United States General Accounting Office Report to Congressional Requesters May 1990 JOB TRAINING PARTNERSHIP ACT Review of Audit Findings Related to the Downriver Community Conference Program fi 1111 I Ill 142902 united states General Accounting Office Washington, D.C. 20548 Detroit Regional Office B-234733 May 16,199O The Honorable Carl Levin United States Senate The Honorable Donald Riegle United States Senate The Honorable John D. Dingell House of Representatives The Honorable William D. Ford House of Representatives Your March 15, 1989, letter asked us to review four expenditures by the Downriver Community Conference’under the Job Training Partnership Act (JTPA). The expenditures were: . $15 1,824 for contractual services to create a data base to be used to identify potential program participants, . $47,740 for a sole-sourcecontract with a computer consultant, . $100,226 for the purchase of an air-conditioning system, and . a $4,725 payment to a terminated employee. These expenditures were questioned in an independent audit report on Downriver activities for the Z-year period that ended September 30, 1987. You also asked us to review the appropriateness of the Michigan Department of Labor’s resolution of the audit findings. We determined whether each expenditure represented an allowable use of JTPA funds. We also determined the sequenceof events related to each expenditure through discussionswith current and former Downriver officials, and its landlord and contractors and through a review of pro- ject records. In addition, we reviewed applicable federal and state laws, and rules and regulations, and discussedthe results of our analysis with state officials and regional and federal Department of Labor officials. Our work was performed between February 1,1989, and January 31, 1990, and was conducted in accordancewith generally accepted govern- ment auditing standards. ‘A regionalorganizationthat, amongother activities, provides employmenttraining assistanceto residentsin the area funded, in part, by the Job Training Partnership Act. Page 1 GAO/HI&D-90405Downriver Community Conference Program i E224722 Background In program years 1985 and 1986, Michigan received $166 million and $136 million, respectively, under the JTPA program. To ensure that the funds are used appropriately and that applicable JTPA regulations and state rules are followed, Michigan regulations require that each local project be independently audited. When auditors question the allowabil- ity of costs incurred by a local project, state audit resolution officials are responsible for determining whether a violation of state rules has occurred requiring the repayment of JTPA funds.2 To comply with state audit requirements, Downriver had an indepen- dent audit performed, covering its activities over the Z-year period end- ing September 1987. The audit report reviewed $12 million in JTPA funds received by Downriver for this period. Results in Brief We agree with the auditor and the state that, at the time of the audit, the costs for purchase of a data base to be used to identify potential program participants should have been disallowed.3Information on per- sonawho might be potential program applicants, to be provided under contract, was not requested or obtained by the Downriver project. How- ever, after the state’s determination to disallow this expenditure, Downriver requested the information (in the form of several reports), and the contractor expressedwillingness to deliver it. If Downriver receivesthe reports, it may request the state to reevaluate the allowabil- ity of the expenditure. (Seep. 8.) Although the state allowed all costs for payments to a consultant for computer services,the costs incurred before the award of a contract under a competitive bid processshould have been disallowed because the state had denied Downriver’s original request for a sole-sourcecon- tract, and instead required Downriver to have the contract competi- tively bid. (Seep. 10.) The expenditures for the air-conditioning system and payment to the terminated employee were allowed by the state. The expenditure for air- conditioning, however, was charged as rent rather than as a capital expenditure that requires state approval. The payment to the termi- nated employee was charged as severancepay but should have been charged as a settlement expensebecauseit was made in return for the 2For a detailedexplanationof the applicablelegal requirements,seeappendixI. 3A more detaileddiscussionof eachof the questionedexpendituresand the basisfor our conclusions appearin appendixII. Page 2 GAO/HI?D90406 Downriver community Conference Program employee’sresignation and pledge not to file suit against Downriver for his termination. Neither federal nor state rules or regulations provide guidance on granting settlements. In the absenceof such guidance,the state is responsible for determining the allowability of this expenditure. However, such a determination had not been made as of April 1990. (See p. 11.) As you requested, we did not obtain written agency commentson this report. We did, however, discussits contents with Michigan Department of Labor officials and Downriver managementofficials, incorporating their commentswhere appropriate. And, as agreed with your offices, unless you publicly announceits contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time we will send copies of this report to the Secretary of Labor, the Michigan Department of Labor, and other interested parties. Should you have any questions, please call me on (313) 226-6044.Major contributors to this report are listed in appendix III. John H. Luke Regional Manager Page 8 GAO/HRD-90406Jhwnriver Community Conference Program Contents Letter 1 Appendix I Discussion of Applicable Legal Requirements Appendix II 8 Discussion of the Purchase of Data Base to Identify Potential Program Participants 8 Allowability of Costs Needs Assessmentand Labor Market Survey 9 for the Downriver Sole-SourcePurchase of Computer Services 10 community Purchase of Air-Conditioning System 11 Payment to a Terminated Employee 12 Conference’s Questioned Expenditures Appendix III 14 Major Contributors to This Report Abbreviations GAO General Accounting Office JTPA Job Training Partnership Act OMB Office of Management and Budget PIG Private Industry Council RFP request for proposals paee4 GAO/FIRDB@106DownrIver Commrrnity Conference Program . Page 6 GAO/HRB9O-105Downriver Ckmmunity conierence Progrm Appendix I Discussionof Applicable Legal Requirements ” The Job Training Partnership Act (JTPA) (29 U.S.C. 1601(1982)) autho- rizes federal financial support to states (and areas within states called service delivery areas) for various employment training programs. JTPA authorizes the U.S. Department of Labor, the agency charged with moni- toring compliancewith the act, to “prescribe such rules and regulations . . . as the Secretary deemsnecessary”(29 USC. 1679(a)). The regula- tions Labor issued pursuant to this authority include standards for determining the allowability of state and local costs under JTPA. The cost allowability standards applicable at the times with which we are here concernedprovide, among other things, that a cost must be “necessary and reasonablefor proper and efficient administration of the program, be allocable thereto . . . , [and] not be a general expense”of the program (20 C.F.R. 629.37(a)(1986)). The regulations also provide that JTPA grant recipients must “administer procurement systemsthat reflect applicable State and local law, rules and regulations as determined by the Gover- nor” (20 C.F.R. 629.34). The Downriver Community Conference,acting as subgrantee, adminis- ters programs funded under the act in a service delivery area in the vicinity of Detroit. Approximately 76 percent of employment and train- ing programs conducted by Downriver are funded under JTPA. As required by Labor regulations (at 20 C.F.R. 627.1), the State of Michi- gan explicitly agreed in the grant agreement(Governor/Secretary Agreement) to comply with JTPA and applicable rules and regulations. The State of Michigan, which was delegatedfiscal control over “disbur- saI of and accounting for” JTPA funds under section 164 of the act, also is responsible for reviewing grantees’expenditures to determine whether they comply with Labor standards. Additionally, the state has issued more detailed JTPA program adminis- tration instructions. These instructions, and not Office of Management Page6 a n d B u d g e t( O M B )guidelinesgenerallyapplicableto federalg r a n t recipi- e n ts, apply to th e J T P Ap r o g r a me x p e n d i turesdiscussedb e l o w .1 ‘In a p r e a m b l to e the federalJ T P Aregulations, L a b o rstated,as follows:“. . . exceptfor the few specificstandardsincludedin the regulations, ‘thedetailedadministrativerequirements of O M BClr- c u l a mA - 8 7a n dA - 1 0 2a n dimplementing regulations in 4 1 C.F.R.Part 2 0 - 7 0d o not applyto J T P A p r o g r a m sa d m i & t e r e dby the G o v e m o ma n dtheir subrecipients”’ ( 4 9 Fed.Reg.1 1 0 7 6(Mar. 16, 1992);2 0 C.F.R.626-694). L a b o rimplementing regulationsalsoprovidethat statep r o g r a m s“o p e r a t e du n d e rTitlesI, II a n dIII of the Act a r enot subjectto the provisionsof 4 1 C.F.R.Part 20-70,exceptas otherwiseexplicitly providedin this chapter”( 2 0 C.F.R.629.1(e)). J T P Afundsthat w e r espento n the air conditionerat Downriverfacilities,a n do n othercosta Y e x a m i n e in d this m e m o r a n d u m w ,e r ederivedentirelyfrom p x o g r a mestablished a u n d e rtitles I, II, a n d III of JTPA,which a r ep r o g r a m sgenerallya d m i t & & r e dby statesa n dservicedeliverya r e a s( 2 0 C.F.R.Part 629).Therefore,costallowabilitystandardscontainedin O M ECirculars S A - 9 7a n dA-102, a n dimplementing regulationa, w e r enot applicable to J T P Afundsappliedby Downriverto the air conditioneror to the otherexpenditures d k u s a e dbelow. P a g e7 G A O /E R D 9 @ lODownriver g C o m m n n i t yC o n f e r e n c eP r o g r a m , Appendix II Discussionof the Allowability of Costsfor the Downriver community mnference’s QuestionedExpenditures The relevant facts pertaining to each of the four expenditures ques- tioned by the auditor are summarizedbelow together with GAO'Sconclu- sions and basis for those conclusions.As part of our discussionof the purchase of a data base for outreach, we also discussthe circumstances and our conclusion regarding a contract for a needs assessmentand labor market survey performed by the same contractor. During the spring of 1986, Downriver managementagreed to pay a sub- Purchase of Data Base contractor $161,824 to create a data base from 96,091 job applications to Identify Potential to a local automotive manufacturer in return for accessto the informa- Program Participants tion from the data base. The information was to be in the form of seven computerized reports, listing the names and addressesand certain other characteristics of the persons that had applied for jobs at the automo- tive plant. The subcontractor created the data base.According to a Downriver official, the project planned to use the listings to identify potential JTPAprogram applicants. Downriver’s intent was to use the data base to contact persons who were not hired by the plant and enroll in training those who were interested and qualified for the JTPApro- gram. At the time of the audit, however, the information to be provided under the contract had not been requested or obtained by the Downriver project, The auditor questioned the allowability of costs related to the contract becauseDownriver officials had not obtained the information for which they had contracted. He determined that to be an allowable cost, the JTPAprogram must derive somebenefit from it, and, becausethe infor- mation was not obtained, no benefit was derived from the expenditure. State officials concluded in their final determination letter that activities under this contract would have been allowable if Downriver officials had obtained the information under contract. However, because Downriver did not obtain the information to be provided under the con- tract, the state agreed with the auditor that JTPAhad not benefited from the contract and that the $161,824 spent under the contract should be disallowed. GAO Conclusion After considering questions raised regarding this activity, we conclude that the expenditure was for an authorized activity-outreach to iden- ii tify potential program participants-under JTPA. However, because Downriver officials had not requested or obtained the information for which they contracted, we initially agreed with the auditor and the state Page 8 GAO/HkDML1O5 Downriver CommuniQ thhreme Progmm I) . * mP@*~ DLeprrion of the Alkmabmty of corn for the DownrIver t3mnnunity Conferenee*n c$Ileatlon@dExpen~turee that the expenditure should be disallowed. But, on November 6,1989, more than a year after the state’s determ ination that the expenditure should be disallowed, Downriver officials requested that the contractor provide them with the information required under this contract, and the contractor has expressedwillingness to deliver the reports. However, as of May 14,1990, Downriver had not received the information. If Downriver receivesthe information, it may request the state to reevalu- ate whether the expenditure is allowable. The delay in the receipt of the information, however, may have reduced the benefit of the information to the JTPA program . Before awarding the contract for developing the data base to be used to Needs Assessment and identify potential program participants, Downriver officials in 1986 Labor Market Survey paid $32,000 to have the samecontractor complete a needs assessment and labor market survey. The purpose was to provide the project with information concerningthe nature and availability of employment opportunities and training programs in the Downriver area. The con- tractor made a presentation to the Downriver Private Industry Council (PIG)’ and staff summarizingthe results of the survey. According to doc- uments in Downriver’s files, the information obtained from the contract was to be used to develop Downriver’s JTPA plan. There was someques- tion as to conflict of interest on the part of the contractor, who was a member of the PIGwhen the contract was entered into. Further questions were raised regarding whether funds paid by Downriver under this con- tract were used by the contractor to prepare for the subsequentcontract to create the data base to be used to identify potential program participants. GAO Conclusion In reviewing the procedures used to award this contract, we found that federal, state, and local laws and regulations were not violated. Because the contractor did not participate in a PIG vote on the contract, JTPAwas not violated. The state conflict of interest statute also was not violated becausethe contract in which the contractor had an interest was with Downriver, not with the PK. Further, Downriver’s bylaws were not vio- lated becausethe contractor did not attend any meeting at which the contract was approved. ‘Establishedby JTPA,PICscon&t of local businessleaders,representativesof educationalagencies, organked labor, rehabilitative agencies,community-based organizations,economicdevelopmentagen- cies,and the local public employmentserviceto provide overall policy guidanceand oversightto the local JTPApro@un. Page 9 GAO/JSRDM-106 Downrlver CommnniW Ckbnferenm Program I D l a e u u i o n of the Allowability of C a e t a for the D o w n r i v e r C o m m u n i t y C a f e r e n c e ’r Q n e e u o n e d lcxpmditulw A lth o u g h s o m ework relatedto th e d a ta e n try c o n tractw a s p e r fo r m e d b e fo r ea w a r d o f th e o u treachc o n tract,th e r e is n o indicationth a t fu n d s receivedu n d e rth e n e e d sa s s e s s m e nc to n tract s u p p o r te dthis work. Fur- th e r , th e work a p p e a r e dto b e m inim a lw h e n c o m p a r e dwith th e cost o f th e c o n tract a n d w o u l d n o t h a v e b e e nsignificante n o u g hto provideth e c o n tractora n u n fair a d v a n ta g ein th e a w a r d o f th e o u treachc o n tract. Downriverm a n a g e m e netn te r e dinto a sole-source c o n tractwith a c o m - S o le-S o u rceP u rch a s e p u ter consultantin D e c e m b e1r 9 8 6 ,a g r e e i n gto p a y $ 3 0 ,2 4 0for consult- o f C o m p u te rS e rvices ing servicesto i m p r o v eth e project’sc o m p u tersystem .B e c a u s ethis w a s a sole-source c o n tractth a t e x c e e d e d$ 1 0 ,0 0 0 state , approvalo f th e con- tract w a s required,H o w e v e r ,Downriver allowedth e consultantto b e g i n work b e fo r er e q u e s tin gstate approvalwith th e stipulationth a t th e con- sultant w o u l d n o t b e p a i d m o r eth a n $ 1 0 ,0 0 0unlessapprovalw a s g r a n te d . S ta teo fficials d e n i e dth e sole-source r e q u e s tb e c a u s eth e y believedth a t o th e r c o n tractorsw e r e interestedin biddingo n th e c o n tract a n d w e r e c a p a b l eo f deliveringth e requiredservices.A lth o u g h state o fficials d e n i e dth e r e q u e s t,th e consultantc o n tin u e dto work a n d w a s told by Downrivero fficials th a t h e m a y bill th e m for servicesu p to th e $ 1 0 ,0 0 0 lim it for sole-source c o n tracts. A fter th e state’sdenialo f th e sole-source r e q u e s t,localo fficials initiated a c o m p e titivebid processfor th e r e m a i n i n gwork. A ccordingto Downriver m a n a g e m e ntht, e consultantw a s told to s u s p e n dall work th a t w o u l d b e carriedover to th e c o m p e titivebid c o n tract.A fter a r e q u e s tfor proposals( R F Pw) a s initiated, s e v e nbiddersreceivedcopies o f th e R F P a n d two proposalsw e r e s u b m i tte d - o n e o f which w a s from th e solesource-consultant. T h e Downriver staff j u d g e dth e sole-source consultant’sproposalsuperiorb e c a u s eo f its extensived e tail a n d sub- stantially lower cost. T h e sole-source consultant’sestim a te dcost for th e r e m a i n i n gwork w a s b e tween$ 2 0 ,0 0 0a n d $ 2 6 ,0 0 0 while , th e o th e r bid- d e r ’sestim a te dcost w a s $ 6 3 ,0 0 0 . T h e a u d i tor q u e s tio n e dw h e th e r p a y m e n tsm a d eby Downriveru n d e r th e sole-source c o n tract w e r e allowableb e c a u s estate o fficials h a d d e n i e dapprovalo f th e sole-source p r o c u r e m e n t. S ta te o fficials ruled th a t th e costsu n d e rth e s ec o n tracts-the sole- sourcea n d th e c o m p e titivebid-were allowable.T h e y believed(1) th e c o n tractorcouldc o n tin u eworking a fter sole-source approvalw a s Page 10 G A O /E R D - 9 0 - 1 0 5D o w n r i v e r C o m m u n i t y C o n f e r e n c e P r o g r a m Appendix II Dlmumion of the AllowabiliQ of Cimte for the Downrlver Conunnnity Chnfemnce’e Queatloned Expenditnree denied as long as the amount paid did not exceed$10,000, and (2) an open and free competitive bid processfollowed. State officials deter- m ined that the Downriver board had not approved the contract as required by Downriver’s procurement procedures, but concludedthat this was not a violation of state JTPA rules and, therefore, was not a basis for disallowing the costs of the contract. GAO Conclusion Our analysis of this contract showed that local officials did not follow the contracting procedures established by state or local rules. We con- clude, becausethe state denied Downriver’s sole-sourcerequest, that all expenditures made for servicesperformed before award of the competi- tively bid contract should be disallowed. Our analysis of the competitively bid portion of the contract showed that it met the requirements of a free and open process.Another bidder participated in the process,but the sole-sourcecontractor’s proposal had the highest score and the lowest cost. Although the contractor did some prior work that could have given him an advantage, any competitive advantage did not result from preference by Downriver and, in any event, would have had no effect on the award. Thus, we concludethat this portion of contract costs should have been allowed, Purchase of Air- In February 1984, the Downriver board approved increasing rent pay- ments to its landlord for the purchase and installation of a central air Conditioning System conditioner. For 17 months (Mar. 1984 through July 1986) the landlord kept the amounts designated for the air-conditioning system in an escrow account. In September1986, a central air-conditioning system was installed in the Downriver building. After all costs had been paid, the landlord refunded to Downriver $14,296 received in excessof the cost of the air conditioner. While payments to the landlord for the air conditioner totaled $114,622, only $71,986 was paid out of JTPA program funds. The remaining cost was paid from other Downriver programs that benefitted from the air-conditioning system. The auditor questioned whether the cost of the central air-conditioning system was allowable becausehe believed it was a capital expenditure and local officials had not obtained state approval as required by state policy. State audit resolution officials disagreed with the auditor’s con- clusion and allowed Downriver to charge the air conditioner cost as rent, which is an allowable expensenot requiring prior state approval. Page 11 GAO/HIUMW106 Downriver Chnmunity Conference Program Appendix II Dbcuesion of the Allowability of Coats for the Downriver community Conference’s Questioned Expenditurea GAO Conclusion We believe the expenditure for the acquisition of the air conditioner was not rent, but was a capital expenditure because(1) the payments to the landlord were increasedspecifically for its purchase, (2) the landlord held the funds in an escrow account, which was used only to pay for the purchase and installation of the air conditioner, and (3) the landlord refunded the excessmoneys. BecauseDownriver did not follow the proper acquisition procedures, state officials did not rule on the allowability of this capital expenditure, as required under state rules. However, state officials told us that the purchase of an air-conditioning system can be an allowable capital improvement expense. On October 10,1986, Downriver paid the manager of its fiscal depart- Payment to a ment $4,726 in return for his resignation and pledge not to sue Term inated Employee Downriver. According to Downriver officials, they had suggestedthe employeelook for work elsewhere.Downriver managementwere con- cerned about firing him , however, becausethey feared he m ight file a lawsuit against the project. The payment represented approximately 2 months of the employee’ssalary and was characterized as severance pay by Downriver officials. The auditor questioned the allowability of severancepay because Downriver personnel policy prohibited such payments, State officials, however, disagreed with the auditor and found the costs were allowable. They cited a rule in the Downriver policy that authorized Downriver managementto make unilateral changesto policy. GAO Conclusion The rule in the personnel manual cited by state officials allows Downriver managementto changepersonnel policy without approval from an employeecommittee.This rule does not, however, authorize Downriver to deviate from establishedpolicy. Downriver management was not authorized to make an exception to its personnel policy in order to provide severancepay to one employee. We believe that Downriver’s characterization of the payment as sever- ance was incorrect. The payment was made in return for the employee’s resignation and pledge not to sue Downriver. Therefore, we believe the payment would be more correctly characterized as a settlement. Page 12 GAO/HlUMMMO6 Downriver Community Conference Program Dbcudon of the Allowability of C4mt.afor the Downriver Commtity Cdmference’s Quedoned ExptmdIti Becausethe payment was incorrectly characterized, state officials did not review the payment as a settlement to determ ine its allowability. We found that neither federal nor state rules or regulations provide gui- dance on granting settlements in JTPA programs. In the absenceof spe- cific cost allowability guidance, the state is responsiblefor determ ining the allowability of expenditures. Page 13 GAO/HltD-80406 Downriver Cbmmuntty Conference Program Appendix III , Major Contributors to This Fkport Franklin Frazier, Director, (202) 276-1793 Human Resources Sigurd R. Nilsen, Assistant Director, (202) 623-8701 Division, Washington, DC. Robert T. Rogers,Evaluator-in-Charge Detroit Regional Office Valerie L. Giles-Reynolds,Site Senior Donna Bright Howard, Evaluator Barry R. Bedrick, Associate General Counsel Office of the General Robert G. Crystal, Assistant General Counsel Counsel, Jane R. Sajewski, Attorney-Advisor Washington, D.C. (206126) Page 14 GAO/HRDW-105 Downriver Community Conference Program Ittyut:sts for copies of (:A0 reports should be sent t,o: 1J.S. Gt*neral Accounting Office Post Off& Hox 6016 Gitit,hersbnrg, Maryland 20877 ‘lwt?phonf? 20%275fi241 ‘IIt* first. five copies of each report art: free. Additional copies art? $2.00 each. There is a 26% discount, on orders for 100 or more copies mailed to a single address. Orders must, be prepaid by cash or by check or money order made out, t.o the Superintendent of Documents. ! -* I
Job Training Partnership Act: Review of Audit Findings Related to the Downriver Community Conference Program
Published by the Government Accountability Office on 1990-05-16.
Below is a raw (and likely hideous) rendition of the original report. (PDF)