; the Secretary of the Department of Homeland
Security, the Under Secretary of the Department of Homeland Security’s
Emergency Preparedness and Response Directorate; and the Inspector
General of the Department of Homeland Security. Copies will also be made
available to others upon request.

If you have any questions about this report, please contact me at (202) 512-
9508 or Steven Haughton, Assistant Director, at (202) 512-5999. The other
key contributor to this assignment was Christine Fant.




Linda M. Calbom
Director, Financial Management and Assurance




Page 16                                       GAO-03-623 CGFAA Claim Payments
Appendix I

Comments from the Department of Homeland                   Appendx
                                                                 ies




Security                                                    Append
                                                                 x
                                                                 Ii




             Page 17         GAO-03-623 CGFAA Claim Payments
Appendix I
Comments from the Department of Homeland
Security




Page 18                                    GAO-03-623 CGFAA Claim Payments
           Appendix I
           Comments from the Department of Homeland
           Security




(190078)   Page 19                                    GAO-03-623 CGFAA Claim Payments
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