oversight

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)

           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
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